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

Good morning, and welcome to HMH Holding, Inc. Third Quarter 2026 Earnings Call and Webcast. [Operator Instructions] As a reminder, conference call is being recorded. I would now like the call to turn over to David Bratton, SVP Finance. Please go ahead.

Good morning, everyone, and thank you for joining us for HMH's third 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, 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. 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 will now turn the call over to Eirik.

Thank you, David, and good morning, everyone. During the third quarter, our results were impacted by several near-term timing and market headwinds, including rig activation delays, continued disruptions in the Middle East and the timing of certain large equipment orders. Despite these pressures, the underlying market remains constructive with increasing deepwater investments supporting activity growth into 2027, and we remain confident in the opportunities ahead of HMH. The timing of equipment orders also impacted cash flow during the quarter. In anticipation of expected demand, we intentionally procured long lead materials ahead of purchase orders to shorten delivery lead times, improve our cost position and ensure we are ready to execute as these opportunities convert. We continue to maintain our cost base through this temporary slowdown in equipment activity, which reduces the pace of facility cost absorption and working capital liquidation but preserves the capacity we believe will be needed as activity increases. We also continue to invest strategically in our long-term growth. On September 21, we announced the acquisition of Deepwater Riser Services, expanding our riser service footprint and further strengthening HMH's position in the deepwater market. Taken together, while timing-related headwinds have affected our near-term results and cash flow, we remain confident in the underlying demand environment and believe the actions we are taking position HMH well as we move into 2027. Moving now into the financial highlights. Orders for the quarter were $191 million, representing a book-to-bill ratio of 1.1x in the quarter. Total revenue for the quarter was $171 million and adjusted EBITDA was $38 million. Looking at revenue composition. Spares revenue declined 2% year-over-year to $57 million, reflecting prior quarter's reduced order intake. Quarter-over-quarter spares orders were up 7% year-over-year, mainly driven by increase in Europe, offsetting the reduced Middle East demand. Service revenue in the quarter was $97 million, driven by repairs and digital technology. Importantly, service order intake increased 16% year-over-year, driven by repairs and field services. Product order intake and revenue remained subdued in the third quarter with order intake of $16 million, revenue of $17 million, reflecting the timing of larger equipment orders we mentioned previously. Turning now to the broader drilling market and what we see developing as we look toward 2027. Following a very strong first half of the year, offshore contracting activity moderated during the third quarter. In the floater market, however, we view this more as a matter of timing than a fundamental change in the outlook. Several tenders remain active across key offshore basins with some awards taking longer to formalize. Importantly, year-to-date floater contracting remains well ahead of last year. Through September, approximately 110 rig years have been awarded globally compared with 59 rig years during the same period in 2025. This distinction between the pace of new contract announcement and underlying future activity is important. While contracting activity has moderated during the second half, the outlook for 2027 remains constructive. A number of rigs have already secured future work and will be undergoing contract preparation, shipyard work, and mobilization ahead of those programs. And we see this clearly within the HMH installed base. Additionally, the recent announcement from RigCo regarding financing of reactivation of 4 rigs, including 2 harsh environment semis with HMH equipment is a positive indicator of investment in the market. To be clear, these are long-term investors putting capital into expanding offshore fleet. The number of HMH key floater currently on contract is broadly stable compared with recent quarters. However, that measure does not fully reflect activity developing beneath the surface. Several HMH equipped units are currently being prepared or mobilized for future contracts, creating a meaningful expected increasing activity as we move into 2027. This is particularly relevant for HMH: bringing a rig back into operation after an extended period of inactivity generates activity ahead of the actual drilling contract through preparation, inspections, equipment refurbishment, shipyard work and mobilization. Once these rigs begin operating, they also expand activity installed base, supporting recurring demand for HMH products and services. As we finish 2026, we expect activity across our HMH key floater fleet to be broadly in line with 2025 levels. Looking into 2027, however, we see a meaningful step-up in activity. Approximately 85% of our expected base case 2027 activity level is already supported by firm customer backlog or contractual options for 2027. This provides a strong foundation for growth even before considering additional contract awards. Importantly, we do expect further contracts to be awarded to HMH-equipped floaters. Based on our current review, we, therefore, expect HMH's key floater activity to increase approximately 10% to 25% year-over-year in 2027, with particular strength in the second half of 2027. The range reflects the timing of contract commencements, option exercises and additional awards that remain to be secured. The key message for HMH is that the number of rigs operating today does not yet reflect the activity level we expect in 2027. As these units transition from stacked status through preparation and mobilization and ultimately into drilling operations, we believe that increasing activity should translate into growing opportunities for HMH. In particular, a larger active installed base should support increased consumption of spare parts, together with additional field service, repairs and maintenance and equipment upgrade opportunities during 2027. The broader floater fundamentals remain supportive as well. At the end of September, global committed floater utilization stood at approximately 86%. And within the harsh environment segment, committed market utilization was approximately 89%. Beneath the near-term contracting cycle, we also continue to see healthy investments in future offshore developments. Global offshore greenfield investment commitments for 2026 are projected at approximately $142 billion with a significant pipeline of projects extending beyond 2026. Turning briefly to our equipment and project business. Order intake has been below our expectations during the last 2 quarters. This has primarily been driven by timing. Some drilling contractors have secured contracts later than we had anticipated, reducing the availability, lead time and operational white space to execute larger equipment upgrades. At the same time, we have seen certain larger projects and upgrade decisions move to later periods as customers maintain a disciplined approach to capital deployment. Importantly, we have not seen these opportunities disappear; rather, the timing of the associated order intake has shifted to the right. We continue to see a healthy pipeline of equipment upgrades and larger project opportunities across our installed base. As customers gain greater visibility on future drilling programs and suitable shipyard and preparation windows become available, we expect this to create opportunities to progress these projects. We, therefore, view the recent lower order intake primarily a timing issue rather than change in the underlying opportunity set for our equipment and our projects business. Turning to the jack-up market. The picture remains more challenging. Global jack-up contracting is running below last year's level with approximately 146 rig years awarded through September compared with 195 rig years during the equivalent period of 2025. The Middle East continued to be an important contributor to this weakness with additional Saudi Aramco rig suspensions during the quarter and further delays to tender activity. For HMH specifically, deterioration in Middle East activity has continued to affect our business. Based on our current expectation, we estimate that lower activity in the region will negatively impact our 2026 order intake by approximately $50 million to $60 million. While we see pockets of improving jack-up activity elsewhere, these have not yet been sufficient to offset the broader year-on-year decline in global jack-up contracting. As a result, we remain cautious on the near-term outlook for this segment. Turning to our land business. I would also like to highlight an encouraging development in North America. Over the past years, we have been executing a multiyear strategy to expand HMH's presence in the North American land market. This has included investments in our facilities, including our new larger facility in Odessa, additions to our product portfolio and broader efforts to strengthen our offering and position HMH closer to our customers. We're now beginning to see those investments translate into results. Although this business remains relatively small for HMH today, we are seeing a significant growth trend across both equipment and service revenues in the North American market. As our equipment presence expands, we also see an opportunity to build associated services and aftermarket business over the life of that installed equipment. This creates the potential for the growth in equipment sales today to support a larger recurring revenue opportunity over time. We are, therefore, encouraged by the momentum we are seeing, and we believe it can become an increasingly relevant contributor to HMH's growth over time. On the Middle East, while we originally believed the impact would be more short-term related for equipment investment, we instead have seen a full push into 2027 for equipment orders. On the service side, in addition to the conflict, we also were impacted by our key customers' decision to defer maintenance, reducing our 2026 order intake. Stepping back, it's important to put these developments into the context of HMH's overall installed base. While the Middle East remains a near-term headwind, the larger picture for HMH is increasingly constructive as we enter 2027. Our greatest offshore installed base exposure is in floaters, and this is where we expect the strongest increasing activity. We expect the anticipated increase in floater activity together with the encouraging growth we are seeing in North American land to mitigate some of the weakness in the Middle East. Importantly, higher activity across our floater installed base should also translate into greater opportunities for spares, services, and equipment upgrades as we move into 2027. Now to provide more detail on our financial results and outlook, I will now turn the call over to Tom.

Thank you, Eirik. As we work through the third quarter financials, I want to reinforce a few of the factors discussed earlier that influenced our results and cash flow. The timing of certain equipment orders, rig reactivations, and the Middle East continued to affect our financial performance during the quarter. Based on what we see today, we continue to view these as timing shifts rather than a change in the underlying demand environment. That timing also affected our cost absorption, working capital and cash flow during the quarter. We continue to procure certain long lead materials in advance of purchase orders, consistent with our historical approach of working closely with customers on multiyear equipment upgrade and service plans. While this resulted in higher working capital in the near term, we believe these investments position us to reduce lead times, improve our cost position and execute efficiently as anticipated orders convert, which we've done effectively in the recent past. Finally, our acquisition of Deepwater Riser Services represents another important deployment of capital to strengthen the business. The acquisition expands our riser services capabilities and deepens our exposure to a deepwater market where we continue to see attractive long-term fundamentals. So while the timing of activity created pressure on our third quarter financial performance and cash conversion, we remain focused on the underlying economics of the business, and we believe we are well positioned to benefit as activity and equipment demand progress into '27. Moving now to third quarter results. Orders for the quarter were $191 million, up 12% year-over-year, driven by strength in our services product line, partially offset by lower product bookings. Sequentially, orders were down 7%, reflecting reduced Middle East demand in services and equipment and rig reactivation delays. Despite the quarter-to-quarter variability, orders exceeded revenue, resulting in a 1.12x book-to-bill ratio. Revenue for the quarter was $171 million, substantially flat quarter-over-quarter as the increase in service volumes were offset by lower spares and equipment revenue. Adjusted EBITDA in the quarter was $38 million, down 3% year-over-year with lower product volume, partially offset by higher services volume. Sequentially, EBITDA increased 13%, driven by service volumes and lower compensation expense. The adjusted EBITDA margin was 22.3% in the quarter, favorable due to mix and lower variable compensation expense, reflecting updated expectations for full year performance. Turning to cash flow. Free cash flow, defined as cash flow from operating activities less purchase of property equipment and development costs was negative at $12 million in the quarter. As previously mentioned, the timing of equipment orders negatively impacted cash flow this quarter. Now I'll walk you through the product line results in more detail. In aftermarket services, revenue was $97 million in the quarter, down 7% year-over-year, driven by contract services, partially offset by increase in repairs and digital technology and increased 9% quarter-over-quarter, driven by increased demand for repairs. Aftermarket services order intake was $115 million in the quarter, up 16% year-over-year, driven by repairs and field services and down 3% quarter-over-quarter, primarily due to lower digital technology orders following strong prior quarter activity. Spares revenue was $57 million in the quarter, down 2% year-over-year and down 6% quarter-over-quarter, reflecting the pace of order intake and regional mix. Spares order intake was $60 million, up 7% year-over-year, driven by increasing European topside demand, offset by reduced Middle East demand and down 7% quarter-over-quarter, driven by lower pressure control spares, partially offset by higher topside spares. Product revenue in the quarter was $17 million, down 69% year-over-year and down 19% quarter-over-quarter, reflecting both the lower backlog and lower intake for the quarter. At $17 million in the quarter, we were not able to fully absorb the global cost base supporting the business, which negatively impacted us in the quarter. Regarding the Middle East impact for the 9 months ended September 30, 2026, the revenue and adjusted EBITDA, the Middle East conflict is roughly $17 million and $8 million, respectively. Moving to our capital structure. We ended the quarter with $90 million in cash and cash equivalents and total liquidity, including the revolving credit facility of approximately $165 million. We have no bond maturities until December 2028 with our revolving credit facility extending through June 2028. Capital expenditures and development costs during the quarter were $5.4 million, primarily supporting aftermarket capabilities, service reliability, and ongoing product development initiatives. We continue to operate an asset-light business model and manage capital intensity carefully while preserving flexibility to support growth as activity levels recover. On the M&A front, on September 21, we announced the acquisition of Deepwater Riser Services, expanding our riser services footprint. The deal expands our aftermarket capabilities with riser inspection, recertification, refurbishment, and storage services in the U.S. Gulf. Additionally, it allows our operation to centralize in Houma, Louisiana to better serve our customers. In addition to the most recent announcement, we are advancing several additional strategic opportunities. We are highly encouraged by both the quality of assets under review and the broader opportunity set available in the market. Consistent with our disciplined capital allocation strategy, we believe these opportunities will enhance our capabilities, expand our market presence and create meaningful long-term value for shareholders. Looking at the full year 2026, we continue to expect a slower volume than originally anticipated, driven by the continued delay in equipment bookings, rig reactivation delays, and continued Middle East disruptions before seeing a strong shift upward in 2027. For 2026 guidance, based on our current backlog, order activity and margin visibility, our full year guidance is now being revised. We now expect the fourth quarter adjusted EBITDA to be roughly flat to slightly below third quarter results, resulting in full year 2026 adjusted EBITDA to be in the range of $135 million to $140 million. As a result, we now expect an effective tax rate of approximately 41% for the third quarter and full year. The higher rate is primarily driven by weaker results from product volume and geographic mix with taxable income across several international jurisdictions. When normalizing for the impact from the Middle East, this would have put adjusted EBITDA between $147 million and $152 million, certainly lighter than expected, but with the remaining gap being mainly attributable to the product segment. Investments in CapEx are expected to be 2% of revenue for 2026. As we close the financial review, I'd also point you to the strategic road map page in our presentation, which frames how we're thinking about the business across the near-, medium- and long-term. In the near-term, while project timing, customer capital discipline and disruption in the Middle East are influencing activity, we continue to position the business for the opportunities ahead, including offshore rig reactivations and technology upgrades as well as evolving requirements in the land market. Over the medium term, we expect these trends to broaden with increased offshore activity, continued investment in major equipment upgrades and an aging installed base supporting aftermarket demand, while longer laterals and higher torque requirements create additional opportunities on land. And over the long term, we believe increasing adoption of electrification, automation and digital technologies and enhanced well construction solutions can further expand HMH's addressable opportunity. When you put those horizons together, we believe HMH has multiple avenues to grow, both organically and inorganically to create long-term value for our shareholders. With that, I will turn the call back over to Eirik for closing remarks before Q&A.

Thank you, Tom. As we conclude, I want to emphasize that while the timing of certain market activity has shifted, our view of the underlying fundamentals has not. We continue to see a constructive outlook for our business and importantly, increasing visibility to the activity opportunity ahead of us in 2027. In the floater market, contracting activity moderated during the third quarter following a very strong first half of the year but the underlying indicators remain supportive. A significant amount of future work has already been secured and several HMH equipment rigs are now moving through preparation, shipyard work, and mobilization ahead of contracts expected to commence in 2027. At the same time, while the timing of certain equipment and project opportunities has moved to the right, we continue to see a healthy pipeline and have not seen a fundamental change in the underlying opportunity set. So as we look towards 2027, we believe HMH is well positioned. Increasing floater activity, a larger active installed base, continued investment in deepwater developments and encouraging growth in our North American land business provide multiple avenues for growth. Together with our differentiated technology portfolio and aftermarket capabilities, we believe these trends position HMH to benefit as the market activity continues to develop. Finally, I want to thank our employees around the world for their dedication and hard work this quarter. Their commitment to our customers and our strategy continues to strengthen the foundation of HMH and position the company for success in the years ahead. Thank you for your continued support of HMH. We look forward to updating you on our progress next quarter. With that, I'll turn the call back to operator for questions.

[Operator Instructions] Our first question comes from the line of Derek Podhaizer from Piper Sandler.

So you gave us an early indication into 2027. I believe you said key floater activity should increase 10% to 25% year-over-year. Obviously, that's a pretty wide range. So I was hoping you could talk to us about the low and the high end of the 10% to 25% and maybe some of the assumptions around it as we start to formulate our thoughts for 2027.

Yes. I think when you look at the low end, that would be kind of what we view as already in the bag. And so you look at contracts that have been signed or options we know are going to get exercised. Additional contracting volume, which we absolutely expect in communication with our customers, drives that a little bit higher. The higher end would require some of the reactivations we've been pushed -- that we've seen be pushed off this year. And again, like we said, we quote those reactivations, we know they're active conversations. So I think that's the right way to think about that range.

Just to add that -- and I'd also like to add that if you look at the contracted volume so far this year, it's more than 80% for 2027 compared to last year, which was 60%. So it's quite a much higher contracted fleet looking -- going into 2027.

Yes. No, that's helpful. And then I guess maybe, look, on products, obviously, we've seen pretty significant declines here in the orders on the top line as well. And I understand things are getting pushed out to the right. But how should we think about the shape of recovery for product and what we need to see from the market, expect from the market? Just some help and color around the product orders specifically.

Yes, sure. I think that I would break that into 3 components. One is Middle East. And I think that, that continues to get pushed off more than we thought, right? Second is drilling equipment. Third is mining. I think some of the mining orders are back-end loaded and into next year, and those have been pushed off. And so I think we're going to be watching for that every day. On the Middle East side, yes, we'd like to see some normalization. There's going to be a big catch-up when that happens. I think you can guess where that is. And then we do think next year, we start to see recovery of that. And a lot of the stuff getting pushed out that we've gotten ready for, we're in regular dialogues with and we think comes to fruition. And we think that '27 should be a better year on that front. But we -- again, these are things that in conjunction with customer calls, we thought would happen this year, and then they've been pushed a little bit. And I think when you think about the absorption there, that puts -- I mean, this quarter was about a $5 million or $6 million bottom line headwind on the absorption. When you step back and say the underlying aftermarket business is looking fairly logical and a little bit light due to the some of the reactivations getting pushed off, but kind of consistent with what we'd expect, that product order does just create a huge drag with the capacity, it's that simple.

The next question comes from the line of Patrick Ouellette from Stifel.