Pason Systems Inc. (PSI) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the Pason Systems Inc. Annual Meeting 2020. [Operator Instructions] I would now like to turn the conference over to your host, Natalie Fenez. Thank you. Please go ahead.

Thank you for joining us today. My name is Natalie Fenez, and I'm the Corporate Secretary of the Board of Directors of Pason. Before we begin, we would like to provide a quick overview of the Lumi virtual meeting platform for you. You should now see an agenda on your screen. At the top of the agenda page is a legend showing 4 different icons you can click on the screen to access different parts of the platform. For example, to ask a question at any time, click the comment bubble icon in the gray bar at the top of the screen. To view the PowerPoint slides for the second half of the presentation, click the icon shaped like a broadcasting tower in the black bar. If your screen shows only the PowerPoint slides or the questions page and you wish to return to the agenda, click the I icon. The voting icon will be displayed once the polls are open. Thank you, and I will now turn it over to our Chairman, Mr. Jim Hill.

Thank you, Natalie. I would like to welcome all of our virtual attendees to Pason Systems Inc.'s 2020 Annual General Meeting of Shareholders. I'm pleased you could all join us today. After the formal part of today's meeting, Marcel Kessler will take us through last year's operations and first quarter financial results. If you have any questions about that part of the meeting, I would like to add additional information, you are also welcome to join the investor call to be held tomorrow morning at 9:00 a.m. Calgary time. Let's now begin the official part of the meeting. I now call to order the Annual General Meeting of Shareholders of Pason Systems Inc. I will chair the meeting. Natalie Fenez, Pason's Corporate Secretary, will act as secretary of the meeting. Jennifer Oliver of Computershare will act as scrutineer. The notice calling this meeting of shareholders was mailed to all of the shareholders in advance of the meeting and is dated March 17, 2020. That notice will be attached to the minutes of today's meeting, which will be available in a few days. According to the attendance report the scrutineer gave me, the quorum requirement set out in Pason's bylaws has been met. I will now turn it over to Natalie to explain the voting process for this virtual meeting.

Thank you, Mr. Chairman. We have received all proxy voting reports for today's resolutions in advance of this meeting. Anyone in attendance today who has not yet voted and has not signed in as a guest will have an opportunity to vote online in real time using the Lumi platform. Rather than hold up the business of this meeting for the final tabulation of votes cast on each motion, the Chairman will be providing the interim results received from the scrutineer in advance of this meeting on each of the motions presented. The Chairman has directed that the final combined results of the advanced poll and the votes entered through the virtual platform on all motions today be included with the minutes of this meeting. Those results will also be available in the report on voting results posted on SEDAR following the termination of this meeting. The polls are now open.

I will propose for all motions.

Thank you. Shareholders and duly appointed proxies will now see your screens change to show the various items of business for today's meeting. You will have from now until the conclusion of this meeting to cast your votes on each of these items. Over to you, Mr. Chairman.

Thanks, Natalie. The minutes of the last shareholders' meeting and the voting results from last year's meeting held on May 2, 2019, are in the corporate records and are available for any shareholder to review. If you would like a copy, please contact Natalie Fenez or you can access this information on SEDAR. Unless someone wants them read or takes issue with them, I will entertain a motion to adopt the minutes from last year's annual meeting. As a reminder, only registered shareholders or proxyholders are entitled to make a motion or vote in favor of motions made during this meeting.

Hello. My name is Ryan van Beurden, and I am a shareholder of Pason. I move the minutes from last year's shareholder meeting held on May 2, 2019, be approved.

Hello. My name is James Parks, and I am a shareholder of Pason. I second that motion.

Are there any questions on this motion? Seeing none, I declare the motion carried. The next item of business is to receive Pason's 2019 year-end financial statements, which are included in the annual report to shareholders, along with the auditor's report on those financial statements. Copies of the financial statements have been previously made available on SEDAR. If you would like a hard copy instead, please contact Natalie. If any shareholders has questions regarding the financial statements, Marcel Kessler will take them after the formal part of the meeting. The next item of business is to fix the number of directors to be elected at this meeting. Pason's articles provide that it may have between 1 and 15 directors on its Board. According to Pason's bylaws, at every annual meeting, shareholders must fix the number of directors to be elected at that meeting. The Board has recommended in the management information circular that shareholders fix the number of directors at 6, and 6 individuals have been nominated to stand for election.

This is James Parks, and I move to fix the number of directors at 6.

This is Ryan van Beurden, and I second that motion.

Are there any questions on this motion? Seeing none, let's proceed to the scrutineer's report. According to the report, the results of the vote to fix the number of directors at 6 is as follows: votes for, 75 million approximately or 99%; votes against, 727,000. I declare the motion carried. The next item of business is the election of the 6 directors. I would ask someone to nominate those persons whose names appear as nominee directors in the management information circular.

This is Ryan van Beurden. And I nominate each of the following for election as directors: Jim Hill; James Howe; Marcel Kessler; Jay Collins; Judi Hess and Laura Schwinn.

Thank you. Are there any questions on the director nominations? Seeing none on my screen, may I please have a motion to close nominations and elect the directors?

This is James Parks. And I move that nominations be closed and that the 6 individuals nominated be elected as directors of the corporation.

This is Ryan van Beurden, and I second that motion.

Any questions on the motion? Seeing none, I will proceed to read the scrutineer's report. The voting results to this point are as follows: for myself, Jim Hill, votes for, 71.9 million, 95% for; 3.8 million votes withheld. For Jim Howe, 74 million votes for, 98%; 1.6 million votes withheld. For Jay Collins, 75.6 million votes for or 99.8%; 168,000 votes withheld. For Judi Hess, 75.5 million votes for or 99.7%; 212,000 votes withheld. For Laura Schwinn, 75.6 million votes for or 99.8%; 155,000 votes withheld. For Marcel Kessler, 75 million votes for or 99%; 711,000 votes withheld. I would like to remind you that Pason's voting policy requires that each director nominee receive more than 50% of the votes cast. I see that all directors have easily cleared the 50%. Therefore, I declare that the 6 nominees have been duly elected as directors of Pason. As noted previously, the final voting results for each director will be available on SEDAR subsequent to this meeting and will also be discussed or disclosed by me by press release. The next item of business is the appointment of Pason's auditors for 2020 and authorizing Pason's Board of Directors to fix the auditors' compensation. The accounting firm of Deloitte has been nominated. May I please have a motion to appoint Deloitte as Pason's auditors and authorizing the Board to fix the auditors' remuneration?

This is James Parks, and I so move.

This is Ryan van Beurden, and I second that motion.

Are there any questions on the motion? Seeing none, let's proceed to the scrutineer's report. According to the report, the voting results for this item are: 74.6 million votes for or 96.8%, 1.4 million votes withheld. I declare the motion carried. We have just one more item. So I'm just providing about a minute's warning prior to the polls being closed on the Lumi system. If you are participating in the meeting through the virtual platform, please ensure your votes are recorded now. The next item of business is the advisory vote on the Board's philosophy on executive compensation. This is referred to as a say-on-pay vote because it gives shareholders an opportunity to comment on how the Board approaches the compensation of the CEO and other executives, but it is not a motion for approval. As indicated in the scrutineer's report, the results of the vote are as follows: 73.3 million votes for, 96.8%; and 2.4 million votes against. As I mentioned, this is simply for reference and information for the shareholders. The polls are now closed. Is there any other business to discuss at today's meeting? Seeing none, I will now entertain a motion to end the meeting.

This is James Parks, and I move this meeting be concluded.

This is Ryan van Beurden, and I second that motion.

Any objections? No. Then I declare this meeting ended. And that concludes the formal part of Pason's shareholder meeting. I would now ask Marcel to take over and give us a presentation about Pason's operations and financial performance for 2019 as well as the results from the first quarter of 2020. Thank you for your attention. And hopefully, we can do this in person next year. Over to you, Marcel.

Thank you, Jim. Welcome, everybody, to the corporate update. The way this presentation is going to work in this system is that you will have to manually change the pages on your screen. So you will see the PowerPoint on the right-hand of your screen. If you move the cursor over that area, arrows will appear to move the pages forward or backward. And I will try to make it clear which page I'm talking about. Now this format is not really conducive to interactions, so I will not be taking questions at this point. However, as Jim Hill pointed out, we will be conducting a conference call for interested analysts, brokers and investors as well as other shareholders to review our 2020 first quarter results and the outlook tomorrow morning at 9:00 a.m. Calgary time and take any questions at that time. The dial-in information for that call is available on our website at www.pason.com. For all Pason employees, we will be holding a virtual town hall in May to answer any questions. First, I would like to draw your attention to the message on Page 6 of the PowerPoint presentation. This presentation does contain forward-looking statements and information, which reflects the current view of Pason Systems with respect to future events and financial performance. Any such forward-looking statements are subject to risks and uncertainties, and Pason's actual results could differ materially from historical results or our current expectations. I will start out with a brief overview of Pason Systems. We will then review the company's performance in 2019 and in the first quarter of 2020. And I will close with my perspective on the outlook and next steps for Pason at this extraordinary time. Let us start on Page 9. I will be brief in this first section. I assume that most participants in this meeting are broadly familiar with Pason Systems. This page provides a snapshot of our company which was founded 42 years ago and has now been public for 24 years. The most significant page on this -- the most significant change on this page from last year's AGM is the market capitalization of Pason. It was USD 1.7 billion 1 year ago and has now shrunk to about $600 million in light of recent events, which we will explore further in this presentation. Turning the page. On Page 10, we show that Pason's business model is unchanged from previous years. We provide rental equipment, software as a service, communications bandwidth and analytics. It is worth pointing out that Pason's unique product platform and distinctive technical capabilities have been and continue to be a key enabler for drilling optimization and automation efforts and big data analytics strategies pursued by our customers. A bit more on that later. Page 11 highlights our international footprint and estimated market penetration of Pason's core product, the Electronic Drilling Recorder, or EDR. As you can see, we were able to sustain our leading market positions in North America, South America and in Australia, which means that Pason has access to the majority of land rigs and users of drilling data in the western hemisphere. Turning to Page 12. We provide a simplified overview of Pason's data ecosystem. On the left-hand side, we have an overview of everything that's going on in the field; on the right-hand side, everything that's going on in the office or in the cloud. Blue is a brief outline of Pason's core products; black, customer systems and customer staff. And in orange, I'm highlighting 2 new products, which have seen significant growth in 2019. On the left-hand side, the Drilling Advisory System or DAS, Pason's drilling automation software package, has now been deployed on over 270 drilling rigs for construction of over 1,700 wells since launch. Drilling performance is improving considerably, and the optimization system is used in terms of higher rate of penetration, that means faster drilling and minimized damaging vibrations, leading to longer life of expensive downhole equipment. On the right-hand side, that means in the office and in the cloud, DataLink, Pason's data delivery solution for automated delivery of large complex data sets from the field to corporate databases and applications, has been utilized concurrently on over 300 active drilling rigs. DataLink is an important enabler for our customers' data analytics efforts to improve the effectiveness and efficiencies of upstream oil and gas operations. Page 13 shows Pason's product segments, and these are also the segments that we are using in our financial reporting. Our biggest segment is Drilling Data, which includes the DataLink revenue, the new product or service that I just talked about. Mud Management & Safety contains products such as the Pit Volume Totalizer, Gas Analyzer and Hazardous Gas Alarm. It's our second-largest product category. Communication is where we provide bandwidth, either terrestrial or by means of satellite, to our customers within the field. This segment has been shrinking for some time as we have transitioned from satellite to terrestrial bandwidth. Drilling Intelligence contains products such as AutoDrillers and the Drilling Advisory System that I have just mentioned. Finally, Analytics & Other includes revenue for Verdazo analytics software, Energy Toolbase, so software-as-a-service revenue and battery control system revenue. I will speak more about that in a few minutes. This last revenue -- the revenue in this last product segment is less correlated with drilling activities. Turning to Page 15. I'm highlighting the key achievements -- the key financial achievements for Pason in 2019. We were able to generate adjusted EBITDA of $130 million, net income of $63 million and generate free cash flow of $86 million. Throughout the year, we maintained a strong balance sheet and ended the year with $161 million in cash and cash equivalents. At the same time, we were able to increase the dividend paid by 6%. And Pason also bought back shares in 2019 through our normal course issuer bid for $24 million. Page 16 takes a look at the total cash returns to our shareholders. You can see that over the past 10 years, Pason has returned over $0.5 billion to shareholders. In 2019, we paid $63 million in dividend, and we purchased Pason shares for $24 million, as just mentioned, for a total cash return of $87 million. Page 17 takes a brief look at our key operational achievements in 2019. We achieved the record revenue per EDR day in Canada and in the United States through increased product adoption both of new products and existing products. We also achieved international revenue growth of 24% and gross profit growth in the international segment of 54%. As mentioned already, both our Drilling Advisory System and DataLink gained a new momentum with our customers. We were very happy about these developments. Page 18 summarizes 2 strategic investments made in 2019 by Pason. We acquired an 80% interest in Energy Toolbase or ETB for $20 million, a U.S.-based software-as-a-service company and combined ETB with the operations of Pason Power. Secondly, we made a $25 million investment to acquire a minority interest in Intelligent Wellhead Systems or IWS, a provider of unique surface control systems for well completion and workover operations. Page 19 takes a closer look at Energy Toolbase or ETB. ETB provides an industry-leading software package to model the economics and build proposals for solar and energy storage, that is battery projects. The ETB product is utilized by distributed energy project developers primarily in the United States. There currently are over 1,000 active ETB software licenses with over 1,800 users. Over the past 2 years, Pason Power built the foundation in the solar and energy storage market through its iEMs battery control system and the Energy DataHub products. We have now combined the capabilities of Pason Power and ETB, and we are now positioning ourselves for meaningful long-term growth in the intelligence layer of solar and energy storage -- of the solar and energy storage market. Our goal is to become the dominant company in the energy storage software market. Page 20 takes a brief look at our 2019 financial summary. Starting on the top left and going around counterclockwise, we're looking at the revenue first for Pason. Our revenue came in at $296 million in 2019, a slight decline from 2018. That revenue breaks down by customer type as follows. We generate 80% of our revenue through our E&P customer, that is -- that's oil and gas companies; and about 20% through joint contractors and other oilfield service companies. The revenue by geography, on the bottom right-hand side, shows that the United States is by far and away our most important market with over 60% of revenue, followed by Canada with 19% and international by 13%. Revenue by product segment. Drilling Data, as highlighted before, is over half of our total revenue, followed by Mud Management & Safety at 29%; Communications at 6%; Drilling Intelligence at 7%; and finally, Analytics & Other at 3%. Page 21 continues the financial summary with a look at adjusted EBITDA, which I already talked about; capital expenditures, which at $24 million was essentially unchanged from the previous year; free cash flow of $86 million, already mentioned that; and the dividend paid of $63 million in 2019. Finally, on the financial summary on Page 22, we are looking at the main business units, the development of revenue, and on the right-hand side, what we call revenue per EDR day, that's the average revenue we generate on each drilling rig that at least -- that has at least one Pason product. And the important thing here is really the trend. We have seen an upward trend over the last few years in revenue per EDR day to record revenues in all geographies driven by the adoption of new products and increased penetration of existing products. Page 23 takes a look at our R&D and IT spending over time. So we spent a total of $32 million in R&D and IT last year, which was about 11% of revenue, and that in the past, we have invested this money, first of all, in IT as well as on R&D. And on the R&D side, in a balance between sustaining existing products and developing new, catering to the needs of our oil and gas company customers versus the drilling contractors, focused on the needs of the field versus the office or the cloud and, lastly, software versus hardware. It is worth highlighting here that the $32 million spent for R&D includes IT infrastructure and services spend, i.e., that's third-party spend such as Amazon Web Services. It also includes the IT team. It includes the core products and customer support team, which other companies might call application engineering. And finally, it does include the new product development team. Page 24. Well, we were not able to highlight the numbers here given that we have just released the financials for the first quarter, so I will speak to them. The first quarter of 2020 started relatively strong when the unprecedented impact of COVID-19 on global oil demand was not yet clear. As the global economy was shutting down, the disagreement between Russia and Saudi Arabia over proposed production cuts led to an increase in supply at the worst possible time. This has resulted in an oil price collapse, and the end of the first quarter became anemic for the industry. Accordingly, Pason's operating environment deteriorated in the period with drilling industry activity decreasing by 25% in the United States compared to the same period in 2019. This headwind was partially offset by 7% higher industry activity in Canada, market share gains in the United States and continued growth in product penetration, as already mentioned, in all geographies. Pason generated revenue of $74 million in the period, a decrease of 10% compared to the same quarter last year. Adjusted EBITDA was $33 million for the quarter, a decrease of 18%. Adjusted EBITDA as a percentage of revenue was 45% compared to 50% 1 year ago, highlighting our largely fixed cost structure. Net income attributable to Pason for the quarter was $17 million or $0.20 per share. Capital expenditures for the quarter were $3 million, and free cash flow was $23 million. At March 31, our working capital position stood at $208 million, including cash and short-term investments of $170 million. We are currently actively assessing an optimal cost structure and capital allocation strategy, including the level of future dividends in order to balance the company's commitment to shareholder returns while preserving its financial strength. Pason will maintain the quarterly dividend to be paid on June 30 at $0.19 per share. However, in light of the uncertainties related to COVID-19 and the significant negative impact that the weakened commodity price environment have on the outlook for industry activity, we currently intend to reduce the following quarterly dividend to $0.05 per share. Finally, I am turning to the outlook. The graphic on Page 26 captures Pason's long-term growth strategy over 3 time horizons. You may have seen this -- a version of this chart before because Pason has pursued the strategy for several years now. Horizon 1 is where we defend and grow the core business. And that's where increases in product penetration or revenue per EDR day, new products like DAS and DataLink and international growth, all of which I already highlighted, were the drivers of growth in 2019 and significant in Q1 2020. Horizon 2 is Pason's entry into adjacent spaces in the oil and gas industry. That's where we made the $25 million investment to acquire a minority interest in Intelligent Wellhead Systems, for instance. And looking forward, we can see that in a rapidly transforming energy industry, new opportunities might arise for Pason to step out beyond the drilling rig. Lastly, Horizon 3 is where we establish pillars of growth beyond oil and gas. And this is, of course, where Energy Toolbase comes in, which we have now combined with Pason Power. Page 27 looks at the impact of oil demand -- the oil demand collapse and the supply surge. The collapse of oil prices has led to very large capital expenditure cuts by oil and gas companies, and drilling and completions activities are being hit disproportionately. It is possible that we will see an active drilling rig count in North American land of close to 200 by the end of the summer. And that's in the United States, Pason's most important market. As a result, survival has become the primary focus of many E&P and oilfield service companies. Significantly reduced cash flows for every company in the industry, including Pason, are unavoidable in the short term. Page 28 takes a quick look at the short-term impact of COVID-19. As some of you are aware, Pason is considered an essential service in the United States and in Canada as well as in many of our international operating countries. As such, we continue to support drilling operations and technology solutions, providing valuable services to our customers in the energy industry. I am very proud how all of our employees have responded in these challenging times. The health and safety of all our employees and customers remains a top priority for us. Accordingly, we have implemented additional procedures in the field and in the office to protect everybody's well-being. To minimize the impact of COVID-19 on ongoing operations, we began working remotely where possible since March 16. Page 29 looks at what's next for Pason. We will continue to make operationally sound and fiscally conservative decisions to support Pason's long-term success as we always have. Government support is being made available to companies in several countries, and we are pursuing such programs where it does make sense for us. We are currently reassessing our cost structure as well as our capital expenditure plans for the rest of 2020. We plan to spend up to $10 million in capital expenditures this year, down from $25 million planned at the beginning of the year. And we will make certain expense reductions while retaining key capabilities and relationships to strengthen our competitive position in the future. We intend to allocate capital to safeguard the long-term prospects of Pason's core drilling-related business and of Energy Toolbase, our foothold in the solar and energy storage market. Importantly, this environment also provides an opportunity for the strongest companies, such as Pason, to become even stronger by leapfrogging competition in terms of service and technology. And new business opportunities may emerge as the energy industry transforms. Finally, Page 30. Rarely, if ever, in our history have we as individuals and as companies faced such uncertainty. However, building on our considerable strengths and unique capabilities outlined on this page, I am confident that Pason will make it through this much better and stronger than our competitors and peers. As the world recovers from COVID-19 and the environment for oil corrects over the next 2 years, the focus will again shift to the long-term future, and there will be new and exciting possibilities in Pason's future. This concludes my presentation. I look forward to seeing or hearing some of you on tomorrow's conference call or I'm looking forward to seeing and hearing Pason's employees at the virtual AGM in May. I wish you a nice evening.

This concludes today's conference. You may now disconnect.