Pason Systems (TSX:PSI) Q3 2026 Earnings Call

0:01 Welcome. The content of today's call are protected by copyright and may not be reproduced without the prior written consent of Payson Systems Inc. Please note that the advisory is located at the end of the press release issued by Payson Systems yesterday, which described forward-looking information. Certain information about the company that is discussed on today's call may constitute forward-looking information. Additional information about Payson Systems, including the risk factors relevant to the company, can be found on his annual information forum. Thank you. And good morning. My name is Kelsey, and I will be your conference operator for today's call. At this time, I would like to welcome everyone to the Payson Systems Inc. Third Quarter 2026 Earnings Call. All lines have been placed on mute to prevent any background noise. And after the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star 1 on your telephone keypad. If you would like to withdraw from your question, please press star 2. Thank you. Ms. Celine Boston, CFO, you may begin your conference.

1:06 Thank you, Kelsey.

1:08 Good morning, everyone, and thank you for attending PAYPOM's 2026 Third Quarter Conference Call. I'm joined on today's call by Jon Faber, our President and CEO. I'll start with an overview of our financial performance in the third quarter. Jon will then provide his perspective on industry conditions, our strategic priorities, and our outlook before we open the call for questions. Our third quarter results reflect continued improvement in North American drilling activity, record revenue for Industry Day, and increased control system deliveries in our solar and energy storage segment. These gains were partially offset by schedule gaps in our completion customers' activities. PaceFund generated consolidated revenue of $119.1 million, an 18% increase from $101 million in the third quarter of 2025.

1:59 Adjusted EBITDA increased 17% to $45.1 million, or 37.9% of revenue, compared to $38.5 million, or 38.1% of revenue a year ago. The strength of our North American drilling business again demonstrated the operating leverage inherent in our segmentation. At the consolidated level, the significant increase in lower-margin solar and energy storage revenue affected our revenue mix and largely explains why adjusted EBITDA margins were slightly lower year over year. I'll start by discussing results by segment. Our North American drilling segment delivered another strong quarter, with revenue growth exceeding the improvement in underlying industry activity. North American drilling activity increased 11% from the third quarter of 2025.

2:46 Against that backdrop, we generated a new quarterly record revenue per industry day of $1,125, up 5% from $1,071 a year ago. Improved product adoption and a greater proportion of Canadian activity, which carries higher average revenue per day than the United States, both contributed to this result. Segment revenue increased 15% to $80 million from $58.8 million in the prior year quarter. which is the highest level of quarterly revenue seen since the first quarter of 2015 when drilling activity was more than double the level seen in the current. While operating expenses remain mostly fixed in nature, they increased to $23.4 million this quarter. This reflected more supplies consumed with higher drilling activities along with additional repairs in anticipation of continued activity increases.

3:41 Our international drilling segment generated revenue of $12.8 million, up 3% from $12.5 million in the third quarter of 2025. Growth across nearly all of our operating regions was partially offset by a particularly strong comparative quarter in Brazil last year. On a year-to-date basis, revenue remains below the prior year level, primarily reflecting lower activity in Argentina as a large customer transitions from conventional towards unconventional development. We have maintained a cost discipline through that transition, with year-to-date operating expenses down 11%. Our completion segment generated revenue of $13.8 million, a 6% decrease from $14.6 million in the third quarter of 2025.

4:27 Several schedule gaps in existing customers' activity resulted in an average of 25 active jobs compared to 30 a year ago and 31 in the second quarter of this year. Partially offsetting the lower job count, revenue for IWFJ increased 11% year-over-year to $6,010 from $5,393. This reflects an increasing proportion of more complex completions operations and the associated mix of technology deployed. The segment's operating expenses are largely fixed in nature, like our drilling segments, and increased slightly by 4% year-over-year. Our solar and energy storage segment generated revenue of $12.4 million compared to $5.1 million in the third quarter of 2025. The 145% increase reflects a higher number of control system deliveries during the quarter. Operating expenses of $12.1 million includes the cost of goods sold associated with those deliveries.

5:27 As we've discussed previously, quarterly revenue in this business can fluctuate meaningfully with the timing of control system project deliveries. The lower margin nature of this revenue also affects our consolidated margin mix. On a consolidated level, net income attributable to PayPal increased 51% to $18.9 million, or $0.24 per share, compared to $12.5 million, or $0.18 per share, in the third quarter of 2025. The increase reflects higher adjusted EBITDA generated year over year. Similarly, cash from operating activities increased 14% to $33.7 million from $29.4 million. Higher earnings were partially offset by working capital investment, including higher accounts receivable and inventory, as North American drilling activity and revenue increased.

6:17 Net capital expenditures were $14.8 million compared to $10.7 million a year ago. These investments supported the growth and scalability of our pressure control automation technologies. Increasingly complex completions operations and the ongoing refresh of our drilling technology platform. After these investments, free cash flow was $18.8 million, relatively consistent with the $18.7 million in the third quarter of 2025. Our balance sheet remains very strong. We ended September with $76.8 million of total cash, $150 million of working capital, and no interest-bearing debt. During the quarter, we returned $11.6 million to shareholders consisting of 10.1 million in dividends and $1.5 million in share repurchases.

7:04 In summary, the third quarter demonstrated strong performance in North American drilling, a new record revenue for Industry Day, and we are well positioned nearing the end of the year. I will now turn the call over to Jon for his comments on our outlook.

7:18 Thank you, Celine. We anticipate that drilling and completions activity will continue to increase through the remainder of 2026 and into 2027, supported by reductions in global oil supplies and drawdowns in crude and product inventories. Geopolitical uncertainty is likely to lead to ongoing commodity price volatility. However, supply and demand fundamentals support an upward activity trend over time. Within that context, Pace One's growth objectives remain unchanged. Our medium-term objective remains to double revenue from 2023 levels over a 5-7 year horizon. We continue to pursue that objective through five areas of growth. First, scaling our completions business. Second, increasing adoption and price realization from our established North American drilling products and services.

8:10 Third, bringing compelling new technologies to the drilling market, including mud analysis. Deploying additional products internationally as a growing share of activity shifts towards unconventional drilling incompletions Pursuing additional data management opportunities in adjacent oil and gas well construction activities Our underlying progress in each of these growth opportunities is often not directly correlated to our quarterly revenue, as near-term results reflect the timing of activity among individual customers. while longer-term performance depends on building and reinforcing strong fundamentals for growth and profitability. In completions, the recovery in activity has lagged drilling, and several of our customers had meaningful gaps in their schedules during the third quarter.

8:59 For several quarters, new customer additions largely served to offset slowdowns among existing customers. As a result, the benefits of expanding our customer base have not been readily apparent in reported revenue. We began to see the benefits of increasing activity across that larger customer base later in the third quarter and into the fourth, with our active IWS job count exceeding 30 in October compared to an average of 25 jobs in the third quarter. Importantly, a higher proportion of our jobs now involve more complex completions operations, generating greater revenue per IWS day. We expect a continued move toward more advanced completion designs and techniques to support additional growth in the interest of demand for our offering.

9:50 We are applying decades of experience from our drilling business in product design, deployment, field service, and ongoing customer support to our completion efforts, and we expect to generate greater profitability as revenue grows over time as a result. In North American drilling, Our leading competitive position and increasing activity supported record revenue for Industry Day and strong revenue performance. At the same time, increasing well complexity and the adoption of data-driven automation and analytics continue to support the value of our technology. These applications depend on reliable, high-quality operational data, an area where Faison has built a distinctive competitive position over more than four decades.

10:36 Customers' desire to use a greater amount of data in their operations provides opportunities for further product and service development. Within the North American segment, revenue from mud analysis continues to grow, and our product development efforts in this area are focused on providing solutions across a wider range of drilling applications. Internationally, the shift toward unconventional drilling and completions remains an opportunity to deploy more of our products, including both mud analysis and completions products. At Energy Toolbase, a significant increase in control system deliveries drove revenue to more than double the level of a year ago. We expect continued strength in that business, while recognizing that quarterly revenue will remain dependent on the timing of project deliveries.

11:24 Consolidated adjusted EBITDA margins of approximately 38% this quarter reflect the effect of a much larger contribution from lower margin solar and energy storage revenue. Across all of our segments, our focus remains on improving profitability as revenue grows. Our approach to capital allocation is unchanged. We balance the discipline and predictability of our regular quarterly dividend, which remains at 13 cents per share, Thank you for joining us today. With the gaps in completion customer activity during the third quarter, we now expect 2026 capital expenditures to be near the lower end of our previously announced $60 million to $70 million range.

12:26 With some capital spending pushed from 2026 to 2027, we anticipate 2027 capital expenditures to be between $65 and $75 million. supporting both growth and activity and a more rapid transition to next generation technologies which are better suited to increasingly complex completions operations. We are well positioned to respond as activity increases. Our leading market share and high operating leverage are particularly valuable in an improving activity environment. Our focus remains on the areas that are within our control, extending our service and technology advantages, investing in growth, maintaining a strong balance sheet and returning capital to shareholders in a disciplined manner.

13:11 And with that, we would be happy to take your questions. Thank you. Ladies and gentlemen, we'll now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchstone phone. You will then hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the two. and if you are using a speakerphone, please lift the handset before pressing any key. One moment please for your first question. And your first question comes from Keith McKay from RBC Capital Markets. Please go ahead.

13:46 Hey, thanks and good morning. Good morning. First question here just around capital allocation. Certainly pretty good free cash flow conversion this quarter. Looks like cash on the balance sheet has increased sequentially and up a little bit from the beginning of the year. Did a little bit of buybacks in Q3. Just curious how we should be thinking about buybacks going forward. Could you get a little bit more aggressive given the volatility in the marketplace and perhaps keeping cash flat where it is now? Just curious on the thinking around buybacks. as we go forward here.

14:33 Thanks, Keith. Appreciate the question. As we would have said, and I think we've said for a while, we always look at the expected returns on capital from organic investments as opposed to share repurchases. And one of the reasons we moved a few years ago from a little less priority on the dividend and more to the share repurchase side was to enable flexibility to adjust the organic investment capital program up or down. and so we've mentioned we expect probably a little bit more on the capital expenditure side in 2027 than in 26, a result of both a little bit of activity delays on the completion side, but also we would look to 27, a move to more next generation equipment and more activity. We'll drive a little more on the capital expenditure side, but to the extent that Activity does grow, and we grow feed cash a little faster than that small increase on the capital expenditure side. That would free up additional capital for us to look at capital allocation.

15:28 And, again, we prioritize repurchases over the dividend in the current environment.

15:33 And maybe, Keith, just to add to that a little bit, in terms of your comment on the cash balance, it would be fair to say that we're not looking to grow the cash balance from these levels. The cash balance grew a little bit from quarter to quarter. but it is kind of within that range that we would consider to be acceptable going forward and not needing to grow from here.

15:50 Okay, okay, appreciate the commentary. Maybe just one on solar. Certainly, revenue can be lumpy and increased quarter over quarter. You know, some are talking about potentially renewable projects becoming more valuable given The quote unquote blue wave we saw in the U.S. midterm elections. Can you just kind of maybe run us through your thoughts on this business, Jon? Are you seeing any of that tailwind or do you expect to see any of that tailwind as well? Any commentary there would be appreciated.

16:29 Well, we haven't seen a lot of tailwinds in the first 36 hours, but I think to your point, When you look at the situation where you have Democrats now in control of the House and the Senate, I think there is a little bit of enthusiasm around whether that will mean more support of the renewables industry, tax incentives to support growth of that industry and advancement of that industry. I think there is some hope that we'll see a little bit more certainty and stability on the global trade policy side, which would be helpful for the solar business. I think that business has been a little bit more exposed to some of the Tara Strife, then maybe we've been exposed on the drilling and completion side. So, I mean, to the extent that those things translate from expectations to policy over time, I do think it's likely to encourage more project development, and more project development would be good for our solar business, both in terms of the economic modeling of projects, but also then the deployment of energy storage assets and the deployment of systems to optimize those assets.

17:30 Okay. I'll leave it there. Thanks very much. Thank you. Thank you. And your next question comes from Aaron McNeil from TD Salmon. Please go ahead.

17:42 Hey, morning, all. Thanks for taking my questions.

17:45 Morning, Aaron.

17:48 I wanted to inquire about your two new directors. From the, you know, Birch Hill perspective, they've built a, you know, 19% position and now have taken two board seats. What do you think they ultimately hope to get from their investment? Is it just simply to participate in the value creation from the existing strategy, or are there particular areas where they believe that they can help accelerate the corporate value creation?

18:16 Yeah, appreciate the question, Aaron, and not surprised to have it this morning. Obviously, the addition of new directors from a large shareholder would stimulate that kind of a question. Look, I think, first of all, what I would say is we're delighted. to have them as partners and shareholders. They are in the business of doing an awful lot of research to find opportunities where they think they can generate outsized returns over time. And the fact that they've identified Payson as an opportunity in that subset is obviously something we're quite proud and happy about. I think if you look at their history, they have a number of different ways that they look to create value. Sometimes it is through continuing to hold companies where they believe that they're undervalued in the market and just let the business continue to perform over time and to accrue returns on that basis.

19:03 So we're delighted to have them. I think what I would point out is as it relates to what should we expect for changes and those sorts of things, It would be fair to say that their desire to join the board was somewhere between interest and an ask, and it certainly wasn't a demand. We've known Virchill for quite a long time. We've shared perspectives with them for quite a long time around how the business was built, what our strategy is for building value over time, how we think about capital allocation, and there's always been tremendous alignment and support of the management team as it relates to all these various topics that we've discussed. and it relates to the timing question just to sort of speak to that as well. Their desire is really to get closer to understanding some of the opportunities on the drilling and completion side in a little more detail and our AGM isn't for another six months. And so their desire is to get closer to it sooner to be able to better understand. So, you know, Birch Hill, they're great investors but I think the other thing I would point out, Aaron, is they're great human beings.

20:05 And anytime you put together a bunch of people in a room where you have three core ingredients around intelligence, curiosity, and humility, you create an environment where people say, look, all of us are smarter than any of us, and we can move this thing forward. And I've seen that at Payton over the last 12 years, and I've seen it in every encounter I've had with the folks at Bridge Hill, and we are really excited to work with them.

20:32 Okay, fair enough. Maybe switching gears, you know, to IWS, you highlighted IWS, Next Generation Technologies, Better Suited for More Complex Completions Operations. I guess, can you better or in more detail describe the sort of customer problem that these technologies address and how differentiated this new opportunity is and how different it would be versus what your current offering is?

21:01 I guess on a simple level, I would say as you introduce more valves, that need to be sort of sequenced in terms of their ability for when they should be open and closed, which ones, waiting for pressure to modulate, all these sorts of things. You need a little bit more sophisticated equipment, and so some of the earlier generation things that we would have built would have been around simpler jobs with less valves kind of in motion, if you will, and as you move to things like simul-track, quadru-track, continuous pumping, etc., that drives the demand for more of these next-generation valves, which are just more capable on the more complex types of operations. And because the market's moving in that direction and our activity participation is moving in that direction, we see the need to move a little more quickly in the transition to that type of equipment.

21:51 Gotcha. Okay. Thanks. I'll turn it back.

21:54 Great. Thanks, Erin. Thank you. And as a reminder, if you wish to ask a question, please press star 1. At this time, there are no further questions. I would like to turn it back to the management team for closing remarks.

22:16 Thank you very much, Kelsey. We really appreciate your continued interest and your joining PaceLine for this morning's call on a Friday morning. If you do have further questions, Celine and I are certainly open to your calls, and we would encourage you to reach out. And otherwise, we will look forward to speaking to you again in February after the release of our fourth quarter and annual results. Ladies and gentlemen, this does conclude our conference call for today. We thank you very much for your participation, and you may now disconnect. Have a great day, everyone.