NCS Multistage Holdings, Inc.

Good day and thank you for standing by. Welcome to the Q2 2023 NCS Multi-Stage 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 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mike Morrison, CFO. Please go ahead.

Thank you, DeeDee, and thank you for joining the NCS Multistage Second Quarter 2023 Conference Call. Our call today will be led by our CEO, Ryan Hummer, 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 expectations for financial results and business operations. These statements, including our financial guidance and expectations, are subject to many risks and uncertainties that could cause our actual results to differ materially from any expectation expressed herein, including the impacts of inflation, central banks' actions to combat inflation, the stress at U.S. regional banks, the Canadian wildfires, and Russia's ongoing invasion of Ukraine on the global economy, oil and natural gas demand, and our company. Please refer to our most recent annual report on Form 10-K and our latest SEC filings for 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 measures to the most comparable GAAP financial measures are included in our second quarter earnings release, which can be found on our website, ncsmultistage.com. I'll now turn the call over to Ryan.

Thank you, Mike, and welcome to our investors, analysts, and employees joining our second quarter 2023 earnings conference call. Our performance in the second quarter of 2023 was mixed relative to the guidance we provided in early May, with revenue below the low end of the range, but adjusted down near the higher end of the range. I'll briefly discuss our results and the outlook for each of our US, Canadian, and international markets. Starting with the US, our revenue of $9.4 million in the second quarter fell below the low end of our guidance of $12 to $13 million and represented a sequential decline from the first quarter of 2023. The sequential revenue decline in the US reflected the impact of falling industry and drilling and completion activity which affected all NCS product lines except for repeat precision, for which revenues improved by 13% sequentially. We expect a return to sequential growth in the third quarter, particularly in our fracturing systems and tracer diagnostics product lines. A customer of ours that operates in the Northeast recently discussed that they had set a new record by drilling out 262 plugs in a single run in a three-mile lateral. We're proud to have been a part of that success and believe that the customer's use of our technology in that well speaks to the robust performance of our plugs, which pump down efficiently, securely hold pressure during the fracturing treatment, and have fast and consistent drill-out and wash-time performance. I'll also highlight one interesting project for the quarter. We were engaged by a customer in West Texas to provide our sliding sleeves for use in a project to assess the capacity to permanently store CO2 in an underground reservoir. For this project, we were able to modify our sliding sleeves to provide a channel for cabling and downhole instrumentation that will be used to assess reservoir performance. This is the first use of our technology for a CO2 storage project, and our sliding sleeve completion technology is ideal to run with permanently installed downhole instrumentation, as this may prevent damage to the cabling that could otherwise be caused by perforating guns. Moving to Canada, our revenue in Canada of $14.3 million in the second quarter was slightly above the top of our guidance range of $13 to $14 million and represented an increase of 11% as compared to the second quarter of 2022, outpacing industry activity growth for the respective periods. The increase was driven by higher sales of composite plugs, which was the result of a concerted effort by a team spanning sales, operations, and technical services in Canada, with direct support from repeat precision, as well as higher service activity from our fracturing systems product line, especially in June. In addition, during the quarter, we moved to a new operations facility at Red Deer in Canada. This allows us to integrate liner hanger activity with our fracturing systems and tracer diagnostics operations. A strategic partner of ours is also co-located at this facility, which is sized to accommodate future volume growth and to support future product line additions. Activity has improved nicely as we've emerged from spring breakup. The impact of the wildfires in Alberta earlier this year have impacted customer cash flows, resulting in company-specific impacts on activity. These impacts could cause a delay in industry rig counts returning to the highs reached during the first quarter of 2023. Internationally, our operations continue to be slow for us in the second quarter, with revenue of $1.7 million coming in below the bottom of our guided range of $2 to $3 million. During the second quarter, we delivered sliding sleeves to a new customer in Norway, with the completion of that well scheduled for later this month. We've also made significant progress with other potential new customers in the region and expect to continue to add to our regional customer base in the North Sea, which may lead to an increase in activity for this region in 2024. During July, we completed our first revenue-generating tracer diagnostics project for a leading national oil company in the Middle East. I want to thank our tracer diagnostics and international team members that have supported this opportunity, as there were significant logistical hurdles to overcome to make the project a success. We are now bidding on projects for several different regional assets with this national oil company and expect to be able to grow this business profitably over time. Our gross margin performance as a company continues to be a bright spot for us. The benefit of price increases realized over the last year has allowed us to generate a gross margin percentage of 39% for the first half of 2023, which compares to 36% for the first half of 2022. We continuously assess opportunities to streamline our operations and to improve profitability. We initiated efforts in June 2023 to consolidate certain operations and facilities for our tracer diagnostics product line and also consolidated repeat precision's manufacturing footprint in Mexico into a single facility. We expect to start recognizing the full benefit of these consolidation efforts in the fourth quarter of this year with an expected annualized benefit of over $1.5 million on a consolidated basis. We maintain our strong balance sheet with $5 million of net cash and an undrawn revolver as of June 30, 2023. In addition, our consolidated net working capital, excluding cash and short-term debt at June 30, 2023, was over $55 million and exceeds our current market capitalization by approximately $7 million. Our net capital expenditures for the quarter were $0.5 million, highlighting both the capital-light nature of our business and our continued financial discipline. Before I ask Mike to discuss our financial results in more detail, I'll provide an update to our litigation provision. We increased this provision by $24.9 million during the second quarter of 2023 to a total of $42.4 million as of June 30th. This primarily reflects the judgment rendered against us in Texas on May 15th, 2023. We intend to appeal this Texas judgment and believe that we have strong arguments that may lead to a reversal of some or all of the awarded damages. We continue to expect a large portion, up to all, of any remaining damages to be covered by insurance and would therefore expect that this matter, once resolved, will not have a significant impact on our liquidity or our operations. Both parties have agreed to non-binding mediation on the Texas matter currently scheduled for the end of August. Over to you, Mike.