Expro Group Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 25, 2024

There are 10 speakers on the call.

Operator

Hello, and welcome to the EXPRO Q2 20 24 Earnings Presentation. My name is Elliot, and I'll be coordinating your call today. I would now like to hand over to Chad Stevenson, Director of Investor Relations. Please go ahead.

Speaker 1

Welcome to EXPAROS Q2 2024 Conference Call. I am joined today by EXPAROS CEO, Mike Jardin and EXPAROS CFO, Quinn Fanning. First, Mike and Quinn will have some prepared remarks, then we will open it up for questions. We have an accompanying presentation on our 2nd quarter results that is posted on EXPARO's website, expro.com, under the Investors section. In addition, supplemental financial information for the Q2 results is downloadable on the EXPARO website, likewise, under the Investors section.

Speaker 1

I'd like to remind everyone that some of today's comments may refer to or contain forward looking statements. Such remarks are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Such statements speak only as of today's date, and the company assumes no responsibility to update forward looking statements as of any future date. The company has included in its SEC filings cautionary language identifying important factors that could cause actual results to be materially different from those set forth in any forward looking statements. A more complete discussion of these risks is included in the company's SEC filings, which may be accessed on the SEC's website, sec.gov, or on our website, again, atexpro.com.

Speaker 1

Please note that any non GAAP financial measures discussed during this call are defined and reconciled to the most directly comparable GAAP financial measure our Q2 2024 earnings release, which can also be found on our website. With that, I'd like to turn the call over to Mike.

Speaker 2

Good morning, everyone. I'd like to start off by reviewing the Q2 financial results presented in today's earnings press release. I will then discuss the macro environment, which we believe offers a favorable multiyear outlook for energy services companies with exposure to international and offshore markets, presenting a compelling growth opportunity for EXPARO. Finally, Clint will provide some additional commentary on the just completed quarter and share some additional financial information. For a recap of consolidated results and quarterly results by region, I'll direct you to Slides 3 through 7 of the presentation that we posted to expro.com.

Speaker 2

Turning to Slide 3, I am pleased to report a very strong quarter for EXPAREL with Q2 2024 revenue of $470,000,000 and adjusted EBITDA of $95,000,000 both exceeding guidance in part due to the early closing of the Cortrax acquisition. Revenues increased sequentially by $86,000,000 or 22% compared to the quarter ended March 2024. Excluding the impact of Cortrax, revenue was up sequentially by $65,000,000 or 17%. This sequential increase is to some extent consistent with historical revenue trends as we usually experience a seasonally soft first quarter. More importantly, results for the 2nd quarter reflect momentum building in the offshore markets for which our outlook remains very strong.

Speaker 2

As reported, 2nd quarter revenue increased 18% year over year and 13% excluding the impact of Coartrex. Q22224 adjusted EBITDA was up 32% compared to Q2222023. Note that Q22224 adjusted EBITDA includes a $7,000,000 contribution from CoreTrax and Q2 2023 included $6,000,000 of LWI related unrecoverable costs. The strong adjusted EBITDA performance was driven by the increased activity across all regions and product lines and solid fall through on incremental revenue. Given our strong year to date momentum and the tailwinds continuing to support profitable growth in our business, we are refining our full year guidance range to reflect expectations for revenue to be between $1,700,000,000 $1,750,000,000 and expectations for adjusted EBITDA to be between $350,000,000 $375,000,000 I will cover our market outlook toward the end of my prepared remarks, but note that the cadence of technical inquiries and requests for budgetary pricing for projects remains high across geomarkets and product lines.

Speaker 2

Our leverage to long cycle development, including deepwater, gives us confidence that EXPAREL's currently strong business momentum will be sustained over at least the next several years. Turning to the regions. For North and Latin America, 2nd quarter revenue was $157,000,000 an increase of $27,000,000 or 20 percent quarter over quarter, reflecting increased activity across our product lines. The NLA well construction and subsea well access teams had a particularly strong quarter with a good level of activity in the U. S, Guyana and Trinidad.

Speaker 2

NLA segment EBITDA margin at 28% was up from 26% in Q1 2024, reflecting the increased activity and a more favorable activity mix in the region. Additionally, we have had further success in commercializing our C CURE technology, which ensures optimal cement placement during the slurry pumping process. This prevents fluid contamination that could potentially have occurred without the C CURE solution. For Europe and Sub Saharan Africa, 2nd quarter revenue was $168,000,000 a sequential increase of $47,000,000 or 38%. Segment EBITDA margin at 21% was flat sequentially and down approximately 4 percentage points relative to Q2 2023, primarily reflecting lower margin recognized on our Congo Production Solutions project.

Speaker 2

Our EESA business currently has good momentum as we continue to capitalize on increased activity in the region. Subsea well access had a particularly strong second quarter delivering a subsea solutions package for Azul Energy and its partners Agogo project. As most of you know, Azul is E and I and BP's joint venture entity in Angola. Xpro was also recently awarded a contract to provide subsea technology for the nearby Ndougou field in Angola, further strengthening our relationship with ENI and Angola where we expect activity to continue to increase over the next several years. We also advanced several other important projects in the quarter.

Speaker 2

Our team in Ghana completed a 21 well development campaign using EXPRO Subsea Landing Strings. This project has run for more than 3.5 years and was completed with no injuries, no service quality events, no high potential safety incidents along with an operational uptime of 99.7%. This is an outstanding achievement from our entire team. Last quarter, we shared that we had reached a milestone in suppressing 1,000,000 man hours LTI free as part of our E and I Congo project to design, construct, operate and maintain a fast track onshore LNG pretreatment facility. Since then, we have moved into the commissioning phase.

Speaker 2

In June, incremental gas from the Xpro built pretreatment facility was first introduced to the client's floating liquefied natural gas facility. First gas was within 22 months of contract award. The Middle East and North Africa team delivered another excellent quarter with revenue at $81,000,000 up 14% sequentially, largely driven by the Cortrax acquisition with good fall through on incremental revenue. MENA segment EBITDA margin at 35% was up 1 percentage point quarter over quarter and about 4 percentage points year over year. This quarter, Xpert has received the approval to commence operations for a 5 year well test contract onshore Middle East.

Speaker 2

The contract requires a mobilization of conventional testing units and multi phase meters along with 150 additional personnel. Finally, in Asia Pacific, 2nd quarter revenue was $63,000,000 up 5% relative to previous quarter, primarily reflecting increased activity in Malaysia and Australia. Asia Pacific segment EBITDA margin of 24% was up over 6 percentage points from the prior quarter, which reflects higher activity in the region and lower LWI related costs. In Brunei, we saved 30 hours of rig time using our hydraulic hammers for the installation of a platform. This efficiency was achieved by using our proprietary jet string elevator, which enhances safety and efficiency in part by eliminating need for man riding during operations.

Speaker 2

Xpro's team in Australia successfully executed well intervention services for recompletion of a CO2 injector well in the Otway Basin for Australia's leading CCUS research organization. We have supported CCUS globally for over 10 years, gaining valuable experience in these types of projects, while delivering excellent results. And we continue to believe that it will be a key industry enabler to support our own as well as our clients' net zero goals. In April, we also published our 3rd sustainability report highlighting EXPAROS achievements in 2023. The progress we have made in working towards our environmental, social and governance objectives and our commitment to being a citizen of the world.

Speaker 2

These efforts resulted in MSCI increasing Xpro's rating from a single A to AA, the 2nd highest rating they have. In terms of commercial activity, I'm pleased we have continued to build on our strong momentum, capturing roughly $196,000,000 of new contract awards, including subsea contracts worth approximately $20,000,000 in Africa and a SODAR meters contract in the Middle East for $16,000,000 Our backlog remains healthy at approximately $2,200,000,000 at the end of the second quarter. The sequential decrease of approximately 5% was due to the strong revenue performance in the quarter, the transition of a Congo project to the operations and maintenance phase and conversion of other large projects. As previously announced, we also successfully closed our acquisition of Cortrax with an effective date of May 1, which is earlier than was assumed in our guidance. Cortrax is a leading well integrity and production optimization company that will enable us to expand our portfolio of cost effective technology enabled well construction and well intervention integrity solutions.

Speaker 2

As a reminder, the acquisition was completed at a transaction value of less than 5 times our estimate for CoreTrax standalone 2024 EBITDA with synergies providing incremental upside. We expect the acquisition to accelerate the growth of CoorTrax's innovative, high value adding drilling optimization, well integrity and production enhancing technology solutions by leveraging Xpro's global operating footprint. Integration efforts are well underway with our teams across the world working on tenders together to realize the potential of pull through revenue synergies. Regarding M and A more generally, we continue to believe additional consolidation is good for the long term health of the energy services sector and that smart synergies focused M and A can be an effective means for experts to accelerate growth and create additional shareholder value. Our team continues to evaluate acquisition opportunities that would allow us to advance our strategy and position Expro to be more relevant to our customers and more relevant to our shareholders.

Speaker 2

We have a disciplined approach to M and A and any opportunities we pursue will meet a rigorous set of criteria that starts with the industrial logic, which includes a plan to capture cost and revenue synergies and has a financing plan that preserves our currently strong financial profile. We like our leverage to what we expect to be a multiyear growth phase for drilling and completions activity, but continue to look for opportunities that allow us to increase our exposure to production optimization solutions and thereby better balance business between CapEx and OpEx funded revenues. While we will be patient to the right opportunities, improving EXPARES through cycle resilience continues to be a strategic objective. Turning to our market outlook, we anticipate the growth observed over the past few quarters will continue driven by favorable underlying market fundamentals in the energy services sector. Strong investment and activity growth support a positive multi year outlook for our services and solutions, with oil demand forecasted to reach record levels of 103,000,000 barrels per day in 2024 and nearly 105,000,000 barrels per day in 2025.

Speaker 2

Expected consumption growth will be primarily fueled by a sustained global economic recovery with significant contribution from non OECD countries in Asia as well as the Middle East and the United States. We believe that a robust rebound in demand coupled with the recent extension of production cuts by OPEC plus will lead to a market deficit in 2024. A tighter liquids market may result in upward pressure on prices. At a minimum, it will underpin a a positive fundamental backdrop and support continued growth in investment and activity. Brent prices rose from $80 per barrel in January and were above $87 per barrel earlier this month, bolstered by continued OPEC plus supply discipline and geopolitical uncertainties, most notably in the Middle East and in Europe due to the ongoing conflict in Ukraine.

Speaker 2

The market is anticipated to tighten further over the remainder of 2024 as demand increases over the Northern Hemisphere summer months is expected to support prices in the mid-80s. Inventories are expected to return to moderate builds in 2025 following the unwinding of OPEC plus cuts And forecast supply growth from non OPEC plus countries is likely to offset increase in global oil demand, possibly leading to a modest weakening of prices over 2025. Most importantly, relatively stable prices above $70 per barrel should support long cycle investment decisions by our oil company customers and provide tailwinds for the international and offshore markets to which Xpro is most levered. Outside of the U. S, gas markets remain fundamentally tight with LNG demand, particularly in China and India expected to recover.

Speaker 2

Longer term, domestic demand and exports are forecasted to increase with gas continuing to play a crucial role in lower carbon electricity generation and as a critical transition fuel towards global net zero targets. Robust commodity prices continue to drive long term investment decisions by energy companies with record levels of final investment decisions in 2023 and sustained high levels of sanction expected in 2024 and beyond. This multiyear pipeline of projects drives demand for our services and solutions, especially in the offshore segment, which is expected to comprise more than 75% of total greenfield investments in 2024. This trend supports increasing activity in our well construction and subsea well asset businesses as well as elements of our well flow management business, which we expect to grow further throughout 2024 and beyond. Forecast for upstream investments in 20 24 indicate This growth will be supported by large projects in the Middle East, driven by This growth will be supported by large projects in the Middle East, driven by Saudi and the UAE, as well as in China, Norway and Guyana and in Brazil in Latin America.

Speaker 2

Targeted exploration and appraisal activity in mature areas, especially in Europe, Sub Saharan Africa and South America are also driving growth. International land activity growth continues, especially in the Middle East with the ongoing large gas and LNG developments in Abu Dhabi, Kuwait, Oman and Saudi. Operators are increasingly focusing on maximizing sustainable returns from their existing assets, striving for cost efficient lower carbon intensive production. This drives demand for our production optimization capabilities within the well flow management and well intervention integrity product lines, particularly in the Asia Pacific and Latin America regions. Finally, investments in lower carbon energies are also increasing with notable activity growth in geothermal, particularly in Asia Pacific and Europe and in carbon capture and storage in North and Latin America and Europe, as our customers aim to reduce their upstream missions to achieve net zero targets.

Speaker 2

As we have discussed previously, we expect the current Energy Services upcycle to be characterized by margin expansion more so than capacity additions, highlighting the importance of both cost and capital discipline. We are committed to continuing to rationalize support costs and we are committed to optimizing equipment utilization and increasing operational efficiency, both of which will positively impact overall profitability. We also continue to engage in constructive conversations with customers about Xpro capturing more of the value we provide through technology, process efficiency, safe while access and enhanced production. Overall, the outlook for EXPARO and the wider Energy Services sector remains very positive. With that, I'll hand the call over to Quinn to further discuss our financial results.

Speaker 3

Thank you, Mike. Good morning, everyone. As Mike noted, we reported revenue of $470,000,000 for the quarter ended June, which represents a new high watermark for quarterly revenue since we completed the EXPROFRANKS merger in the Q4 of 2021. For reference, our guidance for Q2 revenue that was provided in our Q1 earnings conference call was for a range of revenue of $400,000,000 to $420,000,000 Guidance assumed no contribution from Cortrax, which accounted for approximately $21,000,000 of EXPAREL's $50,000,000 to $70,000,000 outperformance relative to guidance. Revenue was up $86,000,000 sequentially or approximately 22% due to higher revenue in NLA, which was largely driven by well construction and subsea well access and ANESA, which was largely driven by subsea well access.

Speaker 3

Year over year, revenue was up by $73,000,000 or approximately 18% relative to the Q2 of 2023. Within NLA Well Construction, offshore tubular running services revenue and tubular product sales were both up solidly quarter over quarter and the PRT Offshore business, which we acquired in Q4 of 2023, had a particularly strong second quarter. With HENESA, as Mike mentioned, we are in late stages of the commissioning of the onshore pretreatment or OPT facility in Congo. Q2 revenue related to the Congo project was approximately $30,000,000 but contribution margin during the construction phase has been dilutive to overall profitability. In addition, as Mike noted, we successfully delivered a large subsea project for Azul Energy in Angola.

Speaker 3

TRS and tubular products should sustain their current momentum into Q3. Revenue from the Congo project, however, is expected to decrease in Q3 as we move into the operations and maintenance phase of the project, with contribution margin becoming accretive rather than dilutive during the O and M phase. In addition, the expected timing of H2 Subsea Well Access projects, including those within the acquired PRT Offshore business, will also result in a step down in revenue in Q3, followed by an expected rebound in Q4. Net income for the Q2 of 2024 was $15,000,000 or $0.13 per diluted share compared to net income of $9,000,000 or $0.08 per diluted share in the Q2 of 2023. Adjusted net income, which excludes merger and integration expense, severance and other expense and stock based compensation expense for Q2 2024 was $31,000,000 or $0.27 per diluted share as compared to $19,000,000 or $0.17 per diluted share for Q2 2023.

Speaker 3

Adjusted EBITDA for the Q2 of 2024 was $95,000,000 as compared to Q2 guidance of $80,000,000 to $90,000,000 representing a year over year increase of approximately $23,000,000 or 32% relative to Q2 of 2023. Adjusted EBITDA margin for the 2nd quarter was 20%, up roughly 200 basis points year over year. Year over year increase in adjusted EBITDA and adjusted EBITDA margin primarily reflects good fall through on incremental revenue due to activity mix, operating leverage and a non repeat of unrecoverable LWI related costs in Q2 2023. As noted on prior calls, the key drivers to our financial targets will be an increase in activity, a shift towards a more favorable business mix that is increasingly weighted to customer CapEx related spending, operational leverage and lastly, net pricing gains. Related to the business mix, deepwater well construction, which is our largest early cycle business, continues to exhibit good momentum.

Speaker 3

Based on current backlog, we expect that momentum to be sustained at least over the medium term. The landing string driven subsea well access business, which is levered to subsea completions activity, also seems to be trending in a positive direction. Both product lines, which provide mission critical, technology enabled, high value adding services, generate attractive contribution margins for Xpro. So faster relative growth should result in improvement in overall profitability. In addition, both product lines are capacity constrained industry wide and as a result should provide scope for pricing gains based on our current outlook for activity.

Speaker 3

Support costs for Q2, twenty twenty four of $86,000,000 represented 18% of revenue and were up approximately 5% sequentially, largely reflecting CoreTrax related overheads from the effective date of the transaction. We continue to expect the support costs for the full year 2024 will be at or below 20% of revenue. Beyond 2024, we expect that support costs will grow in line with inflation and that operating leverage like activity mix will provide scope for adjusted EBITDA margin expansion. Pricing is also trending positively at least within our deepwater well construction and subsea landing string driven business. But net pricing gains are not yet a material driver to reported results.

Speaker 3

Nonetheless, relative to 2023, we continue to expect that we will get a modest benefit to adjusted EBITDA margin from net pricing for the full year 2024. Moving to liquidity, Q2 adjusted cash flow from operations, which excludes cash paid for interest net, cash paid for severance and other expense and cash paid for merger and integration expense was $6,000,000 compared to $36,000,000 in Q2 2023, which was largely driven by an increase in net working capital of approximately $72,000,000 in the just completed quarter, primarily reflecting the step up in revenue in the quarter and a pending milestone payment related to the Congo project. Consistent with historical patterns, the build in net working capital should reverse in the second half of the year. In conjunction with the close of the Cortrax acquisition, Expro increased its bank credit facility from $250,000,000 to $340,000,000 subsequently drew down approximately $76,000,000 to finance the cash portion of the acquisition. At quarter end, we had $121,000,000 drawn on the credit facility.

Speaker 3

Expro had total available liquidity at quarter end of approximately $271,000,000 with cash and cash equivalents, including restricted cash of approximately $135,000,000 and approximately $136,000,000 available for borrowings on our credit facility. Turning to our outlook, Page 9 of our accompanying slides summarizes our guidance for Q3 and the full year 2024. Based on our strong performance in the first half of twenty twenty four and a positive activity outlook, as Mike noted, we are refining full year 2024 guidance with anticipated revenues between $1,700,000,000 $1,750,000,000 and adjusted EBITDA of between $350,000,000 $375,000,000 Adjusted EBITDA margin is expected to be plus or minus 21% and free cash flow margin or free cash flow as a percentage of revenue is still expected to be in the high single digits, but again is expected to be weighted to the second half of 2024. Full year guidance for 2024 assumes cash taxes of between 3% 4% of revenue and CapEx as a percentage of revenue of between 7% 8%. Moving to the Q3 2024 guidance, revenue is expected to be within a range of $410,000,000 $430,000,000 implying year on year growth of approximately 14% and a sequential decline of approximately 10%.

Speaker 3

For sequential comparisons, note that Q2 2024 revenue included 2 months of Cortrax's results and Q3 will include 3 months of Cortrax's results. As I noted at the top of my remarks, also note that second quarter revenue included a total of approximately $60,000,000 of revenue related to our LNG expansion project in the Congo and revenue related to subsea projects that were delivered in Q2 that will not be repeated in the Q3. Regarding the LNG expansion project, Q3 revenue guidance reflects a shift in work scope from the fast track plant delivery phase to a multiyear operations and maintenance phase. As Mike noted, lower revenue expectations for the Subsea Well Access business in Q3 largely reflects the strong second quarter results in the Gulf of Mexico and offshore Angola and the expected start up and completion of other projects. Adjusted EBITDA is expected to be within a range of $85,000,000 $95,000,000 implying Q3 adjusted EBITDA margin within a range of 21% 22% or up approximately 100 basis points to 200 basis points sequentially.

Speaker 3

Our current 2024 guidance assumes CoreTrax will contribute approximately $100,000,000 of revenue to Expro reported results and adjusted EBITDA margin that is accretive to standalone Nexpro results. Looking ahead, we have previously stated and continue to believe that the current fundamental backdrop and underlying business momentum provide a clear path to $2,000,000,000 of revenue, a mid-20s adjusted EBITDA margin and a free cash flow margin of 10% over the medium term. With customer spending priorities focused on offshore development, the deepwater TRS and Subsea Landing Stream Driven Business, which again are our product lines multi levered to drilling and completions activity tend to come with high fall through margin and incremental revenue and have the greatest potential for improved pricing and are expected to remain the key drivers of EXPRO's overall results over the near to medium term. The Cementing Technologies and Performance Drilling Solutions businesses, which we have grown through organic investment in M and A, should also provide margin accretion over the medium term. As Mike mentioned, we are in the early stages of the integration efforts for CoreTrax with cost and revenue synergies providing some incremental margin upside, most likely beginning in 2025.

Speaker 3

With that, I'll turn the call back over to Mike for a few closing comments.

Speaker 2

Thank you, Quinn. 2024 year to date has been an exciting year for EXPARO with solid financial performance and the successful acquisition of CoreTrax, which enhances our depth of talent and the capabilities we offer, and we feel the business is strategically positioned to continue to become more meaningful to customers and shareholders. As Quinn stated, the fundamental macro backdrop is set for EXPARO to deliver value to our customers through our cost effective technology enabled services and solutions, while delivering enhanced returns to our shareholders. This will require the team to execute on our strategic initiatives and continue to both champion safety and deliver best in class service. Closing where I began, we believe that the international and offshore markets are in the early stages of a multiyear growth phase that based upon project sanctioning levels and customer dialogue, we believe could be sustained through the end of the decade.

Speaker 2

With that, we can now open the call for questions. Thank

Operator

Our first question comes from Luc Lamoine with Piper Sandler. Your line is open. Please go ahead.

Speaker 4

Hey, good morning, Mike, Quinn. Good

Speaker 2

morning, Luke.

Speaker 5

How are you doing?

Speaker 4

You raised your 24 EBITDA guide and it sounds like your confidence in the long term outlook is increasing. But maybe there's a little shift between 3Q and 4Q with just some project timing and startups. Could you elaborate on this a little more? And then maybe talk about some of the puts and takes between the high end and the low end of the guidance range this year?

Speaker 2

Sure. And Luke, a lot of it was really a strong Q2. We had some of the, in particular, a couple of subsea projects that literally were within days of where they're going to fall in Q2 or we're going to fall in Q3. So part of the really strong Q2 was some of that revenue that shifted by a couple of days from Q3 into Q2. We'll kind of be back in that more normal rhythm of things as we exit Q3 going into Q4.

Speaker 6

Quinn, do you want to comment? Yes. And then

Speaker 3

the Q4 step up is likewise generally related to subsea well access projects. PRT, as I mentioned in my remarks, had a very strong Q2. Their expectations based on project timing is the step down in Q3 and then the recovery in Q4. It's very similar story for the Africa coast within the Subsea Well Access business. Mike mentioned the Agogo related deliveries in Q2, little more quiet in Q3 within Subsea Legacy Xpro and likewise recovery in the Q4.

Speaker 3

I guess as you look into kind of the larger movements, I would have highlighted the subsea projects as well as the project phasing on the Congo project. And then we'll continue to get incremental contribution from CoarTrax as we pick up the extra month.

Speaker 4

Okay. And then Mike, you talked about core track sum and the revenue synergy possibilities. But is there any way to maybe frame this potential kind of on a multiyear basis? And then could you also talk about how the integration is progressing with CoreTrax?

Speaker 2

Sure. So fundamentally for us with CoreTrax, it's a business today that is we probably have strong activity in 6 or 7 countries. And in broader expo, we operate in somewhere between 60 70 kind of depending on the day of the week. So really it's that internationalization of our ability to go ahead and deploy that into additional markets. We're going to focus on those.

Speaker 2

We're not going to try to roll out to 60 plus countries on day 1. We're really kind of looking at a phased implementation process. And we'll focus in the places like the Middle East, continue to expand the portfolio there. Australia for some of the expandable technology, we think we're really going to see some good traction there. So that's actually going really well.

Speaker 2

I was pleased that we could close it earlier than anticipated, because what we've really been able to do more than anything is really start to leverage both the legacy CoreTrax sales team as well as the broader Xpro sales team and now they can really start having those kind of conversations. Until we got it closed, that's we're not allowed to do that. We've got to kind of keep that wall in between them. So we're really just leaning hard into that now here over the course of the last 6 weeks or so. And I just see a great opportunity and especially from a customer standpoint, they really want to see the deployment, they want to see the added benefits of some of the technologies that we have from the core track.

Speaker 2

So it's one that we continue to be really excited about.

Speaker 4

All right. Perfect. Thanks a bunch.

Speaker 7

Thanks, Luke.

Operator

We now turn to Neil Mehta with Goldman Sachs. Your line is open. Please go ahead.

Speaker 6

Yes. Good morning, team. And really strong performance in the Africa geography. I'd just love your perspective on how you're thinking about that on a multiyear basis. Are there is there more market share and projects to be won?

Speaker 6

And then tie that into any views on West Africa specifically, which seems to be eaten up here?

Speaker 2

Sure. No, Neil, thanks for the question. I think it's probably I wouldn't say it's so much of a market share opportunity for us in West Africa. I think it's just as we start to see more of a ramp up in activity in Africa and in West Africa in particular, because let's bear in mind, I've talked about this a number of times, but let's bear in mind, if we look at, we're finally kind of back to the same FID levels in that kind of 20 24 to 20 26 period that we had historically back in 2012 to 2014. But Africa and West Africa in particular still kind of underrepresented in that.

Speaker 2

And as I alluded to in some of my prepared remarks, just based on pricing inquiries, technical discussions, budgetary pricing discussions with customers and those kind of things, we continue to see some ramp up in what I believe is going to be additional project sanctioning in West Africa here in 2024 and going into 2025. So I think that's a market that's going to continue to grow and be more robust. And keep in mind, part of that is just related to our customers. You're not going to go to someplace like Ghana or Equatorial Guinea and drill 1 or 2 wells. You're going to go with a project of 6, 8, 10, 12, 25 well type projects.

Speaker 2

So I think as they have more confidence based on our discussions from a technical inquiries, those type of things, I think we're going to continue to see kind of ramp up in project sanctioning. And we know that we will win more than our fair share of projects in West Africa. So it's really kind of a timing of when those projects get kicked off. I think it's also one of the reasons why you're seeing some of the tree providers, their backlogs are starting to build, they're having strong backlog numbers, they're having strong inquiries and those types of things. I think we'll see that translate into more activity for us from a service standpoint in coming quarters and coming years.

Speaker 6

Thank you. And just love your perspective on how the core tracks integration is going so far and to the extent it's tracking at or above schedule, do you see the capacity of the organization to do incremental M and A? Are there other core tracks out there?

Speaker 7

So Neil,

Speaker 2

the CoreTrax integration is going really well. Part of one of the things we spent a lot of time on when we did the broader integration with Expro and Frank's was we really developed an integration playbook because we knew that was not going to be the only integration we were going to do. And so it's made us much more efficient to go out and know what to focus on and know how we should sequence things and how we should organize ourselves to go out and do, to go out and do, integration from acquisitions. The other benefit is, really with both the PRT acquisition as well as core tracks, those are not big global. We don't have activity in all 60 countries with core tracks.

Speaker 2

So it's more straightforward for us to integrate that because it's a smaller number of countries. And really a lot of our efforts at this point is really much more on how do we create the revenue synergies, how do we deploy into additional countries. So we continue to look for other core tracks or PRT type acquisitions and it does not give me pause or concern on our ability to go out and be able to integrate additional opportunities like a core tracks. The organization has the bandwidth to take those things on board. So that's not a limiting factor.

Speaker 2

It's more of the how does the technology fit? How does, what are the economics of transactions, those kind of things that we're focused on.

Speaker 6

Thank you, sir.

Speaker 2

Great. Thanks, Neil. Good to speak.

Operator

We now turn to Arun Jayaram with JPMorgan. Your line is open. Please go ahead.

Speaker 8

Yes. Good morning, gentlemen. My first question is just on the updated 2024 outlook. You raised your revenue outlook by $75,000,000 and EBITDA by $12,500,000 at the midpoint. Quinn, that would suggest kind of an incremental EBITDA margin around 17%, which is kind of below the corporate number for the quarter.

Speaker 8

So I know there's some moving pieces with Congo, but wanted to get a little bit more color on the incrementals post your updated guide.

Speaker 3

Yes, I think the Congo is the one, you're certainly right to focus on it. I mean we had $30,000,000 in revenue in the quarter. We've had higher than expected commissioning costs kind of in the late rounds of Phase 1. So really the $30,000,000 in revenue in the Q2 came with no margin as a percentage of completion. So as we've adjusted the project economic expectations, all of that got booked in Q2.

Speaker 3

So we're essentially beyond the commissioning phase at this point. Revenue will drop from that, but margin on a percentage basis will go up. So So EASA, which is where we recognize the Congo project, is expected to be a good quarter, a lower revenue, but higher segment EBITDA margins. So I think that you're focused on the right thing. I'm not sure I'd say that the fall through for the broader businesses viewed more negatively, it's really just the elimination of high or lower margin projects in the results.

Speaker 8

Makes sense. Makes sense.

Speaker 7

The follow-up question

Speaker 8

is you guys have highlighted a medium term target of $2,000,000,000 in revenue, 25% kind of EBITDA margins. And maybe just give us a sense of I believe that outlook does assume some kind of contribution from M and A and just maybe your thoughts on how the business should evolve into next year. Street's generally modeling around 7% revenue growth relative to your updated guide and about 200 basis points of margin expansion next year?

Speaker 3

Yes, I think that again the most significant thing is will be the phasing of the OPT project. But other than that, I think the broader business is trending positively both from a growth perspective. I think the industry wide expectations are high single digit, low double digit growth in the lift, puts and takes probably the most significant headwind will be the non repeat of the Congo type revenue, but again it will be at better margins. So we haven't really kicked off in earnest our budget cycle for 2025, but I would expect we'll be at or above industry wide growth just because of investments in technology and relatively optimistic expectations for again the cementing and performance drilling business, performance drilling being most significantly impacted by the CoreTrax deal. Got it.

Speaker 3

Short way or shorter version of saying is I would expect as we pull together our budget for next year, 7% growth year over year would probably be at the low end of my expectations for rest of the day.

Speaker 7

Great. Thanks, Quinn.

Speaker 3

Thanks, everyone.

Operator

Our next question comes from Eddie Kim with Barclays. Your line is open. Please go ahead.

Speaker 7

Hi, good morning. Just a bigger picture question for you here, Mike. But if I look back a year ago, oil prices were almost in the exact same place as they are today with Brent in the low 80s. And yet it seems like offshore activity and sentiment have gotten much better since then. What would you say is the biggest change in your conversations with customers today versus a year ago?

Speaker 7

And is that part of what led to the full year revenue and EBITDA guidance raised today?

Speaker 2

No. Eddie, it's a great question. And you're spot on. There's not a difference in commodity prices significantly between a year ago versus today. I think it's I think fundamentally for our customers, it's really been they've got more confidence in kind of a stable commodity price environment that it's not we're not going

Speaker 3

going to see a

Speaker 2

I think if we have numbers that are mid-60s and above and I think a lot of offshore deepwater projects will continue to be sanctioned and largely because they become much more efficient. The batch drilling concepts and those type of things have really driven breakeven numbers down to in the 40s. So I think that's what's driven that today. And just the number of technical inquiries, those type discussions we have just continues to be really strong and really robust. And there's just more I guess I would characterize it, there's just more confidence from our customers in sanctioning projects and moving forward.

Speaker 2

And as I said earlier, I think that's one of the reasons why you're seeing the tree providers start to build backlog to those type of things because the tree is probably the biggest limiting factor for some of those projects. So that's why immediately after they approve an FID, the first thing they're doing is securing trees and the second thing they're doing is trying to make sure they get on a rig schedule. So I think there's just all kind of lining up for that kind of confidence with our customers.

Speaker 7

Got it. That's great to hear. And then just my follow-up is on the EBITDA margins and APAC, which we're really impressed with this quarter at 24%. Can you just expand a bit on the improvement there? I know you mentioned higher activity and lower LWI related costs.

Speaker 7

But just looking back historically, I mean, this region hasn't been above 20% EBITDA margin since late 2021. So is there any reason why APAC EBITDA margins shouldn't continue at this kind of 20% plus level going forward? Or should we expect some moderation maybe back to the teens over the coming quarters?

Speaker 3

I would actually expect the current quarter to be more reflective of expectations going forward. LWI was a drag for not a quarter or 2, but for a couple of years here. So I would say Asia Pac returning to kind of low 20s, not as high as some of the other regions because of activity mix, unless of course there's a recovery in Subsea, which we haven't seen a significant amount of activity. Project sanctioning has been slow, particularly offshore Australia. Hopefully, we'll see that pick up in 'twenty five as well.

Speaker 3

So again, I would say what you're seeing in Asia Pac is what our expectations are going forward and hopefully we can move up from here with some incremental subsea activity.

Speaker 7

Got it. Great. Thanks, Quinn.

Speaker 2

Thanks, Eddie. And Ed, I guess one thing I would add there too is, I think it's also Asia Pacific is also an area for focus for us on technology deployment with cementation with some of the core tracks services with expandables those type of things because it does give us competitive opportunities, some competitive advantages, some technology benefits and we will use that to help us kind of reestablish our margin footprint in Asia Pacific because it has been behind what our expectations are. So we'll use that to kind try to accelerate that and try to get back to where we think that particular region should be operating.

Operator

Our next question comes from Steve Farazani with Sidoti. Your line is open. Please go ahead.

Speaker 5

Good morning, Mike. Good morning, Quinn. If we back into your EBITDA and revenue for the year and you take out your guidance for 3Q, it indicates 4Q margin will be by far the highest margin quarter for the year. I think you pointed out a couple of PRT and subsea that's coming in 4Q. But can we use that to some degree as a run rate or would you not?

Speaker 5

And obviously, knowing Q1 is always seasonally lower, but is that getting to a level that you think is more reasonable if you can hit the midpoint of guidance this year?

Speaker 3

Yes. I mean, if you look at kind of Q2 and Q3, at the midpoint of guidance, $185,000,000 of EBITDA and a little less than $900,000,000 of revenue. Q4 historically is a strong one for us and it certainly is the starting point for where we'd like to see the next full year results play out. We always have a step down in Q1, But if we finish in the 22 ish or better zip code for Q4, I think that's a good setup for 25.

Speaker 5

Great. And I don't want to harp on this too much because you covered it pretty extensively. But on the EISA margin, we understand why it was lower in Q2. But as you roll into the lower revenue but accretive margin phase of Congo, do those margins get back to those really high margins you were getting in that region, the back half of last year or not quite because the revenue in Congo is lower?

Speaker 3

Well, if you're talking about margin in percentage terms, yes, I think if you look at late 'twenty three, that's where we'd like to see EASA back to MENA has consistently been above 30%. NLA and EISA have kind of bounced recently. And if you look over a couple of quarter run rate in the high 20s, let's see all three of those regions above 30%. As Mike mentioned, Asia Pac will be a work in process and that's going to take a little bit more time, largely driven by the type of activity.

Speaker 5

Great. And if I could get one in on cash flow. Last year, the working capital reversal really was entirely 4Q and you're guiding for a really strong 4Q. Is it reasonable to assume the bulk of your cash flow this free cash flow this year is 4Q?

Speaker 3

It's tough to put too fine a point on it, Steve. You're right, working capital is the big driver. I think with $70 plus 1,000,000 build in working capital in the quarter, dollars 20 plus of that is milestone payment related on the Congo project. Customers are trying to improve their cash flow profile on the backs of the services industry to some extent. So you've got a combination of revenue growth, customers extending out payment terms of whether it's Q3 or Q4, I'm not sure I predict that at this point, but we should see a much better cash flow profile for H2.

Speaker 5

Thanks Mike. Thanks Quinn.

Speaker 2

Thanks Steve. Appreciate it.

Operator

We now turn to Colby Sasso with Daniel Energy Partners. Your line is open. Please go ahead.

Speaker 9

Hi, Mike and Quinn. You put out a press release in May highlighting your 100th global secure job and you also highlighted this technology in an event you held in Houston back in May. I'm curious if you could provide some color around the time frame it took to get these 100 jobs, what the runway looks like going forward and what some of the economics around the cost savings look like for your customers who use this technology?

Speaker 2

That's a great question and thanks for asking that one. It's so keep in mind, Deltatec was an acquisition that we closed in February of 2023. So relatively short timeline for us to get that number of operations completed. And this is really what the Delta Tech technology really helps with is really in riserless deepwatercementation jobs. And so for each deepwater well, you're going to have 1 to 2 job opportunities for this type of technology because it's really it's only on the first couple of strings.

Speaker 2

And what it really does is it helps improve the overall cement quality, which is extremely important because it's kind of the foundation of casing strings that are run-in those first couple of casing liners. And fundamentally, what that really allows to do, it helps us save the operators typically somewhere between 12 24 hours per job. And nothing pleases me more than to hear rig rates keep going up. We saw some rig rates for Equinor that are going up that are starting to approach almost $600,000 a day. I think that's really healthy.

Speaker 2

And for us, when we can save 12 to 24 hours of rig time, when it's $5,000 or $1,000 plus day rates, that becomes much more of an economic incentive for customers to invest in this type technology. And we've really been able to continue to prior to the acquisition of Delta Tech, that technology really was predominantly being deployed in the UK North Sea and we've been able to start to internationalize that, the Gulf of Mexico in particular. It's kind of starting to become for a number of our customers, it's kind of becoming the standard. They run it on those first 2 to 3 casing strings across the board. So we'll continue to see that accelerate, but it's just a great technology, really drives efficiency, really drives cementation quality improvement and both of those are paramount to operators today.

Speaker 9

That sounds amazing. What other technologies do you view as potentially disruptive in the current environment that we may hear more about over the next 12 months?

Speaker 2

Yes. I think that I'll kind of stick with the theme around well construction in particular because as operators are really trying to drive drilling completions efficiency, those type of things, As batch drilling has become more common in deepwater projects, the number of drilling complete days is is down dramatically. That's part of the reason why as I spoke earlier about the breakeven economics for customers. So really some of our technology around our like our Itong, which is provides automation for makeup of casing running operations, removes personnel from the red zone, improves efficiency, makes it much more repeatable. It's very much done through machine learning and automation, those type of things.

Speaker 2

I think that's a great example of driving efficiency. And also our Versaflow technology, which really helps around tripping operations. And fundamentally, our next generation design will be deployed it was deployed early this year, and we've got really strong demand for that in the Gulf of Mexico as well as in Guyana, and really just improves operational efficiency, reduces personnel on the rig floor, those types of things. So we see that as an area we continue to invest in technology. We did even throughout the downturn over the last 10 or 12 years and even during the pandemic, we've invested in our own engineering development of technologies and we've supplemented that some of the M and As that we've made as well because we think it helps really reduces rig time, reduces the number of personnel on board, improves operational efficiency.

Speaker 2

Those are kind of some key areas that we see for our customers as they go forward and allows them to fundamentally sanction more projects because they've got better breakeven economics as they have more drilling more efficient drilling completions operations. So good very good questions. Thank you.

Speaker 9

Thanks. I'll turn it back.

Speaker 2

Appreciate it.

Operator

Ladies and gentlemen, we have no further questions. So this concludes our Q and A and today's EXPRO Q2 2024 Earnings Presentation. We'd like to thank you for your participation. You may now disconnect your lines.

Powered by Quartr
Earnings Conference Call
Expro Group Q2 2024
00:00 / 00:00