NCS Multistage Holdings, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the NCS Multistage Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to Mr. Ryan Hummer, Chief Financial Officer, NCS Multistage. Please go ahead, sir.

Thank you, Yolanda, and thank you for joining NCS Multistage's third quarter 2020 conference call. Our call today will be led by our CEO, Robert Knipper, and I will also provide comments. Before we begin today's call, we would like to caution listeners that some of the statements that will be made on this call could be forward-looking, and to the extent that our remarks today contain information other than historical information, please note that we are relying on the safe harbor protections afforded by federal law. Such forward-looking statements may include comments regarding our future expectations for financial results and business operations and are subject to known and unknown risks and uncertainties, including with respect to the COVID-19 pandemic and its impact on the global economy, oil demand, and our company. I'd like to refer you to our press release issued last night, along with other public filings made from time to time with the SEC that outline those risks. I also want to point out that in today's conference call, we refer to adjusted EBITDA, free cash flow, and net working capital, which are non-GAAP financial measures. We use these measures because they allow us to compare performance consistently over various periods without regard to costs associated with our current capital structure and in a manner that we believe better reflects our operating performance. Our press release and the updated investor presentation posted yesterday, both of which are available on our website, ncsmultistage.com, provide reconciliations of these non-GAAP financial measures to the nearest GAAP financial measure. I'll now turn the call over to our CEO, Robert Knipper.

Thank you, Ryan. and welcome to our investors, analysts, and employees joining our third quarter 2020 earnings conference call. I hope that everyone listening today is healthy and safe. NCS's performance in the third quarter demonstrates the resilience of our team, the strength of our business model and technology, and the effectiveness of cost reduction and liquidity enhancement measures we've enacted over the last several months. During the third quarter, we saw a trough in U.S. rig counts with a gradual increase over the last several weeks. In addition, there was a strong recovery in the number of frac spreads working in the U.S. in August and September. The Canadian rig count rebounded from multi-decade lows, but the seasonal recovery in the third quarter was much more muted than in prior years. Activity in international markets declined slightly, with meaningful variations across markets. As we benefited from market recovery, NCS was able to deliver sequential revenue growth of 87% in the third quarter as compared to the second quarter, with sequential growth of 103%, 146%, and 25% in the U.S., Canada, and international markets, respectively. The improvement in U.S. revenue was primarily driven by our completion-oriented offerings at repeat precision and in our tracer diagnostic service line. We believe that we are continuing to gain share in the competitive composite plug market through repeat precision, where our plugs provide excellent performance that our customers value, with fast running speeds, reliable isolation, and quick and consistent drill-outs. We've seen continued uptake of our new value-oriented tracer diagnostics offering that removes personnel from the location and reduces the overall cost of wellbore clearance diagnostics. We are cautiously optimistic about activity in the U.S. in the fourth quarter. While completion activity has continued to increase thus far in the fourth quarter, we believe that a seasonal slowdown will occur at the end of this year. as it has in past years. In addition, we were all reminded in the second quarter this year how fast completion activity can be curtailed if commodity prices deteriorate further. In Canada, the seasonal rebound in the third quarter occurred later and was much more muted than in prior years, especially for light oil-directed activity in southern Alberta and Saskatchewan, with an average rig count for the quarter of only 46. As with the U.S., Canadian activity has continued to increase from historical lows, with 85 active rigs as of last Friday as compared to approximately 135 rigs this time last year. We've seen an increase in our activity levels in Canada recently with the improvement in the rig count and with growing activity in the light oil plays. International continued to be a bright spot for us in the third quarter, with international revenue representing 20% of our total revenue and growing sequentially as activity increased in Argentina and we remained active supporting our largest customer in the North Sea, While certain international projects have slipped out of 2020 into 2021, primarily due to COVID-19, we continue to make progress to execute on our largest opportunities in the North Sea and the Middle East. A significant amount of our engineering resources are currently devoted to building out our product and service portfolio for these regions, and we recently onboarded our country manager in Norway, who will oversee our operations in the North Sea and business development in Europe. Our efforts to improve the efficiency of our supply chain and reduce our fixed cost base were evident in the quarter. Our gross margin of 37% in the quarter was 10 percentage points higher than in the second quarter and represented an incremental margin of nearly 50%. In addition, we were able to reduce our SG&A by $3 million versus the second quarter and by $8 million as compared to last year's third quarter. We remain on track to reduce our reported SG&A by over $25 million in 2020 as compared to 2019. We have further reduced our CapEx forecast for the year to $2 to $2.5 million. We have also generated $1 million in cash proceeds from asset sales, primarily related to vehicles utilized in field operations. The next several quarters will likely continue to be challenging for our industry and for our company. though we believe that the second quarter represented the trough in the industry activity, followed by the modest rebound we experienced in the third quarter. With the structural cost reductions to our operations in SG&A, an increase in U.S. completions activity from the trough, and the seasonal winter activity in Canada, we believe that we are positioned to return to positive adjusted EBITDA on a quarterly basis in the fourth quarter of 2020 or the first quarter of 2021. In addition, We expect that our free cash flow will improve in the fourth quarter relative to the third quarter, and that we will generate significant free cash flow for the year. I'd like to touch on a couple of matters related to our intellectual property. NCS has dedicated significant time and resources over the years to bring meaningful innovations to our customers that allow them to operate more efficiently and reduce their costs. We currently hold 68 patents across 28 distinct inventions and have over 90 pending patent applications. We respect the intellectual property of our competitors and at times will negotiate. We pursue these patents and these rights to allow us to make an economic return on the investment required to develop and commercialize technology. We take many steps to ensure the strength of our IP portfolio and that our IP position is not infringed upon. While we prefer settling matters commercially, we will pursue our rights in court if needed. Yesterday's earnings release referenced several settlement agreements related to the ongoing litigation with Diamondback Industries. We are pleased that repeat precision has reached a settlement with Diamondback Industries and Derek Drury, which we hope will bring a closure to a matter that has consumed significant time and financial resources over the last two years. We also noted that we have entered into agreements with several parties to license patents related to our airlock case and buoyancy system. We recently received our first royalty payment associated with one of those licenses. As a technology company, we will continue to pursue innovation on behalf of our customers and will continue to defend our intellectual property from infringement. I'll now ask Ryan to discuss our financial results in more detail.