Hunting PLC (HTG) Earnings Call Transcript & Summary

Good morning, and welcome to the Hunting PLC investor presentation. [Operator Instructions] Before we begin, I'd like to submit the following poll. I'd now like to hand back to Jim Johnson, CEO. Good morning to you, sir.

Good morning. Thank you all for being in attendance today. My goal today is to educate you more on Hunting, tell you how great a 150-year-old company based in London is, how excited we are about the portfolio we have and give you some updates also on our financial performance. Today, we delivered some very excellent results with gains across the board year-over-year in our financial performance. But the real question for, I think, you all is what do we do and how do we get the market and growing. So if I look at our first slide here, we talk about our investment proposition. It's really the fact that we focus on intellectual property, extremely difficult manufacturing items and components, everything from space to subsea, we like to say, making components that go on Elon Musk rockets to products that go in 5,000 feet of water, 30,000 feet into the ground that have to hold extreme pressures and handle temperatures of high levels and things like that. Over 90% of our business is oilfield related. We have a very heavy presence in North America. We have a number of different product lines. And as I go to the next page, you'll see a lot of those highlighted. I'll go into some more details later, but this kind of breaks down our balanced approach to the oilfield service business. We're not a company that just lives and dies off the Permian Basin in Texas. We're very international. We're very diverse, and it shows up whether it's a perforating system, which actually has evolved specifically with fracking operations; numerous product lines in Subsea; OCTG, which stands for oil country tubular goods, which is tubing and casing that goes into oil and gas wells, as well as geothermal and carbon capture applications; advanced manufacturing, as I talked about, we're a supplier to the space industry as well as various defense and aviation companies and in energy transition with a big focus right now on geothermal. The company, again, we've been around for 150 years, and our oilfield side really started in the late 1960s out of the North Sea. We've advanced to today where the bulk of our business activity and headcount is in North America, but a very big presence in Southeast Asia and are literally growing in most basins and areas of activity around the world. IP drives our business as we like to highlight over 500 patents in the company from a huge volume of different products gives us a competitive edge, gives us an edge in pricing out there, allows us to get top industry level margins on our products because of the IP and the technology we bring to our clients. I'd love to show the next slide. It's our customer slide, blue-chip clients from around the world. I'm sure you recognize many of the names. We do a lot of work with the people like Halliburton and Schlumberger on the service side, but then we also deal directly with the super majors around the world like Exxon, for example, on their project in Guyana; Chevron throughout the world and the like of it. A good portfolio there and we're proud to display those people. Market indicators, we're showing you some things about global spending, offshore rig count. We're at a place right now where we monitor rig count activity globally. The U.S. rig count is one that's been pretty flat this year, actually down year-over-year, but a lot of the real growth in the future and today is happening offshore. And the nice thing about those markets, that's where the dollars are at. The margins are higher in the offshore segment because of the risk associated with what goes on in those fields. So again, some good indicators there. Talks about geothermal for a little bit, showing the growth we anticipated there. And Hunting is a company that has products to capitalize on that. I'll talk a little bit more now specifically on the product group. OCTG is a business where we do not buy pipe for inventory. So internationally, we buy on a tender-by-tenure basis. We announced a few months ago, the biggest order in the company's history, which was $231 million for the Kuwait Oil Company, where we're utilizing our proprietary connections, which is our technology applied to pipe at our manufacturing facility in China and then delivered to the client. It's a business model that is increasingly growing in scale. If you look at the one column where years ago, a $10 million or $15 million order, we thought was a big order. Now we're in the magnitude of $100 million, $200 million, and those things are growing as the industry continues to expand. A lot of exposure in the Middle East and in Southeast Asia. A recently opened joint venture in India is now running full speed. It should deliver strong profits for us going forward. That operation is booked into May of next year. It has a great -- we have a joint venture partner by the name of Jindal, who owns a seamless pipe mill in India. And that's who we've teamed up with, to take our premium connection technology to the Indian market. OCTG, it's not just an international business. I'd like to highlight the fact that our TEC-LOCK business which was specifically designed for the Shell applications onshore has really bucked the trend in the rig count, and we've continued to grow market share and profitability in that product line. And along with all the OCTG, the accessory business, which is the bits and components that are attached primarily to the tubing strengths. That business has had a very strong year in the export marketplace, primarily in areas like Guyana and Brazil. Next product, I'll talk about perforating systems. That's our Titan business where we make perforating guns. In the upper right-hand corner, you'll see a picture of the perforating guns. The one in the upper left-hand corner is actually charges, explosive charges that are made. All these products are made in the U.S.A. and a facility in Mexico. We are depending on what quarter it is, the #1 or #2 supplier globally from an independent point of view with those products. This business is a good business, lots of IP, lots of product development continuing, but it's been in the kind of tepid market space. So the North American -- our U.S. land is pretty flat right now, actually down year-over-year. And that's showing up in our results as volumes have just declined, primarily driven by weak natural gas prices in the U.S. Subsea, a business that our revenue is up over 80% year-over-year, one of the newest segments to the company that we have attempted to grow. The Stafford business that makes metal-to-metal seal couplings for subsea trees. We've owned that business for 20 years. The 2 newest ones in the last 3 to 4 years have been our business supplying titanium stress joints and Enpro business. Again, very high dollar products, very -- it's very costly for a client to gamble on other vendors in some of these areas, like in the titanium stress joint marketplace. We are the only people on earth that make titanium stress joints. And we do that, we supply to Exxon in Guyana. It's a product that has been proven over the years. We acquired that company about 3.5 years ago, but growth is going pretty steady. In any place in the world where there's an FPSO, which is a floating production and supply ship basically, that's a market for those products. But Subsea is an area, we want to continue to grow and we see tremendous upside. And it's also one of the highest margin businesses in the company. Advanced manufacturing, really consists of 2 facilities: an electronics facility in Houston, Texas, where we make high, environmentally strong products. And when I say that, it's products that have to withstand high temperature, high -- we call it shake and bake as far as shock to these boards and so these components are going into things like defense equipment, but primarily into oilfield products like MWD tools that have to withstand a lot of shock resistance, 20,000 feet into the ground. So client there are primarily oilfield service companies. The other one, the Dearborn facility, it's the largest percentage of our business that is non-oil and gas. For that business, we machine extremely exotic materials and make extremely high-end products for the aerospace, defense and oilfield business. But we like to say Elon Musk is one of our clients as well as Blue Origin on the rocket side, but also people like GE, Pratt & Whitney and the like come to Hunting for the quality we put into these products. Organic Oil Recovery, Bruce Ferguson's project, and he can talk more about it. We just announced today a $60 million worth of orders that will start this year. This is a product that has an ESG spin to it, where it's a nutrient-based proprietary package that is injected into oil wells for enhanced oil recovery. It allows the oil to flow easier, basically, to sum it up, and it allows an operator to extend the life of an oil field. This should have a great impact and great opportunity upside, especially in areas like the U.K. sector of the North Sea, where governments are reigning in the ability to drill new wells, but operators still need to crawl more dollars out of each well they have in the ground right now. Energy transition, we have focused on geothermal and carbon capture. It's one of those areas where, on the geothermal side, we have been a supplier into that market for more than 25 years. We have the technology. We understand the metallurgy. We continue to develop products and work with vendors on high alloy materials for that market. It's a small market, but it is growing. Carbon capture is another area similar. This will be premium connections on OCTG. It will be exotic grades of material. It's just one that has had a very slow takeoff primarily due to government regulations and the like. Just trying to get permitting and figure out how somebody makes money at it. On the strategic framework we talked about, last September, our team put together on what we rolled out was our Hunting 2030 strategy. This slide, I'm not going to read every one of them off, but this slide highlights our aspirations and what we're trying to get to. The announcements that we just made today, show the steps that we've taken to get to that place. And we are making progress, and we are in line with what we said we were going to do. Our revenue has continued to accelerate growth in revenue, but we have a record backlog right now of $700 million plus. We have continued to see the expansion of our EBITDA margins right now year-to-date, around 12%, up from the depths of COVID and how the -- when the industry was basically in a very slow mode, but we're working to that 15% or better EBITDA margin. The rest of it talks about areas where we would like to grow that business. Some of that will come through; hopefully, acquisitions. We also announced today, we raised our dividend 10%, so we're in line with that. But the Hunting 2030 kind of shows you key points that we're looking at to improve our performance and our returns to shareholders. The Capital Allocation policy. We want to continue to invest in our business. We haven't lasted 150 years by being cheapskates on capital equipment, the latest productivity-enhancing items, things like that. So we'll continue to invest in the business. We want to continue to show that good times are bad. There's going to be a return to our shareholders, which is why the dividend is important to us, and we want to continue to see that grow. We've made 2 acquisitions in the last 4 years on the Subsea side. We are continuing to target that. Our goal is that by 2030, we have a couple of hundred million dollars of new revenue through M&A. To date, we have not been successful in finding anything that makes sense because we're very focused on what we want to buy, something with IP, international scope in areas like Subsea or some others. And again, we talked about shareholder distribution. The best way we think to do it today is through dividends. That's our plan as we stick forward to it now. But as surplus cash builds, you never know. I'm not a big buyback fan, but we'll see how that plays out. Next slide talks about some of the key points on our objectives to the Hunting 2030 strategy. Again, we've looked at new markets. India is a big deal for us. Bruce Ferguson and I just returned from there. The business is going full speed ahead. We have a great partner. It shows our desire to grow in the international marketplace. The Titan product line on perforating, continue to develop new products there, also focusing on international opportunities in some of the new shale plays like in Argentina. Subsea, we mentioned growth in all 3 of those product line offerings there. Extreme growth in Guyana. We should be on every project going forward for the next 10 years in Guyana with Exxon. Advanced manufacturing, good opportunities there. With the world at war, there's always opportunities with defense components. And so that -- I hate to say that, but that's a reality. But we're seeing the defense and aviation business pick up. The backlog for that business is about $100 million right now, going in the right direction. And then energy transition, I've already pretty much talked about. Cost management, we continue to look at our portfolio. Due to the flat market in U.S. onshore, we just recently did some restructuring of our Titan business with closing one manufacturing facility and 2 distribution centers in order to enhance our profitability. And with that, I'm turning it over to Bruce Ferguson.

Thanks, Jim. I'm going to hit the high financial highlights of the half year. Following from Jim comment around the order book, we're now sitting at a record order book of $700 million. Just to give some context: 2, 3 years ago, that would have been $250 million. So we've really seen a massive increase in our order book, which reflects the big tender activity that's out there in the market and the strong growth in international and offshore markets. That gives a lot of comfort in the -- not just this year, in terms of the financial performance, but also into '25, element into '26. So real good line of sight there as well. Despite the fact that the U.S. market has experienced some headwinds, we've seen revenue up by 3%, led by our international and offshore business, which Jim has been talking around. That's given us a really strong EPS, up 61% year-on-year. We've also got a very positive free cash flow. That compares to a negative cash flow last year. So we've really got a strong balance sheet in place, generating good cash, and we talked around this at the Capital Markets Day. We believe that 50% of EBITDA can be converted into free cash flow, and that gives us great opportunities to return that to shareholders or to further invest into the business as well. Our margins are improving as those higher margin sales are coming through. We've seen our factories utilization that is better, more opportunities to increase prices, and that is driving that EBITDA and also the bottom line. We have signaled that we want to get that EBITDA margin to 15%, and we're well on track to achieve that. We have a non-oil and gas business, and that's been -- it's pretty steady, around the $36 million mark. We've got aspirations to increase that in areas such as the advanced manufacturing, but also into geothermal and carbon capture business as well. Fantastic growth in our Subsea, up 85% year-on-year. It's a really strong segment for us. We're seeing massive growth in terms of international basins, the likes of Guyana. This time last year, we had sold [ 14 million ] of products into Guyana, that's now up at [ 35 million ]. So really strong growth into key markets such as that. We're seeing other basins and regions such as Suriname, Mozambique, Namibia, all very much large projects, which we're going to access as well. As Jim mentioned, we continue to look at costs. We'll continue to get efficiencies when businesses aren't performing and when markets are tough. That's what we do. And we've taken the decision to close some facilities in the States and also to reduce some headcount. In terms of our EBITDA, good growth there, 23%, we're now up at $60 million. So some really good returns there for us. Our EBITDA per employee is something we can keep an eye on, just shows the efficiency of the business. We have reduced employees through the COVID years, but our top line, we're doing more with less people, and that's reflected in that EBITDA per employee. We like our dividends. We signal we want to increase that by 10% per year. That's important for us to return our cash to shareholders and get a decent return. And with that improved performance, we're seeing a return on capital improve up to 7%. And at the Capital Markets Day, we talked around our aspiration to get that to 15% by end of '25 and we're confident we're going to achieve that. This next graph shows a little bit spread around the key product lines. We like -- we've got 5 main product lines. This shows the last 3 years' performance. You can see OCTG is slightly flat. It's a big growth area for us. It's a big component of our order book, but we had a very strong contract [indiscernible] last year, which finished at the end of last year, but that's not repeated and there's a slight reduction there. What we will see is the large KOC contract of over $230 million, a big component of that come through the second half. So we're going to see growth through the OCTG product line this year. Perforating Systems, we've seen a big reduction in terms of the U.S. rig count. We've had some shelter on that Perforating Systems sales for the international business. So we've held the line there as well. Subsea massive growth. You see that big chart at the end there on the right-hand side, up over 80%. Advanced manufacturing growth and other manufacturing growth achieving key targets as well. In terms of offshore revenue now overtaking onshore. I think it's important. It shows that our reach into that international offshore Subsea basin, which has been driving our order book, been driving the strong financials. And that trend and trajectory is increasing. Again, strong contribution from Asia Pacific. We're now able to reach into these major operators such as KOC. There's big tenders coming out for the likes of Brazil and Petrobras. We've got tender pipeline consistently above $1 billion. And we also anticipate improvements in the U.S. onshore through '25 as that gas price improves as well. In terms of profit and loss, we've got a strong P&L in front of you there. Our revenue growth is coming through for the half year to $493 million. So we're approaching that $1 billion mark. The last time we saw that was back in 2019 when we had just under $1 billion with an EBITDA of $140 million, and that supported the share price of over 8x. So we're back to where we were pre-COVID times. We're seeing our gross profit up 2 points year-on-year. It shows the strength of the business, even with a softer U.S. That EBITDA is growing nicely up to 12% and absolute terms at $60 million. Your profit after tax is now at $26 million, giving us an EPS of $0.155. So all going the right way and a strong set of numbers there. A key thing for us has always been to maintain a strong balance sheet. We don't like excessive debt that allows us to give us opportunities to build a strong business to weather the storm and also to build on things like M&A when that right opportunity comes along and also to finance the big projects we've seen like KOC. So we've got good property plant equipment. We've got $250 million across the world. That's things like factories and machines that operate in those facilities. Our working capital is a big chunk of the balance sheet, but we make sure that that's tightly controlled, but that is slightly increased as we service that large order book. That will come down over the back end of the year as we reduced some inventory in years like the Titan business and also in the North America. And we've also had some good arrangements to the banks, which allow us to accelerate those receivables in as well. So got very little debt. We're only sitting there at $10 million, and we believe that, that cash figure will be into a positive cash figure of around $30 million by the end of this year, which is a great position to be in. In terms of -- we do a lot of analysis on the working capital. This does get a lot of interest from investors and analysts. We've got a good EBITDA figure there driving the earnings and generating cash. There's a little bit of negative working capital, which, as I said earlier, will reverse over the second half of the year as we get that inventory unwound, and we get that letter of credit receivables in before the end of the year. So that's given us a positive cash flow. And if you look at last year, that was a negative $60 million. We're actually now to positive territory. So that's a really good turnaround there as well. So a small negative cash outflow for the year. As I said, that will reverse and we will get positive cash of $30 million or better by the end of the year. The order book, just a little focus on that. That's a big measure for us, and I think we've made some real great success in terms of converting that tender pipeline into real orders. If you look at the biggest part of that pie chart is in our OCTG, reflects the $230 million of the KOC orders. It doesn't reflect the new $60 million order in our Organic Oil recovery. So as we stand now, our order book is even higher than what we're portraying there. Majority of that $699 million will be recognized in 2024, $400 million of that. We've got $250 million that will be recognized in '25 and another $50 million even reaching into '26. So a really good line of sight of what business is coming down the pipeline. In terms of guidance, we're with that strength and comfort of that order book. We are reconfirming our EBITDA and all our major metrics guidance. EBITDA for this year is between $134 million and $138 million. So that's a significant growth from what we saw last year. EBITDA margins continue to strengthen, marching towards that 15%, we said we'd be at by the end of '25. Effective tax rate, we've got some shelter from our deferred tax assets. So that's an effective place. CapEx, we're fairly light on our CapEx in terms of we spend roughly what we -- our depreciation charges around that $30 million to $35 million. Free cash conversion is excellent at 50% of our EBITDA. We generate lots of cash to the business. And as I said, that will give us a strong cash position by end of the year of between $30 million and $40 million. Let's hand back to Jim to close off.

Okay. Back, we're going to touch on some ESG issues right now. I'm showing you some slides to talk about our quality and our health and safety record, which is stellar. Typically on the incident rate, anything 2 or under is considered excellent in our line of work. So we continue to work hard to keep our people safe globally and make sure that they're trained and have the right information they need to do the job properly. We're showing measures on our emissions, our Scope 1 and Scope 2, renewable energy, energy purchases. I'd like to say that Hunting was well on its way down the ESG ruling before anybody ever talked about ESG. So we've been a good corporate citizen for our 150 years. We're a good employer, a good place to work, and we have an outstanding reputation with our client base. Next slide talks about diversity on our Board and within the company. We have a lot of long-tenured employees at the company. Anyhow, I think the numbers speak for themselves. It's a great place to work, a great environment, and it nurtures all these great ideas that deliver the results that we have today. In summary, we've had a strong period of growth in the first half of this year, even in light of a stagnant North America land business. We have confirmed with our results in the first half of the year that our thesis is right on how diversification is going to drive our profitability through more international and offshore exposure. And we've shown that our technology is paying off in areas like deepwater Gulf of Mexico, Subsea around the world. Our guidance remains strong. Financially, we're strong. We have no balance sheet issues, and we've raised our dividend to continue to give shareholders some return regardless of what happens with the share price. Energy transition work continues. What I'd like to remind people is if you look at all of our opportunities and look at all the things we've accomplished this year, whether it's the India project, whether it's some of our Subsea work, whether it's the Kuwait Oil orders that we've had, these are not something that you wake up on Monday and you have the answer by the end of the month. Many of these take years to develop, just as Bruce has put a lot of time in our organic oil recovery, but we are making the investments today to make sure that these opportunities can be crystallized 2, 3, 4 years down the road as we go into our second 150 years of existence. So with that, I am ending and turning it over to you all for questions. Back to you, Ben.

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

Certainly. Thank you very much. So the first question is from David who said, you mentioned you look at M&A opportunities and specifically for the Dearborn business. Would you also look at acquiring companies in the U.S. energy service sector?

The answer to that is, yes, with a focus on -- primarily on Subsea. That's been the one area where we would like to see a doubling of the size of our business right now. In areas like OCTG, I don't need to make any acquisitions. So we're going to be very choosy on what we decide to do. On the Titan side, there could be some opportunities we look at there. we would like to get something that adds to the completion work out there. But to date, we just -- we recently haven't found anything that made sense from a buying point of view.

Great. And another question from David. And Bruce, this is for you. You touched on inventory levels earlier. Can you give any guidance on end of year levels for your inventory?

Yes. We'll tell you for the areas we believe will move and reduce. And there's the 2 specific areas. One is on our Titan inventory. We believe that will reduce. We've seen a reduction of $11 million over the last 2 months. We believe that will continue. So it's currently around $130 million. We believe that will come down another $25 million by the end of the year. And we believe there's also another $10 million to come out of our electronics business. So just a light in that as well. So that is going to help a year-end balance despite a growing market. So I think that's going to be -- we can achieve that, it is achievable, and we'll get inventory in good shape for the year-end.

Great. A couple of questions from Stephen here. How is Hunting positioning itself to capitalize on strong demand in the Middle East, Asia and Africa.

So the demand there is primarily coming from our OCTG business. For that demand, we have manufacturing facilities we own in China, Indonesia and Singapore, which gives us a gateway into a lot of those markets. The newest venture in India opens up the Indian market for us. From a number of our other products, we supply from out of the states. So we're not really today, I think, looking for more organic new locations. We have a footprint in the Middle East of operation in Dubai, a small operation in Saudi Arabia. So we are in the market, maybe not in those areas as a manufacturer, but we also have sales coverage around the globe.

Great. And a follow-on question from Stephen, and I suspect the answer might be all of them, but which regional product lines offer the most growth potential for Hunting.

All of them. You are right, Ben. All of them.

Great. We did have some other questions submitted, which were either addressed during the presentation or we're not able to answer them in this forum. But that is all the questions submitted to date. So I'll hand back to Alessandro.

Perfect. That's great Ben. What I'll do now is just before redirecting investors. Jim, if I could just ask you for a few closing comments, that would be great.

Yes, like I said the last time I was on the -- the shares are on sale right now. So I looked at the price today. It was almost like a little buy on the rumor, sell on news type of thing. I think that you have seen a great increase in our share price year-over-year. I think it's early stages, and that's only going to accelerate as our multiples improve and our product offering description becomes more known by investors out there to just how significant it is and where their growth is going to be. But I thank you for your time. This is a great -- Hunting is a great company, has a great track record, and I hope to see us just continue to go from strength to strength. And that's it. So thank you all for taking time.

Perfect. Jim, Bruce, Ben. Thank you very much 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 can only take a few moments to complete, and I'm sure it will be greatly valued by the company. On behalf the management of Hunting PLC, we'd like to thank you for attending today's presentation, and good morning to you all.