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spk00: Ladies and gentlemen, thank you for standing by. Welcome to the second quarter 2024 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 like now to turn the conference over to Mike Morrison, Chief Financial Officer. Please go ahead.
spk01: Thank you, Michelle, and thank you for joining the NCS Multistage Second 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 risks 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 Part 10-K and our latest FCC filings for risk factors and cautions regarding forward-looking statements. Our comments today, as well as the results of operations, including in our earnings release, contain the following non-GAAP financial measures. Adjusted EBITDA, adjusted EBITDA margin, adjusted gross profit, adjusted gross margin, adjusted net loss, free cash flow, less distributions, non-controlling interest, and net working capital. The underlying details and reconciliations of these non-GAAP measures to the most comparable GAAP financial measures are provided in our second quarter earnings release, which can be found on our website, ncsmultistage.com. I'll now turn the call over to Ryan.
spk02: Thank you, Mike, and welcome to our investors, analysts, and employees joining our second quarter 2024 earnings conference call. NCS has continued its strong start to 2024. Our second quarter revenue of $29.7 million increased 17% compared to the prior year and was near the high end of our guided range provided on our last earnings call. This was led by our performance in the US and in international markets. Our revenue for the first half of 2024 of $73.5 million represents a 7% increase over last year. Our adjusted gross margin, which excludes depreciation and amortization expense, was 40% and exceeded our guided range for the quarter, supported by margin accretive international revenues. Our SG&A expense of $14.8 million for the quarter was $0.3 million higher than the second quarter of 2023, reflecting higher incentive bonus accruals based on our favorable operating results, substantially offset by cost-saving measures implemented last year and other reduced expenditures. We benefited from an increase in other income as compared to the second quarter of last year, primarily due to royalty income from licensing of our intellectual property, with a new licensee added during the second quarter. Our adjusted EBITDA of $0.9 million exceeded our guided range for the quarter of negative $2 million to break even and represents a year-over-year improvement of over $3 million. Our adjusted EBITDA for the first half of 2024 of $7 million improved by $4.4 million as compared to the first half of 2023. This improvement includes year-over-year contributions from increased revenue, a higher adjusted gross margin percentage, and increased other income, as well as lower SG&A expenses, as each part of our business has contributed to our more favorable results. Our balance sheet remains strong, with our cash balance increasing to $18.6 million at June 30th, supported by our free cash flow, less distributions to non-controlling interest of $3.2 million during the first six months of 2024. In prior earnings calls, I've referenced NCS's core strategies for creating value for our stakeholders. Slide 13 in our investor presentation helps to illustrate our strategy and provide examples of our progress. The first core strategy is to build upon our leading market positions. I'll start with fracturing systems, where we continue to differentiate ourselves both onshore and offshore. During the second quarter, we completed a well for a customer in the Montney Formation in Canada that had 275 sliding sleeves installed. The next pad in this area with the customer will feature four wells with NCS sliding sleeves, with one of those wells currently planned to include over 300 sliding sleeves, which would set yet another record for us. This demanding work demonstrates our differentiated suite of technology, the quality of our robust service tools and multi-cycle sleeves, and perhaps more importantly, the expertise that our people bring to our customers' well sites to support highly efficient, repeatable completions. We've also demonstrated the benefits of our strategy to build on our leading market positions in our tracer diagnostics product line. We believe we have a top two market position in North America and Tracer Diagnostics and are leveraging that position to achieve profitable growth outside of North America. Revenue for our Tracer Diagnostics product line was up 23% for the first six months of 2024 as compared to the same period in 2023. And thus far in 2024, we have provided our Tracer Diagnostics services to customers in seven countries, including five outside of North America. This success ties directly to our second core strategy, which is to capitalize on international and offshore market opportunities. The strategic investments we've made and initiatives implemented over the last several years to expand the scope of our opportunities outside of North America are delivering strong results for NCS in 2024 and have set the stage for further international growth in the coming years. Our international revenue for the first half of 2024 of $8 million has already exceeded our full year 2023 international revenue and has supported the resilience in our adjusted gross margin during the second quarter. For 2024, we are on track to approach or exceed NCS's record level of annual revenue from international markets, established in 2019 at more than $15 million. In addition to the growth in international markets attributable to our tracer diagnostic services in the Middle East, We've expanded our customer base for fracturing systems in the North Sea and have seen a market recovery in Argentina following last year's elections. We're very optimistic in particular about the North Sea over the next several years, as our largest customers in the region intend to proceed with multi-year development plans, complementing the work that we've done to grow our customer base. 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 for successfully entering new markets and regions. I'll briefly highlight a few of these exciting projects. We had a very successful completion of our first well with a new customer in the Norwegian North Sea during the second quarter. For this well, our service tool was deployed on drill pipe, which is technically demanding. We are expanding our market opportunity by providing our customers with fit-for-purpose solutions with various sleeve technologies and the flexibility on how the sleeves can be shifted into the open, closed, or screened positions as desired. We followed up on our successful deployment of tracer diagnostics in the Middle East with sales of our casing buoyancy systems. Our technology was selected for this work due to our extensive efforts to expand the operational envelope for these systems. particularly by increasing pressure ratings to meet the customer's well requirements. Repeat Precision is advancing several new products this year. We currently expect field trials for our new dissolvable frac plug during the third quarter. Successful deployment of this new product will allow us to capture additional revenue from existing customers initially and to grow the customer base at Repeat Precision over time. Earlier this year, we mentioned our successful entry into the SAGD market in Canada for our fracturing systems technology. The operational success of this application has led to additional order from the initial customer, has generated interest from other customers in this large market, including an opportunity to deploy our technology in another more technically demanding application later this year. We have several other technology developments underway across our various product lines, which we'll speak to in future calls. Mike will now review our results for the second quarter and our guidance for the third quarter.
spk01: Thank you, Ryan. As reported in yesterday's earnings release, our second quarter revenues were $29.7 million, a 17% increase year-over-year, with international revenues up almost 250%, U.S. revenues up 26%, while Canadian revenues were down 16%. The significant increase in our international revenues was driven by North Sea frac system sales and tracer work in the Middle East. Our U.S. revenues were higher due to frac system sales, despite the fact customer activity continues to be negatively impacted by lower natural gas prices. The decline in Canadian revenues was a result of certain customers deferring their planned frac systems work to the second half of the year due to wet weather conditions and E&P consolidation transactions. Sequentially, our revenues in the second quarter decreased 32%, with Canada declining by over 60%, reflecting the normal seasonality decline in activity levels associated with spring breakup. Our international revenues increased by more than 160%, and our U.S. revenues increased 18%. Our adjusted gross profit, which excludes depreciation and amortization expense, was $12 million in the second quarter of 2024. Our adjusted gross margin was 40%, a significant improvement compared to the adjusted gross margin of 33% in the second quarter of last year. This improvement was largely contributed by higher margin international revenues. Despite the sequential decline in second quarter revenues, our adjusted gross margin remained consistent with last quarter's adjusted gross margin. Other income of $2.2 million for the second quarter of 2024 improved by $700,000 compared to the same period in 2023, primarily due to increased royalty income from a new licensee including a catch-up payment for prior use of our intellectual property. For the second quarter, we reported a net loss of $3.1 million, or a loss per share of $1.21, an improvement over the net loss in the second quarter of 2023 of more than $3 million, excluding the impact of the prior year litigation provision. Our adjusted EBITDA for the second quarter of 2024 was $900,000, an improvement of $3.2 million to the same period in 2023. Now turning to cash flow items in the balance sheet. For the first six months of 2024, we generated cash flow from operating activities of 4.1 million, a more than 5 million improvement compared to the same period last year. Our free cash flow less distributions to non-controlling interest was 3.2 million, representing an improvement of more than 5 million compared to the first half of 2023. Our June 30th, We had $18.6 million in cash and total debt of $8.9 million, which consisted entirely of finance lease obligations, resulting in a positive net cash position of $9.7 million. At the end of June 2024, the borrowing base availability under our undrawn ABL facility was $14.4 million, and repeat had nothing drawn on their promissory note. Turning now to a few points of guidance for the third quarter. We currently expect third quarter total revenues in the range of $40 to $44 million. We expect Canadian revenues in the range of $27.5 to $29 million, U.S. revenue of $9.5 to $10.5 million, and international revenue of $3 to $4.5 million. We expect our adjusted gross margin to be between 40% and 42%, consistent with the adjusted gross margins obtained in the third quarter of 2023. We expect other income to return to a more normalized quarterly level of 1 to 1.3 million. We expect our adjusted EBITDA to range from 5 to 7 million, and our third quarter depreciation and amortization expense to be approximately 1.3 to 1.4 million. With that, I'll hand back over to Ryan to discuss our 2024 full-year guidance and for closing remarks. Thank you, Mike.
spk02: We're making only slight adjustments to our full-year guidance for 2024. We currently expect full year revenue of $152 to $160 million. This guidance increases the low end of the revenue range by $2 million and maintains the top end of the range. As a reminder, we expect that our revenue growth will primarily result from increased sales of repeat precision SPRAC plug and perforating gun products in both the US and Canada, and from fracturing systems and tracer diagnostics work in international markets, particularly the North Sea and Middle East. We're optimistic about Canadian activity as well. There are fundamental drivers supporting customer activity in Canada, including the TMX oil pipeline that entered service earlier this year, and the LNG in Canada LNG facility, which is due to come online in 2025, which should drive an increase in activity to support higher natural gas production in advance of that facility's commissioning. In addition, the strong U.S. dollar relative to the Canadian dollar should support an increase in Canadian activity in is our Canadian customers have operating expenses denominated in Canadian dollars, but sell oil and condensate at prices linked to the strong US dollar. These positive fundamental factors are tempered a bit by the current wildfires in Western Canada. While there has not yet been any significant impact to our business from wildfires this summer, the possibility of future impact does exist. We've increased our adjusted EBITDA range to $16.5 to $19.5 million, with a midpoint of $18 million. This is a $2 million increase to the midpoint of the range from last quarter, with increases to both the bottom and top end of the range. Due to the seasonality of our business and consistent with prior years, we expect to achieve our annual adjusted EBITDA guidance range weighted to the second half of the year, though as previously mentioned, our adjusted EBITDA for the first half of 2024 was $4.4 million higher than during the same period in 2023. The $6 million year-over-year increase in our full-year adjusted EBITDA using the midpoint of the current range represents an incremental adjusted EBITDA margin of 45% on the $13.5 million increase implied by the midpoint of our revenue guidance. This reflects the impact of the business optimization initiatives undertaken by NCS in 2023, our relatively fixed operating expenses, and an increase in recurring royalty income expected from additional licensing of our intellectual property. We expect our net capital expenditures for the year to be $1.5 to $2 million, and we expect to generate between $6 million and $10 million in free cash flow in 2024 after distributions to non-controlling interests. This is despite a modest investment in networking capital to support our revenue growth. We believe that our expected revenue and earnings growth in the current industry environment, paired with our strong balance sheet, positions us favorably amongst our publicly traded oilfield services and equipment peers. As illustrated on slide 19 of our investor presentation, which benchmarks analyst consensus revenue and EBITDA growth for 2024 for NCS relative to a group of publicly traded peers with a market capitalization below about $1 billion. The charts illustrate that NCS is expected to generate revenue and earnings growth that is well above the median of the peer set. Another chart on the slide demonstrates that our debt to capitalization ratio on March 31st, 2024 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 is currently at 3.3 times enterprise value to 2024 EBITDA. This is approximately one multiple turn below that of the peer with the next lowest multiple and approximately two and a half multiple turns below the peer median. Before we open the call up for Q&A, I'll close with a couple of brief comments. We're benefiting from the core strategies implemented 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 margins, markets providing leverage to grow future earnings. As demonstrated by our current guidance for 2024, achieving the midpoint of our guidance range We grow our annual revenue by 9% and our adjusted EBITDA by approximately 50%. We maintain a strong balance sheet liquidity position with a cash balance of over $18 million at the end of the second quarter. In addition, we expect to add to that cash balance by generating additional free cash flow in the second half of 2024, providing more strategic and financial flexibility. Finally, we continue to benefit from the successful introduction of new technologies that meet the needs of our customers. adding to our portfolio, and expanding our addressable market. With that, we would welcome any questions.
spk00: Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. And the first question comes from Dave Storms with StoneGate. Your line is now open.
spk03: Morning. I'm hoping we could start with some of the puts and takes on 3Q guidance. Is that just as easy as if wildfires do become an issue, Canada ends up on the lower end? Is international, does that tend to be more of a timing concern? Any more color you could give us on what would put you on the lower, higher end of 3Q guidance would be very helpful.
spk02: Yeah, thanks, Dave. I think you really captured it. The low end of the range does have a little bit of conservatism in the event that there's a shift in Canadian activity in response to wildfire activity. Again, we're not seeing that at this time. And you're right, as far as international, that activity can shift, sometimes fall in or out of a quarter. But I think we feel pretty confident within that range and that the guidance range has accounted for some of those potential slippages. So feel good about the range, the low end, yes, driven by potential downside in Canadian activity that we don't see at this time, however.
spk03: That's perfect. Thank you. And then just thinking about the international markets, what inning do you feel like NCS, MSN, and this could be for services or products, but do you still feel like you guys are given a lot of demos and working to get cataloged? In most of your international markets or do you feel like you've kind of gone through that threshold and are now starting to focus on?
spk02: capturing market share Yeah, it's an interesting question And you you kind of have to look at it market by market So we've talked in the North Sea in particular the last two years We've been really focused on expanding the customer base there so we can have a steadier level of activity across across the years as certain customers pick up activity and others ramp down and So I think we're more towards call it the, you know, call it middle innings there where we've had a lot of good conversations with customers. We're having first wells with customers as a result. But we've had, you know, those conversations with a lot of the customer base there. I think there's good upside to come, you know, especially over the next couple of years. We're probably at an earlier stage with respect to the Middle East. That qualification process is longer and programmatic. I think we're certainly happy with the way that we've been able to penetrate the Middle East market with the tracer diagnostics business. But we do expect to be able to pull additional product lines into that market over time, targeting the areas that the customers are expecting an uptick in activity. So thinking through unconventional gas developments for operators in the Middle East and with certain customers that are out there with plans to increase their productive oil capacity. So again, bringing our technology in, we're relatively early, but we're also focused on markets that are going to be growing within those various regions as well.
spk03: Understood. Thank you. And then just one more for me, if I could. I know you mentioned that royalty income was contributed both from a new royalty agreement as well as a catch-up payment. Is there any way we could break that out a little bit just so we can hopefully think about a run rate for that line item?
spk02: Yeah, I think Mike spoke to that. We were certainly a bit ahead of what our traditional run rate had been in the second quarter. I think Mike gave guidance that other income in general would be between $1 and $1.3 million for the third quarter. I think that's probably a good run rate, at least based on what we have. within our portfolio from a licensee standpoint today. We'll certainly work to try to add to that, so there could be some upside, but that's a pretty good run rate for the next several quarters until we have some additional information.
spk03: Understood. Thanks for taking the questions, and good luck in 3Q. Absolutely. Thanks, Dave.
spk00: As a reminder, to ask a question, please press star 11 on your telephone. And our next question comes from John Daniel with Daniel Energy Partners. Your line is open.
spk04: Hey, Ryan, good morning. Ryan, in your prepared remarks, you talked about one of the highlights in Canada being a well that had 275 sleeves and then one that's expected to have 300. I'm just curious if you happen to have sort of like average sleeves per well, sort of Q1 and Q2, and how do you see this playing out over the balance of the next couple of years? And, uh, what could that potentially mean in terms of just incremental revenue if we were to start standardizing on the high 200s, low 300s? Sure.
spk02: There's obviously a lot of variability across the operating bases in Canada and the region. Yeah, yeah. What I will say, and I'll, you know, For the customers that are operating in the Montigny specifically, that tends to be a much higher intensity completion in Canada than areas like the Cardium and obviously some of the light oil plays in southern Alberta and Saskatchewan. You may see on average somewhere between 100 and 150 in the Montigny. This particular operator is looking at tighter density, slightly longer laterals. And obviously they're seeing the economic results from that to justify, you know, kind of continued increases to completion intensity over time. So were that type of design to be kind of promulgated across the customer base, there could be some pretty, you know, pretty meaningful increase in that, you know, number of sleeves per well or opportunity per well for us. We are seeing that a bit in some other markets as well, where customers are moving towards tighter density and seeing positive results from that. And as the initial operator that pursues that program, as the results come in, you see other operators in the area look to it and start to emulate those designs as well. Okay.
spk04: So it's more a tighter density as opposed to a longer lateral. Is that the driver then?
spk02: It's a little bit of both, right? So, you know, laterals are extending Canada just as they are here in the U.S. But, yeah, this particular customer is at a tighter density than I'd say most of the others in the region, and they're continuing to see where they can kind of push to get that economic benefit.
spk04: Okay. Got it. And then I know you probably don't have a strong view on this, but I'm just curious if you could speak to discussions as it relates to international opportunities in 2025.
spk02: Yeah, absolutely. I think as we turn the corner from 2024 to 2025, as we think about where we can probably have the most impactful increase on the international revenue side, I'd say it's going to be more driven by the North Sea next year. I think we can maintain and grow the opportunity set in the Middle East, which has been the biggest driver this year. And next year is where we'll get additional contributions from the North Sea to keep that momentum. Got it.
spk04: Okay. That's all I got. Thanks for including me.
spk02: I appreciate it, John.
spk00: I show no further questions in the queue. I would now like to turn the call back to Ryan Hummer for closing remarks.
spk02: Thank you, Michelle. 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 NCS and repeat precision as we implement our long term strategy. You may have heard me use the phrase technically demanding several times on this call. We're engaged with our customers to enable them to succeed in challenging environments onshore or offshore at ever increasing depths, temperatures and pressures and increasingly outside of North America. It's only through the capabilities of our people in a wide variety of roles across NCS that we can confidently take on these challenges, and I'm grateful to have such an amazing team aligned on achieving our objectives and those of our customers. We appreciate everyone's interest in NCS Multistage, and we look forward to talking again on our next quarterly earnings call.
spk00: This concludes today's conference call. Thank you for participating. You may now disconnect.
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