Good morning. My name is Joelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Pason Systems Inc.'s Fourth Quarter 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. 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, then the number one on your telephone keypad. If you would like to withdraw your question, please press star two. The contents of today's call are protected by copyright and may not be reproduced without the prior written consent of Pason Systems Inc. Please note the advisory is located at the end of the press release issued by Pason Systems yesterday, which describe forward-looking information.
Certain information about the company that is discussed on today's call may constitute forward-looking information. Additional information about Pason Systems, including the risk factors relevant to the company, can be found in its Annual Information Form. Thank you. Celine Boston, CFO, you may begin your conference.
Thank you, operator. Good morning, and thank you for attending Pason's 2022 Fourth Quarter Conference Call. I'm joined on today's call by Jon Faber, our President and CEO. I'll start today's call with an overview of our financial performance in the fourth quarter and 2022 fiscal year. Jon will then provide a brief perspective on the outlook for the industry and for Pason, and we will then take questions. I'm pleased to report on Pason's fourth quarter and full year 2022 results. Pason's 2022 annual financial results represented significant improvements from 2021. Throughout 2022, we saw improved industry conditions, increasing demand for our products and technologies. We were able to defend our strong competitive positioning and demonstrate our high operating leverage.
In 2022, we generated $335 million in revenue and $160 million of adjusted EBITDA, which represented 48% of revenue. These are the highest annual levels achieved by Pason since 2014, which was a record year for Pason. These annual levels exceed what was generated for both revenue and adjusted EBITDA in 2018 when North American land drilling activity was 36% higher. Net income attributable to Pason for the year ended December 31, 2022 was $108 million, a 218% increase from $34 million in 2021. Throughout 2022, Pason incurred $34 million of net capital expenditures.
These investments reflect the ongoing refresh of our technology platform as customer demand for our DataLink product offering continues to grow, fleet maintenance for our field service presence, and also an element of catch-up on the lower levels of capital expenditures that were seen in 2020 and 2021, which were CAD 5 million and CAD 10 million, respectively. With the challenges seen within global supply chains during the year, roughly 50% of this CapEx was incurred in the fourth quarter as these challenges began to ease. Free cash flow generated in 2022 was CAD 70 million, up 28% from the CAD 55 million generated in 2021, and of which over 60% was returned to shareholders through our quarterly dividend and share repurchase plan. Moving on to the fourth quarter.
Pason generated consolidated revenue of CAD 94.4 million in the fourth quarter of 2022, a 50% improvement over the fourth quarter of 2021. With this revenue, Pason posted CAD 48.9 million in Adjusted EBITDA, which represented 52% of revenue, a significant increase from the CAD 24.2 million or 39% of revenue generated in the fourth quarter of 2021, and a continued demonstration of our mostly fixed cost base. All of the company's business segments contributed to the strong quarterly results. Our North American segment set a new quarterly record level for Revenue per Industry Day at CAD 890, beating the previous record of CAD 870 in the third quarter of this year.
This result benefited from a strengthening US dollar in the quarter, but also represents maintained leading market share and an improved pricing environment. Resulting North American revenue was CAD 77.7 million in the fourth quarter, a 54% increase from the fourth quarter of 2021, while segment gross profit increased by 84%. Both of these results once again outpaced the improvement in underlying industry conditions. Similarly, activity levels and revenue generated per day in our international end markets also improved year over year, and revenue generated by the international business unit was CAD 14.4 million in the fourth quarter, a 29% improvement from the fourth quarter of 2021. Segment gross profit was CAD 6 million in the fourth quarter of 2022, a 63% increase from the CAD 3.6 million generated in the fourth quarter of 2021.
Energy Toolbase, our emerging business in the solar and energy storage market, posted a record quarterly revenue result with CAD 2.3 million generated in the fourth quarter of 2022, double the results seen in the fourth quarter of 2021. Fourth quarter revenue for this segment benefited from commissioning of control system projects and improved pricing on its economic modeling software tool. It is worth noting that reported quarterly revenue for this segment will fluctuate with the timing of control system installations. Sequentially, both revenue and Adjusted EBITDA results improved slightly from the third to the fourth quarter of 2022, despite activity levels in North America remaining relatively flat. With respect to our cost structure, our fourth quarter results highlight our mostly fixed cost base and our ability to benefit from higher levels of revenue within this context.
We will continue to see increases in variable elements of our cost structure and will continue to work to manage inflationary effects on our business, which for us is most impactful around the cost of our people. These effects, along with changes in foreign exchange and the relative mix of rigs within our end markets, could have an impact on quarterly margins in the coming quarters .Our fourth quarter Adjusted EBITDA results of CAD 49 million is the highest level that Pason has seen since the fourth quarter of 2014 when rig counts were significantly higher. Net income attributable to Pason for the three months ended December 31, 2022 was CAD 36.3 million or CAD 0.44 per share, a significant increase from the CAD 11.1 million or CAD 0.14 per share generated in the fourth quarter of 2021.
Our balance sheet remains strong and incredibly well-positioned to make strategic investments while returning meaningful cash flow to shareholders. As mentioned earlier on the call, we spent CAD 16 million in net capital expenditures in the fourth quarter in support of our core business as supply chain challenges began to ease. Also, in the fourth quarter, we made incremental investments in Intelligent Wellhead Systems and emerging completions technology business through a CAD 8 million increase in our minority ownership position and a CAD 25 million preferred shared financing agreement, of which CAD 10 million was funded in the fourth quarter to accelerate growth capital plans. We remain committed to shareholder returns and in the fourth quarter, returned CAD 15.6 million to shareholders through dividends and share repurchases, which reflected our increased dividend level of CAD 0.48 per share annually.
We ended the quarter with no interest-bearing debt and CAD 172 million in total cash. In summary, we are very proud of our 2022 results, which continue to reflect our leading market presence, our strong operating leverage through improving activity levels, and our pristine balance sheet. I will now turn the call over to Jon for his comments on our outlook.
Thank you, Celine. Our fourth quarter financial results again showed strong year-over-year growth compared to the fourth quarter of 2021. North American industry activity grew 34% year-over-year in the quarter. Pason again outperformed the growth in underlying drilling activity with a 50% increase in consolidated revenue. Full year revenue increased by 62%. Adjusted EBITDA increased by 120% compared to 2021 levels. We posted another quarterly record for North American Revenue per Industry Day in the quarter due to strong product adoption and improved price realization while maintaining our leading market share position. North American annual revenue was at its highest level since 2014, while our international business unit posted its highest annual revenue since 2009.
Energy Toolbase annual revenue increased by 75% due to the installation of additional energy storage systems and stronger price realization for our economic modeling software tool. We remain focused on maintaining appropriate control over our operating and capital costs with our most significant cost increases coming in areas that directly impact our service and technology advantages and providing capacity for additional revenue growth. The macro environment continues to be challenging. The interest rate hikes implemented by central banks in response to high prevailing levels of inflation have created global recessionary economic conditions. Warmer than expected winter weather has resulted in a collapse of Henry Hub gas prices from a high of just over $7 in late December 2022 to approximately $2.50 today. While approximately 15% below five-year averages, total crude and petroleum product inventories have moved upward from their lows in recent weeks.
We anticipate these factors could lead to some modest near-term declines in drilling activity, particularly in natural gas basins. On the other hand, the ongoing development of additional LNG capacity, geopolitical instability, recovering oil demand as China emerges from COVID-19 restrictions, and increased US oil exports through Europe provide support to demand for North American oil and gas production. On the supply side, the announced reductions in Russian oil production, analyst estimates of tight OPEC spare production capacity, and the completion of releases from the US Strategic Petroleum Reserve also stand as potentially bullish indicators for North American land drilling activity. Oil prices remain at a level that can generate strong financial returns for our customers and justify continued drilling activity. As a result, our medium-term outlook for continued slow, steady growth in North American land drilling activity remains unchanged.
The ability to increase the land rig count to increase oil supply will be challenged by the tight, high-spec rig market and availability of labor. In short, we continue to see downside risk to industry activity being limited by the fundamentals of supply and demand, while the growth rate on the upside is constrained by rig and labor availability. Beyond some potential for near-term pressure on drilling activity, we expect to generate growth through modest increases in industry activity, as well as continued opportunities to realize increases in product adoption and pricing as we deliver additional benefits for our customers. We expect capital spending of approximately CAD 45 million in 2023 as we pursue opportunities to renew and extend the capabilities of important parts of our hosting platform. This will further solidify our leading position and reinforce our foundation for future product development and continued revenue growth.
We continue to position ourselves for future revenue growth through investments in the solar and energy storage business through our majority ownership in Energy Toolbase and in the oil and gas completions market through our non-controlling interest in Intelligent Wellhead Systems. In the fourth quarter, we increased our ownership stake in Intelligent Wellhead Systems through the purchase of CAD 7.9 million of outstanding common shares. We announced an agreement to invest an additional CAD 25 million to fund accelerated growth, CAD 10 million of which was funded late in the fourth quarter of 2022.
The timing of further investments in IWS will be subject to the growth outlook for the business, and we currently anticipate funding additional capital later in the first quarter or early in the second quarter of 2023. We remain committed to returning capital to shareholders through our regular quarterly dividend and through share repurchases. We returned CAD 43 million to shareholders in 2022, and we are maintaining our quarterly dividend at CAD 0.12 per share. The strength of our business allows us to make the required investments to secure our position as the leading provider of the drilling data and technologies to pursue additional sources of revenue outside of the oil and gas drilling market and to return meaningful capital to shareholders.
We remain focused on ensuring that Pason is an innovative, profitable, and responsible company, and we would now be happy to take any questions.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the 1 on your touch-tone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be polled in the order they are received. Should you wish to decline from the polling process, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question. Your first question comes from Keith MacKey with RBC. Please go ahead.
Hi, Jon, Celine. Good morning. Thanks for taking my questions.
Morning, Keith.
Just wanted to start off on the products and price adoption. You mentioned they've been big drivers of growth and Revenue per Industry Day in 2022. How do you frame the upside in those metrics from here going through 2023 with a mix of macro factors in Canada, US, and international?
A good question, Keith. I guess I'll even segment the question on product adoption a little bit into kind of existing products and on the new product side. I think if we look and we say on the pricing side first, we think we have opportunities for continued price realization going through 2023. We've delivered a number of things on the product side in the last year that we think will support some of that on the pricing side. In the product adoption side, you know, data delivery is something we've talked an awful lot about the last couple of years. I think we'll continue to see adoption on the data delivery side.
A little bit on the new product side, there's a few things that'll come in, 2023 that I think we'll see some incremental revenue from. Some of the CapEx that we're talking about in a 2023 environment, we talk about kind of refreshing, renewing some of the core infrastructure. I think some of those investments are not directly revenue generating today. Those are really to set us up for some more price realization and some ideas we have on the product development side where we need to renew and refresh the core infrastructure to set us up for that.
That's helpful context. Thanks for that. Just to follow up on the North America versus international sort of discussion, how do you think about your revenue growth in those two jurisdictions through 2023? Do you think international will outpace North America or will some of these some of these factors offset and lead things to look differently than that? Because I think there's certainly a lot of expectation that international growth will start to outpace North America, but any context you have on your business in that discussion would be helpful.
I think I would say we would probably see it the same way in terms of growth rates, right? I think we probably have certainly in some of our international markets, we would expect higher growth rates than the North American market in 2023. In terms of the impact on the overall business, you know, the aggregate revenue growth may still be larger from the North American markets just by virtue of the relative size of the international markets versus the North American markets for us.
Okay. That's helpful. Thanks very much.
Great. Thanks, Keith.
Your next question comes from Cole Pereira from Stifel. Please go ahead.
Hi. Good morning, everyone.
Morning, Cole.
Assuming we end up in more of a flat activity environment, how should we be thinking about margins? I mean, you touched on pricing a bit and suspect you can slow down some R&M, but do you maybe lose some efficiency gains as well?
Hey, Cole. Good question. I mean, fourth quarter margins of 52% were in the range of the highest margin levels that this business has ever seen. I think, you know, when we talk about potential modest declines in rig counts in the U.S. I would say that's more of a short-term view. You know, we view that the slow growth and steady pace of increases will pick up in the second half of the year. I wouldn't really view any meaningful changes in our fixed cost base in that short term. I'd, you know, I'd say, quarterly margins will fluctuate. When you look back at the years where we were generating these level of margins that are record levels for the company, you would see...
For 2014, for example, you do see some quarterly fluctuations, kind of in the range between the mid-40s and mid-50% range, depending on the mix of rigs, and then we've also seen some fairly significant swings in foreign exchange in recent quarters that have worked in our favor. I would say you're gonna continue to kind of see that quarterly fluctuation potentially.
Maybe just to add one thing, Cole. It's maybe not obvious when you think about the numbers in terms of capacity increments and those sorts of things. We've had quite a bit of investment over the last couple of years sizing the organization for higher levels of activity. We've talked about the investments we've made in people, both on the service side and the technology side. You know, obviously as things start to flatten a little bit from the growth rates we've seen previously, you know, we won't be bringing on new people at quite the same rate. You'll have to remember that anybody who's been in an organization for 1 year versus 2 years, you know, people who have that second year of experience have quite a bit more functional capacity, right?
You think about the capacity that it takes to train the new person from your existing people. So I would say, you know, you're not necessarily gonna see the cost increases, but it will have effective capacity increases will still continue to be reasonably significant, I think, through 23, both on the service side and the technology side, by virtue of the fact that we have a fuller complement of wonderful people here.
Got it. Yeah, that makes a ton of sense. You know, acknowledge that your business has maybe a bit less forward visibility than some of the other services. How have conversations with customers been going just about the next few months? Obviously, we've seen the broader fluctuations in the rig count, but, you know, are some customers picking up rigs? Are some, you know, talking about dropping them?
Yeah, we've certainly seen some of the rig count come off, right, as you sort of indicated. You know, it's possible we could see a little bit further declines from where we are currently. I don't think we're gonna see significant declines from where we are currently. Right? It's, it's more pronounced on the gas side, as you'd know when you see the Henry Hub price moving down as it has. There, there's a couple of offsets there, right? You know, first of all, not all operators get the Henry Hub price, right? Some people do realize quite a bit higher prices for their gas based on what their end markets are.
You may see some movement between rigs that will go from the gas side more, become more oil-directed to the extent that they can do that within the same operating basins. It's also, you know, possible that some people, because you have a fairly tight rig market, some people may continue to drill through a little bit and maybe leave a few more wells uncompleted, but continue the drilling programs to maintain access to those rigs. From where we are today, yep, likely we could see some modest declines, but we don't think it might be quite as significant as what the market might be expecting.
Got it. Okay, perfect. That's all for me. Thanks. I'll turn it back.
Thanks, Cole.
Ladies and gentlemen, as a reminder, should you have a question, please press the star followed by the one. There are no further questions at this time. Please proceed.
Thanks very much, and we appreciate the time that you've taken to join us this morning for our update on the fourth quarter and the full year of 2022. We'll look forward to talking again in early May following the release of our first quarter results. Until then, if you have questions, you can certainly reach out to Celine and myself at any point, and we would be happy to take your calls. Thanks very much and have a terrific day.
This concludes the conference. Thank you everyone. You may now disconnect.