Expro Ltd (XPRO) Earnings Call Transcript & Summary

Hello, everyone. Thank you for joining us, and welcome to the Expro Third Quarter 2026 Earnings Call. [Operator Instructions] I will now hand the conference over to Dave Wilson, Vice President, Investor Relations. Mr. Wilson, please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Expro's Third Quarter 2026 Earnings Call. I'm joined today by Mike Jardon, CEO; and Sergio Maiworm, CFO. Both Mike and Sergio will have some prepared remarks, after which we'll open the call for questions. In association with today's call, we have an accompanying presentation on our third quarter results, which is posted on the Expro website, expro.com, under the Investors section. Before we begin today's call, I'll remind everyone that some of today's comments may refer to or contain forward-looking statements. Such statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. These statements speak only as of today's date, and the company assumes no responsibility to update such forward-looking statements. The company has included in its SEC filings cautionary language identifying important risk factors that could cause actual results to material differently from those set forth in any forward-looking statements. Please note, any non-GAAP financial measures discussed during this call are defined and reconciled to the most directly comparable GAAP financial measures in our third quarter 2026 earnings release, which was issued this morning. With that said, I'll turn it over to Mike.

Thanks, Dave. Good morning, everyone, and welcome to Expro's third quarter call. Before we begin our discussion around the third quarter results, I would like to mention the people recently impacted by the sinking of the Prospector 5 jack-up rig in Gabon. We had a few folks assigned to the rig, all of which were thankfully safely evacuated. This incident serves as an unpleasant reminder of the inherent danger in the work this industry does in order to provide affordable and readily available energy to the world. It also highlights why safety remains a persistent focus for those of us involved in the energy industry. Again, our thoughts and prayers go out to those affected by this accident. With regards to our third quarter, I'll start off by reviewing the financial results found in today's press release. I will then comment briefly on the overall macro environment, then address our fourth quarter and full-year guidance and finally, conclude with some operational highlights for the quarter. Following my comments, Sergio will then address Expro's new operating and financial reporting structure as well as the company's capital allocation during the quarter. Let's begin on Slide #3. For the third quarter, as expected, the company saw a sizable increase in both revenue and adjusted EBITDA. The company generated $440 million of revenue and $91 million of adjusted EBITDA, representing a 21% margin. Adjusted free cash flow for the quarter was $52 million. Overall, revenues were up 12% sequentially and adjusted EBITDA was up 20%. These increases were driven by higher activity in Expro's underlying business lines as well as the inclusion of enhanced drilling operations during the quarter. For the 9 months ending September 30, the company has done well, particularly in our efforts to increase our free cash flow generation. The recent third quarter represents a near record for free cash flow generation. Based upon these results and our projection for the fourth quarter, we are raising our annual 2026 guidance for adjusted free cash flow expectations, which will now be in the range of $140 million to $150 million. While we are pleased with the sequential increases in our third quarter results, we note that they are in the lower half of the guidance range. This is primarily due to our NLA region, where some of our subsea-related activity late in the quarter was impacted by the ongoing loop currents in the U.S. Gulf. I'll touch on this as well as the impact on our fourth quarter expectations in a moment. Prior to addressing our fourth quarter guidance, I want to share a few thoughts on how we currently see the market. We continue to observe a market that is particularly supportive of offshore and international investments, especially in the coming years. This view really has not changed at all this year as we saw the genesis of this late last year. The leading indicators for offshore industry, such as project FIDs, subsea tree orders and flowing rig utilization have all been moving in the right direction. Accordingly, they have served as the basis of the optimism in the market. The Middle East conflict remains one with global ramifications as does too, the Russia-Ukraine conflict. Collectively, these conflicts are expected to continue to have a meaningful global impact on overall energy markets, commodity prices and trade flows. The associated volatility and uncertainty have reinforced the strategic importance of energy security and dependable supply sources. This has prompted operators and governments to reassess supply chains and diversity of investment across multiple regions, particularly offshore, which has added to the long-term optimism surrounding this market. Deepwater remains one of the most attractive areas for incremental upstream investment and is expected to capture a significant share of future capital allocation. This trend aligns closely with Expro's core strengths and global footprint as operators prioritize large, high-quality offshore developments that can deliver competitive returns and long-term production. Offshore is a long-cycle business and one where we believe we are still in the early innings of a developing up cycle. Looking further ahead, we believe the outlook remains favorable through the end of the decade as breakeven prices are much lower today than they were a few years ago. Both offshore and international markets are expected to be healthy as producers continue to focus on recovery optimization, production enhancement and faster execution more so rather than rig-led expansion. This growing emphasis on operational efficiency and brownfield optimization represents a significant opportunity for Expro given our differentiated technologies and expertise in maximizing production performance from existing assets. Turning to Slide 4, where we are providing our fourth quarter and our updated 2026 financial guidance. As I mentioned, we have experienced an operational and a financial sequential step change from the second quarter across the core business as well as the inclusion of our recently announced Enhanced Drilling acquisition, and we expect further sizable sequential increases in the coming fourth quarter. With regards to our expected EBITDA generation, while the bulk of the contributors to the anticipated sequential increase in the fourth quarter are still in place, there has been some activity that has been pushed to the right. This has resulted in adjusted EBITDA expectations for the fourth quarter to be tempered by approximately $20 million. However, you will note that we continue to make solid progress towards our ultimate goal of double-digit free cash flow margins. The activity that has been pushed to the right centers on some high-margin subsea operations in North and Latin America. The delays in the subsea work in NLA are the result of loop currents in the U.S. Gulf that impacted our operations late in the third quarter and early in the fourth quarter. Additionally, the recent hurricane in the U.S. Gulf has temporarily affected the NLA operations. On top of the weather and environmental factors impacted U.S. Gulf activity, there has been a delay in well intervention integrity work in Colombia, which we expect to impact fourth quarter results as well. With regards to the Middle East, while uncertainty and volatility remains, our operations in the Middle East and North Africa regions have continued to be resilient as well. The main effect on the company from the Middle East conflict has been that our originally anticipated, i.e., budgeted activity growth in 2026 in the region did not materialize as we had expected at the start of the year. However, despite the disruptions, we expect that the combined 2026 financial results from these regions to look similar to last year's. We continue to focus on factors that are within our control and we'll maintain a disciplined mindset of deployment of capital. We remain steadfast in our commitment to expand margins, increase free cash flow generation and return capital to shareholders. Looking a bit ahead to 2027, we're in the early phase of working through our budget. But initially, we expect mid-teen growth in our adjusted EBITDA in 2027. We will refine these expectations as we and our customers, more importantly, conclude the budgeting process for next year. And for the time being, we are assuming status quo in the Middle East for the remainder of 2026 and well into 2027. Now moving on to our customer technology highlights for the quarter on Slide #5. Expro recently launched Maestro, which is a modular well test platform that's designed to support safer, more efficient operations while retaining human oversight of critical decisions. This product is very indicative of Expro's focus on technology where it combines automation, remote control and real-time visibility and decision support. Expro's Maestro technology and process helps reduce operational complexity across both onshore as well as offshore environments. A full deployment of Maestro has shown to reduce red zone exposure by up to 67%. Another of Expro's technology that gained traction in the third quarter was Articulock. Across the North Sea, Articulock has been utilized in well construction, intervention and subsea recovery projects and at water depths in excess of 3,300 feet. This technology reduces fatigue and bending loads and on one campaign actually enabled safe operations despite harsh weather conditions where we avoided several days of operational delays. Now continuing to highlight Expro's technology, the company secured 8 finalist nominations at the 2026 Gulf Energy Information Excellence Awards, demonstrating the breadth and strength of our technology portfolio. The company's iTONG won Best Controls, Instrumentation, Automation Technology for Upstream. Expro's success with nominations and award is impressive here, I think, for 2 main reasons. First, it demonstrates the success of the company's continued focus on developing and deploying practical technologies that support safer operations, stronger performance and the evolving needs of our customers. And second, the nominations and awards were competitive with those received by much larger oilfield services companies. This once again demonstrates how we often punch above our weight class when it comes to technology and service. Another area I would like to highlight here is the commencement of the company's first operations utilizing enhanced drilling technologies in West Africa, expanding the technology usage outside the North Sea and the U.S. Gulf. We remain very excited about the Enhanced Drilling acquisition and the technology offering. Not only does it provide tremendous value to its customers, enabling them to access reserves that were previously thought inaccessible, this MPD technology provides value in normal drilling activities by enabling wells to be drilled more efficiently, saving days of total spread costs and ultimately improving project economics for the customers. We believe this dual gradient CML technology is the industry-leading MPD technology and that it will continue to gain traction in the industry over the next couple of years. With that, I'll turn the call over to Sergio for his comments on the quarter.

Thank you, Mike, and good morning to everyone on the call. Before I begin, I just wanted to quickly highlight that we're building strong momentum in cash generation, and we're further increasing our full-year 2026 adjusted free cash flow guidance to a range of $140 million to $150 million. What excites us is the opportunity to build on that performance in 2027. While our budgeting process is still underway, early indications are robust, pointing to mid-teens percentage growth in adjusted EBITDA and an increase in more than 20% in adjusted free cash flow, both year-over-year. That combination of earnings growth and even stronger cash flow growth underscores the opportunity ahead as we remain focused on translating improved profitability into cash and long-term value for our shareholders. Now sticking with our last quarter's format, I do not intend to comment on the specific detailed results by geographic region. Rather, that commentary can be found in both the third quarter earnings release and the appendix of the accompanying presentation. Specifically for Q3, Expro's overall adjusted EBITDA was $91 million with a margin of approximately 21%, which is an increase of almost 140 basis points from the previous quarter. Our adjusted free cash flow was $52 million for the quarter, relatively flat with the previous quarter, but reflects a good improvement year-over-year. Furthermore, we still expect a good improvement in 2026 free cash flow when compared to last year, even as we had to adjust some of our near-term expectations. Moving on to Slide 6. We continue to explore ways to make our business more efficient and optimize our operating structure. As a consequence, during the quarter, we decided to merge a smaller region in terms of revenue and EBITDA, our APAC region into another region, the MENA region to create the combined AMENA region. We believe this move will enable us to take advantage of economies of scale using the larger region in terms of operations and infrastructure to also support a smaller one. The combination also makes operational sense. Both regions provide similar services supporting customers' operating expenditure, brownfield and greenfield projects as well as deepwater operations. Additionally, the customer engagement is similar with some customers in the former APAC region behaving more NOC like with their oilfield service vendors. This combination of regions will enhance the support for operations in Asia rather than taking away from it as there will be more continuity through our product line offerings. Initially, we don't see this as a major cost-saving exercise, though we do expect some small financial benefits in the near term. And finally, now each region will represent approximately 1/3 of the total revenue of the company overall. Now turning to Slide 7. We remain focused on expanding our margins. And as we have mentioned previously, this journey will not necessarily be in a straight line. As Mike mentioned, some of our high-margin work in the fourth quarter has been pushed to the right. And as a result, our margin expectations for the fourth quarter has been moderated as well. We still are committed to expanding our margins. We remain focused on cost efficiency and increasing our customer wallet share at higher margins. Additionally, we continue to internationalize services and technologies acquired through M&A. In the medium term, we still see improvement in our financial performance, some of which will be the result of market factors, but others will be driven by the Expro-specific actions I just highlighted. A look at Slide 8 shows what we are doing with our free cash flow on a relative basis. Index back to 2022, Expro has one of the best free cash flow growth profiles in the industry. It is evidence that our focus on free cash flow is bearing fruit, and it has had a positive impactful change to the company financial performance. And while we're extremely proud of that, we acknowledge more work needs to be done, and we intend to continue to strive to improve our free cash flow profile. Now quickly turning to liquidity position. We have included this on Slide 9. The company has closed the quarter with $260 million in total liquidity. That includes $172 million in cash on the balance sheet. At quarter end, we had $259 million outstanding on our revolving credit facility, which was an increase of approximately $180 million from the previous quarter. This was a result of using the RCF to fund the Enhanced Drilling acquisition less the amount of repayments made on the RCF during the quarter. This puts Expro at a net debt position of just $87 million at quarter end. So, we're still in a very strong financial position with less than half a turn of net leverage. And by maintaining a strong balance sheet, the company is well positioned to execute on its other capital allocation priorities. These are on Slide 10. And rather than go into detail reiterating our capital allocation framework, I will quickly highlight the 4 equally important capital deployment priorities. As I just discussed, one is maintaining a strong balance sheet. Again, by doing so, we maintain the financial flexibility and resiliency to act on our other capital allocation priorities. Another is M&A, where we focus on opportunities that offer clear industrial logic, scalable technologies and synergies and the potential to expand our presence in attractive markets. M&A is an integral part of our overall strategy, and we have a good track record in that regard. We continue to look at a variety of opportunities from small bolt-on to things that would have a much more transformative impact to the company. The third is investing in the business. We utilize CapEx to maintain and drive high-return organic investments and do not spend CapEx speculatively. Every CapEx dollar is geared towards specific projects with known return profiles that meet or exceed our standards. And finally, return of capital to shareholders. As we have already stated, year-to-date in 2026, we've repurchased approximately 3.2 million shares for roughly $52 million. While we have already returned above our at least 1/3 of adjusted free cash flow commitments, we will remain opportunistic with share repurchases through the balance of this year. Before turning the call back over to Mike, I do want to address the financial outlook for the fourth quarter of 2026, as Mike previously addressed in Slide 4. Given Expro's relative size yet broad breadth of exposure globally, the company's overall results can be impacted by industry factors isolated to a specific geographic region or regions from time to time. These industry factors are impacting our expected fourth quarter results, and they do not relate to Expro's level of performance, loss of market share or loss of contract. Rather, they serve as a reminder of some of the challenges in a long-cycle business, it is often difficult to predict. Many sizable fourth quarter contributors such as a production solutions project in North Africa, the tubular sales in NLA and equipment sales in the Middle East and Asia are still on track. Others, as Mike mentioned, have been pushed out, namely some high-margin subsea operations in NLA and the well intervention and integrity work in Colombia. It is important to point out that despite these temporary headwinds, our updated fourth quarter guidance still reflects what would be a record quarter for the company, another indicator that we're moving in the right direction. With regards to work getting pushed to the right, these projects remain in our order backlog for execution in 2027 with their value, profitability and associated cash flow still retained. These changes affect the timing, but not the value of our results with the deferred activity now expected to contribute in 2027. Regarding the Middle East, we're maintaining our status quo view of the region for the fourth quarter and have kept that view as a baseline for 2027. With that, I'll turn the call back to Mike for a few closing comments.

Thank you, Sergio. As we conclude our prepared remarks and before opening up for questions, I'd like to conclude with the following comments. As Sergio just mentioned, we're looking forward to executing on a record performance in this upcoming quarter. We continue to see strengthening in the key indicators that we actively monitor, areas such as FID approvals, subsea tree orders and overall rig utilization. We believe that our relentless focus on technology development, improving internal and external operating efficiencies and punching above our weight each and every day will position us very well for the upcoming offshore and international growth. I remain confident in the company's ability to deliver improving financial results in the future and our employees' ability to deliver safe, high-quality value-added services to our customers. With that, we can open up the call for questions.

[Operator Instructions] Your first question comes from the line of Keith Beckmann with Pickering Energy Partners.

I just, kind of, wanted to ask around -- thinking about free cash flow here, obviously, some headwinds here in 4Q, but free cash flow guidance for 2026 was raised regardless of that and then also 2027, 20% plus growth. Trying to get a sense on maybe some of the internal improvements you guys have been able to make and look like you're trying to continue to make here into 2027 and maybe mechanically, a little bit more depth, how should we think about this?

Keith, thanks for joining. Thanks for the question. I mean, fundamentally, it's -- I mean one of the things I'm extremely proud of is we really have the organization focused on the things that they can control. And activity that we've had in the U.S. Gulf in Q3 or in Q4, when we're dealing with some weather challenges or we're dealing with weather currents -- loop currents the guys can't control that. What they can control is the efficiency on our spend, cost management, cost control, as we introduce new technology that helps drive efficiency, reducing the number of personnel on board or expanding the customer wallet for additional operations on a given asset, those kind of things. And we continue to -- as we've always said, we don't spend CapEx dollars speculatively. We spend CapEx dollars to projects. So we just continue to maintain that focus. And the result of it is making sure that even when we have a little bit of softness because of activity that we continue to stay focused on the cash generation. So, it's really just internal efficiencies of people utilization and how do we use more technology and for back-office support and those kind of things. It's really just kind of the culmination of all of those efforts internally to drive that efficiency. And also with the efficiency that we have on a rig, reducing number of personnel, additional services, I mean, all those kind of things, they all, kind of, combine up. So that's why we're continuing to be able to focus on expanding cash generation.

Okay. Awesome. And then I guess following up on that a little bit. How should we be thinking about capital allocation heading into next year where you guys had the $100 million buyback authorization, right, potential growth internally within Enhanced, if that's possible? And then also the last piece potentially further M&A and on M&A, like what's -- is there any examples of acquisitions or product lines that you think would make more sense and then things that don't make as much sense to give a sense out there if what's possible?

Sure. I'll try to tackle a couple of those. I'll, kind of, try to peel that onion back a little bit. I mean, fundamentally, still to be finalized because we're early innings on the budget process. What we tried to highlight was really, kind of, what our sense is of how 2027 is going to play out. I think we're probably being a little bit conservative today, just given how we see the outlook for next year. I would anticipate we're still going to be at least 1/3 of our free cash flow return to shareholders. I wouldn't anticipate that to change. But frankly, that's a discussion we'll have with the Board once we actually go through the budget for 2027. But right now, I wouldn't anticipate that, that's going to change. We continue -- in terms of M&A, we continue to be focused on that. We continue to look at things that would help us expand our portfolio and help us expand the relevance that we have for customers. I think we're in a unique position because we have touch points all the way from our customers' exploration programs, so their appraisal to drilling to completions to production, all the way up through abandonment. We have a lot of opportunities to focus on bolt-ons that will -- whether it's a technology expansion or it's going to be something that just helps us extend the breadth of the services that we have. We have a lot of options. And we continue to look at a number of transactions. It gives me a lot of confidence because we've been able to go out and execute on transactions. More importantly, we've been able to bring them in. We've been able to take the cost out. We've been able to achieve the synergies. We've been able to integrate those it just gives me more confidence that we can continue to do those things that make sense, but they're always going to be led by the industrial logic. And so nothing pleases me any more than when customers -- we get feedback from customers like we did with enhanced drilling of, wow, that really makes good sense. We're glad to see you guys expand your portfolio into that. That tells me the industrial logic was really sound and easy for them to understand. Sergio, anything you want to add on either of those?

No, Mike. I think that's pretty comprehensive. The other thing is, as Mike mentioned, we look for additional bolt-ons, whether those are technology, but we also look for transformative transactions. It really is guided by the industrial logic or the strategy of the company and how that makes strategic sense. That's what drives our actions. There's no other metric that we look at to, kind of, drive those things.

Your next question comes from the line of Eddie Kim with Barclays.

So you reduced 4Q EBITDA expectations by about $20 million because of Gulf of Mexico subsea work and Colombia intervention activity shifting into next year. How confident are you that essentially all of that EBITDA is going to be recovered next year? And should we think about most of it occurring in the first half of next year? Or do you think it flips maybe to the second half of next year?

Yes. Eddie, thanks for joining. I guess -- so there is no risk of that activity being lost. It's really a timing issue. And so it's more a matter of when they're going to execute on those operations. And frankly, we've had more we've had a greater proportion of our customers being in the completion phase in the U.S. Gulf than in the drilling phase. And for us, our service intensity is a little bit higher when we're in drilling operations versus completion operations. So, that's a little bit of the timing effect that we've had here in Q3 and Q4. And part of it is because as they're dealing with loop currents and we're dealing with vessels that they have a limitation on their ability to reposition dynamically, it's easier to be in the middle of the completion operation and be able to shut things down than it is when you're in the middle of the drilling operation. So it's really just kind of the timing of that. I would anticipate all of that activity will still happen next year. Part of what we'll sort through with the budget process here now is kind of putting pen to paper on what is the exact timing of how those operations? Are they going to happen in January? Are they going to happen in April? That's, kind of, what the timing is. But overall, we won't lose that activity in any way, shape or form. And frankly, the thing coming into Q3 and Q4 that I was the most probably had the highest situational awareness to was some of the bigger, lumpier, kind of, project-related things we had. Those were the ones that I was concerned about actually happening here in the fourth quarter, in particular. Those are not the ones that we're having a bit of a challenge with in the fourth quarter. It's just more of the normal operational rhythm of some of the activities. So, those are things that will continue to come back into the fold as we move into '27, if that makes sense.