Pason Systems Inc.

Good morning. My name is Joelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Pace on Systems, Inc. first quarter 2024 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 star, then the number one on your telephone keypad. If you would like to withdraw your question, please press star two. Thank you. The contents of today's calls 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, operator. Good morning, everyone, and thank you for attending Payson's 2024 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 Payson, and we'll then take questions. I'm very pleased to report on Paysan's first quarter 2024 results, which incorporate results from newly acquired intelligent wellhead systems and also demonstrates our continued ability to outperform industry drilling activity. Paysan generated 104.8 million in revenue in the first quarter, a 7% improvement from the 98.2 million generated in the first quarter of 2023, despite a 15% reduction in North American industry drilling activity in that same period. I'll start with an overview of segment performance for the quarter. Against a challenging industry activity backdrop, Payson's North American Drilling Business Unit generated revenue per industry day of $1,000, which represents a new quarterly record for the company and an 8% increase from the level seen in the first quarter of 2023. With the 15% decline seen in industry activity, mostly driven by the U.S. market, The North American drilling segment generated revenue of $73.6 million for the first quarter, which was only 8% lower than the first quarter of 2023. The segment's cost base remains mostly fixed in nature and saw slightly higher repair costs year over year, resulting in segment gross profit of $44.4 million in the first quarter of 2024, compared to $52.6 million in the first quarter of 2023. Our international drilling segment generated $14.6 million in quarterly revenue, which represents a 6% decline from the first quarter of 2023, primarily resulting from the devaluation seen in the Argentinian peso and the resulting impact on translation to the company's Canadian dollar reporting currency. The devaluation had a similar impact on operating expenses, and the segment's gross profit in the first quarter of 2024 of $7.8 million or 53% of revenue compared to $8.4 million or 54% of revenue in the 2023 comparative period. On January 1st, 2024, Payson closed its acquisition of all remaining and outstanding shares of Intelligent Wellhead Systems or IWS, which is a completions technology business. The IWS acquisition was funded with $88.2 million in cash on hand of which $77.8 million was paid at close and $10.5 million was paid early in the first quarter. Payson previously accounted for its non-controlling investment in IWS as an equity investment, and starting in January 1, 2020-24, IWS's financial results are consolidated within the Payson Group and reported in a newly formed completion segment. With the move from equity accounting to acquisition of control and associated consolidation, Payson recorded a $50.8 million non-cash gain on the revaluation of its previously held equity interest. This gain was reported through other income on the company's financial statements for the three months ended March 31, 2024, and has not been incorporated within the company's adjusted EBITDA calculation. With the addition of the completion segment, we now report two operational metrics for users of our financial statements to assess operating performance of IWS. The first is IWS active jobs and represents the average number of jobs per day that IWS is generating revenue on through the rental of its technology offering to customers during a reporting period. This measure will provide a sense of IWS's market penetration. The second is revenue per IWS day, and this measure represents the total revenue generated by IWS over all IWS active days during the reporting period with IWS active days calculated using IWS active jobs. This measure will provide a sense of IWS's pricing and product adoption. In the first quarter of 2024, Payson's completion segment had 28 active jobs and a revenue per IWS day of $5,026. This resulted in quarterly revenue of $12.8 million. Revenue per IWS day will fluctuate depending on the mix of jobs and the type of IWS technology used by customers going forward. Gross profit for the segment of $1.2 million represents operating expense investments made for the rapid growth IWS has seen, along with $4.4 million in depreciation and amortization expense associated with the property and equipment and intangible assets acquired on January 1, 2024. Energy Toolbase, which is reported within our solar and energy storage segment, generated $3.7 million in quarterly revenue, an increase of 31% from the 2023 comparative period, with increased control system sales year over year. Segment gross profit for the quarter was $0.2 million, compared to a loss of $66,000 in the first quarter of 2023. Sequentially, Payson's results benefited from strong industry activity in Canada through its winter drilling season and the addition of IWS financial results, while U.S. rig counts fell slightly quarter over quarter. Both revenue and adjusted EBITDA improved from the fourth quarter of 2023 to the first quarter of 2024, while a sequential comparison of margins reflects the addition of IWS revenue at lower margin levels given its earlier stage. Consolidated adjusted EBITDA in the first quarter was $42.5 million or 40.5% of revenue compared to $52.4 million or 53.4% of revenue. Adjusted EBITDA margin in the first quarter was impacted by lower industry activity levels in the North American drilling segment over our mostly fixed cost base, along with the addition of lower margin revenue from IWS given its current stage of maturity and growth. We will continue to manage our fixed cost structure towards our expectation of upcoming activity levels, and with the acquisition of IWS in the first quarter, further, we will make the necessary investments in our cost base to deliver on further revenue growth and create opportunities for long-term free cash flow generation. As we've seen many times in Payson's history, growth in industry activity levels in the company's North American drilling segment would highlight the significant operating leverage within the business. Net income attributable to Paython for the three months ended March 31, 2024, was $69.5 million, or $0.87 per share, an increase from $35.8 million, or $0.44 per share, generated in the first quarter of 2023, for which the increase is primarily from the previously mentioned $50.8 million accounting revaluation gain on the IWS acquisition. Our balance sheet remains strong and, coupled with our free cash flow generation, allows us to make growth-related investments while returning meaningful levels of cash to shareholders. Net capital expenditures in the first quarter of 2024 totaled $19.3 million, which included $4.8 million of carry-forward capex from 2023 and also the addition of capital expenditures for IWS's business as we make investments to support their growth trajectory. Resulting free cash flow in the first quarter of 2024 was $11.7 million, compared to $34.7 million in the first quarter of 2023. With this free cash flow and cash on hand, we returned $13.6 million to shareholders through our quarterly dividend and share repurchase program. We also repaid $13.3 million in outstanding debt acquired through the IWS acquisition and ended the year with total cash, including short-term investments, of $74.2 million and no interest-bearing debt. In summary, we are very well positioned for growth with our established position within drilling and our growing position in completions in solar and energy storage. I will now turn the call over to John for his comments on our outlook.

Thank you, Celine. Our financial results for the first quarter of 2024 highlight the strength of our competitive position in our drilling-related segments, as well as the significant opportunities for growth that Payson has in the drilling market, the completions market, and the solar and energy storage markets. Consolidated revenue in the quarter was 7% higher than the prior year period, despite North American land drilling activity being down 15% over the same period. While Payson would benefit from growing North American land drilling activity, our ability to deliver meaningful growth and strong financial results is not dependent on higher activity levels. There are three important ways in which we look to grow, even in an environment where we anticipate North American land drilling activity to remain near current levels for much of 2024 before slowly increasing later this year and into 2025. First, we look to outpace underlying industry activity through growth in North American revenue per industry day. Second, we are growing our international revenue. And third, we are generating increasing revenue from high growth markets, including technology offerings in the completions market and in the solar and energy storage market. I'll speak to each in turn, beginning with North American drilling. Our North American drilling segment displayed the strength of its competitive position by achieving revenue per industry day of $1,000 in the quarter. This marks a notable milestone in Payson's history. Revenue per industry day has increased at a compound annual growth rate of 8.4% over the five-year period since the first quarter of 2019, largely as a result of strong product adoption and improved price realization. We anticipate that growing demand for high-quality data driven by customers deploying a wider range of data-driven technologies will result in continued growth and adoption of our core product offerings, most notably in the area of data delivery products. Our new mud analyzer, which provides customers with continuous real-time readings of critical drilling mud parameters, has experienced very positive early market response. The list price of $1,000 per day for the mud analyzer compares very favorably to Payson's overall revenue per industry day, and with growing adoption of the mud analyzer as it rolls out more broadly into the market, it has the potential to make a meaningful impact on this important metric. We have also seen accelerating traction among our automation products, most notably the drilling advisory system and tool-based control. Our second important area of growth is international markets. Our international drilling segment continues to post strong results, generating $14.6 million in the first quarter. Market dynamics and geopolitical conditions and their impact on near-term activity vary across our international markets. But across the markets we see continued favorable trends of growing technology adoption and a greater use of drilling data in planning and operations. The third growth area I mentioned earlier was our investments in higher growth markets, namely completions technology and solar and energy storage. Obviously North American completions activity is directly correlated with land drilling activity. That said, The use of data in technology and completions significantly lags its usage in drilling. As a result, we see strong growth over the short to medium term as companies more fully utilize data-driven technologies to further drive efficiencies in their completions. IWS generated $12.8 million in revenue in the first quarter, representing an all-time high for the business on the strength of $5,026 in revenue per IWS day. The most significant impact on IWS's growth in the short to medium term is likely to be the increased use of technology within the completions market. We also expect further gains in product adoption. We are also bringing together the unique expertise and experience of PaceOn and IWS to develop a compelling data aggregation and data delivery offering for the completions market. In order to access the full benefits of data-driven technologies, The completions market will need access to reliable, consistent, high-quality data, and we believe that Payson's long history of providing drilling data to customers gives us a unique ability to meet this need in completions. In the solar and energy storage market, government regulations have motivated deployment of a larger number of energy storage assets. As customers look to optimize the performance of those assets, Energy Toolbase has seen a large increase in its pipeline of sales opportunities for energy management control systems. ETB posted revenue of $3.7 million in the first quarter, with the 31% year-over-year growth driven primarily by the sales of additional control systems. Quarterly revenue for ETB will fluctuate as a result of timing of control system deliveries. We're also continually increasing the functionality of our leading economic modeling and proposal generation software tool to address the requirements of additional end markets. Our priorities with respect to capital allocation remain focused on pursuing attractive growth opportunities while returning meaningful capital to shareholders. We continue to expect capital spending of between $75 and $80 million in 2024 including approximately $5 million in anticipated 2023 capital expenditures, which were impacted by the timing of deliveries. We will continue to pursue disciplined returns over time through our regular dividend, which we are maintaining at 13 cents per share. We maintain flexibility in our approach to shareholder returns by evaluating share repurchases in the context of attractive organic capital investments to generate additional free cash flow. We 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. Our balance sheet remains strong. As of March 31st, we had $74 million in total cash, including short-term investments, and positive working capital of $119.6 million. The strength of our business allows us to make the required investments to secure our position as the leading provider of drilling and completions data and technologies to pursue additional sources of revenue outside of oil and gas drilling and to return meaningful capital to shareholders. And we would now be happy to take any questions.