Expro Group Holdings - Q2 2023

Transcript

Operator (participant)

Hello everyone, and a warm welcome to the Expro second quarter 2023 earnings presentation. My name is Emily, and I'll be coordinating your call today. After the presentation, there will be the opportunity for any questions, which you can ask by pressing star, followed by one on your telephone keypad. I'll now turn the call over to our host, Expro's Chief Financial Officer, Quinn Fanning. Please go ahead, Quinn.

Quinn Fanning (CFO)

Welcome to Expro's second quarter 2023 conference call. I am joined today by Expro's CEO, Michael Jardon. First, Mike and I will share our prepared remarks, then we will open it up for questions. We have an accompanying presentation on our second quarter results that is posted on the Expro website, expro.com, under the Investors section. In addition, its supplemental financial information for the second quarter and prior periods is downloadable on the Expro website, likewise, under the Investor section. I'd like to remind everyone that some of today's comments may refer to or contain forward-looking statements. Such remarks are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Such statements speak only as of today's date, and the company assumes no responsibility to update forward-looking statements as of any future date.

The company has included in its SEC filings, cautionary language, identifying important factors that could cause actual results to be materially different from those set forth in any forward-looking statements. A more complete discussion of these risks is included in the company's SEC filings, which may be accessed on the SEC's website, sec.gov, or on our website, again at expro.com. Please note that any non-GAAP financial measures discussed during this call are defined and reconciled to the most directly comparable GAAP financial measure in our second quarter 2023 earnings release, which can also be found on our website. With that, I'd like to turn the call over to Michael.

Michael Jardon (CEO)

Good morning, good afternoon, everyone. As Quinn noted, we posted slides with Q2 highlights to the XPRO website. Quinn and I will refer to several of these slides during our prepared remarks today. As highlighted in our press release, the second quarter of 2023 revenue was $397 million, which is up by $58 million or approximately 17% relative to the first quarter of 2023, and up 27% relative to the second quarter of 2022. Sequential and year-over-year revenue growth compares favorably to the guidance provided on our last earnings conference call, which in summary, was that we expect about 10% revenue growth quarter-over-quarter and about 20% revenue growth year-over-year. As highlighted on slide four, the second quarter results reflect a continued ramp-up in activity across geographies, areas of capabilities, and product lines.

Well Construction revenue was up 12% sequentially and 18% year-over-year, while Well Management revenue was up 20% sequentially and up 32% year-over-year. Adjusted EBITDA for Q2 2023 was approximately $72 million, representing a sequential increase of approximately $30 million or 71% relative to first quarter, primarily reflecting higher revenue, a more favorable activity mix, and lower support costs. Adjusted EBITDA margin in the second quarter of 2023 was 18%, as compared to 12% in the first quarter of 2023. At 18%, reported Adjusted EBITDA margin was at the high end of our guidance range. Quinn will provide some additional details, but I'll note that underlying profitability is trending positively.

Reported contribution margin of 34% includes approximately $6 million of LWI-related, non-reimbursable, non-productive time or what we call NPT, which negatively impacted Q2 contribution margin by approximately 1.5 percentage points. We are taking a relatively conservative approach to the recognition of margin associated with the onshore pretreatment facility that we are constructing for Eni in Congo, which also had a dilutive impact on overall contribution margin of approximately 1.5 percentage points. We are successfully working through discrete operating issues with our LWI system, and excess costs should be transitory in nature. The Eni Congo project has gone well to date, and we expect the facility to become operational sometime in the first half of 2024. We started 2023 with a healthy order book, and I'm pleased that we have continued to build on this momentum.

In the second quarter, we delivered a strong quarter, capturing an additional $300 million in new work orders by capitalizing on a strong resurgence of activity. Contract wins reflect an improving market, the depth of our technical expertise, and Expro's best-in-class service delivery. The breadth of our portfolio is differentiating Expro from our competitors, and I remain optimistic on the outlook for 2023. For reference, we have summarized the backlog trend over the last six quarters on appendix page eight on our accompanying presentation. I'll note that backlog for a services company is not the same as a manufacturer, as the time of realizing revenue and backlog is less certain. Nonetheless, we are pleased to see a stable backlog quarter-over-quarter at an all-time high of +$2 billion.

From our perspective, the macro backdrop remains very constructive, with OPEC+ restraint offsetting a weaker near-term demand outlook. Recent and expected FIDs suggest that the offshore market, from which we generate approximately 70% of our activity and revenue, will attract investment capital that has not been seen in over a decade. Resulting in long cycle development and capacity expansion projects, supporting a multi-year growth phase for energy services overall and for value-adding services providers such as Expro, in particular. Expro's business, which in a nutshell, is largely driven by international and offshore activity, is built to ride the tailwinds that we expect to persist for the next several years, driven by favorable supply-demand dynamics and a heightened emphasis on energy security and diversification of supply. Our basic medium-term business strategy is to maximize this growth cycle.

By rationalizing non-customer-facing functions and selectively consolidating facilities, we have largely realized our previously announced cost synergy targets and reduced our support costs to approximately 20% of revenue. Our team is now focused on capturing new work and executing awarded business. Improved asset utilization across our product lines and increasing the drilling and completions activity should result in a more favorable activity mix. Continued costs and capital discipline should result in improved operating leverage, margin expansion, and better cash generation. We are also pushing pricing to get more value for the services that we provide our customers, and we believe that our results will reflect net pricing gains beginning in the second half of 2023.

I'll remind you that the midpoint of our most recent guidance was for full year 2023 revenue of roughly $1.5 billion, and for full year 2023 Adjusted EBITDA margins of ±20%, implying year-over-year Adjusted EBITDA margin expansion of about 400 basis points. We believe that we will exit 2023 with quarterly run rate revenue of about $400 million or $1.6 billion annualized and Adjusted EBITDA margins of +20%. If full year 2023 results are consistent with our current expectations, we will deliver on key financial targets that we established when we announced the Expro Frank's International merger in early 2021, despite a dynamic operating environment and startup challenges associated with deploying several new technologies.

A combination of incremental activity, merger-related revenue synergies, the investments we have made to date in new technologies, and pricing tailwinds should support mid-teen top-line growth through at least 2024. Let me now move on to some regional commentary, which is covered on slide five. In North or Latin America, our Well Construction product line continues to demonstrate exceptional performance. An operator in the Gulf of Mexico had to suspend a well due to a delivery delay of the completion tree. The well's lower completion was already in place, therefore, regulations required the operator to set and validate by pressure test, two separate mechanical barriers prior to moving to another operation. Expro's team provided two high-tensile, high-pressure BRUTE packer systems for the suspension, offering an extremely robust V3-rated barrier system for ultimate dependability during the toughest weather conditions.

After remaining in the well for five months, once the completion tree was delivered, both packers were successfully retrieved and ultimately allowed the operator to finish the completion of the well. This is an important accomplishment for our BRUTE well isolation system. Moving on to Europe and Sub-Saharan Africa, we recently announced a new $20 million contract with Harbour Energy for a well abandonment campaign as part of the decommissioning project for the Balmoral area in the U.K. continental shelf. Reinforcing our position as a key enabler within the plug and abandonment market, this multi-year contract will utilize Expro's subsea well access technology with a combination of open water and in-riser applications. We continue to see customers look to secure subsea landing string capacity as the backlog of offshore deepwater and ultra-deepwater projects continues to build.

In Ghana, we have also received a contract extension worth more than $50 million to provide subsea packages. Securing the extension is testament to the superior capabilities of our subsea landing strings and excellent service delivery team. In the Middle East and North Africa, at several investor conferences, I discussed Expro's sustainable energy solutions, highlighting examples such as in Algeria, where we provide emissions management and flare reduction services and solutions to help our customers commercialize gas that was historically being flared. We have further demonstrated our commitment to helping make energy safer, cleaner, and more efficient. Utilizing cost-effective, innovative technologies, we support a customer in the MENA region to mitigate potential environmental damage.

Expro's production optimization solution improved operational efficiency and made a significantly positive commercial impact by decreasing the loss of oil, all while minimizing the environmental impact to support our customers' carbon reduction initiatives. We have also deployed an electric-powered slickline unit for a customer in Qatar as part of an initiative to move away from diesel-powered units. This is the first deployment of this unit type within Expro, where the electric power pack replaces the diesel with no additional deck space required and ultimately supporting our customers on their journey to reducing their greenhouse gas emissions. This is another great example of Expro working together with our customers to develop and deploy the right solutions to help contribute to a lower carbon world. Lastly, moving to the Asia-Pacific region, our Indonesia team completed its first semi-submersible exploration and appraisal project with a 100% performance score.

As part of this successful job, Expro delivered services across three wells for three of its subsea direct hydraulic, drill stem testing, downhole sampling, and well testing operations. Turning to slide six, which highlights several operational achievements and technology awards, I will now call attention to a few noteworthy achievements from the quarter to provide you with a further sense of Expro's current business momentum. First, I'm pleased to share positive operational results from our Subsea Well Access product line, which has completed a five-well de-suspension campaign offshore Australia for one of the super majors. Expro has more than 35 years of experience providing a wide range of fit-for-purpose subsea well access solutions and extensive portfolio of standard and bespoke subsea test tree assemblies. Our test tree assemblies, which are also known as landing strings, and our subsea team have supported more than 3,000 customer operations to date.

With a proven track record and a great team, we should be a primary beneficiary of the expected increase in deepwater drilling and completions activity over the next several years. With the recent contract awards in the Europe, Sub-Saharan Africa, and Asia-Pacific regions highlighting momentum in our traditional subsea business. Our recent investment in riserless well intervention has allowed us to significantly expand our subsea toolbox, providing the company with both rig and vessel-deployed light well intervention capabilities and the ability to cost-effectively support our customers' requirements throughout the life of their subsea wells, from completion through production and production optimization, all the way through to ultimate abandonment. As I noted at the top of my remarks, LWI-related NPT negatively impacted quarterly results, but achieving operational status on our vessel-deployed system late in the first quarter was an important milestone for our subsea team.

We expect that the profitability of our Subsea Well Access business will continue to improve in the second half of 2023 and beyond, as we put some of the teething issues of this first LWI work scope behind us and focus on executing additional vessel-deployed LWI work that's been secured. Within our Well Construction product line is our cementing technologies, which we expanded with the acquisition of cementing specialist DeltaTek Global in the first quarter. In June, DeltaTek was presented with the internationally recognized 2023 King's Award for Enterprise, receiving the Innovation Award. As the most prestigious award for businesses in the U.K., the King's Award celebrates the outstanding success and significant contribution of businesses across the country.

In addition to this award, the DeltaTek team has also been recognized for its technology offering at the UK's Northern Star Awards. These are great achievements and reinforce the team's excellent track record of developing and deploying cementing technologies that help increase our clients' operational efficiency, deliver rig time and cost savings, and also help to improve the quality of cementing operations. Additionally, within the Well Construction product line, our team has achieved another record-breaking operation in which we installed a 14-inch casing string, and we utilized Expro's proprietary digital technology, Centi-FI. During this operation, our Centi-FI intelligent command and control solution enabled the rack back of 67 stands of drill pipe offline and set a record-running speed, all while minimizing personnel required for the operation and eliminating the need for personnel in the red zone.

This was one of the fastest and most efficient 14-inch jobs in the North and Latin America region to date. I'll note that our new energy initiatives are ever-increasing. Our geothermal business continues to develop globally, and we have recently accepted a board position on the International Geothermal Association, strengthening our commitment as an integrated service provider to the growing and increasingly important geothermal sector. I'm also pleased to share that after construction, test rig up, and deployment of a geothermal-specific well test evaluation spread for a customer in Germany, they successfully achieved first steam. This demonstrates our enhanced offering capabilities in the geothermal sector and our commitment to a more sustainable and lower carbon future. We are working to advance new strategic partnerships and have recently become members of The Solent Cluster and Carbon Capture and Storage Association.

This is important as we advance our strategy to grow our business in the carbon capture, use, and storage sector, further strengthening our sustainable energy solutions to manage the evolving industry needs around carbon capture, and more broadly, to leverage our technologies and expertise to reduce emissions and unlock new sources of cleaner, lower carbon energy. Before I turn the call over to Quinn, note that slide seven recaps our Q3 and full year guidance, which we are again reaffirming. In summary, the market outlook for 2023 remains positive, with oil demand returning to pre-pandemic levels during the 1st quarter of 2023 and continuing growth demand throughout the remainder of the year and into 2024, as the U.S. and European economies stabilize and demand continues to recover in developing markets, including China.

Liquids balances have tightened since Q1, supporting high and generally stable oil prices, with $70 per barrel of oil currently feeling more like a relatively stable floor. This is consistent with the EIA's average Brent forecast of roughly $79 per barrel for 2023, rising to $84 per barrel in 2024. EIA's longer-term outlook indicates that oil prices will remain at attractive levels for operators. Similarly, we continue to see generally robust gas prices, which have somewhat stabilized from the volatile and unstable highs seen at the beginning of the Russia-Ukraine war. 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.

Upstream investments are expected to continue to grow and should soon exceed pre-pandemic levels as countries are challenged with the energy trilemma to secure reliable, affordable, and sustainable energy, and as operators seek to increase production. Balanced with continued capital investment discipline, particularly amongst the IOCs. While some macroeconomic uncertainty remains, particularly around the timing of a Chinese demand recovery, the outlook continues to be positive for the energy services sector, and we believe demand for our services and solutions will continue to grow throughout 2023 and into 2024. International and offshore activity is continuing to increase, especially in Latin America and across our Europe, Sub-Saharan Africa, Middle East, North Africa, and Asia Pacific regions, as operators look to progress new developments, such as we've observed in Brazil, Guyana, Norway, Qatar, and Egypt, an increase in exploration in both mature basins and frontier areas such as Namibia.

In general, activity in Sub-Saharan Africa, which is historically a strong market for Expro, seems to be experiencing a bit of a renaissance. Deep water and ultra-deep water activities should favor our Well Construction and Subsea Well Access businesses and elements of our Well Flow Management business as well. Additionally, the number of offshore projects expected to be sanctioned continues to climb, with approvals in 2023 forecast to exceed 2019 levels and a continuing pipeline of projects poised to be sanctioned between now and 2030. We are also seeing an increase in exploration and appraisal activity, both in conventional oil and gas and for future carbon capture use and storage projects, which further indicates for an increased future offshore activity, again, supporting the positive longer-term activity outlook.

With high and relatively stable commodity prices, operators are also looking to maximize production from their existing well stock, all the while striving to reduce the amount of methane emissions from their overall fossil fuel operations. This is driving further demand for our production-related activities within our well flow management and Well Intervention and Integrity product lines, especially across the Asia Pacific and Latin America regions. In addition, as the number of mature assets reaching the end of their economic life is increasing, there is a growing requirement for cost-effective plug-and-abandon solutions, underpinning the decommissioning market and increased activity, particularly in Europe. With increasing operator upstream investments and the resulting activity, Expro and the broader energy services sector continue to experience increased utilization of people and assets and a tightening of supply, supporting our ongoing initiatives to raise prices and extract more value for our services and solutions.

All combined, the outlook for the sector at Expro is quite positive. With that, I'll hand the call over to Quinn to discuss the financial results.

Quinn Fanning (CFO)

Thank you, Michael. For those that have a copy of our accompanying slides, note that the appendix to the slide deck has a number of charts and tables covering consolidated results, as well as results by reporting segment, area of capability, and product line. As I noted at the beginning of the call, downloadable financials, including historical combined results of Expro and Frank's, are also available on our website. To recap, second quarter revenue was $397 million, which was up by $58 million, or approximately 17%, relative to the first quarter of 2023, and up approximately $83 million, or 27%, relative to the second quarter of 2022.

Net income for the second quarter was $9 million, or $0.08 per diluted share, compared to a net loss in the first quarter of $6 million, or $0.06 per diluted share. Year to date, net income was $3 million, or $0.03 per diluted share, compared to a net loss of $15 million, or $0.14 per diluted share, for the first six months of 2022. Adjusted net income for the second quarter of 2023 was $19 million, or $0.17 per diluted share, compared to the first quarter adjusted net income of $1 million, or $0.01 per diluted share, primarily reflecting higher Adjusted EBITDA. Second quarter contribution margin, which again is essentially cash basis gross profit, was 34% or flat relative to the first quarter of 2023.

As Michael noted, LWI-related NPT and our Eni Congo project were collectively a drag on margins of about 3 percentage points. Profitability on our LWI-related activities and the Eni Congo project is expected to improve over the next couple of quarters and should contribute to an overall improvement in contribution margin in the second half of 2023. For reference, excluding excess LWI-related costs in Q1 and Q2, contribution margin was down about 1 percentage point quarter-over-quarter to approximately 36%, largely reflecting the dilutive impact on contribution margin of the Eni Congo OPT project. Second quarter support costs at $68 million totaled 17% of group revenue. Support costs were down approximately $8 million sequentially. Year to date, support costs are just below 20% of revenue and are down more than 10 percentage points compared to the combined overheads of Expro and Frank's pre-merger.

Adjusted EBITDA for Q2 2023 was approximately $72 million, representing a sequential increase of approximately $30 million or 71% relative to the first quarter, primarily reflecting higher revenue and a more favorable activity mix. Adjusted EBITDA margin in Q2 2023 was 18% as compared to 12% in Q1 2023 and 16% in Q2 2022. For reference, excluding LWI-related excess costs, Adjusted EBITDA margin was approximately 20% in Q2, or up approximately 400 basis points sequentially and up approximately 200 basis points year-over-year. As highlighted on the first appendix page of our slide, for Q2 2023, quarterly revenue was up approximately 65%, and Adjusted EBITDA is up approximately 275% since Q4 2020, which was the last full quarter prior to our announcing the Frank's International merger.

The following slide recaps adjusted operating cash flow for Q2 and prior periods, reflecting cash provided by operations before cash paid for interest, severance and other expenses, and merger and integration expenses. For the second quarter of 2023, adjusted operating cash flow was $36 million, or up 30% relative to Q1, 2023. The sequential trend in adjusted cash flow from operations largely reflects higher revenue and higher Adjusted EBITDA, offset by an approximate $15 million build in net working capital and cash taxes, which were higher by about $10 million quarter-over-quarter. Capital expenditures for the second quarter of 2023 totaled $29 million, which was flat compared to Q1, 2023.

CapEx for the full year, 2023, should fall within a range of $120 million-$130 million, which is consistent with prior 2023 CapEx guidance of 7%-8% of expected revenue. Total liquidity at quarter end was approximately $311 million. Cash and cash equivalents, including restricted cash, was $181 million as of June 30th. Total liquidity also includes $130 million that is available to the company for drawdowns as loans under a revolving credit facility. The approximate $93 million balance of the facility is available for bonds and guarantees, approximately half of which is currently being utilized.

Note that Q2 cash provided by operating activities and cash at June 30th reflects the company's $8 million payment to the Securities and Exchange Commission during the quarter in order to settle the legacy Frank's FCPA-related internal investigation. Expro has no interest-bearing debt at quarter end. The company has no interest-bearing debt today. Our full year expectation for support costs as a percentage of revenue and cash taxes as a percentage of revenue is 19%-20% and ±3%, respectively. The positive trend in support costs is recapped for you on slide A-7. As discussed on previous calls, anticipated growth and annual incentives typically result in a seasonal build in working capital in H1, with cash flow tending to improve in the second half of the year.

We expect activity and revenue will continue to trend higher, and working capital as a percentage of revenue will moderate as 2023 progresses. As a result, we continue to expect to be cash generative for the full year. Our internal target for 2023 free cash flow margin or free cash flow as a percentage of revenue, remains in the mid to high single digits. As Michael noted, we maintain our prior full year 2023 guidance range for revenue of between $1.45 billion and $1.55 billion, for Adjusted EBITDA of between $275 million and $325 million, and for Adjusted EBITDA margin of between 19% and 21% of revenue. I will now turn the call back over to Michael for a few closing comments.

Michael Jardon (CEO)

Thanks, Quinn. I'd like to leave all of you with three key takeaways before we open up the call to Q and A. First, Expro continues to outpace market growth, delivering and expecting double-digit revenue growth by capturing market share and by introducing new technologies in our established markets. This is a result of us being able to leverage our global operating footprint, excellent track record, and world-class service quality. Second, strong top-line growth, improved operating leverage, and now we're driving more activity and revenue across a more efficient support structure will allow us to expand EBITDA margins and improve free cash flow generation. Finally, we are laser-focused on delivering results. One of the key traits of the organization is execution. We win business because of the quality of our execution, not because we're the biggest service provider.

Similarly, we were successful in achieving and exceeding our merger-related synergies target because we've worked very hard to develop strong and detailed plans, and then we set about implementing them. With that, I'll transfer the call back to the operator for the Q and A session.

Operator (participant)

Thank you. We will now begin the question-and-answer session. If you have a question, please register this now by pressing star followed by one on your telephone keypads. If you change your mind and would like to be removed from the queue, that is star followed by two. When preparing to ask your question, please ensure that your device and your microphone are unmuted locally. Our first question comes from the line of Eddie Kim with Barclays. Eddie, please go ahead. Your line is now open.

Eddie Kim (VP and Equity Research of US Oilfield Services)

Hi, good morning.

Michael Jardon (CEO)

Hey, Eddie.

Eddie Kim (VP and Equity Research of US Oilfield Services)

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

Michael Jardon (CEO)

Sure, Eddie, appreciate the question. I guess, how I would frame it up is, you know, Well Construction for us has really been, historically, has been underrepresented. I think our ability to, you know, some of the first, some of the first revenue synergies we were able to identify and talk about were really Well Construction contracts in places like Saudi and places like Algeria. We've got good opportunities to continue to expand our footprint in Well Construction, you know, in the Middle East. That you could anticipate more of an opportunity set. With Well Flow Management, it's very much tied to what is the level of activity for the operators in the Middle East as well as North Africa.

Probably higher growth potential for us as we can start to convert more contracts into Well Construction. The difference with the Middle East is, you know, you, you don't show up on Monday and win contracts on Tuesday. You have to have a presence there, and that's where we've been able to pull through some of the relationship and some of the infrastructure we have in place from Well Flow Management. We're starting to be able to win some new contracts to Well Construction.

Eddie Kim (VP and Equity Research of US Oilfield Services)

Got it. Got it, understood. Thank you. Just my follow-up is, is on, on pricing in the Well Flow Management segment specifically. Could you just remind us of the duration of typical contract terms in Well Flow Management? Are there differences between NOCs like Aramco, you know, versus your, your smaller customers? When should we start seeing net pricing gains in this product line? Do you expect that in the second half of this year, or have you started seeing it already?

Michael Jardon (CEO)

Sure. You know, really across all of our product lines, for the most part, they're typically three year type contracts. So if you kind of look at it simplistically, we're gonna get a chance of for about a third of our book to be able to reprice on annual basis. That's part of the reason what we have highlighted is that, you know, the step up and ramp up in activity we've had here has been much more mix related. We're not seeing that from a pricing standpoint.

We will start to see some of that come into play in the back end of 2023. Really more as we go into 2024, as we'll, in essence, have been able to start to reprice year two of some of those, you know, three-year contracts as they start to roll over.

Quinn Fanning (CFO)

The other thing I'd mention for you, Eddie, is within well flow management is our Production Solutions business, which is also where we're recognizing, at least on a product line basis, the Eni Congo project. That is part of the story as to why well flow management contribution margins have been in this 33%-34% area in the first half of the year. You know, we would expect that to continue to improve as the year progresses, and particularly in 2024, you know, once we get past this delivery phase on the plan to move into more operations and maintenance mode.

I, I would say there is a bit of an artificial drag on well flow management margins that is related to the Eni Congo project, which, you know, a couple quarters out, you know, knock on wood, that project's been delivered, and you'll start to see things more normalized in the high 30s or better, hopefully.

Eddie Kim (VP and Equity Research of US Oilfield Services)

Okay. Got it. Great. Thank you both for that color. I'll turn it back.

Michael Jardon (CEO)

Thanks, Eddie.

Operator (participant)

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

Alexa Petrick (Equity Research Analyst)

Thank you. This is Alexa.

Quinn Fanning (CFO)

Hi, Alexa.

Alexa Petrick (Equity Research Analyst)

On for Neil Mehta. Wanted to ask, you know, following the strong revenue you guys had this quarter, do you think it's possible to surpass your full year revenue guidance? If not, where are you expecting revenue to maybe soften in the back half of the year?

Quinn Fanning (CFO)

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

Alexa Petrick (Equity Research Analyst)

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

Quinn Fanning (CFO)

Yeah. You know, variability obviously is the timing of, you know, pricing showing up and, you know, results. You know, as Michael mentioned, we've also been holding back on contingencies on the Eni Congo project until we get further along in the delivery schedule. You know, there's certainly upside in terms of the Eni Congo project. Not necessarily gonna be a material, you know, change in consolidated results. I would say those are, you know, key drivers. You know, we're operating under the assumption that we've put, you know, the better part of the teething issues on the LWI initial work scope behind us, and obviously, the absence of a negative on LWI will be a positive for consolidated results.

You know, those are the primary drivers that make us comfortable that we'll finish the year in the 20%-22% EBITDA range, which we included in our slide deck as, you know, second-half guidance.

Michael Jardon (CEO)

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

Alexa Petrick (Equity Research Analyst)

Thank you. I appreciate that. I'll turn it over.

Michael Jardon (CEO)

Great. Thanks, Alexa. Alexa.

Operator (participant)

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

Stephen Ferazani (Senior Equity Analyst)

Good afternoon, Michael, Quinn. In terms of the strengthening, EBITDA margin guidance for the second half of this year, obviously, we're way early on 2024, but I'm guessing your assumption would be your pricing conversations become more constructive as the year plays out, particularly if we start seeing the expectations play out on higher day rates for offshore rigs. How does that start making you think about 2024 at this earlier point?

Quinn Fanning (CFO)

I guess I'd make two points. First, Stephen, is number one, we're already having constructive pricing conversations. Really, what's, you know, kind of the, the dynamic is the contract rollover timing. You know, about a third of our revenue reprices per annum. We are getting, you know, higher pricing on new contract awards and, you know, really it's just a matter of, you know, the lag until it shows up in financial results. We are pre-budget for 2024. I suspect as we have our third-quarter earnings conference call, at least be able to provide a, a peak under the tent in terms of our expectations for 2024.

I would just point out the pattern, you know, over the last couple of years, post-pandemic, has been our exit EBITDA margins, have, you know, essentially been around where we center our, you know, next year budget. We exited 2022 with 20% EBITDA margins. Our guidance for the year was ±20% EBITDA margins. We expect to exit 2023 in the 20%-22% area. I suspect that will be the starting point for our 2024 budgeting cycle.

Stephen Ferazani (Senior Equity Analyst)

Perfect. Thanks.

Quinn Fanning (CFO)

That responsive?

Stephen Ferazani (Senior Equity Analyst)

What's that?

Michael Jardon (CEO)

Did that answer your question?

Stephen Ferazani (Senior Equity Analyst)

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

Michael Jardon (CEO)

Yeah. Stephen, I guess the first thing I would start off with is, you know, we've tried to lay out there for everybody that we believe we can run the business in a 7%-8% of revenue, you know, CapEx world. That allows us to continue to invest in the business, you know, even throughout the pandemic and those type things, over the course of the last number of years, we've continued to invest in the business. We'll continue to kind of work at that. I don't want to call it a CapEx diet, I think it's just us maintaining, you know, capital discipline. We focus on projects, we make sure.

The good thing for us is we have a globally redeployable fleet, so assets that we can use in, you know, Brazil, you know, for Petrobras, we can use those same assets. They can be moved for a project that's gonna happen in, you know, Malaysia. That gives us some latitude and flexibility with that, but we'll continue to operate within that, kinda 7% to 8% CapEx diet.

Stephen Ferazani (Senior Equity Analyst)

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

Quinn Fanning (CFO)

That's correct, and that was a comment we made on the last call, reiterated today. I guess a couple of data points I'd just give you, you know, you know, depending on which cash flow definition you use, probably worth highlighting LTM EBITDA, you know, is $232 million. That's after $33 million of startup and commissioning and, you know, other LWI-related costs. So kind of prior to these costs that Michael had mentioned, we believe to be transitory, were 250+ in LTM EBITDA, and CapEx was $108 million for that same period of time. So we're kind of in the $150 million zip code in terms of EBITDA minus CapEx as a cash flow proxy.

Quite frankly, our challenge, as the industry has been challenged over the last four to six quarters, has been a relatively large working capital build.

Stephen Ferazani (Senior Equity Analyst)

Mm-hmm. Yeah.

Quinn Fanning (CFO)

That's really kind of the difference maker over the next couple of quarters is, can we shrink the balance sheet, you know, even in an increasing activity environment? You know, our expectation is that working capital as a percentage of revenue will start to moderate. The fact of the matter is, is at this point in the cycle, given some of the cash flow pressures on the customer base, you know, the balance sheet is a bit bloated, and that's what we need to see reverse. With cash in hand, i.e., a reversal in working capital, you know, I would suspect that we would more seriously be looking at buybacks. We were out of the market in the current quarter, in part because of this kind of pattern of cash flow realization. We also had done a in the first quarter, which, obviously, we didn't want to work at cross-purposes with that, since one of the primary goals was to improve trading liquidity.

Stephen Ferazani (Senior Equity Analyst)

All right. Thanks, Michael. Thanks, Quinn.

Michael Jardon (CEO)

Sure, thank you.

Operator (participant)

Before we take our next question, as a reminder, if you have any questions today, please press star followed by one on your telephone keypad now. Our next question comes from Luke Lemoine with Piper Sandler. Luke, please go ahead.

Luke Lemoine (Managing Director and Senior Research Analyst)

Hey, good morning, Michael, Quinn.

Michael Jardon (CEO)

Good morning, Luke.

Luke Lemoine (Managing Director and Senior Research Analyst)

Hey, morning. You talked about at least mid-teens top-line growth through at least 2024, which is above the street's 11.5% growth for next year. Can you talk about what's underpinning this growth? Since there were some suppressed margins in the first half of 2023, and you're being conservative on the Eni Congo project, is it fair to assume incrementals could be above normal levels in 2024?

Michael Jardon (CEO)

Yeah, you know, really good question, Luke. What I can tell you is, you know, having traveled an awful lot in the last several months, spending time with customers, I was all throughout Asia last week. You know, as I kind of go through and Quinn said earlier, you know, it's very much pre-budget phase, but in the conversations and discussions I've had with our customers, there just continues to be a, you know, a strengthening level of activity. You know, they're really asking lots of questions around, you know, "How are you guys positioned for people? You know, what's happening with your training programs?

What's happening with recruiting and hiring and those type things? I just get a sense that, as we kind of look at, you know, project by project, region by region, we just continue to see some strengthening activity there. As we kind of translate that into, you know, pre-budget numbers, that's why we've said, you know, we think it's probably a mid-teens growth for next year. Particularly as we're very tied and levered to, you know, Well Construction, new wells, you know, being drilled and new wells being completed. There's going to be a strong level of activity with that.

Luke Lemoine (Managing Director and Senior Research Analyst)

Okay. You talked about your conservative approach to the Eni Congo project, which I believe you said impacted margins by 150 basis points in 2Q. If you become operational in the first half of 2024, can you talk about this continues to go well, how the contingency releases could impact margins? Is this more of a second half of 2023 or first half of 2024 event?

Quinn Fanning (CFO)

I mean, as we get closer to the plant delivery, you know, the need for contingency will diminish and, you know, we'll start to release it. Really the intention all along was that we would recognize margin on essentially the first half of the contract value, which was about $150 million, you know, at a level that is consistent with large equipment sales, with the remainder of the contract being kind of an O&M phase, which is more service delivery. You know, obviously, you know, things need to go according to plan, but we would expect that that O&M phase would, you know, be at substantially higher margins.

Really the point I was making is, is that, you know, with POC accounting, you know, we have, you know, treaded carefully, if you will, in terms of margin recognition till we're closer to delivery date. You know, but we're sub 20% margins on what we've recognized to date, and, you know, we'll start to look to release that as we get closer.

Michael Jardon (CEO)

Most of that, Luke, it's gonna be.

Quinn Fanning (CFO)

Got it.

Michael Jardon (CEO)

It's gonna be a 2024 phenomenon.

Quinn Fanning (CFO)

Plan scheduled to be delivered in the first half of 2024.

Luke Lemoine (Managing Director and Senior Research Analyst)

Okay. Okay, perfect. Thanks, Michael. Thanks, Quinn.

Quinn Fanning (CFO)

Thank you.

Michael Jardon (CEO)

Thanks, sir.

Operator (participant)

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

Michael Jardon (CEO)

No, it's great. We appreciate everybody's time and effort today and look forward to catching up again on the next quarterly call.

Quinn Fanning (CFO)

Thanks, everyone.

Michael Jardon (CEO)

Emily, we can go and disconnect. Thank you.

Operator (participant)

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