NCS Multistage Q3 2023 Earnings Call Transcript

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October 31, 2023

There are 5 speakers on the call.

Operator

Good day and thank you for standing by and welcome to the Q3 2023 NCS Multistage Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Advising your hand is raised. Please be advised that today's conference is being recorded.

Operator

I would now like to introduce your host for today's call, Mike Morrison, CFO. Please go ahead.

Speaker 1

Thank you, Justin. Thank you for joining the NCS Multistage Third 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 expectations including our ongoing litigation matters, inflation, central bank actions to combat inflation, distress at U.

Speaker 1

S. Regional banks, The Canadian wildfires as well as the impact of the conflicts in Ukraine and the Middle East on the global economy, oil and natural gas demand and our company. Please refer to our most recent annual report on Form 10 ks and our latest SEC filings for risk factors and cautions regarding forward looking statements. Our comments today and in our earnings release also include non GAAP financial measures, including adjusted EBITDA, adjusted EBITDA margin, 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 Q3 earnings release, which can be found on our website, ncsmultistage.com.

Speaker 1

I'll now turn the call over to Ryan.

Speaker 2

Thank you, Mike, and welcome to our investors, analysts and employees joining our Q3 2023 earnings conference call. Today's call will be structured a bit differently. I'll be framing my initial comments in alignment with the core strategies and guiding principles that embody our long term corporate strategy, And then Mike will review our financial performance later in the call. This was a very productive quarter for us in terms of advancing our strategy Positioning NCS to deliver value to our stakeholders, including our shareholders. As a reminder, the vision for NCS Is to be globally recognized as a trusted partner and bold innovator, enabling our customers' resource development strategies through technology driven solutions and reliable We have 3 core strategies that are supported by 2 guiding principles.

Speaker 2

I'll walk through each and discuss how certain accomplishments during the quarter will enable long term value creation. The first core strategy is to build upon our leading market positions. Examples of this include the strength of the NCS business across our product lines in Canada and the track record that we've established Fraction Systems product line worldwide. In Canada, early in Q3, we installed over 1,000 sliding sleeves on a 4 well Montney pad with one of our customers. These wells were successfully completed in a highly efficient manner and have exhibited strong initial production rates according to 3rd party data.

Speaker 2

At the beginning of the Q4, we had another significant achievement with the same customer, Placing over £23,000,000 of sand across a lateral that extends more than 2 miles. This well had 262 NCS sleeves installed This is only possible due to the quality of our sliding sleeves, The design of our robust service tools and the expert support provided by our field service technicians. In addition, A customer who has helped us to expand the limits of our fracturing systems technology and wells in the Montney is now applying learnings from those operations to reimagine their well completions in the Ellerzley formation in the Manville area drilling and completing 2 mile laterals with approximately 150 sliding sleeves We continue to have success in securing trials and supporting customers that are using plug and perf completions in Canada as well. We leveraged the testing capabilities of our Global Technology Center in Calgary To confirm the reliability of our Purple Seal Plugs to perform in casing with an internal coating designed to reduce downhole friction. Through product performance, Local field and technical support and local testing capabilities, we believe we are now a top 2 frac plug provider in Canada.

Speaker 2

We have an internal goal to secure the leading market share in frac plugs in Canada, just as we have in sliding sleeves and tracer diagnostics. Further emphasizing our strategy to build upon our leading market position in fracturing systems, I have an update on a multiyear project we have underway with a leading international oil company develop a version of our technology for use in deepwater offshore applications. During August, we participated in a test spanning nearly 2 weeks, Whereby our prototype sleeves and more importantly, our service tool components were able to successfully survive the placement of over £6,000,000 of ceramic proppant, mimicking the conditions that we would expect to see during deepwater operations. Both we and our sponsor were pleased with the results of the testing. In addition to this test, the sponsor has also ordered sleeves from us for use in an onshore trial well in the U.

Speaker 2

S. For the Q4 of 2023, which is a precursor to a future trial well offshore, which could be drilled in 2024. We're very excited about the prospect of taking our fracturing systems technology, has been proven in onshore and shallow water offshore environments into the deepwater offshore environment where we would operate from a floating rate. The second core strategy that I'll speak to is capitalizing on international and offshore opportunities. I'll start in the North Sea, where in September, we successfully installed and began completion operations on a well for a leading E and P customer in Norway.

Speaker 2

The well had 10 stages and included 2 separate sleeve designs. We're very optimistic about the opportunity we have with this customer going forward. In addition, we expect to be awarded fracturing systems work with 3 additional customers in the North Sea beginning in 2024, each of which has the potential to be a multi well program. We're actively working to bring additional product lines into the North Sea to capitalize on the opportunities generated from success with our fracturing systems business. In the Middle East, we completed our 1st revenue generating tracer diagnostics project for a leading national oil company in the region.

Speaker 2

The well was completed in July and reports were provided to the customer in August. With the success on this first well, we are in discussions for 2 additional projects, and we believe that this could become our largest market for tracer diagnostics outside of North America. Our final core strategy is to commercialize innovative solutions to complex customer challenges. This is a very successful and exciting quarter for us in that regard as well. Following extensive testing, we have qualified a new version of our AirLock casing buoyancy system that can be used in customer applications applying high torque to the casing string, Enabled by semi premium threats.

Speaker 2

This product is currently being run-in the field. We've also worked to expand the performance envelope of our AirLock G casing buoyancy system which would give us what we believe to be the highest performance casing buoyancy system utilizing a glass barrier available on the market today. At Repeat Precision, we have several new products available for field trial. We've introduced a version of our Purple Seal Frac Plug with a feature known as a misrun contingency device. This feature, integral to the plug, can save a customer time and money in the event the perforating guns downhole did not fire and a new gun string needs to be deployed.

Speaker 2

Repeat also has a dissolvable plug that we expect to be available for field trials during the Q4. The design is optimized for downhole performance and has been pressure tested to 10,000 PSI. The introduction of a high performance dissolvable plug Compliments our composite plug offering at Repeat, providing consistent performance and a single provider for wells for customers was recently released for field trials. This new system allows for precise phasing of the perc rating charges. We believe this system will be unique in the market by offering customers the plug and play system benefits of our modular Purple Fire perforating guns, which require minimal on-site assembly unlike many of the other oriented systems in the market with precise internal orientation and the ability for the customer to specify the shaped charge that they want to run.

Speaker 2

I'll now speak to the 2 guiding principles that underpin our long term strategy. The first is to maximize financial flexibility. Our financial model continues to be validated as we've maintained a net cash position with an undrawn revolver and generated higher adjusted EBITDA and adjusted EBITDA margin for the 1st 9 months 2023 and during the same period in 2022. During the quarter, NCS and our insurance carrier successfully settled one outstanding legal matter, We've made significant progress towards concluding another. We continue to expect that both matters will be settled within our insurance coverage limits with the settlements paid in full by our insurance carrier.

Speaker 2

As part of the one finalized settlement, NCS collected $600,000 in unpaid invoices associated with unrelated wells that had previously Been previously withheld by the plaintiffs. Our second guiding principle is to uphold the promise. The promise at NCS represents the commitments that we make as a company To our employees, customers, technology, vendors, quality, health, safety, the environment and other stakeholders. Our company values are also embedded in the promise. In further support of upholding the promise, we released our inaugural ESG report in September, titled The Promise in Action.

Speaker 2

The report is available on our website, and I encourage you to read it. We're very pleased with how it came together, The Board and I appreciate the significant and broad based contributions made by our employees as well as the valuable conversations that we had with our customers, You may have seen in our earnings release that we received an unfavorable ruling The decision resulted in certain of our patents being considered invalid and with NCS found to have infringed another company's patent. First, I want to be clear that we disagree with the decision, and we were shocked by the result. We intend to appeal the decision and believe that applicable law supports strong grounds that may lead to a reversal of substantial portions of the decision. But more importantly, as it relates to our people and upholding the promise, I couldn't be more pleased with the way that the team at NCS responded to the news.

Speaker 2

With a tremendous collective effort from our engineering, product line, manufacturing and supply chain, sales, technical services and operations teams, We are able to quickly develop, test and deploy a solution that complies with the decision in a manner that supported our customers' needs during the current time of high field activity levels.

Operator

This is

Speaker 2

a testament to our outstanding people, the problem solving spirit rooted in innovation and the collective character of the team that supported one another to rise and face this unexpected adversity. I'm proud to have the opportunity to lead this exceptional team. In summary, I believe we've made very important and meaningful progress on our long term strategic objectives over the past few months, which has positioned us for success, not just in the upcoming quarter or 2, but for the years ahead. I'll now pass the call back to Mike discuss our results for the Q3 and guidance for the Q4.

Speaker 1

Thank you, Ryan. As reported in yesterday's earnings release, Our Q3 revenues were $38,300,000 a 22% decrease compared to last year's Q3. Our Canada revenues decreased by 19%, U. S. Revenues were down 30% and international revenues decreased by 18%.

Speaker 1

Our Canadian revenues were impacted by a decline in rig count during the quarter resulting from Commodity price volatility and the continuing effect of the Canadian wildfires. Our sales in the U. S. Continued to be affected by lower natural gas prices, which has had a negative impact on customer activity levels. On a sequential basis, revenues in the 3rd quarter increased by 51% With Canada up almost 100%, international up by 26% and the U.

Speaker 1

S. Down by 15%. The increase in Canada was primarily related to normal seasonality associated with the spring breakup in the Q2 with crews getting back to work in the 3rd quarter. Our gross profit, defined as total revenues less cost of sales, excluding depreciation and amortization expense, was $15,700,000 in the Q3 of 2023, Representing a gross profit percentage of 41%, just slightly below our gross profit percentage compared to 1 year ago. Despite decline in revenues, we're able to maintain our gross profit percentage due to improved pricing of our products and services, which countered the effect of the decline in volumes and higher operational costs.

Speaker 1

Our revenues for the 1st 9 months of 2023 were 100 and $7,200,000 a decline of 7% compared to the 1st 9 months of 2022. However, our gross Margin percentage improved to 40%, up from 38% compared to the same period 1 year ago. Selling, general and administrative costs were $12,700,000 in the 3rd quarter, down by $2,700,000 compared to the Q3 of last year. The decrease was primarily due to lower annual incentive bonus accruals year over year and lowering of professional fees, partially offset by Severance and stock based compensation charges associated with the departure of an executive earlier in the Q3. For the Q3, We reported net income of $4,400,000 or an earnings per diluted share of $1.77 This was an improvement over the net income of $3,900,000 And earnings per diluted share of $1.58 1 year ago.

Speaker 1

Our adjusted EBITDA for the 3rd quarter was $6,800,000 For an adjusted EBITDA margin of 18%, an improvement over our adjusted EBITDA margin of 17% 1 year ago. For the 1st 9 months of 2023, our adjusted EBITDA was $9,400,000 an improvement of $700,000 compared to the same period 1 year ago. Turning now to cash flow items and the balance sheet. During the Q3, our cash flow from operations and free cash flow were uses of cash of approximately $400,000 $900,000 respectively. We expect to generate positive free cash flow in the 4th quarter and expect our full year free cash flow after JV distributions to be modestly positive for the full year of 2023.

Speaker 1

On September 30, we had $11,400,000 in cash and total debt of $8,300,000 which consisted entirely of finance lease obligations, resulting in a positive net cash position of $3,100,000 At the end of September, the borrowing base availability under our undrawn ABL facility It was $19,700,000 Also during the Q3, Repeat repaid all outstanding borrowings under their promissory note. Now turning to a few points of guidance for the Q4. We currently expect 4th quarter revenues of $37,000,000 to $41,000,000 About the same level of revenues sequentially and as compared to the Q4 of last year, bringing our full year revenues between $144,000,000 to 148,000,000 We expect U. S. Revenues of $9,000,000 to $10,000,000 international revenue of $2,000,000 to $3,000,000 and Canadian revenues of $26,000,000 to 28,000,000 This represents a sequential increase in both the U.

Speaker 1

S. And international. We expect our Canadian revenues to be equal to or slightly decline sequentially Attributable to the typical holiday slowdown starting in mid December. We expect our gross margin percentage to be between 40% 42%, Consistent with our gross margin percentage this quarter into the Q4 of 2022. We expect our adjusted EBITDA to be between $4,000,000 $6,000,000 Bringing our full year expected adjusted EBITDA to a range of $13,500,000 to $15,500,000 We expect our 4th quarter depreciation and amortization to be approximately $1,100,000 With that, I'll hand it back over to Ryan.

Speaker 2

Thanks, Mike. So before Q and A, I'll close with a couple of brief comments. While the Q3 proved to be more challenging than expected commercially, We made significant progress during the quarter in alignment with our core strategies, especially on initiatives that we believe will enable us to execute on company specific growth opportunities as our technology is commercialized and deployed in North American and international markets. Despite some challenging rig activity trends in 2023, We continue to believe that we are in a multi year cycle of improved growth and earnings prospects for our industry globally. We appear to have reached the bottom of this recent correction With the rig count in the U.

Speaker 2

S. Holding steady over the last several weeks, we expect modest growth in rig activity in the U. S. In the 4th quarter with the potential for further growth from that base in 2024, reflecting recent crude price crude oil price increases and the need to add natural gas supply Demand coming from LNG facilities expected to come online late next year and into 2025. Similarly, in Canada, we believe industry activity will be Reported in 2024 and beyond as the TMX oil pipeline expansion is brought online and as natural gas production ramps into the commissioning of the Coastal GasLink pipeline and Canada LNG facility.

Speaker 2

Through our continuous improvement efforts, we're finding ways to be more efficient, Which supports our gross margin percentage, moderates our SG and A spend and positions us for strong incremental profitability as we grow our revenues. Finally, I'll reiterate how much I appreciate the way that our people have once again proven how they can rise to the occasion in the face of uncertainty and challenges. And with that, we'll welcome any questions.

Operator

And thank And one moment for our first question. And our first Question comes from John Daniel from Daniel Energy Partners. Your line is now open.

Speaker 3

Thank you. Hey, Ryan. Good morning.

Speaker 2

Hey, good morning, John.

Speaker 3

So I'm going to ask a little bit of a rookie question here, but the thing that really intrigued me was your commentary on the product development for Deepwater. Could you just take a step back and tell us sort of the evolution of how you got into deepwater, sort of maybe You might not want to quantify, but I'll try like what it represents today and what this the new technology could mean, call it 3 to 5 years Now if we find ourselves in the long duration cycle, which a lot of talking heads are proficine right now.

Speaker 2

Yes, Josh. So I'll tackle that at a pretty high level and try to respond to as much of that as I can. Certainly, we with our technology, we started several years ago moving into shallow water offshore. We had some work with Maersk, which is now those properties are now owned by Total several years ago, Developed a relationship with Aker BP in the Norwegian side of the North Sea and have continued to develop that portfolio. I think as part of that, certainly, we were able to garner some attention for the capabilities of our systems In those sorts of offshore environments, including some designs that we are looking at that will Really take a frac sleeve from something to just place proppant into the well or do our ship frac close technology to something that can be Truly a life of well production solution, including, if you will, solids control capabilities Within that same sort of frac systems chassis.

Speaker 2

And we have one customer, an international oil company who had a vision for Potentially taking our technology and using it, I'd say the initial Application is targeted actually for you've heard a few operators in the deepwater Gulf of Mexico talking about the paleo gene now. So a target that's a little bit deeper than traditional targets and where our system could potentially be used as the lower completion system, Given our single trip capability, what we're able to do with the service tool, which is able to Actually, many more stages in a single run than typical offshore multi zone single trip type systems that are out there. So it's that's kind of the opportunity that our customer is chasing. Now the challenge for us Right. We're moving from deploying our service tool off of either land or fixed platform A moving rig, right?

Speaker 2

So it's a pretty significant challenge and it's been a multi year development. But obviously, we had the test earlier this year, which proved out the robustness of the sleeves and the service components that's migrating towards A land trial this year with the potential for sales next year. So I think it would be To the point where there could be a multi well opportunity on an annual basis a few years down the road. And the other thing I'd say is that this customer, right, has other partners on those wells who are targeting some of the same applications. But anything in deepwater takes Takes a little bit longer to develop and test and get out there.

Speaker 2

So we're excited about the technology development. I think it will be a really good opportunity for us. But I think we just need to be a little bit patient with it as well.

Speaker 3

Fair enough. But Assuming that does materialize over time, is it safe to assume that like a new technology like this, if adopted And has some scale with you, is a margin enhancing product relative to the core offering or no?

Speaker 2

Yes, absolutely, John.

Operator

Okay. All right. And our next question comes from Dave Storms from Stonegate. Your line is now open.

Speaker 4

Good morning.

Speaker 2

Good morning, Dave.

Speaker 4

So just great to see EBITDA is remaining strong despite the low tick down in revenues here. It looks like you're kind of doing more with less. Can you kind of talk us through what's driving that and if any of the stuff that you've implemented to be able to maintain those strong margins are sticky going forward.

Speaker 2

Yes, absolutely, Dave. I'll start on this and I'll let Mike chime in with anything that I miss. But I will say that, right, the team across the board is dedicated to continuous improvement. In our Q2, I think we noted some facility rationalizations that we had made both with Manufacturing in Mexico and then across our tracer diagnostics business, those are certainly Sticky. And then the supply chain team that we have, part of a recent reorganization we had was putting our supply chain organization together with our Services organization and that started to bear fruit very quickly as well, where the combination of Our supply chain is always thinking of ways to value engineer cost out of the way that we do business together with the tech services Team who can interact with engineering and think about getting things rapidly prototyped and through field trial.

Speaker 2

Yes. I think that's something where we're going to continue to chase ways to operate more efficiently and preserve and grow gross margin dollars. There are some other changes that we've made across the organization to try to structure things to run a little bit more efficiently and a little bit more lean that really impact The SG and A side and help us to preserve the ability to achieve an adjusted EBITDA This year through the 1st 9 months, that's consistent a little bit better than last year despite the fact that revenue is off. We're working with the current market environment where the U. S.

Speaker 2

Rig count troughed maybe a little bit later than we thought it would, where the Canadian ABD didn't come out of break up quite as strong as we had thought it would, but we've been able to make sure that we continue to manage and measure costs in a way that we can Preserve as much profitability as possible and we do think that is sticky to use your phrase so that when we do pivot back to revenue growth That will help us with strong incremental margins and help to grow the average margin as we grow the top line.

Speaker 1

Yes. This is Mike. Great question. Nothing more really further to add other than just SG and A. Ryan had hit upon that, but just Continuing to focus on not growing that, how do we leverage it and how do we strategically reduce that where it makes sense.

Speaker 1

That's a long term effort and we're seeing those benefits.

Speaker 4

That's incredibly helpful. Thank you. One more, if I could. You continue to get gain traction in the Middle East. You continue to get a foothold there.

Speaker 4

Can you kind of talk about the bidding environment there, maybe in comparison to the Canadian market where you're One of the top players already.

Speaker 2

Sure, Dave. So for the Middle East, right, Each country is a little bit different where we've been focused over the last few years. You've seen In some of our commentary in our annual report, we've got a long term contract in Oman for some tracer diagnostics work. We're looking to leverage that Be able to deploy some additional product lines beyond TRACERS through that contract. But where we've really made headway In the last year or so is with Saudi Aramco and that is a long process to get Qualified and what you call cataloged there.

Speaker 2

And typically, it involves you provide Some equipment essentially for free in a free trial. Once the equipment works and proves out the value proposition for the customer, Then you're invited to be part of a cataloging process where the various asset owners in the region can utilize your equipment. And then in time, you may be Selected to participate in multiyear tenders and we're in that middle phase where we have multiple product lines that are cataloged and Can be called off by the asset owners at Aramco and that's for our tracer diagnostics business and for a couple of product lines within well construction. And we continue to work every day to kind of grow that relationship and become part of or have the opportunity to Some of the multi well tenders where you really expect in. But for now, we're happy with the progress we've made and the opportunity that we have.

Speaker 2

We can Participate in revenue generating projects, right now and look to grow the business and look for those longer term opportunities as they present

Speaker 4

That's very helpful. Thank you for taking my questions and good luck in the Q4.

Speaker 2

All right. Thank you, Dave.

Operator

And thank you. And I am showing no further questions. I would now like to turn the Call back over to Ryan Hummer for closing remarks.

Speaker 2

All right. Thank you, Justin. Look, on behalf of our management team and our Board, like to thank everyone who joined the call today, including our shareholders, analysts and especially our employees. I truly appreciate the depth and breadth And the passion and the effort that these people bring to their work. And I look forward to talking to everyone, I guess early next year.

Operator

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

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