Pason Systems Inc.

Good morning. My name is Joelle, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Payson Systems Inc's fourth quarter 2022 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remark, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to redraw your question, please press star followed by two. The contents of today's call are protected by copyright and may not be reproduced without the prior consent of Payson Systems, Inc. Please note the advisory is located at the end of the press release issued by Payson Systems yesterday, which described forward-looking information. Certain information about the company that is discussed on today's call may constitute forward-looking information. Additional information about Payson Systems, including the risk factors relevant to the company, can be found in its annual information form. Thank you. Celine Boston, CFO, you may begin your conference.

Thank you, operator. Good morning, and thank you for attending Paython's 2023 first quarter conference call. I'm joined on today's call by John Faber, our president and CEO. I'll start today's call with an overview of our financial performance in the first quarter. John will then provide a brief perspective on the outlook for the industry and for Paython, and will then take questions. I'm very pleased to report on Paysan's first quarter 2023 results, which continue to demonstrate our strong competitive positioning, the increasing demand for our products and technologies, and significant operating leverage. Paysan generated consolidated revenue of $98.2 million in the first quarter of 2023, a 32% improvement over the first quarter of 2022. With this revenue, Payphone posted $52.4 million in adjusted EBITDA, which represents 53.4% of revenue, a significant increase from the $33.4 million, or 45% of revenue generated in the first quarter of 2022, and a continued demonstration of our mostly fixed cost base. All of the company's business segments contributed to this strong quarterly result. Our North American segment set a new quarterly record level for revenue per industry day, at $922, beating the previous record of $890 in the fourth quarter of last year. This result benefited from a strong Canadian winter drilling season, which is a region that has historically generated higher levels of revenue per day, but also represents maintained leading market share and an improved pricing environment. Resulting North American revenue was $80 million in the first quarter, a 29% increase from the first quarter of 2022, while segment gross profit increased by 43%. Both of these results, once again, outpace the improvement in underlying industry conditions. Similarly, activity levels and revenue generated per day in our international end markets also improved year over year, and revenue generated by the International Business Unit was $15.6 million in the first quarter, a 46% improvement from the first quarter of 2022. Segment gross profit was $7.8 million in the first quarter of 2023, a 70% increase from the 4.6 million generated in the first quarter of 2022. Energy Toolbase, our emerging business in the solar and energy storage market, posted its highest quarterly revenue level yet, with 2.9 million generated in the first quarter of 2023, a 61% increase from the first quarter of 2022. First quarter revenue for this segment benefited from commissioning of control system projects and improved pricing on its economic modeling software tool. As we've previously noted, reported quarterly revenue for this segment will fluctuate with the timing of control system installations. Sequentially, while we benefited from strong industry activity in Canada through its winter drilling season, U.S. rig counts fell slightly quarter over quarter. Despite North American activity levels remaining relatively flat sequentially, both revenue and adjusted EBITDA results improved from the fourth quarter of 2022 to the first quarter of 2023. With respect to our cost structure, our first quarter results continues to highlight our mostly fixed cost base and our ability to benefit from higher levels of revenue within this context. We will continue to see variable elements of our cost structure fluctuate with revenue and will continue to work to manage inflationary effects on our business. These effects, along with changes in foreign exchange and the relative mix of rigs within our end markets, could have an impact on quarterly margins in the coming quarters. That said, our first quarter adjusted EBITDA result of $52.4 million represents 53.4% of revenue and 80% incremental adjusted EBITDA when compared to the prior year comparative period, demonstrating significant operating leverage. Net income attributable to Paython for the three months ended March 31, 2023, was $35.8 million, or $0.44 per share, a significant increase from the $18.6 million, or $0.23 per share, generated in the first quarter of 2022. Net income in the first quarter of 2023 benefited from much lower stock-based compensation expense, which reflects the mark-to-market on the company's cash-settled stock-based compensation plans. Our balance sheet remains strong and incredibly well positioned to make strategic investments while returning meaningful cash flow to shareholders. Payson generated $46.3 million in cash flow from operations in the first quarter, a 65% increase from the first quarter of 2022. The company's proactive efforts on building inventory levels to mitigate supply chain challenges are now mostly complete. In the first quarter, Payson spent $11.6 million in net capital expenditures in support of our core business, representing the ongoing refresh of our technology platform and the maintenance of our fleet. Also in the first quarter, we slightly increased our investment in intelligent wellhead systems and emerging completions technology business through a $400,000 increase in our minority ownership position. Subsequent to quarter end, Payson approved and funded $5 million of the $15 million that was remaining under the company's preferred share financing agreement with Intelligent Wellhead Systems. We remain committed to shareholder returns and in the first quarter returned $20 million to shareholders through dividends and share repurchases. We ended the quarter with no interest bearing debt and $185 million in total cash. In summary, we are very proud of our first quarter results and feel incredibly well positioned entering the 2023 year. I will now turn the call over to John for his comments on our outlook.

Thank you, Celine. Our first quarter financial results representing the continuation of strong performance by Payson. Payson again outpaced the growth in underlying drilling activity with a 32% increase in consolidated revenue exceeding the 18% year-over-year change in North American land drilling activity. We posted another quarterly record for North American revenue per industry day in the quarter at $922, exceeding the $900 level for the first time. We maintained our leading market share position while seeing increases in product adoption and improved price realization, both of which we expect to see continue going forward. Our international business unit generated revenue of $15.6 million, up 46% from the prior year. Our international business benefited from increased industry activity and strong increases in revenue per EDR day from higher product adoption pricing. Energy tool-based revenue increased by 61% year-over-year due to the installation of additional energy storage systems and stronger price realization for our economic modeling software tool. We remain focused on maintaining appropriate control over our operating and capital costs. with our most significant cost increases coming in areas that directly impact our service and technology advantages and providing capacity for additional revenue growth. While U.S. land activity softened in the first quarter and Canada began to experience its seasonal declines due to winter breakup, our outlook for a return of steady growth in North American industry activity in the second half of 2023 is unchanged. Ultimately, the economic forces of supply and demand establish the prevailing direction of industry activity. Significant draws from oil storage and inventories and an inventory of drilled but uncompleted wells below what industry analysts consider to be sustainable levels cannot persist in perpetuity while global oil demand continues to exceed pre-pandemic levels. Our outlook for continued growth in land drilling remains positive. Payson sits at the center of the drilling data ecosystem on the majority of rigs in the Western Hemisphere. As customers use more automation and analytics technologies, data requirements are increasing. We are ensuring that we have the capabilities to manage additional sources of data, higher volumes, throughputs, and speeds of data, and additional transmission and storage protocols. We expect capital spending of approximately $45 million in 2023 as we renew and extend the capabilities of important parts of our hosting platform. We also continue to make investments in our operational assets, which were curtailed in recent years by challenging supply chain conditions. We continue to evaluate our capital program with a focus on supporting increasing revenue, generating free cash flow, and creating shareholder value over time. rather than simply in response to prevailing near-term industry conditions. We continue to make investments in growth-related opportunities outside of our core drilling-related business. The growth trajectory of intelligent wellhead systems is encouraging. We will support the required investments in working capital and capital expenditures to ensure that IWS is positioned to fully capitalize on these opportunities. Demand for energy storage is growing as government policies such as the Inflation Reduction Act in the United States and Net Metering 3.0 in California incentivize the deployment of additional energy storage assets. We are adapting our approach to the sales of our intelligent energy management control systems to leverage Energy Toolbase's strong brand position to further build our pipeline of control system opportunities. We are also expanding the functionality of our economic modeling software tool to support higher price realization and to handle the unique requirements of additional markets. We remain committed to returning capital to shareholders through our regular quarterly dividend and through share repurchases. We returned $20 million to shareholders in the first quarter and we are maintaining our quarterly dividend at 12 cents per share. Our balance sheet remains strong with cash and short-term investments of $185 million and no debt. The strength of our business allows us to make the required investments to secure our position as the leading provider of drilling data and technologies, to pursue additional sources of revenue outside the oil and gas drilling market, and to return meaningful capital to shareholders. We remain focused on ensuring that Payson is an innovative, profitable, and responsible company. And we would now be happy to take any questions.