Hello, and welcome to the Expro Third Quarterly Earnings Conference Call. My name is Elliot, and I will be coordinating your call today. [Operator Instructions] I'll now hand over to our host, Karen David-Green. Karen, please go ahead when you're ready.

Welcome, everyone, to the Expro Group third quarter 2021 conference call. I'm joined today by Mike Jardon, CEO; and Quinn Fanning, CFO. First, Mike and Quinn will share their prepared remarks, and then we will open it up for questions. I'd like to remind everyone that some of today's comments may refer to or contain forward-looking statements. Such remarks are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Such statements speak only as of today's date, and the company assumes no responsibility to update any forward-looking statements as of any future date. The company has included in its SEC filings cautionary language identifying important factors that could cause actual results to be materially different from those set forth in any forward-looking statements. A more complete discussion of these risks is included in the company's SEC filings, which may be accessed on the SEC website or on our website at expro.com. Please note that any non-GAAP financial measures discussed during this call are defined and reconciled to the most directly comparable GAAP financial measure in our third quarter 2021 earnings release, which can be found on our website. We have an accompanying presentation to our third quarter results that is also posted on the Expro website under the Investors section. In addition, the pro forma combined company third quarter financials are downloadable on the Expro website under the Investors section. The downloadable financials include historical Frank's and Legacy Expro financials, along with the combined company pro forma historical financials. With that, I'd like to turn the call over to Mike.

Thank you, Karen. Good morning and good afternoon, everyone. I want to cover 3 things with you today. First, I'll start by discussing our combined portfolio and how we continue to strengthen it. Next, I'll turn to the market and our outlook for the remainder of the year and into 2022. Finally, I'll close with the steps we're taking to enhance margins and maximize cash flow to drive sustainable growth and value creation. I'm pleased that on October 1, we completed the strategic combination with Frank's International to create a leading full-cycle energy services company. Expro began trading on the New York Stock Exchange on October 4 under the ticker symbol XPRO. I would like to thank everyone at Expro and Frank's for their great work in completing the transaction. We have hit the ground running and are positioning the combined company for long-term success. We believe that we have created a truly exciting platform and a strong financial profile that will allow the combined company to accelerate growth, improve profitability and enhance value for shareholders, employees, customers and partners. We have a resilient business model with greater scale and a broader set of product offerings across the well life cycle that position us well to perform through market cycles. We have an expansive geographic footprint that diversifies our exposure and cash flows and improves us with platforms for continued growth in key markets. Notably, for example, on a pro forma basis in 2020, 35% of our revenue is generated in North and Latin America; 28% came from Europe and Sub-Saharan Africa; 21% from Middle East, North Africa; and 16% from Asia Pacific. Our diversified customer base of international and national oil companies gives us opportunities to expand our relationships as we introduce new solutions. With our combined portfolio of…

Thanks, Mike. As was noted in our press release, merger of Expro and Frank's closed on October 1 or just after the quarter's end. As a result, we have separately reported results for Legacy Expro and Frank's, consistent with respective past practices of Legacy Expro and Frank's. Frank's 10-Q will be filed this afternoon. The Legacy Expro results are, of course, available in the press release. And we will also file an 8-K, including Legacy Expro results. The combined company's results will first be reported in the fiscal fourth quarter of 2021. As previously disclosed, Expro was determined to be the accounting acquirer, and go-forward financial reporting will include Frank's net assets at fair value as of the date of the acquisition and Frank's financial results from the date of the acquisition, all consistent with Legacy Expro accounting policies. Expro manages its business and will continue to report results based on 4 geography-based segments, which are North and Latin America or NLA, Europe and Sub-Saharan Africa or ESSA, Middle East and North Africa or MENA and Asia Pacific or APAC. In addition to consolidated results, we will also report segment revenue, segment adjusted EBITDA and segment adjusted EBITDA margin, which is segment adjusted EBITDA expressed as a percentage of revenue. Segment EBITDA and segment EBITDA margin are burdened by geography-based indirect costs but exclude corporate and other central costs not related to core operating activities. Going forward, we also expect to provide supplemental disclosures to include revenue by 4 product line groups, which are well construction, well flow management, subsea well access and well intervention and integrity. Recognizing that at least relative to the Legacy Expro business, Frank's business is more driven by working rigs and customers' capital expenditures through the Investors section of our website, expro.com, we have made…

Thank you, Quinn. I'm going to leave you with 3 key takeaways. First, we believe Expro has an exciting platform with the scale, diversity and financial profile to accelerate growth and provide true cycle resiliency. Second, at the core of our business and instrumental to our future success is our strong financial profile with a healthy balance sheet and ample liquidity, significant synergy opportunities and a strong and sustainable cash flow profile. There's a lot of opportunities in front of us, both internally and externally. And I am excited for our future as one company and confident in our ability to deliver as we progress through a multiyear cyclical recovery. Thank you again. Operator, let's go ahead and open it up for questions.

[Operator Instructions] Today, we'll first begin our Q&A session with a few questions that we have received from our preregistered callers. The first question, would you please share with us how you think about your capital allocation strategy?

Thank you, Elliot. Right now, our near-term focus is really on generating strong free cash flow and competitive returns on invested capital. I think we've really developed a good plan to be able to achieve these overall objectives. Fundamentally, incremental scale makes us more relevant to both our customers and investors. Scale also provides us with an opportunity to rationalize our support costs, consolidate our facilities and really be able to spread the cost of our operating footprint across a bigger and broader base of revenue. In addition to improved overhead absorption, the scale allows us to more efficiently invest in future-facing technologies that are ultimately required to participate in a more meaningful way in the energy transition and help -- and additionally, really still be able to generate good free cash flow. There are also portfolio benefits of the Expro and Frank's merger in that we are better exposed to the entire well life cycle. The breadth of our services and solutions really provides us with a more frequent opportunity to engage with customers and ultimately, to consider integration or bundling of our services. I'm highly confident that we will timely capture these costs and revenue synergies that have been communicated to the market. And I believe that we will benefit ultimately from a tailwind that will be associated with the recovery in both onshore and offshore drilling activity. And as a result, I think we'll have significant free cash flow upside. Ultimately, what we do with that cash will be a function of what opportunities are available to us. And of course, investor expectations will be a significant element of the decision-making process. So the near-term focus is on generating cash, and we'll go through a disciplined process with the Board in terms of how we allocate any excess free cash flow. Ultimately, addressing dividend and buybacks is a bit premature for us at this moment. But know that we have good prospects for revenue growth to be able to expand margins and ultimately, generate additional free cash flow. I think it's also worth noting that our 0-debt balance sheet and our currently strong liquidity position also provides us with a fair amount of strategic flexibility. So ultimately, the true cycle profitability and the free cash flow will allow us to thoughtfully invest in the business. We can better position the company for long-term success and have a constructive dialogue and next steps to enhance shareholder value when that's really appropriate.

The second question, can you please provide some detail around the capital intensity of the combined business?

It's another really good question. Ultimately, another benefits of the Frank's and Expro combination is that the Frank's product lines traditionally have less capital intensity at least in the near to intermediate term, given the fact that we have some underutilized assets, particularly embedded in the Frank's TRS-type services. My sense is that we have capacity within TRS business to generate revenue at or in excess of pre-pandemic levels with very modest incremental CapEx investment. And really, that's going to happen through better utilization of the existing asset base. Ultimately, that said, due to the complexity of the equipment, sometimes with long lead times for specialized equipment and the call-out nature of some of the activity we have in well construction in some markets, CapEx commitments from the traditional well construction business are typically driven more by expectations for growth and demand more so than work that we know that has already been awarded. Ultimately, most of the CapEx-related requirements in the Legacy Expro business, it tends to not be bespoke. It's more project-specific and not speculative. So we do require some CapEx requirements there. But generally, with the Legacy Expro business, it's committed with a contract award in hand. And we have reasonable visibility on payback timing and those type things. So as a general matter, the Legacy Frank's business will tend to be more build to market. And for the Legacy Expro business, there'll be more build to contract. And as we think about the combined business, as we've kind of indicated previously, we expect our CapEx will run somewhere in the kind of 7% to 8% of revenue range. These levels of investment will allow us to build ultimately a sustainable business, generate good free cash flow with expected an increase in overall activity. And really, all things being equal, with the degree of pricing traction, CapEx as a percentage of revenue should come down a couple of percentage points in the future as well.

Our next question will come from the line of Taylor Zurcher from Tudor Pickering Holt.

My first question is just on the 2022 outlook. Can you guys hear me?

Yes. Yes, we can hear you fine. Go ahead, Taylor.

Yes. So first question, just on the 2022 outlook that you're talking about roughly 10% year-over-year revenue growth on a pro forma basis. And you talked -- if I think about just the 4 geographic reporting segments, you talked about some of the near-term issues you're dealing with in the MENA region. So likely a stronger back half-type environment for MENA than the first half in 2022. But if you could just help us think about which geographic segments that you're seeing the most revenue growth opportunities for 2022 relative to that 10% target you put out there. I suspect a lot of them will be second half-weighted. But I'm just curious how do you rank the 4 geographic reporting segments for 2022 in terms of growth opportunities going to come?

Okay. Sure. No, it's a good question. One of the benefits we've had here with the transaction is it's really given us a strong impetus to really engage with customers. I mean, I myself have had a tremendous number of specific customer engagements to talk about the transaction, talk about what we're doing and why we're bringing it together. So it's really been a good reason to do that. And also the fact that some of the world has started to open back up for travel, and those kind of things allows us to have more kind of in-person dialogue and engagement. And I would characterize that overall is it's much more positive and much more constructive with customers today in terms of their kind of future planning. It's much more positive discussions. We're having more technical inquiries, all those type things. So it's really -- it's kind of, I think, setting up well for that. The difference in a normal year and in kind of a normal time by early November, those would be -- we would be starting to see more and more of us translate into actual projects and actual awards and those type of things. It's a little bit slower right now, and I think it's still the -- some of the overhang of the pandemic and folks going back to working in the office and those type of things. But I can tell you from North America, especially offshore, we're starting to see some positive signs. Latin America, Brazil, in particular, I think that in the back end of '22 going into '23, we're going to see some growth. We alluded to in the numbers we have here, we've had some impact of COVID-related type things in the Middle East and North Africa. Hopefully, as…

I think the only thing I would add is we are on a pre-budget basis, and our customers are also finalizing their budgets. So the interim guidance I was giving is plus 10% year-over-year. And as you pointed out, our expectation is largely back-end weighted. I guess, as we sit here today, NLA and Asia Pac seem to be particularly strong markets for us as 2022 progresses, and we'll come back to you with details as we finalize our budget subsequent to year-end. But again, the guidance we were giving was plus 10% revenue year-over-year. And I think if you look at 2H 2022 versus 2021, it would be even a stronger growth profile.

Yes. Understood there. And a follow-up just on free cash flow. So you already explained sort of the pro forma capital allocation strategy. So no real follow-ups there. I'm just thinking about the cadence of free cash flow for the pro forma business. It feels to me like in the near term, you'll probably have some elevated merger and integration-type transaction, cash costs that will eat up a lot of the free cash flow potential of the business at least in the near term and probably more of a second half 2022 story when it comes to meaningful positive free cash flow. But just wondering if you could help us think about when the business -- once you get past some of these integration-related items when the business returned to a positive free cash flow type business on a quarterly basis?

You're right. In regards to the timing of synergies capture, I guess, I'd envisioned it almost as a barbell. We have some support rationalization that will take place in the first 2 couple of quarters out of the gate. As a result, we'll have severance and other friction costs in the first couple of quarters as a combined company. Hopefully mitigating some of those cash requirements will be a reversal of the net working capital build that we've seen in the last couple of quarters, particularly on the Legacy Expro side where we have a more significant exposure to the NOC customer base. So we'll have a significant amount of synergies that we think we can execute on in the first couple of quarters. That should get reflected in financial results as you get into, say, the second quarter of 2022. There's probably going to be some longer lead items that are driven by things like migration to a single ERP platform and things like that. That would tend to be more back-end weighted in 2022. But again, the goal is free cash flow generation. And I think once you adjust for onetime costs like severance and facilities consolidation costs as we exit '22, I think we'll be significantly free cash flow positive. But as you point out, it's going to take a couple of quarters for that to happen.

Our next question comes from James West from Evercore ISI.

Mike, you've had a -- you mentioned you had a good amount of travel recently as things started to reopen. I'd love to hear your characterization of your customer interactions as we've gotten off Zoom, and you're meeting people in person again, and they're talking about their plans for '22 and '23. I mean, your business is a little bit longer cycle. So the -- they need to talk about longer-term trends. How have those conversations gone? How are they thinking about the next several years? And how are they thinking about the merger of Expro and Frank's?

James, good, really good question. I can say it's been -- I historically have traveled an awful lot and always spent a lot of time in the regions and those type of things. And it's been quite nice to be able to go back and do some of that. I was in Brazil for a week here just a week ago. So what I would tell you is -- I'm going to answer the second part of your question first. The customer response and the customer feedback on the merger has been exceptionally positive. I could characterize it as their commentary has been if you remove the color of the coveralls, just keep in mind, Frank's has historically been green coveralls, and Expro has historically been blue coveralls. A number of them have jokingly told me, if I remove the color of the coverall, it's the same people, very focused on customers, very focused on service quality, very focused on HSE performance. And so they see a lot of very similar personality traits. And both of us -- both companies at heart are service companies. It's been very well received. They just want to understand a little bit more about why does this make sense, and we can talk more about through cycle and the fact that we can add some more resources. And we can continue to leverage some of the engineering investment that we've done in both companies, it's going to be transported to the other. So we've had really, really good positive discussions around the transaction. Overall, with their level of activity, it's -- I think there's still some cautious dialogue and cautious conversation. And whether it's caution because keep in mind, especially internationally, we still have customers who have not gone back to work in the…

Right. Okay. Okay. That makes sense. And then with respect to pricing, I know -- I think Quinn mentioned pricing wasn't included in kind of the expectations for '22. Is that an issue of spare capacity in your product lines? Is that just being conservative? Kind of how are you thinking about pricing for your products and services at this point as we move into what should be a pretty healthy upturn?

Well, I'll start, then I'll let Quinn jump in as well. So we fundamentally based as we're going to put together our budgeting and those types of things, we're not going to count on pricing to save us. We've got a chunky level of synergy that we've committed to, and we need to stay focused on that. So we need to keep things kind of equal, so to speak, from year-to-year. And we keep -- by the nature of how we bid our activity and how we engage in our global markets, we have a really good sense of when the supply is starting to tighten from a service side, when do we start to see pricing movements, how -- what are customer behaviors. So we have a really good handle on that. And we're just not seeing those kind of things yet. I think we're seeing outside of North America, I just think there's very few indications of pricing traction. But with that said, we will absolutely do our part once we start seeing the opportunity with tightening of services or more of an activity set, we'll start moving pricing as soon as we can. We're just not going to count on that to give us some margin improvement because we've got a lot of wood to chop, so to speak, on taking costs out. And we want to make sure we stay focused on that. Quinn?

I think Mike's exactly right. The oilfield inflation that has been discussed over the last weeks and months is largely a North American phenomenon. We've certainly had logistics challenges in MENA and elsewhere. To the extent that we have an increase in our equipment or other costs, and we will certainly try to pass on to the customers. What I was really referring to is the ability to push price as a driver of margin, and I don't think we're there yet. But as Mike says, when we can push price, we'll push price. But I think the other thing that I would underscore, particularly given some of the recent commentary from some of the other public service companies, is that we try to design our cost structure and make capital commitments based on the revenue reality as opposed to a revenue aspiration. And that's true on the upturn as it is in the downturn. So when we see signs of a market that can absorb more equipment, we'll certainly bring more equipment online. But we're not going to go out and build a bunch of capacity in hopes that the market is going to bail us out.

Our next question comes from David Anderson from Barclays.

Just a question on the well testing business, not a business we've had a lot of kind of exposure to over the years. So maybe just kind of help us understand kind of some of the drivers in there. I think we understand kind of the well construction, how that's kind of levered to more on kind of really the deepwater rig activity and the subsea part, we get all that. But how does well testing work, particularly as it relates to upstream spending? Because, I guess, people are probably a lot of trying to figure out that 10% number, that sounds a little bit lighter. And you're probably hearing kind of about international spending next year is going to have kind of that mid-teens is what we're hearing. So is it just a function of that's a little bit later cycle, and it just takes a little bit longer and therefore, it should kind of last longer, but it's just going to take a little bit -- just help us understand the dynamics of that business would be very helpful.

Sure. No, it's a great question. And your last kind of sentence in there was really spot on. This is more a matter of kind of the timing. Exploration appraisal activity by the time you actually go in, you complete wells, you start to test them, you start to do those kind of things, it's a little bit more of a mid-cycle significant revenue generation. And that's the reason why you're probably going to see us on the well flow management side be a little bit more later cycle just in terms of recovery because you kind of have -- I try to look at the well testing well flow management business really in 2 elements. One is more about initial exploration and appraisal. And we're starting to see some early indications of exploration projects start to pick up. Seismic activity and those type of things are starting to increase. And that's a really good leading indicator for seismic happens, and then you start to have E&A activity beyond that. And then for us, really the second element is around more of the production optimization, production enhancement, which is really the existing well stock that you start to see. So that kind of stays stable, and that tends to be more of an inflationary change and improvement in that portion of well testing. The strong growth activity comes with a kind of early cycle post drilling, post completion, then you start to test wells and bring them online.

So is it fair to say that the bread and butter part of your revenue is in that production side though on the well testing?

That certainly has become a very much a solid base of our revenue today. Historically, in more normal times, the exploration and appraisal activity would be circa 20% to 25% of our revenue set. Today, it's low -- mid-single digits. And frankly, it's not because we've lost market share. It's just because the customer activity and investment in E&A-type wells, there's just not a lot of that kind of activity today. So as you start to see, we've got a good base level of well flow management. We still have the resources, the expertise, the knowledge to be able to go out and provide those strong services as the E&A-type activity starts to ramp back up.

Got you. And the other -- my other question is kind of looking at Legacy Expro. And if I just kind of look to kind of bigger picture kind of where your overall margins have trended since '14 kind of the peak of offshore and kind of there to kind of -- we've sort of hit kind of a level the last few years, help us understand a little bit about kind of normalized margins. I mean, outside of -- I totally understand all the cost synergies you're taking. But aside from the cost synergies, how should we think about kind of Legacy Expro and kind of where you think that business should be, let's say, in kind of 2 to 3 years when things kind of start picking up? I'm just trying to understand the differences between the business because I know there's a lot of change. I know you moved more onshore in that business, but just a little help just some perspective, I guess, in terms of where margins should go on a normalized basis.

It's Quinn Fanning, Dave. It's a great question and at least where we sit today, to some extent, unknowable. The business has changed significantly from the 2014 to 2016 period, which was very much offshore subsea-driven. And at least back then, it was largely a subsea completions business that Expro was most known for in addition to the E&A-driven well test. And as you can see, the combined Expro legacy businesses has been less volatile than the Frank's business, which has got significant operating leverage to it. We bounced in the plus or minus 40%, 42% ZIP code on a Legacy Expro basis, which has ultimately implied teen-type adjusted EBITDA margins. Can we get back to the high 20s, 30%? I guess it's theoretically possible, but that's not what we're planning around today. So we've got really 2 businesses that will be driven by customer CapEx, and that's the well construction business, i.e., the Legacy Frank's business and our subsea test or subsea completions business. And then you've got elements of well flow management that Mike was just talking about that will benefit from a CapEx cycle. But intervention integrity, large elements of well flow management and increasingly, subsea well access is more production optimization-centric. And I think the nature of the customer spend will ultimately drive the margins. But I don't think when we sit here today I can give you guidance beyond our expectation as we get into that $1.3 billion plus or minus revenue. On a run rate basis, we see ourselves getting the plus or minus 20% EBITDA margins. And I think that's consistent in our nomenclature with 40% to 45% contribution margins.

And I guess the only thing I would add there, Dave, is that's one of the reasons why -- I mean, because of the way we bid and organize our global product lines, we can dial in our pricing well. And we'll make pricing movements and adjustments absolutely when the market is ready for it. And it's a little bit unknown based on when is our customer increase in activity and supply those kind of things. But the here and now that we have is very much around the cost synergies, and that's why we are absolutely fundamentally leaning hard into we've said we'll take out $55 million of run rate cost synergies at the 4 quarters following closing. We absolutely will be able to do that. We can control that. We have really good line of visibility of the costs and the facility consolidations and all those type things. We've really been able to put together a really solid execution plan. And that right there is going to give us some controllable, so to speak, margin expansion and will let us be able to -- by the time we get into the fourth quarter of '22, we start to see customer activity pick up, we're not going to be focused internally on cost synergies, those kinds of things. We're going to be focused on customers and projects and how do we go out and execute and how do we capitalize on an opportunity that's more robust.

This concludes today's conference call. Thank you for participating. You may now disconnect.