Hunting PLC (HTG) Earnings Call Transcript

Hello to everybody who's joined. We gave quite a lot of people to get on. [Technical Difficulty] just going to wait a few seconds and allow everybody to get hooked on, if you can just bear with us. Okay, right. Just a few points of admin to everybody that's joined. This presentation is being recorded. So if you do miss anything, fear not, we will circulate the video again. The management will be referring to some slides. And there is a wealth of information and other slide decks on the Hunting Investor Relations page that I recommend to you. And in terms of process, we're going to hear from the executives and you will be able to submit questions as they're talking. [Operator Instructions] And if time allows, we hope to deal with every question that comes along. So without further ado, we're very pleased to be joined by Jim Johnson, who's the Chief Executive; and Bruce Ferguson, who is the Finance Director of Hunting, a long-established company, they are going to give you an update on what they've been doing under their tenure. And we, of course, just had a recent trading update referring to the financial year of 2023, and they're going to talk about their plans for the future. So I shall now pass over to Jim.

Okay. Thanks, Andy, and welcome, everybody to our webinar today. Thanks for taking time out of your busy schedules. We hit the ground running quickly here early in the year because of a couple of things. One is we're excited about the results that we had in 2023. And so our trading statement is out. It's very positive, and we'll go over some more details on that. And being the new year, it's always good for investors to have new ideas and new thoughts to think about, starting out bright and early. And in the states, we would have called it, it's a January white sale. So prices are on sale right now. Share price is, we think, very undervalued based on the fundamentals of our business and we're going to try to highlight some of that to you today. And for those who don't know, Hunting, the company's history has always been about being a premier supplier to various industries around the globe, whether it's defense and aviation, but primarily, it's been oil and gas. And this year we have the fortunate milestone in front of us of celebrating the 150-year anniversary of the company. So we're excited about that, our goal is for Bruce and myself and the rest of the team carry that tradition on into many, many more decades to come. And we think we're well positioned for markets today and markets that will be valuable to us in the future. The company, again, I can't stress enough the fact that what we focus on, we are not a commodity supplier of products. So what we make and sell in the marketplaces are extremely mission-critical. They are life and death related products, when you're talking about aerospace and even some of our oil and gas, and they are used in some of the most critical environments globally in any industry, whether it's in space because we supply products now for people like Elon Musk and for Blue Horizon in the rocket business, to aerospace, where we make components for people like Pratt & Whitney, to offshore markets where our products are used in water depths of 5,000 feet and going 30,000 feet below ground, having to face the challenges of severe temperature and pressure. So today, we're fortunate with results that we have been able to generate. It has been an extreme challenge for the company coming out of COVID. However, today, I think we're probably better positioned than the company has been positioned in more than a decade. We've reduced our exposure to some lower margin products, and we're trying to focus on enhancing our margins as we continue to evolve the business. One of the things that we're -- we did -- we hadn't done 1 of these in years, but we did a Capital Markets Day back in September. There's a lot of data presentation that lies out there to go through and a lot of detail of our products. And what are -- really our goals and aspirations are for the company from here to year 2030. As I go to Slide 3, I want to briefly talk about the different product lines. I realize there's a lot of people that aren't totally familiar with all the ins and outs of the energy business or especially on what we do. So I'm going to try to give you some information on that, and there'll be a time for questions if you want to ask. So one of the key areas, we look at our oil and gas business, one of the key parts of our business is our perforating business. It was a company called Titan that we purchased over a decade ago, and we are a market leader in technology and in products to provide the explosives and the perforating guns, the explosives go in for the fracking of unconventional resources and these are also used in conventional wells also. But the volumes and the masses of these products has really taken off in the past decade due to the expansion of the shale plays in oil and natural gas, primarily in North America. So we -- we're one of the few people in the world that -- not only do we manufacture the guns, but we have patents and technology on the switching that ignites the guns, and we actually manufacture the explosives that go in them. So these guns are typically 3 feet long, 4 feet long, have numerous charges around. And after the well is drilled, the guns go into the ground through the casing and tubing and they're exploded to fracture the shale, which allows the production to take hold. Our next area I'll talk about briefly is Subsea. It's one of the fastest-growing parts of the company, and it is one of the ones that has the most international exposure. And that business unit is broken down into 3 segments. One of them is based in -- outside of Houston, Texas, and it was the original Subsea business that we acquired many, many years ago that we make components and couplings that go on Subsea trees. So in that business, for example, our largest client is FMC, and those people that are manufacturing Subsea trees. A second business that we acquired 3 years ago, which was kind of the acquisition of the century for us, we bought a company called RTI Energy Services. And that company specializes in making titanium risers. And these risers are what hang off of a floating production vessel in deepwater operations and acts as a conduit for the production of oil and gas to the storage unit. These products are typically -- if you can imagine, it's a titanium joint of pipe that is 30 to 40 feet long. I don't know what they actually weigh, but I can tell you they cost -- we sold them for about $3.5 million a piece. There's a lot of IP in them as far as the connection design as well as the metallurgy and in the welding that goes along with this. And this was a product line that was basically in a hibernation from the previous owner who was not an oil and gas service company. We saw an opportunity. We made this acquisition a couple of years ago. It's been a home run for us and we've been able to crystallize that big time in 2023 with a great outlook for '24. The business itself is generating good results for us, and our key client that we landed has been excellent for business both in Brazil as well as in Guyana. So the Guyana business has just been massive for us and should continue to go from strength to strength. And then recently, we announced in our trading statement, our first orders in the Black Sea region, and that was with a company called TPAO out of Turkey. Next is OCTG. And when you look at Hunting's history in oilfield services, which dates back to the late 1960s and the first development of hydrocarbons in the U.K. Continental Shelf, we were an OCTG-focused company. So today, we have evolved over the time period in many different areas globally. At certain times, we sold pipe. But what we always did was focus on the connections that go on in this pipe, which is the technology and the IP that differentiates us from some of our other competitors. So in this business, we are in the pipe, the tubing and casing market worldwide. In North America, we do not stock or hold the pipe, we let distributors do that. Hence, our inventory risk is nil, and our margin enhancement is much better because I don't have to carry cost for that pipe. Internationally, we actually buy the pipe, put our connections on and sell to international markets, but we're not in the inventory stocking business. So it's a quotation, manufacture, deliver to client, and so there's no real inventory risk. Our big markets are in Southeast Asia for that group as well as the Middle East. And it's a business that has a further upside coming to it in '24, thanks to the benefits of our Jindal joint venture in India, which will make us a commanding supplier in the Indian market for OCTG. Energy transition is one that's got a lot of talk over the last couple of years, obviously, as people look at their ESG credentials. And for Hunting, our real focus on this energy transition is in the modification and use of our existing OCTG platform. And I remind people that Hunting has been involved, for example, in the geothermal market for more than 25 years. We've supplied our products, OCTG-related in markets from Iceland to the Philippines to Indonesia to Southern California. And so today, we're seeing a resurgence in demand for tubulars and kit for geothermal, and we're excited that we have been a player there, and we will continue to be in the future. The second part of that energy transition, as it relates to the OCTG segment is carbon capture. And right now, that whole industry is in early stages but we have great technology that is going to be utilized in these wells. And what the engineers are finding out is you have to put a lot more thought process and engineering design into carbon capture because in things like cryogenic effects on the tubulars, because you're taking basically frozen CO2, injecting it into the ground, the integrity of the well is increasingly more challenging to maintain, and that's where we see our product line fitting in well. And then lastly, in non-oil and gas, and it has an oil and gas exposure, but we are very proud of our advanced manufacturing business units. For that, it consists of 2 operations. One in the U.S. in Maine, outside of Portland, where we are probably the premier machining operation in North America for high precision manufactured components. And as I mentioned earlier, we make components to build on aircraft. We make components there to go on spaceships, defense business, submarines. And there's also a portion of that business that does supply the oil and gas industry, manufacturing tools for people like Halliburton and Baker Hughes for the very demanding MWD and LWD kit that goes in the ground to be drilling wells and logging those wells. With the manufacturing facility in Maine, there's another facility in Houston, Texas that is the premier supplier of harsh environment electronics, and those electronics are primarily used in the oilfield where they have to withstand extremely high temperatures from being downhole as well as the shock issues related to drilling. We've been fortunate in the last couple of years to take the expertise and move it into areas like medical and some defense recently in 2024. So that kind of lays out our business and all the same things should play through. It's high engineering. It's not commodity businesses, and it's those that we see a lot of growth in going forward. In the next slide, I'm going to pass it off to Bruce to talk about our trading update.

Thanks, Jim. I'm going to go through the key highlights for the year-end trading statements. We've got the full update on the website. But in terms of the summary, we had a strong set of results, which I'm pleased to go it through. We saw our EBITDA effectively double from -- year-on-year, from '22 to '23, up to the range of $96 million to $100 million, and that is in line with the guidance we gave back in October. We have a very strong balance sheet of over $900 million of net assets, and we have no debt by the end of the year. So we're in a really strong position in terms of our balance sheet. The -- that also was as a result of some really strong cash generation in quarter 4, where we generated over $68 million in cash flow. So we're really pleased with the quarter 4 cash performance. Our order book is up over 20% from this time last year. It's up to $575 million, and that is a record order book. A lot of that is coming from the strength that Jim is talking around on our OCTG product line, our Subsea product lines, all adding up to a really strong order book as we go into '24. And some of that orders will actually reach into '25 as well. So that give us some real confidence on our financial performance in the next couple of years and beyond. We made some good progress in a couple of those product lines. In terms of OCTG, that was driven by places like in Americas. We've seen some really good performance in activity levels in Guyana and beyond and also Asia Pacific, where we won some record contracts into China and also into India and the Middle East as well. Perforating Systems, despite a slower market in U.S., has performed really well, and that has actually increased sales year-on-year. We've got increased sales in international markets, which has helped strengthen those numbers, and we believe that will continue going into '24 and beyond. Subsea, good results across all 3 platforms. It's a really key space for us, lots of spend in terms of international offshore and Subsea markets, whether that's in Brazil, Guyana, also West Africa, and that has delivered good results in '23, has helped contribute to that strong order book in '24 as well. Advanced manufacturing, good growth in our non-oil and gas revenues, as Jim is talking about, and that's in areas such as the space, aviation and defense as well, some key customers there like Pratt & Whitney, SpaceX. As Jim mentioned, we launched a 2030 strategy back in September, and that is online. We've got some real granular guidance objectives for the next few years and actually beyond into 2030 as well. And we also highlight the fact that our EBITDA expectations for '24 are unchanged. Now these are actually 25% to 30% higher than what we saw in '23. So again, a very strong year to expect for '24, and we also reiterated our '25 guidance of between 15% up to 50% EBITDA margins, which is where we were pre-COVID levels.

Okay. Next slide, there we go. So how did we do this? And what are some other points to highlight with the systems? If you look in this slide on Page 5 here, Perforating Systems, as we talked about, one of the big upside was really the growth we saw in the international marketplace. We introduced some new products as well, our H-4 gun, which allows for some self-orientating action when clients want to be more precise in their fracking. But overall, from a challenging market point of view, we had a 20% decline in the U.S. rig count. I think the decline was even greater than that in Canada. So the performance for the business, I think, was very, very good. We anticipate going forward that onshore U.S. will probably be kind of a quiet first quarter. We're still waiting for budget information from some of our clients. But we are hearing that -- or we do feel and are hearing that by the second half of the year, drilling activity and completion activity will keep up because a key point to remember is with a massive amount of production coming out of North America, if you're looking at 13 million barrels a day of production in the U.S. alone, the treadmill on that since the bulk of that or a large part of it is shale-related, there's going to have to be a lot of drilling just to maintain production. So we're pretty confident we're going to have a good year in perforating. The international sales should continue to expand as the world needs more of these hydrocarbons and these bases become more mature. Argentina is a big growth area for us. We're seeing that Saudi Arabia, believe it or not, has a large unconventional play that they're buying equipment for perforating. And then there's new markets like Australia, where people are now setting up ventures to kind of mimic what's been going on in the Permian Basin. On Subsea, as we mentioned, it's just been a stellar year. The team has done a super job of reestablishing a product line that was kind of abandoned. But with Exxon now on board, we continue to do business with people like Shell in the Gulf of Mexico, the new orders in the Black Sea. We see continued upside with that as the world continues to reinvest in the offshore marketplace, both in the Gulf of Mexico as well as internationally in deepwater. So keep in mind, for like the titanium riser business, that is purely a deepwater operation. So you won't see that in a jack-up operation, we're onshore. OCTG, the big highlight, I think, going there or the big upside there in '24 is the real growth in our joint venture in India with the Jindal people. Again, we've got a strong order book already starting there. The facility is world class, great people there. We have a great partner. And if we have enough excess of pipe, it also provides us another channel of material in our supply chain to go into markets like the Middle East. We expect that the U.S., North American, Canadian OCTG business to be stable, and the OCTG-related products in areas like especially Guyana should continue to be strong, and that was a big upside part of our backlog today and part of the great performance we had last year. Energy transition. What we've tried to do there is make sure our supply chain is secure. And earlier this year, we've gotten some first orders with -- on geothermal in the Philippines. But our relationship with a mill in China called Jiuli is very, very important to our growth in this marketplace because in a lot of these areas like geothermal and like in carbon capture, traditional OCTG tubulars cannot be used because they cannot withstand the temperatures, either cryogenically cold or in the high and hot. And there's a limited amount of mills in the world that manufacture these higher nickel-based tubulars. Jiuli is one of the premier suppliers. So we're happy to be working with them. We've already supplied product in the Brazil with the Jiuli mill and see a big upside there. CRA Tubulars is kind of a technology spend for us where we're looking at things like composite materials for some of the cryogenic issues related to carbon capture. In advanced manufacturing, we see good growth. I mean, we almost -- on defense side, let's just be honest, the world is going to continue to spend a lot of money on defense over the next decade for events that have happened now, in preparing the world to be secure in the future. Aerospace, you all know what the backlogs are for Airbus and Boeing. And yes, we do not have any parts on a Boeing 737-900 Series Max, if I get that question. But we have a good marketplace there. It highlights the importance of the products that Hunting makes in the advanced manufacturing side. So to get through these slides and give you time for questions, we'll go to Slide #6 to talk about 2030, why we laid that out and what do we think and what are the main points. Point number 1 is, I hope I was able to get across in a few minutes the compelling products that we bring to the marketplace. We're not a commodity player. In some areas like titanium stress joints, we have 100% of that market because nobody else makes one. Not that there's not other solutions, but for that solution, which is proving out to be highly economical to clients, there is no place else to go. And we have a lot of other products that, again, one of the key things is focusing on IP. Our engineers do a great job of keeping our products world-class or at least growing new opportunities with clients with new product lines. Strong market fundamentals, we're all bullish on the energy business. I just don't see the oil demand falling. There's projections, and we believe that we're going to head towards 110 million barrels a day of oil demand in the next few years. Natural gas is going to become increasingly important as a clean source replacing coal. And we have to use the same Hunting products in oil well as you do in natural gas well. So from the energy side, we're big believers, there's lots of upside. And that doesn't also -- it doesn't minimize the upside with geothermal and carbon capture. It just complements the whole package for us. Revenue growth. We've projected that in 2030. One of our key focuses is obviously to improve our EBITDA margins, get them back to 15%. That's going to happen through better product mix, better pricing and higher utilization of our facilities. And in Slide 4, we talk about the cash flow projections by 2030. And one of the things we didn't talk about is, we also want to maintain and grow our dividends to our clients. We believe that giving something back to our shareholders on a consistent basis matters, and it shows the strength of our balance sheet and the strength of our business. So with that, I think I'm ready to turn it over to questions, if you're good, Andy. Thanks.

Yes. Thank you very much, and well, fascinating run through, and let's move on. Lots of questions. You were just talking about EBITDA margin. Jim, but maybe it's one for you, Bruce. The question is, from which product groups or indeed regions do you expect to see the most important contributors in terms of moving that margin up from 10.5% to the 15% implied levels?

Yes. I think it's actually -- the markets are quite consistent across all the product lines. But we do see OCTG with the large contracts, going to contribute towards that 15% step-up. The Subsea, with its critical products as well. That's something we can command a higher price and we're seeing higher levels of utilization throughout the plants as well. So that is going to help at the same time. So really, OCTG, the Subsea, the advanced manufacturing group, again, it's highly critical products according to key customers. So that allows us to command a higher sales price, there's barriers to entry as well, so perhaps less competition. So across all those areas, we're confident that can get us back to 15%, which is really the area that we're at back pre-COVID levels, back in 2019. So we have achieved that, and we're confident we can get back there.

We got a question. How much in percentage terms of your revenues comes from non-oil and gas at the moment? And where do you think you can move it to over the next 3 to 5 years?

Right now, the revenue mix, we're about 8%, 9% non-oil and gas. Our goal is by '23 to be at 25% non-oil and gas. That will include the energy transition portion of the business as well as new product lines and things we bring on board and the contribution from the growth in medical, defense and aviation from our AMG business.

Okay. And similar question there is regarding defense that we've just been talking about. What proportion of revenues comes from that segment relative to the whole group? And can you just list 1 or 2 examples of the products and services you provide if they're not restricted?

So I would say, with 8%, total 8% to 9%, we're probably 4% to 5% defense related. And major clients that we deal with, a company called L3, we manufacture components in tube sections for submarines -- naval submarines. Another client, Raytheon, who has -- it's some defense unit equipment that they have, we supply electronic [indiscernible]. But that's just 2 examples on the defense side. But a lot of it -- it's probably -- I probably gave a little higher number on defense, a lot more of it's on the aviation, I think, with Pratt & Whitney and Sikorsky helicopter. And the helicopter could be defense, could be offshore work. It's whatever helicopter it's used for.

Okay. Now going back to oil and gas. Recent commentaries on the company have noted that the North American rig count stabilized, indeed, slightly improved towards the end of '23. It sounded like you had a reasonably positive view for the rest of 2024, Jim, if you could expand on that a little bit more. And perhaps, the view, Bruce, is also the question. Typically, how long does it take for additional drilling to actually drop through to Hunting [indiscernible].

So on North America, I think we're going to have a slower first quarter. I think for some of our clients, budgets haven't even been established yet or set out. I think the real driver is going to be the fact that if you look at a depletion rate as large as they are, they probably have to replace about 1.5 million barrels a day of production just to keep being flat year-over-year, let alone if there's any new growth. The second part of it is, I really think we're going to see a demand call on natural gas starting in the second half of the year, probably Q4 because of the need for orders to be filled for LNG. So we've got more LNG capacity online. I mean, just this morning, it was announced that Chesapeake and Southwestern are merging, creating a $24 billion company. And the focus is there, the upside they're talking about for natural gas as being able to be a bigger marketer in the international field. So those are the 2 drivers. Another one that's probably going to be key for us is going to be Canada. So it had also a declining year last year, but we're hearing a lot of good things for clients about gas needs in the Canadian market as well as continued work on heavy oil.

And Andy, just on -- yes, the U.S. land tends to be short cycle. So you see any impacts of increasing rig counts or decreasing rig count, it'd probably take a quarter to come through. So in 3 months, that's when we start seeing that coming through the financials.

Carbon capture. As you said, Jim, it's still at an early stage, but what is a reasonable time scale that you might expect for meaningful revenues to start to come out of that area? And what sort of partners or sectors are you focused on?

I really think it's going to be a 2025 story. I think this year is going to be one of getting regulations in place that will allow pipelines to get established, getting permitting done. I think it's a testing phase. We're actually in one of our labs right now, working on some testing related to the cryogenic issues on connections. So I'm not expecting a whole lot this year. But going forward, it's something that is real. It is happening. People like Exxon and Occidental spend a lot of money on this, but it's just more of the governmental issues getting it moving.

[indiscernible] Now in terms of that very impressive projected free cash flow number. Perhaps one for you, Bruce. Can you outline how you might look about, as a management team, allocating that substantial free cash flow between investment in the business organically, dividends and potential M&A?

Yes. Well, it's really all 3, Andy. It's -- the great thing about that cash flow will give us that optionality to support the business. We will have sort of large tenders that will come up for working capital. It also give us optionality on M&A targets as they come up in certain areas that we want to invest further in to accelerate that growth. And it also allows us to address the dividends as well. So we're going to be really discerning how we use that, that capital. It's got to achieve greater weighted average cost of capital, so we get the best return for that money. But it's going to be spread across those 3 platforms in order to begin to ensure growth in all areas.

Okay. Understood. And if M&A -- I'm sure M&A opportunity is constantly addressed. But what sort of criteria, either financial or other factors do you apply to opportunities that you're looking at?

In terms of M&A, it really is that return. It's on -- if you look at the -- we want to maintain those EBITDA margins above 50%. So we want to look at companies that got that level of EBITDA return. We don't have to overpay for companies. We want to look at where we're trading our trading multiple, and we don't be paying more than that. So we want to be -- any acquisition to be accretive. And I want to make sure that it's in the right sector. It's going to be in the high-end sector, it's going to have good manufacturing, good IP as well, and it's something we can integrate into our portfolio. So really, we've got quite strict criteria to make sure that we can be buying, spend our capital and it's going to deliver accretive results to the Group going forward.

Very sensible. And related to that, is it fair to assume that these are more likely to be bolt-on transactions rather than anything transformational?

Correct. Yes.