NCS Multistage Holdings, Inc.

Good day, and thank you for standing by. Welcome to the Q221 NCS Multistage Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's 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 your speaker today, Ryan Hummer. Please go ahead.

Thank you, Summer, and thank you for joining the NCS Multistage Second Quarter 2021 Conference Call. Our call today will be led by our CEO, Robert Knipper, and I will also provide comments. We would like to caution listeners that some of the statements 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 federal safe harbor protections. 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 the impact of the COVID-19 pandemic on the global economy, oil demand, and our company. I would like to refer you to our press release issued last night, along with other public filings made with the SEC that outline those risks. In today's 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 regards 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 most comparable GAAP financial measure. I will now turn the call over to Robert.

Thanks, Ryan. Welcome to our investors, analysts, and employees joining our second quarter 2021 earnings conference call. Our performance in the second quarter was generally favorable to the guidance we provided in early May. I'll briefly discuss our results and outlook for each of the U.S., Canada, and international markets. Starting with the U.S., Our revenue of $9.2 million in the second quarter represented a sequential increase of 18%, but fell below our guidance as activity at repeat precision was impacted by unanticipated white space in a large customer's completions program. This customer restarted their completion program in June and has had a steady activity plan through the third quarter. With WTI pricing of $65 to $75 a barrel, we have seen increased fracturing systems work in the U.S., as private operators have increased activity in the basins where pinpoint completions using sliding sleeves have demonstrated operational benefits for our customers. Our tracer diagnostics business has benefited as well, with several multi-well pad projects underway. As a result, we expect that sequential growth in the U.S. will continue in the third quarter. Our Canadian revenue of $9.2 million in the second quarter exceeded our guidance range of $5 to $6 million, as warm, dry conditions allowed our customers to begin increasing their activity in early June. Coming out of spring breakup this year, the Canadian rig count has been tracking closely with 2019 levels, indicating a stronger recovery in Canada thus far than in the U.S. We expect the Canadian recovery to continue to track 2019 levels more closely, outpacing activity growth in the U.S. through the remainder of the year. This is also reflected in the most recent survey by Petroleum Services Association of Canada, which recently increased their expectation for the number of wells to be drilled in Canada in 2021 by 18% to 4,250, as compared to their prior expectation of 3,600 in April, and as compared to just under 3,000 wells drilled in 2020. Although the international recovery has lagged that of North America, our international operations picked up significantly for us in the second quarter, with revenue recovering to $3 million for the quarter up from only a half million dollars in the first quarter and ahead of our guidance of one and a half to two and a half million dollars. We believe that international activity will continue to increase as we move into the second half of the year, though it remains difficult to staff projects in several markets due to COVID-related travel restrictions. We remain very focused on managing our costs and have maintained discipline on the SG&A and capital spending. Our SG&A for the second quarter of 2021 decreased by 24% as compared to the second quarter of 2020 and decreased by 8% as compared to the first quarter of 2021. Our net capital expenditures for the quarter were only $3 million, highlighting both the capital-like nature of our business and our financial discipline. We have also retained our strong balance sheet with approximately $8 million in net cash as of June 30, 2021. The borrowing base for our revolver at the end of June exceeded $10 million. We're seeing signs of cost inflation and supply chain stresses impacting our business in employee wages, steel, fiberglass costs, as well as extended lead times for purchases and higher third-party service charges. We're working with our customers to pass through some of these price increases or secure volume commitments that allow us to mitigate these cost increases, but we have not yet achieved net gain in pricing. I'll also point out that we continue to add licensees for our intellectual property related to our airlock casing buoyancy system providing for a growing stream of royalty income. We will continue to assert and defend our intellectual property as we become aware of competitors that we believe are infringing on our intellectual property. Our team at NCS continues to do a tremendous job, and I'm proud to say that we have continued our track record of zero recordable incidents from 2020 into 2021, with no reportable incidents thus far this year. I'll now ask Ryan to discuss our financial results in more detail.

Thank you, Robert. As reported in yesterday's earnings release, our second quarter revenues were $21.5 million, 146% higher than the prior year's second quarter. On a sequential basis, revenue in the second quarter was 25% lower than revenue in the first quarter, with an increase of 18% in the U.S. and an increase of over 500% in international markets, offset by a seasonally driven decrease of 55% in Canada. Gross profit, defined as total revenue less total cost of sales excluding depreciation and amortization expense, was $7.5 million in the second quarter, or 35% of revenue. This compares to $2.3 million, or 27% of revenue, in the prior year's second quarter. For sequential comparison, gross profit was $10.2 million, or 36% of revenue, in the first quarter of 2021. Our gross margin of 35% during the second quarter of 2021 as compared to 36% in the first quarter of 2021 demonstrated our ability to maintain our margin, even with the impact of lower sequential revenue related to the seasonal spring breakup in Canada and additional costs incurred related to the product design changes that we implemented at repeat precision earlier this year. Selling, general, and administrative costs, or SG&A, were $11.8 million in the second quarter. which was $3.7 million, or 24% lower as compared to $15.5 million in the second quarter of last year. Our second quarter SG&A was also $1 million lower as compared to the first quarter. Our reported SG&A includes share-based compensation and certain non-recurring expenses, including certain litigation costs. In the second quarter, our non-recurring litigation expenses totaled $1 million, and non-cash share-based compensation expense totaled $1.1 million. Our adjusted EBITDA for the second quarter was negative $1.6 million. This is a $6.3 million improvement as compared to the prior year second quarter and a decrease of $1.7 million as compared to the first quarter of 2021. Our depreciation and amortization expense for the quarter was $1.1 million and our net income attributable to the non-controlling interest in repeat precision was $0.3 million in the second quarter. Turning now to cash flow items and the balance sheet. Our cash flow from operations for the second quarter was $2.9 million, and our net capital expenditures for the second quarter were $0.3 million, resulting in free cash flow for the quarter of $2.7 million. Free cash flow for the first six months of 2021 is $0.8 million. On June 31st, we had $13.9 million in cash and total debt of $6 million. As of June 30th, our borrowing base under the credit facility was $10.2 million, with $10.1 million of that available, which is net of letter of credit commitments. In addition, repeat precision currently has access to over $4 million in borrowing capacity that is separate from our revolver. NCS had net working capital of $49.2 million as of June 30th as well. Turning now to a few points of guidance in the third quarter. We currently expect our third quarter total revenue to be between $32 and $35 million. We expect our U.S. revenue of $9 to $10 million and international revenue of $1.5 to $2.5 million. We also expect Canadian revenue of between $21.5 and $22.5 million, reflecting the seasonal increase in activity following spring breakup. We expect our gross margin to improve to between 40 and 45%, reflecting the sequential increase in revenue and limited further costs related to the product designs at repeat precision. We expect our reported SG&A, inclusive of share-based compensation and non-recurring items, to be between $10.5 and $11.5 million in the third quarter. This includes approximately $1 million in non-cash share-based compensation and approximately $0.8 million in litigation expenses. We expect that both our gross profit and reported SG&A will be favorably impacted by payroll tax benefits from the US Employee Retention Credit, which is part of the CARES Act, in the third quarter. We expect a benefit of approximately $1.8 to $2 million, which is net of bonus accruals, with over 70% of that benefit reducing our SG&A, with the remainder reducing our cost of sales. We expect our third quarter depreciation and amortization expense to be approximately $1.1 million, and our net interest expense to be $0.2 million, primarily reflecting unused facility fees and the amortization of debt issuance costs. I'll hand it over to Robert to update our full-year 2021 guidance and for closing remarks.

Thanks, Ryan. Our updated full-year guidance for 2021 is as follows. We currently expect full-year revenue of $118 to $125 million, increasing the low end of the range from $110 million previously provided in May. We currently expect full-year adjusted EBITDA of $8 to $11 million, consistent with the calculations in our earning release. This is an increase from the prior provided range of $5 to $10 million. I will note that this does not include any net benefit from the employee retention credit, which we expect to characterize as non-recurring. We are reducing expected gross capital expenditures for 2021. to $0.8 to $1.5 million from the $1 to $2 million range we provided previously. We expect that we will be free cash flow positive in 2021 with the underlying earnings and the benefit from the employee retention credit more than covering the required investments in working capital to support our growth. Within this guidance, we expect a continued improvement in U.S. revenue in the second half of the year with contributions from fracturing systems, tracer diagnostics, and repeat precision. We expect that activity in Canada in the second half of the year will continue to be relatively consistent with 2019 levels. We anticipate that we will remain active in international markets throughout the second half of the year, especially in our North Sea operations, with activity in the Middle East increasing later in the year as field access improves. Visibility remains limited, however, and this guidance assumes a continuation of oil demand normalization throughout 2021 as economies recover and vaccination progress enables more travel, as well as continued OPEC Plus support of the oil market, among other things. Before we open up the call to Q&A, I'll close with a couple of brief comments. We are well positioned for continued sequential growth in our U.S. operations as activity at repeat precision increases and as fracturing systems activity in the U.S. continues to benefit from activity increases by smaller private operators. We maintain a strong position in the Canadian market, which has exhibited much higher trough activity levels this year as compared to 2020, and which has already recovered to activity levels consistent with the second half of 2019. International activity for NCS rebound in the second quarter, and we expect to remain active in international markets, especially in the North Sea for the remainder of the year. We continue to invest in technology to enhance our current products and services, bring new innovations to our customers, and secure our intellectual property. I'm encouraged by the recovery in global oil demand and the success OPEC Plus in managing supply. We believe that there is a strong possibility for a multi-year cyclical recovery of activity for our industry. We have the infrastructure in place to support revenue growth in each of our markets, providing leverage to grow future earnings in our businesses, And our strong balance sheet, working capital position, and borrowing base are strategic assets for NCS and support working capital requirements associated with organic growth. And with that, we'll welcome any questions.

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question comes from Ian McPherson of Piper Sandler.

Thanks. Good morning, Robert and Ryan. How are you? Morning, Ian.

Doing well, thanks.

Good. Pleasantly surprised by the bounce back in Canada. And just for those of us over here who don't follow those fundamentals quite as closely or as familiar with it as you are, I was wondering if you could just help us understand how much of – you know, the retracing 2019 levels already this year. How much of that do you think is government supported or just fundamentally structurally in a better recovery mode than the U.S. so far? And how that plays into your thinking for 2022 growth prospects as you compare your business in the U.S. to Canada? Not guidance for next year, but just thinking out loud with regard to the fundamental drivers.

Right. Well, I mean, you know, activity certainly has increased. If we look at a recount of over 150 right now versus, you know, I think it was 20 to 30 this time last year. I mean, we've got a lot of support in the market. But one of the things I would say that prior to the pandemic, our Canadian customers and the industry in general has learned to live in a way that the U.S. is now learning to live, where generating free cash flow is king and not overspending the way that we have in the U.S. for years. So I think the U.S. or the Canadian market is a little bit ahead of the U.S. market in terms of living within their means. And so we're seeing now with recoveries in pricing, demand starting to recover. I mean, we're almost at within a couple million barrels of pre-pandemic levels. So As we continue to see support in the market and pricing increases, I think we'll continue to see the Canadian customer base continue to increase activity. Okay.

Would you say that the Canadian market has recaptured more of its theoretical upside a year earlier, or do you think that there's just better organic headroom for growth next year, or is it just too too difficult to call right now.

No, I think it's not that far ahead of what it's captured. I think, again, pricing makes a difference. And so the Canadians have been enjoying better pricing than they've had in the past. And so that certainly helps. But I think there's still just organic activity that will continue to increase as demand increases. Okay. Okay.

Brian, you have, I think you said, close to $50 million of net working capital on the balance sheet. It's a large quantum relative to your balance sheet. So do you have any levers in place to augment the harvesting of that over the next couple of quarters or just refresh us on any kind of rules of thumb on optimized working capital relative to the business?

Yeah, absolutely. So we are running with a relatively high, you know, net working capital balance relative to our historical revenue. I think what we've seen is once you get to, you know, mid or later cycle, we can get to a net working capital of about 35% of revenue. So that would be the target as we move forward. And I'd say, you know, we're in a very good position with respect to our receivables. Our collections have been strong. The team's done a great job there. Yeah, we manage our payables, but we don't overly manage the payables. So the biggest lever for us is going to be inventory, and certainly we need volume and activity growth on the revenue side to be able to work down that inventory. And with the growth that we see throughout the year, I think we'll be very efficient with respect to our growth as far as what we add to stock on the inventory side. As far as a lever for managing that network and capital ratio as compared to revenue down, I think the biggest gains that you're going to see for us will be coming out of the inventory side. Okay, got it. That makes a lot of sense.

Thank you both. I'll pass it over. Thanks, Ian.

Again, to ask a question, please press star 1.

It looks like we don't have any more questions. Is that right, Summer?

Yes, there appear to be no more questions at this time. I'll turn it to you for closing.

Okay, thank you. 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 and especially our employees. I truly appreciate the efforts of our employees and the sacrifices that have been made by everyone at NCS to support the company and each other. 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. Our people have done a tremendous job in managing the many challenges that come with the continued impacts of COVID-19. We are only as good as our people, and I am so proud of the team that we have here at NCS. We appreciate everyone's interest in NCS Multistage, and we look forward to talking again on our next quarterly earnings call. Thank you, Summer, and that concludes our call today.

Thank you. This concludes today's conference. Thank you for participating. You may now disconnect.