Expro Group Holdings N.V.

Hello everyone and a warm welcome to the EXPRO's second quarter 2023 earnings presentation. My name is Emily and I'll be coordinating your call today. After the presentation, there will be the opportunity for any questions which you can ask by pressing start followed by the number one on your telephone keypad. I'll now turn the call over to our host, EXPRO's Chief Financial Officer, Quinn Fanning. Please go ahead, Quinn.

Welcome to EXPRO's second quarter 2023 conference call. I am joined today by EXPRO CEO Mike Jarden. First, Mike and I will share our prepared remarks, then we will open it up for questions. We have an accompanying presentation on our second quarter results that is posted on the EXPRO website, expro.com, under the investor section. In addition, supplemental financial information for the second quarter and prior periods is downloadable on the EXPRO website, likewise 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 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 statements. More complete discussion of these risks is included in the company's SEC filings, which may be accessed on the SEC's website, SEC.gov, or on our website, again, 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 second quarter 2023 earnings release, which can also be found on our website. With that, I'd like to turn the call over to Mike.

Good morning and good afternoon, everyone. As Quinn noted, we posted slides with QCO highlights to the XBRO website. Quinn and I will refer to several of these slides during our prepared remarks today. As highlighted in our press release, the second quarter 2023 revenue was $397 million. which is up by 58 million or approximately 17% relative to the first quarter of 2023 and up 27% relative to the second quarter of 2022. Sequential and year-over-year revenue growth compares favorably to the guidance provided on our last earnings conference call, which in summary was that we expect about 10% revenue growth quarter-over-quarter and about 20% revenue growth year-over-year. As highlighted on slide four, the second quarter results reflect a continued ramp up in activity across geographies, areas of capabilities, and product lines. Well construction revenue was up 12% sequentially and 18% year over year, while well management revenue was up 20% sequentially and up 32% year over year. Adjusted EBITDA for Q2 2023 was approximately $72 million, representing a sequential increase of approximately 30 million or 71% relative to first quarter, primarily reflecting higher revenue, a more favorable activity mix, and lower support costs. Adjusted EBITDA margin in the second quarter of 2023 was 18% as compared to 12% in the first quarter of 2023. At 18%, reported adjusted EBITDA margin was at the high end of our guidance range. Quinn will provide some additional details But I'll note that underlying profitability is trending positively. Reported contribution margin of 34% includes approximately $6 million of LWI-related non-reimbursable, non-productive time, or what we call NPT, which negatively impacted Q2 contribution margin by approximately 1.5 percentage points. In addition, we are taking a relatively conservative approach to the recognition of margin-associated with the onshore pretreatment facility that we are constructing for E&I in Congo, which also had dilutive impact on overall contribution margin of approximately one and a half percentage points. We are successfully working through discrete operating issues, whether LWI system and excess costs should be transitory in nature. The E&I Congo project has gone well to date, and we expect the facility to become operational sometime in the first half of 2024. We started 2023 with a healthy order book, and I'm pleased that we have continued to build on this momentum. In the second quarter, we delivered a strong quarter, capturing an additional $300 million in new work orders by capitalizing on a strong resurgence of activity. Contract wins reflected improving market, the depth of our technical expertise, and Expro's best-in-class service delivery. The breadth of our portfolio is differentiating Expro from our competitors, And I've remained optimistic on the outlook for 2023. For reference, we have summarized the backlog trend over the last six quarters on appendix page eight on our accompanying presentation. I'll note that backlog for a services company is not the same as a manufacturer as the time of realizing revenue and backlog is less certain. Nonetheless, we are pleased to see a stable backlog quarter over quarter at an all time high of plus $2 billion. From our perspective, the macro backdrop remains very constructive, with OPEC plus restraint offsetting a weaker near-term demand outlook. Recent and expected FIDs suggest that the offshore market, from which we generate approximately 70% of our activity and revenue, will attract investment capital that has not been seen in over a decade, resulting in long cycle development, capacity expansion projects, supporting a multi-year growth phase for energy services overall, and for value-adding services providers such as Expro in particular. Expro's business, which in a nutshell is largely driven by international and offshore activity, is built to ride the tailwind that we expect to persist for the next several years, driven by favorable supply-demand dynamics and a heightened emphasis on energy security and diversification of supply. Our basic medium-term business strategy is to maximize this growth cycle. By rationalizing non-customer facing functions and selectively consulting facilities, we have largely realized our previously announced cost synergy targets and reduced our support costs to approximately 20% of revenue. Our team is now focused on capturing new work and executing awarded business. Improved asset utilization across our product lines and increasing the drilling and completions activity should result in a more favorable activity mix. Continued costs and capital discipline should result in improved operating leverage, margin expansion, and better cash generation. We are also pushing pricing to get more value for the services that we provide our customers, and we believe that our results will reflect net pricing gains beginning in the second half of 2023. I'll remind you that the midpoint of our most recent guidance was for full-year 2023 revenue of roughly 1.5 billion and for full year 2023 adjusted EBITDA margins of plus or minus 20%, implying year-over-year adjusted EBITDA margin expansion of about 400 basis points. We believe that we will exit 2023 with quarterly run rate revenue of about 400 million or 1.6 billion annualized and adjusted EBITDA margins of plus 20%. If full year 2023 results are consistent with our current expectations, We will deliver on key financial targets that we established when we announced the expo Frank's merger in early 2021, despite a dynamic operating environment and startup challenges associated with deploying several new technologies. A combination of incremental activity, merger related revenue synergies, the investments we have made to date and new technologies and pricing tailwinds should support mid-teen top line growth through at least 2024. Let me now move on to some regional commentary, which is covered on slide five. In North or Latin America, our well construction product line continues to demonstrate exceptional performance. An operator in the Gulf of Mexico had to suspend a well due to a delivery delay of the completion tree. The well's lower completion was already in place. Therefore, regulations require the operator to set and validate by pressure test two separate mechanical barriers prior to moving to another operation. Express team provided two high tensile, high pressure brute packer systems for the suspension, offering an extremely robust V3 rated barrier system for ultimate dependability during the toughest weather conditions. After remaining in the well for five months, once the completion tree was delivered, both packers were successfully retrieved and ultimately allowed the operator to finish the completion of the well. This is an important accomplishment for our brute well isolation system. Moving on to Europe and Sub-Saharan Africa, We recently announced a new $20 million contract with Harbor Energy for a well abandonment campaign as part of the decommissioning project for the Balmoral area in the UK continental shelf. Reinforcing our position as a key enabler within the plug-in abandonment market, this multi-year contract will utilize EXPRO's subsea well access technology with a combination of open water and in-riser applications. We continue to see customers look to secure subsea landing string capacity As the backlog of offshore deep water and ultra deep water projects continues to build in Ghana, we have also received a contract extension worth more than $50 million to provide subsidy packages. We have held this contract since 2012 and securing the extension is testament to the superior capabilities of our subsidy landing strings and excellent service delivery team. In the Middle East and North Africa, at several investor conferences, I discussed EXPRO's sustainable energy solutions, highlighting examples such as in Algeria, where we provide emissions management and flare reduction services and solutions to help our customers commercialize gas that was historically being flared. We have further demonstrated our commitment to helping make energy safer, cleaner, and more efficient. Utilizing cost-effective, innovative technologies, we support a customer in the MENA region to mitigate potential environmental damage. EXPRO's production optimization solution improved operational efficiency and made a significantly positive commercial impact by decreasing the loss of oil, all while minimizing the environmental impact to support our customers' carbon reduction initiatives. We have also deployed an electric-powered slickline unit for a customer in Qatar as part of an initiative to move away from diesel-powered units. This is the first deployment of this unit type within EXPRO where the electric power pack replaces the diesel with no additional deck space required and ultimately supporting our customers on their journey to reducing their greenhouse gas emissions. This is another great example of EXPRO working together with our customers to develop and deploy the right solutions to help contribute to a lower carbon world. Lastly, moving to the Asia Pacific region, our Indonesia team completed its first semi-submersible exploration and appraisal project with a 100% performance score. As part of this successful job, EXPRO delivered services across three wells for three-inch subsea direct hydraulic, drill stem testing, downhole sampling, and well testing operations. Turning to slide six, which highlights several operational achievements and technology awards, I will now call attention to a few noteworthy achievements from the Corridor to provide you with a further sense of EXPRA's current business momentum. First, I'm pleased to share positive operational results from our subsea well access product line, which has completed a five-well desuspension campaign offshore Australia for one of the super majors. EXPRA has more than 35 years of experience providing a wide range of fit-for-purpose subsea well access solutions and extensive portfolio of standard and bespoke subsea testery assemblies. Our test tree assemblies, which are also known as landing strings, and our subsea team have supported more than 3,000 customer operations to date. With a proven track record and a great team, we should be a primary beneficiary of the expected increase in deepwater drilling and completions activity over the next several years. With the recent contract awards in the Europe, Sub-Saharan Africa, and Asia Pacific regions highlighting momentum in our traditional subsea business. Our recent investment in riserless well intervention has allowed us to significantly expand our subsea toolbox, providing the company with both rig and vessel-deployed lightwell intervention capabilities and the ability to cost-effectively support our customers' requirements throughout the life of their subsea wells, from completion through production and production optimization all the way through to ultimate abandonment. As I noted at the top of my remarks, LWI-related NPT negatively impacted corollary results, But achieving operational status on our vessel deployed system late in the first quarter was an important milestone for our subsea team. We expect that the profitability of our subsea well access business will continue to improve in the second half of 2023 and beyond as we put some of the teething issues of this first LWI work scope behind us and focus on executing additional vessel deployed LWI work that's been secured. Within our well construction product line is our cementing technologies. which we expanded with the acquisition of cementing specialist Delta Tech Global in the first quarter. We continue to generate significant market interest in the innovative technologies that Expro brings to the market. And in June, Delta Tech was presented with the internationally recognized 2023 King's Award for Enterprise, receiving the Innovation Award. As the most prestigious award for businesses in the UK, the King's Award celebrates the outstanding success and significant contribution of businesses across the country. In addition to this award, the Delta Tech team has also been recognized for its technology offering at the UK's Northern Star Awards. These are great achievements and reinforce the team's excellent track record of developing and deploying cementing technologies that help increase our clients' operational efficiency, deliver rig time and cost savings, and also help to improve the quality of cementing operations. Additionally, within the well construction product line, our team has achieved another record-breaking operation in which we installed a 14-inch casing string, and we utilized XPRO's proprietary digital technology, Centrify. During this operation, our Centrify intelligent command and control solution enabled the rackback of 67 stands of drill pipe offline and set a record running speed, all while minimizing personnel required for the operation and eliminating the need for personnel in the red zone. This was one of the fastest and most efficient 14-inch jobs in the North and Latin America region to date. Finally, I'll note that our new energy initiatives are ever increasing. Our geothermal business continues to develop globally, and we have recently accepted a board position on the International Geothermal Association, strengthening our commitment as an integrated service provider to the growing and increasingly important geothermal sector. I'm also pleased to share that after construction, test rig up and deployment of a geothermal-specific well test evaluation spread for a customer in Germany They successfully achieved first steam. This demonstrates our enhanced offering capabilities in the geothermal sector and our commitment to a more sustainable and lower carbon future. We are working to advance new strategic partnerships and have recently become members of the Solent Cluster and Carbon Capture and Storage Association. This is important as we advance our strategy to grow our business in the carbon capture use and storage sector further strengthening our sustainable energy solutions to manage the evolving industry needs around carbon capture, and more broadly, to leverage our technologies and expertise to reduce emissions and unlock new sources of cleaner, lower carbon energy. Before I turn the call over to Quinn, note that slide seven recaps our Q3 and full year guidance, which we are again reaffirming. In summary, The market outlook for 2023 remains positive, with oil demand returning to pre-pandemic levels during the first quarter of 2023 and continuing growth demand throughout the remainder of the year and into 2024 as the U.S. and European economies stabilize and demand continues to recover in developing markets, including China. Liquids balances have tightened since Q1, supporting high and generally stable oil prices with $70 per barrel of oil currently feeling more like a relatively stable floor. This is consistent with the EIA's average Brent forecast of roughly $79 per barrel for 2023, rising to $84 per barrel in 2024. EIA's longer-term outlook indicates that oil prices will remain at attractive levels for operators. Similarly, we continue to see generally robust gas prices which have somewhat stabilized from the volatile and unstable highs seen at the beginning of the Russia-Ukraine war. In our view, gas will remain a structural source of lower carbon electricity generation and a critical transition fuel on the path towards global net zero. Upstream investments are expected to continue to grow and should soon exceed pre-pandemic levels as countries are challenged with the energy trilemma to secure reliable, affordable, and sustainable energy and as operators seek to increase production, balanced with continued capital investment discipline, particularly amongst the IOCs. While some macroeconomic uncertainty remains, particularly around the timing of a Chinese demand recovery, the outlook continues to be positive for the energy services sector, and we believe demand for our services and solutions will continue to grow throughout 2023 and into 2024. International and offshore activity is continuing to increase especially in Latin America and across our Europe, Sub-Saharan Africa, Middle East, North Africa, and Asia Pacific regions as operators look to progress new developments such as we've observed in Brazil, Guyana, Norway, Qatar, and Egypt, and increase in exploration in both mature basins and frontier areas such as Namibia. In general, activity in Sub-Saharan Africa, which is historically a strong market for expo, seems to be experiencing a bit of a renaissance. Deep water and ultra deep water activities should favor our well construction and subsidy well access businesses and elements of our well flow management business as well. Additionally, the number of offshore projects expected to be sanctioned continues to climb with approvals in 2023 forecast to exceed 2019 levels and a continuing pipeline of projects poised to be sanctioned between now and 2030. We are also seeing an increase in exploration appraisal activity both in conventional oil and gas and for future carbon capture use and storage projects, which further indicates for an increased future offshore activity, again, supporting the positive longer-term activity outlook. With high and relatively stable commodity prices, operators are also looking to maximize production from their existing well stock, all the while striving to reduce the amount of methane emissions from their overall fossil fuel operations. This is driving further demand for our production-related activities within our well flow management and well intervention integrity product lines, especially across the Asia Pacific and Latin America regions. In addition, as a number of mature assets reaching the end of their economic life is increasing, there is a growing requirement for cost effective plug and abandonment solutions underpinning the decommissioning market and increased activity, particularly in Europe. With increasing operator upstream investments and the resultant activity, Mike Valdes, expert on the broader energy services sector continue to experience increased utilization of people and assets and a tightening of supply supporting our ongoing initiatives to raise prices and extract more value for our services and solutions. Mike Valdes, All combined, the outlook for the sector and expose quite positive with that i'll hand the call over to Quinn to discuss the financial results.