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.

Thank you, Robert. As reported in yesterday's earnings release, our third quarter revenues were $32.4 million, 99% higher than the prior year's third quarter. On a sequential basis, revenue for the third quarter was 51% higher than revenue during the second quarter, with an increase of 140% in Canada, which was supported by seasonal activity increases, offset by a decrease of 13% in the U.S. and 25% in international markets. Gross profit, defined as total revenue less total cost of sales, excluding depreciation and amortization expense, was $14.8 million in the third quarter, or 46% of revenue, as compared to $6.1 million, or 37% of revenue in the prior year's third quarter. Gross profit for the third quarter of 2021 included approximately $0.8 million in employee retention credit benefits, net of associated bonus-related accruals. For a sequential comparison, gross profit was $7.5 million, or 35% of revenue in the second quarter of 2021. Our gross margin of 46% during the third quarter of 2021 is our highest quarterly gross margin percentage since the fourth quarter of 2019. This demonstrates the operational leverage in our business as revenues increase due in part to structural cost reductions that we've made over the course of the last 18 months. Our SG&A costs were $11 million during the third quarter, which was $1.5 million lower as compared to the $12.5 million from the third quarter of last year. Our third quarter SG&A was also $0.8 million lower sequentially as compared to the second quarter. I'll remind you that our reported SG&A includes share-based compensation and certain non-recurring expenses, including litigation costs. In the third quarter, our non-recurring litigation expenses totaled $0.9 million and non-cash share-based compensation expense totaled $1 million. Our SG&A expense in the third quarter of 2021 also included approximately $1.1 million in net employee retention credit benefits. Our adjusted EBITDA for the third quarter was $4.2 million, which was a $6.3 million improvement compared to the loss of $2.1 million in the prior year's third quarter, and was an increase of $5.8 million as compared to the second quarter of 2021. Our depreciation and amortization expense for the third quarter was $1.2 million. Net income attributable to the non-controlling interest in repeat precision was $0.4 million for the quarter. Turning now to cash flow items and to the balance sheet. Our cash flow from operations and free cash flow for the third quarter were each $5.6 million. Our free cash flow for the first nine months of 2021 is $6.4 million. On September 30th, 2021, we had $18.4 million in cash and total debt of $8.2 million, which was comprised entirely of capital lease obligations. On September 30th, our borrowing base under the credit facility was $13.7 million. In addition, repeat precision currently has access to over $4 million in borrowing capacity, which is separate from our revolver. We had net working capital of $48.7 million on September 30th, 2021 as well. Finally, a few points of guidance for the fourth quarter. We currently expect our total revenue in the fourth quarter to be between $33 and $36 million. Within this, we expect our U.S. revenue to be $8.5 to $9.5 million, and our Canadian revenue to be between $20.5 and $21.5 million. We also expect international revenue of $4 million to $5 million, which is an increase from the third quarter primarily driven by higher activity in the North Sea. We expect our gross margin to be between 43% and 46% during the fourth quarter, reflecting the modest increase in quarterly revenue, including the additional activity in international regions. We expect our reported SG&A, inclusive of share-based compensation and non-recurring items, to be between $12 million and $13 million in the fourth quarter. This includes approximately $1 million in non-cash share-based compensation and approximately $1.3 million in litigation expenses. We expect an increase in other income in the fourth quarter, primarily related to a technical services agreement and support agreement for tracer diagnostics activity in Oman. While we expect that we would qualify for the ERC employee retention credit in the fourth quarter, our guidance excludes any potential benefit related to this in the fourth quarter, as the provisions in a proposed infrastructure bill would terminate the benefit as of September 30th if passed. We expect our fourth quarter depreciation and amortization expense to be approximately $1.3 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 now hand it over to Robert to update our full year 2021 guidance and for closing remarks.

Thank you, Ryan. Based on our year-to-date results and the guidance for the fourth quarter that Ryan mentioned, our updated full year guidance for 2021 is as follows. We currently expect full-year revenue of $115 to $118 million and full-year adjusted EBITDA of $8 to $10 million, consistent with the calculations in our earnings release. This range does not include any net benefit from the employee retention credit, which we characterize as non-recurring. Our expected gross capital expenditures for 2021 is $1 million or less, and we expect that we will be free cash flow positive in 2021. Within this guidance, we expect our activity levels in the fourth quarter in the U.S. and Canada to be consistent with activity levels in the third quarter, and activity increases in October and November offset by the typical holiday slowdown in the last two weeks of the year. We anticipate that we will remain active in international markets throughout the fourth quarter, especially in our North Sea operations, with increased activity in the Middle East and Argentina as well. Before we open up the call to Q&A, I'll close with a couple of brief comments. We are well positioned to return to sequential growth in our U.S. operations with recent momentum in our well construction and tracer diagnostics product lines, complemented by expected improvement at repeat precision. We maintain a strong position in the Canadian market, where the industry has recovered faster than the U.S. and continues to track 2019 levels. International activity for NCS is expected to increase in the fourth quarter, with higher activity in multiple geographies and across multiple product lines. Our team at NCS continues to do a tremendous job operationally, 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. We continue to invest in technology to enhance our current products and services and bring new innovations to our customers and secure and protect our intellectual property. I'm encouraged by the recovery in global oil demand and the success of OPEC Plus in managing supply. We believe there is a possibility for a multi-year cyclical industry recovery. We have the infrastructure in place to support revenue growth in each of our markets, providing leverage to grow future earnings in our business, and our strong balance sheet, networking 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.

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 the line of John Daniels. Your line is open.

Hey, guys. Good morning, and thank you for putting me in the Q&A. No problem. I just have one question for you. You made a comment about starting field trials in two countries in the Middle East. Can you just do a quick tutorial? Once you start field trials, what's the time to prove out product? When do you expect to see orders? Just walk us through that process.

Yeah, that's a great question. In the Middle East, it depends really on where one is. As an example, with Saudi Aramco, it took us probably two and a half years from start to finish to be able to get what's called cataloged so that we could actually start selling products to them. Each product that we fill trial or that we get accepted or cataloged with Saudi Aramco does require going through a particular process. But there are some other countries in the Middle East and elsewhere around the world where that's not that long of a process. So you could be, you know, from field trials, you can move immediately into generating revenue. So with the field trials that we have, we have a bit of a mix, and, you know, the timing on starting to see revenue as a result of these field trials should be within the next, you know, conservatively within the next 12 months. Okay, great. Thank you very much. John?

Your next question comes from the line of . Your line is open.

Hi. Thanks for those comments. This is from Arrowhead. Good morning. um so i just wanted to congratulate you on a good quarter and i just had some uh if i was just wondering if it could give some color on your revenue profile by geography um so obviously you've achieved stellar revenue growth in canada so i was just wondering uh would you put this on a one-time bounce back because of the covet period or because you've got some projects in a gush, or do you think that these revenue levels are more sustainable? I know you're expecting something along the same lines in Q4, but maybe if you could just expand it to the next four quarters, how would it look? And then I also have a follow-up question on the U.S., if you could answer that as well.

Yeah, sure, Aditya. Good morning. I'll take that. So I think with what we see in Canada, certainly – While the market has bounced back faster than in the U.S., I think what we're seeing is continued strong indications from our customers for a very active winter drilling season through the fourth quarter and into the first quarter of next year. At this point, budgets are still being developed, but we would certainly expect there to be activity growth, more than double-digit activity growth in Canada in 2022 As compared to 2021 and with with where we sit within our various product lines with the market share that we have in fracturing systems. We would certainly expect to participate in that and then be able to potentially grow faster than the market within the other product lines as we continue to execute on our cross selling strategies to enhance the market share that we have across. tracer diagnostics, well construction, and also pulling through some additional work for repeat precision in the plug-in perf market in Canada over the course of 2022 as well.

Thanks for that. And then on the U.S., I was just wondering, are you a little disappointed or are you a little concerned with your performance? I know that Robert mentioned that you're expecting recovery over the coming few quarters, but how do you see things improving? When, for example, do you expect things to return to normal, to stabilize? And are you at all worried with what you're seeing?

No, I wouldn't say that we're worried about it, but I'm certainly disappointed in the performance that we've had the last couple of quarters in the U.S. While we've continued to grow in the U.S. market, we haven't grown at the rate that we had hoped we would. For a A couple things that I mentioned, one fracturing services and the other being some product sales of repeat precision. At repeat precision, we had had a product launch earlier in the year of a product. We had a lot of runs on it, and then we found that there was an issue with the design. We had to pull that product off the market. We have redeveloped or we've addressed those issues that we learned. We're back into the market now with the improved product. Our success rate is actually higher than the previous product that we had out there, and we do expect to continue to grow the repeat precision business again in the U.S. market. And we expect to, again, beginning in the first quarter, continue to have sequential growth in the U.S. market.

Great. Thanks, Ryan. That's very helpful.

Thank you.

As a reminder, to ask a question, you will need to press star 1 on your telephone. There are no further questions at this time.

Thank you, operator. On behalf of our management team and our board, we'd like to thank everyone on the call today, including our shareholders and research analysts, and especially our employees. I truly appreciate the tireless effort of our employees and the sacrifices that have been made by everyone at NCS to support the company and each other. I'm excited to return to growth after our team continues to provide excellent service to our customers and is in developing new products and services that will enable our customers to be more successful. We are taking on the demanding and technically challenging work and delivering results to our customers. Our people have done a tremendous job in managing the many challenges that come with continued impacts of COVID-19. We are only as good as our people, and I believe 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. Thank you, operator. That concludes our call.

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