Expro Group Holdings N.V. Q3 FY2024 Earnings Call

Hello, and welcome to the Expro Q3 2024 Earnings Presentation. My name is Elliot, and I'll be coordinating your call today. I would now like to hand over to Chad Stevenson, Director of Investor Relations. Please go ahead.

Welcome to Expro's third quarter 2024 conference call. I'm joined today by Expro's CEO, Mike Jardon; and Expro's CFO, Quinn Fanning. First, Mike and Quinn will have some prepared remarks. Then, we will open it up for questions. We have an accompanying presentation on our third quarter results that is posted on Expro's website, expro.com, under the Investors section. In addition, supplemental financial information for the third quarter results 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 responsibilities to update forward-looking statements as of any future date. The Company has included in its SEC filing 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 the call are defined and reconciled to the most directly comparable GAAP financial measure in our third quarter 2024 earnings release, which can also be found on our website. With that, I'd like to turn the call over to Mike.

Thank you, Chad. Good morning, and good afternoon, everyone. I'd like to start off by reviewing the third quarter financial results summarized in today's earnings press release. I will then discuss the macro environment, which notwithstanding near-term headwinds, we believe supports a solid multiyear outlook for energy services companies with exposure to international and offshore markets, presenting a compelling opportunity for Expro. Finally, Quinn will provide some additional commentary on the just completed quarter and share some additional financial information. For a recap of consolidated results and quarterly results by region, I'll direct you to Slides 3 through 7 of the presentation that we posted on expro.com. Turning to Slide 3. I am pleased to report a solid quarter for Expro with Q3 2024 revenue of $423 million and adjusted EBITDA of $85 million, both within our quarterly guidance ranges. Q3 revenue was essentially at the midpoint of our guidance, and adjusted EBITDA was at the low end of guidance, largely reflecting the recognition of a $7 million negative impact on our Congo Production Solutions project pending resolution of several variation orders. Excluding such losses, we would have been above the midpoint of adjusted EBITDA guidance for the September quarter. As anticipated, the sequential revenue decline of $47 million or 10%, largely reflected the ramp-up of a construction and delivery phase of the Congo project as well as strong Q2 results for our subsea well access business which was driven by PRT activity and NLA and legacy Expro activity and ESSA. Our press release also highlighted sequentially lower well construction and well test activity in NLA, compared to Q3 2023, revenue was up $53 million or 14%, largely reflecting the results of PRT Offshore and Coretrax partially offset by lower revenue from the Congo Production Solutions project. Q3, 2024 adjusted EBITDA decreased $10 million or 10% sequentially and increased $35 million or 69% compared to Q3 2023. In addition to losses recognized on the Congo project in Q2 and Q3 of 2024, note that Q3 2023 adjusted EBITDA included $50 million of LWI-related unrecoverable costs, which were not repeated in Q3 2024. The business continues to generally move in the right direction, and we remain confident that we are in the early innings of a multiyear up cycle for international and offshore leveraged energy services companies that will continue to create growth opportunities for Expro. Having said that, over the past few months, commodity prices have been under pressure, and customers are being more cautious with discretionary spending, increasing their focus on service costs and selectively delaying the start-up of new projects. As a result, we are seeing moderated growth in certain regions, including North and Latin America. As a result, we are refining our full year guidance range to reflect expectations for revenue of between $1.72 billion and $1.75 billion, and expectations for adjusted EBITDA of between $335 million and $350 million. It is important to note we have an active dialogue with our customers related to project timing and scope across all markets. If customer 2025 budgets, as expected, reflect a more cautious approach, the greatest impact will likely be on short-cycle activity and within the North America onshore market with long-cycle activity in the international and offshore markets likely remaining the most resilient. We believe that select projects may be delayed a quarter or two, resulting in a slow start to 2025, but our leverage to long-cycle development, including deepwater, gives us confidence that Expro's business momentum will be sustained moving forward. Assuming OPEC+ navigates near-term supply challenges, commodity prices should recover with demand and activity should gain momentum as we progress through 2025. The energy services industry has essentially no spare capacity and continued capital discipline should support pricing for the technology-enabled services and solutions that Expro provides. While I am confident that net pricing gains will provide scope for margin expansion as sentiment improves, we have recently kicked off several initiatives to further rationalize our support costs to improve operating leverage with expected growth. I don't plan to announce cost targets today, but we will incorporate such targets into our 2025 guidance, which will be provided when we report Q4 results in February. Before turning to the regions, I want to highlight that Expro has been recognized in two industry awards. Our CENTRI-FI consolidated control solution has been selected by Heart E&P's panel of independent judges as winner of the 2024 Special Meritorious awards for engineering innovation in the digital oilfield category. This month, Expro was also recognized as finalists across three categories in the Gulf Energy Excellence Awards. These recognitions reflect our commitment to innovation and leadership within the industry's ongoing sustainability journey. Now moving on to the regions. For North and Latin America, third quarter revenue was $139 million, a decrease of $18 million or 11% quarter-over-quarter, reflecting decreased activity and well construction, well flow management and subsea well access activity in the Lower 48, the Gulf of Mexico and in Mexico. In South America, the well flow management team had a strong quarter in Argentina and the well construction team continued strong performance in Guyana. The NLA segment EBITDA margin at 24% was down from 28% in Q2 2024, reflecting decreased activity and a less favorable activity mix in the region, including what we expect will be a short-term DST hiatus by our primary customer in Mexico. Additionally, we continue to expand Expro's remote boxing device in deepwater Brazil, following our successful trial that demonstrates the safety and reliability of our solution. The solutions consistent performance delivers value on every connection with a cumulative potential to reduce over 28 hours of red zone exposure per well. For Europe and Sub-Saharan Africa, third quarter revenue was $131 million, a sequential decrease of $37 million or 22%, driven by the delivery of a large subsea project in Q2 and lower revenue recognized on the Congo Production Solutions project. Segment EBITDA margin at 24% was up 3 percentage points sequentially and down 4 percentage points relative to Q3 2023. Again, reflecting Q2 and Q3 2024 losses on our Congo project pending resolution of variation orders. To expand on our Congo project, the site is 99% complete, with only equipment retrofits and commissioning remaining. As mentioned last quarter, the first gas export to the client’s floating liquefied natural gas facility was within 22 months of the contract. The plant has successfully operated at 10% overcapacity to demonstrate the plant’s design flexibility. And while our percentage of completion accounting for higher-than-expected costs during Phase 1 of the project have negatively impacted group results, I’m comfortable that we will reach an acceptable resolution of pending variation orders in the coming months. More broadly, our ESSA business has good momentum as we continue to capitalize on the increased activity in the region. The subsea well access business had a strong second and third quarter, respectively, delivering projects in Angola and the Ivory Coast. The subsea team has another large project in Angola that is scheduled for delivery in Q4. Similarly, in Q3, the well flow management team was awarded a well cleanup package to bring eight new wells into production in Norway, which is valued at over $10 million. While not a lot of new development is happening in the U.K. due to an unfavorable tax regime, we expect the P&A market to gain momentum in the new year, and we offer several differentiated services that should lead to incremental opportunities in that market. Finally, in Kazakhstan, we progressed an important project where we delivered three well test packages, allowing the client to achieve early production from their field, where we are processing significant gas and condensate volumes. The Middle East and North Africa team delivered another excellent quarter with revenue of $87 million, up 7% driven by a full three months of revenue from Coretrax. MENA segment EBITDA margin at 35% was flat quarter-over-quarter and up about 6 percentage points year-over-year. Within the region this quarter, we surpassed 1 million hours of data transmission from our data to desk or D2D solution and establish capability used for transmitting and presenting data from the well site in real-time. Users access their data from the well site to any web-enabled device in any location across the globe, and it ensures decisions on well performance are based on the latest available data. Finally, in Asia Pacific, third quarter revenue was $65 million, up 4% relative to the June quarter, primarily reflecting increased activity in Thailand, Australia, and an increase in Coretrax revenue. Asia Pacific segment EBITDA margin at 25% was up 1 percentage point from the prior quarter, which reflects the impact of the Coretrax acquisition. In Brunei, the well intervention and integrity team successfully executed the client's first distributed fiber optic sensing or DFOS job and two wells delivering unique insights that traditional methods couldn't match. DFOS data help pinpoint the ideal injection pressure at rates, permitted fracture extension and minimized integrity risks. It also enabled the client to isolate unproductive zones, optimize the injection profile and refine future well completions, literally transforming their approach to well performance monitoring. In terms of commercial activity, we have continued to build on our momentum, capturing roughly $354 million of new contract awards, including well construction contracts worth approximately $80 million and $31 million in the Gulf of Mexico and Angola, respectively. Our backlog remains healthy at approximately $2.3 billion at the end of the quarter, including roughly $100 million of Coretrax and PRT backlog, which, on an apples-to-apples basis is consistent with the end of the previous quarter. To provide an update on Coretrax, integration efforts are well underway. We are streamlining functional support where it makes sense, and the Expro and Coretrax teams are collaborating on tenders across the world to realize the potential of pull-through revenue synergies. For example, we successfully performed five expandable jobs for a new client in Kuwait. Their operations team recognized our casing patch products as the preferred solution for addressing casing corrosion and to provide perforation seals. In Brunei, we had one of our first cross-product line initiatives between Expro and Coretrax where a well construction field supervisor was mobilized offshore together with a Coretrax tech station to assist in the running of a CX2 bridge plug. As just one example of potential revenue and cost synergies, coordination of the Coretrax product line and our regional business development team supported incremental CX2 activity, and we avoided the need to mobilize additional personnel from outside the country. Turning to our market outlook. Despite near-term pressure on commodity prices, driven by weakened demand in China and uncertainty around future OPEC+ production levels, we remain optimistic about the long-term outlook for international and offshore services and we anticipate the demand for our services and solutions will continue to grow in 2025 and beyond as current commodity prices remain supportive of investment in long-cycle development. Oil demand is projected to outpace supply through 2024, resulting in inventory draws. If OPEC+ continues to delay production increases until late 2024 or early 2025 and successfully navigate near-term supply challenges, commodity prices should recover with demand and activity should gain momentum as we progress through 2025. Brent crude prices have declined from $80 per barrel in January of 2024 to an average of $74 per barrel in September, the lowest since December 2023 despite lower-than-average global inventories and the market being prospectively undersupplied. Since the end of the third quarter, the ebbs and flows of tensions in the Middle East have pushed Brent spot prices above $80 per barrel and then back to the mid-70s and the potential for further escalation creates significant uncertainty and volatility within the oil markets. EIA's assessment indicates ample crude production capacity remains available maintaining their price estimates at $76 per barrel the remainder of 2024. Looking ahead to 2025, production is expected to gradually surpass global demand growth as OPEC+ unwinds voluntary cuts and additional supply comes online from the United States, Guyana, Brazil and Canada. This shift is expected to drive inventory builds potentially resulting in downward pressure on oil prices, absent a better-than-expected demand recovery. Despite an anticipated modest decline in prices over the course of 2025, EIA currently expects Brent to average $78 per barrel next year. Importantly, expected prices should still support continued upstream investment and continued investment in deep water, in particular, due to the cost and transport advantages of deepwater barrels. In contrast, global gas markets are demonstrating more stability and storage levels in the U.S. are expected to keep U.S. prices below $3 per MMbtu throughout 2024. However, there is room for upward price movement by potentially stronger winter demand, continued global growth in LNG demand and the impending end of the Russia/Ukraine transit agreement in December of 2024. Overall, the gas market remains generally balanced with reasonable medium-term support for prices and continued investment in LNG to meet growing demand. Natural gas plays a critical role in reducing carbon emissions and electricity generation and is a key transition fuel towards achieving global Net Zero targets. Despite the negative tone in the equity market, operators remain focused on replacing produced reserves, as evidenced by record levels of FIDs in 2023 and expected sanctioning activity in 2024 and 2025, particularly in the lower cost, lower carbon offshore conventional sector. It is anticipated that in 2024 offshore will represent the majority share of greenfield projects with 82% expected to fall within the segment and 75% in 2025. This trend should support a multiyear demand for Expro services and solutions, particularly in our well construction and subsea well access product lines. Globally, constructive commodity prices should drive continued expenditures on exploration and production with near 2015 levels of upstream investment expected. Investment growth is largely driven by the offshore deepwater and shelf segments, particularly notable projects in Guyana, Brazil, the U.S., Mexico, Saudi Arabia, the Emirates, Norway, and China. In parallel, operators continue to focus on fiscal discipline, aiming to maximize production from existing assets while simultaneously reducing emissions to meet ESG targets. This focus will continue to drive demand for production-related activities, well intervention integrity technologies, and well flow management solutions. As mature assets approach the end of their economic life, the need for cost-effective plug and abandonment solutions is increasing, which is supporting the decommissioning market and driving incremental activity in Europe and in the U.S. Gulf of Mexico. Investments in new energy solutions, such as geothermal energy, particularly in Asia Pacific and the Europe Sub-Saharan Africa region, and carbon capture and storage, primarily in North and Latin America and Europe, are being driven by emissions reduction and Net Zero targets. These decarbonization efforts present additional opportunities for Expro's services and technologies. In summary, the underlying market fundamentals are set to drive a multiyear expansion for the energy services industry, positioning Expro and similar companies to assist operators in meeting growing demand for energy. Despite near-term uncertainty, commodity prices continue to support upstream investment in activities aimed at extracting resources from existing assets and developing new ones. As such, our company continues to see demand for our people, services, and solutions in support of our customer’s activities. With that, I'll hand it over to Quinn to discuss our financial results.

Thank you, Mike. As noted, we reported revenue of $423 million for the quarter ended September 30, compared to our guidance range for Q3 2024 revenue of $410 million to $430 million provided during our Q2 earnings call. Northern Latin America was the only region that fell below Q3 revenue expectations, mainly due to lower-than-anticipated well construction activity in the U.S. and well testing activity in Mexico, though this was partially offset by better-than-expected subsea results in the U.S. Gulf of Mexico. Sequentially, revenue decreased by $47 million due to the absence of a substantial subsea project in Angola from Q2 and the ramp-up of the construction and delivery phase of the Congo Production Solutions project, offset slightly by increased revenue in MENA, driven by additional activity and an extra month of Coretrax revenue. We anticipate a modest sequential rebound in NLA activity in Q4, partly due to an expected rise in well testing activity and solid sequential growth in ESSA, largely due to subsea activities. MENA and Asia Pacific should remain stable, with modest sequential growth and strong year-over-year growth mostly from increased subsea activities, including PRT and Coretrax. Revenue for the quarter ended September 30 increased by $53 million, or 14%, year-over-year, marking the strongest Q3 revenue since the Expro/Frank's merger in Q4 of 2021. Net income for the third quarter of 2024 was $16 million, or $0.14 per diluted share, compared to a net loss of $14 million, or $0.13 per diluted share, in the third quarter of 2023. Adjusted net income, which excludes merger and integration expenses, severance, other expenses, and stock-based compensation for Q3 2024, was $28 million, or $0.23 per diluted share, compared to a net loss of $6 million, or $0.06 per diluted share for Q3 2023. Adjusted EBITDA for the third quarter of 2024 was $85 million, consistent with Q3 guidance of $85 million to $95 million, representing a year-over-year increase of approximately $35 million, or 69%, relative to the third quarter of 2023. The adjusted EBITDA margin for the third quarter was 20%, which reflects an increase of roughly 650 basis points year-over-year. The sequential decrease in adjusted EBITDA results from lower well construction and well management revenue in NLA and reduced well home management and subsea well access revenue in ESSA, which was partially offset by higher revenue across several product lines in MENA due to additional activity and the extra month of Coretrax. The underperformance relative to expectations in Q3 is mainly linked to the losses recognized on the Congo Production Solutions project, awaiting the resolution of several variation orders. Results for the Congo project are included in the ESSA segment, within the well flow management product line. For context, we recorded $1 million in revenue from the Congo project in Q3 2024, $23 million in Q2 2024, and $36 million in Q3 2023. The margin recognized on the project in Q3 2024, Q2 2024, and Q3 2023 was negative $7 million, negative $12 million, and positive $12 million, respectively. Additionally, over the last four quarters, the ESSA segment's EBITDA margin has averaged around 24%. Excluding the Congo project, the segment's EBITDA margin would have been about 30%, or approximately 600 basis points higher. Total support costs for Q3 2024 amounted to $85 million, representing 20% of revenue, and remained flat sequentially. We continue to expect that support costs for the full year 2024 will remain around 20% of revenue. Corporate G&A, a category within total support costs, is expected to account for between 3% and 3.5% of revenue. Regarding liquidity, Q3 adjusted cash flow from operations, which excludes cash paid for interest, net, severance, other expenses, and merger and integration expenses, was $65 million compared to $64 million in Q3 2023. Working capital consumed approximately $4 million of cash during the quarter. Our total available liquidity at the end of the quarter was about $303 million, which includes cash and cash equivalents, along with restricted cash of approximately $167 million, and around $136 million available for borrowing under our revolving credit facility. At the end of the quarter, we had $121 million drawn on the credit facility. Turning to our outlook. Page 9 of our accompanying slide summarizes our guidance for Q4 and full year 2024. As Mike noted, we are refining full year 2024 guidance with anticipated revenues to be in the range of $1.72 billion and $1.75 billion and adjusted EBITDA to be within a range of $335 million and $350 million. Full year adjusted EBITDA margin is expected to be approximately 20%. Cash taxes for the year are expected to be within a range of 3% and 4% of revenue, and CapEx as a percentage of revenue is expected to be within the range of 7% and 8%. Moving to guidance for Q4 2024. Revenue is expected to be within a range of $440 million and $470 million, implying sequential and year-on-year growth at the midpoint of guidance of approximately 8% and approximately 12%. Adjusted EBITDA is expected to be within the range of $90 million and $105 million, implying Q4 adjusted EBITDA margin falling within the range of 20% and 22%. The high end of our guidance for Q4 revenue, adjusted EBITDA and adjusted EBITDA margin in part assumes a favorable resolution of variation orders on the Congo project. Looking ahead, we have previously stated that the current fundamental backdrop and underlying business momentum provide us with a clear path to $2 billion of run rate revenue, a mid-20s adjusted EBITDA margin, and a free cash flow margin of 10% over the medium term. We continue to believe that the markets to which we are most levered and our market position will ultimately support these medium-term targets. However, as Mike noted, given recent market headwinds, we expect that 2025 may start slow and that pricing gains may be more challenging absent an improvement in market tone. As a result, achieving these medium-term targets might be more aligned with a 2026 timeframe. In the meantime, we will continue to focus on integrating the businesses that we have acquired and improving margins by continuing to optimize our cost structure.

Thank you, Quinn. Expro has accomplished a lot year-to-date in 2024 with solid financial performance. Some key highlights include the acquisition of Coretrax, which enhances our depth and talent and the capabilities of our product offerings and the successful integration of the PRT offshore team. As Quinn stated, we believe that the fundamental macro backdrop while setting up to provide only modest near-term growth should provide a multiyear up cycle for the international and offshore sectors. We continue to enhance our ability to support our customers through the cycle with our cost-effective, technology-enabled services and solutions, which we believe can deliver enhanced returns to our shareholders. Based on project sanctioning levels and customer dialogue, we are confident in our future prospects and believe we have a clear path to sustain momentum for the remainder of the decade. We are confident that our talented global team's commitment to excellent execution and advancing our strategic initiatives will enable us to champion safety deliver best-in-class service across the life cycle of the field and capitalize on organic and inorganic growth opportunities. With that, we can now open up the call for questions.

First question comes from Neil Mehta with Goldman Sachs. Your line is open. Please go ahead.

I guess a couple of questions on the outlook. You did a great job kind of helping us understand the last quarter, but can you just talk about the revision to the 2024 outlook in a little bit more detail and what were the most important moving pieces? And then that kind of bridges me to the follow-up, which is, as we think about the path to 25% adjusted EBITDA margin and $2 billion of revenue, how should we think about the building blocks to get there and help the market get confidence around that? So, two related questions.

Thanks, Neil. I'll start, and then Mike can supplement. Yes. So, the midpoint of our current guidance is about 5.5% below the midpoint that we laid out on the Q2 call. Really, as I mentioned, performance also expectations for the third quarter, setting aside the Congo project, which we can touch on as well is really in the Northern Latin market we’ve had, as Mike mentioned, what we believe will ultimately be a temporary hiatus in DST activity as part of the cost containment effort. Similarly, in the Gulf of Mexico, we had weaker performance in the well construction product line and particular to a lesser extent, testing. There's weather in the Gulf of Mexico, certainly in the third quarter that had an impact. So, I guess from our perspective, the business is moving in the right direction, NLA has some soft spots that we just talked about. So, I guess as we kind of look forward, getting back to the momentum that we thought we had 60 days ago was really just to be a function of customer budgets, spending plans, and we think it's going to start a little slow given the market tone and the commodity price backdrop, but the sanctioning activity has been high. It's expected to remain high in the international offshore markets, so we should be a primary beneficiary of that. So, we may have a little bit of zigzagging over the next couple of quarters. But by and large, we think that the market is going to play to our favor. Again, getting to the higher end of the current guidance probably requires a favorable resolution of the Congo project variation orders. There's potentially some upside in terms of an extended season in the Northern European markets. If we see a return to the historical activity that we had in Mexico, that should probably help as well. But I would say, Asia Pac and MENA continue to perform strongly. ESSA is we're going to have a good quarter. We believe in the fourth quarter with Subsea project deliveries in Africa. And NLA, at least in our minds, is the biggest question mark in the short term.

Yes. And Neil, I guess a couple of things I would add is in the discussions that I'm having with customers, and to be honest, really over the course of the last 30, 45 days, I really kind of tried to redouble the efforts around that to understand where their thought process is that, and those types of things. And I'm certainly not seeing project sanctioning is not going to happen or those types of things, I think there’s just some choppiness right now. I think that the fact that there happens that we have to be in an election season in the U.S. is providing a little bit of uncertainty, ongoing what's going on in the Middle East and in Ukraine, which quite frankly, probably becomes more clear how those two areas will play out given post the election results in the U.S. I think that's kind of creating some uncertainty in the short term and whether that's another month or another two months or another quarter, I think, is to be flushed out. But I'm certainly not hearing anything from our customers where they're just not going to move projects forward. And I think if you look at some of the longer-term indicators, the three order backlogs and what's happening with some of the rig rates and what's happening with some of those kinds of things, that's why we continue to see strength in activity through the tail end of the decade. And then the only other comment I would make, and Quinn touched on it for Q4 here. Part of this is dependent upon the resolution we end up with on the Congo project. Keep in mind, that was a fast-track project. The nature of it was such that the variation orders would be agreed upon post the commissioning of the facility because it was intended to be fast track. It's a little bit unique, and we've taken a very careful approach because of project accounting guidance and those types of things, both in terms of how we reflect a thing in Q2 and Q3. And until we have more real clear certainty, i.e., signed variation orders, we're going to continue to be careful and methodical with that. But quite frankly, that was a project that was delivered 30% quicker than typical projects of that size and that requirement for the operator. And it's a facility we've been able to demonstrate has because of the design has a lot of flexibility in which we've been able to operate the facility at greater than 10% of the desired capacity. So, there’s a lot of those kinds of things. There’s just a lot of moving pieces and parts that we'll look to get resolved here in the coming couple of months.

And then just a follow-up, if you could talk about the bridge to that $2 billion and the 25% EBITDA margin. It sounds like you're thinking it could be a '26 event. What are the milestones we should be watching to suggest that you're moving towards that?

I guess just focusing on margins for a second. Really three building blocks that we've talked about on previous calls. Number one is going to be kind of activity set in the market. We think it's going to be against lower starting out the year. So, if you kind of slide our expectations to quarters. That's kind of where our heads are at right now. But it's activity mix, it's operating leverage and it's pricing. And if the activity mix because of a slower ramp-up in drilling completions activity is the case, that shifts things out a bit. As we've talked about in the past, our drilling completions levered businesses tend to come with the highest margins. So, if activity and pricing are going to be less part of the story in the short term, we're focused on maximizing operating leverage and that's why Mike mentioned that we have some cost initiatives. So, we've got more than one tool in the toolkit, and we may be emphasizing the cost side of things more so in the short term than the tailwind that comes with pricing or for that matter, more favorable activity mix. So, I think 60 days ago, we would have said that we would probably, at some point in 2025 we have that $2 billion run rate on a nice glide path towards the mid-20s EBITDA margins. And I still see that in our near-term future, probably shifted out at least a couple of quarters.

We now turn to Arun Jayaram with JPMorgan Chase. Your line is open. Please go ahead.

I wanted to maybe first start with Congo. Mike, my understanding is that you're delivering the plant in the third quarter, and then you would soon be shifting to the O&M piece, which is the eight-year contract. Is that still correct? And is it fair to say that some of the losses that you reported in the last couple of quarters, are those in the rearview mirror? And if you do get some resolution of the change orders that, that could potentially be booked into earnings in the fourth quarter. Just give us a sense of how the profitability of Congo goes from here? And what's embedded in that fourth quarter guide in terms of Congo?

Sure. No, it's a great question and I appreciate the opportunity to clarify it. So fundamentally, yes, we will go operational and move into the O&M phase here in any day now so to speak, the facility is up and running already, but the handover portion is about to be completed. So, we will move into that O&M phase. And that's part of the question around some of these outstanding variation orders is are they going to be tagged as part of the upfront build phase? Or are they going to be added into the O&M phase? And so that's part of what we're working our way through with some engagements with the customer. Overall, project economics may change a little bit based upon the build phase or the O&M phase based upon the resolution of those variation orders. But as I said a few minutes ago, fundamentally delivered 30% quicker than historical facilities have been delivered. We have the production capability, the capacity capability to ramp up to over 10%, so there's a lot of those kinds of positives. And it's just working our way through a fast-track project to get those kinds of things resolved and ironed out.

Okay. Got it. And then, in terms of the fourth quarter guide, what are your assumptions around Congo just to be specific?

Yes. So, as I mentioned in my prepared remarks, at the high end of guidance, we're going to have some margin recovery in the fourth quarter on the Congo project. As Mike mentioned, whether or not that is essentially resolved as part of the construction phase, which would benefit Q4 or Q1 results or if it's tacked on to the O&M phase, that will be spread over a longer period of time. So, I think that's a big question mark in terms of where we fall in the guidance. But maybe just to put things in context, the midpoint of the range that we're talking about is a little over 2% shy of where we established guidance at the beginning of the year, certainly moving to this upper half of the guidance as we revise things on the Q2 call is perhaps unfortunate retrospect. But we're still 5.5% lower from where we revised guidance to call it, 90 days ago. So certainly, the weather we're off 2% relative to the initial guidance for the year of 5.5% relative to the guidance we provided on 2Q, it's with a 40% stock price correction over 90 days, the equity market seems to have a more negative view of the outlook that we do.

Yes. Fair enough. Maybe my follow-up is just to maybe, Mike, to understand what’s your sense in the ground of trends in Mexico? And obviously, we had a handoff at the government level. So, I know there's been a little bit of a slack ending in activity. But what are you seeing on the ground? And maybe just remind us about Expro's exposure to Pemex in terms of your NLA segment?

Sure. There have been some changes in the government in Mexico and leadership shifts at Pemex. If you had asked me this question last week, my response would have been different because we’re currently observing a more historically significant trend in exploration than we did a month ago. It seems that they are in a process of sorting things out. Our involvement in Mexico mainly includes some exploration testing and a bit of well construction. These exploration tests can lead to substantial revenues, and if they don’t achieve success, they may not proceed with testing the well or might be carefully managing their exploration budgets as they've shown recently. That constitutes most of our exposure and activity in the region. We handle a lot of this through third parties rather than having a direct relationship with Pemex; we collaborate with other service providers.

Our next question comes from Eddie Kim with Barclays. Your line is open. Please go ahead.

Just wanted to touch on the outlook for next year. It seems like your views on next year have kind of come down a bit versus three months ago, especially with kind of the medium-term guidance, $2 billion revenue, 25% EBITDA margin is getting pushed out a few quarters. Is that related to the white space concerns for next year that the offshore drillers have been telegraphing over the past two to three months or is it something different?

Eddie, I would say that we are still in the early stages of our budget process for 2025. We conduct a thorough analysis grounded in specific customer feedback on projects. We are in the initial phases of this process. My observations are based more on sentiment rather than specific concerns about potential challenges translating into our activities based on direct discussions with customers. However, we are mindful of comments from others regarding a slowdown in offshore international activities, suggesting a shift from high single-digit growth to more moderate single-digit growth. We aim to remain attentive to this feedback. As we proceed with our budgeting, which will incorporate detailed customer project insights over the next 45 days, we will gain a clearer understanding of how this impacts our activities for 2025. I anticipate that 2025 may unfold in two distinct halves, with a certain activity level in the first half and a significant increase in the second half, which could pose operational challenges. That's my perspective on how we might see developments in 2025.

Okay. Understood. My follow-up is about net pricing. You mentioned earlier that net pricing gains in the second half of this year would contribute about 100 to 200 basis points to the overall EBITDA margin uplift. Is that still the expectation? Looking ahead to next year, I realize it may be challenging to achieve net pricing gains, as you suggested. What should we expect in terms of margin uplift next year, if anything?

Yes, Eddie, I believe the net pricing impact for the second half of 2024 is quite similar to what we discussed last quarter. We aim to achieve as much pricing adjustment as possible on a project basis, especially in terms of net pricing. The setup for 2025 in pharmacy will depend on the activity levels in the first half compared to the second half. If this trend continues, I feel we will likely see around 100 basis points of impact in the latter half of 2025. However, we are still in the early stages of our budgeting process, which involves examining how previous pricing levels affect next year's activities. That's my perspective. Quinn, do you have anything to add?

I think in terms of well construction, particularly regarding drilling completions and broader activity, we are experiencing improved pricing, as previously mentioned. The projects we have in our backlog are priced better than the work we've executed so far. Whether this trend continues in a more challenging environment is uncertain, but it will likely hinge on supply and demand dynamics, as well as the capacity constraints within deepwater well construction. The technology-enabled services in our landing stream-driven business have allowed us to maintain pricing, which we have been able to achieve. Whether this pricing persists is debatable. We had expected up to a 200 basis point benefit to margins in 2024 from pricing, which would have positioned us at the higher end of our initial guidance of 20% to 22% EBITDA margins. Based on current guidance, we are now estimating margins closer to around 20% for the year, and we anticipate finishing Q4 in the range of 21% to 22%. This is clearly lower than our expectations from 60 or 90 days ago.

Understood. And I appreciate we're a bit early on 2025. So, I appreciate all the color.

Thanks, good speak.

We now turn to Steve Ferazani with Sidoti. Your line is open. Please go ahead.

Mike and Quinn appreciate and responses this morning, to give us a little bit more understanding where things might be going. Can you talk a little bit about the new contract awards with a very solid backlog, which is back up the backlog that you're getting from Coretrax and PRT? Trying to get a sense of what's embedded in some of these more recent contract awards was embedded in margins? And are you seeing what you're getting in backlog to be better pricing, somewhat better pricing than what you're reporting right now?

Somewhat better is probably the best way to describe it. The improvements are primarily in the drilling and completions leveraged businesses, particularly in capacity-constrained areas like deepwater well construction and subsea. Generally, we've seen a 10% to 15% increase in pricing for deepwater well construction and subsea well access. However, this is not uniform across different regions or all of our product lines. Some product lines are showing positive movement, while others are not performing as well.

To reach that medium-term target by 2026, it still suggests at least double-digit top line growth in 2025 and 2026. Are you still comfortable with that?

I think we'll hold off on providing revenue or other guidance for '25 until we get through the budget season. But to get to those medium-term targets seen in our slides, contemplates plus 10% top line growth. And that's certainly not what we're expecting in the very short term. We think it's more of a '25.

Yes. Synergies and how you feel so far about Coretrax and where that's trending and your growth opportunities for Coretrax, what you're thinking now versus maybe 90 days ago when it was still much more recent?

We are very enthusiastic about Coretrax. It can be a bit challenging to truly gauge everything when you fully dig in, but I can assure you we have not encountered any surprises. One discussion I had with some members of the Coretrax team was about prioritizing the countries we should focus on first. Currently, we operate in about 10 to 12 countries with Coretrax, and we can't expand to 60 overnight. Therefore, we will concentrate on the most impactful markets in the right sequence, as the technology is impressive. The Coretrax team is especially excited because they have significantly more customer interactions and contracts in underrepresented markets, particularly in Latin America. This creates immense potential for revenue synergies, focusing on avoiding costs rather than just acheiving cost efficiencies. We'll enhance certain back-office support areas, including engineering, finance, IT, and HR, within Coretrax. This presents a fantastic opportunity for us, and we remain highly optimistic about it. We hope to continue accelerating growth for the business. This situation is similar to the outcomes we've seen from the PRT acquisition and DeltaTek; we obtained technologies alongside very capable teams, and now the challenge is to internationalize these solutions and strategically enter the next ten countries to maximize our potential.

Our final question comes from Josh Jayne with Daniel Energy Partners. Your line is open. Please go ahead.

So, if we take a step back and just think about a lot of the issues that you're trying to solve for in your business, specifically in deepwater. There's let's call this white space for the next 12 months, that's fine. But day rates are still elevated for a lot of the contracts that have been signed. And so, I would assume the value proposition hasn't changed for a number of your products. Could you speak to that a little bit?

Yes, that's a valid question, Josh. It's important to remember that the impact of the white space varies among different drillers. We're actively utilizing around 130 floating assets, with approximately 70 of those engaged in various services. I believe the impact of the white space is likely to be more pronounced in the first half of the year. We're witnessing strong healthy day rates being contracted, driven in part by efficiency improvements. This is why I mentioned in our prepared remarks the advancements we're making with CENTRI-FI and our DeltaTek cure technologies, as they significantly enhance operational efficiencies on the rigs. With elevated day rates, whether in the short, medium, or long term, employing technology that greatly reduces operating time and waiting time for cement results in real financial advantages for our customers. That’s how I see it unfolding. This perspective also supports my earlier comments about expecting to observe two distinct rates of activity growth in 2025, which I believe relates to some potential uncertainties associated with the white space.

Certainly. You’ve been quite active in mergers and acquisitions in recent years. One potential positive from the recent decline in oil prices over the summer is that it may create more opportunities for you. Could you discuss how the drop in oil prices has influenced the number of opportunities you’ve been able to evaluate in the past three to six months, how it may have altered your outlook, and how you're considering future capital allocations?

Sure. It's a good question. We have a dedicated corporate development team, although it's small, and we have been exploring many potential combinations over the past several years. We continue to put effort into this. For us, the guiding principle is the industrial logic that drives our thought processes. Our goal is to become more relevant to our customers, which we believe is crucial. If we achieve greater relevance, we can better explain to investors and analysts why this is beneficial for our company. Currently, we are heavily leveraged to the drilling and completion phases of the industry, aligned with our customers' capital expenditure spending. We feel this is advantageous given our expectations for drilling and completion activity for the rest of the decade. However, at some point, we will increase our exposure to our customers' operational expenditure spending, which will involve more production-related activities, optimization, and interventions. Therefore, we continue to evaluate various aspects and opportunities. I don't view the correction in commodity prices as a clear advantage or disadvantage for us. Instead, we focus on the long-term industrial logic and valuation aspects. In summary, we are actively pursuing opportunities that will strengthen our position and enhance our relevance to both our customers and the market.

Okay. I have one last question regarding 2025. In your prepared remarks, Mike, you mentioned that you won’t be providing specific cost targets for next year at this point. However, can you discuss at a high level the types of cost opportunities you are targeting? Clearly, there will be synergies from the mergers and acquisitions you've made, but could you elaborate on some of the areas where you see potential for cost improvements in the business as we look toward next year? This would be helpful to understand how you plan to achieve margin expansion even if the rig count remains flat.

Sure. I'll begin and let Quinn provide some additional insights. We initiated this effort about 60 days ago, before any softness in commodity prices. Our main goal is to determine how we can achieve more with less, focusing on increasing efficiency and improving operational processes. If we had aimed to accomplish these objectives over the next 18 to 24 months, considering a potentially softer market in 2025, we would likely be looking at a shorter time frame of 9 to 15 months instead. We are committed to intensifying our efforts to remove inefficiencies. This initiative is not solely about reducing headcount; it revolves around enhancing operational efficiencies and refining internal processes in areas like finance and supply chain. It's about simplifying our business, making it more efficient, and leveraging technology to help accelerate our goals.

And I think that we have made significant investments in systems, I mean this is not a novel concept, but investing a bunch in technology or an ERP platform in order to do bad processes faster is not what we would consider to be a win. So, we've made the investments in technology. We're trying to take a fresh look at our underlying business processes where there's inefficiencies redundancy within our matrix organization, whether there's scope for incremental rationalization of support whether there's opportunities to either centralize more in the existing centers of excellence or whatever, but yes, there's a cost benefit associated with it, but it's really about creating operating leverage with growth. And if we're in a lower growth environment in the short term, maybe it's more focused on where can we squeeze margin in the short term. But the real long-term objective is to make sure we get margin expansion with revenue growth, and as Mike said, is trying to do less with less. So, I think that's what it's about, and we'll have pretty specific targets internally, and we'll articulate in some form or fashion in February when we provide Q4 results. But as I mentioned earlier in the call, we've got three tools in the toolkit in terms of margin expansion, whether it's activity mix, pricing or operating leverage, the fact of the matter is in the short-term operating leverage has become more important than the other two, but all three should play into getting us to that mid-20s level that we've talked about.

Ladies and gentlemen, this concludes our Q&A and today's Expro Q3 2024 earnings presentation. We'd like to thank you for your participation. You may now disconnect your lines.