Pason Systems Inc.

The contents of today's call are predicted 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 describes forward-thinking 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. Good morning. My name is Andrew, and I'll be your conference operator for today. At this time, I'd like to welcome everyone to the Payson Systems, Inc., third 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'd like to withdraw your question, please press the pound key. Celine Boston, CFO. You may begin your conference.

Thanks, Andrew. Good morning, and thank you for attending Paysound's 2024 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 will then take questions. I'm pleased to report on Payson's third quarter 2024 results, which demonstrate our strong competitive position and continued ability to outperform industry drilling activity. As a reminder to listeners, Payson acquired and began consolidating Intelligent Wellhead Systems, or IWS, on January 1st of this year, creating a new completion segment for the company. As such, references made to 2024 will include IWS's financial results, whereas 2023 will not. Faison generated $105.9 million in revenue in the third quarter, a 14% improvement from the $93.1 million generated in the third quarter of 2023, despite a 5% 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, particularly in the U.S., Paython's North American Drilling Business Unit generated revenue per industry day of $1,058, a new record level and a 9% increase from the third quarter of 2023. As a result, outpacing the 5% reduction in industry drilling activity, The North American drilling segment generated revenue of $74.1 million in the third quarter of 2024, which was 3% higher than the third quarter of 2023. The segment's cost base remains mostly fixed in nature and saw lower repair expenses in the third quarter, while depreciation and amortization expenses grew year over year with increased capital expenditures recently. Resulting segment gross profit of $45.5 million in the third quarter of 2024, was 3% higher than the $44.2 million generated in the third quarter of last year. Our international drilling segment generated $15.3 million in quarterly revenue, a level consistent with prior year, with stable industry activity and continued strength in our competitive position in international end markets. The segment also carries a mostly fixed cost base and saw slightly higher depreciation and amortization in Q3 of 2024, with resulting gross profit of $7.6 million compared to $7.9 million in the third quarter of 2023. Our completion segment includes results from Intelligent Wellhead Systems, a completions technology business that we fully acquired and began consolidating on January 1, 2024. Through very challenging industry conditions and completions in the third quarter of 2024, IWS had 28 active jobs and revenue per IWS day of $4,868, compared to 29 active jobs and revenue per IWS day of $5,108 in the second quarter of this year. The decline quarter over quarter is driven by reductions in completions activity from existing customers, with new customer additions offsetting some of these declines. Reported revenue for the segment was $12.5 million. Growth profit for the segment of $0.3 million represents operating expense investments made for the growth IWS has seen recently, along with $5.1 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 $3.9 million in quarterly revenue, a decline of 30% from the 2023 comparative period, with the timing on deliveries of control system sales driving the difference year over year. The segment's revenue will continue to fluctuate with timing of these deliveries going forward. Sequentially, Paython's results benefited from the seasonal improvements in Canadian drilling activity coming out of spring breakup, and also from a 7% increase in revenue per industry day quarter over quarter. These improvements more than offset the continued decline seen in U.S. drilling and completions activity from Q2 to Q3, and revenue increased by 10%, or $10 million, from $95.9 million in the second quarter of 2024 to $105.9 million in the third quarter. Highlighting the fixed cost nature of the business, adjusted EBITDA grew by $11 million quarter over quarter, while revenue grew by $10 million. Consolidated adjusted EBITDA in the third quarter of 2024 was $44.1 million, or 41.7% of revenue, compared to $42.3 million, or 45.4% of revenue in the third quarter of 2023. While adjusted EBITDA in absolute dollars highlights the operating leverage of Payson's business on its mostly fixed cost base, a comparison of adjusted EBITDA margins reflects the addition of lower margin revenue from IWS in 2024, given its current state of maturity and growth. We will continue to make the necessary investments in our cost base to deliver on further revenue growth and create opportunities for long-term free cash flow generations. Depreciation and amortization for the company has increased from $7 million in the third quarter of 2023 to $13.7 million in the current quarter. This increase is attributable to higher levels of capital expenditures in recent quarters with growth-related investments within our newly acquired completion segment, along with the depreciation and amortization associated with the fixed asset and intangibles capitalized as part of the IWS acquisition on January 1st of this year. Further, as a result of the lower average cash balances during the current quarter and a declining interest rate environment in Canada, PAYSON saw lower levels of interest income in the third quarter of 2024 in comparison to the prior year comparative period. Resulting net income attributable to PAYSON for the three months ended September 30, 2024, was $24.2 million, or $0.30 per share, compared to $27.7 million, or $0.35 per share, generated in the third 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 third quarter of 2024 totaled $13.7 million. which included the addition of capital expenditures for IWS's business as we make investments to build out their fleet of rental assets. Free cash flow in the third quarter of 2024 was $16.7 million, compared to $25 million in the third quarter of 2023. With this free cash flow, we returned $11.3 million to shareholders through our quarterly dividend and share repurchase program and ended the quarter with total cash, including short-term investments, of $73.9 million and 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 and solar and energy storage. I will now turn the call over to John for his comments on our outlook.

Thank you, Celine. Our financial reports for the third quarter of 2024 demonstrate the resilience of our business. Consolidated revenue in the quarter was 14% higher than the prior year period, despite North American land drilling activity being down 5% over the same period. Our North American drilling segment continues to hold a strong competitive position, evidenced by revenue per industry day of $1,058 in the quarter, up 9% compared to the third quarter of 2023. In our international drilling segment, revenue was unchanged from the prior year period. Our completions business posted revenue of $12.5 million in the quarter, with the sequential revenue decline mirroring the decline in the reported number of active frac spreads in the quarter. Revenue per IWS day remained strong at $4,868. While IWS has been disproportionately exposed to the effects of a challenging natural gas market and significant M&A activity in the E&P sector, IWS continues to enjoy high retention rates of existing customers, while adding new customers. Given its stage of development, IWS is much more sensitive to customer mix and changes in the activity of specific customers than our drilling-related business, where our financial results are much more strongly correlated to overall industry activity given our substantial market share. ETB posted revenue of $3.9 million in the third quarter, up 24% sequentially from the second quarter, 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, and the year-over-year decline in ETB reflects the higher number of deliveries in the third quarter of 2023. Energy Toolbase continues to see strong growth in its bookings and its pipeline of sales opportunities for energy management control systems. Payson generated $44 million in adjusted EBITDA in the third quarter. Sequentially, adjusted EBITDA increased by $11 million, while revenue increased by $10 million. We expect that North American land drilling activity will remain near current levels in the remainder of 2024 before beginning to increase in 2025 with completions activity following a similar trajectory. 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. As customers continue to deploy data-driven automation and analytics technologies in their operations, our drilling and completions-related businesses stand to benefit. Our innovative new drilling mud analyzer provides continuous real-time readings of critical drilling mud parameters, and we are seeing higher adoption of our automation products. Our well site automation products provide valuable safety and efficiency benefits for customers in their completions operations. And we are working closely with customers to develop compelling data aggregation and management solutions for the completions market, benefiting both operators and service companies. The gains that we have made in increasing North American revenue per industry day in our drilling segment and in expanding our customer base while maintaining a strong revenue per IWS day in our completions business should translate into continued outperformance against industry conditions. Our demonstrated ability to outperform the underlying industry activity, coupled with our high operating leverage, should position us to deliver strong results if and when industry activity improves. Our priorities with respect to capital allocation remain focused on pursuing attractive growth opportunities while returning meaningful capital to shareholders. 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 remains making the necessary investments to position ourselves for higher levels of free cash flow in our drilling and completions-related businesses. We expect capital expenditures in 2024 to total up to $70 million, down from our previous guidance of between $75 and $80 million. In 2025, we expect to spend approximately $65 million in capital expenditures. 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 September 30th, we had $74 million in total cash, including short-term investments, and positive working capital of $118.1 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, including completions and solar and energy storage, and to return meaningful capital to shareholders. And we would now be happy to take any questions that you might have.