Pason Systems Inc. (OTCPK:PSYTF) Q2 2022 Earnings Conference Call August 11, 2022 11:00 AM ET
Company Participants
Celine Boston – Chief Financial Officer
Jon Faber – President and Chief Executive Officer
Conference Call Participants
Keith MacKey – RBC Capital Markets
Michael Robertson – National Bank Financial
Operator
Good morning. My name is Chavana and I’ll be the conference operator today. At this time, I would like to welcome everyone to Pason Systems Inc.’s Second Quarter 2022 Earnings Call. [Operator Instructions] Thank you.
The content of today’s call are protected by copyright and may not be reproduced without the prior written consent of Pason Systems Inc. Please note the advisories located at the end of the press conference issued by Pason Systems yesterday, which describe the forward-looking information. Certain information about the company that is discussed on today’s call may constitute forward-looking information. Additional information about Pason Systems, including the risk factors relevant to the company can be found on its annual information form.
Thank you, Ms. Boston, you may begin your conference.
Celine Boston
Thanks Chavana. Good morning and thank you for attending Pason’s 2022 second quarter conference call.
I am joined on today’s call by Jon Faber, our President and CEO. I’ll start today’s call with an overview of our financial performance in the second quarter. Jon will then provide a brief perspective on the outlook for the industry and for Pason and we will then take questions.
Our second quarter results reflect a continuation of improved industry conditions and also reflect our strong competitive positioning, operating leverage and balance sheet. Pason generated consolidated revenue of $74 million in the second quarter of 2022, a 69% improvement over the second quarter of last year. With this revenue Pason on posted $31 million and adjusted EBITDA, which represented 42% of revenue, a significant increase from the $13 million or 29% of revenue generated in the second quarter of 2021. All of the company’s business segments contributed to the strong quarterly results. North American revenue was $60 million for the second quarter, a 71% improvement from the second quarter of last year, and a result that once again outpaced the improvement and underlying industry conditions. Revenue per industry day in our North American business unit was $801 in the second quarter, which although down slightly from the new record set in the first quarter of this year of $835 was still over the $800 mark for the second time ever in the company’s history.
As we mentioned in previous calls, revenue per industry day in North America will fluctuate with seasonality effects of drilling activity in Canada, and we saw this effect in the second quarter when comparing to the first quarter record level. That said, second quarter revenue per industry day of $801 represents a 10% increase from the levels seen in the second quarter of 2021, for which the increase is driven by improved product adoption along with a more favorable pricing environment as activity levels have continued to recover. Similarly activity levels in international end markets also improved and revenue generated by the International Business Unit was $12 million in the second quarter, a 58% improvement from the second quarter of 2021. It’s also worth noting that in the second quarter, our international business unit generated the highest level of quarterly revenue since 2015. Energy Toolbase, our emerging business in the solar and energy storage market generated $1.7 million in the second quarter of 2022 in revenue, a 94% improvement from the level seen in the second quarter of 2021. Similar to the first quarter reported revenue for Energy Toolbase begins to incorporate revenue generated by control system and related hardware sales. Quarterly revenue for this segment will fluctuate with the timing of commissioning of control systems.
As the industry recovers and our outlook remains positive, we will continue to make investments and incur certain costs in anticipation of future revenue increases, primarily as it relates to equipment repairs and people. Specifically, we continue to be especially proactive on the repair of our existing fleet and technology as we grapple with ongoing difficulties in predicting timing on deliveries of capital equipment purchases. Further, we are managing inflationary effects on certain components of our cost structure. That said, our second quarter adjusted EBITDA of $31 million or 42% of revenue does near pre pandemic levels and in fact is very similar to levels that we saw in the second quarter of 2019 with 23% less North American land rigs.
Net income attributable to pace on for the three months ended June 30, 2022 was $18.5 million or $0.23 per share, a significant increase from the $5.3 million or $0.06 per share generated in the second quarter of 2021. Year-to-date, Pason generated $148 million of revenue, a 72% increase from $86 million in the corresponding 2021 period. Adjusted EBITDA for the six months ended June 30, 2022, was $664.3 million or 43% of revenue, compared to $26 million or 30% of revenue for the first six months of 2021. Accordingly, net income attributable to Pason in the first half of 2022 was $37 million or $0.45 per share, up from $9.5 million or $0.12 per share. A comparison of year-to-date results continues to highlight the improved industry conditions, higher levels of revenue generated per operating day and strong operating leverage.
Our balance sheet remains strong and incredibly well positioned to make strategic investments within our core business. We ended the quarter with $187 million in cash and cash equivalents and no interest bearing debt. In support of increased levels of activity, we continue to make investments in our core business. We mentioned last quarter that we would be making strategic and proactive investments in inventory levels of components and supplies in an effort to mitigate the impacts of ongoing supply chain challenges. In the second quarter that included $2.4 million in inventory investments. And we expecting to continue with this strategy in the coming quarters. Further, in the second quarter of 2022, Pason spent $6.5 million in net capital expenditures relating to maintaining and refreshing our technology platform. Resulting free cash flow in the second quarter was $19.1 million, a 237% improvement from $5.7 million generated in the second quarter of 2021. We remain committed to shareholder returns and in the second quarter returned $8.1 million to shareholders through dividends and share repurchases.
In summary, we are very proud of our second quarter results which reflect our leading market presence, our strong operating leverage through improving activity levels and our pristine balance sheet. We continue to be in a position of excellent competitive and financial strength.
I will now turn the call over to Jon for his comments on our outlook.
Jon Faber
Thank you, Celine. Our second quarter financial results reflected our strong competitive position and the continuation of the steady growth in activity as the industry has recovered since bottoming in the third quarter of 2020. As Celine noted, our consolidated revenue and adjusted EBITDA on the quarter were nearly identical to our results in the second quarter of 2019 despite industry activity being 23% lower in the second quarter of 2022, as compared to the same period in 2019. We expect to build on the advancements that we’ve made in our business over the past few years. We are well equipped to provide the drilling data and technologies that our customers are increasingly using to deploy automation and analytics to improve their operational performance. In recent months, the macro environment has become more challenging as Central Bank’s attempt to bring down high prevailing levels of inflation by raising interest rates while trying to avoid putting economies into recession. The world is wrestling with a global energy crisis with significant shortages and elevated prices in many countries.
And at the same time, geopolitical instability has placed an increased focus and attention on where commodities are sourced. Oil prices have become more volatile as traders weigh the implications of supply shortfalls against the potential demand destruction from an economic slowdown. Against that more challenging backdrop, we remain confident that the North American land drilling activity will continue to trend slowly and steadily higher in the coming quarters. Global oil demand is now similar to pre- pandemic levels. And while there are growing concerns about potential demand impacts from a recessionary environment, supply factors may overwhelm those demand impacts. In previous cycles, high oil prices have led to significantly oversupplied markets. In the current situation however, major sources of supply are below pre-pandemic levels and trending lower. US storage levels of crude oil and petroleum products are at levels last seen in 2008. Since the beginning of April, the United States has released approximately 800,000 barrels per day from the Strategic Petroleum Reserve to help meet demand. However, that program is currently scheduled to end in late September.
Today, the reported inventory in the strategic petroleum reserves sits at the lowest levels since May 1985, more than 37 years ago. US planned production remains almost 10% below pre-pandemic levels. The inventory have drilled but uncompleted wells, something we call DUCs in the United States has decreased for 24 consecutive months to its lowest level in more than nine years. The pace of decline has significantly slowed over the past few months, suggesting that the DUC inventory may be plateauing at a minimum level. There is a finite limit to how much supply can come from drawing down on storage and uncompleted well inventories. Any new wells being prepared for production to slow the drawdown of inventories to meet demand will require new drilling.
As a result, we expect land drilling activity to steadily grow over the coming quarters. In our solar and energy storage efforts, we expect a growing number of control system installations and increasing recurring monthly revenue from subscriptions to our economic modeling software package to contribute to revenue growth. Across our business, we will make the necessary investments to position ourselves to realize future revenue gains. Our operating costs will be increases in anticipation of further activity gains and prevailing inflation rates. We will invest in research and development efforts to drive continued market share and pricing improvements. We continue to plan to spend approximately $30 million in capital expenditures in 2022 though global supply chain shortages and disruptions are impacting delivery schedules. We will continue to evaluate our capital programs in the context of future opportunities to evolve our product and service offering while navigating continued supply chain challenges. We are pursuing opportunities to mitigate the impact of supply chain disruptions by strategically increasing our inventory of equipment components and parts further in advance of anticipated repairs and equipment builds.
Our balance sheet remains strong and our free cash flow generation continues to improve. We will continue to allocate capital by making investments in maintaining our leadership position in our existing drilling related markets, positioning ourselves for future growth in new and growing markets and returning capital to shareholders. We remain committed to returning capital to shareholders through our regular quarterly dividend which we’re maintaining at $0.08 per share and through share repurchases, we remain focused on ensuring that Pason is an innovative, profitable and responsible company. And we would now be happy to take any questions.
Question-and-Answer Session
Operator
[Operator Instructions]
Thank you. First question comes from Keith MacKey at RBC Capital Markets.
Keith MacKey
Hi, good morning, and thanks for taking my questions here. Just maybe wanted to start off, Jon, curious for your thoughts on where you see North American recounts trending through 2023. I know you expect them to gradually improve. But maybe you could put a little bit more of a range or a finer point on what you expect to see in the market.
Jon Faber
Yes, of course, my crystal ball is no better than yours, Keith, right. So I think if we’re talking about the US land marketing in particular, which is, of course, the vast majority of our activity, we would have seen a world prior to the pandemic that was in that higher 800, 000 to lower 900,000 sort of range. I can see us getting back to that range. The question is how quickly and I think that’s ultimately going to be constrained a little bit by the availability of labor and equipment. And so to the extent that remains a rate limiter on the growth rate I think continuing to see that the type of pace we’ve seen on average in the last few months is probably more realistic. So there’ll be a slower pace than we saw earlier in the recovery. But this gradual, slowly trend up to the right.
Keith MacKey
Yes, got it. Thanks for that. And, and rig providers are starting to talk a little bit more about activating longer-idle AC rigs. And as they get deeper into their stacks, and potentially some more substantive upgrades, as that rig count sort of trends up, can you maybe just talk about, what do you think could be your potential market share, as these newer rigs come back to work? Do you have a sense of where Pason already installed? And what the opportunity might be to participate in any of these new sorts of rigs that are going back to work.
Jon Faber
Yes, I think our share of the people who are talking about reactivated, Keith, would be such that we would expect our share of the new rigs firing up to be about the same as the rigs that we’ve seen active in the market recently. So I don’t know that I would see a material change in market share up or down from the reactivation of rigs.
Operator
[Operator Instructions]
Next question comes from Michael Robertson at National Bank.
Michael Robertson
Hey, good morning, Jon and Celine. Congrats on the solid quarter. Thanks for taking my question. You had mentioned in your commentary that one of the factors supporting the stronger revenue per industry day was product adoption. I was just wondering if maybe you could wrap some more color around some of the like, the particular products that you’re seeing stronger adoption rates with that’s driving that. And maybe if you could speak to what kind of ballpark penetration those have in the market right now to understand how much further that adoption could go?
Jon Faber
Sure, probably two categories, Michael, around what that product adoption increase looks like, I’d say, some of the product adoption increases are what I’ll call the re-adoption of some products that may have come off through more challenging environments. One of the things when customers are looking to bring their spending down, as they’ll look at trying to do as much with a little less equipment. And so when things get a little better, they tend to take some of those products back. So we’ll call that kind of a re-adoption effect. And that effect is probably largely played out today. So I don’t know that there’s a significant amount of re-adoption type of opportunity. So maybe this specific area and call outs around kind of revenue growth as it relates to newer product types of adoption. It’s really in the data delivery space that we talked about within our drilling data segment. And that’s really customers looking to bring the data into their systems through a variety of mechanisms. And so I think that has more running room than the re-adoption effect has.
Michael Robertson
Got it. That’s really helpful color. Any updates on your free cash flow prioritization here, assuming we’re looking at industry activity levels continuing to climb? Just wondering how you’re thinking about where you would put that to work?
Jon Faber
I think one of the best places for us to put our capital to work today is in the business, we think there’s real opportunities for further investment within our existing business. You mentioned some of the space where customers are increasingly have a focus on how do they get that data moving around into various systems that they’re using. And I think there’s real opportunities for further investment in the business first and foremost. Then when you start to look at the returns to shareholder questions, I think we’ve articulated in the past that our desire has to be a bit more flexible in our capital allocation, or returns, shareholder returns than we were in the past. So a little bit less focused on the regular dividend, which we expect will continue to increase, but a more significant use of repurchases than we would have had in the past because that’s a more flexible mechanism to scale up and down as other opportunities for investment show up. So as free cash flow improves, and continues to get a little better that makes more available for that return to shareholder side as well. And as I said continued growth in the regular dividend, but also probably a little more use of the repurchase side.
Operator
Thank you. There are no further questions you may proceed.
Jon Faber
Thanks very much for joining our call this morning. If you have any follow up questions. You’re certainly welcome to reach out to Celina or myself. And otherwise we’ll look forward to speaking to you after the third quarter results in November.
Operator
Ladies and gentlemen, this concludes today’s conference call. We thank you for participating. And we ask that you please disconnect your line.
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