Hello, everyone, and a warm welcome to the Expro Second Quarter 2023 Earnings Presentation. My name is Emily, and I will be coordinating your call today. [Operator Instructions] I'll now turn the call over to our host, Expro's Chief Financial Officer, Quinn Fanning. Please go ahead, Quinn.

Welcome to Expro's second quarter 2023 conference call. I am joined today by Expro's, CEO, Mike Jardon. First Mike and I will share our prepared remarks then we will open it up for questions. We have an accompanying presentation on our second quarter results that is posted on the Expro website, expro.com under the Investors section. In addition, supplemental financial information for the second quarter and prior periods is downloadable on the Expro website, likewise 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 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's website sec.gov, or on our website again 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 second quarter 2023 earnings release, which can also be found on our website. With that, I'd like to turn the call over to Mike.

Good morning and good afternoon, everyone. As Quinn noted, we posted slides with Q2 highlights to the Expro website. Quinn and I will refer to several of these slides during our prepared remarks today. As highlighted in our press release, the second quarter of 2023 revenue was $397 million, which is up by $58 million or approximately 17% relative to the first quarter of 2023, and up 27% relative to the second quarter of 2022. Sequential and year-over-year revenue growth compares favorably the guidance provided on our last earnings conference call, which in summary was that we expect about 10% revenue growth quarter-over-quarter, and about 20% revenue growth year-over-year. As highlighted on Slide 4, the second quarter results reflect a continued ramp up in activity across geographies, areas of capabilities and product lines. Well construction revenue was up 12% sequentially and 18% year-over-year, while well management revenue was up 20% sequentially and up 32% year-over-year. Adjusted EBITDA for Q2 2023 was approximately $72 million, representing a sequential increase of approximately $30 million or 71% relative to first quarter, primarily reflecting higher revenue, a more favorable activity mix and lower support costs. Adjusted EBITDA margin in the second quarter of 2023 was 18%, as compared to 12% in the first quarter of 2023. At 18%, reported adjusted EBITDA margin was at the high end of our guidance range. Quinn will provide some additional details, but I'll note that underlying profitability is trending positively. Reported contribution margin of 34% includes approximately $6 million of LWI related, non-reimbursable, non-productive time or what we call NPT, which negatively impacted Q2 contribution margin by approximately 1.5 percentage points. In addition, we are taking a relatively conservative approach to the recognition of margin associated with the onshore pretreatment facility that we are constructing for Eni in…

Thank you, Mike. For those that have a copy of our accompanying slides, note that the appendix to the slide deck has a number of charts and tables covering consolidated results as well as results by reporting segment, area of capability and product line. As I noted at the beginning of the call, downloadable financials including historical combined results of Expro and Frank's are also available on our website. Now to recap, second quarter revenue was $397 million, which was up by $58 million or approximately 17%, relative to the first quarter of 2023, and up approximately $83 million or 27% relative to the second quarter of 2022. Net income for the second quarter was $9 million or $0.08 per diluted share, compared to a net loss in the first quarter of $6 million or $0.06 per diluted share. Year-to-date, net income was $3 million or $0.03 per diluted share, compared to a net loss of $15 million or $0.14 per diluted share for the first six months of 2022. Adjusted net income for the second quarter of 2023 was $19 million or $0.17 per diluted share, compared to the first quarter adjusted net income of $1 million or $0.01 per diluted share, primarily reflecting higher adjusted EBITDA. Second quarter contribution margin, which again is essentially cash basis gross profit was 34% were flat relative to the first quarter of 2023. As Mike noted, LWI related NPT and our Eni Congo project were collectively a drag on margins of about 3 percentage points. Profitability on our LWI related activities and the Eni Congo project is expected to improve over the next couple of quarters and should contribute to an overall improvement in contribution margin in the second half of 2023. For reference, excluding excess LWI related costs in Q1 and…

Thanks, Quinn. I'd like to leave all of you with three key takeaways before we open up the call to Q&A. First, Expro continues to outpace market growth delivering and expecting double-digit revenue growth by capturing market share and by introducing new technologies in our established markets. This is a result of us being able to leverage our global operating footprint, excellent track record, and world-class service quality. Second, strong top-line growth, improved operating leverage, and our driving more activity and revenue across a more efficient support structure allow us to expand EBITDA margins and improve free cash flow generation. And finally, we are laser-focused on delivering results. One of the key traits of the organization is execution. We win business because of the quality of our execution, not because of the biggest service provider. Similarly, we were successful in achieving and exceeding our merger-related synergies target because we have worked very hard to develop strong and detailed plans, and then we set about implementing them. With that, I'll turn the call back to the operator for the Q&A session.

Thank you. [Operator Instructions] Our first question comes from the line of Eddie Kim with Barclays. Eddie, please go ahead. Your line is now open.

So a big team across the big three this quarter that has been the ramp up of Middle East activity, with all reporting pretty strong sequential growth here in the second quarter. You also posted strong MENA growth of 16% this quarter and specifically called out higher well flow management activity in Saudi. As activity in Saudi in other parts of the Middle East ramps up over the next several years, should we expect well flow management to see the most growth going forward or is well construction growth expected to kind of catch up? How should we think about the growth going forward in those two segments specifically?

Sure. Eddie, appreciate the question. I guess I how I would frame it up is, probably so, well construction for us has really been, historically has been underrepresented. So I think our ability to some of the first some of the first revenue synergies we were able to identify and talk about were really well construction contracts in places like Saudi, in places like Algeria. So, we have got good opportunities to continue to expand our footprint in well construction in the Middle East so that you could anticipate more of an opportunity set. And with well flow management, it's very much tied to what is the level of activity for the operators in the Middle East as well as North Africa. So probably higher growth potential for us, as we can start to convert more contracts into well construction. The difference with the Middle East is, you don't show up on Monday and win contracts on Tuesday. You have to have a presence there, and that's where we have been able to pull-through some of the relationship and some of the infrastructure we have in place from well flow management, that's why we are starting to be able to win some new contracts to well construction.

Got it. Understood. Thank you. And just my follow-up is on pricing in the well flow management segment specifically. Could you just remind us of the duration of typical contract terms in well flow management, other differences between NOCs like Aramco versus your smaller customers? And when should we start seeing net pricing gains in this product line? Do you expect that in the second half of this year, or have you started seeing it already?

Sure. So really across all of our product lines, for the most part, they are typically three year type contracts. So if you kind of look at it simplistically, we are going to get a chance of for about a third of our book to be able to reprice on an annual basis. That's part of the reason what we have highlighted is that, the step-up and a ramp up and activity we have had here has been much more mix related. We are not seeing that from a pricing standpoint. We will start to see some of that come into play in the back end of 2023, and really more as we go into 2024 as well, in essence, have been able to start to reprice year two of some of those three year contracts as they start to roll over.

The other thing I would mentioned for you, Eddie, is within well flow management is our production solutions business, which is also where we are recognizing at least on a product line basis, the Eni Congo project, that is part of the story as to why well flow management contribution margins have been in this 33%, 34% area in the first half of the year. We would expect that to continue to improve as the year progresses, and particularly in '24, once we get past this delivery phase on the plant and move into more operations and maintenance mode. So I would say, there is a bit of an artificial drag on well flow management margins that is related to the Eni Congo project, which a couple quarters out, knock on wood, that project's been delivered and you will start to see things more normalized in the high 30s or better, hopefully.

Our next question comes from the line of Alexa Petrick with Goldman Sachs. Alexa, please go ahead.

Thank you. This is Alexa on for Neil Mehta. I wanted to ask following the strong revenue you guys had this quarter, do you think possible to surpass your full year revenue guidance? And then if not, where are you expecting revenue to maybe soften in the back half of the year?

Well, I wouldn't say we are expecting revenue to soften in the back half of the year, we have had a pretty decent step-up sequentially and we think we will sustain this kind of, you know, circa $400 million run rate per quarter, at least in the third quarter. That, again, doesn't contemplate material pricing gains. We are hoping to see some of the contract awards that we have already got in hand roll onto the new rates and that would certainly benefit top-line and margin performance. But I don't think we are in a position now to revise guidance, but we are certainly comfortable with the $1.45 billion to $1.55 billion area. And as Mike mentioned, we expect to exit the year at least at a $1.6 billion run rate.

Okay, that's helpful. Thank you. Just to follow-up on margins, what are some of the variables you are seeing in terms of the low and high end of guidance? And how should we think about the trajectory in the back half of the year?

So, variability obviously is the timing of pricing showing up and results. As Mike mentioned, we have also been holding back on contingencies on the Eni Congo project until we get further along in the delivery schedule. So there is certainly upside in terms of the Eni Cargo project. Not necessarily going to be a material change in consolidated results. I would say those are key drivers. We are operating into the assumption that we have put the better part of the teething issues on the LWI, initial work scope behind us. And, obviously, the absence of a negative an LWI will be a positive for consolidated results. So those are the primary drivers that make us comfortable that we will finish the year in the 20% to 22% EBITDA range, which we included in our slide deck as second half guidance.

Alexa, the only thing I would add is, part of it too is, as we have said the whole time, we anticipate getting some more net pricing impact in the second half of 2023. That's part of what really helps vary this is when do some of those contracts actually go operational? When do they start drilling wells or completing wells? Do you end up with one month and a quarter, do you end up at two months and a quarter? That's part of why we -- there is some range in there.

Our next question comes from Steve Ferazani with Sidoti & Company. Steve, please go ahead. Your line is now open.

So, in terms of the strengthening EBITDA margin guidance for the second half of this year, how does that and obviously, we are way, way early on '24? But I'm guessing your assumption would be, your pricing conversations become more constructive as the year plays out, particularly if we start seeing the expectations play out on higher day rates for offshore rigs. How does that start making you think about 2024 to earlier point?

I guess I'd make two points. First, Steve, is number one. We already having constructive pricing conversations really what's kind of the the dynamic is the contract rollover timing. About a third of our revenue reprices per annum. So we are getting higher pricing on new contract awards and really, it's just a matter of the lag until it shows up in financial results. We are pre-budget for 2024. And I suspect as we have our third quarter earnings conference call, at least be able to provide a peek in terms of our expectations for 2024. And I would just point out the pattern, over the last couple of years plus pandemic has been our exit EBITDA margins have essentially been around where we center our next year budget. So we exited 2022 with 20% EBITDA margins. Our guidance for the year was plus or minus 20% EBITDA margins. And again, we expect to exit '23 in the 20% to 22% area. I suspect that will be the starting point for our 2024 budgeting cycle.

Perfect. Thanks.

That response...

In terms of -- what's that?

Does that answer your question?

It does. It does. Thanks Mike. In terms of how you are thinking about cash flow, as you take on more projects, what's the potential that CapEx becomes a higher percentage of revenue, particularly some of the new technology you have added and also just updates on how you are thinking about uses of cash flow?

Steve, I guess, the first thing I would start off with is, we have tried to lay out there for everybody that we believe we can run the business in a 7% to 8% of revenue CapEx world. That allows us to continue to invest in the business. And even throughout the pandemic and those type things over the course of last number of years, we have continued to invest in the business. So we will continue to kind of work at that. I don't want to call it a CapEx diet, but I think it's just us maintaining capital discipline. And we focus on projects, and we make sure, the good thing for us is we have a globally re-deployable fleet. So assets that we can use in Brazil, for Petrobras, we can use those same assets. They can be moved for a project that's going to happen in Malaysia. So, that gives us some latitude and flexibility with that, but we will continue to operate within that kind of 7% to 8% CapEx diet.

And then any updated thoughts on -- no buyback this quarter. Any updated thoughts on use of cash, particularly as you noted, second half tends to be the better cash flow half?

That's correct. And that was a comment we made on the last call and reiterated today. I guess, a couple of data points I just give you depending upon which cash flow definition to use, probably worth highlighting LTM EBITDA. It's $232 million, that's after $33 million of start up in commissioning and other LWI related costs. So kind of prior to these cost that Mike had mentioned, we believe to be transferred. We are $250 million plus in LTM EBITDA, and CapEx was a $108 million for that same period of time. So we are kind of in the $150 million zip code in terms of EBITDA minus CapEx as a cash flow proxy. Quite frankly, our challenge as the industry has been challenged over the last four to six quarters has been a relatively large working capital build. And that's really kind of the difference maker over the next couple of quarters is, can we shrink the balance sheet even in an increasing activity environment and our expectation is that working capital as a percentage of revenue will start to moderate. But the fact of the matter is, at this point in the cycle, given some of the cash flow pressures on the customer base, the balance sheet is a bit bloated. That's what we need to see reverse but with cash in hand, i.e. reversal of working capital. I wouldn't suspect that we would more seriously be looking at buybacks. We were out of the market in the current quarter, in part, because of this kind of pattern of cash flow realization. We also had done a secondary in first quarter, which, obviously, we didn't want to work across purposes with that, since one of the primary goals was to improve trading liquidity.

[Operator Instructions] Our next question comes from Luke Lemoine with Piper Sandler. Luke, please go ahead.

Good morning, Mike, Quinn. You talked about mid-teens top-line growth through at least '24, which is about streets, 11.5% growth for next year. Can you talk about what's underpinning this growth? And since there were some suppressed margins in the first half of '23, and you are being conservative on the Eni Congo project. It's fair to assume incrementals could be above normal levels in '24?

Yes, really good question, Luke. What I can tell you is having travel an awful lot in the last several months spend time with customers. I was all throughout Asia last week. And as I kind of go through and Quinn said earlier, it's very much pre-budget phase. But in the conversations and discussions I have had with our customers, there is continues to be a strengthening level of activity. They are really asking lots of questions around, how are you guys positioned for people? What's happening with your training programs? What's happening with recruiting and hiring and those type things? I just get a sense that, as we kind of look at project-by-project, region-by-region, we just continue to see some strengthening activity there. And as we kind of translate that into pre-budget numbers, that's why we have said we think it's probably a mid teens growth for next year, particularly as we are very tied and levered to well construction, new wells being drilled and new wells being completed. There is going to be a strong level of activity with that.

Okay. And then you talked about your conservative approach to the Eni Congo project, which I believe you said impacted margins by a 150 bps in 2Q, and if you become operational in the first half '24. Can you talk about this continues to go well, how the contingency releases could impact margins? And is this more of a second half '23 or first half of '24 or not?

I mean, as we get closer to the plant delivery, the need for contingency will diminish and we will start to release it. But really, the intention all along was that, we would recognize margin on essentially the first half of the contract value, which was about $150 million at a level that's consistent with large equipment sales, with the remainder of the contract being kind of an O&M phase, which is more service delivery in. Obviously, things need to go according to plan, but we would expect that that O&M phase would be at substantially higher margins. So really, the point I was making is that with POC accounting we have tried it carefully, if you will, in terms of margin recognition. So, we are closer to delivery date. But we are sub 20% margins on what we have recognized to date and we will start to look to release that as we get closer.

And most of that, Luke, it's going to be a 2024 phenomenon.

We have scheduled to be delivered in the first half of '24.

Okay. Perfect. Thanks Mike. Thanks Quinn.

Those are all the questions we have for today. So, I'll turn the call back to the management team for any closing comments.

That's great. We appreciate everybody's time and effort today, and look forward to catching up again on the next quarterly call. Emily, we can go and disconnect. Thank you.

Thank you everyone for joining us today. This concludes our call and you may now disconnect your lines.