INVX - NYSE

Good morning and welcome to Innovex’s First Quarter 2025 Earnings Call. [Operator Instructions] At this time, I would like to turn the call over to Avinash Cuddapah, Senior Director of Investor Relations. Please go ahead.

Thank you and good morning. We appreciate you joining us on today’s call. An updated investor presentation has been posted under the investors tab on the company’s website along with the earnings press release. This call is being recorded, and a replay will be made available on the company’s website following the call. Before we begin, I would like to remind you that Innovex’s comments may include forward-looking statements and discuss non-GAAP financial measures. It should be noted that a variety of factors could cause Innovex’s actual results to differ materially from the anticipated results or expectations expressed in these forward-looking statements. Please refer to the first quarter 2025 financial and operational results announcements that we released yesterday for a discussion of forward-looking statements and reconciliations of non-GAAP measures. Speaking on the call today from Innovex, we have Adam Anderson, Chief Executive Officer; and Kendal Reed, Chief Financial Officer. I would now like to turn the call over to Adam Anderson.

Good morning and thanks to everyone for joining us today. I am pleased by the progress we have made on our strategic initiatives, which is thanks to our incredible team of people. I am extremely grateful for their efforts in the first quarter. On today’s call, I’ll discuss how we are uniquely positioned to continue providing value to our customers and shareholders in all phases of the cycle and give an update on our continued transformation of the combined business. Kendal will discuss our quarter one financial result and how Innovex continues to be well positioned financially and operationally to be opportunistic and flexible in a volatile macro environment. We’ve created a unique energy focused industrial platform that drives exceptional value and service for our customers and exceptional absolute returns for our shareholders. Since Innovex’s inception in 2016, we’ve generated strong financial returns on capital employed. To achieve these returns, we’ve curated a portfolio of what we call small ticket big impact products, employing a capitalized business model that focuses on technology-enabled consumable products with consistently high gross margins. Given the nature of our product set and our lean operating model, Innovex has historically required a small amount of CapEx to sustain and grow our business, typically 2% to 3% of revenue, allowing us to convert somewhere between 50% to 60% of our EBITDA into free cash flow under normal business conditions. To drive innovation, organic growth, and operational excellence are no barriers cultures paramount. No barriers means eliminating all of the barriers between ourselves and our customers, as well as within our company to ensure that we’re elevating the experience for everyone. Our culture drives innovation and customer loyalty, as evidenced by continued gains in market share across multiple markets. Turning to our first quarter results, I’m very pleased by the resilience of our North America land business. Our legacy U.S. land downhole business remains flat while our reported revenues grew 17% sequentially, driven by the inclusion of a full quarter of DWS revenue and seasonal growth in Canada. Q1 name results demonstrate delivery on both pillars of our strategy to both grow market share organically as well as inorganically through high returning acquisition opportunities. DWS continues to be the market leader in their product category in the U.S. In addition to strong U.S. results, DWS delivered record revenues in Canada by levying the operations and sales team from Legacy drill. Distribution synergies in Canada were another driver of the merger and we’re pleased to see early proof points of our thesis. If anticipated, our international and offshore revenue is down from 2024, but the decline in revenue is greater than we had originally anticipated. This was primarily caused by greater than expected weakness in Mexican drilling activity along with some seasonality and delivery delays in our U.S. offshore during the first two months of quarter one. Despite the activity declines in Mexico, we continue to see exciting opportunities in other international markets such as the Middle East and Latin America. One such highlight was a recent well for Petrobras in which Innovex was able to combine a fully integrated solution in the Buzios field, one of the most significant pre-solved fields. This was the first well in the country to integrate products from each legacy company utilizing drill clips subsea wellhead and X-pack liner hanger with Innovex’s centralizer and fully equipment technology. The successful installation on this well led to an order for ten additional liner hanger systems highlighting the untapped organic growth and synergy opportunities available to us. We continue to place focus on profitability and cash flow, as evidenced by our margins remaining flat sequentially in our generation of $24 million of free cash flow, which equated to approximately 52% of our adjusted EBITDA. Oil cycles are a feature, not a bug of our business model. We’ve successfully grown through all phases of the oil cycle but are particularly adept at exploiting down cycles to create lasting value for our shareholders. A key enabling pillar of our strategy is maintaining a strong balance sheet. We currently enjoy a net cash balance, and we do not intend to leverage our business over one time debt EBITDA. In an up cycle, we innovate across our small ticket big impact product portfolio to grow share while divesting non-core businesses that no longer meet our stringent financial criteria. During the mid-cycle, we continue to optimize margins by focusing on process and product optimization while evaluating highly accretive high return acquisition opportunities. Finally, during the down cycle which we may be entering now, we are able to utilize our balance sheet and execution capabilities to exploit transformative investment opportunities. Importantly, during down cycles, we unwind working capital which further increases our liquidity. No matter where we are in the cycle, we continue to invest in R&D and innovation. We truly mean it when we say that down cycles are a feature, not a bug of our business model. In March of 2021, not long after oil had treated it negative pricing, we acquired Rubicon Oilfield International. Due to the preceding macro environment, we were able to transact on this acquisition at a highly attractive price. We acquired our fishing tool business at that time, which we had transitioned into a highly profitable franchise that holds the leading market share position. This acquisition also bolsters our international distribution network which has helped drive significant organic growth in Latin America and the Middle East. During industry downturns, we focused our innovation flywheel on projects that drive value and efficiency for our clients. For instance, we evaluate our portfolio for opportunities to provide tailored solutions combining different products or technologies within the same well to reduce our customers’ costs and streamline their operations. We also look to provide technologies that save the customer significant time and money by reducing their costs and enhancing their operational efficiencies. One example of this is our Sub

Thank, Adam. And good morning, everyone. We are pleased that our quarter one financial result continues to demonstrate the earnings power and cash flow resilience of our platform, with further margin enhancement opportunities in 2025, as synergies are realized through the full integration of both Dril-Quip and DWS. As a reminder, we closed on the merger with Dril-Quip on September 6, 2024, and Innovex was the accounting acquirer in the merger. So historical comparative periods prior to quarter three 2024 were like legacy Innovex stand-alone results. Our first quarter revenue was $240 million which is an increase of 88% year-over-year and a decrease of 4% sequentially. The year-over-year increase is primarily driven by the impact of the Dril-Quip and DWS acquisitions. We evaluate our revenue geographically by separating our shorter cycle onshore U.S. and Canadian operations, which we refer to as NAM Land, from our longer cycle international and offshore operations, which include offshore U.S. Our Q1 NAM Land revenue of $121 million increased 17% as compared to Q4 revenue of $103 million primarily as a result of one full quarter of DWS results. Our international and offshore revenue during the first quarter of 2025 was $120 million a decrease of 19% sequentially due primarily to greater than anticipated revenue weakness in Mexico due to the dramatic slowdown in local activity and a slow start to the year in our U.S. offshore business. While our top line results were slightly weaker than expected, we evaluate our performance based on margins, free cash flow, and ROCE, all of which showed good progress during the quarter. Turning to costs and expenses, our Q1 cost of sales, exclusive of depreciation and amortization, decreased by $2 million sequentially to $164 million. Selling general and administrative expenses for the quarter decreased by $6 million sequentially to $32 million. Importantly, our SG&A as a percentage of revenue has continued to decrease from the close of the merger, moving from approximately 25% in quarter three 2024 to 13% in Q1. Strong execution on synergies has driven increases in EBITDA margin from the time of the merger, rising from 18% in Q3 2024 to 19% in Q1, despite the pullback in revenue. As a reminder, our realized cost synergies will phase in over time, partially impacting Q1 and fully impacting Q2. We continue to identify opportunities for cost savings and margin enhancements and believe that in the long-term, the combined Innovex platform can generate EBITDA margins of 25% or greater in line with Innovex’s historical results. We expect the sale of the Eldridge facility to unlock the next phase of margin expansion, which we expect to realize over the course of 2026. Adjusted EBITDA for the first quarter was approximately $46 million, a decrease of approximately $3 million sequentially and an increase of $13 million year-over-year, with a sequential decrease primarily driven by greater than anticipated weakness in Mexico. Free cash flow for the first quarter was $24 million, a sequential decrease of $5 million, but in line with our goal to convert 50% to 60% of our EBITDA into free cash flow. Given that Q1 is seasonally our lowest cash flow quarter, we are pleased with our strong free cash flow generation, which allowed us to fully fund our acquisition of SCF Machining in February while still increasing our net cash balance during the quarter. Capital expenditures in the first quarter of 2025 were $7 million, representing approximately 3% of revenue. This value is consistent with our historically capital-light business model. We expect our near-term CapEx to be on the high end of Innovex’s historical average of 2% to 3% of revenue as we continue working through merger integration, including facility moves and consolidation after the sale of Eldridge. We expect the bulk of any additional CapEx to occur in 2025 and to be far outweighed by the net proceeds of the Eldridge sale. Our balance sheet continues to be strong with the net cash position of $43 million to end the quarter. Our total debt on March 31, 2025, was $25 million representing a debt to trailing 12-month adjusted EBITDA ratio of 0.17 times, more than offset by $68 million of cash and equivalents. Our return on capital employed for the 12 months ended March 31, 2025, was 12%, which is consistent with the 12 months ended December 31, 2024. We continue to work towards our goal of returning the business to Innovex’s seven-year historical average ROCE of approximately 18%. Turning to our guidance for the second quarter of 2025, while acknowledging that there is significant uncertainty in the market at the moment, in particular with respect to U.S. land activity levels, we currently expect adjusted EBITDA of $40 million to $45 million and revenues of $225 million to $235 million. The decrease in revenue sequentially is driven by the continued weakness in Mexico, sequential declines in Canada related to spring breakup, and lumpiness in our Subsea deliveries related to project timing. We expect deliveries in the Subsea business to be back half weighted in 2025. As a reminder, we are no longer accounting for wellhead deliveries on a percentage of completion basis. While this will add lumpiness to our quarterly results, we believe the change better aligns incentives across the organization, which will help drive on-time delivery to our goal of greater than 90% and will significantly improve earnings quality and cash conversion. I would next like to briefly address the fluid tariff environment. As our business and supply chain is highly diversified across several global markets, we do have exposure to rising tariffs. This exposure mainly arises from raw materials sourced out of Asia. However, we maintain a very flexible and diverse supply chain network which will allow us to throttle manufacturing both domestically and at specific international hubs to optimize profitability and mitigate the impact of rising tariffs. To enhance our global supply chain capabilities, we recently acquired SCF Machining Corporation in Vietnam, which gives us access to low-cost manufacturing which is well positioned to serve our eastern hemisphere operations. Importantly, the majority of our business is not locked into long-term pricing agreements. Thus, we have the flexibility to work with our customers to pass along cost increases over time as necessary. We will continue to monitor and assess this landscape as it evolves. As Adam mentioned, we strongly believe that our business model can be opportunistic in all phases of the cycle. I would like to expand a bit further on this. The high margin capital-light nature of our business model allows us to fund our growth and maintenance capital needs through internally generated cash flow. We currently have $68 million of cash on the balance sheet, expect to generate continued free cash flow from operations, and expect to receive additional cash from the net proceeds of the $95 million sale of the Eldridge facility, all of which provides us with significant capital to deploy even before considering our borrowing capacity. Given the lack of capital available to the energy sector, we’ve been pleased with the number of opportunities to acquire businesses that fit our qualitative investment criteria and have the potential to generate ROCE above our corporate average, often in excess of 20%. The recent acquisition of DWS is a great example of this. DWS continues to drive growth in the NAM Land market, and its products are actively being distributed to untapped international markets through our global distribution network. There is an abundance of PE-backed companies that will be looking for an exit in the coming year, and a select group of these will meet our high return, stable margin, high free cash flow, and small ticket big impact consumable product proposition. We also announced last quarter that our board authorized a $100 million share repurchase program which allowed us to have a competing use of capital to organic and inorganic growth opportunities. Since the announcement 10 weeks ago, we have repurchased approximately $6 million worth of shares. We will continue to weigh share repurchases as a use of capital, especially in the current macro environment where there’s significant volatility in the markets. Importantly, we believe the current weakness in oil prices will further constrict capital to the sector, which should provide the ideal backdrop for us to invest in our business either via our share repurchase program or through a creative high returning acquisition opportunities. We are very excited as this is exactly the kind of market we were built for. I’ll now turn the call back to Adam.

Thanks, Kendal. In closing, we’re extremely pleased with our progress to date on the drill quick merger, the performance of the DWS business, margins in our downhill product lines, and the way we position this company for a potential down cycle. That said, we’re disappointed that our revenues did not meet our guidance range. We are learning and getting better at modelling the Subsea business, which enjoys strong backlog-driven visibility that is inherently lumpy. We expect quarter two to be the low point for this business in 2025 and foresee a stronger back half based on the timing of customer deliveries. Despite lower than anticipated activity, we are pleased with the free cash flow and margin performance and still believe that our goal of mid-20s EBITDA margins is attainable over time. Since I’ve told many investors over the past year, oil prices or activity levels are hard to predict, but we’re adept at responding to customer needs and changes to their plans. Our flexible supply chain, high gross margins, and small ticket big impact value proposition positions us well for whatever the market brings. We would like to open the line for questions now. Operator?

Thank you, and we will now begin the question-and-answer session. [Operator Instructions] And our first question comes from the line of David Smith with Pickering Energy Partners. Your line is open.

Hey, good morning. Thank you for taking my question.

Hi, Dave.

So, I think we touched on this, but with the net cash balance of $43 million and for the $95 million sale of the Eldridge facility, net cash balance will – where it’s almost $140 million, 14% of your market cap. And I know Innovex has a strong M&A record across cycles, but I imagine today’s environment presents a little bit more of a challenge for both buyers and sellers between the macro uncertainty policy risk, WTI flirting with the mid 50s. How do you balance that desire to pursue strategic deals with the risk of, foreign activity levels still being in flux? And how are you seeing kind of seller expectations and historically, how long do it take to adjust to, activity disruptions that seem increasingly likely.

Thanks, Dave. Yes, it’s a really good question. Maybe just to start out, as you point out, we have a lot of cash on the balance sheet today, with more coming in from the sale of Eldridge plus generating continual free cash flow from our operations, generated approximately $94 million of free cash flow over the past four quarters, and we have a countercyclical cash flow profile. So, if we’re going into a period of declining activity here, we do expect to spend out even more free cash flow, so we’ll have a lot of capital to put to work. We continue to really like our opportunity set and believe there are multiple great businesses out there that fit with our strategy which can be acquired at attractive valuations. To your point, there’s always an element of thinking about what’s going to happen with the market and getting to an evaluation that works for everyone. So, each acquisition that we’ve done over time has taken a while to come to fruition, but we think given the number of good opportunities out there, there’s still some good things we can do on the M&A side. I’d also point out we do have significant bandwidth remaining on our $100 million share or purchase program, so we’re going to weigh M&A against buybacks to maximize returns, given the market volatility, and we’ll continue to stay very disciplined on valuation. But like I said, I think, this is a great market environment to invest in our business and between our active M&A pipeline and the buyback program, really confident that we’ll be able to put our excess cash to work in a way that drives returns for our shareholders.

Yes, maybe if I would just add a couple of words to, I think that was well said, but we focus on, let’s say things that create value for the long term. I don’t think we’re very good prognosticators on what’s going to happen in the next six or 12 months in terms of activity. Obviously, we’re going into a period of some level of decline we’re going to generate a bunch of free cash, so we’ll have even more opportunities to do deals, but I think we really look at, hey, what. From an acquisition standpoint we look at hey is this deal going to make sense for us over the next three, five plus years, not just over the next six months or 12 months.

Really appreciate that caller if I could ask one and follow-up. You said the weaker than expected in Mexico activity as a driver of the quarter one revenue miss and quarter two outlook. Can you help frame how meaningful Mexico was to your international revenue last year and how the current run rate compares to that prior baseline?

Yes, so Mexico was historically, or I said last year was roughly 5% total company revenue, so whatever that pencils out to on the international offshore, piece of the business. So, it was a really meaningful part of the business, and we ran our highest – some of our highest technology liner hanger and well construction equipment in Mexico, so it was 5% of revenue last year. It’s, it came off hugely, year-over-year. Yes, so we’re down about our run rates down probably 80%, if not a bit more than that, in Q1, and we’re expecting not much of a rebound in Q2. I think at some point they’re going to have to get back to drilling more wells, maybe not back to what it was last year, but we’re having lots of conversations where we know that there is some more – some talks in the way about getting some of the local contractors – getting back to work with through some of the local contractors as well as some of the bigger service companies down there, but that’s probably going to take a little bit of time to work through the system.

I appreciate that. If I can be greedy and slip in one related one, for the U.S. Gulf, it sounds like quarter one deliveries were on the softer side as expected. Can you talk about how, your outlook for the U.S. Gulf business for the rest of 2025 compared to quarter one?

Yes, so Q1 was off a little bit from Q4. We had a really a lot of deliveries in Q4, Q1 was a little lighter as we had expected. It probably picks up a little bit in Q2 and then ramps a little bit harder, in Q4 we’re expecting some deliveries there. So, I think all in all for us we’re thinking yes full year-over-year is probably flattish and ‘25 versus ‘24, it feels like that. I mean it’s a little bit early to say but it feels like ‘26 is probably similar so we got a few customers picking up some activity, a few customers that are softening a little bit, but I think flattish in general it’s just a little bit lumpy quarter-to-quarter given those big deliveries.

Really appreciate it. I’ll turn it back.

Thanks, David.

And your next question comes from the line of Eddie Kim with Barclays. Your line is open.

Hi, good morning. Just wanted to ask about the second quarter guidance. You noted in your slide deck that the market assumptions for continued weakness in Mexico and for slight activity declines in the name land market. And based on what we’re hearing so far from the [indiscernible], just in the past couple of days, it sounds like the NAM Land market could decline more meaningfully in the second quarter on a sequential basis. So, I just wanted to get some more color on your assumption there. And could you also just remind us how much of your business today is exposed to the NAM Land market. I was under the understanding it was about 60%, but if you could confirm that, that’d be great.

Yes, thanks Eddie. So just, in general, roughly half of our business comes from the NAM Land market, about half from the international and offshore market today just to frame that. Adam can probably add some more color on Activity Outlook, but the one specific thing we highlighted on the call is seasonality in Canada with spring breakups. We will see some reduction in that revenue as expected, seasonally light in Q2, and then, as we said there is significant uncertainty around what’s going on in the U.S. land market today. We’re expecting a little bit of softness there but acknowledge there’s some volatility. I don’t know if you want to add anything to that.

No, I mean, obviously we try to, we stay close to what our customers are saying, and just this week we’ve had a couple of folks talk about, reducing CapEx from a little bit to 20-ish, or a little more than that. Obviously, that’s going to take them a little bit of time, so we haven’t seen the impact of that yet, so there might be a little, what we’re estimating is, we start to see a little bit of that at the end of the quarter. But as I said earlier and as I’ll reinforce, we do not pretend to be great prognosticators on the level of activity. I think it’s hard for anybody to do to do accurately. I think what we really take pride in and try to do exceptionally well is being highly responsive to what the market gives us and optimizing our business for the stage of the cycle that we’re in.

Got it. My follow-up is just on kind of preliminary thoughts into the second half of the year. I know that the market is very uncertain, at the moment, but if the NAM Land market does, deteriorate, from here, is it fair to assume that kind of overall, companywide second half revenue and EBITDA should decline from versus first half levels, or will some of those subsea deliveries in the second half of the year potentially provide, a sufficient offset, to make second half look maybe fairly balanced versus first half level? Just any preliminary thoughts on second half.

Yes, it’s probably difficult to quantify at this point just given the uncertainty around what’s going to happen with activity levels, but I think, you make a good point that we will have some international offshore deliveries that’ll be tailwinds to the second half of the year that would definitely help offset any softness in the NAM Land market. And then maybe the other thing I’ll just underscore is to reiterate Adam’s point, we have a very flexible business model, right? If things are slowing down, we’ll be able to take costs out of the business, maintain margins, and we do have this countercyclical cash flow profile that will allow us to generate a lot of cash through those cycles in the market that we look to deploy either through M&A or through repurchasing shares to kind of drive returns. So, I think we have multiple ways to win, even if we are going into a soft period in the market, but yes, it’s very difficult to say exactly what’s going to happen the rest of this year.

Yes, and I think just to add a little bit to that, we are obviously – historically we’ve had a pretty good track record of organically growing market share. I think right now a great example of that is the legacy DWS business that we acquired late last year and been partnered with for a couple of years. They continue to grow market share – and the address they – and that business is really well levered to longer laterals. As those laterals get longer and longer, we need more and more of that kind of drilling optimization products that we provide. So, we have some segments and some parts of the market that we think can outgrow the overall market performance.

Got it. Thanks for that color. And if I could, just squeeze one more in here, just on free cash flow, you said that under normal business conditions the company converts about 50% to 60% of EBITDA into free cash flow. I don’t think it’d be fair to characterize what we’re going through now, as normal business conditions, but wanted to ask what your expectations were for free cash flow this year and if you think that, EBITDA conversion could still hold this year?

Yes, no, it’s definitely an important point. So, when we talk about normal business conditions, we’re thinking more mid-cycle where things are relatively stable and just as a reminder, so our business is very capital lite. We tend to spend 2% to 3% of revenue on CapEx. We do invest in working capital stocking inventory close to our customers to support their activities. So actually, if things are slowing down, we’d expect to generate more than 50% to 60% of our EBITDA converted into free cash flow. It’s during periods of growth that we tend to generate a little bit less than that. So, I think if we’re kind of in a flat to down market over the next year or two, I think that 50% to 60% is very achievable, hopefully a bit better than that.

Understood. Great, thanks for that color. I’ll turn it back.

And we have follow-up questions from David Smith with Pickering Energy Partners. Your line is open.

Hey, thanks for letting me back in. I did want to say congratulations on the first deployment of the VXTE tree. I wanted to ask if you could share any details on the performance of that installation and client feedback, but also, whether you’re seeing any additional customer interest and the VXTE? And if so, how do you think about the path to commercialize that technology?

Yes, thanks, David. It’s a good question. Yes, so that’s a really awesome technology and I think the first installation went very smoothly so that the customer is really pleased with the performance, so huge hats off to our technical team that’s been working on that for quite a long time, from the design all the way through implementation. It went, as smoothly as these kinds of things can go so, I think the customer is very pleased with that initial installation. Yes, we are, and as a reminder, like they asked me the customer estimate was that we could save up to seven days of installation time because this tree directly orients to the tubing hanger and the wellhead and cuts out a lot of intermediate steps that people typically use to deploy trees today in an offshore deep-water environment. We absolutely are getting some more customer interest on the back of that success, as that’s a very long lead time, long sales cycle on subsea trees, but we have a lot of customers who’ve been paying attention for a while and now that it’s been successful, they’re, they want to know more about it. As you know our scale on the subsea tree business today is really pretty small, so I don’t – what we’re evaluating is there an avenue for us to commercialize this technology by getting our customers excited about it and then partnering with their existing tree provider to implement this technology and combine kind of our wellhead tubing hanger technology with the customer’s existing tree supplier so that’s how we’re thinking about it today but again it’s going to take a while for that to actually reveal itself.

Great, that’s all I had. Thank you.

Thanks.

And with no further questions, I will now turn the conference back over to Mr. Adam Anderson for closing remarks.

Thank you very much. Thanks to everybody for joining the call and especially thank you to all our employees for everything that they do to make the company so successful. We’re very pleased with where we’re headed and I look forward to updating everyone on our progress.