Expro Group Holdings N.V. Q4 FY2021 Earnings Call

Hello, and welcome to today’s Expro Fourth Quarter Earnings 2021 Conference Call. My name is Elliot, and I’ll be coordinating your call today. The operator will provide instructions for participants on how to ask questions. I would now like to hand over to our host, Karen David-Green. Please go ahead.

Welcome, everyone, to Expro’s fourth quarter 2021 conference call. I'm joined today by Mike Jardon, Chief Executive Officer; and Quinn Fanning, Chief Financial Officer. First, Mike and Quinn will share their prepared remarks, and then we will open it up for questions. The condensed consolidated financial statements of the company reflect the financial position, results of operations and cash flow of legacy Expro for all periods prior to October 1, 2021, the merger day, and of the combined company, including activities of Frank’s, for all periods subsequent to the merger. We have an accompanying presentation on our fourth quarter results that is also posted on the Expro website, expro.com, under the Investors section. The presentation, along with the downloadable financials, reflect the pro forma combined company results of legacy Expro and legacy Frank’s. 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 at a 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 fourth quarter 2021 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. I'm excited to be speaking with all of you today to discuss Expro’s strong results for the fourth quarter, which marks the first full quarter of our new company after completing our merger with Frank's International. While Expro and Frank's were both leaders in their own right, together we have a more resilient business model that is positioned to continue to win in the market and lead the next chapter of our industry, given the following: our balanced portfolio of services and solutions that span the well lifecycle, which provides true cycle resilience and the ability to better capture cyclical recovery upside; our diversified global footprint with operations in key growth markets; our best-in-class innovation platform and technology portfolio that enable us to support our customers' carbon reduction goals; and finally, our strong balance sheet and merger-related synergies, which bring a significant degree of operational flexibility and strategic optionality in order to accelerate growth and create long-term shareholder value. The fourth quarter results we announced today and our outlook for 2022 underscore the strong business combination that we have created through the merger and the opportunities ahead for our business as we continue to capitalize on positive industry trends. On today's call, I plan to first walk you through our fourth quarter performance, secondly give you an update on our integration process, and finally provide some perspective on trends we are seeing in the broader industry environment. Starting with our fourth quarter performance, we delivered outstanding results that demonstrate our progress unlocking the value inherent in our scale, broad portfolio of solutions, global operating footprint, through-cycle capabilities and strong financial profile. For the fourth quarter, we delivered revenue of $296 million and adjusted EBITDA of $51 million. Our growth was broad-based across our regions and product lines, with particularly notable growth in areas of production, subsea, well access and well intervention and integrity services. Importantly, we saw a significant benefit of our diversified portfolio as we enhanced our business mix and our team continued to capitalize on improving industry fundamentals and our broad suite of innovative solutions to win new business and expand our relationship with existing customers. We achieved contract wins and extensions totaling $235 million, which is a true testament to our team's resilience and traction and that our solutions are gaining in the market. On a regional basis, in North and Latin America, we were awarded contracts across Argentina, the Gulf of Mexico, Trinidad, Guyana and Canada for test services, flow-back services, the provision of tubulars, advancements for testing and integrated testing services for exploration and appraisal wells. During the quarter, we also successfully completed our first operation for a Distributed Fiber Optic System in Argentina. Our Europe and Sub-Saharan Africa team secured contracts in Angola, the Eastern Mediterranean and the U.K. for subsea and well test work, again as a direct result of our continued focus on service delivery. In the fourth quarter, we also commissioned our first automated tong system, which uses artificial intelligence to optimize tubular makeups. This groundbreaking system will facilitate a step change in drilling rig efficiency and safety, reducing manpower requirements and improving well integrity. This one-touch automated system is well aligned with our customers' drive for automation and will build on our record-setting rig operations performance. In the Middle East and North Africa, we secured a significant contract in Northeast Africa for the provision of multiphase pumps, which allow enhanced production from challenging production wells. During the quarter, we also successfully carried out a large trace element campaign supporting the design of a future gas plant in Iraq. A $67 million contract was secured in Saudi Arabia, the first contract that we can directly attribute to the merger of the two companies, for the provision of tubular running services. We also achieved a significant milestone in the region, as we passed half a billion hours of data transmission. This is a testament to the breadth of our data analytics capabilities, and a win for our team in the region as they are able to harness the data to develop more targeted solutions for our customers. In Asia Pacific, the team secured contracts in Thailand for well intervention to convey perforating solutions in Indonesia and subsea work for a four-well abandonment campaign in Australia, all as a result of our service delivery performance. We also performed a rotary cutting service for a new geothermal customer in Indonesia, where we were able to successfully perform operations which had previously proven problematic. In November, we announced four significant subsea well access contracts in Southeast Asia and Australia, worth an excess of $50 million. This award includes the delivery of an integrated subsea solution, including our industry-leading intervention riser system to access the wells and undertake plug-and-abandonment work. During the quarter, we also continued to advance our innovation platform to develop the next generation of solutions that will serve as differentiators for Expro and we believe will help bring onboard new customers. A key highlight from this work is our successful test of a legacy Expro electrohydraulic subsea umbilical with a legacy Frank's running services Sheaveless COBRA control line manipulator arm. This combination of technologies provides deployment efficiency while improving the safety of operations. This test generated significant customer interest and we already have one large customer committed to this offering in a key operation in the Eastern Mediterranean in the first quarter of 2022. Additionally, in the quarter, we announced the launch of Galea, the world's first fully autonomous flow intervention system designed to maximize production while reducing intervention costs, HSE risks and overall environmental impact. This system builds on our commitment to developing new technologies that help our customers achieve their carbon reduction goals and create a more sustainable future. While our technology is a key differentiator, one of the main reasons we are seeing customers continue to choose Expro over our competition is our consistently excellent service. I want to specifically highlight the work of our Europe and Sub-Saharan Africa teams; their flexibility and commitment to our customers led to growth and new business in December with a record score for our job performance across all of our operating areas. Our customers' feedback averaged 97%, meaning the majority of our customers ranked our service in all categories as excellent. This is a testament to the strong project execution by our team, combined with Expro's cost-effective technology-driven solutions offering. Our service quality, based on our customer job performance rating, is historically very strong, and we ended 2021 with an average of 94.6% across all regions where North and Latin America, Europe and Sub-Saharan Africa, and Asia-Pacific were all in excess of 94% and the Middle East and North Africa was over 95%. We expect to continue to enhance our service delivery as we continue implementing our integration plans to enhance the coordination and collaboration of our legacy Frank's and Expro teams to work as one seamless organization. We have already made significant progress executing on the comprehensive plans we developed prior to close. As we have worked through this process, we have begun to see the true power of our combined team. Our strong financial profile provides us the flexibility to continue to invest in our portfolio through market cycles to develop the next generation of solutions that address our customers' needs and support their carbon reduction goals as part of the energy transition. This past year we allocated 40% of our research and development spending to carbon reduction initiatives and efforts and we expect that percentage to approach 50% in 2022. In doing so, we're developing and advancing solutions that will play a critical role in enabling our customers to achieve their own emission reduction goals. Expro is committed to playing a leading role in the low-carbon energy transition by transforming our portfolio and achieving net zero emissions by 2050. We continue to pursue work across the value chain with suppliers and customers to not only reduce our own environmental impact, but to support the sustainability initiatives of our customers. Expro has established operations and technologies with geothermal and flow reduction in gas recovery segments and has continued to develop our offerings within the energy transition space. In particular, we have seen increasing growth in carbon capture and storage, or CCS, since our involvement in the successful Northern Lights CCS project in Norway. Before I turn the call over to Quinn, I want to provide a perspective on trends we are seeing in the market and what we expect in the year ahead. We continue to see strengthening signals of a multi-year recovery. We expect demand for our services and solutions to increase throughout 2022 as operators look both to increase production from existing assets and develop new fields. We anticipate better business conditions and activity levels throughout 2022 and beyond and are confident that the pipeline of projects we are seeing will support multi-year growth for the energy services sector with particularly strong potential for a number of the geographies within North and Latin America, the Middle East, Africa, and Asia. Natural gas demand has remained strong in the U.S. and internationally due to increased economic activity, which is forecast to drive new infrastructure developments and further increased activity levels. Although Expro has traditionally had minimal revenue in Russia and Ukraine, less than 1%, we’re disheartened to see the ongoing conflict in Ukraine and hope that a peaceful resolution will soon be achieved. There is also a trend for the IOCs to increase natural gas's share of their overall production to better balance their gas liquids portfolios. Similarly, national oil companies are focused on accelerating field development efforts in order to stimulate their country's economic recovery. Internationally, the supermajors are increasingly focused on lower-risk, phased developments, and efforts to reduce emissions and more broadly to position themselves for the energy transition continue to gather momentum and be a priority for our IOC customers. We believe international exploration activity will become more near-field and infrastructure-focused in the near term. Looking at the second quarter of 2022, it indicates a continuing modest recovery in E&P expenditures, albeit at different rates in individual countries. In the medium term, with final investment decision approvals anticipated to continue growing, nearly 60% of those commitments are expected to be offshore. We also believe oil and gas demand will soon recover to 2019 levels, resulting in operators needing to again focus on reserves replacement following a multi-year period of underinvestment and lower volumes of discoveries. For now, operators seem most focused on maximizing the investments that they have made previously. Consistent with past recoveries, incremental offering extensions and brownfield enhancement programs are expected to be an additional area of customer focus. In select markets, we are seeing some signs of recovery in intervention and well integrity projects, execution of which is a traditional strength of Expro. More broadly, we believe offshore deepwater activity and shale or tight oil projects will be the largest growth areas, which should support sustained growth for Expro given our capabilities in subsea well access services, complex well construction services and production optimization. Bolstered by constructive commodity pricing, we are experiencing increased activity which we expect to gain momentum as we progress through 2022 and beyond. Expro is uniquely positioned to serve our clients in the current market environment. We anticipate increased demand for existing services and more opportunities to provide new solutions from our enhanced portfolio. We are differentiating ourselves in the market as Expro spans the full well lifecycle with a focus on integrity in all its forms, whether that means ensuring connection integrity, integrity in our services to our customers, or the ability to manage integrity. We're also leading the industry in technology supporting the energy transition, which will become increasingly important as customers around the world accelerate their carbon reduction strategies. Combined with technology and know-how, prioritizing QFC allows the company to get absolute focus on advancing the company and delivering maximum value to our customers, shareholders and other stakeholders. With that, I will hand the call over to Quinn to discuss our financial results.

Thank you, Mike. Good morning, good afternoon to everyone on the call. As Mike noted, I will cover the results for the quarter and year ended December 31, 2021, and we'll highlight sequential and year-over-year performance on both an as-reported basis, which is consistent with the presentation of financial results in our press release and SEC filings, and on a pro forma basis, which is consistent with the presentation of financial results in the slides that Karen referenced at the top of the call and that are available in the investor section of our website, expro.com. To recap, we reported revenue of approximately $296 million for the fourth quarter, which was up $98 million, or approximately 50%, relative to the September quarter. The increase was driven by the merger between legacy Frank's International and legacy Expro, which contributed $112 million in additional revenue, partially offset by $21 million in production equipment sales that occurred during Q3 2021 but did not reoccur in Q4. On a pro forma basis, revenue was down $17 million, or approximately 5.5% quarter-over-quarter. Excluding the referenced Q3 production equipment sales and consistent with the guidance provided on our third quarter earnings conference call, revenue was essentially flat quarter-over-quarter and largely reflected our expectations for a seasonally weaker fourth quarter. As reported, adjusted EBITDA for Q4 2021 was approximately $51 million, representing a sequential improvement of approximately $20 million or 61% quarter-over-quarter. In percentage terms, adjusted EBITDA was up approximately 120 basis points quarter-over-quarter to 17% of consolidated revenue. The merger contributed $17 million of the quarter's adjusted EBITDA increase. The balance of the adjusted EBITDA increase reflects a modestly more favorable activity mix, but limited pricing traction today, at least in international markets. On a pro forma basis, adjusted EBITDA was up $6 million, or approximately 12% quarter-over-quarter. In percentage terms, pro forma adjusted EBITDA was up approximately 270 basis points quarter-over-quarter to 17%. Relative to 2020, reported revenue was up $151 million, or 22% year-on-year, $112 million of which was due to the merger. The remaining increase was driven by higher activity across North and Latin America (NLA), Europe and Sub-Saharan Africa (ESSA), and Asia Pacific (APAC), partially offset by a reduction in activity in the Middle East and North Africa (MENA) segment. On a pro forma basis, consolidated revenue was up $78 million or approximately 7% year-over-year. As reported, adjusted EBITDA for 2021 increased by $26 million, or 26%, to $126 million. Adjusted EBITDA margin was 15% for both 2021 and 2020. On a pro forma basis, adjusted EBITDA increased by $49 million, or approximately 45% year-over-year to $158 million. In percentage terms, pro forma adjusted EBITDA was up approximately 360 basis points year-over-year to approximately 14%. As highlighted in our press release, the adjusted net loss for the fourth quarter of 2021 was $4 million or $0.03 per common share, compared to adjusted net income for the third quarter of $1 million or $0.02 per common share, with a sequential trend largely reflecting incremental per-share depreciation, amortization and tax expense as a result of the merger. The adjusted net loss for 2021 was $19 million or $0.24 per common share, compared to an adjusted net loss for 2020 of $29 million or $0.41 per common share, with a year-over-year trend largely reflecting incremental per-share adjusted EBITDA. Total liquidity at the quarter end was approximately $370 million. Cash and cash equivalents, including restricted cash, were $240 million as of December 31. Total liquidity also includes $130 million available to the company for drawdowns as loans under a $200 million revolving credit facility. The balance of the facility is available for bonds and guarantees. Expro had no interest-bearing debt at the end of Q4 2021 and the company had no interest-bearing debt at the time of this call. During the quarter ended December 31, 2021, cash provided by operating activities, net, was $16 million as compared to cash used in operating activities of $2 million in Q3 2021. Q4 adjusted operating cash flow, reflecting cash used in operations before cash paid for interest, severance and other expenses and merger integration expenses, was $41 million, compared to $11 million in Q3 2021. Investing and financing activities collectively generated $160 million of cash in Q4 2021 and primarily reflected $190 million of cash and cash equivalents and restricted cash that was acquired as a result of the merger, partially offset by capital expenditures in the quarter of $28 million, $20 million of which was CapEx related to core operations, including $5 million related to well construction business of legacy Frank's, and $8 million of which was related to new technology investments such as Lightweight Intervention, CoilHose and annual integrity, all of which we expect to generate material revenue and good margins in 2022. CapEx as a percentage of revenue continues to trend downwards, management focused on maximizing utilization of existing assets and where practical limiting new capital expenditures. The company continues to plan for 2022 capital expenditures in the range of $90 million to $100 million or 7% to 8% of expected revenue. Moving into the details by reporting segment: North and Latin America (NLA) revenue for the fourth quarter of 2021 was $100 million, an increase of $68 million quarter-over-quarter. Approximately $67 million, or nearly all of the sequential increase in revenue, related to the merger. So pro forma NLA revenue was essentially flat quarter-over-quarter. In particular, a sequential increase in revenue in South America was primarily driven by well intervention and integrity activity in Argentina and subsea well access activity in Brazil. In the Caribbean, growth was driven by intervention and integrity activity and was offset by a sequential revenue decrease in our North American offshore business, largely driven by a relatively large tubular sale by legacy Frank's in Q3, which was not repeated in Q4, and in Mexico which reflected lower rig activity and therefore lower well flow management activity. U.S. land revenue was essentially flat quarter-over-quarter, as our focus in this market remains on margin over market share. On a pro forma basis, Q4 revenue in NLA was up 16% year-over-year. As reported, NLA full-year revenue for 2021 was $193 million, an increase of $77 million, or approximately 67%, of which $67 million relates to the merger. On a pro forma basis, full-year NLA revenue was $393 million and was up 6% year-over-year. As reported, NLA Segment EBITDA for the December quarter was $21 million, approximately 21% of segment revenue, up by $16 million quarter-over-quarter. For Q3 2021, NLA Segment EBITDA was 17% of segment revenue. On a pro forma basis, NLA Segment EBITDA was essentially flat quarter-over-quarter in dollar and percentage terms. As reported, full year 2021 Segment EBITDA for NLA was $32 million or approximately 17% of segment revenue as compared to essentially breakeven results for legacy Expro for the full year 2020. On a pro forma basis, NLA Segment EBITDA for 2021 was $75 million or 19% of segment revenue. Pro forma Segment EBITDA was up $36 million, or approximately 8.5 percentage points year-over-year. Legacy Frank's had a particularly strong position in NLA and we expect that NLA financial results for the combined company will continue to benefit from the incremental scale, complementary operating footprints and customer relationships that were made possible by the merger. For the ESSA segment, which is Europe and Sub-Saharan Africa, revenue in Q4 was $94 million, which was up $7 million or approximately 8% quarter-over-quarter. The sequential improvement was primarily due to the merger, which contributed incremental revenue of $29 million. This was partially offset by production equipment sales in Sub-Saharan Africa totaling approximately $21 million that occurred during Q3 but did not recur in Q4. On a pro forma basis, Q4 ESSA revenue was down 18% quarter-over-quarter, again reflecting Q3 equipment sales which were not repeated in Q4. Excluding the production equipment sales, ESSA revenue was essentially flat quarter-over-quarter, reflecting the offsetting effects of a sequential revenue increase in the U.K., which was primarily driven by well intervention and integrity and subsea well access activity, and the sequential and largely seasonal revenue decrease in Norway, which most significantly impacted our vessel management activity. On a pro forma basis, Q4 revenue in ESSA was up approximately 40% year-over-year. As reported, ESSA revenue for the full year of 2021 was $301 million, an increase of $81 million, approximately 37% year-over-year. Approximately $28 million was due to the merger. On a pro forma basis, full-year ESSA revenue was $373 million and was up approximately 25% year-over-year. Excluding the previously referenced production equipment sales, pro forma ESSA revenue was up approximately 18% reflecting easing of COVID restrictions, incremental customer spending and brownfield enhancement programs. As reported, ESSA Segment EBITDA for the December quarter was $20 million or 21% of segment revenue. ESSA Segment EBITDA increased $2 million quarter-over-quarter with Segment EBITDA as a percentage of revenue improving approximately 1 percentage point quarter-over-quarter. The increased Segment EBITDA was primarily through the merger, which contributed incremental ESSA Segment EBITDA of $9 million for the fourth quarter results. This was partially offset by reduced Segment EBITDA due to the non-recurring production equipment sales and a modestly less favorable activity mix. On a pro forma basis, ESSA Segment EBITDA was down approximately $5 million quarter-over-quarter and ESSA Segment EBITDA as a percentage of segment revenue was down approximately one percentage point quarter-over-quarter, again largely reflecting the non-recurring equipment sales in Q3 and a modestly less favorable activity mix. As reported, full year 2021 Segment EBITDA for ESSA was $53 million or approximately 18% of segment revenue. For 2020, ESSA Segment EBITDA was approximately 16% of segment revenue. On a pro forma basis, ESSA Segment EBITDA for 2021 was $72 million or approximately 19% of segment revenue. Pro forma segment EBITDA was up $24 million, or approximately three percentage points year-over-year. For the MENA segment, revenue in the fourth quarter was $49 million, an increase of $11 million or approximately 30% quarter-over-quarter. The merger contributed $8 million of sequential increase in revenue in the quarter. On a pro forma basis, Q4 revenue in MENA was up approximately 8% quarter-over-quarter, largely reflecting increases in well flow management activity in Algeria and Egypt. Activity in other key markets, including the Kingdom of Saudi Arabia, was relatively stable quarter-over-quarter. On a pro forma basis, Q4 revenue in MENA was down approximately 4% year-over-year. As reported, MENA revenue for the full year of 2021 was $171 million, a decrease of $23 million or approximately 12% year-over-year. Relative to 2020, lower revenues in MENA largely reflect lower well flow management activity across the region, offset by approximately $8 million of Q4 MENA revenue that was a result of the merger. On a pro forma basis, full year MENA revenue was $194 million and was down approximately 13% year-over-year. As reported, MENA Segment EBITDA for the December quarter was $16 million or approximately 33% of segment revenue, an increase of $5 million, or approximately four percentage points quarter-over-quarter. An increase of $1 million was due to the merger and the remaining increase was due to a more favorable activity mix and improved activity levels, which also contributed to the improvement of segment EBITDA margin during the fourth quarter. On a pro forma basis, MENA Segment EBITDA was up approximately $5 million quarter-over-quarter and MENA Segment EBITDA as a percentage of segment revenue was up approximately eight percentage points quarter-over-quarter to 32% of segment revenue, largely reflecting a more favorable activity mix. Start-up costs of new projects, which were a drag on Q3 Segment EBITDA margins, also contributed to the sequential improvement in financial results for MENA. As reported, full year MENA Segment EBITDA was lower than the prior year by approximately $21 million due to lower activity on higher-margin contracts and the just-referenced start-up costs, partially offset by an increase in segment EBITDA related to the merger, which contributed approximately $1 million of MENA Segment EBITDA. In percentage terms, MENA Segment EBITDA margin for 2021 and 2020 was 33% and 40% respectively. As reported, Asia Pacific (APAC) revenue for the fourth quarter was $51 million, which was an increase of $11 million, or approximately 28% sequentially. The merger contributed $8 million of the increase in revenue in the quarter. On a pro forma basis, revenue in APAC was up approximately 5% quarter-over-quarter, reflecting a modest easing of COVID-related restrictions, and higher subsea well access activity in Malaysia and increased well intervention and integrity activity in Thailand, Indonesia and Brunei. On a pro forma basis, Q4 revenue in APAC was up approximately 17% year-over-year. As reported, APAC revenue for the full year of 2021 was up $15 million, or approximately 10% year-over-year. The merger contributed $8 million of incremental revenue and the remaining increase was driven by increased well flow management and well intervention integrity revenue. On a pro forma basis, full year APAC revenue was $184 million and was up approximately 5% year-over-year. As reported, APAC Segment EBITDA for the December quarter was $12 million or approximately 24% of segment revenue, an increase of $4 million or approximately five percentage points quarter-over-quarter; an increase of $1 million was due to the merger. The remaining increase was due to a more favorable activity mix. On a pro forma basis, APAC Segment EBITDA was up approximately $3 million quarter-over-quarter, and APAC Segment EBITDA as a percentage of segment revenue was up approximately 5.5 percentage points quarter-over-quarter. As reported, full year 2021 Segment EBITDA for APAC was $33 million, or approximately 21% of segment revenue. For 2020, APAC Segment EBITDA was approximately 24% of segment revenue. On a pro forma basis, APAC Segment EBITDA for 2021 was $35 million or approximately 19% of segment revenue. Pro forma segment EBITDA was down approximately $2.5 million, or approximately 2.5 percentage points year-over-year, reflecting a less favorable activity mix driven by lower subsea well access activity and reduced activity on higher-margin contracts. As Mike mentioned, our integration plans are progressing well. We are already starting to realize the significant synergy benefits we anticipated when we first announced our business combination. During the fourth quarter, we identified and actioned cost savings representing more than 50% of our previously stated $55 million run rate cost synergies target for the first 12 months following the merger close. It will take a quarter or two for our financial results to reflect such cost synergies, but we remain confident that we are on track, if not a bit ahead of schedule with regards to the first-year synergies targets. As noted in our press release, and as Mike highlighted in his remarks, we are also now pursuing growth opportunities afforded by our broader portfolio and geographic footprint with early wins such as the recent TRS award in the Kingdom of Saudi Arabia, increasing our conviction that revenue synergies will allow us to realize incremental adjusted EBITDA growth as we continue to benefit from our strong customer relationships, global scale and the tailwinds from the multi-year industry recovery and global economic recovery that are beginning to play out. As we further improve our cost structure and capitalize on the global recovery, we expect to generate strong free cash flow. To reiterate our near-term outlook, we expect that Q1 2022 revenue will be generally flat relative to the circa $300 million of revenue reported for Q4 2021 and that we will also experience some sequential margin compression driven primarily by a less favorable mix of activity. In particular, we expect that adjusted EBITDA margin in the first quarter of 2022 will be 12% to 14% of consolidated revenue. As we move into the Northern Hemisphere summer season in the second quarter of 2022 and onwards, we expect that our H2 2022 revenue run rate will approach that of the pre-pandemic 2019 revenues of legacy Expro and legacy Frank's on a combined basis, implying quarterly revenue in the back half of 2022 of approximately $325 million to $350 million. With the benefit of fall-through on incremental revenue and synergies, expected adjusted EBITDA margins in the second half of 2022 will be in the area of 20% of revenue. As always, our objective is to enhance long-term value for our shareholders, employees, partners and the communities in which we operate. With that, I will turn the call back over to Mike for a few closing comments.

Thank you, Quinn. We ended 2021 on a strong note with excellent fourth quarter operating performance that demonstrates the potential of our resilient, flexible business model. As we look ahead to 2022, we are well-positioned to build on our momentum given our strong business fundamentals and tailwinds from broader industry trends. We are gaining more traction in the market to win new business and expand our mandate with existing customers as our team capitalizes on our broader portfolio, best-in-class service quality and our reputation as an industry-leading well expert with a focus on well integrity. Leveraging our strong innovation platform, we continue to advance our technology to develop the next generation of solutions to address our customers' needs and support their carbon reduction objectives. We are capitalizing on the industry recovery as drilling activity continues to ramp up, particularly offshore and in key growth markets where we are fortunate to already have a strong presence. As customers increase activity, we're also seeing more demand for carbon reduction solutions across the board. Suffice to say, we are firing on all cylinders and are well-positioned to continue delivering excellent service to our customers by implementing our thoughtful plans to unleash the full power of Expro. I am particularly proud to see how our combined team is coming together to support each other and deliver exceptional service to our clients. Their work is inspiring and is the bedrock of our success. I'm excited entering 2022 as a new company and look forward to what the future holds for us as we focus on accelerating growth, improving profitability and enhancing value for shareholders, employees, customers and partners. Thank you again. Operator, let's go ahead and open up for questions.

Thank you. We will now proceed with the Q&A. The operator will provide instructions for participants on how to ask questions. Today, we'll first begin our Q&A session with a few questions that we have received from our pre-registered callers. The first question is: could you provide more detail on how you believe Expro is differentiated in the market? What do you believe you are providing that others are not?

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

Great. I think that's a good question. I like to think about Expro in terms of upscale solutions and overall service. With the new combined company, we have a significant global footprint that includes operations in all the key growth markets where our customers operate. Our scale and geographic footprint will allow us to expand our relationships with those customers and ultimately provide them with the same services they rely on across different regions and different operations. In particular, we're well-positioned across many of the key markets where we see strong growth activity potential, in particular North America, the North Sea and the Middle East. In addition to our broad footprint, with the new combined company we offer an expanded suite of solutions that allows us to serve our customers in all stages of the well lifecycle. When our customers are beginning new exploration activity, managing current well flow, or completing new wells, the combined company has best-in-class solutions that can support that full lifecycle activity. This proposition allows us to serve customers today and gives us visibility into their future projects, helping us anticipate how we can support them better in the future. A good example is in the Middle East where we won a well construction contract, which was our first noteworthy revenue synergy from the merger. We're also very focused on leveraging our strong innovation and technology platforms that allow us to continue to advance solutions that support our customers. Finally, customers often come to Expro for our solutions, but the reason they stay with us is our excellent service quality. Both Frank's and Expro have always been known for service quality, and since completing the merger we're already starting to see the tremendous potential benefits of the combination from our customers' perspective. Our outstanding service quality was highlighted by the ESSA performance this quarter. Exceeding 97% on customer feedback means you're really clicking on all cylinders; it's a real testament to how well the team is performing. With a broader footprint, an expanded suite of solutions, and strong service quality, we position ourselves as a partner for our customers in the industry. On the energy transition question, it's top of mind in the industry. Almost every conversation with our customers and partners includes it. Customers increasingly ask how we can help reduce project carbon footprints. We believe our commitment to sustainability and our portfolio of carbon reduction solutions is a key differentiator. In 2021, 40% of our R&D spending focused on solutions to help customers reduce their carbon footprint, and we expect to allocate almost 50% of R&D to this area in 2022. We think we can develop advanced solutions that play a critical role for our customers' emission reduction goals and our own. Separately, we are focused on our own sustainability goals: targeting a 50% reduction in our carbon emissions by 2030 and net zero by 2050. Demonstrating this commitment in our operations shows customers we practice what we preach.

Our next question comes from Taylor Zurcher from Tudor Pickering Holt. Taylor, your line is now open.

Hey, Mike and Quinn, thanks for taking my question. I have a first one on the MENA region — really strong Q4 results in that geographic segment. Given this constructive commodity price environment, could you shed some light on the mindset of your NOC customers in that region today? What might that mean for growth in MENA for you over the course of 2022?

Hi Taylor, good question. We're seeing continued investment from our NOC customers in the Middle East. They tend to be methodical and careful on investment decisions and ramping up activity, but the strong commodity prices today are supportive. We've been able to leverage contracts such as the TRS contract in Saudi. Because of our presence from the legacy Expro business and the combined company, we expect to expand our footprint throughout the Middle East. Overall, the industry should be strong in the Middle East as we continue into 2022.

Yeah, good to hear. Follow-up on free cash flow: I asked this last quarter as well. I imagine some more cash outlays for merger and integration expenses in the near term, but thinking about full-year 2022, is it reasonable to assume that the cash balance on the balance sheet is likely to build from current levels exiting 2022 relative to today?

That's certainly our expectation, Taylor. Free cash flow can be defined differently across investors, but based on the guidance we've given today — adjusted EBITDA margins of 12% to 14% in Q1 and about 20% in the back half — you can interpolate for Q2 and average across the year. That puts you in the mid-to-high teens on EBITDA margin for the year. Management remains focused on constraining CapEx; planned revenue-related CapEx is in the high-single digits as a percentage of revenue. Using EBITDA minus CapEx as a proxy suggests a high-single-digit free cash flow margin target. We do expect to build cash this year, notwithstanding integration-related expenses including some CapEx associated with facilities consolidation.

Awesome, thanks for the answers.

Our next question comes from James West of Evercore ISI. James, please go ahead.

Hey, good morning, Mike and Quinn. Thanks for the guidance for the full year — that was helpful. As we think about the integrated business, curious, Mike, in your conversations with customers, particularly in the offshore environment, do you start to see momentum building for at least a decent offshore cycle into 2023 and 2024?

I think completing the merger has given me an opportunity to speak with and meet a lot more customers. Today there is cautious optimism. We expect a meaningful portion of FIDs will be offshore — roughly 60% of the commitments anticipated — and we should see momentum build in the second half of the year. I don't think we'll see the same level of multi-well FIDs approved immediately as in the past; operators are approving smaller phased programs, but positive sentiment is increasing and I have more confidence today in our activity set for the end of the year than I did at the end of last calendar year.

If you look at customer inquiry activity, campaigns that historically were approved as multi-well programs are being approved in more discrete elements. For example, an eight-well program might be approved as two separate four-well approvals. One interesting knock-on effect is that customer turnaround requests, for example for subsea completions work, seem to be shortening.

Okay, that's very interesting. Thanks. Then on the carbon reduction solutions that you provide, are those scoped into contracts at this point where customers are specifically asking for those, or is it more of a conversation topic?

Right now it's more of a conversation topic. We're starting to see requests and some requirements, especially from more European-centric operators. It's not yet compulsory, but there is an emerging scope and definition. I view it somewhat like HSE performance was 15 years ago: it initially started as data provision and then became a prerequisite. We're at the stage of providing data for some customers and I think that'll become more of an industry norm over time.

Right. Okay, got it. All right, thanks, guys.

Our next question comes from Ian Macpherson from Piper Sandler. Your line is now open.

Hi, good morning. This is John stepping in for Ian. Given that you currently have over $2 per share of cash on the balance sheet and visible free cash flow generation, could you please provide a reminder on your capital allocation priorities?

In regards to capital allocation, our number one priority is generating free cash flow. We're only one quarter into the combined company and we'll have a robust dialogue with our board as we gain better visibility on the timing and trajectory of recovery, particularly offshore. We understand investor expectations and the full suite of alternatives will be on the table, whether incremental organic investments, bolt-on M&A, or some repatriation strategy. We expect that discussion to play out over 2022. For now, our initial focus is on generating cash flow more so than on specifying allocation outcomes.

Okay, great, thanks for the color there. And then to follow up: we're early in the integration period, and there's naturally some noise in EBITDA adjustments, specifically with stock-based comp and merger and integration expenses. Could you help us think about how these items settle over the next few quarters?

Sure. We will file our inaugural Form 10-K early next week and a lot of the details regarding stock-based compensation will be included there to help you understand go-forward expectations. I'll point out that the vast majority of the stock-based compensation expense recognized in the Form 10-Q relates to valuation of legacy Expro options based on the merger closing stock price; we recognized a substantial non-cash expense related to those legacy option programs. Those details will be available in the 10-K. Regarding merger integration expenses, we will continue for a couple of quarters to recognize severance associated with support cost rationalization, some operating expense reductions and likely a bit of CapEx associated with consolidation of facilities. For example, we're consolidating a single headquarters in Houston and recognized some lease abandonment costs in Q4 related to that. We'll continue to have some of those expenses, but we expect that once we get through 2022 the numbers will settle down and you'll see fewer adjustments. The schedules we provide with the press release should help cut through the noise and show core operational performance.

Great. Thanks for taking my questions. I'll turn it back.

Thanks, John.

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