NCS Multistage Holdings, Inc.

Good day and thank you for standing by. Welcome to the Q3 2021 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 zero. I would now like to hand the conference over to your speaker today, Ryan Hammer. Thank you, please go ahead.

Thank you, Gail, and thank you for joining the NCS Multistage Third Quarter 2021 Conference Call. Our call today will be led by our CEO, Robert Knipper, and I will also provide comments. We'd like to caution listeners that some of the statements made on this call could be forward-looking in nature, 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 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 most comparable GAAP financial measure. I will now turn the call over to Robert.

Thank you, Ryan, and welcome to our investors, analysts, and employees joining our third quarter 2021 earnings conference call. Our performance in the third quarter was generally consistent at a consolidated level with the guidance we provided in early August, with some variations by region. I'll briefly discuss our results and outlook for each of the US, Canada, and international markets. Starting with the US, our revenue of $8 million in the third quarter of 2021 fell short of our guidance range provided on the last earnings call, with reduced product sales at repeat precision and in our fracturing systems product line partially offset by improving performance within our well construction and tracer diagnostics product lines. Historically, we have noted a correlation between oil prices and tracer diagnostics activity on a slightly lagged basis. That correlation appears to be holding as our job volumes increased in the latter part of the third quarter and have maintained so far at those higher levels early in the fourth quarter. Our well construction business, which is more aligned with drilling than completion activity, also improved sequentially. We expect future increases in wells drilled to outpace increases in wells completed as our customers in the U.S. have substantially reduced their inventory of drilled but uncompleted wells. The well construction business has also benefited from a portfolio extension within our airlock case and buoyancy product line, providing customers with additional options while retaining the unmatched reliability history that we've established as the innovator of cost-effective case and buoyancy solutions. We currently expect to deliver modest sequential growth in the U.S. in the fourth quarter, which assumes normal holiday-related field activity declines in the last couple of weeks of the year. Our Canadian revenue of $22.1 million in the third quarter represented sequential growth of 140% as compared to the second quarter of 2021, outperforming the comparable sequential growth in the Canadian land rig count of 111%. Canadian revenue for the quarter was within our guidance range of $21.5 to $22.5 million as activity in Canada continues to track at or above 2019 levels, with a stronger industry recovery in Canada thus far than in the U.S. We continue to leverage our strong presence in fracturing systems in Canada to pull through opportunities for our other product lines. We expect Canadian industry activity to continue to track 2019 levels for the remainder of the year. There is one exciting operational accomplishment I'd like to highlight in Canada. We recently worked with a customer to complete a zipper frack operation using our cemented multi-cycle coil shifted sliding sleeves. There was one frack crew on site and two coal tubing units, allowing for near continuous pumping operations. Both wells had over 100 sliding sleeves and each well was completed in a single tool run using our shift frack close process. which provides additional flexibility during the completions operations and helps to maintain profit in the formation, minimizing sand flow back and post-frack clean-out costs. With zipper frack operations, the customer was able to better maximize completions efficiency while generating a complex fracture network. Turning now to our international operations, revenue during the third quarter of $2.3 million was also within our guided range of $1.5 to $2.5 million. Our activity accelerated as we progressed through the quarter with multiple crews working in the North Sea and operations resuming in Argentina and in September. That momentum has continued into the fourth quarter as we have steady work in the North Sea, ongoing operations in Argentina and China, and have first product sales or trials ongoing in two countries in the Middle East. Our team is doing a great job in navigating the difficulties in staffing projects and several international markets due to COVID-related travel restrictions. With the increased revenue in the third quarter of 2021, we were able to deliver a gross margin of 46%, which exceeded the guided range of 40% to 45% for the quarter and is our highest gross margin percentage since the fourth quarter of 2019. We remain very focused on managing our costs and have maintained discipline on SG&A and capital spending. Our SG&A for the third quarter of 2021 decreased by 12% as compared to the third quarter of 2020 and decreased 7% as compared to the second quarter of 2021. Our net capital expenditures for the quarter were less than $100,000 and have totaled $300,000 for the first nine months of the year, highlighting both the capital-like nature of our business and our financial discipline. We maintain a strong balance sheet with approximately $10 million of net cash as of September 30, 2021, and an increase of $2 million from June 30, 2021. The borrowing base for our revolver at the end of September was nearly $14 million. We continue to experience the early impacts of cost inflation and supply chain stresses, increases in employee wages, steel, fuel and fiberglass costs, as well as extended lead times for purchases and higher third-party service charges. We have selectively implemented price increases and surcharges and will continue to evaluate future price increases as input costs continue to rise. In addition, we are working with our largest customers to secure volume that will allow us to better plan purchases to strategically mitigate these cost increases. Our spend on IP-related litigation matters is expected to increase in the fourth quarter of 2021 and the first quarter of 2022 as we approach trial dates for litigation related to our airlock case and buoyancy system in the U.S. and related to fracturing systems in Canada. Finally, I'd like to share some exciting developments regarding our products serving in the offshore market. We've qualified our Raytech sleeves used in the North Sea with a V0 rating. which means the sleeves were qualified through testing to be gas-tight when run into the wellbore, with testing performed under high load and through temperature cycles. We expect that the V0-rated sleeves will help us to grow our customer base in the North Sea and other offshore markets over time. Taking this even further, we've recently contracted with an international oil company to develop and qualify a completion system to be run in a deepwater subsea application. We're early in the process, and the system will take time to develop, but the relationship with this customer clearly demonstrates our leadership in fracturing systems, product line. I'll now ask Ryan to discuss our financial results in more detail.