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spk03: Good day and thank you for standing by and welcome to the Q1 2024 NCS Multistage Earnings Conference Call. At this time all participants are in a listen-only mode. After the speaker's presentation there'll be a question and answer session. To ask a question during the session you'll need to press star 1-1 on your telephone. You then hear an automated message advising your hand is raised. To withdraw your question please press star 1-1 again. Please be advised that today's conference is being recorded. I would not like to hand the conference over to your speaker today, Mike Morris, and CFO. Please go ahead.
spk02: Thank you, Justin, and thank you for joining the NCS Multistage First Quarter 2024 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 our financial guidance and comments regarding our future expectations for financial results in business operations. These statements are subject to many risk and uncertainties that could cause our actual results to differ materially from any expectation expressed herein. 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 as well as the results of operations including our earnings release contain the following non-GAAP financial measures. Adjusted debita, adjusted debita margin, adjusted gross profit, adjusted gross margin, free cash flow less distributions to non-controlling interest in networking capital. The underlying details and reconciliations of these non-GAAP measures to the most comparable GAAP financial measures are provided in our first quarter earnings release which can be found on our website ncmultistage.com. I'll now turn the call over to Ryan.
spk01: Thank you, Mike, and welcome to our investors, analysts, and employees joining our first quarter 2024 earnings conference call. NCS is off to a strong start in 2024. Our first quarter revenue of $43.9 million exceeded the high end of our guided range by nearly $4 million. The strength was broad-based as we achieved or exceeded the high end of our guided revenue range for each of our U.S., Canadian, and international markets with the largest relative outperformance coming from Canada. Our adjusted gross margin of 40% which excludes depreciation and amortization expense was within our guided range for the quarter. Our SG&A expense of $13.8 million for the quarter was $2.3 million lower than in the first quarter of 2023 resulting from cost savings measures that demonstrate our commitment to control expenses and a -over-year reduction in litigation-related professional fees. We also benefited from an increase in other income as compared to the first quarter of last year, primarily royalty income related to licensing our intellectual property and the benefits from a technical services agreement with a local partner in Oman. Our adjusted EBITDA for the first quarter of $6.1 million exceeded our estimate of $3 to $4 million and represents a -over-year improvement of $1.2 million and a sequential improvement of $3.5 million. In prior earnings calls, I've referenced NCS's core strategies for creating value for our stakeholders. We've included a new slide in our investor presentation which is available on our website, slide 13, that helps to illustrate our strategy and provide examples of our progress. The first core strategy is to build upon our leading market positions. We've demonstrated our commitment to this strategy in Canada thus far in 2024. Our Q1 revenue in Canada of $32 million increased by 3% as compared to the first quarter of 2023, despite a reduction in the average rig count in Canada of 6% for the same period. This performance reflects the initiatives to leverage the strength of our market position and customer relationships developed over time in our fracturing systems business and to pull through additional revenue opportunities across our other product lines. In particular, we continue to capture additional well-construction opportunities with our fracturing systems customers and to grow the customer base for our purple seal frac plugs and fracture express systems and plug and perf completions in Canada. Our second core strategy is to capitalize on international and offshore opportunities. We've previously discussed our efforts to grow our customer base in the North Sea and to position the company for long-term growth opportunities in the Middle East in particular. We are now benefiting from these strategic investments. We're off to a good start so far this year, having sold sliding sleeves to a new North Sea customer in the first quarter. As we move to the second quarter, we expect activity in the North Sea to improve on a seasonal basis, with installation and completion activity increasing, including the expected delivery of sliding sleeves to yet another new North Sea customer. In addition, we are experiencing a meaningful increase in tracer diagnostics activity in the Middle East. In April, we completed tracing the first of multiple paths for a leading national oil company in the Middle East, supporting development plans for their unconventional resource base. We expect to participate in at least two similar projects over the remainder of 2024. In addition, NCS has been awarded the opportunity to trace additional conventional wells for the same customer, supporting activity between the unconventional well pads. This is only possible because of the tireless effort of individuals across our organization to educate our customer on the value that our tracer diagnostic services can bring, to tackle the procurement and logistical challenges of the work, and to provide outstanding customer service throughout the jobs and for the reporting process. Including the expected midpoint for international revenue guidance for the second quarter, our international revenues would approximate $7.2 million for the first half of 2024. This compares to $3.3 million in the first half of 2023, and would exceed our full year international revenue of $6.5 million. As a reminder, full year international revenue for NCS exceeded $10 million for each of 2018 through 2021, reaching a high of over $15 million during that period, highlighting our opportunity outside of North America. The third core strategy for NCS is to commercialize innovative solutions to complex customer challenges. We have internal objectives this year tied to obtaining field trials for new products and successfully entering new markets and regions. I spoke to this extensively on our prior call, so I'll just briefly highlight some of these exciting projects. We had a successful onshore trial during the first quarter for a completion system designed for deep water operations. This was developed in conjunction with an international oil company with potential applications in the Gulf of Mexico and other deep water regions. We've completed initial field trials for our pinpoint-oriented perforating gun system at repeat precision, and we continue to advance further testing and validation aligned within influential customers' requirements. In the second quarter, we expect to install a well that will represent our highest-ever sleeve count in the U.S. at over 200 sleeves. The well will be utilizing fiber optic technology to help the customer optimize a horizontal water flood program. We had a successful entry into the SAGD market in Canada for our fracturing systems technology earlier this year. This is a first for NCS, and we expect to utilize our technology for additional applications and customers in this market over time. In addition to these projects, we have several other technology developments underway across our various product lines, which I'm looking forward to discussing as they roll out. Mike will now review our results for the first quarter and guidance for the second quarter.
spk02: Thank you, Ryan. As reported in yesterday's earnings release, our first quarter revenues were $43.9 million, a 1% increase year over year, with our Canadian and international revenues up 3% and 39%, respectively, and our U.S. revenues down 12%. Despite a slight decrease in the average recount, we saw a modest increase in our Canadian revenues. Additionally, our international revenues experienced growth driven by the sell of a system to a customer in the North Sea. Our U.S. revenues continue to be impacted by lower natural gas prices that have curtailed some customer activity. Sequentially, our revenues in the first quarter increased by 24%, with Canada up 27% and the U.S. up 10%, while international revenues nearly doubled. Our adjusted gross profit defined as total revenues less total cost of sales, excluding depreciation and amortization expense, was $17.6 million in the first quarter of 2024. Our adjusted gross margin was 40%, down compared to our adjusted gross margin of 43% for the same period in 2023, but up sequentially from 37% for the fourth quarter of 2023. Selling, general, and administrative costs were $13.8 million for the first quarter, down by $2.3 million compared to the same period last year. This significant reduction was due in part to our restructuring efforts in 2023 to streamline operations and better leverage our SG&A spend. For the first quarter, we reported net income of $2.1 million, or diluted earnings per share of 82 cents, compared to a net loss of $15 million, or a loss per share of $6.10 for the same period in 2023. Our prior net loss was impacted by a $17.5 million litigation provision recorded in the first quarter of 2023 that was later settled and reversed in the fourth quarter of 2023. Adjusted EBITDA for the first quarter was $6.1 million, an improvement to the $4.9 million in the same period in 2023. Now turning to cash flow items in the balance sheet. Cash flow from operating activities and free cash flows less distributions to non-controlling interest or uses of cash of $1.9 and $2.5 million respectively. Our forecast for the full year of 2024 is to be free cash flow positive. However, similar to the first quarter of 2023, our negative cash flow was primarily due to an increase in networking capital of approximately $6 million. This was due in part to an increase in our accounts receivable, partially offset by a reduction in our inventory balances. On March 31st, we had $14 million in cash and total debt of $8.9 million, which consists primarily of finance lease obligations, resulting in a positive net cash position of $5.1 million. At the end of March 2024, the borrowing base availability under our under-run ABL facility was $20.4 million and repeat had $6 million of outstanding borrowings under a promissory note that was repaid in full in April. Now turning to a few points of guidance for the second quarter. We currently expect second quarter total revenue in the range of $27 to $30 million. We expect Canadian revenue in the range of $12.5 to $13.5 million, US revenue of $10 to $11 million, and international revenues of $4.5 to $5.5 million. We expect our adjusted gross margin to be between 36 and 38 percent, an improvement to our adjusted gross margin for the second quarter of 2023. Due to the Canadian seasonal impact of spring breakup, we expect our adjusted EBITDA to be between break even and a negative $2 million, and our second quarter depreciation and amortization expense to be approximately $1.2 million. With that, I'll hand it back over to Ryan to discuss our 2024 full-year guidance and for closing remarks.
spk01: Thanks, Mike. We're making only slight adjustments to our full-year guidance for 2024 at this time. We currently expect full-year revenue of $150 to $160 million. This guidance increases the low end of the revenue range by $5 million and maintains the top end of the range. As a reminder, we expect our revenue growth will primarily result from increased sales at repeat precision and our fracturing systems product line in the US and in international markets, the North Sea and Middle East in particular. We're cautiously optimistic about Canadian activity as well. There are fundamental drivers supporting customer activity in Canada, including the TMX oil pipeline coming online this quarter and the Canada LNG facility due to come online in 2025, which is driving activity increases to support increased natural gas production in advance of the facility's commissioning. In addition, the strong US dollar supports Canadian activity as our Canadian customers have operating expenses in Canadian dollars but can sell oil and condensate at prices linked to the strong US dollar. These positive fundamental factors are tempered by the drought conditions continue to exist in Western Canada. If we have a dry spring or an active wildfire season like we did in 2023, access to fresh water for our customers could be reduced, which could result in lower completions activity as firefighting and agricultural activity would have preferential access to fresh water. At this point, our guidance incorporates at least some disruption from the drought conditions and wildfire prospects, though there could certainly be more favorable Canadian customer activity levels if we continue to benefit from a wet spring as we have thus far and a less active fire season. We've increased our adjusted EBITDA range to $14.5 to $17.5 million with a midpoint of $16 million. The increase to the midpoint of the range is $1 million with increases to both the bottom and top end. Due to the seasonality of our business and consistent with prior years, we anticipate that the achievement of our annual adjusted EBITDA guidance range will be weighted to the second half of the year. The $4 million -over-year increase in adjusted EBITDA at the midpoint of the current range represents an incremental adjusted EBITDA margin of over 32% on the $12.5 million increase implied by the midpoint of our revenue guidance range, reflecting the impact of the business optimization initiatives undertaken by NCS in 2023 and our relatively fixed operating expenses. We expect our gross capital expenditures for the year to be between $1.5 and $2.5 million and we expect to generate over $5 million in pre-cash flow in 2024 after distributions to non-controlling interests, despite the modest investment in networking capital that could result from supporting our revenue growth. We believe that our expectation for revenue and earnings growth in the current industry environment paired with our strong balance sheet positions us favorably amongst other publicly traded oil field services equipment peers. This is illustrated on slide 19 of our investor presentation, which benchmarks analyst consensus revenue and EBITDA growth for 2024 for us and a group of publicly traded peers with a market capitalization of below $1 billion. The charts illustrate that NCS is expected to generate revenue and earnings growth that is above the median of the peer set. Another chart on the was below the median for the peer set, reflecting our resilient balance sheet. However, this favorable growth in balance sheet profile is not reflected in our trading multiple, which at 3.4 times enterprise value to 2024 EBITDA was one multiple turn below that of the peer with the next lowest multiple and approximately two multiple turns below the peer median. Before we open the call to Q&A, I'll close with a couple of brief comments. We're benefiting from the core strategies that we put in place in 2022 aimed at generating value for our stakeholders through organic growth and technology development. We have the infrastructure in place to support revenue growth in each of our geographic markets, providing leverage to grow future earnings. As demonstrated by our current guidance for 2024, achieving the midpoint of our guidance range would grow our annual revenue by 9% and our adjusted EBITDA by over 30%. We maintain a strong balance sheet and liquidity position with a cash balance of over $14 million at the end of the first quarter. In addition, we expect to add to that cash balance by generating positive free cash flow in 2024, providing us with financial and strategic flexibility. Finally, we continue to benefit from successful introduction of new technologies that meet the needs of our customers, adding to our portfolio and expanding our addressable market. With that, we welcome any questions.
spk03: Thank you. As a reminder to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. One moment for our first question. Our first question comes from Dave Storm from Stonegate. Your line is now open.
spk04: Good morning. Good morning, Dave. Just hoping we could start with the top line guidance. It's great to see that you raised the low end. What would you need to see either in the international markets or elsewhere to also raise the top end of that guidance?
spk01: Sure. Thanks, Dave. Appreciate the question. I think for us, the biggest thing right now is that we are taking a relatively conservative approach to the Canadian market. I outlined during the call what we think is a really, really strong fundamental backdrop for Canada. I think that will persist throughout the year. However, we certainly are aware that coming into 2024, you had a couple of years of extended drought conditions. There was a very active wildfire season last year. We're fortunate that there's a relatively wet spring so far, but it's easy. I think we're just being a little bit cautious right now around the potential prospects for some potential reduced activity on the completion side if our customers find that it's a bit more difficult to access fresh water for their completions as we move into the summer months. I think as we move through the second quarter and understand what the extent of that impact will be, if any, I think that's where we have a bit more confidence in really assessing whether there's some upsides at the top into the range as well. Understood.
spk04: Very helpful. Then you mentioned that international markets used to operate around $15 million or so a year. What's the pathway to get back to that? Is that going to be getting cataloged with current companies? Is that going to be addressing new markets? What does that look like?
spk01: Another great question, Dave. I think the path to that is the path we're on, quite frankly, and there are two components to it. I think first is during that period, we had one customer who was very active in the North Sea, an Acre BP, who we've referred to as kind of our anchor customer in the North Sea over time. As you know and as we've discussed, we've been really active in adding to our customer base for the North Sea. We think we'll work with at least five different companies this year. What we're really looking forward to is both Acre and one of the other customers have field development projects that they're looking to bring online as we move forward into 2005 and 2026, which would represent more consistent work and would look a lot more like the level of activity that we saw back in those months or those prior years. You pair that with the work that we've been doing in the Middle East. We're in a really good spot right now with tracer diagnostics in the Middle East. We're getting additional well construction products qualified to be called out there. With the North Sea back to historical activity levels that we saw during that period tied together with the additional opportunities in the Middle East, I think we are on the path towards hitting that revenue profile that we saw in those prior years.
spk03: That's very helpful. Thank you. I'll get back to you. Thank you. One moment for our next question. Our next question comes from Blake McLean from Daniel at Energy Partners. Your line is now open.
spk05: Hey, guys. Thanks for taking my call.
spk01: Yeah, absolutely. Hey, Blake.
spk05: Hey, Ryan. I was hoping you could provide a little bit more color on how we should think about the offshore opportunity set timing associated with that and what that path forward to incremental revenue looks like over the next year or two or whatever time frame works.
spk01: Sure. Yeah. Happy to do the best I can there. Again, this year we're going to work for more customers in the North Sea than we ever have before. It will not be a large well count with any customers individually, but I think that sets the stage for some more work going forward. I mentioned that there are two customers in particular operating in the North Sea, one on the Norwegian side, one on the UK side that have some larger development programs that we would expect to participate in. We would see the work on those programs starting to ramp up more so next year, but could represent pretty consistent work for a multiple year time frame. We pair that with the technology development project that we have for the deep water application. That's a little bit longer to develop, and I'd say the number of wells per year is not necessarily at the same scope the North Sea is, but they're very attractive well opportunities for us on a single well basis. That could move forward and be a small handful of wells per year, but those individual well opportunities would be pretty impactful for us as a company. Again, that would develop over a longer term time frame. I don't think you'd see that ramping up until we may have a first well in 2025, but that would pick up more in 2026 and beyond.
spk05: That's
spk01: helpful.
spk05: Thank you. Maybe just one more, just building on the last set of questions. Again, maybe zooming out a little bit, how should we think about the opportunities that internationally and specifically in the Middle East, and how do you sort of tee yourselves up to be successful there? What does the sales and business development team look like? How do you sort of execute well over there? Do you have that team in place? Do you have a plan to build that out? Where do you think that the tracer diagnostics and some of the things you guys are doing out there, where do you think it really makes sense if we think about it from a multiyear perspective?
spk01: Yeah, another really good question. What I'd say is that at the highest level, we've got the right teams and strategies in place when we think about the leadership for our international group and the business development teams from the international group. We're aligned with what we think are very strong local partners in the various geographies in Oman and in Saudi particularly, who are helping us to navigate that process of getting each of our product lines cataloged and in a position where the asset managers in the various international regions can kind of call out our work very quickly and without getting additional approvals from procurement and whatever the case may be. So moving it from call it a technology trial into having our products and services utilized in production mode. The big opportunity for us that we're executing on this year are these unconventional tracer projects. For a Middle East customer, I'd say that customer is very early in their development of their unconventional resource and the opportunity there, that's really that period where utilizing tracer diagnostics in particular is very, very valuable for a customer to help them understand their resource and optimize their development plans. So I think there's a good runway there where we'll probably need to support that development over time will be with additional operations personnel. Right now we're mobilizing people from North America, from Argentina, from China to service some of that work in the Middle East. So we'll probably need to make some more investments in personnel both within our own head count but also some folks within our local partners. And over time we may look to make some strategic investments in the region as well, whether that's what I'd call sort of a relatively light footprint tracer lab or some other types of investment there. But we'd only do that once we've established the track record and have several years of relatively robust revenue and earnings in those markets before we deploy additional capital into supporting that business.
spk05: Got it. Thanks for walking through that in some detail. I've got just one more, if you don't mind. Could you provide a bit more color on the sleeve that you guys highlighted in your prepared remarks?
spk01: Sure. I think you're talking about the one in the US with the fiber optics. Is that right? Yes. Yeah. Yeah. So that's a pretty interesting project. So what we're able to do there, the customer wants to run a fiber optic line in that well. And it's a really, it's a somewhat unique project, especially in the US where historically water flood projects have been used, you know, vertical injectors. This is an area that was developed horizontally. So they're looking to execute a horizontal water flood program and optimize that. The well that's going to be installed will have a very large number of sliding sleeves and they'll have a fiber optic cable clamped to it. And part of the reason that the customer would use sleeves for that is one, to be able to have as many well-known access points along that lateral. More importantly, as opposed to if you were going to plug in perf that well, there's a risk of, you know, having your perforation if it's not aligned properly, accidentally shoot that cable and cut off your ability to acquire the data. So we're able to channel that fiber in between the ports of our sleeves to take that risk off the table. So, you know, the customer will benefit in a number of ways. And the other piece with that, by installing sliding sleeves and specifically reclosable sleeves, if the customer sees water breakthrough in parts of that well, you know, that's indicated by the fiber, what we can do is go in and help the customer manipulate those sleeves to shut off water breakthrough in certain areas and, again, just maximize the value, you know, for that area through the deployment of the technology.
spk05: Okay. Thanks for that detail, y'all. I'll kick it back to y'all.
spk03: And thank you. And if you would like to ask a question that is star 11, again, if you'd like to ask a question that is star 11, one moment while we compile the Q&A roster. And I'm showing no further questions. I would now like to turn the call back over to Ryan Hummer, CEO, for closing remarks.
spk01: All right. Thank
spk03: you,
spk01: Justin. All right. On behalf of our management team and board, we'd like to thank everyone on the call today, including our shareholders, analysts, and especially our employees. I truly appreciate the tremendous work and dedication demonstrated by our team here at MCS and Repeat Precision as we implement our long-term strategy. We're only as good as our people, and I believe we have the best team in the industry. 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. We appreciate everyone's interest to MCS Multistage, and we look forward to talking again on our next quarterly earnings call.
spk03: This concludes today's conference call. Thank you for participating. You may now disconnect.
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