HMH Holding Inc. (HMH) Earnings Call Transcript

Hello, everyone. Thank you for joining us, and welcome to HMH Holding's Second Quarter 2026 Earnings Call. [Operator Instructions] I will now hand the conference over to David Bratton, Senior Vice President, Finance. Please go ahead.

Good morning, everyone, and thank you for joining us for HMH's second quarter results. Joining me today are Eirik Bergsvik, our Chief Executive Officer; and Tom McGee, our Chief Financial Officer. Before we begin, we would like to remind you that this conference call may include forward-looking statements. These statements, which are subject to various risks, uncertainties and assumptions, could cause our actual results to differ materially from these statements. These risks, uncertainties and assumptions are detailed in this morning's press release as well as our filings with the SEC, which can be found at our website at investor.hmhw.com. We undertake no obligation to revise or update any forward-looking statements or information, except as required by law. Management's statements may include non-GAAP financial measures. For reconciliations of these measures, please refer to our earnings release and our SEC filings. Following our prepared remarks, we will open the call for your questions. I'll now turn the call over to Eirik.

Thank you, David, and good morning, everyone. Overall, our second quarter results reflect the continued resilience and quality of our business model. Orders for the quarter were $205 million, representing a book-to-bill ratio of 1.2x in the quarter. Total revenue for the quarter was $171 million and adjusted EBITDA was $34 million. Importantly, adjusted EBITDA margins grew year-over-year to 20%, driven by disciplined cost execution, favorable mix and a continued focus on operational efficiency. Looking at revenue composition, spares revenue increased 17% year-over-year to $61 million, largely on track to our expectations, reflecting increased fulfillment activity as customers prepare for upcoming contracts. Service revenue in the quarter was $89 million with repair activity slower than planned, offset by stronger digital technology volume. Importantly, service order intake was strong, increasing 50% year-over-year, driven by robust digital technology upgrade orders. This is a positive sign for future service revenue and underscores healthy upgrade demand from our customers. Product revenue of $21 million reflected the timing of product order bookings in which we saw several customers delay project approvals and purchase orders amid ongoing planning activities and geopolitical uncertainty. Now turning to the broader market environment. The positive momentum we discussed in the first quarter has continued through the second quarter, particularly in Floater segment. Contract award activity remained healthy across several key offshore basins with operators continuing to sanction projects, advance development programs and secure drilling capacity for future campaigns. Importantly, we see a growing number of awards being made well ahead of required start dates, providing increased visibility into 2027 for both drilling contractors and the broader offshore supply chain. Contract durations have also continued to extend. Compared with recent years, operators are increasingly committing to multi-well and multiyear campaigns, particularly in deepwater and harsh environment markets. At the same time, lead times between contract award and contract commencement have expanded, reflecting greater confidence in future activity levels and the desire among operators to secure high-quality assets well in advance. These are all constructive indicators for the long-term health of the offshore industry. What is particularly encouraging is that we increasingly see today's contracting activity is supported by strong long-term market fundamentals rather than short-term commodity cycles. Industry project inventories have declined significantly over the past decade, while global energy demand continues to grow. As a result, you would expect operators to begin rebuilding development pipelines and sanction additional offshore projects to sustain future production levels. This is already translating into increased offshore investment. Industry forecasts indicate that global deepwater capital expenditures are expected to increase materially over the coming years, with 2027 spending projected to be meaningfully higher than 2025 and 2026 levels. At the same time, offshore projects continue to compete effectively for capital with deepwater project's economics remaining significantly below the peak breakeven levels seen during the last major offshore cycle. These factors continue to support investment in offshore development across multiple regions and customers. Looking specifically at the floater market. Utilization remains at healthy levels today and is expected to strengthen further as demand growth outpaces available supply. Industry forecast suggests marketed floater utilization could move close to 90% in 2027 with harsh environment assets remaining among the strongest performing segments globally. We continue to see supportive day rates and increasing backlog visibility for premium submersibles and drillships. For HMH, these developments are particularly encouraging. Several key rigs within our installed base secured contracts award during the quarter, including a number of units equipped with significant HMH packages. We continue to see backlog growth across key rigs with our installed base, especially within the harsh environment semisubmersible fleet. This trend has steadily improved since the fourth quarter of last year and continued to strengthen throughout the second quarter, further improving long-term visibility for our aftermarket equipment and digital upgrades and our automation opportunities. Importantly, many of the recent awards involving HMH equipment rigs are long term in nature and have been secured further ahead of commencement than we have seen in recent years. This not only increases revenue visibility for drilling contractors, but also creates a favorable environment for customers to invest in equipment upgrades, automation solutions and digital technology throughout the life of the contract. We believe this positions HMH exceptionally well to benefit from the next stage of the offshore up-cycle. In terms of timing for HMH, these investments are one of the larger contributors to [ our year ]. While certain customer factors may influence the pace and timing of investment decisions from our customers, we believe these factors are temporary and do not alter the long-term demand outlook for the critical equipment and services we provide. Regionally, Brazil remains one of the strongest offshore markets globally. Petrobras continues advancing major development programs, while additional exploration and appraisal activity across South America supports continued demand for high-specification drilling assets. In the North Sea and broader harsh environment market, operators continue advancing field developments and sanctioning new projects. Recent contract awards, development approvals and tender activity point towards sustained demand for harsh environment semisubmersible well into the latter part of the decade. Given HMH's strong installed position across this fleet segment, we view these developments as particularly positive for our long-term outlook. Looking further ahead, activity continues to build across West Africa, Canada and select Asia Pacific markets. New discoveries, project approvals and upcoming development programs are supporting incremental drilling demand and reinforce our confidence that offshore investment levels will remain constructive for years to come. Turning briefly to our land business. Market conditions remain relatively stable, while activity in North America continues to reflect operator capital discipline. International markets remain supported by energy security initiatives and ongoing production investments. We continue to see healthy demand for aftermarket services, equipment upgrades and reliability solution across our installed base. In mining, customer focus remains centered on productivity, safety and sustainability. Long-term demand fundamentals for critical minerals remain attractive, driven by electrification, grid expansion and broader infrastructure investment trends. We continue to see opportunities to leverage HMH's engineering expertise and technology capabilities to support customers seeking improved operational performance and equipment reliability. Overall, we continue to view the market environment as increasingly constructive. Longer duration awards, growing offshore investments, improving utilization, increasing lead times and rising backlog across our installed base support our confidence in continued market strength throughout 2027 and beyond. With our leading technology portfolio and broad installed base, we believe HMH is well positioned to capitalize on these trends. Now to provide more detail on our financial results and outlook, I will now turn the call over to Tom.

Thank you, Eirik. I'll begin with the total company results and then discuss our outlook for the year. Orders for the quarter were $205 million, up 19% year-over-year, driven by continued strength in our digital technology offerings and our service product line, partially offset by lower product bookings. Sequentially, orders were down 6%, reflecting the timing of product awards and repair activity. Despite the quarter-to-quarter variability, orders exceeded revenue, resulting in a 1.2x book-to-bill ratio. While we expected a degree of volatility in first half order intake, customer decision-making was somewhat slower than anticipated. The softness was concentrated in product orders and repairs where several customers delayed project approvals and purchase orders amid ongoing planning activities and geopolitical uncertainty. While these delays in contract spending ahead of reactivations impact orders and corresponding revenue in the short term, we believe the underlying demand environment remains intact, customer discussions continue to progress, and we believe many of these opportunities represent timing shifts rather than changes in customer spending intentions. As a result, we remain optimistic about order activity improving as the year progresses. Revenue for the quarter was $171 million, substantially flat quarter-over-quarter as the increase in service volumes were offset by lower spares and equipment revenue. Adjusted EBITDA in the quarter was $34 million, an increase of 3% year-over-year with higher spares activity offsetting lower product volume. Quarter-over-quarter, EBITDA increased 13%, driven by service volumes. In the quarter, we had nonrecurring impact of IPO expenses of $22.8 million and $5 million of restructuring. The adjusted EBITDA margin was 19.8% in the quarter, further demonstrating our underlying margin resilience supported by disciplined cost execution, favorable product mix and continued focus on operational efficiency. Excluding the nonrecurring impact of the IPO expenses, our tax rate for the second quarter was 25%. Turning to cash flow. Free cash flow defined as cash flow from operating activities less purchase of property, equipment and development costs and excluding the impact of onetime cash payments associated with the IPO was positive at $22 million in the quarter. Now I'll walk you through the product line results in more detail. In aftermarket services, revenue was $89 million in the quarter, down 4% year-over-year due to lower repair activity, partially offset by stronger digital technology volume; and increased 24% quarter-over-quarter, driven by increased demand for repairs, digital technology and other services. Margins in this segment remains supported by service mix, execution focus and selective cost actions implemented over the past several quarters. Aftermarket services order intake was $118 million in the quarter, up 50% year-over-year and up 19% quarter-over-quarter, driven by strong digital technology volume. Aftermarket services, excluding digital technology, were slower than expected in which longer cycle digital technology orders replaced shorter-cycle repair activity in the quarter. Spares revenue was $61 million in the quarter, up 17% year-over-year due to increased demand from customers as they prepare for upcoming contracts and down 8% quarter-over-quarter. Spares order intake was $65 million, up 1% year-over-year and up 2% quarter-over-quarter, driven by global offshore market dynamics. Product revenue in the quarter was $21 million, down 66% year-over-year and down 38% quarter-over-quarter, reflecting the lower backlog to start the quarter and partially due to delay in equipment deliveries and installation and commissioning work in the Middle East. Order and delivery delays in the Middle East adversely impacted revenue in the quarter. Moving to our capital structure. We ended the quarter with $120 million in cash and cash equivalents, total liquidity, including the revolving credit facility of approximately $195 million. We have no long-term debt maturity until June 2008 (sic) [ 2028 ]. Capital expenditures and development costs during the quarter were $5.2 million, primarily supporting aftermarket capabilities, service reliability and ongoing product development initiatives. We continue to operate an asset-light business model and manage capital intensity carefully while preserving flexibility to support growth as activity levels recover. As discussed in our first quarter earnings call, we completed our IPO on April 2. The IPO has significantly strengthened our capital structure and positioned us well to support long-term growth and deliver value to our shareholders. Basic earnings per share is calculated by dividing the net income attributable to the HMH by the weighted average number of Class A shares during the same period. For the periods following the IPO, Class B shares are excluded from the computation of basic and diluted earnings per share. We have 12,042,625 Class A shares and 31,891,652 Class B shares. We refer you to our Form 10-Q for further details. On the M&A front, we are advancing several strategic opportunities. We are highly encouraged by both the quality of assets under review and the broader opportunity set available in the market. Consistent with our disciplined capital allocation strategy, we believe these opportunities will enhance our capabilities, expand our market presence and create meaningful long-term value for shareholders. Looking ahead, we already see another strong order rate so far in the third quarter, and we expect another quarter of book-to-bill above 1x. Looking at the full year 2026, we continue to expect second half revenue to be meaningfully stronger than the first half, driven by strong service and spares orders bookings during the first half of the year that will translate into higher revenue as customers prepare for higher activity levels. Looking further ahead to 2027, we already have approximately 80% visibility into our projected 2027 floater rig years with HMH installed base based on contracts and contract options, a meaningful improvement from the roughly 65% visibility we had at the comparable point last year when forecasting 2026. This increased visibility reinforces our confidence in the outlook and supports our expectation of increased activity in 2027. For 2026 guidance, based on our current backlog, order activity and margin visibility, our full year guidance remains unchanged with full year adjusted EBITDA to be in the range of $157 million to $177 million, with performance improving in the second half. Investments in CapEx, excluding development costs, are expected to be 2% of revenue for 2026. With that, I will turn the call back over to Eirik for closing remarks before Q&A.

Thank you, Tom. As we conclude, I want to emphasize that while our second quarter revenue reflected choppiness in product orders and repair intake, the underlying fundamentals of our business remains strong. We delivered year-over-year expansion in adjusted EBITDA margins, maintained disciplined cost execution and continue to generate healthy commercial activity across our markets. Importantly, order momentum for digital technology upgrades remained robust during the quarter, reinforcing our confidence in the demand environment and providing further support for future revenue growth. This performance reflects both the strength of our customer relationships and the value customers place on our technology and service offerings. The offshore drilling market continues to evolve favorably. Floater contracting activity is improving, customers securing longer duration awards and many of the rigs winning work today are equipped with HMA technologies. At the same time, operators remain focused on enhancing operational performance through equipment upgrades, automation, digital solutions and next-generation technologies, all areas where HMH is uniquely positioned to create value. Looking ahead, we remain confident in an anticipated market acceleration through the second half of the year and into 2027 and in HMH's ability to capitalize on opportunities in front of us. Finally, I want to thank our employees around the world for their dedication and outstanding execution this quarter. Their commitment to our customers and our strategy continues to strengthen the foundation of HMH and position the company for success in the years ahead. Thank you for your continued support of HMH. We look forward to updating you on our progress next quarter. With that, I'll turn the call back to the operator for questions.

[Operator Instructions] Your first question comes from Derek Podhaizer with Piper Sandler.

I wanted to start with the comment, Tom, you made in your remarks about the visibility that you have for your '27 floater rig year. You said 80%, up from 65% this time last year. Obviously, a great improvement there. So maybe just help us understand closing that 20% gap. And even if you could talk about the upside and downside scenarios for meeting those 2027 rig year estimates.

Yes. Just -- there's a lot of noise, obviously, still in some of the tail end of that, whether you've got rigs that may be rolling off contract need to be re-contracted, potential for reactivation. So I'd say, again, if you look at the rig activity forecast and you reforecast it from 6 months ago to today, you'd be at the same levels in terms of forecast, more certainty around it. And there is both upside and downside. I'd say you're starting to narrow the gap on the downside just by seeing the contract announcements that we've had. So we don't go rig by rig, but it's just trying to give comfort that what we see today is exactly what we've expected to see. And we expect to see further strengthening throughout the year. And again, kind of comparing it to past cycles, we're ahead of where we'd be when looking at the forecast.

Let me add to that. Let me add that for the first 7 months in '26, contracted rig years was 50% higher than the same period in '25. That also gives an indication that '27 is up.

Right. Okay. No, that makes sense. That's helpful. And then -- so obviously, it sounds like you're expecting an order inflection here in the back half of the year. Obviously, revenue came in a little bit light. You're expecting an inflection second half into 2027. Sounds like your customers had some delays just given the current geopolitical events. Maybe could you talk to us about your conversations with your customers, what they're waiting for? Any specific clearing event? Is it just they need a resolution in the Middle East to kind of go back to things? Maybe just a little bit more color around the guidepost that we should be looking out for to then see that inflection in the back half.

Yes. Let me separate that into 2. I'm glad you asked about Middle East. So, I think when you look at the Middle East, this is not true in the previous quarter. In this quarter, you had specific installation commissioning delays and order delays related to the situation that's obviously persisted longer than we thought. That in and of itself was about a $10 million revenue headwind in the quarter. So that was -- that is sort of a discrete item, although it does affect some purchasing elsewhere. What you did see, as Eirik alluded to, is an acceleration of digital. So you had significantly higher digital orders than we saw. So we saw customers making those longer-term decisions the way we would expect them to and even a little bit ahead of what we'd expect them to. Where you've got a little bit of delay is on some of the spend on repair in advance either of reactivations or knowing a rig is going on contract and just waiting a little bit longer to spend the money. And by the way, on the reactivations, so let's not respect on any reactivation, one, without saying the name, you've got 50 POs on reactivation that you're updating on a weekly or monthly basis. So I mean like it's been kind of like that. And historically, you've seen some of that spend occur ahead of contract. You're not seeing that. And even when they have contracts, you're seeing a little bit of a delay in terms of when that picks up.

Yes. And I think you mentioned it yourself, geopolitical situation that actually drives the drillers to be a little bit more cautious about when they actually do the work on the upgrade they are planning to do. So they wait as long as they can.