NCS Multistage Holdings, Inc.

Good morning, ladies and gentlemen, and welcome to the fourth quarter 2020 NCES multi-stage earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at this time. If anyone should require assistance during the conference, please press tar, then zero on your touchstone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Ryan Hummer, CFO. You may begin.

Thank you, Jerome, and thank you for joining NCS Multistage's fourth quarter and full year 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 need to point out that in today's conference call, we refer to adjusted EBITDA, free cash flow, and free cash flow less distributions to non-controlling interests, as well as net working capital, which are all 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, which are both 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 Robert.

Thanks, Ryan, and welcome to our investors, analysts, and employees joining our fourth quarter 2020 earnings conference call. I hope that everyone listening today is healthy and safe. Today, I'll review some of our key accomplishments during 2020, review our strategic priorities for 2021, and briefly discuss the outlook for each of the US, Canadian, and international markets. After that, Ryan will discuss the fourth quarter results in more detail and speak to our guidance for the upcoming quarter. I'll then provide closing remarks. First, I want to thank our employees. It is through the hard work, dedication, and ingenuity of our people that we were able to navigate the challenging conditions that we faced during 2020, and it takes the effort of the entire team to position us to achieve our near and long-term objectives. We continue to help our customers optimize their operations and maximize the value of their assets by bringing them efficiency-enabling technologies supported by our service capabilities. Our focused product and service offerings deliver changeable value to our customers. Key examples from 2020 and early 2021 include the following. Within fracturing systems, we recently set a record for NCS, completing a 250-stage well in the Montany in a single tool run, utilizing our shift-fract-close method to optimize profit placement. This was part of a three-well pad with over 600 sleeves in which we helped our customer precisely place 99.5% of the planned profit volume. Our terrace sleeves for water flood applications allow for greater control of water injection and therefore sweep efficiency. Sales of these products have begun to increase in Canada recently, and we are actively working to expand the product line. Our Purple Seal Frac Plugs from Repeat Precision provide customers with efficiencies in pump-down and drill-out times, while our factory-assembled Purple Seal Express system that combines our Frac Plug with a setting tool reduces on-site HSE risk during plug-and-purr operations. We have developed a new tracer deployment system, which is optimized for simulfrac operations, allowing us to provide our customers with valuable information in these highly efficient completions. We've also seen continued uptake of our new value-oriented tracer diagnostics offering that removes personnel from the location and reduces the overall cost of wellboard clearance diagnostics. Within well construction, our airlock system provides our customers with greater assurance of landing casing and extended reach laterals, optimizing field development cost. The technology can also reduce case and running time, providing a net savings to the customer. We had our first airlock system installations in Saudi Arabia in 2020, and we've been successful in bundling airlock systems with other well construction products in North America. We provided both sliding sleeves and tracers in an international geothermal test with Deep Earth Energy Production Corp. during the fourth quarter and are excited to be partnering with them. This work is part of Deep Earth's project to develop a 20 megawatt geothermal power facility in southern Saskatchewan. As those of us in Texas can appreciate, this is fully winterized baseload power. While our revenue earned from the applications that support renewable energy and electrification initiatives is small at this point, we are exploring ways to utilize our existing technology and research and development capabilities to participate in opportunities serving the energy transition thing. We deliver all our products and services through an exceptional and highly trained field operations team that support our customers' operations. We operate in a safe and efficient manner in all we do with a commitment to safety that extends to our employees and our customers. We finished 2020 with no recordable incidents and have continued that record into 2021. While activity levels were lower, our employees faced new challenges, such as closing down operations, consolidating facilities, and all of the other challenges related to working in the midst of a global pandemic. I'm very proud of the entire team for staying focused on working safely during this time. Another significant achievement for the team was that we recently passed our annual ISO quality audit without a single recommendation or finding. This is almost unheard of and speaks not only to the dedication and focus that the organization has on safety and best practices, but to the quality of our systems and people as well. 2020 was a challenging year for us, and we're not alone in that regard. Our team rose to the occasion to meet the challenge. We made hard choices that led to material reduction in our workforce and changes in our organizational structure and our supply chain. We closed two field locations and relocated our U.S. assembly operations to better align with supply chain partners. We were able to reduce our SG&A expense in 2020 by over $29 million, or 33% as compared to 2019, and expect that SG&A will decline further in 2021. In 2020, we reduced our gross capital expenditures to approximately $2 million and generated over $1 million in asset sale proceeds. reducing our net capex to $1 million. We also took steps to enhance our liquidity, including amending our revolving credit facility. We ended 2020 with a stronger balance sheet than we had at the end of 2019, increasing our cash balance by over $4 million, while reducing debt by over $7 million, resulting in a net cash position of $9.8 million at the end of the year. One final highlight for the fourth quarter and for 2020 was the settlement the final court judgment related to our historical litigation with Diamondback, as discussed in the last quarter. During the fourth quarter, repeat precision received over $23 million in cash and was also granted ownership of the patent related to our disposable setting tool. As a reminder, NCS invested approximately $16 million in repeat precision through our initial investment in the joint venture in 2017 and a subsequent earn-out payment in 2019. Through the end, of December of 2020, NCS has received nearly $26 million in distributions from repeat while still retaining our 50% ownership position. It has been a great investment for us. Turning now to 2021, our strategic priorities for the year are straightforward. First, as a technology company, we will continue to bring tangible value to our customers through our differentiated product and service offering. In this, we aim to commercialize new products that will facilitate both near-term opportunities and position us for long-term growth within the oil and gas industry and serving energy markets more broadly. We look forward to discussing some of the new products we are working on as they are proven out during field trials and launched commercially. Second, we will continue to strive to have revenue performance that exceeds underlying industry activity trends in each of the U.S., Canada, and international markets. We are focused on growing our international business, international increase from 8% to 11% of our total revenue last year, and we expect international revenue to grow as a percentage of our total revenue again in 2021. And finally, we aim to generate free cash flow in 2021. Our Capital Light business model facilitates free cash flow generation through our ability to generate free cash flow in 2021 will depend on the rate of growth in the business through the year and the resulting working capital needs to support it. I'll now briefly review the market environment and our current strategies in each of our geographic markets. Starting with Canada, our current expectation for full-year industry activity is flat to modestly lower. Drilling activity in the first quarter has increased seasonally as expected from the fourth quarter of 2020, but remains more than 3% lower than last year's first quarter. We believe that we are well positioned to grow our revenue in Canada in 2021 as compared to 2020, despite our expectation for slightly lower levels of industry activity. Our sales and business development team in Canada is exceptional and has remained highly engaged with our customers throughout the pandemic. They are delivering our strategies in Canada to cross-sell our products to existing fracturing systems customers, commercialize new products, and grow our market share in under-penetrated regions, including the Monteney. These efforts showed up in our fourth quarter 2020 Canadian results with a sequential revenue increase of 279%. That increase is from an artificially low base influenced by a later than normal emergence from spring breakup in 2020, but the momentum has carried into early 2021. The performance is the team effort. We're developing the right products, leveraging our technology center, and our sales and operations teams are working seamlessly to deliver the kind of results I discussed earlier for our customers. In the U.S., our current expectation is that industry capital spending will be flat to 10% lower in 2021 than in 2020, but that drilling and completion activity will increase on a sequential basis as we progress through the year. We currently expect that our U.S. revenue will be lower in the first quarter of 2021 than in the fourth quarter of 2020, primarily related to decreasing activity at repeat precision. Repeat loss of market share with existing customers in late 2020, as we've seen competitors reducing pricing to what we believe to be unsustainable levels, especially going forward if there is continued pressure in raw material prices. During the first quarter, we've already gained some of the share back due to performance issues experienced by our competitors, and we are confident that we will continue to increase our market share. Our products and services deliver value beyond the sales price, and customers are recognizing that. While we believe our efficient manufacturing and supply chain would allow us to compete on price with even the most aggressive competitors, we choose to balance fair pricing with world-class products and service delivery for our customers. we will continue to monitor the market and make decisions accordingly. Late in the fourth quarter and into the first quarter, repeat also experienced growing pains related to a new plug design that we had introduced. Performance for the new design, while robust, was below the high standards that we hold ourselves to. We have since modified the design and have seen the performance improvements we expected. We have since gained work with new customers and are participating in increasing activity with existing customers. Revenue has been improving as we progressed through the first quarter, though with our high exposure to the Permian Basin, or through our high exposure to the Permian Basin, we were materially impacted by disruptions from the recent winter storm. We expect that repeat will return to sequential growth in the second quarter of 2021. Outside of repeat, the recent increase in commodity prices provide us with additional opportunities within our tracer diagnostics product line, which some customers view as more discretionary as well as our fracturing systems product line, as many of the areas where sliding sleeves can deliver clear benefits to our customers in the U.S., such as in the Central Basin Platform and the Powder River Basin, have a break-even oil price that is below current strip pricing and are populated with private operators who have been adding activity in recent months. We believe that industry capital spending outside of North America will increase slightly in 2021 as compared to 2020. but that the increases will be weighted to the second half of the year. We continue to grow our international customer base with our international operations representing a greater share of our overall business over time. The North Sea remains an important market for us, and we continue to grow our presence in the Middle East. I mentioned our sale of airlock systems in Saudi Arabia earlier, and we also recently completed our first fracturing systems job in the UAE. We have a successful contract and partnership in place in Oban and expect to participate in that market with additional product lines and with additional customers in 2021. In addition, activity has resumed in areas that were subject to extended COVID-related shutdowns, including Argentina and China. While we believe we can outperform industry activity based on the value proposition of our products and services, we remain committed to cost discipline. supporting our gross margins and managing capital expenditures and SG&A. We believe the investments and initiatives over the past several years, including our investment in repeat precision and our technology center, provide us with opportunities for capital efficient growth and increased cash flow, free cash flow over time. Maintaining our cost position is critical given the current industry environment. We're in a very competitive industry. and one in which the activity levels for our customers continue to be depressed as compared to historical levels. We have taken the difficult steps to right-size our operations for the current market environment, and we'll be ready to react if industry conditions change. I'll now ask Ryan to discuss our financial results in more detail. Ryan?