Expro Group Holdings - Q1 2024

Transcript

Operator (participant)

Good morning, ladies and gentlemen. Welcome to the Expro Group Holdings N.V. 2024 earnings presentation. My name is Jaquita. I will be your moderator for today's call. Our lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. If you would like to ask a question, please press star 1 on your telephone keypad. I would now like to pass the conference over to your host, Chad Stephenson, Director of Investor Relations. One moment, please.

Chad Stephenson (Director of Investor Relations)

Welcome to Expro Group Holdings N.V.'s Q1 2024 conference call. I am joined today by Expro Group Holdings N.V.'s CEO, Mike Jardon, and Expro Group Holdings N.V.'s CFO, Quinn Fanning. First, Mike and Quinn have some prepared remarks, then we will open it up for questions. We have an accompanying presentation on our Q1 results that is posted on Expro Group Holdings N.V.'s website, expro.com, under the Investors section. In addition, supplemental financial information for the Q1 results is downloadable on the Expro Group Holdings N.V. 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 risk and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.

Such statements speak only to today's date, and the company assumes no responsibility to update forward-looking statements as of any future date. The company has included in its SEC filings cautionary language identifying important factors that could cause actual results to be materially different from those set forth in any forward-looking statements. A more complete discussion of these risks is included in the company's SEC filings, which may be accessed on the SEC 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 Q1 2024 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)

Good morning. Good afternoon, everyone. I'd like to start off by reviewing the Q1 financial results presented in today's earnings press release, including providing an update on commercial activity and the CoreTrax acquisition. I will then discuss the macro environment, which we believe supports a favorable multi-year outlook for energy services companies that are leveraged to international and offshore markets and presents a compelling growth opportunity for Expro Group Holdings. Following my remarks, Quinn will share our outlook for 2024. For a recap of consolidated results and quarterly results by region, I'll direct you to slides three through seven of the presentation we posted to expro.com. Turning to slide three, I am pleased to report another strong quarter for Expro Group Holdings with Q1 2024 revenue of $383 million, exceeding guidance provided on our Q4 earnings call in February.

Q1 2024 adjusted EBITDA at $67 million was at the midpoint of guidance. Overall, the Q1 results were in line with our full-year expectations for revenue of $1.65 billion in revenue and for adjusted EBITDA of $350 million. Revenues decreased sequentially by $23 million, or 6%, compared to the quarter ending December 2023. This decrease is generally consistent with historic revenue trends, as we usually experience softer Q1 performance related to the winter season in the northern hemisphere and the budget cycles of our National Oil Company customers. This seasonal dynamic is typically most prevalent in our Europe and Sub-Saharan Africa region. Q1 revenue increased by 13% year-over-year, reflecting activity growth across the international and offshore markets. Of note, Q1 2024 adjusted EBITDA was up 61% compared to Q1 2023, which included $11 million of LWI-related unrecoverable costs.

For North and Latin America, revenue of $130 million was down $15 million quarter over quarter, primarily reflecting lower well construction revenue in the Gulf of Mexico, including tubular product sales due to project delays, and in Guyana due to rig maintenance. NLA segment EBITDA margin at 26% was down from 30% in Q4 2023, reflecting lower activity and activity mix but was up about 100 basis points relative to the Q1 of 2023. In terms of NLA operational updates, in the Q1, our team successfully deployed Expro Group Holdings' Rotating Plug Launcher during cementing operations for one of the major operators in the U.S. The client is now in the process of standardizing these operations across its fleet of over 20 active drilling rigs. This was a great example of our ability to provide cost-effective, innovative solutions to meet an important client's evolving needs.

For Europe and Sub-Saharan Africa, revenue of $122 million was down $12 million quarter-over-quarter, and segment EBITDA margin at 21% was down sequentially but was up approximately 250 basis points relative to the Q1 of 2023. In addition to the seasonal reduction in activity in Europe and the resulting compression in margin, we recognized lower margin on our LNG expansion project for Eni in Congo and also incurred higher costs in the Q1 related to subsea projects that will be starting in the Q2 of 2024, particularly in West Africa. We have very good business momentum in the ESA region with contract awards for upcoming campaigns in Angola and the Black Sea, totaling more than $30 million. These contract awards, which include subsea, TRS, and cementing services and solutions, are a testament to the region and product line teams delivering technology-enabled, fit-for-purpose solutions.

Highlighted on page 5 is our provision of TRS services in the Q1 for a pilot project for green hydrogen and chlorine production in France. Similar to the way in which we have leveraged our experience in well construction, well flow management, and well intervention and integrity to grow our geothermal business, this is another good example of how Expro Group Holdings can deploy existing assets and leverage current capabilities to support the development of sustainable energy solutions. Page 8 of our slides also highlights that in the Q1, our Eni Congo project team surpassed 1 million man-hours without a lost-time incident, which highlights our unwavering commitment to both safety as well as sustainable operations. First production from this plant expansion is scheduled in the first half of 2024. Essentially, all equipment has now arrived in country, making a crucial milestone in our journey towards operational readiness.

We're incredibly proud of the tireless efforts of the Congo project team to safely deliver this important project to our customer and the incremental lower carbon energy that the Congo LNG facility will produce. The Middle East and North Africa team delivered another excellent quarter, with revenue at $71 million, up 9% sequentially and up 40% year-over-year, largely driven by higher well flow management activity in Saudi and Algeria, with good fall-through on incremental revenue. MENA segment EBITDA margin at 34% was up nearly 2 percentage points quarter-over-quarter and up about 5 percentage points year-over-year. During the quarter, we secured and executed a major contract for cementing accessories with an international operator in Egypt's deepwater market. The regional team's deployment also featured our wireless cement heads, which increases safety and efficiency through remote operation.

This contract marks the initial step in broadening the adoption of our hands-free cementing operations globally. Finally, in Asia-Pacific, Q1 revenue was $60 million, down 4% relative to the previous quarter, primarily reflecting lower activity in Malaysia but up 24% year-over-year. Asia-Pacific segment EBITDA margin of 18% was up over 9% from the prior quarter, which reflects higher activity in the region and lower LWI-related costs. During the Q1 in the Asia-Pacific region, Expro announced a new carbon capture and storage contract with INPEX Corporation for Japan's first clean hydrogen production demonstration project. The Kashiwazaki Clean Hydrogen/Ammonia Project is a key milestone in Japan's energy security journey. Designed to produce clean energy from domestically sourced gas, this will be Japan's first project to build an integrated hydrogen and ammonia value chain from production to usage.

Expro Group Holdings' work scope will include the delivery of tubular running services for multiple sections of casing, liner, and tubing over a 12-month period. This project furthers Expro Group Holdings and our client's efforts to reduce carbon emissions while advancing our sustainable energy solutions. We have supported CCUS globally for over 10 years, gaining valuable experience in executing operations with excellent results, and we continue to believe that we will be a key industry enabler to support our own as well as our client's net-zero goals. In terms of commercial activity, I'm pleased we have continued to build on our strong momentum from last year, capturing roughly $230 million of new contract awards, including subsea contracts worth approximately $40 million in Africa and TRS and well integrity contract extensions in the Gulf of Mexico and Argentina, respectively, each of which was valued at more than $20 million.

At quarter end, our backlog was approximately $2.3 billion, which is consistent with the close of the Q4 and in line with expectations, given historical seasonal patterns of contract awards at the beginning of the year. As discussed on our Q4 call early in the Q1, Expro Group Holdings entered into a definitive agreement to acquire CoreTrax, a leading well integrity and production optimization company for a mix of cash and stock consideration, totaling approximately $210 million. As a reminder, the acquisition is expected to be accretive to Adjusted EBITDA margin and free cash flow. With a transaction value of less than 5x our estimate for standalone 2024 EBITDA, the CoreTrax transaction should also be immediately accretive to shareholder value, with synergies providing incremental upside. Our full year and Q2 guidance assumes that we close the transaction at the beginning of the Q3.

If we can close the transaction a month or two earlier than assumed, there's a bit of CoreTrax-related upside to our guidance. Our integration planning is well underway, and we expect to hit the ground running on day one post-close. We look forward to welcoming John Fraser and his team to Expro Group Holdings as we expand the suite of technology-enabled solutions in our well construction and well intervention integrity businesses and increase our capabilities in geographies such as the Middle East, North Africa, where we anticipate good multi-year growth. Regarding M&A more generally, our team continues to evaluate acquisition opportunities that would allow us to advance our strategy and position Expro Group Holdings to be more relevant to our clients and shareholders.

We take a disciplined approach to M&A, and opportunities we pursue will meet a rigorous set of criteria that starts with the industrial logic, has a comprehensive review whether it's complementing existing capabilities and/or building out our presence in growth markets, and a clear identification of cost and revenue synergies, finally concluding with a sensible financing plan that preserves our currently strong financial profile. We continue to believe additional consolidation is good for the long-term health of the energy services sector and that smart, synergies-focused M&A can be an effective means for Expro Group Holdings to accelerate growth and create additional shareholder value. Turning to our market outlook, we expect the very positive current growth trends to continue given the solid market fundamentals underpinning the energy services sector that we have seen over the past few quarters.

Ongoing investment and activity levels support a favorable multi-year outlook, with oil demand forecasted to reach record levels of 103 million barrels per day in 2024 and over 104 million barrels per day in 2025. These increases are driven by an expected recovery in Asian countries, improving economic data for the Middle East and the United States, as well as increased industrial requirements and global travel driving the consumption of jet and marine fuel. We believe the pace of oil demand growth is stabilizing. With continued production discipline from OPEC+, as was again highlighted by the recent extension of voluntary production cuts in February, we expect market conditions to remain favorable, supporting investment and activity levels at and above pre-COVID levels.

The combined effect of supply discipline and geopolitical turmoil, including the Middle East and Ukrainian conflicts, is resulting in upward pressure on oil prices, with the outlook for 2024 average Brent up from $82 per barrel to closer to $90 per barrel. Assuming the voluntary production cuts are fully unwound, the current outlook for 2025 average Brent is roughly $87 per barrel. Extended and stabilized pricing should support continued investments by our customers in the long-cycle development and capacity expansion projects that underpin the international and offshore markets to which Expro Group Holdings is most levered. The gas markets continue to experience sustained high storage volumes, with demand growth curtailed due to mild winter seasonal temperatures. Longer term, domestic demand and exports are forecasted to increase as gas remains a structural source of lower carbon electricity generation and a critical transition fuel in the path towards global net-zero.

Constructive oil market pricing is allowing operators to make long-term investment decisions with FIDs at record levels in 2023 and a continuing robust pipeline of projects that are forecast to be sanctioned through 2024 and beyond. The continued growth of the multi-year sanctioned project pipeline through 2030 is driving demand for our services and solutions. More specifically, we continue to see increased activity in our well construction and subsea well access businesses, as well as in certain areas of our well flow management product line. We are confident that demand for our services will continue to increase throughout 2024 and beyond. Upstream investment forecasts for 2024 are further strengthening and are now at the highest levels we have seen since 2015. We're seeing a significant growth of offshore and deepwater and shelf driven by Guyana, Azerbaijan, Brazil, the US, Indonesia, Malaysia, and Norway.

This also includes targeted exploration and appraisal activity in mature areas, especially in the Europe, Sub-Saharan Africa, and South American regions. International land activity growth continues, specifically in the Middle East, with the ongoing large gas and LNG developments in Saudi, Kuwait, the Emirates, and Qatar. Our customers also remain focused on maximizing their existing investments by driving cost-efficient, lower carbon intensive incremental production. This is resulting in further demand for our production optimization related activities within well flow management and well intervention integrity product lines, especially across the Asia-Pacific and Latin America regions. Finally, investment in lower carbon energy alternatives is also increasing across the industry, with growing activity in the geothermal sector, especially within Europe and Asia-Pacific, and the carbon capture and storage sector as operators work to reduce their upstream emissions to achieve their net-zero goals.

As we have discussed previously, 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 and free cash flow performance. We also continue to have constructive conversations with customers about capturing more of the value we create through technology, process efficiency, safe well access, and enhanced production. All combined, the outlook for Expro Group Holdings and the broader sector continues to be robust and positive. With that, I will hand the call over to Quinn to discuss financial results in greater detail as well as our outlook.

Quinn Fanning (CFO)

Thank you, Mike. Good morning to everyone on the call. As Mike noted, we reported revenue of $383 million for the March quarter as compared to the guidance of $365-$375 million that was provided in our Q4 conference call. As anticipated, revenue was down sequentially by $23 million, or approximately 6% relative to the Q4 of 2023, largely reflecting seasonality. However, year-over-year revenue was up by $44 million, or approximately 13% relative to the Q1 of 2023. The net loss for the Q1 of 2024 was $3 million, or $0.02 per diluted share, compared to a net loss of $6 million, or $0.06 per diluted share in the Q1 of 2023.

Adjusted net income, which excludes merger and integration expense, severance and other expense, and stock-based compensation expense for Q1 2024 was $10 million, or 9 cents per diluted share, as compared to $1 million, or 1 cent per diluted share for Q1 2023. Adjusted EBITDA for the Q1 of 2024 was just over $67 million as compared to Q1 guidance of $63-$73 million, representing a year-over-year increase of approximately $26 million, or 61% relative to the Q1 of 2023. Adjusted EBITDA margin for the Q1 was 18%, up roughly 600 basis points year-over-year. The year-over-year increase in adjusted EBITDA and adjusted EBITDA margin primarily reflects good follow through on incremental revenue due to activity mix, operating leverage, and a non-repeat of unrecoverable LWI related costs in Q1 2023.

Pricing is trending positively, particularly in our deepwater well construction and subsea landing string driven businesses, but net pricing gains are not yet a material driver to reported results. Nonetheless, relative to 2023, we continue to expect 100-200 basis points of incremental adjusted EBITDA margin from net pricing for the full year 2024. Regarding our LWI business, as disclosed during the Q4 earnings conference call, we determined not to participate in the recovery of the subsea module from the seabed floor, which was completed in the March quarter. Regarding uncompleted customer work scopes, we are not currently able to assess the timing and potential costs of completing the projects for which the vessel deployed LWI system was integral. That said, we are continuing to pursue an insurance claim related to the abandoned subsea module, with any insurance recovery available to offset any additional out of pocket costs.

Based on available information, we do not expect additional unrecoverable LWI related costs net of insurance recoveries to be material to Expro's financial results. We remain active in the rig deployed light well intervention space, and 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. Support costs for Q1 2024 of $81 million total 21% of revenue, which was up approximately 7% year-over-year. Compared to Q1 2023, support costs as a percentage of revenue were down approximately 130 basis points, and we expect the support costs for the full year 2024 will be at or below 20% of revenue.

Moving to liquidity, Q1 adjusted cash flow from operations, which excludes cash paid for interest net, cash paid for severance and other expense, and cash paid for merger and integration expense, was $38 million compared to $27 million in Q1 2023. Cash conversion, or adjusted CFFO, as a percentage of adjusted EBITDA for Q1 2024 was 57% as compared to 65% in Q1 2023. Q1 2024 adjusted EBITDA less capital expenditures and free cash flow, or adjusted CFFO less core CapEx, was approximately $37 million and approximately $11 million, respectively. Expro had total available liquidity at quarter end of approximately $291 million, with cash and cash equivalents, including restricted cash, of approximately $164 million. Additionally, at March 31st, we had $127 million available under our revolving credit facility.

Note that the closing of our pending acquisition of CoreTrax will require $75 million of cash, which we expect to fund with an increase in our revolving credit facility. This will allow the company to maintain its currently strong liquidity position. Turning to our outlook, page nine of our accompanying slides summarizes our guides for Q2 and for the full year 2024. Based on our strong performance in Q4 2023, continued momentum through Q1 2024, and a positive activity outlook, we are reaffirming full year 2024 guidance with anticipated revenues between $1.6-$1.7 billion and adjusted EBITDA between $325-$375 million. Adjusted EBITDA margins is expected to be within a range of 20%-22%. Free cash flow margin, or free cash flow as a percentage of revenue, is expected to be between 8%-9% and is expected to be weighted to H2 2024.

Full-year guidance for 2024 assumes cash taxes of between 3% and 4% of revenue and CapEx as a percentage of revenue of between 7% and 8%. Q2 2024 revenue is expected to be within a range of $400-$420 million, implying year-over-year growth of about 5% and sequential growth of about 8%. For year-over-year comparisons, note that Q2 2023 revenue included approximately $13 million of vessel-deployed LWI revenue that will not be repeated in Q2 2024. In addition, revenue related to our Congo LNG expansion project is expected to be $10-$13 million lower in Q2 2024 than was reported in Q2 2023, reflecting a shift in work scope from a fast track plant delivery phase to a multi-year operations and maintenance phase.

Adjusted EBITDA is expected to be within a range of $80-$90 million, implying Q2 adjusted EBITDA margin within a range of 20%-21%, or up 2-300 basis points year over year and sequentially, in both cases based on the midpoint of Q2 guidance. As a reminder, our 2024 guidance assumes that we will close the CoreTrax transaction at the beginning of the Q3. Based on that assumption, CoreTrax is expected to contribute $70-$80 million of revenue and an adjusted EBITDA margin that is accretive to standalone Expro results. As Mike noted, if we can close the transaction a month or two earlier, we expect a bit of upside to the current guidance.

Looking beyond 2024, as Mike noted on our Q4 earnings conference call, with a constructive fundamental backdrop and strong 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% in the medium term. Over time, we expect higher Adjusted EBITDA margin from incremental drilling and completions activity and an expectation for above market growth in our higher margin businesses such as cementing technologies and performance drilling solutions, which together should provide a mixed benefit. Similarly, merger-related synergies have allowed us to improve operating leverage. Finally, net pricing, while less under our control, is obviously 100% follow through, and pricing seems to be trending positively, particularly in capacity-constrained asset classes such as deepwater TRS equipment and subsea test trees.

Improved Free Cash Flow performance should come from maximizing utilization of existing assets, CapEx discipline, and growing our less capital intensive services and solutions. With that, I'll turn the call back over to Mike for a few closing comments.

Mike Jardon (CEO)

Thank you, Quinn. The Q1 of 2024 establishes a solid foundation for the year for Expro with strong financial performance relative to guidance. During the quarter, we continue to build business momentum and strategically grow the business through the acquisition of CoreTrax and numerous meaningful contract wins. The team has continued to execute the business strategy to deliver on our financial goals while maintaining our reputation of excellence and execution through cost effective technology enabled services to our customers within a safety focused culture. I'd like to thank our teams around the world for their dedication to delivering value for our customers and our shareholders. The macro backdrop is constructive. Demand for energy, including oil, gas, and geothermal, is growing, and internationally, there is a heightened focus on energy security and diversification of supply.

We remain confident that the business is poised to benefit from the momentum in the international and offshore markets as our customers focus on low cost, carbon advantaged incremental production across essentially all international basins. We have a strong presence in key markets and our position to provide mission critical services and solutions to our customers. As I stated previously, at Expro, we are achieving better financial results across our business, and over the medium term, we expect to deliver on our targets, which include annual revenue of $2 billion and adjusted EBITDA margin of 25%. We are confident we are taking the right steps to unlock the full value potential of Expro, and we are pleased that strong market fundamentals are serving as a tailwind helping to drive our company's continued profitable growth.

As activity continues to ramp up, we are well positioned to support our customers across the full well lifecycle, deliver on our strategic and financial objectives, and drive sustainable long term value for shareholders. With that, we'll open up the call for questions.

Operator (participant)

Absolutely. We will now begin the question and answer session. If you would like to ask a question, please press star one on your telephone keypad. If for any reason you would like to remove that question, please press star two. Again, to ask a question, press star one. If you're using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. The first question comes from the line of Luke Lemoine with Piper Sandler. Your line is now open.

Luke Lemoine (Equity Research Analyst)

Hey, good morning, Mike, Quinn. I just want to talk about the outlook a bit more. Hey, morning. I want to start with the outlook and maybe the guidance as well. If I just kind of take the midpoint of the 2Q guide and use that for 3Q and 4Q, you basically get the low end of the guide for the year, and that assumes no further growth past 2Q. It wouldn't include CoreTrax either. But if you include CoreTrax in the second half, I mean, it starts to look like the midpoint's very reasonable. Can you just talk about your confidence around this, and then also what are some of the puts and takes to get to the high end of the annual guidance this year?

Quinn Fanning (CFO)

Yeah, and I'll start. Mike can probably add some supplemental comments. I think the first thing I would highlight is if you look at Q2 2023, we had a number of relatively chunky revenue contributions that will not be repeated in Q2 2024. So that's obviously LWI, where I think we had about $13 million of revenue in Q2 2023. And in addition, as we phase the Congo OPT project from the plant delivery to the O&M phase, we're losing another plus $10 million of revenue. So at the midpoint of guidance of $410 million of revenue, and if you look at adjusted Q2 2023, that's a +10% year-over-year growth. So what kind of brings you to the low or high end of guidance is really two things.

In my mind, most notably, when the Congo project starts the kind of production phase, so the delivery of the plant, then we've got a couple of relatively significant subsea projects on the African coast that are kicking off in the Q2 of 2023. So that's number one. And then CoreTrax, if we can close it a month or two earlier, as Mike and I mentioned, we think is a possibility. We're really just waiting for one antitrust clearance at this point. But if we do get CoreTrax closed, it's probably another $10+ million a month in incremental revenue and another $3+ million worth of EBITDA. So I think those would be the kind of key drivers.

As is always the case, projects can slip to the right or get pulled forward, but the range that we provided, excluding an early close of CoreTrax, is the best available information we have today.

Mike Jardon (CEO)

Yeah, Luke, I guess one thing I would add is it's, I mean, the way our subsea projects in particular, timing wise, looks like those are going to get kicked off. It's really at the back end of Q2. So whether it moves to the left by a couple of days or to the right by a couple of days is going to make a difference in the quarter. But I think fundamentally, just the activity set, the customer engagements, the customer dynamics, I think continue to be really strong. And Q4 is always we've got better visibility and we've got better confidence in Q2 and a little bit less in Q3 and a little bit less in Q4.

I can tell you from travels and spending time with customers and those type things, I think we're going to continue to have strong activity sets in the back half of the year that should continue to give us confidence in being able to deliver on that guidance range.

Luke Lemoine (Equity Research Analyst)

Okay. And then you talked about net pricing gains, not a material driver yet, but you're starting to see that in Subsea Test Trees, deepwater TRS. What could be next outside of Subsea Test Trees and deepwater TRS, do you think?

Mike Jardon (CEO)

I think we'll have some opportunities just as you see more of the exploration and appraisal activity start to firm up. Some of the more drilling and completions related well test activity, whether it's flowbacks, cleanups, those type things, I think we can get some pricing on. 70% of our activity is more tied to drilling and completions. So all of that, we'll have pricing opportunities. It's just kind of the timing of those. Some are going to be more later in kind of the recovery cycle. We're always going to have that roughly a third of our activities more OpEx related. Those, we're not going to get we're going to continue to try to make sure we get inflationary cost adjustments and those kind of things, but very minimal net pricing increases.

Luke Lemoine (Equity Research Analyst)

Okay. Thanks so much.

Mike Jardon (CEO)

Great. Thanks, Luke.

Operator (participant)

Thank you. The next question comes from the line of Atin Modak with Goldman Sachs. Your line is now open.

Luke Lemoine (Equity Research Analyst)

Hey, good morning, guys. Just curious on your capital allocation strategy here. So you've previously noted one third of free cash flow for returns and have historically leaned into buybacks. So how should we think about your latest thought process around the potential for a dividend in that mix? Is there a free cash flow margin target where that becomes more of a discussion?

Mike Jardon (CEO)

Yeah, I think it's an ongoing discussion that we have with our board of directors. We're really fortunate we have some really strong financially astute board directors. So we have really good dialogue and discussion about those things. I think for any company, what's tremendously important really is the longevity of a dividend. And once you commit to it and something you've got to have that kind of staying power, so to speak, we're still going to stick within that kind of third of our free cash flow. And at this point in time, I think we're probably going to continue, at least in the short term, to be more predisposed to buybacks as opposed to a dividend. But we're getting to that threshold. We're going to be more second half cash generative just with the nature of our activity.

We're going to get to that threshold kind of run rate, so to speak, back into this year, going to next year that I think more solid discussions around dividends will start to be had.

Luke Lemoine (Equity Research Analyst)

That's awesome. Thank you for that. And then beyond the CapEx plans that you've announced, how should we think about the M&A component as a use of cash for the remainder of the year versus leaning into buybacks? Seems like there's some industry-wide acceleration and consolidation. So curious how you see it for Expro for this year.

Quinn Fanning (CFO)

Yeah, it's tough to predict. M&A obviously takes two to tango. We continue to look at lots of different opportunities. I think we've now gotten two either across the finish line or close to the finish line with PRT and CoreTrax. I'll just note that in both cases, we were in dialogue with those counterparties for well over a year in one case and for a couple of years in another. We looked at 30+ opportunities over the previous 12 or 14 months and got two to the finish line. So very tough to predict M&A. We're interested in M&A. We think we're good at integration. And as Mike highlighted, it all starts with industry logic and where we actually believe we can add value.

So M&A for us is not just big for big's sake, but it's big because we think it allows us to deliver something that is more differentiated to the customers and become more relevant to investors. But I think we can do both. We today sit on a negative net debt position. So the balance sheet's strong. Our cash flow outlook is strong. So I think we can continue to allocate a third of free cash flow to a return of capital plan with plenty of free cash flow and balance sheet capacity to pursue M&A, if it makes sense.

Mike Jardon (CEO)

Yeah, I guess the only thing I would add is, as Quinn highlighted, this is all going to be driven by the industrial logic. But fundamentally, we're also going to make sure we're not going to become a roll up story. We're not going to try to go out and do 200+ M&A transactions in a short period of time because we're actually going to integrate them. We're going to drive efficiencies. We're going to make sure we eliminate the silos and bring those things together. So we're going to be purposeful about the ones that come into the portfolio. We're going to make sure we add value to our customers and ultimately to our shareholders. But there are opportunities out there, and we'll continue to pursue those. And we're going to be patient.

We're not going to, as Quinn said, both of those had kind of a long interaction and engagement. Sometimes you just have to be patient to get those things done. And we'll continue to be focused on opportunities of how do we strengthen the brand? How do we have a great platform, and we can do more for our customers. And what I really like is with both of those transactions, when I go to customers right now and I try to say, "Hey, let me explain to you about PRT. Let me explain to you about CoreTrax," they put their hand up as a stop sign and say, "No, no, we get it. We understand. You don't have to explain why it makes sense." That's how compelling the industrial logic is.

To me, that's tremendously positive for us because if our customers get the industrial logic without a lot of discussion, I know we can explain the industrial logic to investors or analysts alike.

Luke Lemoine (Equity Research Analyst)

Yeah, that makes sense. Thanks. Thanks. That's a great color. Appreciate it.

Mike Jardon (CEO)

Thanks for your participation. We enjoy it.

Operator (participant)

Thank you. The next question comes from the line of Arun Jayaram with JPMorgan. Your line is now open.

Luke Lemoine (Equity Research Analyst)

Hey, Arun. Yeah, good morning, gentlemen. I want to get your thoughts maybe on two kind of markets that you participate in, TRS and cementing. Maybe give us a sense kind of internationally, offshore, kind of the dynamics that you see playing out in TRS between your volume gains, pricing, and maybe a similar thought on cementing where I think you're at called $100 million run rate, and I think you've talked about growing that business to $250 million of revenue over time.

Mike Jardon (CEO)

Yeah, I think especially with cementation today and even some of the technologies we're rolling out in TRS, particularly applicable in deep water, a lot of this is around efficiency gains. A lot of this is around improving operations. Our cementing technologies, we have the ability we have at a project in the Gulf of Mexico where we've helped reduce the waiting on cement time by 17-18 hours. And in an increasing rig rate environment, that starts to become more meaningful for our customers. And it's the same thing with some of our TRS technologies that we've rolled out, our iTONG, our Centri-Fi. Not only are we reducing the number of personnel on the rig floor, but we're also improving the efficiency, the makeup times, the running speeds, those kind of things. We're improving efficiencies, and we're taking people out of the red zone.

So we're reducing the opportunities to have HSE events. And when you can bring both of those things, efficiencies and repeatable operations, is tremendously valuable to customers. And as that rig rate goes up, the value proposition or the savings opportunity for them really starts to be strong. So I think our focus on technology and our focus on efficiency and some of the things we've done around M&A and transactions is going to help us with that. And that's also you're absolutely right. We've said openly that $100 million of cementing activity today, that's a $200 million-$250 million opportunity for us. And I think as the market continues to strengthen and as rig rates continue to move up, I think we're going to have more and more opportunities because we're going to introduce cementing technologies at the right rate because we're not going to give up on pricing.

We create tremendous value. So we'll take a little slower activity introduction over a few quarters because by the time we get into the back part of this year and into next year and rig rates continue to be strong, then I think we're going to be in a good position on pricing.

Luke Lemoine (Equity Research Analyst)

Great. And just maybe a follow-up on some of the M&A discussion. Mike, are you still kind of targeting more bolt-on type of transaction that you've done like DeltaTek and CoreTrax, or are you looking at perhaps some deals that may be a little bit larger in scale and maybe just give us a sense of the pipeline as it sits today?

Mike Jardon (CEO)

Yeah, we will look at everything. And frankly, we do. Quinn alluded to we had 30+ type transactions we discussed or were some level of diligence in last year. And I can tell you some of those were up to transformational type things. So it's not just the $100 million-$200 million bolt-ons. We're going to look at all of these. But it all really starts with I know it sounds I keep repeating on my soapbox about the industrial logic, but that's exactly what it leads for us. That's the first, the second, and the third conversation. If that makes sense, then we'll look at those. And it doesn't have to be it can be a merger of equals. We could be the smaller partner. We're going to look at things that make sense.

So, across the board, kind of across the pitch are the kind of things we're looking at and having conversations around.

Quinn Fanning (CFO)

I also wouldn't consider DeltaTek to be a real bolt on. We actually think about M&A in three different silos: DeltaTek, SolaSense. These are very modest investments of cash, frequently with a performance driven payout structure. That's a way for us to kind of add disruptive technologies to the portfolio and continue to have something that is differentiated for the end user customer. Now, PRT or CoreTrax, which are now nine figure transactions, but still within the existing balance sheet capacity, that's what I would consider to be a bolt on. So kind of $1 million-$500 million in aggregate value. Once you get beyond the high end of that range, it's probably involving some equity funding, potentially significant equity funding. And at that point, it's a relative valuation discussion as much as anything else. And we're open to transformational M&A or large equity funded transactions.

But it's got to be something that Mike can demonstrate is compelling to customers and just as importantly compelling to you and the investors that you represent.

Luke Lemoine (Equity Research Analyst)

Great. Thanks, Quinn.

Quinn Fanning (CFO)

Thanks, Arun.

Operator (participant)

Open. Addie, please make sure your line is unmuted. Thank you. We will go to the next question from the line of Steve Ferazani with Sidoti. Your line is now open.

Luke Lemoine (Equity Research Analyst)

Thanks. Morning, Mike. Morning, Quinn. Appreciate all the detail on the call.

Quinn Fanning (CFO)

Morning.

Luke Lemoine (Equity Research Analyst)

To strengthen top line this quarter, sounds like I mean, while construction was soft year-over-year, so I'm trying to figure out where you made up for it. And was it just the expansion and new projects in Saudi and Algeria? If you can give a little bit more detail on the strength on top line this quarter.

Quinn Fanning (CFO)

Yeah, as Mike mentioned, we had a very strong Q4 in terms of well construction, notably large tubular product sales. It was a lighter quarter, not surprisingly, given the historic seasonal patterns and well construction. So we had some projects that were moving to the right, particularly in the North American offshore market, so the Gulf of Mexico. And as Mike also mentioned, Guyana. I guess the trend that we've seen across the sector is that rig maintenance or special surveys are seemingly taking much longer than was previously expected. So most of the rigs in Guyana have moved from 60- to 90-day-type maintenance schedules. And that was a driver to some of the weaker NLA performance and well construction.

Not something that we expect to be a continuing trend, but as the rigs come out of maintenance in Guyana and activity picks up in the Gulf of Mexico, we're expecting Q4 type performance in NLA. But until then, MENA, and really other than the OPT project in Congo, ESA, had relatively strong quarters relative to our expectations. And I'd say MENA in particular seems to go from strength to strength, including revenue trajectory and margins. So very pleased with that performance.

Luke Lemoine (Equity Research Analyst)

Great. CapEx this quarter and then your guidance for the rest of the year, it sounds like you're trending towards the high end of that CapEx percentage of revenue range, which given the number of new projects and activity makes sense. But does that soften your view on free cash flow expectations for the year?

Quinn Fanning (CFO)

No, I mean, most of our CapEx tends to be project driven. So if our CapEx is going to be higher, it's going to be because the backlog is growing. But no, I wouldn't say that in and of itself would change our view in terms of the expectations for free cash flow performance. You're correct that if you take the $30+ million of CapEx in Q1 and the kind of range we provided in the press release, we would be closer to the 8% area. But I'm pretty confident that if CapEx continues at these elevated levels, it's going to be still within the percentage ranges because the denominator will grow at the same cadence. Over time, actually, CapEx should shrink as a percentage of revenue, particularly with pricing.

Luke Lemoine (Equity Research Analyst)

Yep. Great. On the integration process, PRT, well, underway, you've got CoreTrax coming up. You did the smaller one, DeltaTek, a year ago. Can you tell me what your learning curve has been on integration? Is it getting easier, or is it going to be different for each one? And obviously, CoreTrax is larger, or does it matter more what you're buying in terms of the complexity of the integration, considering the number of opportunities that may or may not be out there down the road?

Mike Jardon (CEO)

Sure. No, Steve, it's a great question. I can tell you one of the things we did when we did the Franks transaction or Franks merger, I really made sure that we looked at that through a long-term lens. We spent a lot of time and effort to develop an integration playbook because I had every intention of us doing more of those type transactions going forward. So we really laid out the methodology, the kind of the know-how. We dedicated one of the executives to be the integration lead on that project. So a lot of time and effort was spent on how do you develop a playbook and how do you make it sustainable and repeatable down the road?

So we've really been able to now, the other transactions have been smaller, so it's not been to the same extent, but it's the same methodology, the same approach. That particular executive has also played an advisory role for us because he retired. I guess it was at the end of 2022. But he's continued to play an advisory role for that. So I think we're getting better in integration. A lot of lessons learned. A lot of, "We should double down on this. We should not focus on that." A lot of those kind of discussions. So I think it's going to continue to help us be more efficient. But we learned a lot. And when we did the original Frank's transaction integration, and we're kind of able to use that as a good stepping stone, how we lean into these other ones.

The difference with PRT or with CoreTrax, those are not full-fledged global integrations. Those are generally more regional integrations, which means that we should be able to execute on those more quickly than what we did on the bigger one.

Luke Lemoine (Equity Research Analyst)

Perfect. Great. Thanks, Mike. Thanks, Quinn.

Quinn Fanning (CFO)

Thanks, Steve.

Mike Jardon (CEO)

Thanks, Steve.

Operator (participant)

Thank you. The next question comes on the line of Josh Jayne with Daniel Energy Partners. Your line is now open.

Josh Jayne (Managing Director)

Thanks. Just to sort of build on the line of questioning around Franks, there was a presentation highlighting Adjusted EBITDA margins for the combination back when it was done, but they were between 7%-14% in the 5 years prior to the deal closing, which also represented sort of a depressed offshore spending market. You were in the upper 20s, low 30s in 2014 and 2015. Obviously, low 20s guided for this year. As you sit today and look at the business, what can be done outside of price to get back to those margin levels, and how do you see those evolving over the next couple of years?

Mike Jardon (CEO)

Sure. Josh, it's a good question. We appreciate it. A lot of it for us is really around the cost in the organization. If you look at the kind of the last full quarter before we began the integration of the two companies, we were at 31% total support costs. And for us, just to be clear, the way we look at support costs is the support all the way down to the field level to the guy who's going to go out and execute the job. So we don't try to be cute and just talk about SG&A is a corporate SG&A is 3%-3.5% because I think that's kind of hiding the bacon. I'm going to look at the total support that it takes for us to go out and execute a job.

But we were at 31% then, and we finished 2023 at 19.4%, I believe. So we've taken a lot of support costs out of it, out of the organization. So I look at it as having a number of, I've got 6 or 7 points of margin in my back pocket, so to speak. And as we continue to grow and we continue to add top line, our support costs will grow at more of an inflationary rate, not at the same rate that our top line will grow. So for us to get back to a, it's the reason why we've talked about a pathway to $2 billion of revenue and mid-20s% EBITDA margins. That's something that's eminently doable for us.

For me, it's not a question of if, it's a question of when that we can get back to those kind of EBITDA margins, and I think even be able to push through the mid-20s into the upper-20s.

Josh Jayne (Managing Director)

That's great. Thanks. And just one follow up. One of the things you mentioned, you talked about carbon capture for a moment. You highlighted in the press release Japan's first clean hydrogen production demonstration. As it relates to Expro, could you just talk about the addressable market for the company over the next few years and give us a sense of the other inquiries you're having or seeing there?

Mike Jardon (CEO)

Yeah. It is a massive addressable market. I think as we start to see the Exxons and the Gulf of Mexico and other operators globally, I think it's really going to be at the pace at which they continue to address their carbon capture needs and requirements. For us, it's really we can multipurpose our personnel and a lot of our equipment, especially when you start talking about clean projects, whether it's clean hydrogen or ammonia type projects. We're going to go through well testing, wellbore cleanup, cleaning of fluids, separation of fluids, those type things. So it gives us a lot of flexibility on utilizing the same assets and same people and having the technique and having the kind of reservoir knowledge and understanding to apply that. So it's a very significant opportunity.

It's really going to be driven by what's the pace at which those operators and those customers focus on carbon capture.

Josh Jayne (Managing Director)

Great. Thank you very much.

Mike Jardon (CEO)

Great. Thanks, Josh.

Operator (participant)

Thank you. There are no additional questions waiting at this time. I would now like to pass the conference back to management for any additional or closing remarks.

Mike Jardon (CEO)

Great. So we'll go ahead and close for now. I appreciate everybody listening in on the Q1. I think as we said, we continue to see some gaining momentum in the space, in the sector, particularly offshore international. And we look forward to speaking to all of you in the next quarterly call. Thank you.

Operator (participant)

That concludes today's conference call. Thank you for your participation. You may now disconnect your line.