HMH Holding Inc.

Hello everyone. Thank you for joining us and welcome to HMH Holding Second Quarter 2026 Earnings Call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. I will now hand the conference over to David Bratton, Senior Vice President, Finance. Please go ahead.

Good morning, everyone, and thank you for joining us for HMH's second quarter results. Joining me today are Eirik Bergsvik, our Chief Executive Officer, and Tom McGee, our Chief Financial Officer. Before we begin, we would like to remind you that this conference call may include forward-looking statements. These statements, which are subject to various risks, uncertainties, and assumptions, could cause our actual results to differ materially from these statements. These risks, uncertainties, and assumptions are detailed in this morning's press release, as well as our filings with the SEC, which can be found at our website at investor.hmhw.com. We undertake no obligation to revise or update any forward-looking statements or information excessively required by law. Management statements may include non-GAAP financial measures. For reconciliations of these measures, please refer to our earnings release in our SEC filings. Following our prepared remarks, We will open the call for your questions. I'll now turn the call over to Eirik.

Thank you, David, and good morning, everyone. Overall, our second quarter results reflect the continued resilience and quality of our business model. Orders for the quarter were at $205 million, representing a book-to-bill ratio of 1.2 times in the quarter. Total revenue for the quarter was $171 million, and adjusted EBITDA was $34 million. Importantly, adjusted EBITDA margins grew year-over-year to 20%, driven by disciplined cost execution, favorable mix, and a continued focus on operational efficiency. Looking at revenue composition, fairs revenue increased 70% year-over-year to $61 million, largely on track to our expectations, reflecting increased fulfillment activity as customers prepare for upcoming contracts. Service revenue in a quarter was $89 million, with repair activities slower than planned, offset by stronger digital technology volume. Importantly, service order intake was strong, increasing 50% year-over-year, driven by robust digital technology upgrade orders. This is a positive sign for future service revenue and underscores healthy upgrade demand from our customers. Product revenue of $21 million reflected the timing of product order bookings, in which we saw several customers delay project approvals and purchase orders amid ongoing planning activities and geopolitical uncertainty. Now turning to the broader market environment. The positive momentum we discussed in the first quarter has continued through the second quarter, particularly in floater segments. Contract award activity remained healthy across several key offshore basins, with operators continuing to sanction projects, advance development programs, and secure drilling capacity for future campaigns. Importantly, we see a growing number of awards being made well ahead of required start dates, providing increased visibility into 2037 for both drilling contractors and the broader offshore supply chain. Contract durations have also continued to extend. Compared with recent years, operators are increasingly committing to multi-well and multi-year campaigns. Eirik Bergsvik, Tom McGee Eirik Bergsvik, Tom McGee What is particularly encouraging is that we increasingly see today's contracting activities supported by strong long-term market fundamentals rather than short-term commodity cycles. Industry project inventories have declined significantly over the past decade, while global energy demand continues to grow. As a result, you would expect operators to begin rebuilding development pipelines and sanction additional offshore projects to sustain future production levels. This is already translating into increased offshore investment. Industry forecasts indicate that global deepwater capital expenditures are expected to increase materially over the coming years, with 2027 spending projected to be including higher than 2025 and 2026 levels. At the same time, offshore projects continue to compete effectively for capital, with deepwater projects' economics remaining significantly below the peak break-even levels seen during the last major offshore cycle. These factors continue to support investment in offshore developments across multiple regions and customers. Looking specifically at the floater market, utilization remains at healthy levels today and is expected to strengthen further as demand growth outplaces available supply. Industry forecasts suggest marketed floater utilization could move close to 90% in 2027, with harsh environment assets remaining among the strongest performing segments globally. We continue to see supportive day rates and increasing backlog visibility for premium submersibles and drift ships. For HMH, these developments are particularly encouraging. Several key rigs within our installed base secured contracts award during the quarter, including a number of units equipped with significant HMH packages. We continue to see backlog growth across key rigs with our installed base, especially within the harsh environment semi-submersible fleet, This trend has steadily improved since the fourth quarter of last year and continues to strengthen throughout the second quarter, further improving long-term visibility for our aftermarket equipment and digital upgrades and automation opportunities. Importantly, many of the recent awards involving HMH equipment rigs are long-term in nature and have been secured further ahead of commencement than we have seen in recent years. This not only increases revenue visibility for drilling contractors, but also creates a favorable environment for customers to invest in equipment upgrades, automation solutions, and digital technology throughout the life of the contract. We believe this positions HMH exceptionally well to benefit from the next stage of the offshore outfackel. In terms of timing for HMH, these investments are one of the larger contributors to our year. While certain customer factors may influence the pace and timing of investment decisions from our customers, we believe these factors are temporary and do not alter the long-term demand outlook for the critical equipment and services we provide. Regionally, Brazil remains one of the strongest offshore markets globally. Petrobras continues advancing major development programs, while additional exploration and appraisal activity across South America supports continued demand for high-specification drilling assets. In the North Sea and broader harsh environment market, operators continue advancing field developments and sanctioning new projects. Recent contract awards, development approvals, and tender activity point towards sustained demand for harsh environment semi-subversional well into the latter part of the decade. Given HMH's strong installed position across this fleet segment, we view these developments as particularly positive for our long-term outlook. Looking further ahead, activity continues to build across West Africa, Canada, and select Asia-Pacific markets. New discoveries, project approvals, and upcoming development programs are supporting incremental drilling demand and reinforce our confidence that offshore investment levels will remain constructive for years to come. Turning briefly to our land business, market conditions remain relatively stable, while activity in North America continues to reflect operated capital discipline. International markets remain supported by energy security initiatives and ongoing production investments. We continue to see healthy demand for off-the-market services, equipment upgrades, and reliability solutions across our installed base. In mining, customer focus remains centered on productivity, safety, and sustainability. Long-term demand fundamentals for critical minerals remain attractive, driven by electrification, grid expansion, and broader infrastructure investment trends. We continue to see opportunities to leverage HMH's engineering expertise and technology capabilities to support customers seeking improved operational performance and equipment reliability. Overall, we continue to view the market environment as increasingly constructive. Longer duration awards, growing offshore investments, improving utilization, increasing lead times, and rising backlog across our installed base support, our confidence in continuing market strength throughout 2027 and beyond. With our leading technology portfolio and broad installed base, we believe HMH is well-positioned to capitalize on these trends. Now, to provide more detail on our financial results and outlook, I will now turn the call over to Tom.

Thank you, Eirik. I'll begin with the total company results and then discuss our outlook for the year. Orders for the quarter were $205 million, up 19% year-over-year, driven by continued strength in our digital technology offerings and our service product line. Partially offset by lower product bookings. Sequentially, orders were down 6%, reflecting the timing of product awards and repair activity. Despite the quarter-to-quarter variability, orders exceeded revenue, resulting in a 1.2 times book-to-bill ratio. While we expected a degree of volatility in first-half order intake, customer decision-making was somewhat slower than anticipated. The softness was concentrated in product orders and repairs, where several customers delayed project approvals and purchase orders amid ongoing planning activities and geopolitical uncertainty. While these delays in contract spending ahead of reactivation impact orders and corresponding revenue in the short term, we believe the underlying demand environment remains intact, customer discussions continue to progress, and we believe many of these opportunities represent timing shifts rather than changes in customer spending intentions. As a result, we remain optimistic about order activity improving as the year progresses. Revenue for the quarter was $171 million, substantially flat quarter over quarter, as the increase in service volumes were offset by lower spares and equipment revenue. Adjusted EBITDA in the quarter was $34 million, an increase of 3% year over year with higher spares activity offsetting lower product volume. Quarter over quarter, EBITDA increased 13% driven by service volumes. In the quarter, we had Non-recurring impact of IPO expenses of $22.8 million and $5 million have restructured. The adjusted EBITDA margin was 19.8% in the quarter, further demonstrating our underlying margin resilience supported by disciplined cost execution, favorable product mix, and continued focus on operational efficiency. Excluding the non-recurring impact of the IPO expenses, our tax rate for the second quarter was 25%. Turning to cash flow, free cash flow defined as cash flow from operating activities, plus purchase of property, equipment, and development costs, and excluding the impact of one-time cash payments associated with the IPO, was positive at $22 million in the quarter. Now I'll walk you through the product line results in more detail. In aftermarket services, revenue was $89 million in the quarter, down 4% year-over-year due to lower repair activity, Partially offset by stronger digital technology volume and increased 24% quarter over quarter driven by increased demand for repairs, digital technology, and other services. Margins in this segment remain supported by service mix, execution focus, and selective cost actions implemented over the past several quarters. Aftermarket services order intake was $118 million in the quarter, up 50% year over year, and up 19% quarter over quarter driven by strong digital technology volume. Aftermarket services excluding digital technology were slower than expected, in which longer-cycle digital technology orders replaced shorter-cycle repair activity in the quarter. Spares revenue was $61 million in the quarter, up 17% year-over-year due to increased demand from customers as they prepare for upcoming contracts and down 8% quarter-over-quarter. Spares order intake was $65 million, up 1% year-over-year and up 2% quarter-over-quarter, driven by global offshore market dynamics. Product revenue in the quarter was $21 million, down 66% year-over-year and down 38% quarter-over-quarter, reflecting the lower backlog that started the quarter and partially due to delay in equipment deliveries and installation and commissioning work in the Middle East. Order and delivery delays in the Middle East adversely impacted revenue in the quarter. Moving to our capital structure. The end of the quarter with $120 million in cash and cash equivalents, total liquidity including the revolving credit facility of approximately $195 million. We have no long-term debt maturity until June 2008. Capital expenditures and development costs during the quarter were $5.2 million, primarily supporting aftermarket capabilities, service reliability, and ongoing product development initiatives. We continue to operate an asset-light business model and manage capital intensively carefully while preserving flexibilities to support growth as activity levels recover. As discussed in our first quarter earnings call, we completed our IPO on April 2nd. The IPO has significantly strengthened our capital structure and positioned us well to support long-term growth and deliver value to our shareholders. Basic earnings per share is calculated by dividing the net income attributable to the HMH by the weighted average number of Class A shares during the same period. For the periods following the IPO, Class B shares are excluded from the computation of basic and diluted earnings per share. We have 12,042,625 Class A shares and 31,891,652 of Class B shares. We refer you to our Form 10-Q for further details. On the M&A front, we are advancing several strategic opportunities. We are highly encouraged by both the quality of assets under review and the broader opportunity set available in the market. Consistent with our disciplined capital allocation strategy, we believe these opportunities will enhance our capabilities, expand our market presence, and create meaningful long-term value for shareholders. Looking ahead, we already see another strong order rate so far in the third quarter, and we expect another quarter to book the bill above one times. Looking at the full year of 2026, we continue to expect second-half revenue to be meaningfully stronger than the first half. Driven by strong service and spares orders booking during the first half of the year, it will translate into higher revenue as customers prepare for higher activity levels. Looking further ahead to 2027, we already have approximately 80% visibility into our projected 2027 floater rig years with HMH install base based on contracts and contract options, a meaningful improvement from the roughly 65% visibility we had at the comparable point last year when forecasting 2026. This increased visibility reinforces our confidence in the outlook and supports our expectation of increased activity in 2027. For 2026 guidance, based on our current backlog order activity and margin visibility, our full-year guidance remains unchanged, with full-year adjusted EBITDA to be in the range of $157 million to $177 million, with performance improving in the second half. Investments in CapEx, excluding development costs, are expected to be 2% of revenue for 2026. With that, I will turn the call back over to Eirik for closing remarks before Q&A.

Thank you, Tom. As we conclude, I want to emphasize that while our second quarter revenue reflected toughness in product orders and repair and tech, the underlying fundamentals of our business remain strong. We delivered year-over-year expansion in adjusted EBITDA margins, maintained disciplined cost execution, and continue to generate healthy commercial activity across our markets. Importantly, order momentum for digital technology upgrades remained robust during the quarter, reinforcing our confidence in the demand environment and providing further support for future revenue growth. This performance reflects both the strength of our customer relationships and the value customers place on our technology and service offerings.

The offshore drilling market continues to evolve favorably.

Closer contracting activities improving, customers securing longer-duration awards, and many of the rigs winning work today are equipped with HMH technologies. At the same time, operators remain focused on enhancing operational performance through equipment upgrades, automation, digital solutions, and next-generation technologies. All areas where HMH is uniquely positioned to create value. Looking ahead, we remain confident in anticipated market acceleration through the second half of the year and into 2027, and in HMH's ability to capitalize on opportunities brought to us. Finally, I want to thank our employees around the world for their dedication and outstanding execution this quarter. The commitment to our customers and our strategy continues to strengthen the foundation of HMH and position the company for success in the years ahead. Thank you for your continued support of HMH. We look forward to updating you on our progress next quarter. With that, I turn the call back to the operators for questions.

Thank you. We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. The first question comes from Derek Hodizer with Piper Sandler. Please go ahead.

Morning, guys. I wanted to start with the comment, Tom, you made in your remarks about the visibility that you have for your 27 Florida rig years. You said 80% up from 65% this time last year, obviously a great improvement there. So maybe just help us understand closing that 20% gap. And even if you could talk about the upside and downside scenarios for meeting those 2027 rig year estimates.

Yeah, it's just, there's a lot of noise, obviously, you know, still in some of the, you know, the tail end of that, whether you've got rigs that may be rolling off contract, need to be recontracted, potential for reactivation. So I'd say, you know, again, if you look at the rig activity forecast and you re-forecast it, you know, from six months ago to today, you'd be at the same levels in terms of forecast, more certainty around it. and there is both upside and downside. I'd say you're starting to narrow the gap on the downside just by seeing the contract announcements that we've had. We don't go rig by rig, but it's just trying to give comfort that what we see today is exactly what we expected to see and we expect to see further strengthening throughout the year and again, kind of comparing it to past cycles, we're ahead of where we'd be when looking at the forecast.

Let me add to that question. Let me add that for the first seven months in 26, contracted read years was 50% higher than the same period in 25. That also gave an indication that 27 is up. Right. Okay.

No, that makes sense. That's helpful. And then, so obviously, it sounds like you're expecting an order inflection here in the back half of the year. Obviously, revenue came in a little bit light. You're expecting the inflection second half into 2027. Sounds like your customers had some delays just given the current geopolitical events. Maybe can you talk just about your conversations with your customers, what they're waiting for, any specific clearing event? Is it just they need a resolution in the Middle East to kind of go past the thing? Maybe just a little bit more color around the guidepost that we should be looking out for to then see that inflection, the back half.

Eirik Bergsvik, Tom McGee That in and of itself was about a $10 million revenue headwind in the quarter. So that is sort of a discrete item, although it does affect some purchasing elsewhere. What you did see, as Eirik alluded to, is an acceleration of digital. So you had significantly higher digital orders than we saw. As we saw customers making those longer-term decisions the way we would expect them to, or even a little bit ahead of what we'd expect them to, where you've got a little bit of delays on some of the spend on repair, Eirik Bergsvik Respect on your reactivation, you know, one without saying the name, you know, you've got 50 POs on reactivation that you're updating on a weekly or monthly basis. So, I mean, like it's been kind of like that. And historically, you've seen some of that spend occur ahead of contract. You're not seeing that. And even when they have contracts, you're seeing a little bit of a delay in terms of when that picks up.

Yeah, I think you mentioned it yourself, geopolitics situation that actually – drives the drillers to be a little bit more cautious about when they actually do the work on the upgrade they are planning to do. So they wait as long as they can.

Great. Thank you, Eirik and Tom. I'll turn it back.

Thank you. Your next question comes from Jason Kim with J.P. Morgan. Please go ahead.

Good morning. Good morning, Eirik and Tom. Thank you for asking my question this morning. So, Tom, you just mentioned customers are making some of these longer-term digital decisions even a bit ahead of your expectations, while some shorter-cycle repair spend is being deferred. As that digital and automation mix grows within the services segment, how should we think about its contribution to margins and the stickiness of that revenue over the life of these longer contracts? Yeah.

Yeah, it's kind of a two-part. A lot of what that allows us to do is actually plan. So it's actually nice that it's happened because it allows for better operational planning. Margin profile is similar. I mean, I think it's an aftermarket margin profile, so what you'd expect. There is a little bit, you know, if you take that six, and there's more on the back end of that, we believe. But some of that is just spent around the upgrade itself, and then some of it is an annuity beyond that. So it's a little bit of a mix.

Got it. That's helpful. And as a follow-up to that, on the roughly 10 million Middle Eastern headwind you flagged, as those installation and commissioning activities resume, do you view that as largely recoverable revenue that shifts into the back half in 27, or are you already seeing those delayed activities begin to unlock?

I'd split that into two. First of all, yes, it's all recoverable. So every bit of that we think will be recovered. I think it In terms of the installation and commissioning, yes, I think you see that as soon as the situation kind of resolves itself. There's equipment, both our equipment and equipment that's needed for some of the installation and commissioning that's literally stuck on ships right now, as you would expect. On the new orders, I think we see, without getting into the customers, An acceleration of discussions, but just like, I need to wait on this. I have to rebuild infrastructure. And so you have the order delays could extend further than this year, would be my belief.

Wonderful. I'll turn it back.

Your next question comes from Stephen in general with Stiefel. Please go ahead. Good morning, everybody.

Morning.

Morning, Stephen. Steven, you're breaking up a little bit.

Sorry, you're breaking up a little bit.

I think that'd be helpful. We're having trouble hearing you. I apologize. We'll wait for patient. We don't know if he's coming back on or not. Let's give him a minute. He was trying to call back in. Guys, I think I'll turn it back over to Eirik. We'll catch up with Stephen offline. Eirik, do you want to go ahead and wrap?

Yeah, okay. Thank you for your support and participation on today's call, and we're looking forward to updating you on the third quarter results when that comes. Thank you all.

This concludes today's call. Thank you for attending. You may now disconnect.