Pason Systems Inc.

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 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. Thank you. Good morning. My name is Andrew and I will be your conference operator today. At this time, I would like to welcome everyone to the Payson Systems Inc's fourth 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'd 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. Thank you. Celine Boston, CFO, you may begin your conference.

Thank you, Andrew. Good morning, everyone, and thank you for attending Payson's 2024 fourth 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 fourth 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 Payson's fourth quarter and full year 2024 results, which demonstrate the incorporation of our new completion segment, the resilience in our drilling segments, and growth in our solar and energy storage segment. As a reminder to listeners, Payson acquired and began consolidating intelligent wellhead systems or IWS on January 1st of 2024, creating a new completion segment for the company. As such, reference made to 2024 will include IWS's financial results, whereas 2023 will not. In 2024, Payson generated $414 million in consolidated revenue, a result that was 12% higher than revenue generated in 2023. Through a 10% decline in industry activity year over year, Payson's North American drilling segment generated annual revenue of $283 million, a result that was only 2% lower than the prior year. Payson's annual revenue per industry day grew by 8% from 2023 and was a new annual record for the company at $1,000.25 through continued gains in product adoption and improved price realization. Payson's newly acquired completion segment generated $52.6 million in revenue in 2024, a 15% increase from the revenue IWS generated in the 2023 year prior to being consolidated within Payson's results, and that significantly outpaced the 10% decline seen in active frack spreads in the U.S. Adjusted EBITDA in 2024 was $161.8 million, or 39.1% of revenue, compared to $171.5 million, or 46.4% in 2023. Revenue growth in 2024, coming from earlier stage segments, such as completions and solar and energy storage, is at lower margin levels than Payson's drilling segments, with the investments made for their current stage of growth. Further, within drilling segments, lower industry activity levels over a mostly fixed cost base impacted margins in 2024. Net income attributable to Payson for the year was $121.5 million, or $1.53 per share, and included a $50.8 million non-cash accounting gain relating to the acquisition of IWS. From a quarterly perspective, Payson generated a consolidated revenue of $107.6 million in the fourth quarter of 2024, compared to $93.3 million in the fourth quarter of 2023. With this revenue, Payson generated $42.1 million in adjusted EBITDA, or 39.1% of revenue. I'll now provide an overview of the fourth quarter by business unit. Against a challenging industry activity backdrop, particularly in the U.S., Payson's North American drilling business unit generated revenue per industry day of $1,000.46, a 5% increase from the fourth quarter of 2023. As a result, outpacing the 3% reduction in industry drilling activity, the North American drilling segment generated revenue of $71.8 million in the fourth quarter of 2024, which was 2% higher than the fourth quarter of 2023. The segment's cost base remained mostly fixed in nature and saw lower repair expenses in the fourth quarter, while depreciation and amortization expenses grew year over year with increased capital expenditures recently. Further, strength in the U.S. dollar versus the Canadian dollar in the fourth quarter of 2024 impacted U.S. dollar sourced revenue and expenses for the segment. Resulting segment gross profit of $43.4 million in the fourth quarter of 2024 was 4% higher than the $41.5 million generated in the fourth quarter of last year, highlighting the segment's operating leverage. Our international drilling segment generated $15 million in quarterly revenue and $6.5 million in segment gross profit in the fourth quarter. Prior year Q4 revenue and segment gross profit benefited from inflationary and foreign exchange factors with a significant devaluation seen in the Argentinian peso in that period. In our completion segment, IWS had 26 active jobs and revenue per IWS day of $5,668 through very challenging industry conditions in the fourth quarter of 2024. I'll remind listeners that revenue per IWS day will fluctuate depending on the mix of technology adopted amongst existing customers and further will be impacted by foreign exchange fluctuations with the U.S. and Canadian dollar. Reported revenue for the segment was $13.6 million, up from $12.5 million in the third quarter of 2024. Gross profit for the segment of $0.8 million represents operating expense investments made for the segment's current stage of growth, along with $5.5 million in depreciation and amortization expense associated with the property and equipment and intangible assets acquired on January 1st of 2024. Energy tool base, which is reported within our solar and energy storage segment, generated $7.2 million in quarterly revenue, a new quarterly record, and an increase of 49% from the 2023 comparative period, with the timing on deliveries of control systems driving the difference year over year. The segment's revenue will continue to fluctuate with timing of these deliveries going forward. Sequentially, revenue growth in the company's completions and solar and energy storage segments offset the seasonal declines in industry drilling activity leading up to the December holiday period. Revenue grew by 2% quarter over quarter as a result. Adjusted EBITDA of $42.1 million in the fourth quarter compares to $44.1 million in the prior quarter and reflects the addition of lower margin revenue from IWS and Energy Toolbase given their current stage of maturity and growth. Depreciation and amortization for the company has increased from $7.8 million in the fourth quarter of 2023 to $13.9 million in the current quarter. This increase is attributable to higher levels of capital expenditures in recent quarters, with growth-related investments within our completion segment, along with the depreciation and amortization associated with the fixed assets and intangibles capitalized as part of the IWS acquisition on January 1st of this year. Net income attributable to Payson for the three months ended December 31st, 2024, was $16.9 million, or 21 cents per share. compared to $8.5 million, or 11 cents per share, generated in the fourth quarter of 2023. Our balance sheet remains very strong, and coupled with our free cash flow generation, allows us to make growth-related investments while returning meaningful levels of cash to shareholders. In 2024, net capital expenditures were $69 million, which now includes the addition of capital expenditures for IWS's business as we make investments to build out their fleet of rental assets. Reflecting these investments, free cash flow in 2024 was $54.1 million compared to $97 million in 2023. With this free cash flow, we returned $51.4 million to shareholders through our quarterly dividend and share repurchase program and ended the quarter with total cash, including short-term investments, of $81 million and no interest-bearing debt. In summary, we continue to be well-positioned for growth within 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 results for 2024 demonstrate the ability of our business to outperform industry activity. Our North American drilling segment declined by 2% compared to a 10% decrease in North American land drilling activity. North American revenue for Industry Day was $1,025 for the year, an 8% increase from 2023, largely driven by increased product adoption and, to a lesser extent, improved price realization. Revenue from our completion segment grew 15% from 2023 levels, far outpacing a 10% decrease in the reported number of active frack spreads in the United States, or 25% outperformance. In our international drilling segment, reported revenue decreased by 6% in 2024, with 2023 results benefiting from inflationary and foreign exchange factors in Argentina. Energy tool-based revenue increased 15% year-over-year from 2023 levels. Consolidated revenue for the year of $414 million was 12% higher than the prior year. Adjusted EBITDA for the year totaled $162 million, representing an adjusted EBITDA margin of 39%. Margins decreased from 2023 levels as a result of higher revenue contribution from the completions and solar and energy storage segments, where segment margins are lower at their current stage of development. We do expect the margins in these segments to expand over time as revenues increase. Fourth quarter results for 2024 similarly demonstrated our ability to outpace industry activity, particularly in our North American drilling segment, where a 2% year-over-year increase in quarterly activity outpaced a 3% decrease in industry activity, and in our completion segment, where a 9% sequential increase in revenue outpaced a 4% decrease in the number of active frack spreads in the United States in the quarter. We currently expect that North American land drilling activity in 2025 will be similar to 2024 levels, while completions industry activity for the year may be slightly lower owing to a stronger first half of 2024. In that context, we expect PaceOn to continue to outpace industry activity and to deliver meaningful growth and strong financial results. Both our drilling and completions businesses benefit from increasing complexity in drilling and completions operations. As customers continue to pursue automation and analytics efforts, including leveraging artificial intelligence applications and the establishment of real-time operating centers, access to consistent, reliable, high-quality data is increasingly important for both drilling and completions operations. Payson's experience over more than four decades in serving the data needs of the drilling market provide us with the ability to make meaningful advancements in helping customers access data across the entire well construction process. 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 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 management solutions for the completions market, benefiting both operators and service companies. Strong bookings of control systems in our solar and energy storage segment in 2024 are expected to translate into further revenue gains in 2025. Our capital allocation priorities are driven by a focus on return on invested capital. Today, our highest expected returns on capital come from the organic investments we are making to continue the growth of our completion segment, coupled with the ongoing rollout of the mud analyzer in our drilling-related business. In 2025, we expect to spend approximately $65 million in capital expenditures. We will continue to pursue disciplined shareholder returns over time through our regular quarterly dividend and share repurchases. We aim to consistently deploy capital to share repurchases through market cycles, thus buying back a larger number of shares during periods of market weakness and less shares when the market is stronger. We are maintaining our quarterly dividend at 13 cents per share and preserving flexibility to continue repurchasing shares in the current environment of uncertainty. 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 December 31st, we had $81 million in total cash, including short-term investments, and positive working capital of $121 million. We would now be happy to take any questions.