Expro Group Holdings - Q2 2024

Transcript

Operator (participant)

Hello, and welcome to the Expro Q2 2024 earnings presentation. My name is Elliot, and I'll be coordinating your call today. If you would like to register a question during today's event, please press star followed by one on your telephone keypad. I would now like to hand over to Chad Stephenson, Director of Investor Relations. Please go ahead.

Chad Stephenson (Head of Investor Relations)

Welcome to Expro's second quarter 2024 conference call. I am joined today by Expro's CEO, Mike Jardon, and Expro's CFO, Quinn Fanning. First, Mike and Quinn will have some prepared remarks, then we will open it up for questions. We have an accompanying presentation on our second quarter results that is posted on Expro's website, expro.com, under the Investors section. In addition, supplemental financial information for the second quarter results is downloadable on the Expro website, likewise, under the Investors section. I'd like to remind everyone that some of today's comments may refer to or contain forward-looking statements. Such remarks are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Such statements speak only as of today's date, and the company assumes no 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 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, everyone. I'd like to start off by reviewing the second quarter financial results presented in today's earnings press release. I will then discuss the macro environment, which we believe offers a favorable multi-year outlook for energy services companies with exposure to international and offshore markets, presenting a compelling growth opportunity for Expro. Finally, Quinn will provide some additional commentary on the just completed quarter and share some additional financial information. For a recap of consolidated results and quarterly results by region, I'll direct you to slides 3 through 7 of the presentation that we posted to expro.com. Turning to slide 3, I am pleased to report a very strong quarter for Expro, with Q2 2024 revenue of $470 million and Adjusted EBITDA of $95 million, both exceeding guidance, in part due to the early closing of the Coretrax acquisition.

Revenues increased sequentially by $86 million or 22% compared to the quarter ended March 2024. Excluding the impact of Coretrax, revenue was up sequentially by $65 million or 17%. This sequential increase is, to some extent, consistent with historical revenue trends, as we usually experience a seasonally soft first quarter. More importantly, results for the second quarter reflect momentum building in the offshore markets, for which our outlook remains very strong. As reported, second quarter revenue increased 18% year over year and 13%, excluding the impact of Coretrax. Q2 2024 Adjusted EBITDA was up 32% compared to Q2 2023. Note that Q2 2024 Adjusted EBITDA included a $7 million contribution from Coretrax, and Q2 2023 included $6 million of LWI-related unrecoverable costs.

The strong Adjusted EBITDA performance was driven by the increased activity across all regions and product lines, and a solid fall through on incremental revenue. Given our strong year-to-date momentum and the tailwinds continuing to support profitable growth in our business, we are refining our full year guidance range to reflect expectations for revenue to be between $1.7 billion-$1.75 billion, and expectations for Adjusted EBITDA to be between $350 million-$375 million. I will cover our market outlook toward the end of my prepared remarks, but note that the cadence of technical inquiries and requests for budgetary pricing for projects remains high across geo markets and product lines. Our leverage to long cycle development, including deepwater, gives us confidence that Expro's currently strong business momentum will be sustained over at least the next several years.

Turning to the regions. For North and Latin America, second quarter revenue was $157 million, an increase of $27 million or 20% quarter-over-quarter, reflecting increased activity across our product lines. The NLA Well Construction and Subsea Well Access teams had a particularly strong quarter, with a good level of activity in the U.S., Guyana, and Trinidad. NLA segment EBITDA margin at 28% was up from 26% in Q1 2024, reflecting the increased activity and a more favorable activity mix in the region. Additionally, we have had further success in commercializing our SeaCure technology, which ensures optimal cement placement during the slurry pumping process. This prevents fluid contamination that could potentially have occurred without the SeaCure solution. For Europe and Sub-Saharan Africa, second quarter revenue was $168 million, a sequential increase of $47 million or 38%.

Segment EBITDA margin at 21% was flat sequentially and down approximately four percentage points relative to Q2 2023, primarily reflecting lower margin recognized on our Congo Production Solutions project. Our EASA business currently has good momentum as we continue to capitalize on increased activity in the region. Subsea Well Access had a particularly strong second quarter, delivering a subsea solutions package for Azule Energy and its partners' Agogo project. As most of you know, Azule is Eni and BP's joint venture entity in Angola. Expro was also recently awarded a contract to provide subsea technology for the nearby Ndungu field in Angola, further strengthening our relationship with Eni in Angola, where we expect activity to continue to increase over the next several years. We also advanced several other important projects in the quarter. Our team in Ghana completed a 21-well development campaign using Expro subsea landing strings.

This project has run for more than 3.5 years and was completed with no injuries, no service quality events, no high potential safety incidents, along with an operational uptime of 99.7%. This is an outstanding achievement from our entire team. Last quarter, we shared that we had reached a milestone in surpassing 1 million man hours LTI-free as part of our Eni Congo project to design, construct, operate, and maintain a fast-track onshore LNG pretreatment facility. Since then, we have moved into the commissioning phase. In June, incremental gas from the Expro-built pretreatment facility was first introduced to the client's floating liquefied natural gas facility. First gas was within 22 months of contract award.

The Middle East and North Africa team delivered another excellent quarter, with revenue at $81 million, up 14% sequentially, largely driven by the Coretrax acquisition, with good fall through on incremental revenue. MENA segment EBITDA margin at 35% was up one percentage point quarter-over-quarter and about four percentage points year-over-year. This quarter, Expro has received the approval to commence operations for a five-year well test contract onshore Middle East. The contract requires a mobilization of conventional testing units and multi-phase meters, along with 150 additional personnel. Finally, in Asia Pacific, second quarter revenue was $63 million, up 5% relative to the previous quarter, primarily reflecting increased activity in Malaysia and Australia.

Asia Pacific segment EBITDA margin of 24% was up over six percentage points from the prior quarter, which reflects higher activity in the region and lower LWI-related costs. In Brunei, we saved 30 hours of rig time using our hydraulic hammers for the installation of a platform. This efficiency was achieved by using our proprietary Jet String Elevator, which enhances safety and efficiency, in part by eliminating the need for man riding during operations. Expro's team in Australia successfully executed well intervention services for recompletion of a CO₂ injector well in the Otway Basin for Australia's leading CCUS research organization. We have supported CCUS globally for over 10 years, gaining valuable experience in these types of projects while delivering excellent results, and we continue to believe that it will be a key industry enabler to support our own, as well as our clients' net zero goals.

In April, we also published our third sustainability report, highlighting Expro's achievements in 2023, the progress we have made in working towards our environmental, social, and governance objectives, and our commitment to being a citizen of the world. These efforts resulted in MSCI increasing Expro's rating from a single A to double A, the second highest rating they have. In terms of commercial activity, I'm pleased we have continued to build on our strong momentum, capturing roughly $196 million of new contract awards, including subsea contracts worth approximately $20 million in Africa and a Sonar meters contract in the Middle East for $16 million. Our backlog remains healthy at approximately $2.2 billion at the end of the second quarter.

The sequential decrease of approximately 5% was due to the strong revenue performance in the quarter, the transition of a Congo project to the operations and maintenance phase, and conversion of other large projects. As previously announced, we also successfully closed our acquisition of Coretrax with an effective date of May 1, which is earlier than was assumed in our guidance. Coretrax is a leading well integrity and production optimization company that will enable us to expand our portfolio of cost-effective, technology-enabled well construction and well intervention integrity solutions. As a reminder, the acquisition was completed at a transaction value of less than 5x our estimate for Coretrax's standalone 2024 EBITDA, with synergies providing incremental upside. We expect the acquisition to accelerate the growth of Coretrax's innovative, high value-adding, drilling optimization, well integrity, and production-enhancing technology solutions by leveraging Expro's global operating footprint.

Integration efforts are well underway with our teams across the world, working on tenders together to realize the potential of pull-through revenue synergies. Regarding M&A more generally, 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 to accelerate growth and create additional shareholder value. Our team continues to evaluate acquisition opportunities that would allow us to advance our strategy and position Expro to be more relevant to our customers and more relevant to our shareholders. We have a disciplined approach to M&A, and any opportunities we pursue will meet a rigorous set of criteria that starts with the industrial logic, which includes a plan to capture cost and revenue synergies and has a financing plan that preserves our currently strong financial profile.

We like our leverage to what we expect to be a multi-year growth phase for drilling and completions activity, but continue to look for opportunities that allow us to increase our exposure to production optimization solutions, and thereby better balance the business between CapEx and OpEx-funded revenues. While we will be patient for the right opportunities, improving Expro's through-cycle resilience continues to be a strategic objective. Turning to our market outlook, we anticipate the growth observed over the past few quarters will continue, driven by favorable underlying market fundamentals in the energy services sector. Strong investment and activity growth support a positive multi-year outlook for our services and solutions, with oil demand forecasted to reach record levels of 103 million barrels per day in 2024, and nearly 105 million barrels per day in 2025.

Expected consumption growth will be primarily fueled by a sustained global economic recovery, with significant contribution from non-OECD countries in Asia, as well as the Middle East and the United States. We believe that a robust rebound in demand, coupled with the recent extension of production cuts by OPEC+, will lead to a market deficit in 2024. A tighter liquids market may result in upward pressure on prices. At a minimum, it will underpin a positive fundamental backdrop and support continued growth in investment and activity. Brent prices rose from $80 per barrel in January and were above $87 per barrel earlier this month, bolstered by continued OPEC+ supply discipline and geopolitical uncertainties, most notably in the Middle East and in Europe, due to the ongoing conflict in Ukraine.

The market is anticipated to tighten further over the remainder of 2024, as demand increases over the Northern Hemisphere summer months, is expected to support prices in the mid-$80s. Inventories are expected to return to moderate builds in 2025, following the unwinding of OPEC+ cuts. And forecast supply growth from non-OPEC+ countries is likely to offset increase in global oil demand, possibly leading to a modest weakening of prices over 2025. Most importantly, relatively stable prices above $70 per barrel should support long cycle investment decisions by our oil company customers and provide tailwinds for the international and offshore markets to which Expro is most levered. Outside of the U.S., gas markets remain fundamentally tight, with LNG demand, particularly in China and India, expected to recover.

Longer term, domestic demand and exports are forecasted to increase, with gas continuing to play a crucial role in lower carbon electricity generation and as a critical transition fuel towards global net zero targets. Robust commodity prices continue to drive long-term investment decisions by energy companies, with record levels of final investment decisions in 2023, and sustained high levels of sanctions expected in 2024 and beyond. This multi-year pipeline of projects drives demand for our services and solutions, especially in the offshore segment, which is expected to comprise more than 75% of total greenfield investments in 2024. This trend supports increasing activity in our well construction and subsea well access businesses, as well as elements of our well flow management business, which we expect to grow further throughout 2024 and beyond.

Forecast for upstream investments in 2024 indicate the highest levels of spending since 2015. Significant growth is expected, particularly in the offshore, deepwater, and shelf segments. This growth will be supported by large projects in the Middle East, driven by Saudi and the UAE, as well as in China, Norway and Guyana, and in Brazil, in Latin America. Targeted exploration and appraisal activity in mature areas, especially in Europe, Sub-Saharan Africa, and South America, are also driving growth. International land activity growth continues, especially in the Middle East, with the ongoing large gas and LNG developments in Abu Dhabi, Kuwait, Oman, and Saudi. Operators are increasingly focusing on maximizing sustainable returns from their existing assets, striving for cost-efficient, lower carbon-intensive production.

This drives demand for our production optimization capabilities within the well flow management and well intervention integrity product lines, particularly in the Asia Pacific and Latin America regions. Finally, investments in lower carbon energies are also increasing, with notable activity growth in geothermal, particularly in Asia Pacific and Europe, and in carbon capture and storage in North and Latin America and Europe, as our customers aim to reduce their upstream emissions to achieve net zero targets. As we have discussed previously, we expect the current energy services upcycle to be characterized by margin expansion, more so than capacity additions, highlighting the importance of both cost and capital discipline. We are committed to continuing to rationalize support costs, and we are committed to optimizing equipment utilization and increasing operational efficiency, both of which will positively impact overall profitability.

We also continue to engage in constructive conversations with customers about Expro capturing more of the value we provide through technology, process efficiency, safe well access, and enhanced production. Overall, the outlook for Expro and the wider energy services sector remains very positive. With that, I'll hand the call over to Quinn to further discuss our financial results.

Quinn Fanning (CFO)

Thank you, Mike. Good morning, everyone. As Mike noted, we reported revenue of $470 million for the quarter ended June, which represents a new high watermark for quarterly revenue since we completed the Expro Frank's merger in the fourth quarter of 2021. For reference, our guidance for Q2 revenue that was provided in our Q1 earnings conference call was for a range of revenue of $400 million-$420 million. Guidance assumed no contribution from CoreTrax, which accounted for approximately $21 million of Expro's $50 million-$70 million outperformance relative to guidance. Revenue was up $86 million sequentially, or approximately 22%, due to higher revenue in NLA, which was largely driven by well construction and subsea well access. And in ESA, which was largely driven by subsea well access.

Year-over-year, revenue was up by $73 million, or approximately 18% relative to the second quarter of 2023. Within NLA well construction, offshore tubular running services revenue and tubular product sales were both up solidly quarter-over-quarter, and the PRT Offshore business, which we acquired in Q4 of 2023, had a particularly strong second quarter. Within ESA, as Mike mentioned, we are in the late stages of the commissioning of the onshore pretreatment, or OPT facility in Congo. Q2 revenue related to the Congo project was approximately $30 million, but contribution margin during the construction phase has been dilutive to overall profitability. In addition, as Mike noted, we successfully delivered a large subsea project for Azule Energy in Angola. TRS and Tubular Products should sustain their current momentum into Q3.

Revenue from the Congo project, however, is expected to decrease in Q3 as we move into the operations and maintenance phase of the project, with contribution margin becoming accretive rather than dilutive during the O&M phase. In addition, the expected timing of H2 subsea well access projects, including those within the acquired PRT Offshore business, will also result in a step down in revenue in Q3, followed by an expected rebound in Q4. Net income for the second quarter of 2024 was $15 million, or 13 cents per diluted share, compared to net income of $9 million, or 8 cents per diluted share in the second quarter of 2023.

Adjusted net income, which excludes merger and integration expense, severance and other expense, and stock-based compensation expense for Q2 2024, was $31 million, or $0.27 per diluted share, as compared to $19 million, or $0.17 per diluted share for Q2 2023. Adjusted EBITDA for the second quarter of 2024 was $95 million, as compared to Q2 guidance of $80 million-$90 million, representing a year-over-year increase of approximately $23 million or 32% relative to the second quarter of 2023. Adjusted EBITDA margin for the second quarter was 20%, up roughly 200 basis points year over year. The year-over-year increase in adjusted EBITDA and adjusted EBITDA margin primarily reflects good fall through an incremental revenue due to activity mix, operating leverage, and a non-repeat of unrecoverable LWI-related costs in Q2 2023.

As noted on prior calls, the key drivers to our financial targets will be an increase in activity, a shift towards a more favorable business mix that is increasingly weighted to customer CapEx-related spending, operational leverage, and lastly, net pricing gains. Related to the business mix, deepwater well construction, which is our largest early cycle business, continues to exhibit good momentum. Based on current backlog, we expect that momentum to be sustained at least over the medium term. The landing string-driven subsea well access business, which is levered to subsea completions activity, also seems to be trending in a positive direction. Both product lines, which provide mission-critical, technology-enabled, high-value adding services, generate attractive contribution margins for XPRO, so faster relative growth should result in an improvement in overall profitability.

In addition, both product lines are capacity-constrained industry-wide, and as a result, should provide scope for pricing gains based on our current outlook for activity. Support costs for Q2 2024 of $86 million represented 18% of revenue and were up approximately 5% sequentially, largely reflecting Coretrax's related overheads from the effective date of the transaction. We continue to expect that support costs for the full year 2024 will be at or below 20% of revenue. Beyond 2024, we expect that support costs will grow in line with inflation and that operating leverage, like activity mix, will provide scope for Adjusted EBITDA margin expansion. Pricing is also trending positively, at least within our deepwater well construction and subsea landing string-driven business, but net pricing gains are not yet a material driver to reported results.

Nonetheless, relative to 2023, we continue to expect that we will get a modest benefit to adjusted EBITDA margin from net pricing for the full year 2024. Moving to liquidity, Q2 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 $6 million compared to $36 million in Q2 2023, which was largely driven by an increase in net working capital of approximately $72 million in the just completed quarter, primarily reflecting the step-up in revenue in the quarter and a pending milestone payment related to the Congo project. Consistent with historical patterns, the build in net working capital should reverse in the second half of the year.

In conjunction with the close of the Coretrax acquisition, Expro increased its bank credit facility from $250 million-$340 million, and subsequently drew down approximately $76 million to finance the cash portion of the acquisition. At quarter end, we had $121 million drawn on the credit facility. XPRO had total available liquidity at quarter end of approximately $271 million with cash and cash equivalents, including restricted cash of approximately $135 million and approximately $136 million available for borrowings on our credit facility. Turning to our outlook, page nine of our accompanying slides summarizes our guidance for Q3 and the full year 2024.

Based on our strong performance in the first half of 2024 and a positive activity outlook, as Mike noted, we are refining full year 2024 guidance with anticipated revenues between $1.7 billion-$1.75 billion, and Adjusted EBITDA of between $350 million-$375 million. Adjusted EBITDA margin is expected to be ±21%, and free cash flow margin or free cash flow as a percentage of revenue, is still expected to be in the high single digits, but again, is expected to be weighted to the second half of 2024. Full year guidance for 2024 assumes cash taxes of between 3%-4% of revenue, and CapEx as a percentage of revenue of between 7%-8%.

Moving to the Q3 2024 guidance, revenue is expected to be within a range of $410 million-$430 million, implying year-on-year growth of approximately 14% and a sequential decline of approximately 10%. For sequential comparisons, note that Q2 2024 revenue included two months of Coretrax's results, and Q3 will include three months of Coretrax's results. As I noted at the top of my remarks, also note that second quarter revenue included a total of approximately $60 million of revenue related to our LNG expansion project in the Congo, and revenue related to subsea projects that were delivered in Q2 that will not be repeated in the third quarter. Regarding the LNG expansion project, Q3 revenue guidance reflects a shift in work scope from the fast-track plant delivery phase to a multi-year operations and maintenance phase.

As Mike noted, lower revenue expectations for the subsea well access business in Q3 largely reflects the strong second quarter results in the Gulf of Mexico and offshore Angola, and the expected start-up and completion of other projects. Adjusted EBITDA is expected to be within a range of $85 million-$95 million, implying Q3 adjusted EBITDA margin within a range of 21%-22%, or up approximately 100-200 basis points sequentially. Our current 2024 guidance assumes Coretrax will contribute approximately $100 million of revenue to Expro reported results at an adjusted EBITDA margin that is accretive to standalone Expro results.

Looking ahead, we have previously stated and continue to believe that the current fundamental backdrop and underlying business momentum provide a clear path to $2 billion of revenue, a mid-20s Adjusted EBITDA margin, and a free cash flow margin of 10% over the medium term. With customer spending priorities focused on offshore development, the deepwater TRS and subsea landing string-driven business, which again, are our product lines most levered to drilling and completions activity, tend to come with high flow-through margin and incremental revenue, and have the greatest potential for improved pricing, and are expected to remain the key drivers of Expro's overall results over the near to medium term. The Cementing Technologies and Performance Drilling Solutions businesses, which we have grown through organic investment in M&A, should also provide margin accretion over the medium term.

As Mike mentioned, we are in the early stages of the integration efforts for Coretrax, with cost and revenue synergies providing some incremental margin upside, most likely beginning in 2025. With that, I'll turn the call back over to Mike for a few closing comments.

Mike Jardon (CEO)

Thank you, Quinn. 2024 year-to-date has been an exciting year for Expro, with solid financial performance and the successful acquisition of Coretrax, which enhances our depth of talent and the capabilities we offer, and we feel the business is strategically positioned to continue to become more meaningful to customers and shareholders. As Quinn stated, the fundamental macro backdrop is set for Expro to deliver value to our customers through our cost-effective, technology-enabled services and solutions, while delivering enhanced returns to our shareholders. This will require the team to execute on our strategic initiatives and continue to both champion safety and deliver best-in-class service. Closing where I began, we believe that the international and offshore markets are in the early stages of a multi-year growth phase that based upon project sanctioning levels and customer dialogue, we believe could be sustained through the end of the decade.

With that, we can now open the call for questions.

Operator (participant)

Thank you. If you would like to ask a question, please press star, followed by one on your telephone keypad. If you would like to withdraw your question, please press star, followed by two. When preparing to ask your question, please ensure your device is unmuted locally. Our first question comes from Luke Lemoine with Piper Sandler. Your line is open. Please go ahead.

Luke Lemoine (Managing Director)

Hey, good morning, Mike, Quinn.

Mike Jardon (CEO)

Morning, Luke. How you doing?

Luke Lemoine (Managing Director)

I'm doing great. You raised your 2024 EBITDA guide, and it sounds like your confidence in the long-term outlook is increasing. But maybe there's a little shift between Q3 and Q4 with just some project timing and startups. Could you elaborate on this a little more, and then maybe talk about some of the puts and takes between the high end and the low end of the guidance range this year?

Mike Jardon (CEO)

Sure. And Luke, a lot of it was really a strong Q2. You know, we had some of the, in particular, a couple of subsea projects that literally were within days of were they gonna fall in Q2 or were they gonna fall in Q3? So you know, part of the really strong Q2 was some of that revenue that shifted by a couple of days from Q3 into Q2. We'll kind of be back in that more normal rhythm of things, as we, you know, exit Q3, going into Q4. ... Quinn, you want to comment?

Quinn Fanning (CFO)

Yeah, I think the Q4 step-up is likewise generally related to subsea well access projects. PRT, as I mentioned in my remarks, had a, you know, very strong second quarter. Their expectations based on project timing is a step down in Q3, and then the recovery in Q4. Very similar story for the Africa coasts, you know, within the subsea well access business. Mike mentioned the Agogo-related deliveries in Q2, a little more quiet in Q3, within subsea, you know, legacy Expro, and likewise, recovery in the fourth quarter.

I guess as you look into kind of the larger movements, I would have highlighted the subsea projects as well as the project phasing on the Congo project, and then we'll continue to get, you know, an incremental contribution from Coretrax as we, you know, pick up the extra month.

Luke Lemoine (Managing Director)

Okay. And then, Mike, you talked about Coretrax, and the revenue synergy possibilities, but is there any way to maybe frame this potential kind of on a multi-year basis? And then could you also talk about how the integration is progressing with Coretrax?

Mike Jardon (CEO)

Sure. You know, it's so fundamentally for us with Coretrax, it's a business today that is... You know, we probably have strong activity in 6 or 7 countries. You know, and in broader Expro, we operate in somewhere between 60 and 70, kind of, depending upon the day of the week. So really, it's that internationalization of our ability to go ahead and deploy that into additional markets. You know, we're gonna focus on those. We're not gonna try to roll out to 60+ countries on day one. We're really kind of looking at a phased implementation process. And, you know, we'll focus in the places like the Middle East, continuing to expand the portfolio there.

Australia, for some of the, expandables technology, we are-- I think we're really gonna see some good traction there. So that's, that's, you know, that's, that's actually going really well. I was pleased that we could close it earlier than anticipated, because what we've really been able to do more than anything is, really start to leverage both, you, you know, both the legacy CoreTrax, sales team as well as the broader Expro sales team, and now they can really start having those kind of conversations. Until we got it closed, you know, that's-- we're not allowed to do that. We've got to kind of keep that wall in between them. So we're really just leaning hard into that now here over the course of the last, you know, six weeks or so.

I just see a great opportunity, and especially from a customer standpoint, you know, they really want to see the deployment. They want to see the added benefits of, you know, some of the technologies that we have from Coretrax. It's one that we continue to be really excited about.

Luke Lemoine (Managing Director)

All right. Perfect. Thanks a bunch.

Mike Jardon (CEO)

Thanks, Luke.

Operator (participant)

We now turn to Neil Mehta with Goldman Sachs. Your line is open. Please go ahead.

Neil Mehta (Analyst)

Yeah. Good, good morning, team. And, and really strong performance in, in the Africa geography. I'd just love your perspective on how you're thinking about that on a multi-year basis. Is there more market share and projects to be won? And then tie that into any views on West Africa, specifically, which seems to be heating up here.

Mike Jardon (CEO)

Sure. No, Neil, thanks for the question. I think it's probably... I wouldn't say it's so much of a market share opportunity for us in West Africa. I think it's just as we start to see more of a ramp-up in activity in Africa and in West Africa in particular. Because let's bear in mind, I've talked about this a number of times, but let's bear in mind, if we look at, you know, we're finally kind of back to the same FID levels in the kind of 2024-2026 period that we had historically back in 2012-2014, but Africa and West Africa, in particular, are still kind of underrepresented in that.

As I alluded to in some of my prepared remarks, you know, just based on pricing inquiries, technical discussions, budgetary, you know, pricing discussions with customers, and those kind of things, we continue to see some ramp-up in what I believe is gonna be additional project sanctioning in West Africa here in 2024 and going into 2025. So I think that's a market that's gonna continue to grow and be more robust. And keep in mind, you know, part of that is just related to our customers. You're not gonna go to someplace like Ghana or Equatorial Guinea and drill one or two wells. You're gonna go with a project of, you know, 6, 8, 10, 12, 25 well, you know, type projects.

So I think as they have more confidence based on our discussions from technical inquiries, those type of things, I think we're gonna continue to see kind of a ramp-up in project sanctioning. And, you know, we know that we will win more than our fair share of projects in West Africa. So it's really kind of a timing of when those projects get kicked off. I think that's also one of the reasons why you're seeing, you know, some of the tree providers, you know, their backlogs are starting to build. They're having strong backlog numbers. They're having strong, you know, technical inquiries and those type of things. I think we'll see that translate into more activity for us from a service standpoint in, you know, coming quarters and coming years.

Neil Mehta (Analyst)

Thank you. And just love your perspective on how the Coretrax integration is going, so far, and, to the extent, it's tracking at or above schedule. Do you see the capacity of the organization to do incremental M&A? Are there other Coretraxes out there?

Mike Jardon (CEO)

You know, so Neil, with the you know the Coretrax integration is going really well. Part of one of the things we spent a lot of time on when we did the broader integration with Expro and Frank's was we really developed an integration playbook because we knew that was not gonna be the only integration we were gonna do. And so it's made us much more efficient to go out and know what to focus on and know how we should sequence things and how we should organize ourselves to go out and do you know integrations from acquisitions.

The other benefit is really with both the PRT acquisition as well as Coretrax. Those are not big global. You know, we don't have activity in all 60 countries with Coretrax, so it's more straightforward for us to integrate that because it's a smaller number of countries. And really, a lot of our efforts at this point is really much more on how do we create the revenue synergies? How do we deploy into additional into additional countries? So, we continue to look for other Coretrax or PRT type acquisitions, and it does not give me pause or concern on our ability to go out and and be able to integrate, you know, additional opportunities like a Coretrax.

That the organization has the bandwidth to take those things on board, so that's not a limiting factor. It's more the how does the technology fit? How does you know... What are the economics of transactions? Those kind of things that we're focused on.

Neil Mehta (Analyst)

Thank you, sir.

Mike Jardon (CEO)

Great. Thanks, Neil. Good to speak.

Operator (participant)

We now turn to Arun Jayaram with J.P. Morgan. Your line is open. Please go ahead.

Arun Jayaram (Analyst)

Yeah. Good morning, gentlemen. My first question is just on the updated 2024 outlook. You raised your revenue outlook by $75 million and EBITDA by $12.5 million at the midpoint. Quinn, that would suggest kind of an incremental EBITDA margin around 17%, which is kind of below the corporate number for the quarter. So I know there's some moving pieces with Congo, but wanted to get a little bit more color on the incrementals post your updated guide.

Quinn Fanning (CFO)

Yeah, I think the Congo is the one you're certainly right to focus on it. I mean, we had $30 million in revenue in the quarter. We've had higher than expected commissioning costs, kind of in the late rounds of phase one. So really, the $30 million in revenue in the second quarter came with no margin, because it's percentage of completion. So as we've adjusted the project economic expectations, all of that got booked in Q2. So we're essentially beyond the commissioning phase at this point. Revenue will drop from that, but, you know, margin on a percentage basis will go up. So, you know, Q3, which is where we recognize the Congo project, is expected to be a good quarter, a lower revenue, but higher segment EBITDA margins.

So I think that you're focused on the right thing. I'm not sure I'd say that the, you know, fall through for the broader businesses, you know, you know, skewed more negatively. It's really just the elimination of high mar-- or lower margin projects, you know, the results.

Arun Jayaram (Analyst)

Makes sense. Makes sense. The follow-up question is you guys have highlighted a medium-term target of $2 billion in revenue, 25% kind of EBITDA margins. And maybe just give us a sense of—I believe that outlook does assume some kind of contribution from M&A, and just maybe thought... your thoughts on how the business should evolve into next year. You know, Street's generally modeling around 7% revenue growth relative to your updated guide and about 200 basis points of margin expansion next year.

Quinn Fanning (CFO)

Yeah, I think that the, again, the most significant thing is, will be the, you know, phasing of the OPT project. But other than that, I think the, the broader business is trending positively, both from a, a growth perspective. I think the industry-wide expectations are for high single-digit, low double-digit growth and less, you know, puts and takes. Probably the most significant headwind will be the non-repeat of the, the, you know, Congo-type revenue, but again, it will be at, at better margins. So, you know, we haven't really kicked off in earnest our budget cycle for 2025, but I would expect we'll be at or above, industry-wide growth, just because of investments in technology and, you know, relatively optimistic, expectations for, again, the cementing and performance drilling business. Performance drilling being most significantly impacted by the Coretrax deal.

Arun Jayaram (Analyst)

Got it.

Quinn Fanning (CFO)

A shorter version of saying, as I would expect, as we pull together our budget for next year, you know, 7% growth year-over-year would probably be at the low end of my expectations versus today.

Arun Jayaram (Analyst)

Great. Thanks, Quinn.

Quinn Fanning (CFO)

Thanks, Arun.

Operator (participant)

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

Eddie Kim (Analyst)

Hi, good morning. Just a bigger picture question for you, Mike, but if I look back a year ago, oil prices were almost in the exact same place as they are today with Brent in the low 80s, and yet it seems, you know, like offshore activity and sentiment have gotten much better since then. What would you say is the biggest change in your conversations with customers today versus a year ago? And is that part of what led to the full year revenue and EBITDA guidance raised today?

Mike Jardon (CEO)

No, Eddie, it's a great question, and you know, you're spot on. There's not a difference in commodity prices significantly between a year ago versus today. I think it's... I think fundamentally for our customers, it's really been—they've got more confidence in kind of a stable commodity price environment, that it's not—we're not gonna see a— You know, I think if we have numbers that are, you know, mid-$60s and above, I think a lot of offshore deepwater projects will continue to be sanctioned, and largely because they've become much more efficient. You know, the batch drilling concepts and those type things have really driven break-even numbers down to, you know, in the 40s. So I think that's what's driven that today.

And just the, you know, the number of, the number of technical inquiries, those type discussions we have just continues to be really strong and really robust, and there's just more—I guess I would, you know, characterize it, there's just more confidence from our customers in sanctioning projects and moving forward. And as I said earlier, I think that's one of the reasons why you're seeing the, you know, the tree providers start to, you know, build backlogs and those type things, because, you know, the tree is probably the biggest limiting factor for some of those projects. So that's why immediately after they approve an FID, the first thing they're doing is securing trees, and the second thing they're doing is trying to make sure they get on a rig schedule.

I think there's just all kind of lining up for, you know, that kind of confidence with our customers.

Eddie Kim (Analyst)

Got it. That's great to hear. And then just my follow-up is on the EBITDA margins and APAC, which we're really impressed with this quarter at 24%. Could you just expand a bit on the improvement there? I know you mentioned higher activity and lower LWI-related costs, but just looking back historically, I mean, this region hasn't been above 20% EBITDA margin since late 2021. So, is there any reason why APAC EBITDA margins shouldn't continue at this kinda 20%+ level going forward, or should we expect some moderation, maybe back to the teens over the coming quarters?

Quinn Fanning (CFO)

I, I would actually expect the current quarter to be more reflective of expectations going forward. You know, LWI was, you know, a drag for not a quarter or two, but for, you know, a couple of years here. So I, I would say Asia Pac returning to kind of, you know, low twenties, not as high as some of the other regions because of activity mix. Unless, of course, there's a recovery in subsea, which we haven't seen a significant amount of activity. You know, project sanctioning has been slow, particularly offshore Australia. Hopefully, we'll see that pick up in 2025 as well. So, again, I, I would say what you're seeing in Asia Pac is what our expectations are going forward, and, you know, hopefully, we can move up from here, you know, with some incremental subsea activity.

Eddie Kim (Analyst)

Got it. Great. Thanks, Quinn.

Quinn Fanning (CFO)

Thanks, Eddie.

Mike Jardon (CEO)

And, Eddie, I guess one thing I would add there, too, is I think it's also, Asia Pacific is also an area for focus for us on technology deployment, with cementation, with you know, some of the Coretrax services, with expandables, those type of things, because it does, it does give us some competitive opportunities, some competitive advantages, some technology benefits. And we will, you know, use that to help us, you know, kinda reestablish our, you know, margin footprint in Asia Pacific, because it has been behind what our expectations are. So we'll use that to kinda, you know, try, try to, try to accelerate that and try to get back to where we think that, that particular region should be operating.

Operator (participant)

Our next question comes from Steve Ferrazzano with Sidoti. Your line is open. Please go ahead.

Steve Ferrazzano (Analyst)

Morning, Mike. Morning, Quinn. You know, if we back into your EBITDA and revenue for the year, and you take out your guidance for 3Q, it indicates 4Q margin will be by far the highest margin quarter for the year. I think you pointed out a couple of PRT and subsea that's coming in 4Q. But can we use that to some degree as a run rate, or would you not? Obviously, knowing Q1 is always seasonally lower, but is that getting to a level that you think is more reasonable, if you can hit the midpoint of guidance this year?

Quinn Fanning (CFO)

Yes, I mean, if you look at kind of Q2 and Q3, you know, at the midpoint of guidance, you know, hundred and eighty-five million dollars of EBITDA, a little less than nine hundred million dollars of revenue. Q4, historically, is a strong one for us, and it certainly is the starting point for, you know, where we'd like to see the, the next full year results play out. And can we always have a step down in Q1, but if we finish in the, you know, 22-ish or better zip code for Q4, I think that's a good setup for 2025.

Steve Ferrazzano (Analyst)

Great. And I, I don't wanna harp on this too much because you covered it pretty extensively, but on the ESA margin, we understand why it was lower in Q2. But as you roll into the lower revenue, but accretive margin phase of Congo, do those margins get back to those really high margins you were getting in that region, the back half of last year, or not quite because the revenue in Congo is lower?

Quinn Fanning (CFO)

Well, if you're talking about margin in percentage terms, you know, yeah, I think if you look at, you know, late 2023, you know, that's where we'd like to see ESA back to. You know, MENA has consistently been above 30%. NLA and ESA have kinda bounced recently, and, if you look over a couple quarter run rate in the high 20s%, you know, like to see all three of those regions above 30%. As Mike mentioned, Asia Pac will be a work in process, and that's gonna take a little bit more time-

Steve Ferrazzano (Analyst)

Mm-hmm

Quinn Fanning (CFO)

... largely driven by, you know, the type of activity.

Steve Ferrazzano (Analyst)

... Great. And if I could get one in on cash flow. Last year, the working capital reversal really was entirely Q4, and you're guiding for a really strong Q4. Is it reasonable to assume the bulk of your cash flow, this free cash flow this year is Q4?

Quinn Fanning (CFO)

Yeah, it's tough to put too fine a point on it, Steve. You're right, working capital is the big driver. You know, I think with $70+ million build in working capital in the quarter, you know, 20%+ of that is milestone payment related on the Congo project. You know, customers are trying to improve their cash flow profile on the backs of the services industry to some extent. You know, so you've got a combination of revenue growth, customer, you know, customers extending out payment terms, and whether it's Q3 or Q4, I'm not sure I'd predict that at this point, but it—you know, we should see a much better cash flow profile for H2.

Steve Ferrazzano (Analyst)

Great. Thanks, Mike. Thanks, Quinn.

Mike Jardon (CEO)

Thanks, Steve. Appreciate it.

Operator (participant)

As a reminder, if you'd like to ask a question, please press star one on your telephone keypad now. We now turn to Colby Sasso with Daniel Energy Partners. Your line is open. Please go ahead.

Colby Sasso (Analyst)

Hi, Mike and Quinn. You put out a press release in May highlighting your 100th global SeaCure job, and you also highlighted this technology in an event you held in Houston and back in May. I'm curious if you could provide some color around the timeframe it took to get these 100 jobs, what the runway looks like going forward, and what some of the economics around the cost savings look like for your customers who use this technology?

Mike Jardon (CEO)

No, it's a great, it's a great question, and thanks for asking that one. It's something... You know, keep in mind, though, DeltaTek was an acquisition that we, that we closed in February of 2023, so relatively short timeline for us to get that number of, of operations completed. You know, this-- and this really, what the DeltaTek technology really helps with is really in riserless deepwater cementation jobs. And, you know, so for each, you know, deepwater well, you're gonna have 1-2 job opportunities for this type of technology, 'cause it's really, it's only on the first couple of strings.

And what it really does is it, it helps improve the overall cement quality, which is extremely important because, you know, kind of the foundational casing strings that are run in those first couple of casing liners. And fundamentally, what that really allows us to do, it, it helps us save the operators typically somewhere between 12 hours-24 hours per job, and nothing pleases me more than to hear rig rates keep going up. You know, we saw some rig rates for Equinor that are going up, that are, you know, starting to approach, you know, almost $600,000 a day. I think that's really healthy.

And for us, when we can save, you know, 12-24 hours of rig time, when it's $500,000+ day rates, that becomes much more of an economic incentive for customers to invest in this type of technology. And, you know, we've really been able to continue to... You know, prior to the acquisition of DeltaTek, that technology really was predominantly being deployed in the UK North Sea, and we've been able to start to internationalize that. You know, the Gulf of Mexico in particular, it's kinda starting to become, for a number of our customers, it's kind of becoming the standard. They, they run it on, on, you know, those, you know, first, you know, 2-3 casing strings, you know, across the board.

So we'll continue to see that, you know, accelerate, but it's just a-- it's a great technology, really drives efficiency, really drives, you know, cementation, quality improvement, and both of those are paramount to operators today.

Colby Sasso (Analyst)

That sounds amazing. What other technologies do you view as potentially disruptive in the current environment that we may hear more about over the next 12 months?

Mike Jardon (CEO)

Yeah, you know, I think that, you know, I'll kinda stick with the theme around, around well construction in particular, because as operators are really trying to drive, you know, drilling completions efficiency, those type things, you know, as batch drilling has become more common in, in deepwater projects, you know, the number of, of drilling complete days is, is down dramatically. That's part of the reason why, as I spoke earlier about, you know, the break-even economics for customers. So really, some of our technology around, you know, around our, like our iTongue, you know, which provides automation for, you know, for, for, for makeup of casing running operations, removes personnel from the red zone, improves efficiency, makes it much more repeatable.

It's very much done through machine learning and automation, those type things. I think that's, that's a, you know, that's a great example of driving efficiency. And also our, our, our VersaFlo technology, which really helps around, around tripping operations, and, and fundamentally, our next generation design will be deployed, it was deployed earlier this year, and we've got really strong demand for that in, in the Gulf of Mexico as well as in Guyana. And, and really just improves operational efficiency, reduces personnel on the rig floor, those type things. So we, we see that as an area we continue to invest in technology.

You know, we did, you know, even throughout the downturn over the last 10 or 12 years, and even during the pandemic, we've invested in our own engineering development of technologies, and we've supplemented that with some of the M&As that we've made as well, because we think it helps, really, really reduces rig time, reduces the number of personnel on board, improves operational efficiency. Those are kind of some key areas that we see for our customers as they go forward, and allows them to, to fundamentally sanction more projects because they've got better break-even economics as they have more drilling, more efficient drilling completions operations. So good, very, very, very good questions. Thank you.

Colby Sasso (Analyst)

Thanks. I'll turn it back.

Mike Jardon (CEO)

Appreciate it.

Operator (participant)

Ladies and gentlemen, we have no further questions, so this concludes our Q&A and today's Expro Q2 2024 earnings presentation. We'd like to thank you for your participation. You may now disconnect your lines.