Expro Group Holdings N.V. (XPRO) Earnings Call Transcript & Summary

Good afternoon. I'd like to introduce Mr. Mike Jorden, CEO of Expro position he's held since April 2016. After holding the position of COO for 5 years. Before joining the company, Mike was VP of Lull Testing and Subsea at Schlumberger, and held senior roles in wireline completions, well testing and subsea from 1992 to 2008. Mike has a number of slides to present, after which we'll have some time for Q&A. Mike, thanks for joining us today.

So good afternoon. Thanks for joining me. What I'll try to do here is because I know for a number of investors were relatively a new, and kind of unknown quantity. Let's try to step through some things, tell you a little bit about who we are, what we do, just give a bit of context and then obviously, Eddie and I are going to do a Q&A session as well. So fundamentally, I guess what I would start with is Expro's very much a technology company. We're focused on very key product lines allows us to differentiate, allows us to bring technology to bear for our customers. But it really takes us from -- all the way from exploration through appraisal through drilling, completions, production, development, even up to including well abandonment and decommissioning. So we have a lot of touch points with our customers, a lot of engagement with them, and what that really has allowed us to do is -- have a business that's very diverse. It's very geographically split. As you can see here on the slide, about 1/3 of our revenue comes from North and Latin America, another 1/3 comes from Europe and Sub-Saharan Africa. And the remaining 1/3 is really pretty evenly split between Middle East, North Africa and Asia Pacific. We think that geographic diversity gives us a lot of flexibility. And then across our customer business units across our product lines. We also have good diversity there. Well construction is about 1/3 of business, workflow management, which could be involved in really any of those phases of exploration, appraisal, drilling completions, it's about 1/3 of -- again, just over 1/3 of our revenue comes from that. And then the remaining portion of the business comes very strongly from our Subsea Well Access business very much focused around completions and providing connectivity during complete operations, and the remaining portion of the business is really around our -- well Intervention integrity. Fundamentally for us, we're about 80% international, 70% offshore. If you're looking for exposure to U.S. land pressure pumping land drilling, that's not going to be us. That's not what we're going to do. But as you can see here, we have a very strong balance sheet, 0 net debt at this point in time. But I think the one thing I would really highlight here probably more so than anything is that figure down the bottom left, that 95% service quality performance. We have -- we executed exceptionally well. We have a fantastic reputation with our customers, very challenging, difficult wells. Those are kind of operations we're involved in, and we go out and we execute exceedingly well. I think that's -- I'll talk a little bit about the macro, how are things setting up kind of going forward? How does the industry look? I think what you see here is -- and this really is kind of a subset of global FIDs really around the offshore element. And you can see that here kind of in the 2024 range, we're over -- right at $100 billion of FIDs that have either been approved or kind of are coming. And you start to see that the deepwater portion is really starting to grow. Finally, we're back at a point in time where offshore, especially deepwater FIDs are kind of back to the same level as what we were at. If you look at the 2012 to 2014 period versus the 2024 to 2026 period, we're probably back to that same kind of level of investment. But I think it's really important to kind of peel that onion back a little bit because I think one thing that you don't see in this data right here really is the underrepresentation of West Africa. West Africa back in that 2012 to 2014 period was $75 million, $80 billion of deepwater FID investments. If you look at the period now 2024 to 2026, it's only about -- it's about half that. And I think what's interesting about that is it's not because the reservoir doesn't exist. It's not because the geology doesn't exist. It's really just about the operators sanctioning moving forward those projects. So why do I highlight that? Well i highlight that predominantly because as we start to see that investment happen as we go forward, you don't go to West Africa and drill only 2 wells. You're going to go to West Africa and you're going to drill 12 wells, 16 wells, 24 wells. They're going to be longer projects and longer programs. So once we start drilling those projects, they're going to be 3 to 5 years in duration. And frankly, if you approve an FID today, by the time you take delivery of a tree, you secure a rig, all those type things. You're probably not drilling that prospect until 2026 or beyond. So that gives me confidence that we're really going to start to see some longevity and some kind of legs, so to speak, behind the activity we see here the remainder of the decade. I think the other thing that's worthwhile to note is we've got a very healthy CapEx spend in the industry, as you can see there. But what you're really starting to see is, you're starting to see much more of a shift into two areas. One is offshore. And the second one is international. That's where a lot of the dollars that were being spent in North America, in particular, are now being spent internationally in offshore, in particular. Why is that important? Why do we highlight that? Well, we highlight that because as I said earlier, 80% of our business comes from international and 70% of our business comes from offshore. So seeing those dollars start to shift and start to be kind of driven in that direction is an important factor. When you take that into account with the FIDs that are starting to be approved and starting to be sanctioned, you can really see some kind of longevity and some legs to the sector. The only thing I would highlight here is really around the -- more important to look at what's happening with the offshore tree guys -- test trees and Christmas trees and those types of things and the like, as they really start to build order backlog and start to build the kind of book-to-bill and activity they see going forward, that's really a strong indicator, I think, of what we're going to start to see within the offshore space as we go forward. So really for us, what does that mean? How does that kind of translate into Expro? How should you interpret the things I tried to lay out really kind of around the macro. Fundamentally, we gave updated guidance here in Q2 that we would be kind of between $1.7 billion and $1.75 billion in revenue and kind of that 20% to 22% EBITDA range. We're very much on a path. We've kind of laid out, we see a near-term path of $2 billion in revenue and mid-20s EBITDA percentage. So I think we're setting ourselves up to be well on our way towards that. And fundamentally, just to give some context, if you kind of look at the left-hand side of that bar chart, if you look at the 2 previous companies, Frank's and Expro, just going to look at a combined 2014. In essence, $2.5 billion in revenue, 31% EBITDA margins. So to me, that kind of demonstrates the potential of what the business is. I think it's really important to bear in mind that part of what we've done by bringing the 2 companies together has really created a tremendous amount of operating leverage. If you go back to that 2014 time period. If you kind of look at the pro forma, the combined company overhead support costs. And for us, for me, when we talk about support costs, we're talking about the cost all the way from myself all the way down through to the person at the sharp end of the stick who's actually executing operations all the support that's involved in that operation. So that was back in the 2014 period was 27% of revenue. If you look at how we've operated the last 6 quarters, we're staying under 20%. We're managing the business to that. We've driven a lot of efficiency into it, and we continue to focus on shared cost centers, how do we how do we reduce personnel, how do we use technology offshore to reduce the number of personnel that are required in those type of things. So we've got a much more efficient operation. We've taken a significant amount of -- created a significant amount of operating leverage. So our ability to get to that mid-20 EBITDA and push through that and into the upper 20s is very much within our capacity. So fundamentally, as I said a few minutes ago, the near-term target is $2 billion in revenue, mid-20s EBITDA percentage and 10% free cash flow margin. So fundamentally, just kind of to sum up, and then Eddie and I'll go through some questions here. We feel like there's a very strong commodity price environment, with the underinvestment we've had in the industry over the course of the last 10 years. I think the FIDs you're seeing coming through the Tree sanctioning -- the [ Tree area ] is a room to be in place. I think that's all kind of culminating the last 10 years of investment. Those project approvals are going to drive customers' capital spending. About 70% of our activity today comes from our customers' CapEx spend. We think it's a great time to be highly levered to the drilling and completions activity set. So we think that's a great thing. And because we have such strong technology positions and deepwater technologies in our Well Construction, our Subsea and our Well Flow Management businesses, we think that will set us up particularly well. But we've also continued to invest in technology, whether it's engineering efforts or some of the acquisitions we've done over the course of the last couple of years, very much been around trying to continue to have very strong product lines, very strong technology bents and really kind strengthen our market share positions with our customers. And then -- as I said through on the previous slide, we see a very clear pathway to that $2 billion revenue target, mid-20s EBITDA margins and 10% free cash flow margin. So with that, thank you. And Eddie, thank you again for Barclays putting us on. We appreciate the thought.

Our pleasure, Mike. And thanks for -- do that overview. Let's just start off with challenged market conditions over the past 1.5 months, all offshore related stocks have come down materially over that time frame on a combination of global macro concerns as well as some white space. Offshore drillers talked about white space between contracts during their second quarter earnings last month. And that's been a big theme at this conference yesterday -- today. I'd have to imagine this might impact your well construction business. Are you seeing any indicators or hearing any indications of white space at all in your business?

I always spend a lot of time with our customers and have -- in particular in the course of the last 60 to 90 days -- as a matter of fact, we were just in Asia last week. And we're not seeing this translate into our business. We're not -- to be honest, most of the customers were talking about Project A and they want to talk about that, but they also want to talk about the next project that they see that's going to come. They're very much focused around that. And I think part of it may be -- we probably globally -- and I tried to highlight in one of the early slides. We have a very diverse business. Whether it's geographical diversity or its product line diversity, we try to have that -- we always kind of manage it in the portfolio. How do we have -- how we're not too overexposed to one particular aspect? But I think fundamentally, we're probably on somewhere between 350 and 400 rigs worldwide. So if 1 or 2 rigs...

Both onshore and offshore?

Onshore and offshore, keep in mind, 130-ish rigs, floating assets today, and we're on probably 75 of those rigs with some of the various capacity. Loosing 1 rig doesn't -- and we're not necessarily going to see it. And we're just not from our customer engagements. We obviously hear the messages from and hear what the drilling guys are having to say. We pay attention to that. That kind of means we've -- that's part of the reason why I said -- I spent a lot of time with customers over the last 90 days, kind of to double down to really -- it's different when you talk to a customer one-on-one. And when you're in Thailand and you talk to PTVP, you've got a different sense than just a phone call or those kind of things. But more frankly, we're just not seeing it translate into our business today, certainly not in the short term or the medium term right now.

Okay. That's good to hear. The Africa opportunity in your slide, you mentioned -- West Africa. Is this the region where you expect kind of the most incremental demand from here over the next 12 to 18 months? What gives you confidence in the ramp-up in activity here? And then what part of your businesses is this going to impact most?

It's a good question. So I think it's probably going to be more on the -- because let's face it, if they sanction a project in Angola today, that project is not going to start drilling for probably 18 to 24 months. By the time they find a rig by the time they place a tree order, all those kind of things -- a lot of things have to line up. Drill and tree guys have done some things to compress the cycle times. But as they get busier, those lead times will be a challenge. But yes, I do think that we're going to see a continued ramp of that activity in West Africa. And [indiscernible] is really based upon customer engagements, customer discussions. It's technical inquiries we're involved in. It's tender, it's pre-tender clarifications that are going on. It's budgetary pricing request, we're getting, it's those type things. And so I do think we're going to see West Africa activity start to ramp up down the road for us, in particular, because it's -- most of that is going to be deepwater and even smelter deepwater. It's really going to be it's going to be our Well Construction business, TRS in particular. It's going to be Subsea Landing Strings, it's going to be those type of activities that will lead in West Africa. And those are typically longer duration contracts. There are large number of wells. So when you can introduce new technology like our Cure Technologies that allow you to reduce 80 hours of rig time waiting on cement, those kind of things start to be meaningful when rig rates and spread rates are getting to the levels that they're at today.

Just your medium-term outlook, you highlighted $2 billion of revenue, 25% EBITDA margins. Can you elaborate on the market conditions we're going to need to achieve this target? And then in terms of timing, I know you previously mentioned that you might be able to get there on an annualized basis by end of next year. Is that still the expectation?

Yes. There's really -- there's three things that have to start to happen for us to continue to drive towards our medium-term -- mid-20s EBITDA percentage. The first one really is mix. And as we see mix shift more towards deepwater, ultra-deepwater, more of our high technology services, as we continue to ramp up introduction of some of our new technologies like the Cure Technologies or some of the things we've been able to bring into the market now with our acquisition of Coretrax. That's where the first one. The second one is the operating leverage. I talked earlier about the operating leverage we've taken out of the business. And it's something we're focused on. We continue -- even now today, we've got initiatives ongoing to look at how do we continue to lean out the organization? And when I say lean out the organization, it doesn't mean we're just going to reduce headcount. What it really means is how are we going to learn how to do less with less? We're going to have to start doing some things, how do you become more fit for purpose on using technology to automate processes that we have internally -- that we're using personnel today. It's really kind of how do we do that. That's the second thing is the operating leverage. And the third one, of course, is pricing. And we -- like I think all of our -- all the other service companies, we are trying to push price every day of the week with our customers. There's only -- because there's a market dynamic and there is a competitive landscape, although be it for us in a number of situations, it's just a two-horse race, but we're going to push price as much as we can, but we're not going to be relying upon that. What we're going to be relying upon is really the thing we have most in our control. How do we create more efficiency, more operating leverage within the business. That's really kind of three things for us to get there.

Got it. That's a good segue to my next question on pricing. Last quarter, you talked about pricing trending positively, especially within your Deepwater Well Construction and Subsea Landing stream-driven businesses. You said net pricing gains are going to contribute 100 to 200 basis points of margin improvement this year. What kind of pushback are you getting from customers, if any, as you're implementing [ these ]?

I wish I could say that customers embrace us with open arms when we try to push price. But the reality is -- that's not the case. You have to be consistent about it. I think that it's -- I think that -- all of the major service companies that we participate with or compete against -- everybody is trying to move the pricing up and to the right. We, because of the nature of how we bid our work, we have central oversight of pricing levels and those kind of things. So we really understand when you bid a project in Brazil, and then next week you've bid a project in Malaysia, we understand what the competitive nature was in those contracts. And I think that helps us make sure -- you always want to win or lose a contract by very, very small margins. And customers, especially around the last several years, we've had more of an opportunity to push pricing on personnel rates and those kind of things, because they -- they understand the competitive nature and the requirement for really good people, and I highlighted in one of my slides how well operationally our team executes. So our customers are generally pretty open to addressing pricing from that. And then the second element of [indiscernible] really is around -- is around technology. When you can go out, as I alluded to earlier, if you can introduce Cure Technologies and you can reduce 16, 18, 24 hours of rig time, that's when you really have an opportunity to get some premium pricing, because it has such a -- it has such an effect on, not only the rig rates, but the total spread rate and also improves the quality of the smelt operations.

We've seen a resurgence in capital spending for long-cycle development projects. 70% of your business is offshore focused as you highlighted. Could you talk about how your company is positioned through the life cycle of the well? I know when people think about Expro it's usually well construction, TRS, but your business is much more than that. How are you positioning the company through and beyond the just the drilling cycle?

No, it's a great question. When we -- so when we put the 2 companies together back -- and we sure had this conversation in 2020 during the pandemic. One of the reasons why the Expro's management team felt like this made sense was -- it wasn't a question of if? It was a question of when we're going to go through a drilling completion recovery? And obviously, the well construction business is 85% tied to CapEx spend. We felt like coming into a time in which during completion was going to have a recovery for a number of years, being highly levered to drilling and completion operations. That was good timing. Longer term, we need to get to a point where about 70% of our revenue today comes from our customers' CapEx spend. We need to get to a 55-45. We need to have a better balance of CapEx to OpEx because, if I've learned nothing else in my 32-plus years in the industry, it's that -- it's a cyclical business and you better figure out how you're going to weather those storms because we're going to have a cycle. I think we've got 4, 5, 6 years of really strong activity right now. But we are -- I am focused on making sure that we start to position ourselves to be more OpEx related and be able to be -- be able to provide more services and more support to our customers in that kind of realm because it gives you that through cycle balance -- kind of goes back to my comment earlier about being a portfolio, we want to have. If you don't want to have all your eggs in one basket and this allows us to kind of start to balance that out.

Got it. This dovetails nicely into the next question. On M&A, you completed DeltaTech, that acquisition early last year than PRT Offshore. And most recently, Coretrax here a couple of months ago in May. What are the gaps in your portfolio are you seeing from either a product line or regional perspective? What are you targeting going forward?

For us, we very much -- we very much focused on the industrial logic. It's been interesting to me with whether it was the original bringing Frank's into the fold or DeltaTech or PRT or Coretrax. I'd want to go to see customers, and I'd be all excited to go and talk to them about Coretrax. And I'm excited. I'm not telling what we're doing and why we're doing it and how it fits in. And this is the response I got most of the time. I got a hand up "no stop you don't have to explain it to us, it makes sense, we know that business. We know your business. Bringing them together makes absolute sense". So when the industrial logic is really easy and compelling to explain to our customers, I know we're going to be able to explain to investors why we're doing it. So those are the kind of things we look at. And -- we've made investments in things that were more wireline intervention integrity, levered more subsea levered, more well construction levered. We're going to look at things that just fit in that we think -- if the industrial logic makes sense. And also, we feel like we can internationalize it. Coretrax is a great example of -- it's a business that operates today in a handful of countries. Probably 10 or 12 countries today. There's no reason why we won't have the ability to expand that footprint to the 60-plus countries that we operate broader Expro and -- the one thing I would add is I think fundamentally for us, what we have to continue to be mindful of is how do we increase our through-cycle resiliency. So how do we expand our production optimization, our production enhancement, our intervention, those type things, how do we continue to grow that proportion because that provides a really good foundational part of the business that has that through-cycle resiliency, which I think is something that I'm very focused on.

Got it. It sounds like you're not done with M&A even after these acquisitions. But how far are you going to stretch the balance sheet? Or is there kind of a max net leverage ratio you have in mind?

Sure. I wouldn't want to see us go over about 1.5 turns of leverage in the short term. And we've got to have the ability and a path to get that down to something that's more like 1 turn in a very reasonable amount of period. We're not afraid to put leverage on the balance sheet. If it makes sense, if the industrial logic makes sense, and when we -- if we think it's something that's accretive to the business, we would -- certainly would do that. The size of the transactions we've done here lately didn't require us to do that. But we're not going to -- the size of the transaction doesn't -- isn't going to be a showstopper. It's really around the industrial logic and can you come to an appropriate agreement on valuation? As these things take -- I can tell you, with the last 2 we've done with PRT and Coretrax, we're -- they were pushing 2 years from the time we started until the time we got done. And part of it was we're going to be patient, and we're not going to overpay. We're going to value things fairly and we're going to try to get transactions done like that. Sometimes just think shouldn't be inpatient when you execute those.

[ Bid ads ] spreads can be pretty wide.

They can. Yes absolutely.

Opportunities outside traditional oil and gas. I understand this is a relatively small part of your business right now, but you have had a few nice wins in carbon capture. The past quarter, you separately just finished the construction phase of the LNG expansion project in the Congo. Are there other projects out there? And which is the kind of the low carbon opportunities, be it LNG, CCUS, geothermal or anything else, do you see as the biggest potential opportunity?

I think it's -- the production opportunities like we had in Congo with ENI. It is a great project. We continue to pursue those. Those tend to be much lumpier and much more sizable type projects. But we continue to pursue them. We have a given set of criteria that we're going to go in and we're going to pursue projects on. We're not going to go down the path of EPC type projects. We're not going to do cost plus, that's not us. Ours are going to be fast tracked, they're going to be modular. There's going to be a -- an early monetization requirement from the customer, so to speak. But the others, the one that I would say that I see great potential in -- really is around carbon capture. And as I said, I was just in Asia last week and with PTVP, they're looking at carbon capture projects. Obviously, Exxon is very active with carbon capture projects here in the U.S. That's the one, I think is going to continue to be an area of strength for the opportunity. And I think for us, because we're used to dealing with fluids and gases and those type things, it's not a whole lot different producing those -- elements to reinjecting them. So for us, from our personnel, our equipment, our expertise, our knowledge, our downhole activities, reservoir knowledge -- those type things, we can really leverage that. And that's one that I think we have good expertise and I think it's going to be a growing requirement to capture carbon and reinject. So I think it's going to be a great area for growth.

Got it. I have just one last question for you here. But we might have time to pull the audience for a few questions to end the session. If we can get the mics going around. Last question just on shareholder returns. I know you're focused on kind of bolt-on M&A still, but you previously talked about being in a position or the Board being in a position to start having discussions around shareholder returns framework maybe towards the end of this year, maybe early next year. Is that still the right time?

Yes. I mean it's -- what we've said is our intention is to return roughly 1/3 of our free cash flow to shareholders and some makeup of buybacks and potentially dividends. I certainly -- more predisposed at this point in time in our journey for these to be buybacks as opposed to dividends. But we have a very -- I'm fortunate that I have a very sophisticated Board of Directors. So we have really good quality discussions and debate around these issues. This is going to be -- as you said, this is going to be more of a sec-half. I won't say phenomenon, but we're going to be more cash generative just because of the nature of our -- of some of our activities with the acquisitions and as well as with the Congo project, we're more cash generated in the second half of the year. And we'll look at those, we've done some, what I would call, opportunistic share buybacks in the past, and we'll continue to look at being able to do those kind of things. And then ultimately, I think as we continue to be further down that path of -- the kind of midterm objective. I threw out there of $2 billion of revenue and 10% free cash flow margin. Once you start to get to that level of cash generation, then I think we kind of opened the aperture up of what does the capital return policy look like? Is it balanced between buybacks and dividends? Or how does that -- we'll have an opportunity to start to have more of those kind of robust discussions, so to speak.

Got it. Great. If there any questions from the audience? We can take them now. All right. Great. Mike Jardon, CEO of Expro.

Eddie. Thanks. Appreciate it.

Thanks so much.

Good to see you again.