HMH Holding Inc. (HMH) Earnings Call Transcript & Summary

Thank you for standing by. My name is Amny, and I will be your conference operator for today. At this time, I would like to welcome everyone to the HMH Holding First Quarter 2026 Earnings Call. [Operator Instructions] It is now my pleasure to turn the call over to David Bratton, Senior Vice President of Finance with HMH Holding. You may begin.

Good morning, everyone, and thank you for joining us for HMH's first quarter results. Joining me today are Eirik Bergsvik, our Chief Executive Officer; and Tom McGee, our Chief Financial Officer. Before we begin, we would like to remind you that this conference call may include forward-looking statements. These statements, which are subject to various risks, uncertainties and assumptions, could cause our actual results to differ materially from these statements. These risks, uncertainties and assumptions are detailed in this morning's press release as well as our filings with the SEC, which can be found on our website at investor.hmhw.com. We undertake no obligation to revise or update any forward-looking statements or information, except as required by law. Management's statements may include non-GAAP financial measures. The reconciliations of these measures, please refer to our earnings release and our SEC filings. For reconciliations of these measures, please refer to our earnings release and our SEC filings. Following our prepared remarks, we will open the call for your questions. I'll now turn the call over to Eirik.

Thank you, David, and good morning, everyone. Before we discuss our performance, I want to take a moment to say thank you to every HMH employee around the world. Your hard work, your dedication and your innovative spirit have been the driving force behind our successful IPO and the strong foundation we are building today. We could not have reached this milestone without you, and I'm truly excited about what we'll achieve together in the future. Now turning to our financial results. Our first quarter of 2026 results demonstrate the resilience and quality of our business model. Orders for the quarter were $218 million, representing a book-to-bill ratio of 1.3x in the first quarter. Total revenue for the quarter was $171 million, reflecting the expected softness relative to last year, driven by the lower backlog coming into the quarter. Importantly, adjusted EBITDA margins grew year-over-year to 17.6%, driven by disciplined cost execution, favorable product mix in spare parts and the continued focus on operational efficiency. Looking at revenue composition, spare parts revenue was a standout, increasing 11% year-over-year to $67 million, reflecting continued demand from our installed base and growing aftermarket activity. Service revenue of $72 million was as expected, primarily due to the backlog of repairs as we entered the year. Product revenue of $33 million reflected the conclusion of capital equipment projects and lower backlog to start the year, which we expect to reverse in the second half of the year. Before turning to market developments, I want to briefly acknowledge the heightened geopolitical tension in the Middle East. While these dynamics have the potential to create some near-term disruption, particularly across certain onshore and jack-up activities in the Middle East, we continue to view their overall impact on HMH as manageable. Our exposure today is increasingly weighted towards offshore markets where major long-cycle projects are progressing in regions outside the Middle East. As a result, while we remain vigilant, our overall outlook for HMH remains constructive. Turning to the overall market. Over the past several weeks, the outlook for offshore drilling market has improved meaningfully. After several quarters of relatively soft contracting activity, the first quarter of 2026 marked a clear inflection point with a notable increase in newly announced contracts, contract extensions and that was of intent across multiple regions. In fact, this quarter represented the strongest quarter for offshore contracting activity in more than 3 years. Importantly, this momentum has carried into the second quarter and market indications suggest that additional near-term awards are likely to be announced shortly. This improving contracts environment is now translating into rising backlog and improving utilization, reinforcing our view that the long anticipated offshore market recovery is beginning to materialize. The recovery has been particularly strong within the floater segment. In the first 4 months of 2026 alone, approximately 110 rig years floater awards, including options and letters of intent have been announced, equating to roughly 75% of the total award volume seen during all of 2025. Similar to the overall market, conditions have also improved for HMH in installed base. A significant portion of recent awards have gone to high-spec units with HMH equipment and utilization across submersible rigs with our installed base is now moving back into the high 80% range, representing an important inflection point. We expect a similar trajectory for drillships as current tenders convert into firm awards. A significant portion of recent awards has come from Brazil, where we signed a development agreement with Petrobras focused on rotating control device technology, which is at the core of managed pressure drilling. We are also seeing encouraging momentum across the other regions, including the North Sea, Canada and Asia. While many of these awards were contemplated in our internal planning assumptions, their conversion into firm contracts materially enhanced our confidence in the outlook. Overall, these recent awards meaningfully support the flow of 2026 activity levels. While the near-term revenue impact of these announcements may be modest, they materially improve visibility and certainty for 2027 and beyond. It's also worth highlighting that several of the recent awards are long term in nature, creating a more constructive environment for customers to evaluate future upgrades and enhancements, such as drilling automation solutions. In addition, a number of contracts have been awarded to key units with HMH equipment that have been ready stacked for several quarters and are now either returning to work or scheduled to do so in during 2026. Taken together, these developments increase our confidence that we are entering a period of sustained year-over-year growth, both in 2026 and into 2027. Turning to jack-up and land market. First quarter activity was impacted by geopolitical developments in the Middle East. We did see some temporary disruptions and contract suspension across the part of the Middle East region. However, many of these units have since returned to work, and we are seeing resilience across several key basins and provinces. At the same time, we are observing a growing appetite to accelerate drilling activity in other regions. Collectively, these signals support a constructive near- and medium-term outlook for both jack-up and land markets. Overall, we maintain a very positive outlook across both offshore and onshore drilling markets, supported by rising oil prices and an increasing focus on energy security and energy independence, we see continued recovery in global drilling demand. We remain optimistic that future awards will drive additional reactivations across rigs with HMH equipment. As always, we continue to monitor geopolitical developments closely and assess whether they could have broader implications. At this stage, demand indicators across global drilling and mining markets remain solid and overall market conditions continue to be supportive. While we are watching developments in the Middle East carefully and evaluating potential impact on supply, demand and capital allocation, the indicators today remain very constructive. To provide more detail on our financial results and outlook, I will now turn the call over to Tom McGee.

Thank you, Eirik. I will begin the total company results and then discuss our outlook for the year. Revenue for the quarter was $171 million, down 14% year-over-year, reflecting lower product and service volumes, partially offset by higher spares volumes. This was primarily driven by reduced product and services backlog entering the period. Adjusted EBITDA in the quarter was $30 million, relatively flat year-over-year with higher spares activity offsetting lower service and product volume. Quarter-on-quarter, EBITDA declined 44%, driven by lower volumes and the non-repeat of Q4 benefits from inventory optimization and contract services, partially offset by spares. The adjusted EBITDA margin was 17.6% in the quarter. Despite lower volumes, we continue to demonstrate underlying margin resilience, supported by disciplined cost execution, favorable product mix and continued focus on operational efficiency. Orders for the quarter were $218 million, up 10% year-over-year, driven by products and projects slightly offset by field services and contract services and up 25% quarter-on-quarter, driven by equipment and repairs as customers prepared for increased activity in the second half of 2026. Orders exceeded revenue in the quarter, resulting in a book-to-bill of 1.3x. Importantly, quarter-over-quarter order and backlog growth reflects improving customer visibility and positions us well for increased activity levels in the second half of the year. Turning to cash flow. Free cash flow, defined as cash flow from operating activities, less purchase of property, equipment and development costs was positive at $4.6 million in the quarter. The result reflects expected seasonality as we typically see a lighter first half of the year while preparing for a second half uptick. CapEx and development costs during the quarter were $2.7 million, remaining consistent with historical quarters, primarily supporting aftermarket capabilities and service reliability. We continue to operate an asset-light business model and manage capital intensity carefully while preserving flexibility to support growth as activity levels recover. We ended the quarter with $101 million cash and cash equivalents on hand. Subsequent to quarter end, we completed our IPO, which materially strengthened our balance sheet and enhanced our liquidity and financial flexibility. Net proceeds after underwriting discounts, commission costs and shareholder loan repayments were approximately $21 million. Before we move on, I'd like to clarify that the results discussed in today's conference call reflect the historic financial results of HMH Holding B.V., which is the predecessor entity to HMH Holding, Inc. HMH Holding Inc. was formed as a holding company in connection with the IPO and related transactions and as of March 31, 2026, had not conducted any operating activities. The financial results do not represent the results of HMH Holding, Inc. as if the IPO and related transactions had occurred during the period discussed. Now I'll walk you through the product line results in more detail. In aftermarket services, revenue was $72 million in the quarter, down 14% year-over-year and down 30% quarter-on-quarter, impacted by softer 2025 order intake and non-repeat of contractual service volume. Margins in the segment remained supported by service mix, execution focus and selective cost actions implemented over the past several quarters. Aftermarket services order intake was $99 million in the quarter, down 3% year-over-year, driven by lower field service and digital technology orders and up 33% quarter-on-quarter, driven by customers preparing for an uptick in 2026 activity, primarily in upgrades and contract services. Spares revenue was $67 million in the quarter, up 11% year-over-year, driven by land and topside spares, slightly offset by pressure control spares and up 23% quarter-over-quarter as customers prepare for second half activity. Spares order intake was $63 million, up 4% year-over-year and up 12% quarter-over-quarter, driven by customer preparations, as previously mentioned. In Projects, Products & Other, revenue in the quarter was $33 million, down 40% year-over-year and down 30% quarter-over-quarter, driven by lower starting backlog due to customer CapEx deferrals in 2025. Moving to our capital structure. We ended the quarter with $101 million in cash and cash equivalents and total liquidity, including the revolving credit facility of approximately $175 million. We have no long-term debt maturity until June 2028. On April 2, 2026, we completed our initial public offering of 10.52 million shares of Class A common stock, representing approximately 24% of the company at a public offering price of $20 per share. During the second quarter, we used a portion of the IPO proceeds to repay outstanding shareholder loans. After underwriting discounts, commissions and these repayments, net proceeds totaled approximately $21 million. On April 30, 2026, the underwriters exercised their option to purchase an additional 685,844 shares of Class A common stock, which closed on May 5, 2026. Net proceeds of approximately $12.9 million were paid entirely to the company's principal shareholders. Overall, the IPO has significantly strengthened our capital structure and positioned us well to support long-term growth and deliver value to our shareholders. Looking ahead, we are already seeing a strong order rate so far in the second quarter, and we expect another quarter of book-to-bill above 1x. Looking at the full year '26, we expect second half revenue to be meaningfully stronger than the first half, driven by strong services and spares bookings during the first half of the year that will translate into revenue as customers prepare for higher activity levels. Based on our current backlog, order activity and margin visibility, we expect full year adjusted EBITDA to be in the range of $157 million to $177 million, with performance weighted towards the back half as activity levels ramp. Investments in CapEx expected to be 2% of revenue for 2026. Overall, we are excited for the next chapter for HMH. We are proud to be the first oil and gas company to go public in 2026 and the first offshore oilfield company to go public since 2014. While near-term activity levels remain mixed, we expect demand to improve as the year progresses, supported by a strengthening order book, continued offshore activity and customer focus on equipment reliability and life cycle support. HMH continues to advance strategic initiatives focused on margin durability, operational efficiency and disciplined growth as a public company. With that, I will turn the call back over to Eirik for closing remarks before Q&A.

Thank you, Tom. To conclude my prepared remarks, I want to emphasize that while Q1 revenue reflects expected softness given our starting backlog to the year, our underlying business fundamentals are strong. Adjusted EBITDA margins grew year-over-year. Cost discipline is delivering results and our commercial pipeline is robust. The offshore drilling market is in a supportive position. Floater contracting activity is improving, long-term contracts are being awarded to rigs carrying our equipment, and our customers are increasingly investing in upgrades and new technology. We are well positioned to capitalize on these trends with our differentiated technology portfolio as HMH. Before we move to Q&A, I'd like to take a moment to recognize and thank several group whose contributions were critical to our success and our completion of our IPO. First, to our advisory team, our legal counsel, banking partners, consultants and everyone else who worked tirelessly behind the scenes. Your expertise, preparation and guidance throughout the investor process and pricing were invaluable. And we sincerely appreciate the role you played in delivering such a strong outcome. I also want to thank Akastor and Baker Hughes for their consistent support over the years. We value these relationships greatly and are excited about continuing our partnership as we enter the next chapter of HMH's growth. To our customers, thank you for your continued trust and support from our formation in 2021 through today as a unified company operating as HMH. Your partnership across our business units has been essential to our progress. Most importantly, to our HMH employees, thank you for your commitment, collaboration and believe in what we are building together. Over the past 4.5 years, we have achieved a great deal. And while we're proud of that progress, we know there is still significant opportunity ahead as we continue to strengthen HMH's position as a leading drilling solution provider. Finally, to our new shareholders who help make our IPO possible. Thank you for your confidence in our strategy and leadership team. We remain fully committed to earning your trust each day and look forward to continued engagement with you and the analyst community in the years ahead. With that, I'll turn the call back to the operator for questions.

[Operator Instructions] Your first question comes from the line of Arun Jayaram with JPMorgan.

I wanted to just see if you could provide just a little bit of a flavor around the inbound orders. You mentioned the 1.3x book-to-bill in 1Q and continue to see favorable order trends in April. But just give us a flavor of what type of inbound kind of you're seeing thus far on a year-to-date basis.

Well, I think it's a combination of everything. We talked about the individual categories. Where we're light is obviously on the product and project side. Not surprisingly, the sort of a trailing impact of last year, but you're starting to see spares, digital upgrades and repair kind of in advance of people going back to work.

Fair enough. Fair enough. And just maybe some thoughts on the full year outlook, Tom. You mentioned, and this is how we're modeling it, that the second half of the year will be stronger in terms of revenue and EBITDA trends. But can you help us frame what -- you have a range of, call it, $157 million to $177 million for EBITDA. How do you think about what elements put you towards the low end versus the high end? But give us a little bit of thoughts on maybe how 2Q could play out, but just a little bit more color on the full year guidance would be helpful.

I think, yes, I think we're trying not to give too much quarterly guidance because things can shift between quarter-to-quarter, although Q2 will -- I think, based on -- you look at the order rate, it will be higher. I think you can look at that and conclude that safely. But if you think about what you could dial up or down on the full year, it would really, at this point on the downside have to be just things that are going to happen and they get pushed out for some reason. I think there's probably a little bit more potential optimism there, given that you could have some reactivation, you could have some larger equipment orders. And I think those would really be what we'd be looking for on the upside. Hopefully, that gives you enough information. I can't get into too much more specifics other than we felt pretty comfortable with what we put out. And certainly, there's a path higher with some things continue to accelerate in the industry.

Yes. We hear the optimism on orders and how trends are going. So I appreciate that, Tom and Eirik.

The next question comes from the line of Stephen Gengaro with Stifel.

Two things for me. The first, can you talk a little bit about just if you're seeing anything on the pricing side? I mean you talked about the order flow was good, I think, particularly on the spare side. Have you seen any pricing? And maybe just to kind of give us some color on how the pricing dynamics generally work as the market tightens.

Stephen, I would say that we haven't -- there's nothing much to say about that. We don't see any specifics when it comes to pricing at the moment. So...

Yes. And I think as we talked about, I think I'd reframe it a little bit and say that as the market tightens, day rates should increase, really, the benefit that provides us and what we see in the industry, they have more money to spend. And so we look at it when they start to spend, broaden their spending, upgrade equipment and upgrade capability. I think that is the more important dynamic with the market tightening.

Okay. And then the other question that has come up a few times with clients, too, has been when we talk about the interplay between the spare part order flow and then the aftermarket business itself. Is there any link there at all as far as how we should think about that? Or are they kind of separate entities and sort of the drivers and how they sort of play out from a timing perspective?

They work together very closely. I mean I think -- and sometimes they are explicitly linked, sometimes they are not. And so it just depends on how -- because you could actually be doing a repair and providing parts. But I think directionally, those things over the course of the year are going to move in the same direction.

Okay. So the spare order flow, that portends positive growth for the aftermarket piece over the next several quarters?

Yes, I would look at it over a longer term, yes. Because what you're seeing is -- I mean, if you think about what would happen, you could get orders for parts before a rig is actually working. You may do some repair on that, right? But I think what it's doing is it's kind of getting that rig in operation.

Your next question comes from the line of Scott Gruber with Citigroup.

Congrats on hosting your first conference call. So I wanted to ask, as you kind of get deeper into this deepwater restart and you had really solid orders in the first quarter. Maybe just some color on how this restart differs from restarts in the past. Are you seeing, say, more digital upgrade demand, more MPD? Are you seeing more kind of real capacity upgrades maybe around hook load? Just some color around kind of what you're seeing this restart versus past restarts and what that means for HMH.

Scott, I think if you look at the orders that have been stacked that got contracts now in the last quarter or last 4, 5 months, you will see that it's a spread of rigs, everything from middle deepwater to ultra-deepwater and also rigs that are highly automated and rigs that are not highly automated. I think it very much depend on where these rigs are going. So I wouldn't say that there are any specific different this cycle or this uptick from what we've seen before. Of course, you will see some more MPD, you will see some digital -- more digital upgrades. But all in all, it's very much about seeing the same as before.