NCS Multistage Holdings, Inc.

Good day and thank you for standing by. Welcome to the fourth quarter 2021 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. If you require any further assistance, please press star 0. I would like to hand the conference over to your speaker today, Ryan Hummer, Chief Financial Officer. Please go ahead.

Thank you, Victor. And thank you for joining the NCS Multistage fourth quarter and full year 2021 conference call. Our call today will be led by our CEO, Robert Knipper, and I will also provide comments. I want to remind listeners that some of today's comments include forward-looking statements, such as comments regarding our future expectation for financial results and business operations. These statements are subject to many risks and uncertainties that could cause our actual results to differ materially from from any expectation expressed herein, including the impact of the COVID-19 pandemic on the global economy, oil demand, and our company. Please refer to our latest Securities and Exchange Commission filings for our risk factors and cautions regarding forward-looking statements. Our comments today also include non-GAAP financial measures, including adjusted EBITDA, free cash flow, and net working capital. The underlying details and reconciliations of non-GAAP to the most comparable GAAP financial measures are included in our fourth quarter and full year earnings release, which can be found on our website, ncsmultistage.com. I'll now turn the call over to Robert.

Thanks, Ryan, and hello to everyone joining our call this morning. I'll review our performance and accomplishments in 2021, how our actions during 2021 have positioned us to capitalize on the growth opportunities we have ahead of us, and our strategic objectives for 2022. Ryan will follow and cover details of our quarterly performance. 2021 was marked by an increase in underlying industry activity from the trough levels experienced in 2020. Completions activity in the U.S. outpaced drilling activity, especially early in the year as the inventory of drilled but uncompleted wells was drawn down. The growth in drilling activity began to outpace completions activity late in 2021, and we expect that to continue through 2022. The Canadian market recovered nicely in 2021 as well, with strong activity levels in the second half of the year that eclipsed activity during the first quarter, which is a bit unusual based on the typical seasonal conditions in that market. Activity in the second half of 2021 outpaced 2019 levels during the same period, indicating that Canadian activity has already recovered to pre-pandemic levels, which we see continuing through 2022. Activity in international markets was a bit more challenged in 2021, primarily due to the continued impacts of COVID, which hampered our ability to effectively and efficiently mobilize our personnel and limited the ability to meet with customers in person. These restrictions began to ease in late 2021, and market and customer access continues to improve in 2022. Against this backdrop, we were able to increase our revenue to $118.5 million in 2021, an increase of 11% as compared to 2020, primarily driven by the strength of our performance in Canada, where our revenue increased by over 50%. I'm pleased with the way we were able to pivot from the defensive posture of 2020 as we navigated through the sharp industry downturn to participate in industry growth, advanced our product and service portfolio, and continue to bolster our balance sheet and liquidity profile. We made significant progress in each of our key product and service lines in 2021, adding to our portfolio of technologies that support our customers and expanding our addressable market in the process. Beginning with fracturing systems, late last year we qualified our Raytech sleeves used in the North Sea with a V0 rating, which means that the sleeves were qualified through testing to be gas-tight when run into the wellbore, with testing performed under high-load and thorough temperature cycles. We expect that our Raytech sleeves will help us to grow our customer base in the North Sea and other offshore markets over time, and have signed a contract with a large international oil company to provide completions equipment in the North Sea, which we expect to result in at least one well in 2022, with the potential for a larger program in the coming years. In addition, we've made meaningful progress and the development of a completion system to be run in a deepwater subsea application for a large IOC. As with our work in the North Sea, we expect that the use of our technology would enable a reduction in completion time, providing our customer with a significant reduction in their completion costs. We've also continued to add to our technology portfolio in well construction. Most significantly, we commercialized the portfolio extension within our airlock case and buoyancy product line which provides customers with additional options while retaining unmatched reliability history that we've established as the innovator of cost-effective casing buoyancy solutions. Our team in Canada has been very successful in executing on our cross-selling strategy to leverage our strength and fracturing systems in Canada to pull through additional opportunities. We had meaningful increases in our sales of airlock systems, tow sleeves, and liner hangers in 2021, with the increase the increases well surpassing underlying industry activity levels. We expect this to continue in 2022 with a particular focus on growing the customer base for our liner hanger product line. Finally, as it relates to well construction, we are pleased that a jury in a recent trial affirmed the validity of our patent utilized in our airlock case and buoyancy system and concluded that the patent had been infringed upon. We make meaningful investments in research and development and in securing and maintaining our intellectual property and will continue to defend our IP if we believe others are infringing. Within Tracer Diagnostics, we have primarily been focused on geographic expansion in the near term as we advance longer-duration R&D efforts. We successfully provided Tracer Diagnostics services for a trial well in Saudi Arabia in 2021 and are working through the qualification process for additional work going forward. We have also begun providing tracer diagnostic services for a customer in Indonesia, our first work in the Asian Pacific region for that product line. We believe that the current oil prices and activity levels are supportive of growth in tracer diagnostics opportunities in North America, and we have recently realigned our tracer operations to be able to execute on these opportunities more efficiently and to drive continued advances of technology within the product line. At Repeat Precision, the existing portfolio of frac plugs and setting tools continues to perform well. REPEAT is supported by the efforts of the NCS team in Canada, where we have been able to successfully introduce the Purple Seal to additional customers in the Deep Basin, providing an additional growth opportunity. The most significant news at REPEAT is the introduction of our Purple Fire factory-assembled modular perforating gun system, which provides us with the opportunity to participate in a larger addressable market. This new product for repeat is still in the field trial stage, but did achieve first revenue in late 2021 and is also contributing in 2022. We are pleased with the performance of the Purple Fire system in the field trials and continue to incorporate knowledge gained from the field trials into the product as we move toward commercialization. The Purple Fire perforating gun system is compatible with our factory-assembled Purple Seal Express system, which combines a disposable setting tool and a composite frack plug. With the addition of Purplifier, repeat can provide all of the downhole components required for plug and perf operations. I want to touch briefly on our margin performance in 2021, the impacts of supply chain and labor cost increases on our business that began in 2021 and continues in 2022, and how we're responding to those inflationary pressures. For the full year in 2021, we delivered a gross margin percentage of 41%, which was in line with 2020. we were able to leverage our increased volumes to offset continued pricing pressure in a competitive marketplace. We were not immune from the impacts of cost inflation and supply chain stresses in 2021. We experienced increases in employee wages, steel, fuel, and fiberglass costs, as well as extended lead times for purchases and higher third-party service charges, and those pressures have become more acute in early 2022. We have selectively implemented price increases and surcharges and expect to initiate future price increases as our input costs continue to rise. In addition, we are working with our largest customers to secure volume commitments that will allow us to better plan purchases strategically to mitigate these cost increases. From a timing standpoint, we believe some cost increases in early 2022 will be incurred before we receive the benefit from our pricing actions. leading to pressure on gross margins until the full impact of the price increases is evident in the second half of the year. While we remain very focused on managing our costs and have maintained discipline on SG&A, we do expect our SG&A to rise in 2022 from the 2021 levels, reflecting the full-year impact of wage restorations that occurred in the second half of 2021 and early 2022, cost of living increases for 2022, the restoration of the company match for retirement plans and other items. We are also actively investing in our people to support the growth that we believe that we can achieve. In addition, our spend on IP related litigation matters is expected to remain at elevated levels in 2022. Trials related to our airlock case and buoyancy system in the US and related to fracturing systems in Canada were concluded during the first quarter with other trials scheduled for later this year. As a result, we believe that our total SG&A could increase by 15% to 20% in 2022 relative to 2021 levels. One of our key company goals for 2021 was to be free cash flow positive and continue to strengthen our balance sheet. We were very successful in this regard with free cash flow of over $11 million in 2021. Our people pulled together to achieve this objective, and we ended 2021 with over $22 million in cash and cash equivalents, no credit facility borrowings, and a borrowing base of just over $15 million. We are well positioned to capitalize on the growth opportunities ahead of us. Over the past five years, from 2017 through 2021, we've generated $68 million in free cash flow on a consolidated basis, or over $39 million after deducting distributions to our joint venture partner. Finally, I'd like to touch briefly on industry consolidation. We've been consistent in expressing our belief that our industry needs to consolidate now. Our customer base is consolidating, and while industry activity is recovering, it's likely that the peak of this cycle will be less robust than the prior cycles. There are simply too many services companies chasing after a smaller pie. Over the last year and a half or so, it seemed like the bid-ask spread on potential consolidation opportunities was too great to overcome, but that appears to be improving in recent decades. in the recent few months. We see significant value in our organic growth strategy and opportunities, but we are also very well positioned to participate in industry consolidation with our presence in multiple product lines and multiple geographies, our strong balance sheet, and the infrastructure that we have in place as a public company. Now I'll ask Ryan to discuss our financial results in more detail. Ryan?

Thank you, Robert. As reported in yesterday's earnings release, our fourth quarter revenues were $36.1 million, 32% higher than in the prior year's fourth quarter. On a sequential basis, revenue in the fourth quarter was 11% higher than revenue in the third quarter, with increases of 25% and 98% in the U.S. and international markets respectively, offset by a decrease of 2% in Canada, reflecting a slowdown in activity during the holiday season. Gross profit, defined as total revenue less total cost of sales, excluding depreciation and amortization expense, was $15.9 million in the fourth quarter, or 44% of revenue, compared to $11.7 million, or 43% of revenue, in the prior year's fourth quarter. For a sequential comparison, gross profit was $14.8 million, or 46% of revenue, in the third quarter of 2021, although that included a net benefit of approximately $0.9 million related to the employee retention credit, or ERC. Our gross margin of 44% during the fourth quarter of 2021 demonstrates the continued operational leverage in our business as revenues increase, due in part to structural cost reductions made over the last 18 months. However, as Robert mentioned, we are seeing meaningful cost increases across our supply chain, which are putting pressure on our gross margins in early 2022. Our selling, general, and administrative costs, or SG&A, were $13.5 million for the fourth quarter, which was $2.9 million higher as compared to the $10.6 million in the fourth quarter of 2020, reflecting increased compensation and higher litigation-related expenses, among other items. Our fourth quarter 2021 SG&A expense was also $2.5 million higher as compared to the third quarter, reflecting higher litigation-related expense, R&D costs, and higher compensation expense as the expense in the third quarter, our SG&A expense in the third quarter was partially offset by $1.1 million in net benefits from the ERC. Our reported SG&A expense includes share-based compensation and certain non-recurring expenses, including certain litigation costs. In the fourth quarter of 2021, non-recurring litigation expenses totaled $2.1 million and non-cash share-based compensation expense totaled $1 million. We recognized other income during the quarter of $1 million, reflecting both royalty income and the benefit from a technical services and support agreement related to tracer diagnostics activity in Oman. Adjusted EBITDA in the fourth quarter of 2021 was $6.5 million, a $3.5 million improvement as compared to $3 million in the prior year's fourth quarter. and a sequential increase of $2.3 million as compared to the third quarter of 2021. Depreciation and amortization expense for the fourth quarter was $1.1 million, and net income attributable to the non-controlling interest in repeat precision was $0.3 million for the quarter. Turning now to cash flow items in the balance sheet. Our cash flow from operations and free cash flow for the fourth quarter were $4.9 million and $4.7 million, respectively. Our free cash flow for the full year in 2021 was $11.1 million. As of December 31, 2021, we had $22.2 million in cash and total debt of only $7.8 million. On December 31, our borrowing base under the credit facility was $15.4 million, providing us with additional liquidity. In addition, repeat precision has access to over $4 million in borrowing capacity from a facility which is separate than our corporate revolver. We had networking capital of $48 million as of December 31st, 2021 as well. Turning now to a few points of guidance for the first quarter of 2022. We currently expect our total first quarter revenue to be between $36.5 and $40.5 million. We expect our U.S. revenue to be between $9 and $10 million, our Canadian revenue to be between $26 and $28 million, and our international revenue to be between $1.5 and $2.5 million. We expect that our gross margin will be between 36 and 40% during the quarter, which is a reduction from the fourth quarter of 2021, reflecting the cost increases impacting our supply chain and a lower contribution from international activity in the first quarter of 2022 as compared to the fourth quarter of 2021. We expect our reported SG&A, inclusive of share-based compensation and non-recurring items, to be between $15.5 and $16.5 million in the first quarter. This includes approximately $0.8 million in non-cash share-based compensation and approximately $1.6 million in litigation expenses. Our SG&A for the first quarter of 2022 also includes approximately $1 million of incremental expense related to cash-settled long-term compensation awards, the value of which fluctuates with changes in our share price, which has increased from the end of 2021 to the investing date at the end of February and which will be remeasured again at the end of the quarter. We expect that our first quarter depreciation and amortization expense will be approximately $1.2 million and that our net interest expense will be approximately $0.2 million, primarily reflecting unused facility fees and the amortization of debt issuance costs. I'll hand it over to Robert to provide our full year 2022 guidance and for closing remarks.

Thanks, Ryan. Our full year guidance for 2022 is as follows. We currently expect full year revenue of $145 to $160 million and fully adjusted EBITDA of $13 to $18 million. consistent with the calculations in our earnings release. We expect gross capital expenditures for 2022 to total $2 to $3 million. While we strive to be free cash flow positive in 2022, that will be difficult given our growth expectations as we anticipate net working capital to be use of cash in 2022. Underpinning our revenue growth expectations is anticipated industry activity growth of 10 to 15% in Canada. We expect wells drilled in the U.S. to increase by at least 20% in 2022 and wells completed in the U.S. to increase by at least 10% as compared to 2021. Finally, we expect international industry activity to grow by at least 10% in 2022. We expect our revenue growth to exceed the growth in the underlying industry activity through market share increases in selected product and service lines, growth in international markets, and through continued adoption of newly introduced technologies like our Purple Fire perforating gun system. We also expect that the full impact of price increases that we achieve with our customers will offset cost inflation and will have a more meaningful impact in the second half of the year. Given the fact that our ability to achieve price increases will lag the impact of increased cost in our cost of sales and within our personnel cost, We expect that the achievement of our annual adjusted EBITDA guidance range would be weighted to the second half of the year. Our guidance is based on current market conditions and a further escalation of hostilities by Russia and Ukraine or changes to sanctions against Russia implemented by various global governments that impact Russia's oil and gas sector could cause meaningful changes to the market conditions, including increasing inflationary pressures and adding further stresses to certain components of the global supply chain. Before we open up the call for Q&A, I'll close with a couple of brief comments. We had strong performance in 2021 as we successfully began our pivot back to growth. We have the infrastructure in place to support revenue growth in each of our geographic markets, providing leverage to grow future earnings. We continue to successfully introduce new technologies that meet the needs of our customers, adding to our portfolio and expanding our addressable market. We are diligently managing through the supply chain challenges that we and others in our industry are facing. Our team at NCS continues to do a tremendous job operationally, and I'm proud to say that we've had zero recordable incidents in each of 2020 and 2021, and no recordable incidents so far this year. And as we enter 2022 with a very strong balance sheet and liquidity position, having generated over $11 million in free cash flow in 2021, providing us with strategic flexibility. And with that, no questions. Okay. Well, apparently we don't have any questions.

Sorry. Sorry. Go ahead.

Well, apparently we don't have any questions in the queue, so 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 tremendous work and dedication demonstrated by our team here at NCS and Repeat Precision. We're only as good as our people, and I believe that we have the best team in the industry. Our team continues to provide excellent service to our customers and is commercializing new products and services that will enable our customers to be more successful. We're taking on demanding and technically challenging work and delivering results for our customers. We see the potential for a multi-year cycle of improved growth prospects for our industry, and I'm excited by how NCS is positioned to be able to participate in that growth and deliver benefits to our employees, customers, shareholders, and all of our other stakeholders. We appreciate everyone's interest in NCS Multistage and look forward to talking again on our next quarterly earnings call. With that, operator, we'll conclude the call.

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