Hunting PLC (HTG) Earnings Call Transcript & Summary

Good morning, and welcome the Hunting PLC Full Year Results Investor Presentation. [Operator Instructions]. Before we begin, I'd like to submit the following poll. And I'd now like to hand you over to Jim Johnson, CEO. Good morning, sir.

Good morning, everybody, and thanks for taking the time to join us today as we go over our full year 2023 results and I'm fortunate and happy to say they were excellent results. So as I go and look at the highlights for the year, revenue up 28%, a nice move across the board for a number of our product lines, nearly doubling our EBITDA, very strong sales order book with backlogs that will assure a large percentage that delivered in 2024 and into '25. We were able to generate a lot of cash in the second half of the year as we unwound business from earlier placed orders. Our non-oil and gas sales continue to increase, up 59% year-over-year and our EBITDA margins improved and they actually were at 12% for the second half of the year. And I think one of the key points that you'll see and hopefully take note of throughout this presentation is diversification is really part of the story we wanted to get out to everybody. We're a lot more than a one basin play, we're not just depending on the U.S. land rig count. Even though we love the U.S. land, there's also so many other parts of the business in which we're really seeing the benefit of that go to our bottom line and the performance this year. On the next slide, we talk about our Hunting 2030 strategy, and there's key points that we'll touch on all of this. But again, it's a diversification of what we have as a company and product lines that we offer. In OCTG, we were able to grow our supply chain as well as expand our business in a number of different areas. If you look at the TEC-LOCK business, for example, we outgrew -- our sales outgrew the rig count decline was in the U.S., strong results in North America. Perforating Systems, the Titan business, I think, performed well, considering a 21% decline in the U.S. rig count. The growth there really spurred by the international work. Subsea, one of the most exciting new growth areas for us. A lot of new markets opened up like the Turkish area, the Black Sea and South America being very, very busy for us. On the other product lines in Advanced Manufacturing, strong year growth there. A lot of the supply chain issues that hampered us in COVID and just coming out of COVID have been dissolved away. So we see further upside there in pricing in activity levels. Energy transition, an area we have enhanced the focus on internally from a sales perspective as well as product development. But one that still is rather in a slow growth mode and it's not because of anything of Hunting, it's because of just limitations in government regulations and permitting of things like that. And throughout the year, while we grew the business, we also kept our eye on our cost basis. We closed a facility in Oklahoma City, consolidated some facilities. One of the big accomplishments that I'm happy about was the disposal of our legacy E&P assets. Some of these oil and gas assets, which were all in the U.S. dated back to the 1940s and '50s. But what we really did by selling those off was we eliminated the potential for plug and abandonment costs that would impact us in the future. On ESG, a number of points up there to take note of, you can see our Scope 1 and Scope 2 emissions increased about 9%, but that was far less than our revenue increase year-over-year. So we were able to keep our intensity heading in the right direction, which is south. As you can see on the other line, it went from 30.9 to 25.9. I always give a shout out to our HSE team led by Greg Farmer. Our recordable incident rate was extremely low, better than in '22, and that's quite an accomplishment given the ramp-up in new employees and the extra efforts in new training and things like that, that we have to do throughout the group. On this next slide, getting into more detailed specifics on the products. OCTG had a very, very strong performance. I'd like to remind people that when I first got to know this company or even beginning in the oilfield side, it was really OCTG focused. So it's like what's old is new again. We continue to put a lot of focus on this side of our business where we have a lot of strategic advantages, both in our supply of products in areas like South America as well as the new Indian joint venture, our Asia Pac business and our TEC-LOCK product line expansion, which fortunately we rolled out it at the right time for the U.S. onshore. The perforating business, I talked earlier about Titan. The new H-4 perforating system is gaining strength. We had a very good January with that product line. That is the product line, the gun system that allows more accurate placement of the charges, aligning the charges down hole. We see that as a product line with continued growth opportunities. The H-3 product continued to increase sales force. I think that the business performed well, again, considering the 21% decline in U.S. land and offshore - I'm sorry not offshore, and international remains a key focus for us to continue to see growth in this business. On the advanced manufacturing, the one area that has significant non-oil and gas workforce driven by the advanced manufacturing operation at Dearborn and Maine, which does a lot of aerospace and defense and rocket business. The electronics business added some defense work this year to have more diversification. They also participate in the medical business. And again, these are mission-critical components, very few people in the world can do the electronic work we do or the machining technology work that we do. And so there's some good margin protection, and there's a good safety net around those businesses as far as stickiness to the clients because of the fact that you're in these programs. But you see a big increase in revenue and a substantial improvement in the EBITDA year-over-year with that product line. Subsea, one of the ones that we've put our last two acquisition dollars in place to with the purchase of Enpro and the RTI, titanium stress joint business. Both of those are performing well, along with our historic business with where we've made subsea couplings in Stafford, Texas. The real growth was in the titanium stress joint market though, driven by Exxon and Guyana as well as new markets such as in the Black Sea area of Turkey with a company called TPAO. We see a lot of growth there as FPSOs become more abundant in the deepwater offshore play. And we've -- after buying Enpro right as COVID was hitting, we now have the biggest order book at Enpro that we've ever had and see a real bright upside for that business going forward. On other manufacturing, it's a well-testing business, well intervention. They are driven by capital expenditures, primarily from the bigger oilfield service companies like Schlumberger, that has improved. But one of the big keys there was the selling and the disposal of our E&P assets, which were just not core. And we got that legacy business disposed off and got rid of the plug and abandonment exposure. Energy transition. I've briefly talked about, small part of our business right now. We focus a team on this. The key is we've secured supply chain channels, which allow us now to participate in the market. We just need the market opportunities to come to us and as we go and explore them. The areas that I'm most optimistic on is in geothermal, primarily because of a lot of international demand in places like Indonesia and the Philippines that we think are going to drive business. As a matter of fact, we landed a small order in January already in the Philippines on geothermal. On carbon capture, it's going to be one of those ones where we'll have the products and the materials in place, but it's really hampered, I would say by issues related to government policies on permits and pipelines and issues like that. And now I'll turn it over to Bruce.

Thanks, Jim. Good morning, everyone. I'm pleased to take everyone through a strong set of financial numbers. Let me start off, just to go through the main highlights of the 2023 period. We have our revenue up by 28% and that's primarily driven by the strength in the offshore International and Subsea business. That's a big part of our business now, and that's really driving that growth. It's also supported by a really strong sales order book of $565 million. And that gives us pretty good visibility for year '24 -- year '24. That doesn't include our Titan business. So actually, when we take 80% of that $565 million will be delivered in 2024 plus the Titan. That gives us really good confidence we can deliver another strong year in 2024. All that has shaped up to give us a really strong EPS increase up to [ $0.203 ] and a doubling of our EBITDA from last year to $103 million. And when you consider we had a softening market in the U.S., that's a really strong performance. Our non-oil and gas has increased by 59%, and that has effectively doubled from where we were two years ago. That's on now almost $76 million. EBITDA margins are strengthening along with our top line and that as the second half of the year progressed go up to 12%. Our target, as we outlined in the Capital Markets Day is to get that figure to 15% by 2025, and we're well in the way to achieve that. We've seen a lot of improvement through our operating efficiencies due to the restructuring we did over the last couple of years. We disposed some legacy commoditized businesses as well, saved some costs. We're in much better shape as a business and more efficient, and that's drawn out by our EBITDA per employee being $44,000 compared to $25,000 last year. We're really keen to continue with progressive dividend, and that's increased by 11%, and that's now up to declared dividend of $0.10. A technical point, we have recognized $83 million of deferred tax assets. The real thing to draw from that is there's no confidence in our -- and the strength of our forecast financial performance, and that allows us to recognize those $83 million of assets on our balance sheet. Returning capital is a key metric for us. We're seeing that improve from 1% to 6%, as we look to increase that over the next couple of years as well. Just a little bit more detail in terms of our product groups is how we define our business in terms of the main product groups. As Jim mentioned earlier, the strength of OCTG, that's increased 53% year-on-year. We have seen perforating systems hold the line, and that's despite their key market dropping 20%. So that's a good performance, a real growth in the international business by 34% year-on-year. And then we see Advanced Manufacturing, and Subsea, all north of 40% in terms of their growth. So I'll point into a strong revenue performance. We're showing here on the next slide, the income statement and all those components we just talked about are on there. In terms of our revenue at $929 million for the year. Our gross profit has increased 1 point year-on-year, and that's now 25%, delivering $227 million gross profit. We're seeing the doubling of the EBITDA there at $103 million. That flows through to a profit after tax of $36 million, a diluted earnings per share of $0.020 and a total dividend declared of $0.10, which is an 11% increase. A really important metric for us is our order book. That is now sitting at $565 million. That compares to a pre-COVID order book, which is then down at $225 million, $250 million. So a real improvement in terms of our order book visibility. We also break that down by what's oil and gas and what's not oil and gas, and we're seeing that increase in non-oil and gas exposure up to 16%. So that gives us real strength in terms of 2024. We've also got a tender pipeline we keep an eye on, and that is north of $1 billion. So that is orders we've already tended for, and they will mainly play out in '25 and beyond. So that gives us real confidence in our earnings, not just this year, for the next two years as well. The next slide is quite a busy slide, but that breaks down all our product lines, and it also breaks down our operating segments. So within that, along the roads, we've got all the main product lines that's broken down by sales, by revenue and by EBITDA and EBITDA margins. So it's really pointing to the fact we are no longer just one product line in Titan, relying on the U.S. market. We've got a diverse portfolio that covers offshore subsea and the U.S. land and all the product lines are doing very well. All the segments have improved year-on-year. And I think that details that very well. Next slide, we're looking at our balance sheet. We've got a very -- the key aspects to take from that, is a very strong balance sheet. We've got $957 million worth of assets. That compares to a market cap of $666 million. So that's a very strong balance sheet. We've generated $68 million worth of cash over quarter 4. Its a great performance. So that has got back to a cash neutral position and that will list out all our main asset groups there. So really strong platform to grow the company. In terms of working capital, that's something we keep a close eye on. We want to try and be as efficient as we can and optimize our working capital, so we can generate as much cash. Obviously, business levels have increased. So correspondingly, working capital has increased as well. A couple of areas that didn't increase was on our inventory, and that's due to the lead times on areas such in the Titan business where we had to have long lead times from our supply chain for [ license ] explosive charges, also electronic chips. It's more of a timing issue, and that will unwind over the course of 2024, and that cash will return back to the balance sheet. The working capital metrics we use as the annualized working capital against revenue. But again, we believe that will improve going to next year. Again, that will make us more efficient. We're using a variety of sources to optimize that working capital, whether that's advance payments or in terms of payments for purchases going forward. So all that will help our working capital performance going to '24. In terms of our cash flow, just picking up a couple of the main items there, we have doubled our earnings in terms of EBITDA, and then we add back a share-based payments. There's 2 main outflows there above our free cash flow, which is a CapEx which is $35 million and also the working capital movements of $55 million. That is a fairly neutral free cash flow position. We then remove our dividend payments and the payments for shares for Hunting. [ share scheme ] and that gives a net outflow of $25 million. So we take that with the $24 million to start the year with, that gives a [indiscernible] a mutual cash position. I'll finish the slide by just looking ahead but more into our guidance for 2024. So a very strong year for 2023, we believe that will continue going into '24, with a significant uptick in terms of our EBITDA, and we're guiding towards $125 million to $135 million. Margins continue to improve towards a 12% to 13% rate with the deferred tax asset on the balance sheet, we've got a range of 25% to 28% of effective tax. Our CapEx, plus intangible assets is slightly higher, but still at fairly around distribution levels of $35 million to $45 million. And we believe we're going to throw up a lot of cash going forward. We're confident in that figure of 50% of free cash flow conversion. And with that, I'll hand back to Jim.

Okay. Thanks, Bruce. So we're going to talk about the market a little bit. And one of the things that I always say is that markets in this business, they never go straight up, they never go straight down. And so right now, in some of our areas like offshore and international, they are moving substantially higher in activity levels. And we see that -- we believe everything we read, that's going to continue to grow in areas like West Africa, Guyana and Middle East all become strong. Even Gulf of Mexico, there's some more positive trends happening there for future developments, whether it be brownfield or greenfield. On the onshore side of the business, we see that being pretty flat in North America year-over-year. We're anticipating the end of the year being better as natural gas prices come out of the huge slump that they're in right now. But again, those are our best guess. We think the depletion and the fact that some operators have already announced cutbacks and scaling back on production for gas but that will end up ultimately strengthening the market with more LNG exports. On the U.S. and Canada, we think our TEC-LOCK product line will continue to grow. It's an interesting chart at the bottom left because, again, we -- it's a business where we showed growth in the business, even though the market, the actual market in the U.S. was down 21%. And so Canada -- Canadian operation, our people in Calgary did a great job last year. They continue to see strong momentum going forward. On the perforating gun side. There's this chart that shows you H-3. We think there's going to be further increases in market share in business with the H-4 product rolling out. I've seen what the January results have been for that, and they're pretty strong. And I think that will continue to increase. In Brazil and Guyana, key areas for us for our Subsea business and our U.S. completion business, which comes under OCTG, where we do the accessories for the tubing strings in these wells. If you look at the completion packaging numbers, it doesn't seem like a lot, but these are many, many tens of millions of dollars. The actual completion packages for an Exxon are well in excess of $100 million a well for materials product in time. For us, it's supplying each one of those as many millions of dollars because of the extreme criticality of the material going into those wells, which again adds to the price of the whole package. And the titanium stress joint business for us continues to expand Brazil and Guyana, both two key marketplaces. Here in Middle East, Africa, one of the areas where we have struggled over the years, I think, as Bruce mentioned, we went from a loss of [ 9% down to 6%, down to 2% ]. The business is generating positive EBITDA right now. We're still working on that to do some things to fine-tune it, such as the closure of one of our facilities in the Netherlands moving into Dubai. That should also strengthen the sales for our well for well testing business because we'll be closer to the client. But we do see some geothermal optionality coming into the business as far as opportunities in Germany and Holland, which will benefit our Dutch location and things like the organic oil recovery and an increase in well intervention should help our operations in the U.K. India, one of the exciting areas that we are really talking a lot about and really excited about. Daniel Tan, who runs our Asian business has done a great job on getting this across the finish line. Bruce and I were there in September to do the grand opening. I think we've got a backlog of something like 70,000 joints of pipe to thread right now with our SEAL-LOCK product line. And so we're excited to be in India. We have a great partner with the Jindal people, who manufactures a great tubular product to marry with our premium connections. So we're excited about the opportunity for that in-pit going forward. Again, Asia Pac, we're seeing increased activities in places like the Philippines. We think Indonesia is going to be very busy, especially in the second half of the year. Areas like Thailand are picking up. So we're pretty bullish on that market as well. A lot of the Asia Pac business, again, it shows that the sales into the Middle East because it's sourced in Asia Pac, primarily in China for OCTG, we manufacture and do the premium connections of our facility in China, more facility in Indonesia. We do accessories in Singapore to provide a total package and then ship them out throughout the Middle East, Southeast Asia, even into West Africa. In summary, we are really pleased with the results that we delivered this year. We're never -- I won't say we're ever content because we always want to do better. We want to improve margins. We want to improve return on capital. We are very sensitive to the fact that we want to increase returns to shareholders, while the dividend is a very important part of our whole business plan and what we are trying to do, and we plan to grow that. We continue to look at ESG metrics, not just in carbon, but also as it relates to our employees, diversity, things like that and strive to continue to improve that. But right now, we think we have a good marketplace driven by international and offshore. I think Hunting is a great company. We have fantastic people that make this company a success and with our balance sheet strength, with our product IP strength, we're just, I think, well positioned to take advantage of a growing marketplace. And with that, that's my final comments on this. I believe we'll open it up for questions.

[Operator Instructions] And Ben at this point if I could hand over to you to start the Q&A. That would be great. And I'll pick from you at the end.

We've got a few questions from David -- which is -- can you give us a revenue and profit breakdown of the U.S. shale region only for Hunting ties in North America, given quite a lot of sales go internationally?

Yes. That's primarily just a Titan division, which sales were circa $250 million at a EBITDA margin of 14%. So that is our main division that's leading to the shale plays in the U.S.

Bruce, second question, with further M&A consolidation on the producing side in the U.S. shale region, can you already say whether this is a net positive for Hunting?

I would say that it's not a net positive or negative. I mean, there's consolidation happening right now, and there's been a large wave of that in the last 6 months announced. But in my whole career, which goes a long way back now, there's always been consolidation. And every consolidation has led to new spin-offs and new companies starting up and it's kind of like a never-ending cycle. So if people can remember when there was a Texaco and a [ Unico and Amoco ], those were all absorbed, parts were spun off. You'll see the same thing happen again with this cycle delivering today.

Are inventory levels at a comfortable level now? Or would you need further buildup of inventory in '24?

I'll start on that. I don't think we need -- at current levels right now, we actually need to reduce our inventory sum. At Titan, we were a little oversupplied. But part of that was due to hedging or that's on activity levels in the supply chain challenges. Those have gone away right now, and so there's just been a build their new product introduction and the like. Obviously, if business accelerates dramatically higher, that's going to take in more inventory. Bruce, do you want to add anything to that?

Just to follow up to that, Jim. Yes, your [ venture ] levels at [ 328 ], certainly not looking to build that's going to be dependent, as Jim mentioned about the demand that's going to come our way. But there are a couple of items in the -- specifically in Titan and also electronics. We believe we're going to unwind those venture levels. So the $40 million to $50 million lower on a like-for-like basis next year.

What's the guidance on CapEx for '24?

We're guiding between $35 million and $45 million. That includes CapEx and tangible assets, intangible assets. Intangible assets be things like our new ERP system. So the majority of that would be the big items, we've got a $5 million expense expansion into Dubai. And the other $30 million of CapEx it is really is new machinery -- automated machinery for the likes of Dearborn Advanced Manufacturing Group and also into U.S. manufacturing that supplies the completion packages to the likes of Guyana and a lot of these new machineries, a much more efficient cost effect as well.

What are your thoughts around a share buyback program?

We're not going to do it. I think that if we're going to do shareholder returns through increased dividends and continue to invest in our business. We did a small buyback years ago. It doesn't buy you anything. It buys a short term for short-term investors, but we really would rather put cash in people's pocket.

Amidst all the regional restructuring Hunting has done. Can you provide any guidance on the impact on operating costs for the year? Cost savings?

Yes, I'll take that in the sense that what we've done in the last couple of years. We talked around this at Capital Markets Day that we have produced through a number of things. We've exited businesses such as in the North Sea, with [ CG ] business, Canada, base consolidations, employee reductions, this is fixed costs of around $45 million per annum. So that's baked into our numbers now. We've actually continued to look at [ self-help ] and drive out costs. What we've done this year is another $3 million to $5 million as well. So that's closing facility in Oklahoma for the consolidation of Aberdeen and the E&P assets, which we disposed off as well. So we're looking around about $50 million per annum.

Okay. I've got a question from [indiscernible]. You've already touched on capital allocation with regards to buybacks, but he says, can you please share your thoughts on the priorities of capital allocation, choosing between investing in growth, M&A, dividends and buybacks on a 3 to 5-year horizon? Do you plan to increase cash returns to shareholders in the medium term?

We -- first of all, we plan to increase our returns to shareholders. We laid that out in our Hunting 2030 Strategy that we want to increase dividends as time goes on. I think that what makes it exciting to be in Hunting is we come in every day wanting to grow this business. So sometimes that's going to take capital. Sometimes it's going to be new product lines. I'll go back to like 3 years ago when we got into the Decor business, an area that we weren't in before. It added synergies to our perforating gun businesses. We are constantly looking at M&A and want to be able to grow the business through M&A. Part of our plans in 2030 isn't doing it all organically. So we'll be looking at non-oil and gas opportunities preferably something tangential to what we do now in defense or aviation as well as looking at things we can bolt on to areas like Subsea or Titan.

Question from Mark is here. With EBITDA margin improving to 11%, what measures are in place to maintain or enhance this going forward?

Well, the plan as we signaled in the Capital Markets Day was to get that 15% by 2025. H2 '23, we're already at 12% so well on our way there as well. So it's a combination. There's no silver bullet. It's looking to increase sales prices where we can and maximize our revenue margin that way is to continue looking at our cost base to be more efficient. It's a product mix will influence that as well. So it really is a combination and utilization is imposed for us as well. As we see that utilization figure improved 10% year-on-year. That helps to absorb cost and that does flow through to the bottom line, and that will help us get to 15% and further on beyond that and improve on that 15% in the years ahead.

I've got two from Ben here. Are the strategies and trends that you see power the non-oil and gas revenue growth to $75 million set to continue and what visibility do you have on this space?

So the same focus that brought us the great increase this year is in place now to bring in next year. At the end of the day, it becomes getting close to your customers, being efficient in what you do and adding in the case of advanced manufacturing new product lines or, for example, in aerospace and new part numbers. I mean I look at the business that 4 years ago, our rocket business didn't exist. So now Blue Horizon, Elon Musk business of SpaceX are now clients of ours. So we're continuing to pursue those opportunities where we can. And that's why we're pretty optimistic that there's not a lot of people in the world that can bring the backing, the technology that we do to make these parts. And I think that will be a big plus for us on our chances to grow the business.

Okay. This is the last question of what's been a really, really great set of questions. If you could pin down the key drivers of the order book growth, are they set to continue? And how are you managing cost inflation in your pricing to stay competitive?

Well, I'll let you take the inflation. But on the order book, I mean, we are -- because of the nature of our business right now with the Subsea business, those are long lead time orders. You can't just call up and get a Titanium stress joint in 60 days. So that takes time, long lead times. The AMG business has long lead times. . Some of our OCTG business is scattered where you saw orders like our Chinese order, there's many, many shipments over a long period of time to make up that $80 million, $90 million [indiscernible] there. So we have pretty good guidance going forward because of the backlog today, and I don't see a trend changing any of those fundamentals for those type of orders.

I'd say the good news on the input costs are normalizing, becoming -- decreasing to where they were 2 years ago, things like labor costs, energy costs, new steel cost, in many ways, we can pass on to customers. So that's not one that I see any concern around that area. It's less than what it was over the last 18, 24 months.

Right. Well, that's all the questions. So I'll hand back to Alessandro.

Perfect. Jim, Bruce thank you very much for answering those questions from investors. And of course, the company will review all the questions submitted today, and we'll publish their responses on the Investor Meet Company platform. But just before redirecting investors provide you with their feedback, which is particularly important to the company. Jim, could I just ask you for a few closing comments?

Yes, I would tell people to buy now while it's cheap. So that's my key message, right? I mean I think that the company is extremely undervalued. When you look at the yield and the return that we're doing right now, when you look at the fact -- if you're a U.K. or European shareholder or investor, there's really not a lot of options in those markets to be in what is an exciting marketplace in the oil and gas industry and with a company that also has part of its business diversified to kind of balance out the ups and downs. So like I said, we think we're very undervalued. It's a good return when you invest in this company. We've got a strong leadership team and a strong ethics and I would say, a culture in this company that has made us a success. And just to remind everybody, this year, we're 150 years old, and you don't last 150 years old without doing some things right and being able to adapt along the road. So that's my closing remarks.

Perfect. Thank you once again for updating investors today. Could I please ask investors not to close this session as you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. This might take a few moments to complete but that shall be greatly valued by the company. On behalf of the management team of Hunting PLC, we'd like to thank you for attending today's presentation, and good morning to you all.