Pason Systems Inc.

Good morning. My name is Sylvie, and I will be your conference operator. 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 advisories located at the end of the press release issued by Payson Systems yesterday, which describe 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. At this time, I would like to welcome everyone to Payson Systems, Inc., second quarter 2024 earnings call. Note that 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. And if you would like to ask a question during this time, simply press star then number one on your telephone keypad. And if you would like to withdraw your question, please press star followed by two. Thank you. Celine Boston, CFO, you may begin your conference.

Thank you, operator. Good morning, and thank you for attending Paysom's 2024 second 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 second quarter. And John will then provide a brief perspective on the outlook for the industry and for Payson, and we will then take questions. I'm pleased to report on Payson's second quarter 2020-24 results, which incorporate results from newly acquired intelligent wellhead systems and also demonstrates our continued ability to outperform industry drilling activity. Payson generated $95.9 million in revenue in the second quarter, a 13% improvement from the $84.7 million generated in the second quarter of 2023, despite a 13% 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 $993, which represents a 9% increase from the level seen in the second quarter of 2023. With the 13% decline seen in industry activity, mostly driven by the U.S., the North American drilling segment generated a revenue of $63.8 million for the second quarter, which was only 5% lower than the second quarter of 2023. The segment's cost base remains mostly fixed in nature, and depreciation and amortization expenses grew year over year, with increased capital expenditures in recent quarters, resulting in segment gross profit of $34.1 million in the second quarter of 2024, compared to $40.8 million in the second quarter of 2023. Our international drilling segment generated $15.3 million in quarterly revenue, which represents a 2% increase from the second quarter of 2023, with strong industry activity and improved revenue per day across the segments and markets. The segment also saw slightly higher depreciation and amortization in Q2 of 2024, with resulting gross profit of $7.3 million compared to $7.4 million in the second quarter of 2023. Our completion segment includes results from Intelligent Wellhead Systems, a completions technology business that we fully acquired and began consolidating results for on January 1st of this year. In the second quarter of 2024, Payson's completion segment had 29 active jobs, up from 28 in the first quarter of 2024, and a revenue per IWS day of 5,003, also an increase from the first quarter of 2024. These increases occurred against a challenging industry condition backdrop in the completion sector in the second quarter. Reported revenue for the segment was a new quarterly record at $13.7 million. Gross profit for the segment of $1.4 million represents operating expense investments made for the rapid growth IWS has seen, along with $5 million in depreciation and amortization expense associated with the property and equipment and intangible assets that were acquired on January 1st of 2024. Energy Toolbase, which is reported within our solar and energy storage segment, generated $3.1 million in quarterly revenue, an increase of 31% from the 2023 comparative period, with increased control system sales year over year. The segment's revenue will fluctuate with timing of control system deliveries. Sequentially, Paython's results were impacted by the seasonal decline in Canadian drilling activity, coupled with a decline in U.S. drilling activity as well. Revenue fell 8.5% quarter over quarter as a result, despite a 13% decline in North American industry drilling activity quarter over quarter. Consolidated adjusted EBITDA in the second quarter of 2024 was $33.1 million, or 34.6% of revenue, compared to $37.9 million, or 44.7% of revenue in the second quarter of 2023. Adjusted EBITDA margin in the second 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 this year. 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 PAYFON's history, growth in industry activity levels in the company's North American drilling segment would highlight the significant operating leverage within the business. Depreciation and amortization for the company has increased from $5.8 million in the second quarter of 2020-2023 to $12.9 million in the current quarter. This increase is attributable to higher levels of capex in recent quarter with growth-related investments within our drilling segment and newly acquired completion segment, along with the depreciation and amortization associated with the fixed assets and intangibles capitalized as part of the IWS acquisition earlier this year. As a result, net income attributable to PAYSON for the three months ended June 30, 2024, was $10.9 million, or 14 cents per share, compared to $25.5 million or 32 cents per share generated in the second quarter of 2023. 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 second quarter of 2024 totaled $17.9 million, which included the addition of capital expenditures of IWS's business as we make investments to support their growth trajectory. Resulting free cash flow in the second quarter of 2024 was $8 million compared to $18 million in the second quarter of 2023. With this free cash flow and cash on hand, we returned $13.1 million to shareholders through our quarterly dividend and share repurchase program and ended the quarter with total cash, including short-term investments, of $71.2 million with no interest-bearing debt. In summary, we continue to be well-positioned for growth with our established and resilient 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 second quarter of 2024 highlight the resilience of all three areas of our business, namely oil and gas drilling, completions, and solar and energy storage. Consolidated revenue in the quarter was 13% higher than the prior year period, despite North American land drilling activity being down 13% 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 fully dependent on higher activity levels. There are three important ways in which we look to position ourselves to outpace underlying North American land drilling activity. First, we look to outpace underlying industry activity through growth in North American revenue per industry day. Second, we look to grow international revenue. And third, we are generating increasing revenue from higher growth markets, including technology offerings in the completions market and in solar and energy storage. Our North American drilling segment displayed the strength of its competitive position again by posting revenue per industry day of $993 in the quarter, up 9% compared to the second quarter of 2023. We continue to see strong product adoption and improved price realization, and we anticipate that growing demand for high-quality data will result in continued growth and adoption of our core product offering. During the second quarter, we began to receive additional deliveries of mud analyzer units, which provide customers with continuous real-time readings of critical drilling mud parameters, and we are beginning to deploy these to the field to early positive market feedback. We've also seen greater traction among our automation products in 2024, most notably the drilling advisory system and tool-based control. Our second important area of growth is in international markets, where we generated $15.3 million in revenue in the second quarter. Market dynamics and geopolitical conditions and their impact on near-term activity will vary across our international markets. But across all markets, we continue to see favorable trends of growing technology adoption and a greater use of drilling data in planning and operations. The third growth area is our investments in higher growth markets, namely completions and solar and energy storage. In completions, we see strong growth over the short to medium term as companies more fully utilize data-driven technologies. IWS generated $13.7 million in revenue in the second quarter, representing another all-time high for the business. on the strength of $5,103 in revenue per IWS day. We continue to be encouraged by the profile of IWS's revenue growth. While the company has been disproportionately exposed to the effects of a challenging natural gas market and significant M&A activity in the E&P sector, which has resulted in slowing activity among existing customers, IWS continues to hold their share within those customers while adding new customers. With a growing customer base and strong customer loyalty, we expect to benefit as customers who have slowed their completions programs begin to increase their activity, which we anticipate seeing heading into 2025. Over the medium term, increased use of technology within the broader completions market and further gains in product adoption are expected to drive further revenue growth. We're also bringing together the unique expertise and experience of Payson 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. ETB posted revenue of $3.1 million in the second quarter, up 31% year-over-year from the same period of 2023, driven primarily by the sales of additional control systems. As a reminder, quarterly revenue for ETB will fluctuate as a result of timing of control system deliveries. As storage attachment rates to solar projects increase and as customers look to optimize the performance of those storage assets, Energy Toolbase has seen strong growth in its bookings and in its pipeline of sales opportunities for energy management control systems. 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. We will continue to pursue disciplined returns over time through our regular quarterly dividend, which we are maintaining at 13 cents per share. Outside of the regular dividend, our primary focus in 2024 remains making the necessary investments to position ourselves for higher levels of free cash flow in our drilling and completions-related businesses. In the first half of 2024, we spent $6 million on share repurchases as well. 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. At June 30th, we had $71.2 million in total cash, including short-term investments, and positive working capital of $113.5 million. 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 of oil and gas drilling and to return meaningful capital to shareholders.