Hello, and welcome to today's Expro Q3 2022 Earnings Presentation. My name is Elliot, and I will be coordinating your call today. [Operator Instructions] I would now like to hand over to our host, Karen David-Green, Chief Communications Stakeholder and Sustainability Officer.

Welcome, everyone to Expro's Third Quarter 2022 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. We have an accompanying presentation on our third quarter results that is posted on the Expro website, expro.com, under the Investors section. In addition, supplemental financial information for the third quarter and prior periods is downloadable on the Expro website under the Investors section. 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 2022 earnings release, which can be found on our website. With that, I'd like to turn the call over to Mike.

Thank you, Karen. Good morning and good afternoon, everyone. Expro delivered solid third quarter results on the back of favorable industry trends that should position us for continued growth and margin expansion. While there are concerns regarding global economic growth and inflation, energy market fundamentals remain strong and in fact, continue to trend upward. The extended period of underinvestment in global upstream production, historically low spare global capacity and inventories and increase in energy demand to pre-COVID levels and a heightened OECD focus on energy security and diversification of supply supports a multiyear energy recovery and in turn, sets the stage for long-term growth for the energy services industry. We are confident that our business model, broad geographic footprint and leading portfolio of solutions will allow us to continue to capture considerable growth opportunities from these trends. Approximately 70% of our business mix is tied to drilling and completions activity and roughly 70% is tied to offshore markets, both areas of customer spending that are in the early stages of a cyclical recovery. Similarly, with roughly 80% of our revenue generated in international markets, we are well positioned to capitalize on the acceleration of activity in key growth markets and support our customers in the jurisdictions where they need us most. These factors, together with a shift in business mix to higher-margin activities, the continued commercialization of recently deployed technologies and investments, improved operating leverage from merger-related cost synergies and scope for net pricing gains should allow us to drive above-market top line growth, margin expansion and strong cash flow generation in 2023 and beyond. Finally, our debt-free balance sheet and available liquidity should provide us with the flexibility to pursue smart, synergies focused M&A and adoption of a shareholder-friendly capital allocation framework. On today's call, I will touch on…

Thank you, Mike. Good morning and good afternoon to everyone on the call. Given the timing of the close of the Expro-Frank's transaction last year, I will primarily highlight our sequential performance compared to the quarter ended June 30, 2022, as I review our third quarter performance. To recap, we reported revenue of approximately $334 million for the September quarter, which was up sequentially $20 million or approximately 7% relative to the second quarter of 2022. As Mike noted, the sequential increase in revenue was driven by higher activity across all of our segments, most notably in ESSA, which contributed about half of the sequential increase in revenue. Adjusted EBITDA for the third quarter of 2022 was approximately $48 million, representing a sequential decrease of approximately $3 million. Adjusted EBITDA margin in the third quarter was 14% as compared to 16% in the second quarter. Excluding the $17 million impact of the commissioning costs on the subsea project that was covered in Mike's remarks, adjusted EBITDA would have been $65 million and adjusted EBITDA margin would have been approximately 19%, reflecting fall-through on incremental revenue, a more favorable business mix and lower support costs as a result of merger-related synergies. Making comparable adjustments to Q2 results, second quarter adjusted EBITDA and adjusted EBITDA margin would have been $55 million and 18%, respectively. Adjusted net loss for the third quarter of 2022 was $0.07 per diluted share compared to adjusted net income for the second quarter of 2022 of $0.02 per diluted share. Note that results in the third quarter of 2022 and the second quarter of 2022 include foreign exchange losses of $0.07 and $0.05 per diluted share, respectively. Third quarter contribution margin of 33% was down approximately 5 percentage points sequentially, primarily reflecting the impact of higher commissioning costs…

Thank you, Quinn. In closing, I would like to leave you with a few highlights on why we view Expro as a differentiated and compelling investment opportunity. First, market sector fundamentals are very favorable and support a multiyear upturn. Expro has a diverse set of global capabilities and well construction and well management that will allow us to capitalize on a growth cycle that we expect to be multiyear in duration, global in scope, span all phases of oil and gas development and include all operating environments. Second, we have a leading and differentiated portfolio and are well positioned in markets that benefit from strong industry fundamentals. We believe we are in the early innings of an international and offshore recovery, and we expect good growth and strong incremental margins as drilling and completions activity continues to ramp up and merger synergies translate into improved operating leverage. Net pricing gains should provide a scope for additional margin expansion. In terms of contribution margin, which is essentially cash basis gross margin fall through incremental drilling and completions revenue should be greater than 50%. Third, our debt-free balance sheet and free cash flow upside provides us with significant financial, operational and strategic flexibility that will allow us to fund investments to deliver above-market growth and execute a disciplined and shareholder-friendly capital allocation framework, both of which will be designed to create long-term value for Expro stakeholders. We are incredibly excited about the platform that we have built and the opportunities ahead for our business. Thank you very much for your participation on today's call. 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 is 2 large projects were highlighted in your press release, the first of which sounds like it negatively impacted results for the last couple of quarters and materially so in the September quarter, and the second of which sounds like it could be a consequential win. Based on our reading of the press release, the first project is a subsea well access project in Asia, and the second project sounds like an EPS project in Africa. First, any additional details on the 2 projects that you can provide would be helpful. Second, your press release noted that adjusted EBITDA margin in Q3, excluding start-up costs on the APAC Subsea project was 19%. Can you just confirm that the 19% EBITDA margin is comparable to your guidance for Q4 of plus or minus 20% adjusted EBITDA margin.

Thanks for putting the question forward. Good question, I'll be happy to comment on the difference in the 2 projects because they are fundamentally very different. So I'll talk about that more from project kind of side by side and how those fit in. I'll let Quinn comment on some of the margin questions as well to include him. But I guess, fundamentally, as I noted in some of my preprepared remarks, the first project is, it's an inaugural project for us. We have a newly developed light-well intervention or what we call LWI solution, which we hope will become operational in late Q4, early Q1. and what's really unique about this solution is that it's designed to reduce the cost of subsea well interventions by limiting the need for a drilling rig. So let's us go in with a much smaller vessel, kind of more nimble, quicker rig ups, quicker operations, those type things. And this really as we feel is very, very important for the marketplace, given the increasing number of subsea wells and given the age profile of the global subsea well inventory. So we think that's a real critical one. The second one, this is an EPS type project. It's more of a what we call a fast track modular treatment facility. This will be in Sub-Saharan Africa. It's largely being constructed to bring incremental gas to the European marketplace, and obviously, there's lots of concerns in Europe today around anxiety around diversification of supply, energy security, those type things. So this really allows a response to bring additional gas supply into Europe. So obviously, the first project kind of fits within our subsea well access business and the second project fits within our production solutions. If you kind of look at these side-by-side, there are…

Yes. Sure, Mike. As both Mike and I covered in our prepared remarks, excluding the start-up and commissioning costs on the LWI project, Q2 and Q3 adjusted EBITDA margins were 18% and 19%, respectively. As Mike mentioned, we are assuming more modest excess costs in Q4 or directionally at a level that is consistent with the excess costs that were incurred in Q2, so about $4 million is what we've kind of bookmarked at this point based on what we know today, and as we expect the LWI system to be operational sometime in either late Q4 or early Q1 2023. And it's really on that basis that we remain comfortable with our guidance of plus or minus 20% adjusted EBITDA margin in Q4 as we exit 2022.

Our second question is, can you provide more perspective on the industry's energy transition and Expro's role in supporting it?

Yes. I think it's another really good question. I can tell you that energy transition is, I think, the top of the mind of everyone in the industry. And frankly, almost every conversation that I have with customers or clients or partners, inevitably turns to some type of a discussion around sustainability and how do we ultimately, as an industry, reduce our carbon footprint. And I think fundamentally over the coming years, I think that this will be one of the first questions that will be asked for any new project. It's really around sustainability and how can operators and how can suppliers ultimately drive towards a lower carbon footprint. I think what's unique for Expro is we're really built for a lower carbon world. We think that our commitment to sustainability and our strong portfolio and some of the carbon reduction solutions we have today. We think those are really solid differentiators; whether it's technology-driven solutions, especially in automation and digitalization, we've made some tremendous progress in well construction on more machine learning, artificial intelligence, reduction of personnel in a red zone and reduction of personnel on the rig floor that has a dramatic impact and frankly makes operations or more efficient. In 2021, I think it's a good example. Roughly 40% of our research development spending was on solutions that we could tie back to helping create a more sustainable future for our customers. And in 2022, it's going to be almost a 50% commitment from our R&D dollars. So that's something that we've been doing. We think it's very important. We think it's a unique set of technology that we can help kind of bring and bear to the industry. I think we're also starting to see some increasing interest in Expro geothermal capabilities, particularly in Europe and Asia. As the market starts to diversify and look for more support energy and new energy addition type projects. So fundamentally, we're overall committed to lowering our own CO2 emissions. Our bigger contribution to CO2 emissions that our services is how will help eliminate and reduce carbon CO2 emissions from our customers, and I think that just positions us with being a trusted service partner with our customers. And then, I think it's also important to recognize that I commented about earlier in my prepared remarks, but I'm very proud of the Expro team. We've gathered some really strong recognition for our ESG efforts, getting our first ESG report out there in record time, I think, was tremendous. And for us to be recognized by MSCI for the efforts and to be rated as a single [Indiscernible], I think, was quite an effort just want to commend the team, and that's the kind of commitment that we make to sustainability as experts. I think it's a really positive message from that.

We now turn to Eddie Kim from Barclays.

Mike, you talked about starting to see some opportunities to push pricing and those opportunities would likely accelerate exiting this year and into next year. So just curious if you're having more of those discussions today and in which of your business lines, has it been easier to push pricing and have those type of discussions.

Sure. Eddie, good question. I appreciate that. Yes, we are starting to see, particularly in some of our higher end well construction, some of our subsea test reassemblies those type of things. We're starting to see opportunities to push pricing. I think it's been really positive for us to see that a number of the offshore drillers were talking at your conference back in September, rig rates that we're starting with a 4. Well, now we're even starting to hear some rig rates that are starting with a 5. So I get the sense that we're starting to build more and more momentum in the industry, especially international and offshore, where we're going to start to get some pricing leverage. I can also tell you I put a lot of weight in the kind of questions. Over the last 6 to 8 months, I've really been able to get out there and be much more active traveling to visit customers globally. And I oftentimes, put a lot more credence in the questions that customers ask as opposed to the things that they're telling us and lots of questions around how is Expro sitting for people, how are your training programs? Hove you recruiting? How is your asset base? What's your CapEx spend like I just get more and more of a sense that our customers are starting to sense that activity is ramping up, utilization of people and equipment is ramping up, and they know what comes next, and that's really from kind of a pricing standpoint. So it's lots of anecdotes right now, but I'm starting to feel like we're getting some momentum behind some of those things. And we push price every opportunity we can. We push as hard as we can to be able to start moving things in that direction because it's important for us to get back to some better pricing levels than what we've had here in the last several years.

And that's great to hear. Mike, just kind of related follow-up. I mean, you highlighted a number of new contract wins in your prepared remarks. But it's just a little bit difficult for us to tell whether these are kind of normal course wins their business or if they represent a meaningful step-up as compared to prior years. So could you just give us a sense here as to how much of an increase [Indiscernible] maybe provide some additional color on the quality of these wins, perhaps from a pricing and duration perspective?

Sure, Eddie. And I guess I would frame it up is those are probably more noteworthy ones to highlight. And we highlighted a large number of them because we're starting to see the number of technical inquiries we have from customers, the number of projects they're putting out to tender. We're really starting to see that step up and ramp up. So it is incremental to go into next year. Most of these typically are kind of a 2- to 3-year type duration. The difference we have today is really still hasn't quite changed yet, but a number of international projects today, operators are approving a 3- or 4-well project, and then they roll that into another 2 wells and probably another 2 wells beyond that. They kind of are seeming to dip their toe into these things. And I actually look at that as a real positive because when you win those contracts, the first time, our ability to just roll those over in future activities is quite strong. And generally, we can have some pricing adjustments there, too. So overall, I guess what I would say is it's hard for me to quantify for you without really digging into the weeds. But what I would say is we're seeing an increase in tendering activity. We have a very high bid win rate today, and we'll start to see that translate into better activity, higher number of jobs, executing those type of things as we go into '23.

Our next question comes from Samantha Hoh from Evercore.

I know you talked about this already, but I was just wondering on the geothermal, it was great to see you guys win some contracts in Asia. I was wondering if you could kind of [Indiscernible] for us like what the growth opportunity is in Asia versus Europe. You have a sense of how large this market opportunity could be for you? And how much of a contributor could be over time?

Good question, Samantha. I would say I probably have a better sense for the European opportunity than Asia just because we've had participation in some recent customer forums and those kind of things, and I think there's going to be tremendous growth opportunities in Europe. And I think that at some point in time down the road for us, geothermal, alternative energy, kind of service lines and things that we don't do today, it is kind of a new customer base, so to speak. It will become a meaningful revenue stream for us. And whether that's 2 years from now or 5 years from now, it's going to be a double-digit percentage of our revenue that we'll have from kind of alternative energy. So I think it's quite a strong opportunity. I'd better flavor today for the interest in Europe, largely because so much discussion around European energy security and supply and really a requirement for them to start to have power generation from alternative sources that's not necessarily hydrocarbon because of some of the challenges with Nord Stream. So I would anticipate, we'll see some of the same type of interest in Asia, but I think there'll be a little bit of a laggard compared to what we see in Europe.

Okay. Great. I was also curious about this announcement that you guys had last month about winning funding for carbon-reducing technology development over in Aberdeen. Curious if you could also just tell us a little bit more about that. Like what's the time frame for this type of R&D effort?

Sure. Good question, and frankly, I probably should have highlighted that in today's remarks, so thanks for bringing it up. So we were awarded some funding from the Net Zero Group in the U.K., and for us, it's targeted around. So this really will be activity in research that will go on here over the course of 2023 going into 2024, fits in with a number of the flaring type reduction initiatives we have and some of the carbon capture initiatives we have. I think there were several hundred, I want to say, 320 initial submissions and there were about 20 of us that were selected in the end to achieve some funding. It was a very diverse group that selected who the awards were going to go to. So really for us, it gives us a chance to collaborate more further with customers in particular. So, we can use them as a sounding board as this fit in with their technology. So it just helps really fit in well with us for our technology development road map in reducing emissions and improving flaring technology.

Okay. And if I could squeeze in one more. Was there an acquisition for a solar company, did I hear that right?

No. There's a company that we acquired called SolaSense, and this is much more around digital fiber optics, and we made that in Q1?

It's a relatively modest upfront investments. There are some contingent consideration elements to it. But as Mike mentioned, SolaSense is an incremental technology for well Intervention Integrity business, and again, is focused on data acquisition and data interpretation, which fits in well with what we're trying to do in terms of higher value-added services to complement our mechanical and other intervention services.

Thank you, ladies and gentlemen. That concludes your conference for today. We appreciate your participation. You may now disconnect.