Earnings Call Transcript - XPRO Q4 2023

Operator, Operator

Hello, everyone, and welcome to the Expro Q4 2023 Earnings Presentation. My name is Emily and I'll be coordinating your call today. After the presentation, there will be the opportunity for you to ask any questions. I will now turn the call over to our host, Quinn Fanning, Chief Financial Officer. Please go ahead.

Quinn Fanning, CFO

Welcome to Expro's fourth quarter 2023 conference call. I am joined today by Expro CEO, Mike Jardon. First, Mike and I have some prepared remarks. Then we will open it up for questions. We have an accompanying presentation on our fourth quarter results just posted on the Expro website, expro.com under the Investors section. In addition, supplemental financial information for the fourth quarter and full year 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 responsibility to update forward-looking statements as of any future date. The company has included in its SEC filings, cautionary language identifying important factors that could cause actual results to be materially different from those set forth in any forward-looking statements. More complete discussion of these risks is included in the company's SEC filings, which may be accessed on the SEC's website, sec.gov or on our website again at expro.com. Please note that any non-GAAP financial measures discussed during this call are defined and reconciled to the most directly comparable GAAP financial measure in our fourth quarter 2023 earnings release, which can also be found on our website. With that, I'd like to turn the call over to Mike.

Mike Jardon, CEO

Thank you, Quinn. Good afternoon, everyone. I'd like to start off by reviewing the fourth quarter financial results presented in today's earnings press release. I will then discuss the macro environment, which we believe supports a favorable multiyear outlook for energy services companies, levered to international and offshore markets and presents a compelling growth opportunity for Expro. Finally, Quinn will share our outlook for 2024. 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 to expro.com. As you can see on slide 3, Expro begins 2024 in a strong position for growth having delivered a solid fourth quarter with actual results at or above the high end of the revenue and adjusted EBITDA guidance ranges that we provided on our third quarter earnings call. Fourth quarter revenue was $407 million, and adjusted EBITDA was $85 million or 21% of revenue. Adjusted EBITDA for the three months ending December 31 includes $4 million of unrecoverable LWI related costs. Excluding such costs, adjusted EBITDA would have been $89 million or 22% of revenue. Revenue for the 12 months ended December 31, 2023 was $1.5 billion, up 18% year-over-year. Adjusted EBITDA for 2023 was $249 million or 16% of revenue. Excluding unrecoverable LWI related costs of $36 million, adjusted EBITDA for 2023 would have been $285 million or 19% of revenue. Most significantly fourth quarter results reflect the expected rebound in North and Latin America activity. The notable step-up in revenue and profitability in the fourth quarter followed a relatively weak third quarter. NLA revenue at $145 million was up sequentially by $40 million primarily reflecting the increased well construction activity in the US Gulf of Mexico and Guyana and a rebound in well testing activity in Mexico. In addition, Q4 results include results of recently acquired PRT Offshore, which generated approximately $15 million of revenue in the December quarter. NLA segment EBITDA at 30% reflects the significant step up in revenue and a good mix of higher-margin activity. While the Q3 results reflected a confluence of factors, the NLA team has delivered very solid results since we completed the merger back in October of 2021 with approximately $1.1 billion of aggregate revenue over the last nine quarters. NLA segment EBITDA margin has averaged 27% since mid-2022. Operationally, noteworthy NLA, our Tubular Running Services or TRS business achieved an Industry-First in the Gulf of Mexico by successfully completing an operator's well using a fully non-marking completion running package. This running package provides the industry's only truly non-marking tubular running solution, which helps preserve well integrity and extends the life cycle of the well. This was also the first deployment of the Collar Load Support system in the region. The success of this completion run was the culmination of extensive planning and testing with a super major customer. This is a great example of our ability to provide solutions and positive results for the industry's most complex wells. For Europe and Sub-Saharan Africa, revenue at $134 million was generally flat quarter-over-quarter with lower revenue recognized on our ongoing ENI project in Congo. ESA segment EBITDA margin at 31% has been strong over the last several quarters. Notable in the ESA region, we were awarded a corporate frame agreement to deliver well testing services for Equinor in the Norwegian Continental Shelf. The four-year contract with the potential of three, two-year options builds on Expro's previous seven-year agreement. The scope of work includes well flow management and production optimization services to enhance Equinor's assets across completion, intervention, production, as well as abandonment operations. Building on the corporate frame agreement, the work scope will see the delivery of hydraulic intervention well services, using our innovative CoilHose light well circulation system that is designed to provide a more efficient and lower carbon footprint approach to operations versus traditional coiled tubing. A significant portion of the contract is directly linked to the demonstrable commitment to a low carbon plan allowing Expro to implement its environmental capabilities with Equinor and further enhance the strength and depth of this partnership. The Middle East and North Africa team also delivered an excellent quarter with revenue up 13% sequentially to $65 million and good fall-through on incremental revenue. META segment EBITDA margin at 33% was up about 3.5 percentage points quarter-over-quarter. Noteworthy in MENA, Expro's Automated Bucking and Catwalk system delivered improved safety and record efficiency on one of our clients' challenging wells. We were contracted to provide a high-quality, low-risk tubular running service to our clients' onshore fleet of drilling rigs. Making an operational first for the triple catwalk in the Emirates, on the initial deployment of our TRS system, we set a record for instantaneous tripping speed and the second-best performance overall tripping speed while running 18 5/8 tubulars. The overall rate was more than twice that of the average run in the same field previously. Finally, in Asia Pacific, fourth quarter revenue was $62 million, down 13% relative to the September quarter primarily reflecting lower Subsea Well Access revenue, following our suspension of vessel-deployed Light Well Intervention operations in September. At 9%, Asia Pacific segment EBITDA margin reflects demobilization and other unrecoverable LWI related costs. Excluding unrecoverable LWI related costs, the Asia-Pacific segment EBITDA margin would have been 16%. During the fourth quarter, Expro completed in an Asia-Pacific region, the deepest deployment of our Mark 6 CoilHose coupled with a successful nitrogen lifting application at a remote location offshore New Zealand. This marked the first-ever Mark 6 CoilHose deployment in Asia-Pacific, reaching an impressive depth of 8,650 feet, surpassing depths achieved globally by approximately 25%. The CoilHose solution provides a swift breakup time compared to traditional coiled tubing, minimizing planning and operational duration. This streamlined approach not only reduces safety risk but also lessens the environmental impact during well intervention operations. In terms of commercial activity, we built a healthy order book for the first three quarters of 2023 and I'm pleased that we have continued to build on this momentum. During the fourth quarter, we captured roughly $186 million of new contract awards including a production manpower contract worth roughly $50 million in Thailand. Other notable contract awards during the quarter included several subsea contracts across both West Africa where we were awarded a contract to provide subsea services for a multiyear plug and abandonment campaign and also in Australia. The NLA team was also awarded a multiyear well test contract in Latin America, which highlighted the importance of service quality in a very competitive market. At quarter end, our backlog was approximately $2.3 billion, which is down modestly from September 30th and is generally consistent with historical seasonal patterns of contract awards in the year-end period. I will also note that Expro is increasingly working with larger service providers where we have complementary capabilities and operating footprints to deliver integrated services and solutions for our common customers. Our reputation for safety, service delivery, and cost-effective innovative solutions enables us to collaborate effectively with other service partners. In addition to a number of technology awards that are highlighted in our press release, we had several operational and commercial successes during the fourth quarter, which are summarized on Slide 8 of our earnings presentation. The fourth quarter of 2023 marked 40 years since the launch of our first Subsea Test Tree system. Since then Expro has remained at the forefront of Subsea Landing String technology. We have undertaken more than 3,000 subsea deployments in exploration and appraisal, completion, and intervention applications and remain a global leader in large bore Subsea Test Reassembly solutions. The evolution of this market and these assemblies has allowed us to expand into the open water well intervention business through the introduction of both riser-based and riser-less well intervention solutions. I'm also pleased to share that Expro was named Energy Transition Pioneer of the Year at the 2023 Global OWI Awards, in recognition of our commitment to sustainable energy solutions. This recognition reflects Expro's critical role in creating a cleaner and more sustainable future. We have a number of initiatives underway across our business that build on our work to both reduce our own emissions as well as to support our clients in achieving their sustainability targets. We're innovating with a purpose by adapting and investing in technologies that are focused on carbon capture, use, and storage, the geothermal sector, and emissions monitoring management and mitigation solutions. Just a few days ago, we announced that Expro had entered into a definitive agreement to acquire a leading oil and gas well integrity and production optimization company Coretrax. Total consideration is roughly $210 million, and we expect to close this transaction sometime in the second quarter. The acquisition is expected to be accretive to adjusted EBITDA margin and free cash flow. With an enterprise value of less than five times our estimate for stand-alone 2024 EBITDA, the Coretrax transaction should also be immediately accretive to shareholder value with cost and revenue synergies providing incremental upside. Headquartered in Aberdeen, Coretrax has operations globally with over 50 technologies and an impressive intellectual property portfolio of more than 250 patents. We're excited to welcome John Fraser and his teammates to Expro and to incorporate the Coretrax suite of technology-enabled solutions into our Well Construction and Well Intervention & Integrity businesses. As many of you may know, Expro is a market leader in deepwater Tubular Running Services with a range of technology differentiated solutions. TRS and tubular products represent about 80% of our 2023 well construction revenue of $534 million. Our overall strategy is to develop in-house as well as acquire complementary services and solutions that allow us to leverage our global operating footprint, become more relevant to our customers around the world, expand margins, and improve free cash flow performance. Consistent with the strategy, within well construction, we are focused on growing our cementing technologies and performance drilling tools business. In addition to adding breadth to businesses in which Expro has expertise and experience, the cementing technologies and performance drilling solutions that we are focused on tend to complement rather than compete with the Downhole Drilling, Surveying, and Logging offerings of larger service companies. While our preference in most cases is to contract directly with operators, our market-leading Deepwater TRS business and a suite of Innovative Cementing Technologies and Performance Drilling solutions allow us to be a preferred services partner with both the larger service companies as well as the drilling contractors. Expro's Cementing Technology business was bolstered with a small technology acquisition, DeltaTek, that was completed in early 2023. Cementing Technologies is approaching $100 million of revenue annually. With good margins and low capital intensity, we see the potential to grow that business to $200 million to $250 million of annual revenue within the next couple of years. Similarly, combining Coretrax's Field-Proven technologies and Performance Drilling and Wellbore Cleanup with Expro's existing drilling optimization portfolio provides a comprehensive solutions toolbox. Coretrax adds meaningful scale to an attractive business, at what we believe to be a compelling valuation with combined revenue of more than $100 million that combined Expro and Coretrax Drilling Technologies business will have critical mass and scope for good growth and high incremental margins. In addition to Performance Drilling Tools and Wellbore Cleanup Solutions, Coretrax's best-in-class expandables business provides us with additional capabilities within our Well Intervention and Integrity Product line. Expandables are used in both drilling applications and to extend the life of existing well stock, either as a permit solution to a repair zone of damage or to isolate existing perforations prior to refracking. Coretrax's expandable business is more levered to production optimization and drilling activity providing Expro with additional breadth to our Well Intervention and Integrity offering and to expand our OpEx levered revenue. From a regional perspective, Coretrax strengthens our presence in the ESSA and MENA regions where both companies have strong established relationships and adds new revenue opportunities and areas for growth in North and Latin America and Asia Pacific. About half of Coretrax's 2023 revenue originated in MENA, so the additional breadth that Coretrax adds to our portfolio of services and solutions will allow us to more fully participate in MENA projects, which are expected to substantially increase over the coming decade. The business of Expro and Coretrax in Saudi is less levered to new offshore oil developments than it is to gas and unconventionals, so we continue to expect good growth in the Kingdom. Based on recent comments from a Saudi Aramco official that they expect to be very, very busy rather than very, very, very busy over the next several years, we also agree with several of the sell-side market analyst comments that the market reaction to Aramco's capacity growth curtailment announcement was a little bit overblown. More broadly regarding M&A, our team looks at a lot of acquisition opportunities. We analyze many of these in detail and for a variety of reasons take a pass on most of them. We do believe, however, that additional consolidation is good for the long-term health of the energy services sector and that we can utilize smart synergies focused M&A to accelerate growth and create shareholder value for Expro. The proposed Coretrax acquisition, like the PRT Offshore acquisition that we completed in the fourth quarter of 2023, will provide breadth to an existing product line, increase differentiated technology, and add incremental scale in select geomarkets. For both Coretrax and PRT Offshore, we think the valuation was attractive with potential cost and revenue synergies providing additional upside. In both cases, the consideration mix reflects our intent to maintain a low leverage capital structure. Turning to our market outlook, we expect current growth trends to continue in 2024 and beyond with the best available information indicating that oil demand will surpass 2023 pre-pandemic levels at approximately 103 million barrels per day. This momentum will be driven by continued recovery in Asia, improving macroeconomic data for the US and Europe, and an increase in global travel with a subsequent increase in jet fuel demand. We believe the pace of growth is stabilizing, which along with production restraint by OPEC provides market tailwinds supporting sustained investment and activity growth in the high single to low double-digit range. The EI forecast average barrel prices will remain flat overall year-on-year with average 2024 prices of about $82 per barrel. I will caution that geopolitical turmoil, including ongoing conflicts in the Middle East, could result in upward pricing pressure as we progress throughout the year. Constructive pricing levels should allow our oil company customers to make final investment decisions on new projects including FIDs on the long-cycle development projects that characterize the international and offshore markets and to which Expro is most levered. In the gas markets, we observed high inventories in storage due to warmer than normal winter conditions in the Northern Hemisphere and a persistent lack of sustained cold weather in the first part of the US winter. These trends have loosened market conditions resulting in slightly lower forward gas price forecasts. In our view, gas will remain a structural source of lower carbon electricity generation and a critical transition fuel on the path towards global net zero. As a result, the case for continued investment in LNG to meet the ongoing requirements of Europe and Asia remains very strong. Operators continue to focus on shareholder returns and maintaining fiscal discipline. Upstream investments are expected to continue to grow following the positive post-pandemic trends and spending that we observed through 2023. Development activities provide relatively good visibility for strong and sustained offshore spending over the medium-term, with global offshore FIDs in each of 2024 and 2025 likely to be in the $100 billion area and projects in Norway, Brazil, Guyana, and Angola collectively will attract the largest share of offshore development budgets. Additionally, strong activity growth in international land is forecasted in the Middle East in countries such as Saudi Arabia, the Emirates, and Qatar in support of the ongoing large gas and LNG developments. The industry experienced a record level of project FIDs in 2023. This growth in capital commitments and the multi-year sanctioned projects pipeline through 2030 is driving demand for our services and solutions. Specifically, we're experiencing increased activity in our well construction and subsea well access businesses, as well as elements of our well flow management business, which apart from moving into an operations and maintenance phase on our Congo project, we envision will grow further through 2024. Similarly, energy security, diversification of supply, operators' desire to maximize investments from existing assets, and a drive for cost-efficient lower carbon production continues to drive further demand for our production optimization-related activities within our well flow management and well intervention integrity product lines, especially across the Asia Pacific and Latin America regions. Despite robust commodity pricing and production optimization efforts, the number of mature assets reaching the end of their economic and environmentally sustainable life continues to increase, particularly in Europe and in the US. This underpins the increased activity in the decommissioning market and a growing requirement for cost-effective plug and abandonment solutions, which will also be bolstered by the proposed Coretrax acquisition. Finally, investment in lower carbon energy alternatives is also increasing with growing activity in the geothermal sector, especially within Europe and Asia Pacific and the carbon capture and storage space, as governments, operators, and even financial institutions look to be catalysts for reduced emissions. As we've discussed in the past, the current energy services cycle is more about margin expansion than it is about capacity additions. We have ongoing efforts to optimize equipment utilization and increase operational efficiency, both of which will have positive impacts on overall profitability. We also continue to have generally constructive conversations with customers about capturing more of the value we create through technology, process efficiency, safe well access, and enhanced production. As noted in the slides we prepared for today's call, net pricing did not have a material positive impact on margins in 2023. However, market conditions in our backlog seem to support a 1% to 2% positive impact on adjusted EBITDA margins in 2024, with capacity-constrained asset classes such as Deepwater TRS, Subsea Test Tree, and elements of the well test business having the greatest pricing momentum within Expro product lines. All combined, the outlook for Expro in the broader energy services sector remains positive. With that, I'll hand the call over to Quinn to further discuss our financial results.

Quinn Fanning, CFO

Thank you, Mike. Good morning, good afternoon to everyone on the call. I'll again remind you that our press release and the accompanying slides are available in the Investors section of our website expro.com. We plan to file our 10-K after the market closes today and we will also make available downloadable financials covering Q4 and full year 2023. As Mike noted, we reported revenue of $407 million for the December quarter, as compared to the guidance of $375 million to $385 million that was provided on our Q3 earnings conference call. Revenue was up sequentially $37 million or approximately 10% relative to the third quarter of 2023. Year-over-year, revenue was up by $56 million or approximately 16% relative to the fourth quarter of 2022. Looking at the full year, revenue was up by $234 million or approximately 18% year-over-year. Adjusted EBITDA for the fourth quarter of 2023 was a bit over $85 million as compared to Q4 guidance of $75 million to $85 million, representing a sequential increase of approximately $35 million or 70% relative to the third quarter of 2023. Adjusted EBITDA margin for the fourth quarter was 21%. It was up approximately seven percentage points quarter-over-quarter. Excluding the $4 million impact of LWI related recoverable costs, adjusted EBITDA would have been $89 million and adjusted EBITDA margin would have been approximately 22% compared to $65 million and 18% for Q3 on a comparable basis. On a full year 2023 basis, adjusted EBITDA was $249 million, which represents an increase of $43 million or approximately 21% relative to 2022. Adjusted EBITDA margin for the full year was approximately 16%. For full year 2023, excluding unrecoverable LWI related costs of approximately $36 million, adjusted EBITDA would have been $285 million and adjusted EBITDA margin would have been 19% compared to $234 million and 18% for 2022 on a comparable basis. Regarding our LWI business, as previously disclosed, the well control package and lubricator components of our vessel-deployed LWI system were recovered in November. We have determined not to participate in the recovery of the subsea module for the seabed where it has remained since September of last year when the vessel provider's crane wire failed during operations offshore Australia. Expro reached this decision after considering a range of factors including the expected cost of recovery and repair, which also includes the necessary recertification of the system. To the extent possible, we are trying to put excess LWI related costs behind us. In this context, note that Q4 results include a non-cash charge for accelerated depreciation of the subsea module and related equipment of $19 million. At this time, we're not able to assess the timing and potential cost of completing customer work scopes for which the vessel-deployed LWI system was integral, but do not expect such costs to be material to Expro's financial results. We remain active in the rig deployed light well intervention space. We are continuing to determine a path forward for our vessel-deployed LWI business and what alternative service delivery and service partner options are available to the company. In the near-term, however, our focus will be on cost avoidance and loss mitigation. Separately, we are also pursuing an insurance claim related to the subsea module with any insurance recovery available to offset any additional out-of-pocket costs. Support costs for 2023 at $294 million totaled 19% of revenue, which was up about 6% year-over-year and down as a percentage of revenue by 230 basis points year-over-year and down by 650 basis points from 2021. Improved operating leverage reflects merger-related synergies from the Expro Frank's transaction and good cost discipline alongside strong revenue growth. Turning to liquidity, full year adjusted cash flow from operations, which excludes cash paid for interest net, cash paid for severance and other expenses, and cash paid for merger and integration expenses was $170 million inclusive of a $25 million increase in net working capital. Cash conversion or adjusted cash from operations as a percentage of adjusted EBITDA for 2023 was 68%. Full year adjusted EBITDA less capital expenditures and free cash flow or adjusted cash flow from operations less CapEx was $130 million and $55 million, respectively. In addition to $122 million of total CapEx in 2023, uses of cash included the acquisition of DeltaTek in Q1, the acquisition of PRT Offshore in Q4, and the repurchase of 1.2 million Expro common shares at an average price per share of $16.70. Expro has total available liquidity at year-end of approximately $300 million, with cash and cash equivalents including restricted cash of approximately $152 million and availability on our revolving credit facility of $147 million. Interest-bearing debt at year-end was $20 million. In connection with the proposed acquisition of Coretrax, which contemplates paying at least $75 million of cash at closing, we intend to exercise the accordion feature on our revolving credit facility to maintain our currently strong liquidity position. A lender in the existing credit facility has agreed to provide a backstop for the exercise of the accordion for up to $75 million. Moving to our outlook for 2024 and beyond, based on our strong performance in Q4 2023 and a positive activity outlook, we currently anticipate generating revenues of between $1.6 billion and $1.7 billion in 2024. Adjusted EBITDA is expected to be between $325 million and $375 million. Adjusted EBITDA margin is expected to be in a range of 20% and 22%. Free cash flow margin or free cash flow as a percentage of revenue is expected to be within a range of 8% and 9%. Our 2024 guidance assumes that we will close the Coretrax transaction around midyear and that Coretrax will contribute $70 million to $80 million of revenue at an adjusted EBITDA margin that is accretive to stand-alone Expro results. Furthermore, guidance assumes no revenue and no additional unrecoverable LWI related costs in 2024 and a step down in revenue that we recognize in our LNG capacity expansion project in Congo beginning in Q2. Finally, full year guidance for 2024 is based on aggregate support costs and cash taxes of between 19% and 20% and 3% and 4% of revenue, respectively. As is typical, Q1 is expected to reflect the seasonal impacts of the winter season in the Northern Hemisphere and the budget cycles of our national oil company customers. With revenue expected to be in a range of $365 million to $375 million, that's down about 10% sequentially from a very strong Q4 and up about 9% year-over-year, in both cases based on the midpoint of guidance. Adjusted EBITDA margin is expected to be in the range of $63 million to $73 million or approximately 18% of revenue. Beyond 2024, with a constructive fundamental backdrop and good business momentum, we see a clear path to $2 billion of revenue, mid-20s adjusted EBITDA margin, and a free cash flow margin of 10%. The business drivers that we believe are critical to meeting these medium-term targets are summarized, but I will highlight plus 10% organic revenue growth and modest net pricing gains as two of the most important assumptions. Through this growth cycle, our intention is to remain disciplined with costs and CapEx. Operating leverage is key to margin expansion and is more in management's control than pricing. Our capital allocation strategy focuses on maximizing the utilization of existing assets and growing higher margin, lower capital intensity services and solutions. For 2024, absent large new production solutions projects, which typically include milestone payments, capital expenditures should remain within a range of 7% to 8% of revenues or approximately $120 million to $135 million. With growth and less capital-intensive elements of our business and better pricing, CapEx as a percentage of revenue should moderate over time. With that, I will turn the call back over to Mike for a few closing comments.

Mike Jardon, CEO

Thanks, Quinn. In the fourth quarter of 2023, we captured strategically important contract wins, closed on a meaningful acquisition, and continued to build on strong business momentum. Our performance reflects a culture of excellence in execution, and our focus on providing cost-effective, technology-enabled services and solutions to our customers. I am proud of what we've accomplished since the merger of the Expro and Frank's businesses two years ago, and I'm excited to lead this team as we grow into the future. As you heard from Quinn, our initial guidance for 2024 reflects a positive outlook for the year ahead with a midpoint expectation for about 9% revenue growth and adjusted EBITDA margin of 21%, likewise at the midpoint of guidance. When we announced the Expro and Frank's merger, I indicated that we believe the company had a clear path to $1.5 billion in revenue and adjusted EBITDA margin of plus 20%. Today, we believe the international and offshore recovery is still in the early innings of a multi-year growth phase that will favor long cycle development in general and the cost and carbon-advantaged barrels of deepwater development, in particular. Expro was built to ride the industry tailwinds that we expect to persist for the next several years with good leverage to the international offshore Middle East, North Africa capacity expansion and global gas themes that we believe will characterize energy markets for the balance of the decade. Our core competencies align well with operators that are motivated to maximize production and minimize emissions from existing well stock. At Expro, we are starting to see better financial results across our businesses, and over the medium term, the company should be able to deliver on our medium-term targets, which include annual revenue of $2 billion and adjusted EBITDA margins of plus 25%. As activity continues to ramp up, we are well positioned to support our customers across the well life cycle and to deliver on the financial and other objectives that we have outlined. We appreciate the investment community's interest in Expro and your continued support of our ambitious business plan. With that, we'll be more than happy to open up the call for questions.

Operator, Operator

Thank you. Our first question today comes from Luke Lemoine with Piper Sandler. Luke, please go ahead.

Luke Lemoine, Analyst

Hey, good afternoon Mike, Quinn. Mike, you gave us the overall revenue and EBITDA guide for this year and talked about some of the global themes along with where you're seeing pricing this year. But just seeing if you could kind of maybe help us understand or build up kind of where your growth is coming from a 2024 either by geo-market or kind of major product lines?

Mike Jardon, CEO

So, Luke, great question, thanks for participating. Really, the two major areas for us are really going to be subsea. We're going to see a step-up in the traditional subsea landing string business. We're also going to see a step up in well construction and in particular, very strong growth in West Africa. I think as you've heard me comment before, when you look at the number of FIDs or the dollars of FIDs that are being sanctioned in West Africa in particular, we're still behind where the curve was back in 2013-2014. I think we're going to continue to see those FIDs approved here in 2024, which tells me we're going to continue to have a really strong backlog of subsea projects and well construction projects. It is really tied to the drilling of wells and completing the wells. I think we're really going to set up well for strong growth in 2024 and even into 2025 as well.

Luke Lemoine, Analyst

Okay. Perfect. Thanks so much.

Operator, Operator

The next question comes from Arti Mojack with Goldman Sachs. Please go ahead.

Unidentified Analyst, Analyst

Hi. Good morning, team.

Mike Jardon, CEO

Hey.

Unidentified Analyst, Analyst

On Coretrax it looks like it's a little bit more manufacturing-focused or manufacturing of equipment versus services. Obviously, the margins look pretty good but curious if you think about how you think about the relative revenue mix as a target for the company between services and manufacturing. And what's the thought process around margins as you think about acquisitions going forward with that in mind?

Mike Jardon, CEO

Sure. No it's a great question. Coretrax is not so much of a manufacturing; it's more of a rental business. So it's more rental of tools and probably less service intensity. One of the benefits for us, quite frankly, is that it has lower personnel requirements for operational things. Oftentimes they'll either be rented to the operator or rented to the rig to be run and installed, but it very much fits in, particularly with well construction and of course within our well intervention integrity. We see really good alignment with that, but still around that very similar to the nature of Expro overall with we rent our equipment and provide services with our people, so it's very similar in that sense.

Unidentified Analyst, Analyst

Got it. That’s very helpful. And then you mentioned market conditions and backlog for the 1% to 2% margin expansion, but maybe something similar on the long-term target of 25% if you can help us understand what the components and drivers there are?

Mike Jardon, CEO

Yes, I believe part of it will be due to pricing traction. I also think it will be mixed. Referring back to Luke’s question, we are increasing service intensity in our well construction and subsea businesses, which typically yield higher margins because they involve drilling and completions-related activities. As we transition more towards that mix in 2024 and into 2025, we will continue to see some margin expansion. Additionally, we anticipate being able to realize the effects of net pricing improvements in 2024.

Quinn Fanning, CFO

And obviously operating leverage is a significant part of the story as well. So I would say at least in the medium-term, probably half of the margin expansion is coming from activity mix and pricing, as Mike indicated, and then probably the other half is the fact that support costs are growing at an inflationary factor, and we expect top line to be at least 10% organically.

Unidentified Analyst, Analyst

Makes sense. Thank you for taking the questions.

Mike Jardon, CEO

Great.

Quinn Fanning, CFO

Thanks, Arti.

Mike Jardon, CEO

Thanks, Arti. Appreciate it.

Operator, Operator

The next question comes from Arun Jayaram with JPMorgan. Please go ahead.

Arun Jayaram, Analyst

Yes, Mike, I want to get your perspective on what Expro's plans are to pursue the LWI kind of service line. Obviously, you mentioned that you weren't able to recover the subsea module. How does that factor into your thinking, and just trying to maybe help investors understand what kind of invested capital did you have in the subsea module?

Mike Jardon, CEO

Sure, thanks for the question. We will keep participating in the light well intervention business. We have our in-riser systems, which are more rig-deployed, and we are actively expanding our presence and commitment in that area. Our experience and knowledge in subsea landing string and valve technology directly apply to intervention systems. We are also exploring alternatives for a vessel-deployed system, looking into potential partnerships and joint ventures. There is a significant demand in the market for this technology to enable efficient intervention capabilities, as very few subsea wells are currently being intervened globally. We are not abandoning the light well intervention concept because of this market need; rather, we are reconsidering our approach and the partners we will work with to create a more balanced risk profile.

Quinn Fanning, CFO

One important point to highlight is our decision not to participate in the recovery of the subsea module. This was not due to an inability to recover it; rather, we opted out of the recovery operations. After assessing the costs related to recovery, repair, and recertification, we concluded that these expenses might surpass the asset's value. We had to make this decision before recovery operations began. Our assessment of the risk balance and our aim to limit additional expenses led us to decide against participating in the recovery. The subsea module will be retrieved, but since we opted out, the responsibility falls to the vessel provider, as it was their crane wire failure that placed the subsea module on the seabed in the first place. We chose not to recover it, yet the module will indeed be recovered, and from Expro's perspective, this will be treated as a recovery, and we will file a separate insurance claim.

Arun Jayaram, Analyst

Understood. And any sense of the invested capital?

Quinn Fanning, CFO

You'd have to disaggregate it; obviously, we recovered the well control package and lubricator. All in the system, we've invested circa $40 million. We recognized accelerated depreciation in the just completed fourth quarter for about half of that. So obviously, we've got elements of the system that we can use to either build out something similar or packages as part of a joint venture partnership, as Mike indicated.

Arun Jayaram, Analyst

That's helpful. And just my follow-up, Quinn, you mentioned that the Congo project, as previously stated, would be shifting from the construction phase to more of the services phase of that contract. Can you just help us about what will happen sequentially in 2Q as you transition?

Quinn Fanning, CFO

The timing of completing the plant sale part of the contract is a factor. This was a contract worth about $300 million in total, with roughly $150 million tied to delivering the plant to the customer, which we expect to finish by the second quarter. The rest will be spread out over more than eight years in an operations and maintenance contract. Since the fourth quarter of 2022, we have been recognizing $25 million to $30 million of revenue based on the percentage of completion. By the second quarter, we anticipate that this will decrease to about $5 million to $6 million, but it should contribute a significantly higher margin, consistent with our other services. When considering year-over-year growth, we start off at a disadvantage of $100 million due to the suspension of certain operations and the Eni Congo project. Our guidance does include some revenue from Coretrax in the latter half of the year, but we essentially need to recover that $100 million before we see any real growth. If we look at same-store sales, the actual growth of the business is much stronger than what is implied by our guidance, despite a little assistance from Coretrax.

Arun Jayaram, Analyst

Thanks for the time. Appreciate it.

Mike Jardon, CEO

Thanks, Arun.

Quinn Fanning, CFO

Thanks for the question. Appreciate it.

Operator, Operator

Our next question comes from the line of Eddie Kim with Barclays. Eddie, please go ahead.

Eddie Kim, Analyst

Hi. Good morning. My first question is just on the Saudi exposure in your business in light of their news of the capacity expansion curtailment. Could you just remind us roughly how much of your overall revenue is generated in Saudi, and if the primary exposure there is in the well flow management business, which I believe it is. And separately, you mentioned Coretrax also has a strong position in the Middle East and I assume Saudi as well. So just any way you could help us understand the exposure to Saudi in your business would be great.

Mike Jardon, CEO

Sure, thanks for the question. Most of our revenue in Saudi comes from well flow management, with a significant portion linked to gas and unconventional sources. This won't be greatly affected by our activity in Saudi. It's important to remember that there will still be notable growth in Saudi overall, although it may not reach the levels previously expected. We are still anticipating a strong level of activity in 2024 and 2025. The market emphasizes differentiated services and technology, which is what Aramco is looking for. This aligns well with both our traditional well flow management services and the Coretrax services, which offer distinct technologies. We continue to expect a high level of activity in Saudi specifically.

Eddie Kim, Analyst

Okay. Got it. Thank you. And just my follow-up is on net pricing. Mike, around the middle of last year, you said you expect the net pricing gains to kind of really start gaining traction and hitting the P&L towards the end of the year. But if I heard you correctly, it sounds like that might not have come through as you had expected. Did I get that right? And if so, could you talk about which product lines or segments maybe underperformed your expectations on the pricing front last year?

Mike Jardon, CEO

Sure. Eddie, you understood correctly. Last year, we indicated that we anticipated starting to feel the effects of net pricing towards the end of 2023, which is what sets us up for the expected 1% to 2% margin expansion in 2024. The areas driving this are the tighter asset classes, such as well construction, TRS, deepwater activity, and subsea landing string, where we are seeing more pricing traction. However, it's important to note that about 30% of our business is still tied to production optimization, which is generally associated with customer operational expenditure. We did not foresee and do not expect to see significant net pricing traction in that segment since it is based on ongoing activity regardless of the number of FIDs or CapEx spending. It’s not that this segment underperformed; rather, it performed as we expected, and we don’t anticipate much pricing improvement there. However, this type of work is beneficial during market softness or cycles, which is why we maintain a balance between CapEx and OpEx. Overall, considering last September, there were many discussions among rig operators about rig rates, and they believed strengthening would continue. While pricing traction is still expected, it seems the pace of growth isn't as steep as some may have anticipated when we last met in September.

Eddie Kim, Analyst

Great. Understood. Thank you for all that color. I'll turn it back.

Mike Jardon, CEO

Great. Thanks. Appreciate the question.

Operator, Operator

Our next question comes from Steve Ferazani with Sidoti & Company. Steve, please go ahead.

Steve Ferazani, Analyst

Good afternoon, Quinn and Mike. I wanted to inquire about the M&A pipeline. You've announced a few favorable acquisitions recently, which are higher-margin and clearly accretive, and the multiples have been quite reasonable. Considering your balance sheet, it appears you could pursue this strategy extensively. What parameters are you taking into account, and what does the pipeline possibly look like?

Mike Jardon, CEO

It's a great question, and we spend a lot of time discussing and analyzing this internally. There are three key criteria that we focus on: industrial logic, industrial logic, and industrial logic. We prioritize those in our decision-making. When it’s clear from an industrial logic perspective to our customers and the market, those are the deals we pursue. While there are other opportunities we could consider, we are committed to ensuring that both the industrial logic and the financial logic align, which means the value must be appropriate. Additionally, we don't want to become just a roll-up; we won't pursue numerous acquisitions without proper integration. When we do acquire, we intend to integrate those companies, drive synergies, and merge the entities effectively. That’s why we are deliberate in our approach. We appreciate your insights on Coretrax, as you've clearly grasped our strategy there. It makes sense for us to proceed with such opportunities, and we remain active in that area.

Steve Ferazani, Analyst

Great. That’s helpful. On pricing in area where it's not developing as a market where you were talking about moving assets out of US land. I know last quarter you were talking after the disappointment in LA, you talked about maybe getting some of those assets into international markets. I think you specifically noted TRS and US land. Given that 2024 is probably not going to be much better in US land. Can you talk a little bit about progress there?

Mike Jardon, CEO

We discussed in Q3 to provide a full insight into the situation in NLA. As reflected in the numbers, the conditions in Q3 were misaligned in NLA, but we don't observe that issue currently. Activity levels in the Gulf of Mexico, well construction in Guyana, and well flow management in Mexico have all returned to typical patterns. While we've been monitoring US land for the past 18 months, we don't plan to completely exit the US land business. Instead, we will concentrate on the most suitable basins and locations in the US. If we identify excess assets, which we have experienced, we will look to redeploy those assets into stronger markets moving forward. We will continue to adjust the size of that business accordingly, and this has been a continuous process for us in US land for the last six quarters.

Steve Ferazani, Analyst

Thanks, Mike.

Mike Jardon, CEO

Perfect. Good to talk to you. Thank you.

Operator, Operator

We have no further questions. So I'll turn the call back over to the management team for any closing remarks.

Mike Jardon, CEO

Great. Thank you everybody. We really appreciate the time and look forward to catching up with all of you for one-to-ones and those types of things. Have a good afternoon. Thank you.

Operator, Operator

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