Pason Systems Inc.

Good morning. My name is Ludi and I will be your conference operator today. At this time, I would like to welcome everyone to the Payson Systems Inc's third quarter 2023 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star, then the number one on your telephone keypad. If you would like to withdraw your question, please press the star followed by the number two. The contents of today's call are protected by copyright and may not be reproduced without the prior written 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, Ludi. Good morning, everyone, and thank you for attending Payson's 2023 third 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 third quarter. John will then provide a brief perspective on the outlook for the industry and for Payson, and we'll then take some questions. I'm pleased to report on Payson's third quarter 2023 results, which highlight the company's ability to deliver on strong financial performance despite a modest decline in activity levels. Payson generated consolidated revenue of $93.1 million in the third quarter of 2023, which was slightly ahead of the $92.5 million generated in the third quarter of 2022. With this revenue, PAYFON generated $42.3 million in adjusted EBITDA, which represented 45.4% of revenue. All of the company's business segments contributed to this quarterly result. Compared to the third quarter of 2022, our North American business unit saw a 14% decrease in industry drilling activity. However, the business unit generated revenue per industry day of $975 in the third quarter of this year, a new quarterly record and a 12% increase from the same quarter of 2022. This result continues to highlight the company's strong competitive position, the growing demand for our products and technologies, and a more favorable pricing environment than seen in the third quarter of the prior year. Resulting North American revenue was $72.2 million in the third quarter, only a 4% decrease from the third quarter of 2022, despite the 14% reduction in industry activity. Gross profit for the business unit was $42.9 million in the third quarter of 2023, a 12% reduction from the $49 million generated in 2022 and reflects higher levels of depreciation and amortization with the increased investments the company has been making in capital expenditures in recent quarters. Cash operating costs, titled rental services and local administration, for the business unit only increased by 2% year-over-year, highlighting the business unit's mostly fixed cost base. Similarly, revenue generated per day in our international end markets also improved year over year. Reported revenue for our international business unit was $15.3 million in the third quarter of 2023, down slightly from $15.8 million in the comparative 2022 period. Excluding the impacts of hyperinflationary accounting for the company's Argentinian subsidiary in each respective period, revenue would have increased by 14% year over year. Reported segment gross profit was $7.3 million in the third quarter of 2023 for the business unit, slightly down from the $7.8 million generated in the third quarter of 2022. Energy Toolbase continues to grow its presence in the solar and energy storage industry and posted a record quarterly result of $5.6 million, which represents a 293% increase from Q3 of 2022. The segment had increased control system sales in the quarter, which will fluctuate with timing of deliveries on future projects. Sequentially, U.S. rig counts declined throughout the third quarter, with the recovery in Canadian rig counts coming out of spring breakup mostly offsetting these declines. Resulting North American industry activity was flat sequentially, while revenue per industry day increased by 7%. This improvement in revenue per day, coupled with the record results from Energy Toolbase, resulted in consolidated revenue increasing by 10% quarter over quarter, and adjusted EBITDA followed suit and increased by 12% from Q2 to Q3. Our third quarter results continue to highlight our mostly fixed cost base, which is currently in place to support higher levels of activity than seen in the third quarter of 2023. We will continue to manage our fixed cost structure towards our expectation of upcoming activity levels and will work to manage inflationary effects on our business. These effects, along with changes in foreign exchange, sales contribution from energy tool base, and the relative mix of rigs within our end markets, could have an impact on quarterly margins in the coming quarters. Net income attributable to PAYFON for three months ended September 30, 2023, with $27.7 million, or $0.35 per share, a 19% increase from the $34.2 million, or $0.42 per share, generated in the third quarter of 2022. The decline year-over-year reflects the lower industry activity levels, along with higher levels of depreciation and amortization expense on increased capital expenditures in recent quarters, along with higher stock-based compensation expense, which reflects the mark-to-market on the company's cash-settled stock-based compensation plans. Year-to-date, Payson generated $276 million in revenue, a 15% increase from $240.6 million in the corresponding 2022 period. This compares to underlying North American land drilling activity that was essentially flat on average year over year. Adjusted EBITDA for the nine months ended September 30th, 2023 was $132.6 million or 48% of revenue compared to $110.6 million or 46% of revenue for the first nine months of 2022. Accordingly, net income attributable to Payson in the first nine months of 2023 was $89 million or $1.10 per share, up from $71.4 million, or $0.87 per share. A comparison of year-to-date results reflects the company's operating leverage with higher levels of revenue generated per operating day, improved industry conditions in the first quarter of 2023, and the effects of a strengthening U.S. dollar. Our balance sheet remains strong and incredibly well positioned to make strategic investments while returning meaningful cash flow to shareholders. Paysan generated $31.7 million in cash flow from operations in the third quarter, a slight increase from the third quarter of 2022. In the third quarter, Paysan spent $6.7 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 third quarter, we approved and funded $5 million of the $10 million that was remaining under the company's preferred share financing agreement with Intelligent Wellhead Systems and approved the funding of the final $5 million subsequent to quarter end. We remain committed to shareholder returns and in the third quarter returned $15.6 million to shareholders through dividends and share repurchases. We ended the quarter with no interest bearing debt and $178.4 million in total cash. I will now turn the call over to John for his comments on our outlook.

Thank you, Celine. Our third quarter results again demonstrated our ability to generate financial and operational results that outpace underlying drilling industry activity. Our revenue increased 1% from the prior year while North American land drilling activity was down 14% over the same period. We maintained our leading market position and our North American revenue per industry day increased 12% year-over-year to $975 for the quarter driven by higher levels of product adoption and improved price realization. Our international business unit had a solid quarter as well. While reported revenue decreased 3% from the prior year, revenue was up 14% before considering the effects of hyperinflationary accounting related to our operations in Argentina. Energy Toolbase posted its highest quarterly revenue on record at $5.6 million, driven by the installation of additional energy storage control systems, and growth in revenue from our economic modeling software tool. We continue to see strong growth in our pipeline of control system opportunities, but the timing of booking and deliveries can fluctuate meaningfully between quarters. We are making the necessary investments in operating and capital costs to strengthen our capabilities in areas that directly impact our service and technology advantages and provide capacity for additional revenue growth. We continue to expect that we will see a return to steady growth in North American industry activity. Recently reported North American land rig counts show signs of plateauing around current levels, and we expect rig counts will begin to increase later this year and into 2024. Ultimately, the economic forces of supply and demand establish the prevailing direction of industry activity. Global oil demand remains strong, while storage and the inventory of drilled but uncompleted wells remain at or near multi-year lows. Any efforts to increase supply will require additional drilling activity, and as such, 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 data transmission and storage protocols. We continue to expect capital spending of approximately $45 million in 2023 as we renew and extend the capabilities of important parts of our hosting platform, and we currently anticipate that our 2024 spending will be at a similar level. As always, we will evaluate our capital program with a focus on increasing revenue, generating free cash flow, and creating value for shareholders 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 has been impressive. During the third quarter, we funded an additional $5 million as part of our previously announced preferred share financing arrangement with IWS, and the final $5 million tranche will be deployed in the fourth quarter. Energy Toolbase is also showing positive momentum as demand for energy storage is growing as government policies incentivize the deployment of additional energy storage assets. We remain committed to returning capital to shareholders through our regular quarterly dividend and through share repurchases. We returned $51.9 million to shareholders in the first three quarters of 2023 through a combination of regular dividends and share repurchases, and we are maintaining our quarterly dividend at $0.12 per share. Our balance sheet remains strong with cash and short-term investments of $178 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 and to return meaningful capital to shareholders. Our demonstrated ability to generate revenue growth that outpaces the growth in underlying industry activity and our high operating leverage will allow us to deliver strong financial results as rig counts begin to increase. And the momentum within both energy tool base and intelligent wellhead systems gives us further confidence in even greater growth in the future.