This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk04: 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.
spk00: 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.
spk03: 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.
spk00: Thank you, Robert. As reported in yesterday's earnings release, our third quarter revenue was $16.3 million, 73% lower than the prior year's third quarter. However, on a sequential basis, revenue in the third quarter was 87% higher than in the second quarter, reflecting the recovery and completions activity in the U.S. and the seasonal improvement from the historically low rate count and activity level in Canada in the second quarter. As Robert mentioned, we delivered sequential revenue increases of 103% in the U.S., 146% in Canada, and 25% internationally. Gross profit, defined as total revenue less than total cost of sales excluding depreciation and amortization expense, was $6.1 million in the third quarter, or 37% of revenue. This compared to $28.6 million, or 47% of revenue, in the prior year's third quarter. For a sequential comparison, gross profit was $2.3 million, or 27% of revenue, in the second quarter. Our gross margin percentage increased primarily due to the sharp increase in revenue, which led to better absorption of fixed costs and also benefited from the actions we've taken to rationalize our field service footprint and to improve our manufacturing efficiencies. SG&A costs were $12.5 million in the third quarter, which was $8 million or 39% lower as compared to the $20.4 million in SG&A expense in the prior year's third quarter. It was also $3 million lower than the $15.5 million in SG&A we incurred in the second quarter. Our reported SG&A include share-based compensation and certain non-recurring expenses, including certain litigation costs and severance expenses. In the third quarter, non-recurring severance expenses totaled $0.8 million, while litigation expenses were $1.2 million. Our adjusted EBITDA for the third quarter was negative $2.1 million as compared to $13.6 million in the prior year's third quarter. This represented an improvement of $5.8 million as compared to the second quarter of 2020, however. Depreciation and amortization expense for the quarter was $1.1 million, and our net income attributable to the non-controlling interest was $0.7 million during the quarter, reflecting profitability at repeat precision. Turning now to cash flow items and the balance sheet. Our cash flow from operations for the third quarter was negative $5.6 million, and our net capital expenditures for the third quarter were $0.6 million, resulting in free cash flow for the quarter of negative $6.2 million. Free cash flow for the first nine months of the year was a positive $13.3 million. At September 30th, 2020, We had $8.6 million in cash and total debt of $6 million with our revolving credit facility undrawn. At September 30th, our available borrowing base was $4.2 million and repeat precision has additional borrowing capacity that is separate from our revolver. In addition, NCS has had networking capital of $53 million at September 30th. Turning now to a few points of guidance for the fourth quarter. We currently expect the fourth quarter total revenue to increase by at least 40% as compared to the third quarter. With increases in completions activity, especially in the Permian Basin, we expect our U.S. revenue to increase by 5 to 10% sequentially in the fourth quarter. We expect our international revenue for the fourth quarter to be flat to down 10% from third quarter levels. With the increase in Canadian rig count in the fourth quarter, we currently expect that revenue will increase by approximately 150 to 200 percent in the fourth quarter in Canada as compared to the third quarter. The increase in activity and the full impact of our supply chain initiatives is expected to improve our gross margin in the fourth quarter relative to the third quarter, with incremental margins expected to be 40 percent or higher during the fourth quarter. We expect our reported SG&A, which is inclusive of share-based compensation, non-recurring items, to be between $12.5 and $13 million during the fourth quarter. This includes approximately $1.5 million in share-based compensation and approximately $1.2 million in litigation expenses. We expect our fourth quarter depreciation and amortization expense to be approximately $1.1 million and our net interest expense to be $0.3 million primarily reflecting unused facility fees and the amortization of debt issuance costs. Our expected gross capital expenditures for 2020 have been revised to $2 to $2.5 million, a further reduction from prior guidance, and at the midpoint, 65% below our gross capital expenditures of $6.4 million in 2019. I'll note that all guidance for the fourth quarter excludes any potential benefits related to the Diamondback settlement agreements. Finally, we announced our expected reverse share split in last night's release, which we expect will take effect on December 1st. The primary objective for the reverse stock split is to reach compliance with the NASDAQ minimum bid price requirements to ensure continued listing. I'll hand it over to Robert for closing remarks.
spk03: Thank you, Ryan. Before we open up the call for Q&A, I'll close with a couple of brief comments. While we believe we are past trough market limits, activity levels, we continue to face an uncertain environment and we are focused on the aspects of our business that we can control. We have taken actions to structurally reduce our cost structure while preserving our ability to provide exceptional customer service and drive further innovation and value for our customers. We continue to make disciplined and targeted investments to advance near and long-term opportunities for our business, which will expand our addressable market over time. We have taken steps to enhance our liquidity and preserve our strong balance sheet. Our revolver is undrawn, and we have demonstrated our ability to generate free cash flow over the years. We are positioned to weather the current industry downturn and to benefit from an eventual recovery in the industry activity. In bringing innovations to our customers, we have made substantial investments to develop our intellectual property, and we continue to work to enforce and defend our IP to ensure we make a proper return on those investments. And with that, we'd be happy to take your questions.
spk04: As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. And your first question comes from the line of George O'Leary with TPH and Company.
spk03: Morning, guys. Morning, George. Morning.
spk01: But the guidance call you guys provided was very helpful. I guess the incremental margins were strong, 50% incremental margins in the third quarter, if I remember correctly. You got into 40% plus. I guess what are the puts and takes that could pull that back up closer to third quarter incrementals? Any color there would be super helpful.
spk00: Yeah, George, this is Ryan. Look, I think in the last quarter's call, we got into incrementals being 40% plus, and we ended up coming in a bit ahead of that. And part of that has to do with the mix of revenue in the third quarter. So we were a little bit stronger in the U.S., particularly in tracer diagnostics and in repeat, which have a pretty strong incremental margin profile. The Canadian business didn't pick up quite as strongly during the third quarter as we had anticipated. and international also was a bigger percentage of the overall revenue during the third quarter. So those were the drivers that allowed us to come in at that close to 50% level in the third quarter. As we look forward to the fourth quarter, as you can kind of parse through the guidance, a large percentage of the revenue growth is coming from Canada. And while there's certainly some benefit in, you know, being able to amortize that revenue and better absorb fixed costs in Canada, and then also to realize a full quarter's worth of our manufacturing efficiencies. The incremental margins on product sales in Canada aren't quite as strong as some of the other areas, so that's really what's moderating, I think, the guidance with respect to incremental margins there. And I think we feel pretty good about where we've guided. Certainly, we hope there is potential for some upside there, but we're comfortable with that 40% plus on the fourth quarter incrementals.
spk01: All right, Dan. Very helpful, Ryan. Thank you. And then, Robert, I think you mentioned the composite plug market share early in the prepared remarks. I wondered if you could frame where you guys think you sit from a market share perspective, or if you don't want to give the number, just frame it. How much do you think that market share has improved year-to-date over the last few years? Any way to help us think about market share for y'all in that composite plug business would be helpful.
spk03: Yeah, so if you recall, our first full quarter of commercialization with our composite plug product line was in the first quarter of 2018. And so we've been able to successfully grow market share over time on a quarter-by-quarter basis. When we came into the downturn earlier this year, because of our customer mix, we saw what appeared to be a decline in market share, and it was a fairly significant decline. But as those operators came back to work and our customer mix got back closer to normal, we saw our market share increase to beyond where it was before that downturn. So we believe that we're in the top five in terms of market share for composite plugs in the U.S. and continuing to grow market share.
spk01: Great. Very helpful. And then I'll sneak in one more if I could. That $53 million in working capital that you guys have, can that still be a source of cash even as revenue starts to grow? Or how should we think about free cash flow moving forward with working capital, CapEx, and kind of some moving pieces as we head into 2021?
spk00: Yeah. So, Jordan, I think we'll have some offsetting impacts there. So, as our revenue grows, I think you'd expect to see our receivables tick up a little bit along with that. However, inventory continues to be a source of opportunity for us. We've been able to reduce our inventory by, I think it's $3 million over the last two quarters and expect to be able to continue to bring that down as we continue to utilize existing sleeves, existing tracers in our operations and are very judicious about what we bring back into the company. So working capital will help to offset but might not fully offset – I'm sorry, inventory will work to offset but maybe not fully offset accounts receivable. And then the other piece to that, the big piece within working capital would be payables. And as the business picks up, we'd expect payables to increase a little bit as well, which would also offset some of the receivables growth.
spk04: Thanks for the call, guys. And once again, to ask a question, please press star, then the number one. And your next question comes from the line of Kurt Khalid with RBC. Hey, good morning.
spk02: Morning, Kurt. I appreciate all the color commentary as always. So just wanted to come back around to the reference you made and to the patent lawsuit settlement. So you expect to get a $15 million upfront cash payment. You have general sense as to when you could reasonably expect that to come across?
spk03: Yeah, Kirk. Just keep in mind that that is a lawsuit between Repeat Precision and Diamondback Industries and Derek Drury, so it is Repeat, not an NCS lawsuit. Okay. So where we are currently is there's a bankruptcy confirmation hearing next week. Assuming that the plan that the company has put forward to emerge from bankruptcy is approved by the courts, then we would expect within two to four weeks to be able to start getting those payments.
spk02: Okay. Got it. Thank you. Thank you for that. So as you guys go into the first quarter, you know, Brian, you kind of talked through your incremental margins here in the fourth quarter. I know that there's extreme seasonality that could occur as you roll through second quarter next year on your Canadian business, but Should we think about that, you know, 40% plus, you know, kind of incrementals as kind of think about that for 2021 as something that's reasonable?
spk00: I think when you're looking at a full year, you know, incrementals that are something better than 40% is fair. However, as you alluded to, So, yeah, there's a pretty significant seasonality in our business, which will drive variation quarter to quarter as we would progress through 2021. Okay, got it.
spk02: And then I'm just kind of curious, you know, on the Canadian front, you know, very strong revenue growth expected here in the fourth quarter. By most accounts, the, you know, overall activity is not going to double fourth quarter versus third quarter. So, you know, where do you see yourselves picking up that differential in revenues?
spk03: Yeah, well, as we mentioned earlier, we've had a pretty slow start for activity in the third quarter coming out of breakup, and that's not common for the industry. So we believe that the activity increase will come in from the rig count standpoint. One of the things that has a little uncertainty around it is what's going to be the availability of frack crews in Canada, how many frack spreads are actually going to be on the markets. And can the current frack spreads handle the amount of activity that we see coming into the fourth quarter? So that's kind of a wild card for us is are there going to be enough frack spreads? We think that there will be. But our customer mix is we feel very good about the guidance that we gave for revenue in the fourth quarter.
spk02: Okay. Thank you.
spk03: Thanks.
spk00: Operator, if there are no further questions, I think we will, Robert would like to provide some closing remarks.
spk04: Okay.
spk03: On behalf of our management team and our board, we'd like to thank everyone on the call today, including our shareholders and the research analysts who cover NCS, but especially our employees. I truly appreciate the enormous effort that our people are putting in and the sacrifices that have been made by everyone at NCS to support the company and and each other through this very challenging market environment. We continue to operate safely with zero recordable incidents this year. Our team continues to provide excellent service to our customers and is developing new products and services that will enable our customers to be more successful in the current market environment. Our people have done a tremendous job in managing the many challenges that come with the impacts of COVID-19 on life in general, as well as our industry and our company. We're only as good as our people, and I believe that we have the best team in the industry. We appreciate everyone's interest in NCS Multistage, and we look forward to talking again on our next quarterly earnings call next year. And that will conclude our call, operator.
spk04: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
Disclaimer