Pason Systems Inc.

Good morning. My name is Joanna, 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 2025 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 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. Celine Boston, CFO, you may begin your conference.

Thanks, Joanna, and good morning, everyone. Thanks for attending the Paid Funds 2025 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 and for the full year 2025. John will then provide a brief perspective on the outlook for the industry and for Paython, and will then take questions. Paython's results in 2025 demonstrate the resilience of our business model through lower industry activity. In 2025, Paython generated $419 million in consolidated revenue, 1% higher than revenue generated in 2024, even though there were declines in industry activity in both drilling and completion. Despite a 6% decline in North American drilling activity, our North American drilling segment generated $275 million of revenue and achieved a record annual revenue per industry day of $1,053, up 3% year-over-year. In completion, PAYSON generated $59 million in revenue, a 12% increase from revenue generated in the segment in 2024, despite a 24% decline in active frack spreads in the U.S. during that time. Our international drilling segment also saw challenging industry conditions and a strategic shift by a large customer in Argentina impacted revenue generated of $52 million in 2025, which was down from $60 million in 2024. Based on solar and energy storage segment grew 87% year-over-year to $33.7 million in revenue generated, driven by increased control system sales, particularly in the fourth quarter. Adjusted EBITDA was $153.4 million in 2025, or 37% of revenue, compared to $161.8 million, or 39% of revenue, in 2024, reflecting lower activity levels in PaidSounds drilling segments, as well as more revenue generated in 2025 from earlier stage segments at lower margins. The company recorded net income attributable to Paython of $53.2 million, or $0.68 per share, in 2025, compared to $121.5 million, or $1.53 per share, recorded in the prior year period. This primarily reflects the non-recurring non-cash gain recorded in 2024 related to the revaluation of our previously held equity interest in IWS. PayPal generated $117.7 million in cash from operations in 2025, only a 4% decline from $123.2 million generated in 2024, benefiting from strong working capital management through more challenging industry conditions. In 2025, PayPal invested $54.3 million in net capital expenditures, compared to $69.1 million in 2024. Resulting free cash flow in 2025 was $63.3 million, a 17% increase from $54.1 million generated in 2024. With this free cash flow, PaySong returned $62.7 million to shareholders through the quarterly dividend of $40.7 million and $22 million of share repurchases, while ending the year with a strong balance sheet of $77 million in total cash as of December 31, 2025. Now turning to the fourth quarter, Paysom generated consolidated revenue of $109 million and adjusted EBITDA of $38.1 million, or 35% of revenue in the fourth quarter of 2025. Paysom's fourth quarter results include a record quarterly result for the company's solar and energy storage segment, with $16.2 million generated in revenue by Energy Toolbase. As a reminder, revenue in this segment will fluctuate based on the timing of control system deliveries. The North American drilling industry continued to be challenging in Q4 of 2025, with reductions in both U.S. and Canadian land rate counts when compared to the prior year period. North American land drilling activity fell by 6% from the fourth quarter of 2024 to the fourth quarter of 2025. During that time, PaceOn held revenue for Industry Day consistent at $1,044. Industry conditions for completions activity in North America also continued to be challenging in the fourth quarter of 2025, with active frack spreads in the U.S. declining by 23% from this prior year comparative period. Against this backdrop, the company's completion segment generated $13 million of revenue, which represents only a 5% decrease from $13.6 million generated in the fourth quarter of 2024, significantly outpacing industry conditions. Within our solar and energy storage segment, operating expenses increased with the record level of sales given the variable cost nature of this segment. While within our drilling and completion segment, operating expenses remain mostly fixed in nature, and the company continued to focus on disciplined cost management in the context of lower industry activity. Paysom generated $38 billion in adjusted EBITDA, or 35% of revenue, in the fourth quarter of 2025. compared to $42 million, or 39% of revenue, in the fourth quarter of 2024. Current quarter adjusted EBITDA reflects the impacts of more challenging industry conditions on the company's drilling and completions revenue over a mostly fixed cost base. And further, a comparison of adjusted EBITDA margins year over year reflects higher levels of revenue generated by the company's solar and energy storage segment at lower margins. We continue to maintain a strong balance sheet, ending the quarter with total cash, including short-term investments of $77 million and no interest-bearing debt. In the fourth quarter of 2025, net capital expenditures were $12 million, which includes investments in building up our valve management and automation technology within completion and the ongoing investments in our drilling-related technology platform. Free cash flow in the fourth quarter of 2025 was $16.1 million, only slightly down from $17.6 million generated in the same quarter in 2024, despite lower industry activity levels. With this free cash flow, we returned $13.1 million to shareholders, $10.1 million through our quarterly dividend, and $3 million through our share repurchase program. In summary, 2025 was defined by challenging industry conditions across both drilling and completions markets. Through this environment, though, We achieved record annual revenue per industry day in our North American drilling segment. We significantly outperformed industry conditions in our earlier stage completion segment. We increased free cash flow year over year, all of which was returned to shareholders through dividends and sharing purchases. And we maintained a strong balance sheet. We remain very well positioned as we enter 2026. I'll now turn over the call to John.

Thank you, Celine. Payson's 2025 financial results represented the eighth consecutive year where Payson's consolidated revenue growth outpaced change in North American land drilling activity. Over that time period, we have strengthened our competitive position in North America, grown our international business, and entered the completions in solar and energy storage markets. This demonstrates that our growth prospects are not solely reliant on increases in North American land drilling activity. In 2025, consolidated revenue grew by 1% despite North American drilling declining by 6%. Notably, more than 20% of consolidated revenue for the year was contributed from our non-drilling segments, namely completions and solar and energy storage. The higher revenue contribution from these earlier stage segments impacts consolidated margins in the short term, and we anticipate margins will improve as revenue grows in these segments. The compound effect of continued outperformance has been significant. Over the past 10 years, Payson's consolidated revenue has increased by 47% despite a 35% decline in the North American land rate count. Notwithstanding the margin effects of the revenue contribution from earlier stage segments, our 2025 adjusted EBITDA margins of 37% were higher than 2015 margins, And over the 10-year period, we have reduced our share count by 7%, returned over $560 million to shareholders through dividends and sharing purchases, and we completed the acquisition of Intelligent Wellhead Systems with no dilution to shareholders. In our drilling-related business, where North American Revenue per Industry Day of $1,053 represented the highest annual result in Payson's history, we continue to focus on delivering innovative products, best-in-class service, and exceptional support to our customers. We look to increase both product adoption and price realization over time through delivering expanded features and functionality in both existing and new products. In our completion segment, we were able to offset activity reductions among larger incumbent customers through the addition of new customers. resulting in a 12% revenue growth annually as compared to a 24% reduction in the average number of active U.S. frac spreads during the year. We have narrowed our focus in the market by shifting away from jobs which utilize only a small number of ancillary products. This results in a reduction in active or IWS active jobs. At the same time, revenue pride of U.S. state increases as we focus on larger jobs which are more closely aligned with our unique equipment and capabilities and more profitable. In our international drilling segment, a 14% revenue decrease in the year was largely the result of an operational shift of a large customer in Argentina away from conventional drilling toward more unconventional development. As unconventional drilling becomes a focus in international markets, we anticipate opportunities to achieve greater adoption of our more advanced technologies, including those for the completions market. Our solar and energy storage segment posted an 87% increase in revenue in 2025 to $33.7 million as a result of a record number of deliveries of energy storage control systems. With pending changes in the regulatory environment for renewable energy project developers, we have maintained a strong pipeline of new project opportunities. As a reminder, revenue from our solar and energy storage segment can vary significantly based on the timing of deliveries of energy storage control systems. We expect industry conditions to remain relatively flat over the next few quarters, driven by ongoing macroeconomic uncertainty and concerns about the potential for oversupplied oil markets. Increasing adoption of existing products and rolling out new products are both significantly more difficult in the current environment. We see, however, several supportive industry trends that should provide tailwinds to our efforts over the medium to longer term. Artificial intelligence benefits BASON as a result of increased demand for both high-quality data and power. Our position as the leading provider of drilling data and our efforts to expand our data management capabilities to the completions market serves us well as AI technologies drive increasing demand for data as inputs to the artificial intelligence models being deployed. The anticipated growth in demand for natural gas as a source for baseload power for data centers is expected to result in increases in natural gas directed drilling activity. Technology has played an essential role in driving efficiency improvements in drilling and completions operations, and we expect customers will look for further efficiency gains driving greater demand for data and technology. We also anticipate that over time, the efficiency gains from technology will see diminishing returns, while geological degradation will accelerate as top-tier locations are drilled, resulting in additional drilling and completions activity to maintain production. PaceOn also benefits from the additional data and technology requirements associated with increasing complexity of drilling and completions operations. Over time, we anticipate that overall decline rates for global oil and gas production will increase, driving higher levels of drilling and completions activity as a result of more natural gas directed drilling, more offshore development and unconventional drilling, which have higher decline rates than oil directed, onshore, and conventional drilling. Our capital allocation priorities are unchanged and are driven by a focus on return on invested capital. We are making investments in areas where we can generate high returns on capital, which are not directly available to shareholders in the market. And we are returning excess capital to shareholders in a disciplined and flexible manner. Our highest expected returns on capital continue to come from the organic investments we are making to generate additional free cash flow in our existing businesses. Our experience through previous cycles has been that maintaining investments focused on technology development and service quality through periods of uncertainty provides the greatest opportunity to enhance our competitive position. 2025 capital expenditures of $54.3 million came in below the low end of our previously provided range of $55 to $60 million, and we anticipate our 2026 capital program will be broadly aligned with 2025 levels at between $55 and $60 million. 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. We will continue to pursue shareholder returns over time through our regular quarterly dividend, which we are maintaining at $0.13 per share, and share repurchases. This combination of shareholder returns provides disciplined returns to shareholders over time while retaining flexibility to adjust our capital allocation during times of changing industry conditions. Our priorities in navigating the current environment of uncertainty are centered on expanding our service and technology advantages, maintaining a strong balance sheet, and returning capital to shareholders in a disciplined and flexible manner. And we would now be happy to take any questions you might have.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touch-tone phone. You will hear a prompt that your hand has been raised. If you wish to decline from the polling process, please press star followed by the two. And if you are using a speakerphone, please lift the handset before pressing any keys. The first question comes from Erin McNeil with TD Cowan. Please go ahead.

Hey, morning, all. Thanks for taking my question. In the North American drilling market, you mentioned the revenue per industry day outperformance over the last eight years. Based on the granular data that you see, has the outperformance in 2025 been a function of rig mix as the rig count declines, you get sort of higher quality revenue per industry day, or are same store sales basically growing based on new product adoption. I'm sure it's a bit of both. But I guess I'm wondering, you know, if the rig count either stabilizes in 2026 or increases, is it possible that you could be negatively impacted as maybe incremental rigs don't have the same kit that some of the ones do today?

Yeah, good question, Aaron. To your earlier or to your comment, it is always a mix of both. But I would say more of it would be, as you categorized it, same-store sales and increased adoption of products. And that's true on both on the new product side but also on the existing product side. And so, I think our expectation would be that if we had a flattish environment, that that metric would be probably the same to slightly up this year based on how we would see it today.

Okay. And just to maybe, as my follow-up, a bit more details on that, like, is this the mud analyzer or is it other products? Like, what's sort of driving that growth?

Well, I think the mud analyzer is the one that probably gets the most attention from ourselves and investors, candidly, but it's not the only one. There's always a portfolio of products. There's some things that we've done that I would classify as kind of lower revenue per unit, but a lot more units going out. The mud analyzer would be a higher dollar per unit with less units going out, but it's been a combination of a few things on the new product side and then adoption on the existing as well.

Fair enough. Maybe I'll sneak one more in. You know, obviously got to ask a question about the solar business this quarter, given the strength. Big picture, how are you thinking about that business in the context of the Payson portfolio, and what's sort of the end game for you with it?

Yeah, sure. So that business is a really good business. as evidenced by the performance it's had. There's been a couple things that have been pretty helpful for that business in the last year in particular, but even kind of the last couple years. I would say the competitive landscape in that industry has shifted in a way that would be to the positive for energy tool base. And there's been some changes on the regulatory environment and some coming changes in the regulatory environment for renewable projects, which has caused people to probably accelerate some things on the project side to sort of remain captured under the existing regulations. So, that's all been positive. But longer term, we think it's a great business. The question will become over time, how much is it consistent with our focus to say, look, at the end of the day, what we are best at is providing data that helps people make decisions around well construction activities. in the oil and gas market, and so that becomes less clear over time, Aaron, and so we like the business a lot. We think it's excellent at what it does. The question is whether it fits with a different set of capabilities than what the existing core PASON business does.

Fair enough. Thanks, John. I'll turn it back. You bet.

Thank you. Ladies and gentlemen, as a reminder, if you have any questions, please press star 1 now. We have no further questions in queue.

I will turn the call back over to John Sabour for closing remarks.

Thanks very much, Joanna. We do appreciate the time. Those of you taken on a Friday morning to join today's call. This is not a unique opportunity to ask questions of the management team. If you have questions, certainly don't hesitate to reach out to Celine or myself at any point. We'd be happy to discuss further. And otherwise, we'll look forward to talking to you following the release of our first quarter results, which will happen in May. So, take care, and we'll talk to you in a few months.

This concludes the conference. Thank you, everyone. You may now disconnect.