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spk00: Hello and welcome to today's Expro Q3 2022 earnings presentation. My name is Elliot and I'll be coordinating your call today. If you would like to register a question during the presentation, you may do so by pressing star followed by one on your telephone keypad. I'd now like to hand over to our host, Karen David-Green, Chief Communications Stakeholder and Sustainability Officer. The floor is yours, please go ahead.
spk05: Welcome, everyone, to ExPro's third quarter 2022 conference call. I'm joined today by Mike Jarden, CEO, and Quinn Fanning, CFO. First, Mike and Quinn will share their prepared remarks, and then we will open it up for questions. We have an accompanying presentation on our third quarter results that is posted on the ExPro website, expro.com, under the investor section. In addition, supplemental financial information for the third quarter and prior periods is downloadable on the EXPRO website under the investor section. I'd like to remind everyone that some of today's comments may refer to or contain forward-looking statements. Such remarks are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Such statements speak only as of today's date, and the company assumes no responsibility to update any forward-looking statements as of any future date. The company has included in its SEC filings cautionary language identifying important factors that could cause actual results to be materially different from those set forth in any forward-looking statement. A more complete discussion of these risks is included in the company's SEC filings, which may be accessed on the SEC website or on our website at expro.com. Please note that any non-GAAP financial measures discussed during this call are defined and reconciled to the most directly comparable GAAP financial measure in our third quarter 2022 earnings release, which can be found on our website. With that, I'd like to turn the call over to Mike.
spk03: Thank you, Karen. Good morning and good afternoon, everyone. Expo delivered solid third quarter results on the back of favorable industry trends that should position us for continued growth and margin expansion. While there are concerns regarding global economic growth and inflation, energy market fundamentals remain strong and, in fact, continue to trend upward. The extended period of underinvestment in global upstream production, historically low spare global capacity and inventories, an increase in energy demand to pre-COVID levels, and a heightened OECD focus on energy security and diversification of supply supports a multi-year energy recovery and, in turn, sets the stage for long-term growth for the energy services industry. We are confident that our business model, broad geographic footprint, and leading portfolio of solutions will allow us to continue to capture considerable growth opportunities from these trends. Approximately 70% of our business mix is tied to drilling and completions activity, and roughly 70% is tied to offshore markets, both areas of customer spending that are in the early stages of a cyclical recovery. Similarly, with roughly 80% of our revenue generated in international markets, we are well positioned to capitalize on the acceleration of activity in key growth markets and support our customers in the jurisdictions where they need us most. These factors, together with a shift in business mix to higher margin activities, The continued commercialization of recently deployed technologies and investments, improved operating leverage for merger-related cost synergies, and scope for net pricing gains should allow us to drive above-market top-line growth, margin expansion, and strong cash flow generation in 2023 and beyond. Finally, our debt-free balance sheet and available liquidity should provide us with the flexibility to pursue smart, synergies-focused M&A and adoption of a shareholder-friendly capital allocation framework. On today's call, I will touch on three main topics. First, I'll walk you through our third quarter performance. Second, I'll give an update on our integration process. And finally, I'll provide some perspective on trends we are seeing in the broader industry environment. For the third quarter, we delivered revenue of $334 million and adjusted EBITDA of $48 million, excluding $17 million of commissioning costs on a subsea project, which I'll come back to in a moment, Adjusted EBITDA in Q3 was $65 million, or 19% of revenue, primarily driven by a more favorable activity mix and faster-than-anticipated realization of merger-related synergies. Third quarter revenue increased 7% sequentially, and on a pro forma basis, 7% year-over-year. Well construction revenue was up 6% quarter-over-quarter, and on a pro forma basis, 13% year-over-year, supported by accelerating new well activity. We have one of the most advanced well construction portfolios in the industry. We specialize in complex and technically demanding wells with solutions that transform how these wells are built in order to enhance efficiency and production across their lifetime. Our best-in-class technology and capabilities are garnering recognition from both customers and industry organizations. In fact, our well construction team won the best health, safety, environment, sustainable development offshore award for our Centrify technology at the recent 2022 World Oil Awards. The Centrify Consolidated Control Console is one of a suite of digitally intelligent well construction solutions to address today's and tomorrow's energy challenges. This award reflects our commitment to developing innovative technologies that provide truly differentiated value to our customers. Revenue generated by our well management product line group, which includes our well flow management, subsea well access, and well intervention integrity businesses was up 7% quarter over quarter, and on a pro forma basis, 4% year over year. Note, however, that Q3 2021 well management revenue included approximately $20 million in equipment sales. Adjusting for this, underlying service revenue was up approximately 15% year over year. The significant underinvestment in energy supply over the last decade, coupled with growing demand, is resulting in new FID approvals. Importantly for our company, nearly 60% of new customer commitments are expected to be offshore. This sanctioning of offshore projects is expected to drive approximately $400 billion of capital spending over the next three years. I will remind you that 70% of our revenue today is generated in the offshore market. On a regional basis, in North and Latin America, or NLA, we secured subsidy well access work for a major client in the Gulf of Mexico. consisting of three confirmed wells and two potential wells, with all operations scheduled to start in early 2024. We have worked with this international operator since 2006, and this award confirms our place in the next phase of this client's development subsea wells. Our well construction team continues to demonstrate their position as the premium provider of tubular running services and products, with contract wins and operational success across the region. The team's outstanding focus on service quality played a major part in these wins. We were also awarded a five-year tubular running services contract in Brazil, and EXPR's unique technical capabilities helped us secure a contract with a major international operator for cementing technologies and downhole service tools in Canada. In Argentina, demand for our wireline intervention services is very high, and we are awarded case tool services work with clients who highlighted service quality as a key factor in their decision-making. For one customer, we secured a two-year contract for case toll operations in South Argentina and received excellent feedback on our performance. This expands our relationship with this client and builds on our recent success in plug and perforation activities performed on this particular project. During the quarter, I was able to travel to Argentina, and we also celebrated the opening of a new base in New Can, Argentina to better position our business in the country. The larger facility replaces our existing base and demonstrates our commitment to the region and to the service lines we operate in Argentina. Expo Argentina has key wireline and testing operations and offers leading services and technologies across well intervention and integrity. In Europe and Sub-Saharan Africa, or ESA, we continue to make excellent progress in developing new business and delivering great performance in ESA. We were awarded a to-be-conveyed perforation, or TCP, contract supporting the energy transition across three geothermal projects in the Netherlands. which marks the first such project in the Netherlands' history. Additionally, we retained our well test and wireline intervention contract with our long-standing customer in the country. In Angola, we won a three-year TRS contract with a major client, and in Azerbaijan, we were pleased to secure another extension to an existing TRS contract with a major international client. We also successfully completed our first well construction hammer operation in Angola and are in discussions with the customer to expand our scope of work there. In the Turkish sector of the Black Sea, we recently commenced a well flow management and intervention campaign on multiple wells. In the UK North Sea, we provided the cementing technologies required to carry out an extended reach deployment for a casing section. This was safely achieved with zero non-productive time, with the client praising our offshore support as second to none for this unique operation. In Gabon, we conducted an extensive slickline perforation campaign for a key client. The utilization of SICLINE reduced costs and enabled the use of lightweight units that will ultimately increase production on the client's offshore asset. Finally, in production solutions, a major international oil company recently awarded expert a contract to construct and operate and maintain a fast-track onshore pretreatment facility in West Africa in order to increase its liquefied natural gas production from the area. Upon completion, this facility will facilitate incremental gas production and feedstock for low-carbon electricity generation targeting the continental Europe market, a market that is increasingly focused on security of supply and energy security issues. The contract has potential to generate in excess of $300 million in revenue over a contract term of up to 10 years. In the Middle East and North Africa, or MENA region, the MENA region maintained their excellent safety performance this quarter. We were awarded a significant contract for mercury removal in North Africa. and continue to expand our work with our customers in Egypt, including winning a two-year surface well testing contract and further extension of an existing well test contract. Additionally, this quarter marked a number of operational firsts for our business in the region, including the first data-to-desk operation in Egypt for a key customer where we enabled them to access and view production parameters remotely. The first well construction hammer job delivered for an international operator in Qatar and the first field deployment of Expro combined sonar and multi-trace technology in Saudi to create a tailored solution that meets the customer's wet gas multi-phase measurement requirements. We also delivered a bespoke well testing approach to evaluate the effectiveness of a minimally intrusive wet gas flow meter solution combining sonar and multi-trace. The solution will ultimately improve the testing frequency, reduce any potential hydrocarbon release, reduce equipment and personnel footprint, and reduce the test duration for each well compared to conventional well testing. We look forward to progressing this innovative solution, which will ultimately avoid well shutdown and minimize production deferral, thereby optimizing operating costs. Finally, in Asia Pacific or APAC region, EXPRESS successfully completed an 18-well plug-in abandonment operation in Australia, building on our established subsea well access experience and track record which enabled the customer to solve unique abandonment challenges. This project demonstrates our strong position to deliver value and extraordinary performance in the integrated decommissioning and plug-in abandonment market. We were also awarded a subsea contract for the sale of two sets of subsea large bore controls in China. We further strengthened our relationship with this longstanding client, winning a contract covering the provision of technology for a minimum of 12 new subsea wells. Our well construction team in Brunei have achieved a remarkable safety milestone of 4,015 days or 11 years without a recordable incident, which reflects EXPRO's commitment to delivering a safe operation, and I congratulate the team for this fantastic achievement. Finally, as was noted in our press release, EXPRO's third quarter results in Asia Pacific were impacted by $17 million of startup and commissioning costs related to a vessel deployed wired through water, light well intervention, or what we call LWI solution that Expro is introducing to the market. In sum, the introduction of new technology during a global pandemic has come with a number of unique challenges with COVID and weather-related delays, supply chain issues, and several technical challenges collectively resulting in significant delays in the startup of operations, and as a result, significant delays to revenue generation. While we do expect some continued impact in the fourth quarter, albeit at reduced levels, we do not expect the startup costs to continue in 2023. The best available information has us finalizing systems testing with the customer in the fourth quarter and the startup of operations in late the fourth quarter or early Q1 of 2023. As an order of magnitude, once it's operational, we expect our LWI system to generate between $50 to $75 billion of annual revenue with additional pull-through opportunities. Turning to new energy initiatives, When we completed our merger with Frank's last October, we set our sights on forging ahead with our ESG journey and continuing to improve business practices in order to transform our business portfolio and reduce greenhouse gas emissions. In April, we published our inaugural Environmental, Social, and Governance, or ESG, review with the stated aim of achieving net zero by 2050 with a 50% reduction in carbon intensity by 2030. We have worked to embrace ESG in every facet of our business and create a better future for our team members, customers, communities, and ultimately the overall planet. We have received recognition for our efforts with MSCI, which is one of the most important organizations that evaluate companies' ESG programs, recently upgrading EXPRO's sustainability rating by two full levels to an A rating. This is a testament to the impressive work of our ESG Leadership Council and all those who support them, and I want to thank our teams for all of their efforts. As recognized global well experts and a trusted partner, we are committed to playing our role to support the energy transition. Technology is a critical component of advancing sustainable energy solutions, and our team has made significant progress introducing value-added services and innovative solutions to meet our customers' challenges. EXPR remains committed to allocating roughly 50% of our research and development budget to carbon reduction initiatives to help our customers advance their energy transition and positioned expo to achieve our own goals. Digitalization will help drive our industry's journey to net zero, and I'm pleased to highlight the progress that we continue to make across our organization. One example of our digital strategy in action is our ITONG system, which advances fully autonomous tubular running services. ITONG is designed to enhance operations and reduce personnel on the rig floor, resulting in improved safety and efficiency with lower operational costs. The system has successfully completed field trials for one of our key customers in the North Sea, taking part in 22 jobs with more than 1,600 connections being made. We also continue to expand our geothermal business, including the noteworthy wind in the Netherlands I discussed earlier, as well as a geothermal contract in Indonesia for a 12-well, 24-month contract for pipe recovery in a very difficult environment. This was a significant capture for the Indonesia team, which was based on our excellent service quality. These wins, combined with the strengthening of our portfolio advancement leadership team, position us well to capitalize on significant new geothermal market opportunities. They also demonstrate that our decades of experience and unique blend of transferable technologies and expertise can support the wells of today and the new energy wells of tomorrow. This quarter also marks the one-year anniversary of the close of the Expro and Frank's business combination. I'm very pleased with the considerable progress our team has made to come together as one global organization and to capture efficiencies across our business. During this first year, we have exceeded our first year targeted cost savings of $55 billion by 13%. Importantly, our combined support costs have declined from 31% of revenue in Q4 2020 before we announced the transaction to 20% in the third quarter of 2022. As outlined previously, we are targeting cost and revenue synergies between $80 to $100 million within 24 to 36 months post-merger. We remain confident that we will achieve $70 million in projected cost synergies during this time, if not earlier. In the third quarter, we consolidated additional facilities, including locations in Perth, Australia, Kuala Lumpur, Malaysia, and Den Helder in the Netherlands. We are also making strong progress to work with our customers to identify operational efficiencies that are possible from our new global organizational structure and drive revenue growth opportunities. As I have said before, while revenue synergies are more difficult to quantify, we expect that our previous estimate of an incremental $10 to $30 million in EBITDA from revenue synergies through our expanded customer relationships and operating footprint, increased time on rig, and greater exposure to the full life of field will likely prove to be very conservative. Another important milestone achieved during the quarter was the full implementation and conversion to a single ERP, which we expect will allow us to streamline a number of key processes across our organization and help us drive even more efficiencies as we enter 2023. I would like to sincerely thank the entire Expo team and service partners for their hard work and numerous contributions towards helping us realize our integration goals ahead of schedule. Without a doubt, we have a winning team that has proven its ability to deliver on our commitments. Before I turn the call over to Quinn, I want to provide some perspective on trends we are observing in the market. Today, the energy market recovery is continuing following growth over the previous two quarters, with upstream investments forecast to grow again through Q4 2022 and throughout 2023. Increase in global economic activity, together with a likely loss of Russian barrels and an increased focus on energy security and diversification of supply, particularly in Europe, further supports the favorable multi-year macro backdrop for energy services activity. While commodity pricing will likely remain volatile in the near term as a result of potential supply disruptions and a possible slowdown in global economic growth, oil and gas demand is expected to exceed pre-pandemic levels of 101 billion barrels of oil equivalent per day in 2023, underpinning the continued positive outlook for the services sector. With good momentum building in longer cycle projects, we expect international and offshore activity to accelerate the remainder of 2022 and into next year as international customers in general and the nocs in particular ramp up their activity as i noted earlier international activity drives about 80 of the expo business so as momentum develops in markets outside the u.s experts should be a primary beneficiary supporting our outlook we are seeing an increase in tendering and license round activity for new projects globally and we continue to see growth in exploration and development activity driven primarily by South America and Asia, with further activity also expected in Norway and select markets within the Sub-Saharan Africa region. Increased drilling and completions activity should support sustained global growth across our portfolio of capabilities in complex well construction services, surface well testing, and subsea well access, which collectively represent about 70% of our business. We are also experiencing increased demand for services and solutions that support increased production in Africa, which is traditionally a core strength of Expro. As noted earlier, the significant underinvestment in energy supply over the last decade, coupled with growing demand, is resulting in increased FID approvals. Importantly, for our company, nearly 60% of the new customer commitments are expected to be offshore. Sanctioning of offshore projects is expected to drive approximately $400 billion of capital spending over the next several years. Again, 70% of our revenue today is generated in that offshore market. Further, through customer engagement and inquiries, we are seeing increasing interest in our geothermal capabilities, as highlighted earlier in Europe and Asia, as the market diversifies in support of energy transition. Geographically, Expo sees strong multiyear growth potential in North and Latin America, the Middle East and North Africa, Sub-Saharan Africa, as well as Asia. The acceleration of global activity, coupled with capacity constraints in certain asset classes, including high-end well construction equipment and subsea test trees, should also result in net pricing gains in 2023 and beyond. Overall, the outlook for the remainder of 2022 and into 2023 remains positive with sustained increases in E&P expenditures. Expro is operating from a position of strength as we are experiencing increased customer activity levels across all segments and regions of our business. bolstered by a backdrop of strengthening industry fundamentals. We believe this positive momentum will accelerate going into 2023 and beyond. For EXPRO, sustained growth and shareholder value begins with strong, defensible market positions, a robust mix of growth opportunities, delivering value with integrity, and a clear strategic vision. Central to our ability to continue to grow is a well-balanced and scalable global operating footprint. We have a strong presence with a full range of capabilities in both mature and emerging markets around the world. We're also leveraging our global operating footprint to do more with our current support structure. Additionally, as customers increase focus on lowering their carbon footprint, we expect more of our business to come from technology-enabled, high-margin services that support sustainability. With that, I'll hand the call over to Quinn to discuss our financial results.
spk02: Thank you, Mike. A good morning and good afternoon to everyone on the call. Given the timing of the close of the expo Frank's transaction last year, I will primarily highlight our sequential performance compared to the quarter ended June 30th, 2022. As I review our third quarter performance to recap, we reported revenue of approximately $334 million for the September quarter, which was up sequentially $20 million or approximately 7% relative to the second quarter of 2022. As Mike noted, Sequential increase in revenue was driven by higher activity across all of our segments, most notably in ESA, which contributed about half of the sequential increase in revenue. Adjusted EBITDA for the third quarter of 2022 was approximately $48 million, representing a sequential decrease of approximately $3 million. Adjusted EBITDA margin in the third quarter was 14%, as compared to 16% in the second quarter. Excluding the $17 million impact of the commissioning costs on the subsea project that was covered in Mike's remarks, adjusted EBITDA would have been $65 million, and adjusted EBITDA margin would have been approximately 19%, reflecting fall through on incremental revenue, a more favorable business mix, and lower support costs as a result of merger-related synergies. Making comparable adjustments to Q2 results, second quarter adjusted EBITDA and adjusted EBITDA margin would have been $55 million and 18% respectively. Adjusted net loss for the third quarter of 2022 was $0.07 per diluted share compared to adjusted net income for the second quarter of 2022 of $0.02 per diluted share. Note that results in the third quarter of 2022 and the second quarter of 2022 include foreign exchange losses of $0.07 and $0.05 per diluted share respectively. Third quarter contribution margin of 33%, was down approximately five percentage points sequentially, primarily reflecting the impact of higher commissioning costs associated with the previously referenced subsea project. Excluding such commissioning costs, contribution margin would have been 38%. Third quarter support costs at $66 million totaled 20% of group revenue and were down approximately $4 million sequentially, or approximately two percentage points relative to the second quarter of 2022, and we're down $12 million for approximately 11 percentage points relative to the combined support costs of Expo and Franks in Q4 2020, which was the last full quarter prior to the announcement of the merger. Total liquidity at quarter end was approximately $287 million. Cash and cash equivalents, including restricted cash, was $157 million as of September 30th. Total liquidity also includes $130 million that is available to the company for drawdowns as loans under our $218 million revolving credit facility. The balance of the facility is available for bonds and guarantees, approximately half of which is currently being utilized. Expro had no interest-bearing debt at quarter end, and the company has no interest-bearing debt today. Our current cash position is in the $175 million area. During the quarter end of September 30th, 2022, cash used in operating activities was $1 million as compared to cash provided by operating activities of $2 million in the second quarter. Q3 adjusted operating cash flow reflecting cash used in operations before cash paid for interest, severance and other expenses, and merger and integration expenses was $8 million compared to $10 million in the second quarter. As highlighted in our press release, increases in networking capital in the just completed quarter and year-to-date were $29 million and $99 million, respectively, primarily reflecting a growth in customer receivables, which we expect to reverse beginning in Q4 and into 2023. Capital expenditures totaled $19 million in the third quarter, compared to $21 million during the second quarter. For the fourth quarter of 2022, the company is planning for capital expenditures in the range of approximately $30 million to $40 million, implying total capex for 2022 of $81 million to $91 million, or approximately 7% to 7.5% of expected revenue. Now moving into the details by reporting segment, NLA revenue for the third quarter was $135 million, a sequential increase of $5 million. The increase was primarily due to higher well construction product sales in the U.S., higher well construction services revenue in the U.S. and Mexico, and higher well-flow management services revenue in Canada, partially offset by lower well-flow management revenue in the U.S. and lower well construction revenue in Guyana. And only segment EBITDA was $40 million. It was up sequentially by a million dollars. Segment EBITDA margin was consistent with the strong prior quarter at approximately 30%. The increase was attributable to higher activity and a more favorable business mix during the three months ended September 30th. For the EISA segment, revenue in the third quarter was $100 million, which was up $10 million, or approximately 11% quarter over quarter. The sequential increase was primarily driven by higher subsea well access revenue in Azerbaijan and in Angola, and higher wealth management revenue in the United Kingdom and Nigeria due to increased customer activities. The increase in revenue was partially offset by lower subsea well access revenue in the United Kingdom. ESA segment EBITDA of the third quarter was $18 million, or approximately 18% of segment revenue, a sequential increase of $3 million. The increase was primarily attributable to higher activity levels and a more favorable activity mix during the September quarter. For the MENA segment, revenue in the third quarter was $50 million, an increase of $5 million, or approximately 11%. The sequential increase was driven by higher wealth flow management revenue in Saudi Arabia and in Algeria. MENA segment EBITDA was $15 million, or approximately 29% of segment revenue, a sequential increase of $1 million quarter over quarter. The increase in segment EBITDA was primarily due to higher activity. For APAC, revenue in the third quarter was $50 million, which was an increase of $2 million, or approximately 4% sequentially. The increase in revenue was primarily due to higher subsea whale access revenue in Australia, China, and Indonesia, and higher wealth construction revenue in Japan. Increase in revenue was partially offset by lower equipment sales related to wealth management services in Malaysia. APEC segment EBITDA was negative $9 million for a negative 17% of segment revenue compared to $4 million for approximately 9% of segment revenue in the prior quarter. As previously noted, the reduction in segment EBITDA was primarily due to the $17 million in startup and commissioning costs on a large subsidy project that were incurred during the quarter. Excluding $17 million and $4 million, respectively, of the above-mentioned startup and commissioning costs during the three months ended September 30th and June 30th, segment EBITDA was about $8 million for both the third quarter and the second quarter. The segment EBITDA margin was 16% and 17%, respectively. We expect that revenue segment EBITDA margin in APEC will trend positively in Q4 and into 2023. As Mike mentioned, our integration plans are progressing well. We are already starting to realize the significant synergy benefits we anticipated when we first announced our business combination. Through the third quarter of 2022, we have identified in action more than 110% of our year one synergies capture plan, both in regards to headcount and annualized value in dollars. We are well on our way to achieving our goal of $70 million in cost savings within 24 to 36 months up close. As to our near-term outlook, we expect that revenue in the fourth quarter will be flat to up modestly compared to the third quarter, reflecting continued business momentum in NLA and the startup of new contracts in ESA and MENA. Consistent with prior guidance, we continue to expect that our revenue run rate will approximate that of the pre-pandemic 2019 revenues of Legacy Expro and Legacy Franks on a combined basis, and we therefore reaffirm Our guidance that Q4 revenue should fall within a range of $325 million to $350 million. We may see a seasonal drop in revenue in Q1 as Northern Hemisphere activity falls off, but 2023 overall looks to be a very good year in terms of activity, revenue growth, and year-over-year margin expansion. With the benefit of fall through on incremental revenue and synergies, we expect that adjusted EBITDA margins will be in the area of 20% of revenue as we exit the year. Provided our year-to-date build and working capital begins reversing Q4, as was currently anticipated, our year-end cash position should be in the $200 million area, with cash generated from operating activities, funding integration costs, CapEx, the Q1 acquisition of SolarSense, and the share buyback program that was completed in Q2. By preserving and protecting our currently strong financial profile, and by maintaining a disciplined approach to investment, we believe ExPro will have sufficient financial flexibility to fund growth and increase returns to shareholders. As always, our objective is to enhance long-term value for our shareholders, employees, partners, and the communities in which we operate. With that, I will turn the call back over to Mike for a few closing comments.
spk03: Thank you, Quinn. In closing, I would like to leave you with a few highlights on why we view ExPro as a differentiated and compelling investment opportunity. Market sector fundamentals are very favorable and support a multi-year upturn. Expro has a diverse set of global capabilities and well construction and well management that will allow us to capitalize on a growth cycle that we expect to be multi-year in duration, global in scope, span all phases of oil and gas development, and include all operating environments. Second, we have a leading and differentiated portfolio and are well positioned in markets that benefit from strong industry fundamentals. We believe we are in the early innings of an international and offshore recovery, and we expect good growth and strong incremental margins as drilling and completions activity continues to ramp up and merger synergies translate into improved operating leverage. Net pricing gains should provide a scope for additional margin expansion. In terms of contribution margin, which is essentially cash basis gross margin, fall through on incremental drilling and completions revenue should be greater than 50%. Third, Our debt-free balance sheet and free cash flow upside provides us with significant financial, operational, and strategic flexibility that will allow us to fund investments to deliver above-market growth and execute a disciplined and shareholder-friendly capital allocation framework, both of which will be designed to create long-term value for expo stakeholders. We are incredibly excited about the platform that we have built and the opportunities ahead for our business. Thank you very much for your participation on today's call. Operator, let's go ahead and open it up for questions.
spk00: Thank you. For our Q&A, if you would like to ask a question, please press star followed by one on your telephone keypad. When preparing to ask your question, please ensure your device is unmuted locally. Today, we'll first begin our Q&A session with a few questions that we have received from our pre-registered callers. The first question is, large projects were highlighted in your press release, the first of which sounds like it negatively impacted results for the last couple of quarters, and materially so in the September quarter, and the second of which sounds like it could be a consequential win. Based on our reading of the press release, the first project is a subsea well access project in Asia, and the second project sounds like an EPF project in Africa. First, any additional details on the two projects that you can provide would be helpful. Second, Your press release notes that adjusted EBITDA margin in Q3, excluding startup costs on the APAC sub-C project, was 19%. Can you just confirm that the 19% adjusted EBITDA margin is comparable to your guidance for Q4 of plus or minus 20% adjusted EBITDA margin?
spk03: Elliot, thanks for putting the question forward. So, you know, good question. I'll be happy to comment on the difference in the two projects because they are fundamentally very different. So I'll talk about that more from, you know, project kind of side by side and how those fit in. I'll let Quinn comment on some of the margin questions as well to include him. But I guess, you know, fundamentally, as I noted in some of my pre-prepared remarks, you know, the first project is, it's really, it's an inaugural project for us. We have a newly developed light well intervention, or what we call LWI solution, which we hope will become operational in late Q4, early Q1. And what's really unique about the solution is that it's designed to reduce the cost of subsea well interventions by eliminating the need for a drilling rig. So it lets us go in with a much smaller vessel, kind of more nimble, quicker rig ups, quicker operations, those type things. And this really is, we feel, is very, very important for the marketplace, you know, given the increasing number of subsea wells and given the age profile of the global subsea well inventory. So we think that's a real critical one. The second one, this is an EPS type project. It's more of a what we call a fast track modular treatment facility. This will be in Sub-Saharan Africa. It's largely being constructed to bring incremental gas to the European marketplace. And obviously, there's lots of concerns in Europe today around, you know, anxiety around, you know, diversification of supply, energy security, those type things. So this really allows a response to bring additional gas supply into Europe. So obviously the first project, you know, kind of fits within our subsidy well access business, and the second project fits within our production solutions. But if you kind of look at these side by side, there's a number of key differences. But I think, you know, what's really important to keep in mind is that these two projects really capture the essence of what EXPRO does on a day in, day out basis. Fundamentally, we try to differentiate ourselves from other service companies, really because we have the ability to go in and provide engineered solutions, really high value added services to major IOC or blue chip customers, both in terms of well construction and well flow management opportunities. I guess I would just expand on the light well intervention vessel delay and those type things. Yes, we've had some delays that really have resulted in some excess cost during the startup phase of the operation, but I do think that most of those startup costs are really behind us. I would look at that $17 million of cost in the third quarter as kind of a one-off, not a recurring cost. And fundamentally, you know, once we go operational, we're very confident in the technology because the challenges we've had in the startup in this has not been around the technology. It's much more been related to some COVID issues, supply chain challenges. Some of our third-party partners have had some delays and those type things. But it's fundamentally not been an issue with the technology. It's just been more of kind of the shakedown cruise, so to speak, aspects to get some of these things ramped up. And really, in terms of the production project in Africa, this is, as we mentioned, this is with an international oil company and really helps us utilize some of our proven production technologies that allows us to construct, operate, and then ultimately maintain a fast-track modular pretreatment facility that, as I said earlier, will allow the operator to increase LNG production from the area. The facility additionally will help provide incremental gas production feedstock. And really, I think importantly, it's a low carbon electricity generation because of some of the technology we can bring with mercury removal and some of the CO2, carbon dioxide recompression treatments and those types of things. And this is a very significant project for us. It's something that we anticipate will be revenue over the project duration will be in excess of $300 million. And we think this really just highlights the capabilities of our production solutions. And I think we're going to see more and more of these type projects as energy security and energy supply to Europe become more critical as we move forward. I guess I'll just leave that with there. But, Quinn, do you want to comment on some of the margin questions as well?
spk02: Sure, Mike. As both Mike and I covered in our prepared remarks, excluding the startup and commissioning costs on the LWI project, Q2 and Q3 adjusted EBITDA margins were 18% and 19% respectively. As Mike mentioned, we are assuming more modest excess costs in Q4. I'd say directionally at a level that is consistent with the excess costs that were incurred in Q2, so about $4 million is what we've kind of bookmarked at this point based on what we know today. And as we expect the LWI system to be operational sometime in either late Q4, for early Q1 2023, and it's really on that basis that we remain comfortable with our guidance, so plus or minus 20% adjusted EBITDA margin in Q4 as we exit 2022.
spk00: Our second question is, can you provide more perspective on the industry's energy transition and EXPRO's role in supporting it?
spk03: Yeah, I think it's another really good question. I can tell you that energy transition is, I think, the top of the mind of everyone in the industry. And frankly, almost every conversation that I have with customers or clients or partners inevitably turns to some type of a discussion around sustainability and how do we ultimately, as an industry, reduce our carbon footprint. And I think fundamentally, over the coming years, I think that this will be one of the first questions that will be asked for any new project. It's really around sustainability and, you know, how can operators and how can suppliers ultimately drive towards a lower carbon footprint? I think what's unique for Expro is, you know, we're really built for a lower carbon world. We think that our commitment to sustainability and our strong portfolio and some of the carbon reduction solutions we have today, we think those are really solid differentiators. You know, whether it's technology-driven solutions, especially around automation and digitalization. We've made some tremendous progress in well construction on more machine learning, artificial intelligence, reduction of personnel in a red zone and reduction of personnel on a rig floor that has a dramatic impact and frankly makes operations more efficient. You know, in 2021, I think it's a good example, you know, roughly 40% of our research development spending was on solutions that we could tie back to, you know, helping create a more sustainable future for our customers. And in 2022, it's going to be almost a 50% commitment from our R&D dollars. So that's something that we've been doing. We think it's very important and we think it's a unique, you know, unique set of technology that we can help kind of bring and bear to the industry. You know, I think we're also starting to see some increasing interest in EXPRA's geothermal capabilities, particularly in Europe and Asia, as the market starts to diversify and look for more support energy, you know, and new energy addition type projects. You know, so fundamentally, you know, we're overall committed to lowering our own CO2 emissions. Our bigger contribution to CO2 emissions that our services is how we'll help eliminate and reduce carbon CO2 emissions from our customers. And I think that just positions us with being a trusted service partner with our customers. And then I think it's also important to recognize that I commented about earlier in my prepared remarks, but I'm very proud of the expert team. You know, we've gathered some really strong recognition for our ESG efforts. You know, getting our ESG, first ESG report out there in record time, I think, was tremendous. And for us to be recognized by MSCI for the efforts and to be rated as a single A there, I think, was quite an effort. Just want to commend the team. And that's the kind of commitment that we make to sustainability as experts. I think it's a really positive message from that.
spk00: We now turn to Eddie Kim from Barclays. Your line is open.
spk01: Hi, good morning. So last quarter, Mike, you talked about starting to see some opportunities to push pricing and that those opportunities would likely accelerate exiting this year and into next year. Just curious if you're having more of those discussions today, and in which of your business lines has it been easier to push pricing and have those type of discussions?
spk03: Sure. Eddie, good question. I appreciate that. Yes, we are starting to see, particularly in some of our higher-end well construction, some of our subsea test tree assemblies, those type things, we're starting to see opportunities to push pricing I think it's really, you know, it's been really positive for us to see that, you know, a number of the offshore drillers were talking at your conference back in September, you know, rig rates that were starting with a four. Well, now we're even starting to hear some rig rates that are starting with a five. So I just, I get the sense that we're starting to build more and more momentum in the industry, especially international and offshore, where we're going to start to get some pricing leverage. I can also tell you, I put a lot of weight in the kind of questions, you know, over the last six to eight months, I've really been able to get out there and be much more active traveling to visit customers globally. And I oftentimes put a lot more credence in the questions that customers ask as opposed to the things that they're telling us and lots of questions around, you know, How is experts sitting for people? How are your training programs? How's your recruiting? How's your asset base? You know, what's your capex spend like? I just get more and more of a sense that, you know, our customers are starting to sense that, you know, activities ramping up, utilization of people and equipment's ramping up, and they know what comes next. And that's really from kind of a pricing standpoint. So just lots of, now, Grant, it's lots of anecdotes right now, but I'm starting to feel like we're getting some momentum behind some of those things. And we push price every opportunity we can. You know, we push as hard as we can to be able to start moving things in that direction because it's important for us to get back to some better pricing levels than what we've had here in the last several years.
spk01: Got it. Great. And that's great to hear. Mike, just kind of a related follow-up. I mean, you highlighted a number of new contract wins in your prepared remarks today. But it's just a little bit difficult for us to tell whether these are kind of normal course wins for your business or if they represent a meaningful step up as compared to prior years. So could you just give us a sense here as to how much of an increase this is and maybe provide some additional color on the quality of these wins, perhaps from a pricing and duration perspective?
spk03: Sure, Eddie. And I guess how I would frame it up is, you know, those were probably more noteworthy ones to highlight. And we highlighted, you know, a large number of them because we're starting to see, you know, the number of technical inquiries we have from customers, the number of projects they're putting out to tender. We're really starting to see that step up and ramp up. So it is incremental to, you know, going into next year. Most of these typically are kind of of a know three two to three year type duration um the difference we have today is is which which really still hasn't quite changed yet but a number of international projects today operators are approving you know a three or four well project and then they roll that into another two wells and probably another two wells beyond that they they kind of they kind of are seeming to dip their toe into these things And I actually look at that as a real positive because when you win those contracts the first time, our ability to just roll those over in future activities is quite strong. And generally, we can have some pricing adjustments there too. So overall, I guess what I would say is it's hard for me to quantify for you without really digging into the weeds. But what I would say is we're seeing an increase in tendering activity. We have a very high bid-win rate today, and we'll start to see that translate into better activity, better, you know, higher number of jobs, execute, and those type of things as we go into 23. Got it.
spk01: I appreciate all that, Tyler, and I'll turn it back.
spk03: Thanks, Eddie.
spk00: Our next question comes from Samantha Ho from Evercore. Your line is open.
spk04: Hey, guys. Mike, I know you talked about this already, but I was just wondering on the solar, or not solar, the geothermal piece. It was great to see you guys win some contracts in Asia. I was wondering if you could kind of peg for us what the growth opportunity is in Asia versus Europe. Do you have a sense of how large this market opportunity could be for you and how much of a contributor it could be over time?
spk03: Good question, Samantha. I would say I think that the – I probably have a better sense for the European opportunity than Asia just because we've had some recent – we've had some participation in some recent customer forums and those kind of things. And I think there's going to be tremendous growth opportunities in Europe. And I think that at some point in time down the road for us – you know, geothermal, you know, alternative energy, kind of service lines and things that we don't do today. It's kind of a new customer base, so to speak. It'll become a meaningful revenue stream for us. And whether that's, you know, two years from now or five years from now, you know, it's going to be a double-digit percentage of our revenue that we'll have from kind of alternative energy. So I think it's quite a strong opportunity. I'm more – I have a better flavor today for the interest in Europe, largely because so much discussion around European energy security and supply and really a requirement for them to start to have power generation from alternative sources that's not necessarily hydrocarbon because of some of the challenges with Nord Stream. I would anticipate we'll see some of the same type of interest in Asia, but I think there'll be a little bit of a lag compared to what we see in Europe.
spk04: Okay, great. I was also curious about this announcement that you guys had last month about winning funding for carbon-reducing technology development over in Aberdeen. I'm curious if you could also just tell us a little bit more about that. You know, like, what's the timeframe for this type of R&D effort?
spk03: Sure. No, good, good, good.
spk04: I think it's kind of slurring and venting.
spk03: It does. No, good, good question. And frankly, I probably should have highlighted that in today's remarks. So, thanks for bringing it up. So, we were awarded some funding from the Net Zero Group in the U.K., And for us, it's targeted around, so this really will be activity and research that will go on here over the course of 2023 going into 2024. Fits in with a number of the flaring type reduction initiatives we have and some of the carbon capture initiatives we have. So, you know, it was, I think there were several hundred, I want to say 320 initial submissions. And there were about 20 of us that were selected in the end to it to, to achieve some funding. And it was a very diverse group that selected who the awards were going to go to. So really for us, and it gives us a chance to collaborate more further with customers in particular. So they have some, we can use them as a sounding board, as a, does this fit in with their technology? So it just helps really fits in well with us for our technology development roadmap reducing emissions, and improving flaring technology.
spk04: Okay, and if I could squeeze in one more, was there an acquisition for a solar company? Did I hear that right?
spk03: No, there's a company that we acquired called SolarSense, and this is much more around digital fiber optics, and we made that, Quinn, in Q1.
spk02: It's a relatively modest upfront investment. There are some contingent consideration elements to it, but as Mike mentioned, SolarSense is an incremental technology for well intervention integrity business, and again is focused on data acquisition and data interpretation, which fits in well with what we're trying to do in terms of higher value added services to complement our mechanical and other intervention services.
spk04: Okay, that makes sense. Sorry about that. Yeah, thanks so much, and congrats again on the quarter.
spk03: Sounds good. Thank you, Samantha. Appreciate it.
spk00: Thank you, ladies and gentlemen. That concludes your conference for today. We appreciate your participation. You may now disconnect.
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