Yahoo Finance Expro Group Holdings N.V. (NYSE:XPRO) Q1 2024 Earnings Call Transcript
Expro Group Holdings N.V. (NYSE:XPRO) Q1 2024 Earnings Call Transcript April 25, 2024
Expro Group Holdings N.V. misses on earnings expectations. Reported EPS is $0.09 EPS, expectations were $0.12. Expro Group Holdings N.V. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, ladies and gentlemen. Welcome to the Expro Q1 2024 Earnings Presentation. My name is Jacquita. I will be your moderator for today's call. [Operator Instructions] I would now like to pass the conference over to your host Chad Stephenson, Director Investor Relations. One moment, please.
Chad Stephenson: Welcome to Expro's first quarter 2024 conference call. I'm joined today by Expro's, CEO, Mike Jardon; and Expro's, CFO, Quinn Fanning. First, Mike and Quinn have some prepared remarks. Then we will open it up for questions. We have an accompanying presentation on our first quarter results that is posted on Expro's website expro.com under the Investors section. In addition, supplemental financial information for the first quarter results is downloadable on the Expro website, likewise under the Investors section. 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 to 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 website sec.gov or on our website again, at expro.com. Please note that any non-GAAP financial measures discussed during this call are defined and reconciled to the most directly comparable GAAP financial measure in our first quarter 2024 earnings release, which can also be found on our website.
With that I'd like to turn the call over to Mike.
Mike Jardon: Good morning, good afternoon, everyone. I'd like to start off by reviewing the first quarter financial results presented in today's earnings press release including providing an update on commercial activity and the Coretrax acquisition. I will then discuss the macro environment, which we believe supports a favorable multiyear outlook for energy services companies that are levered to international and offshore markets and presents a compelling growth opportunity for Expro. Following my remarks, Quinn will share our outlook for 2024. For a recap of consolidated results and quarterly results by region, I'll direct you to Slides 3 through 7 of the presentation we posted to expro.com. Turning to Slide 3. I am pleased to report another strong quarter for Expro with Q1 2024 revenue of $383 million exceeding guidance provided on our Q4 earnings call in February.
Q1 2024 adjusted EBITDA at $67 million was at the midpoint of guidance. Overall, the first quarter results were in line with our full year expectations for revenue of plus or minus $1.65 billion in revenue and for adjusted EBITDA of plus or minus $350 million. Revenues decreased sequentially by $23 million or 6% compared to the quarter ending December 2023. This decrease is generally consistent with historic revenue trends as we usually experience softer first quarter performance related to the winter season in the Northern Hemisphere and the budget cycles of our national oil company customers. This seasonal dynamic is typically most prevalent in our Europe and Sub-Saharan Africa region. First quarter revenue increased by 13% year-over-year, reflecting activity growth across the international and offshore markets.
Of note, Q1 2024 adjusted EBITDA was up 61% compared to Q1 2023, which included $11 million of LWI-related unrecoverable costs. For North and Latin America revenue of $130 million was down $15 million quarter-over-quarter, primarily reflecting lower Well Construction revenue in the Gulf of Mexico, including tubular product sales due to project delays and in Guyana due to rig maintenance. NLA segment EBITDA margin at 26% was down from 30% in Q4 2023, reflecting lower activity and activity mix but was up about 100 basis points relative to the first quarter of 2023. In terms of NLA operational updates, in the first quarter our team successfully deployed Expro's rotating plug launcher during cementing operations for one of the major operators in the US.
The client is now in the process of standardizing these operations across its fleet of over 20 active drilling rigs. This was a great example of our ability to provide cost-effective innovative solutions to meet an important client's evolving needs. For Europe and Sub-Saharan Africa, revenue of $122 million was down $12 million quarter-over-quarter and segment EBITDA margin at 21% was down sequentially but was up approximately 250 basis points relative to the first quarter of 2023. In addition to the seasonal reduction in activity in Europe and the resulting compression in margin, we recognized lower margin on our LNG expansion project for Eni in Congo, and also incurred higher costs in the first quarter related to subsea projects that will be starting in the second quarter of 2024, particularly in West Africa.
We have very good business momentum in the ESSA region with contract awards for upcoming campaigns in Angola and the Black Sea, totaling more than $30 million. These contract awards, which include subsea, TRS and cementing services and solutions, are a testament to the region and product line teams delivering technology-enabled fit-for-purpose solutions. Highlighted on page 5 is our provision of TRS services in the first quarter for a pilot project for green hydrogen and chlorine production in France. Similar to the way in which we have leveraged our experience in well construction, well flow management and well intervention integrity to grow our geothermal business, this is another good example of how Expro can deploy existing assets and leverage current capabilities to support the development of sustainable energy solutions.
Page 8 of our slides also highlights that in the first quarter, our Eni Congo project team surpassed one million man-hours without a lost time incident, which highlights our unwavering commitment to both safety as well as sustainable operations. First production from this plant expansion is scheduled in the first half of 2024. Essentially, all equipment has now arrived in country making a crucial milestone in our journey towards operational readiness. We're incredibly proud of the tireless efforts of the Congo project team to safely deliver this important project to our customer and the incremental lower-carbon energy that the Congo LNG facility will produce. The Middle East and North Africa team delivered another excellent quarter with revenue at $71 million, up 9% sequentially and up 40% year-over-year, largely driven by higher well flow management activity in Saudi and Algeria with good fall-through on incremental revenue.
MENA segment EBITDA margin, at 34%, was up nearly two percentage points quarter-over-quarter and up about five percentage points year-over-year. During the quarter, we secured and executed a major contract for cementing accessories with an international operator in Egypt's deepwater market. The regional team's deployment also featured our wireless cement heads, which increases safety and efficiency through remote operation. This contract marks the initial step in broadening the adoption of our hands-free cementing operations globally. Finally, in Asia Pacific, first quarter revenue was $60 million, down 4% relative to the previous quarter, primarily reflecting lower activity in Malaysia, but up 24% year-over-year. Asia Pacific segment EBITDA margin of 18% was up over 9% from the prior quarter, which reflects higher activity in the region and lower LWI-related costs.
During the first quarter in the Asia Pacific region, Expro announced a new carbon capture and storage contract with INPEX Corporation for Japan's first clean hydrogen production demonstration project. The Kashiwazaki Clean Hydrogen/Ammonia Project is a key milestone in Japan's energy security journey. Designed to produce clean energy from domestically sourced gas, this will be Japan's first project to build an integrated hydrogen and ammonia value chain from production to usage. Expro's work scope will include the delivery of tubular running services for multiple sections of casing, liner and tubing over a 12-month period. This project furthers Expro's and our clients' efforts to reduce carbon emissions while advancing our sustainable energy solutions.
We have supported CCUS globally for over 10 years, gaining valuable experience and executing operations with excellent results, and we continue to believe that we will be a key industry enabler to support our own as well as our clients' net zero goals. In terms of commercial activity, I'm pleased we have continued to build on our strong momentum from last year, capturing roughly $230 million of new contract awards, including subsea contracts worth approximately $40 million in Africa and TRS and well integrity contract extensions in the Gulf of Mexico and Argentina, respectively, each of which was valued at more than $20 million. At quarter-end, our backlog was approximately $2.3 billion, which is consistent with the close of the fourth quarter and in line with expectations given historical seasonal patterns of contract awards at the beginning of the year.
As discussed on our Q4 call, early in the first quarter Expro entered into a definitive agreement to acquire Coretrax, a leading well integrity and production optimization company, for a mix of cash and stock consideration totaling approximately $210 million. As a reminder, the acquisition is expected to be accretive to adjusted EBITDA margin and free cash flow. With a transaction value of less than 5x our estimate for stand-alone 2024 EBITDA, the Coretrax transaction should also be immediately accretive to shareholder value, with synergies providing incremental upside. Our full year and Q2 guidance assumes that we close the transaction at the beginning of the third quarter. If we can close the transaction a month or two earlier than assumed, there's a bit of Coretrax-related upside to our guidance.
Our integration planning is well underway, and we expect to hit the ground running on Day 1, post close. We look forward to welcoming John Fraser and his team to Expro as we expand the suite of technology-enabled solutions in our well construction and well intervention integrity businesses and increase our capabilities in geographies such as the Middle East North Africa, where we anticipate good multiyear growth.Regarding M&A more generally, our team continues to evaluate acquisition opportunities that would allow us to advance our strategy and position Expro to be more relevant to our clients and shareholders. We take a disciplined approach to M&A and opportunities we pursue will meet a rigorous set of criteria that starts with the industrial logic has a comprehensive review, whether it's complement existing capabilities and/or building out our presence in growth markets and a clear identification of cost and revenue synergies, finally, including with a sensible financing plan that preserves our currently strong financial profile.
We continue to believe additional consolidation is good for the long-term health of the energy services sector and that smart synergies focused M&A can be an effective means for Expro to accelerate growth and create additional shareholder value. Turning to our market outlook. We expect a very positive current growth trends to continue, given the solid market fundamentals underpinning the energy services sector that we have seen over the past few quarters. Ongoing investment and activity levels support a favorable multiyear outlook with oil demand forecasted to reach record levels of 103 million barrels per day in 2024 and over 104 million barrels per day in 2025. These increases are driven by an expected recovery in Asian countries, improving economic data for the Middle East and in the United States as well as increased industrial requirements and global travel driving the consumption of jet and marine fuel.
We believe the pace of oil demand growth is stabilizing with continued production discipline from OPEC+ as was again highlighted by the recent extension of voluntary production cuts in February, we expect market conditions to remain favorable, supporting investment and activity levels at and above pre-COVID levels. The combined effect of supply discipline and geopolitical turmoil including the Middle East and Ukrainian conflicts is resulting in upward pressure on oil prices, with the outlook for 2024 average Brent up from $82 per barrel to closer to $90 per barrel. Assuming the voluntary production cuts are fully unwound, the current outlook for 2025 average Brent is roughly $87 per barrel. Extended and stabilized pricing, should support continued investments by our customers in the long-cycle development and capacity expansion projects, that underpin the international and offshore markets to which Expro is most levered.
The gas markets continue to experience sustained high storage volumes, with demand growth curtailed due to mild winter seasonal temperatures. Longer term, domestic demand and exports are forecasted to increase, as gas remains a structural source of lower-carbon electricity generation and a critical transition fuel in the path towards global net zero. Constructive oil market pricing is allowing operators to make long-term investment decisions with FIDs at record levels in 2023, and a continuing robust pipeline of projects that are forecast to be sanctioned through 2024 and beyond. The continued growth of the multiyear sanctioned project pipeline through 2030 is driving demand for our services and solutions. More specifically, we continue to see increased activity in our well construction and subsea well access businesses, as well as in certain areas of our well flow management product line.
We are confident that demand for our services, will continue to increase throughout 2024 and beyond. Upstream investment forecasts for 2024 are further strengthening, and are now at the highest levels we have seen since 2015. We're seeing a significant growth of offshore and deepwater and shelf, driven by Guyana, Azerbaijan, Brazil, the US, Indonesia, Malaysia and Norway. And this also includes targeted exploration and appraisal activity in mature areas especially in the Europe, Sub-Saharan Africa and South American regions. International land activity growth continues, specifically in the Middle East with the ongoing large gas and LNG developments in Saudi, Kuwait, the Emirates and Qatar. Our customers also remain focused on maximizing their existing investments by driving cost-efficient, lower-carbon-intensive incremental production.
This is resulting in further demand for our production optimization-related activities within well flow management and well intervention integrity product lines, especially across the Asia Pacific and Latin America regions. Finally, investment in lower-carbon energy alternatives is also increasing across the industry, with growing activity in the geothermal sector, especially within Europe and Asia Pacific and the carbon capture and storage sector, as operators work to reduce their upstream emissions to achieve their net zero goals. As we have discussed previously, the current energy services cycle is more about margin expansion than it is about capacity additions. We have ongoing efforts to optimize equipment utilization and increase operational efficiency both of which will have positive impacts on overall profitability and free cash flow performance.
We also continue to have constructive conversations with customers about capturing more of the value we create through technology, process efficiency, safe well access and enhanced production. All combined, the outlook for Expro and the broader sector continues to be robust and positive. With that, I will hand the call over to Quinn to discuss financial results in greater detail as well as our outlook.
Quinn Fanning: Thank you, Mike. Good morning to everyone on the call. As Mike noted, we reported revenue of $383 million for the March quarter, as compared to the guidance of $365 million to $375 million that was provided in our Q4 conference call. As anticipated, revenue was down sequentially by $23 million or approximately 6% relative to the fourth quarter of 2023, largely reflecting seasonality. However, year-over-year revenue was up by $44 million or approximately 13% relative to the first quarter of 2023. The net loss for the first quarter of 2024 was $3 million or $0.02 per diluted share compared to a net loss of $6 million or $0.06 per diluted share in the first quarter of 2023. Adjusted net income, which excludes merger and integration expense, severance and other expense and stock-based compensation expense for Q1 2024 was $10 million or $0.09 per diluted share as compared to $1 million or $0.01 per diluted share for Q1 2023.
Adjusted EBITDA for the first quarter of 2024 was just over $67 million, as compared to Q1 guidance of $63 million to $73 million, representing a year-over-year increase of approximately $26 million or 61% relative to the first quarter of 2023. Adjusted EBITDA margin for the first quarter was 18%, up roughly 600 basis points year-over-year. The 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 Q1 2023. Pricing is trending positively, particularly in our deepwater well construction and subsea landing stream-driven businesses, but net pricing gains are not yet a material driver to reported results.
Nonetheless, relative to 2023, we continue to expect 100 to 200 basis points of incremental adjusted EBITDA margin from net pricing for the full year 2024. Regarding our LWI business, as disclosed during the Q4 earnings conference call, we determined not to participate in the recovery of the subsea module from the seabed floor, which was completed in the March quarter. Regarding uncompleted customer work scopes, we are not currently able to assess the timing and potential costs of completing the projects for which the vessel-deployed LWI system was integral. That said, we are continuing to pursue an insurance claim related to the abandoned subsea module with any insurance recovery available to offset any additional out-of-pocket costs. Based on available information, we do not expect additional unrecoverable LWI-related costs and that of insurance recoveries to be material to expose financial results.
We remain active in the rig-deployed light well intervention space. We are continuing to determine a path forward for our vessel-deployed LWI business and what alternative service delivery and service partner options are available to the company. Support costs for Q1 2024 of $81 million totaled 21% of revenue, which was up approximately 7% year-over-year. Compared to Q1 2023, support costs as a percentage of revenue were down approximately 130 basis points and we expect that support costs for the full year 2024 will be at or below 20% of revenue. Moving to liquidity, Q1 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 $38 million compared to $27 million in Q1 2023.
Cash conversion or adjusted CFFO as a percentage of adjusted EBITDA for Q1 2024 was 57% as compared to 65% in Q1 2023. Q1 2024 adjusted EBITDA less capital expenditures and free cash flow or adjusted CFFO less core CapEx was approximately $37 million and approximately $11 million respectively. Expro had total available liquidity at quarter end of approximately $291 million with cash and cash equivalents, including restricted cash, of approximately $164 million. Additionally, at March 31st, we had $127 million available under our revolving credit facility. Note that the closing of our pending acquisition of Coretrax will require $75 million of cash, which we expect to fund with an increase in our revolving credit facility. This will allow the company to maintain its currently strong liquidity position.
Turning to our outlook, page 9 of our accompanying slides summarizes our guides for Q2 and for the full year 2024. Based on our strong performance in Q4 2023, continued momentum through Q1 2024 and a positive activity outlook, we are reaffirming full year 2024 guidance with anticipated revenues between $1.6 and $1.7 billion and adjusted EBITDA between $325 and $375 million. Adjusted EBITDA margins is expected to be within a range of 20% and 22%. Free-cash flow margin, or free cash flow's percentage of revenue, is expected to be between 8% and 9% and is expected to be weighted to H2 2024. Full year guidance for 2024 assumes cash taxes of between 3% and 4% of revenue and CapEx as a percentage of revenue of between 7% and 8%. Q2 2024 revenue is expected to be within a range of $400 million and $420 million, implying year-over-year growth of about 5% and sequential growth of about 8%.
For year-over-year comparisons, note that Q2 2023 revenue included approximately $13 million of vessel-deployed LWI revenue that will not be repeated in Q2 2024. In addition, revenue related to our LNG expansion project in Congo is expected to be $10 million to $13 million lower in Q2 2024 than was reported in Q2 2023, reflecting a shift in work scope from a fast-track plant delivery phase to a multiyear operations and maintenance phase. Adjusted EBITDA is expected to be within a range of $80 million and $90 million, implying Q2 adjusted EBITDA margin within a range of 20% and 21%, or up 200 to 300 basis points year-over-year and sequentially; in both cases, based on the midpoint of Q2 guidance. As a reminder, our 2024 guidance assumes that we will close the Coretrax transaction at the beginning of the third quarter.
Based on that assumption, Coretrax is expected to contribute $70 million to $80 million of revenue and an adjusted EBITDA margin that is accretive to stand-alone Expro results. As Mike noted, if we can close the transaction a month or two earlier, we expect a bit of upside to the current guidance. Looking beyond 2024, as Mike noted on our Q4 earnings conference call, with a constructive fundamental backdrop and strong business momentum, we see a clear path to $2 billion of revenue, mid-20s adjusted EBITDA margin and a free cash flow margin of 10% in the medium term. Over time, we expect higher adjusted EBITDA margin from incremental drilling and completions activity and an expectation for above-market growth in our higher-margin businesses such as cementing technologies and performance drilling solutions, which together should provide a mix benefit.
Similarly, merger-related synergies have allowed us to improve operating leverage. Finally, net pricing, while less under our control, is obviously 100% fall-through, and pricing seems to be trending positively, particularly in capacity-constrained asset classes such as deepwater TRS equipment and subsea test trees. Improved free cash flow performance should come from maximizing utilization of existing assets, CapEx discipline and growing our less capital-intensive services and solutions.With that, I'll turn the call back over to Mike for a few closing comments.
Mike Jardon: Thank you, Quinn. The first quarter of 2024 establishes a solid foundation for the year for Expro, with strong financial performance relative to guidance. During the quarter, we continued to build business momentum and strategically grow the business through the acquisition of Coretrax and numerous meaningful contract wins. The team has continued to execute the business strategy to deliver on our financial goals, while maintaining our reputation of excellence and execution through cost-effective, technology-enabled services to our customers within a safety-focused culture. I'd like to thank our teams around the world for their dedication to delivering value for our customers and our shareholders. The macro backdrop is constructive.
Demand for energy, including oil, gas and geothermal, is growing. And internationally, there is a heightened focus on energy security and diversification of supply. We remain confident that the business is poised to benefit from the momentum in the international and offshore markets as our customers focus on low-cost carbon-advantaged incremental production across essentially all international basins. We have a strong presence in key markets and are positioned to provide mission-critical services and solutions to our customers. As I stated previously at Expro, we are achieving better financial results across our business and over the medium-term, we expect to deliver on our targets which include annual revenue of $2 billion and adjusted EBITDA margin of 25%.
We are confident we are taking the right steps to unlock the full value potential of Expro and we are pleased that strong market fundamentals are serving as a tailwind helping to drive our company's continued profitable growth. As activity continues to ramp-up we are well-positioned to support our customers across the full well life cycle deliver on our strategic and financial objectives and drive sustainable long-term value for shareholders. With that, we'll open up the call for questions.
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