Pason Systems Inc.

The content 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 would 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 on its annual information form. Thank you. And good morning, everyone. My name is Kelsey, and I'll be your conference operator for today's call. At this time, I would like to welcome everyone to the Payson Systems, Inc. First Quarter 2026 Earnings Call. All lines have been placed on mute to prevent any background noise. And after the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, just simply press star then the number one on your telephone keypad. If you'd like to withdraw your question, please press star two. Thank you. Missy Lynn Boston, CFO, you may begin your conference.

Thank you, Kelsey. Good morning, everyone, and thank you for attending PayPal's 2026 first quarter conference call. I'm joined on today's call by John Thaler, 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 Paython, and will then take questions. Paython generated consolidated revenue of $102.4 million in the first quarter of 2026, a 9% decrease from $113.2 million in the first quarter of 2025. The year-over-year decline requests lower drilling and completion of industry activity in North America, along with negative impact of a weaker U.S. dollar relative to the Canadian dollar on our U.S. dollar source revenue. On this revenue, we generate $38.2 million in adjusted EBITDA, or 37.3% of revenue. I'll now walk through each of our four reporting segments, starting with North American drilling. Industry conditions in North America were more challenging in comparison to a year ago. As a reminder, industry rate counts fell after meaningful tariff announcements of the U.S. administration on April 2nd of 2025. Since that decline, rate counts have remained relatively stable through the last four quarters. However, when comparing Q1 2026 results with Q1 2025 results, rate counts in both the U.S. and Canada were below prior year levels, and industry drilling days were down 6% year-over-year. Against that backdrop, our North American drilling segment generated revenue of $69.8 million, an 8% decline from $75.8 million in the first quarter of 2025. Revenue per industry day was $1,046 compared to $1,067 in the prior year quarter, a 2% decrease driven primarily by foreign exchange. While operating expenses declined slightly year over year with strong discipline around costs, segment gross profit was $41.7 million compared to $46.8 million a year ago as a result of the more challenging industry conditions over the segment's mostly fixed cost base. International drilling generated $11.7 million of revenue in the first quarter compared to $14 million in the same period of last year. The decline reflects two factors. Our largest customer in Argentina shifted focus from conventional to unconventional drilling, which has reduced the active rates during that transition, and foreign exchange headwinds on U.S. dollar list revenue. Operating expenses fell 22% to $5.7 million on lower activity, and segment gross profit was $5 million compared to $5.8 million the prior year. Our completion segment generated $15 million of revenue, a 6% decline from $16 million in the prior year, but achieved against a 21% decline in active U.S. grant spreads, which represents meaningful outperformance relative to industry activity. IWS averaged 28 active jobs in the quarter compared to 32 in Q1 of 2025 and up from 23 in Q4 of 2025. Revenue for IWSA was $5,883, a 7% increase year-over-year despite the negative effect of foreign exchange, reflecting a more complex technology mix being adopted by our customers. We continue to invest in the technology platform for completion, which in a daily rental business model shows up in advance of revenue. As such, gross profit or loss for the segment includes depreciation and amortization expense of $7.5 million on this continued investment, which includes $2.2 million of amortization on intangibles acquired in the IWS transaction. Our solar and energy storage segments generated $5.9 million of revenue, a 21% decrease from $7.4 million in Q1 of 2025. As we noted in the past, revenue in this segment will continue to fluctuate with the timing of control system deliveries. For context, Q4 of 2025 was a record quarter for the segments with $15.2 million of revenue. Paycom continued to demonstrate strong cost discipline in the first quarter, with many fixed cash operating costs declining slightly year-over-year. Notably, SG&A was $10.1 million, down 6% year-over-year, resulting in just an EBITDA of $38.2 million compared to $45.2 million generated in the first quarter of 2025, with lower revenue generated from the company's drilling and completion segments over the company's mostly fixed cost base. Net income attributable to PaySong was $13 million, or $0.17 per share, compared to $20 million, or $0.25 per share, in the prior year period, and was impacted by lower-end EBITDA, along with higher levels of depreciation and amortization expense with ongoing investments to the company's technology offerings. Cash from operating activities was $20.9 million, compared to $39.9 million in the prior year. reflecting that lower adjusted EBITDA and higher cash taxes paid for amounts owing under the renewed advanced pricing arrangement finalized in Q4 of 2025. Net cash flow expenditures were $12.4 million, down from $16.7 million in Q1 of 2025 due to timing on purchases. Resulting free cash flow was $8.5 million compared to $23.2 million in Q1 of 2025. We've returned $13.5 million to shareholders during the quarter, $10.1 million to our quarterly dividend of 13 cents per share, and $3.4 million to share repurchases. We ended the quarter with $73.5 million in total cash, $97.9 million in working capital, and no interest-bearing debt. In summary, our Q1 results reflect a more challenging industry environment, but our business continues to demonstrate the durability that comes from a leading market position a largely fixed cost base, and a strong balance sheet. We remain well-positioned to support continued growth across our segments and to return meaningful capital to shareholders. With that, I'll turn the call over to John to comment on our outlook.

Thank you, Celine. Let me turn to how we see the operating environment and where we're headed. The U.S. land rate count has stayed in a fairly tight band between 525 and 535 rates since mid-2025. As we have said before, we believe that Payson can grow revenue and earnings in a meaningful way without needing a step-up in North American land drilling activity. Our medium-term goal has not changed. We are targeting a doubling of revenue from 2023 levels from our oil and gas well construction activities over a five- to seven-year horizon. That growth is expected to come from five places. First, scaling our completions business. Second, increasing adoption and improving price realization of our established drilling products and services. Third, bringing compelling new technologies to the drilling and completions markets, with the mud analyzer being the most current example. Fourth, expanding our international revenue, particularly as more work shifts towards unconventional drilling and completions. And fifth, addressing data management opportunities in adjacent well construction activities that we believe the industry has underserved. We are pleased with the progress that we are making in each of these areas. Incompletions, slowing activity from some of our existing customers has been offset by new customer wins and deploying technologies aimed at more complex jobs. The data demands that come from the rapid spread of artificial intelligence are a tailwind. both for our core drilling products and for new product opportunities in completions. Uptake of the mud analyzer continues to build, and we are working on additional mud analysis products that broaden the set of drilling operations that we can serve. Internationally, as customers move toward more unconventional development, we see a path to wider product adoption across more of our product portfolios over the medium term. We are also building a presence within certain surface rig operations and are tailoring our products and support to fit the unique requirements of that market. Yesterday, at our annual general meeting, I took a few minutes to speak to some of the foundational principles of Faison. I spoke of the power of simplicity, the importance of discipline, and the benefits of compounding. Technology deployed simply. That has been our slogan and our operating philosophy for many years. The technologies that ultimately get the broadest use in the market are the ones that take complex problems and solve them with products that are intuitive and simple in the hands of the user. Simplicity also shapes how we think about scaling the business. We are investing to streamline and simplify our product and service offerings so that the operating and capital cost per job comes down over time. Simplifying our business also means staying focused on areas where we have a distinctive and durable competitive advantage. We play the long game by concentrating where our unique capabilities can generate significant free cash flow and attractive returns over time. We are disciplined in our operating and capital costs. The benefits of operating leverage are greatest when we carefully manage our fixed cost base. Our capital expenditures are increasing as we invest in building out our completions business, but we only do so with high expected returns on capital on additional investments. We expect 2026 capital expenditures to be between $60 million and $70 million. We currently anticipate full-year spending to come in near the lower end of that range, and we will continue to monitor our plans as industry conditions and our competitive position evolve. In completions in particular, we're adding new customers at an accelerating rate. Average job size is moving up, and more customer activity is shifting toward the complex jobs that utilize our newest technologies. Any M&A activities that surface have to compete against the expected returns from reinvesting in our own business or buying back our own shares. Today, the highest expected returns we see continue to come from organic investment in our business. Focusing on generating valuable products and service for our customers in areas where we have a unique and distinctive advantage and being disciplined on our costs, allows us to outpace underlying North American land drilling activity. Continued outperformance over time leads to strong financial performance through the benefits of compounding. We continue to build our business with a focus on ensuring that we have the foundation for continued growth and compounding over the medium and longer term. As we generate additional free cash flow, we look to allocate capital responsibly between shareholder returns, and growth-oriented investments. On capital allocation, our framework is unchanged. We balance the discipline and predictability of our regular quarterly dividend, which we are maintaining at 13 cents per share, with the flexibility to invest organically and to repurchase shares, both of which we evaluate through the lens of expected returns on capital. We are also mindful of potential supply chain disruptions and inflationary pressures tied to ongoing U.S. trade dynamics, as well as tensions in the Middle East. The effective closing of the Strait of Hormuz has materially tightened global oil and LNG supply. Concerns of an oil glut from earlier in the year have faded. As the long end of the oil futures curve has strengthened, we are starting to see producers accelerate capital programs and contract incremental rigs. We are well positioned to respond as activity picks up. The benefits of our leading market share and high operating leverage tend to be most pronounced when activity is rising. Uncertainty is likely to stay with us for a while. Our focus is on delivering exceptional performance in the areas within our control, extending our service and technology advantages, investing in growth opportunities that are not directly available to shareholders, keeping a strong balance sheet, and returning capital to shareholders in a disciplined way. Simplicity, discipline, and compounding have shaped Payson for decades, and we believe they continue to position us well for the opportunities ahead. And with that, we would be happy to take your questions.

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 touchstone phone. You will hear a prompt that your hand has been raised. Did you wish to do the Connie phone polling process? Please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, while we pile up your questions. At this moment, there are no further questions. I would like to turn the call back over to Mr. John Faber. You may continue.

Thank you very much for taking the time to join us this morning. We appreciate your continued interest and your support, and we'll look forward to speaking with you again following our second quarter results after our August release. If you have any further questions in the meantime, Celine and I will always welcome your calls, and we look forward to talking. Thank you very much, and have a great day.

Ladies and gentlemen, this does conclude your conference call for today. We thank you very much for your participation, and you may now disconnect. Have a great day, everyone.