NCS Multistage Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 10, 2023

Key Takeaways

  • Reported U.S. revenue of $11.3 million in Q1, below the guided $12–13 million due to reduced natural gas activity and lower perforating gun sales.
  • Canadian revenue of $30.7 million came in near the midpoint of guidance, driven by strong volume growth in sliding sleeves and pricing gains realized in late 2022.
  • Achieved a 43% gross margin in Q1, exceeding the guided 38–41% range and marking the highest quarterly margin in the past year.
  • Booked a $17.5 million litigation charge related to a jury verdict, though management expects insurance recoveries and plans to appeal, limiting long-term impact.
  • Maintained a robust balance sheet with $5.2 million net cash, over $61 million in net working capital (exceeding market cap), and minimal capital expenditures of $0.5 million.
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Earnings Conference Call
NCS Multistage Q1 2023
00:00 / 00:00

There are 3 speakers on the call.

Operator

Good morning, and welcome to the NCS Multistage First Quarter 2023 Conference Call. All participants will be in a listen only mode. After today's presentation, There will be an opportunity to ask Please note that this event is being recorded. I would like now to turn the conference over to Mr. Mike Morrison, CFO of the company.

Operator

Please go ahead.

Speaker 1

Thank you, Caroline, and thank you for joining the NCS Multistage First 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 impact Inflation, Central Bank Actions to Combat Inflation, Distress at U. S.

Speaker 1

Regional banks 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 ks for our latest SEC filings for risk factors And cautions regarding forward looking statements. Our comments today also include non GAAP financial measures, including adjusted net income, Adjusted earnings per diluted share, adjusted EBITDA, free cash flow and net working capital. The underlying details and reconciliations of non GAAP measures The most comparable GAAP financial measures are included in our Q1 earnings release, which can be found on our website at ncsmultistage.com. I'll now turn the call over to Ryan.

Speaker 2

Thank you, Mike, and welcome to our investors, analysts and employees joining our Q1 2023 earnings conference call. Our performance in the Q1 of 2023 was largely in line with the guidance we provided in early March, With revenue slightly above the low end of the range and adjusted EBITDA near the higher end of the range, I'll briefly discuss our results and outlook for each of the U. S, Canada and International Markets. Starting with the U. S, our revenue of $11,300,000 in the first Well, below the low end of our guidance of $12,000,000 to $13,000,000 reflecting reductions in activity by certain customers that are focused on natural gas production And lower than expected perforating gun sales.

Speaker 2

Despite the reduction in industry drilling and completion activity targeting natural gas, We expect to return to modest sequential revenue growth in the U. S. In the Q2. The operational performance of our perforating guns in the field was very strong in We also made good progress in introducing these products to additional customers. It has taken time to migrate customers from trials It's a steadier ongoing work, which is what led to the lower than expected sales volumes for the quarter.

Speaker 2

Offsetting the lower perforating gun sales, We saw increased momentum throughout the Q1 in purple seal composite plug sales for Repeat Precision, which has continued into the 2nd quarter. Our Canadian revenue of $30,700,000 in the first quarter was near the midpoint of our guidance range of $30,000,000 to $32,000,000 We had strong increases in revenue as compared to both the 1st and 4th quarters of 2022, with the 4th quarter having been impacted by customer budget exhaustion. We continue to grow product sales volumes across sliding sleeves and well construction products, and the impact of the pricing increases we achieved The second half of twenty twenty two are reflected in our product margins, which I'll touch on a bit later. I'd like to highlight how one of our customers in Canada Leveraging our technology to drive asset performance and operational efficiency. The customer recently completed 2 4 well pads, 8 wells in total In a project with over 220 sliding sleeves per well on average.

Speaker 2

During the completions, they utilized a simul frac technique, Optimizing the surface footprint and horsepower and orchestrated the activity across the wells with several coiled tubing units. Operationally, the customer utilized our shipped frac close process, which provides operational flexibility and helps to ensure that Profit placed in the formation stays in the formation, minimizing the need for post job cleanouts. The shipwreck close operations And these high intensity completions also highlight some of the key features that differentiate NCS from our competition, including the quality of the seals in our sliding sleeves And the repeatably robust performance of our frac initiation assemblies, which benefit from features protected by our intellectual property and will leverage our extensive track record. We've also continued to execute on opportunities to grow our market share in composite frac plugs in Canada. We've committed additional field support to the product line and are benefiting from some of the customer consolidation that's been taking place in the Montney and Duvernay.

Speaker 2

We continue to monitor the wildfire situation in Western Alberta to ensure that our people are safe. We expect that our Canadian business We'll exhibit typical seasonality in the Q2 with a period of lower activity through May before recovering in June, which could be exacerbated by the impact of the wildfires on We're encouraged by the discussions we've had with customers about both the timing and scope of their expected activity after spring breakup. Peak activity in the Q3 of 2023 in Canada could be as robust as the Q1. Our international operations were seasonally slow in With revenue of $1,600,000 coming in just above the midpoint of our guided range of $1,000,000 to $2,000,000 We've mentioned in the past the attractive opportunity for our tracer diagnostics product line in international markets and we'll highlight one recent project. NCS ran tracers on a Middle East miscible gas flood project, injecting tracers in 7 wells and collecting samples from 17 producing wells.

Speaker 2

The analysis of the recovered tracer from the producing wells provided valuable insights for our customer. This diagnostic technology and evaluation provided critical information Regarding reservoir connectivity, gas breakthrough patterns and optimization opportunities for gas injection and condensate production. Further tracing is planned in this area to help refine reservoir simulation models as our customer updates their field development plan. The Continuous monitoring of TRACER results will be crucial for the ongoing success of this project. Our international activity has begun to improve in the Q2 and we believe that will Continue to increase as we move to the second half of the year.

Speaker 2

As installation and service activity increases in the North Sea, As TRACER projects pick up in Argentina and as we grow our revenue base in the Middle East and in Saudi Arabia in particular. A bright spot for the quarter for us was our gross margin, which at 43% exceeded our guided range of 38% to 41% and was higher than any quarter during We previously discussed the cost increases that we incurred in 2022 before we were able to achieve pricing increases with our customers, which were primarily realized during the second half of twenty twenty two. The benefit of these pricing gains shows up most clearly while looking at the gross margin on our product sales, which was 40% during the Q1 of 2023 as compared to 32% in the Q1 of 2022 And also drove an overall gross margin improvement of approximately 4.50 basis points between the two quarters. We continue to pursue additional, though more modest pricing improvements with our customers, which are necessary to offset the impact of costs incurred across our supply chain, Especially the cost of oilfield tubulars, which despite some recent moderation remain more than 100% higher than they were in early 2021.

Speaker 2

We maintain our strong balance sheet with approximately $5,200,000 in net cash and an underarm revolver as of March 30, 2023. In addition, our net working capital, excluding cash and short term debt at March 31, of over $61,000,000 Exceeds our current market capitalization by nearly $15,000,000 Our net capital expenditures for the quarter $500,000 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 address the litigation provision that we booked during the Q1. On May 2, 2023, a jury issued a verdict against us, awarding approximately $17,500,000 in damages, resulting in us accruing a contingent liability. The matter related to well damages for 4 wells in 2018 resulting from an alleged product effect Related to components provided by a third party supplier of ours.

Speaker 2

We expect a large portion up to all of the awarded damages to be covered by insurance, which would offset this liability, and we would therefore expect that the matter, once resolved, to not have a significant impact on our financial position or on our operations. In addition, we intend to appeal the judgment and believe that we have strong arguments that could lead to the reversal of some or all of the awarded damages. Over to you, Mike.

Speaker 1

Thank you, Ryan. As reported in yesterday's earnings release, our Q1 revenues were $43,600,000 11% higher than the prior year's Q1. Our U. S. And Canadian revenues increased by 25% and 8%, respectively, with our international revenues slightly up compared to 1 year ago.

Speaker 1

On a sequential basis, revenue in the Q1 was 8% higher than revenue in the Q4 of last year with a 24% increase in Canada, partially offset by declines of 16% 19% in the U. S. And international markets, respectively. Our gross profit, defined as our total revenues less cost of sales, excluding depreciation and amortization expense, was $18,500,000 in the Q1. Our gross profit percentage improved to 43% compared to 38% for the same period 1 year ago and 40% sequentially.

Speaker 1

This improvement was due to, in part, our customer pricing increases and a higher utilization of our manufacturing capacity and field service personnel, more than offsetting our higher supply chain costs. Selling, general and administrative costs were $16,200,000 in the 1st quarter, Slightly up compared to the Q1 of last year. Our salary and wage related expenses are up due to increases in our headcount, Merit raises and higher incentive bonus accruals, which were mainly offset due to decreases in our share based compensation and professional fees compared to 1 year ago. For the Q1, we reported a net loss of $15,000,000 or a loss per share of $6.10 As Ryan mentioned moments ago, Our first quarter results were impacted by a $17,500,000 charge related to a jury verdict against us last week. While we expect most, if not all, of the award to be covered by insurance, we have not yet recorded the insurance recovery as an asset To offset this legal contingent liability, we currently expect to book the offsetting insurance recoveries in the coming quarters as they become more supportable and realizable for GAAP accounting purposes.

Speaker 1

Excluding this litigation charge, net of tax, Our adjusted net income was $1,200,000 or $0.50 per diluted share, an improvement over the adjusted net loss of 1,800,000 or a loss per share of $0.73 in the Q1 of 2022. Our adjusted EBITDA for the Q1 was $4,900,000 an improvement of $2,600,000 compared to 1 year ago. Turning now to cash flow items and the balance sheet. Cash flow from operations and free cash flow were a use of cash of $1,600,000 $2,000,000 respectively. While we continue to anticipate being free cash flow positive for the full year of 2023, our negative free cash flow for the Q1 was primarily due to an increase in our net working capital of $6,500,000 which totaled $61,700,000 at March 31.

Speaker 1

On March 31, we had $13,600,000 in cash and total debt of $8,400,000 resulting in a positive net cash position of $5,200,000 As of March 31, the borrowing base available under our undrawn ABL facility It was $21,100,000 Turning now to a few points of guidance for the Q2. We currently expect 2nd quarter total revenues of 27 $30,000,000 We expect U. S. Revenue of $12,000,000 to $13,000,000 international revenue of $2,000,000 to $3,000,000 And we expect Canadian revenue of $13,000,000 to $14,000,000 reflecting the seasonal impact of spring breakup. We expect our gross margin percentage to be between 34% and 36%, an improvement compared to the 33% gross margins we Due to the seasonal impact of spring breakup, we expect our adjusted EBITDA to be between negative $3,000,000 $2,000,000 before turning positive again in the second half of the year.

Speaker 1

We expect our 2nd quarter depreciation and amortization expense Approximately $1,100,000 I'll hand it over to Ryan to discuss our 2023 full year guidance and for closing remarks.

Speaker 2

Thank you, Mike. We're making slight adjustments to our full year guidance for 2023. We currently expect full year revenue of $170,000,000 to $185,000,000 and full year adjusted EBITDA of $20,000,000 to $25,000,000 consistent with the calculations in our earnings release. This new revenue range is $5,000,000 below the prior range, but we have our adjusted EBITDA guidance, reflecting better expected gross margin performance as seen in the Q1 and slightly lower expected SG and A expenses for the remainder of the year. With the improved performance in the Q1 of 2023 as compared to the same period in 20 22.

Speaker 2

Our adjusted EBITDA for the trailing 12 month period is $17,700,000 We expect our gross capital expenditures for 2023 $3,000,000 to $5,000,000 which is reduced to the low end of the range by $1,000,000 from the prior guidance. We continue to expect to be free cash flow positive in 2023 after accounting for both capital spending and investments in net working capital to support our growth. As we move past the Q2 of 2023, we expect our spending on litigation matters to moderate meaningfully, which should allow us to convert a higher As anticipated year over year average annual industry activity growth of up to 10% in both Canada and the U. S. The activity in the U.

Speaker 2

S. Is expected to remain below the levels reached in the Q4 of 2022, primarily as a result of Furthermore, we expect international industry activity to grow by at least 10% in 2023. We expect our revenue growth to exceed that of the underlying industry activity by achieving market share increases in selected product and service lines, growth in international markets and continued adoption of newly introduced technologies across our product and service lines. We also expect that the full impact of additional price increases that we achieve with our customers to offset cost inflation will provide a positive impact, especially in the second half of the year. Due to the seasonality of our business and consistent with prior years, we would anticipate that the achievement of our annual adjusted EBITDA guidance range will be weighted to the As discussed earlier, we believe that the recent jury verdict against us will be covered by insurance with the award potentially reduced We believe that the final resolution of the matter, which could take several quarters, will not have a significant impact on our financial position or operations.

Speaker 2

Before we open up to Q and A, I'll close with a couple of brief comments. We continue to build on our strong performance over the last several years as we execute on our growth NCS has the infrastructure in place to support revenue growth in each of our geographic markets, providing leverage to grow future earnings. As demonstrated by our guidance for 2023, achieving the midpoint of our guidance range would grow our annual revenue by 14% And further increase our adjusted EBITDA margin to approximately 12.5% for the year. We maintain a strong balance sheet and liquidity position With a cash balance of over $13,000,000 at the end of the Q1. In addition, we expect to add to that cash balance by generating positive free cash flow in 20 20 3, providing us with financial and strategic flexibility.

Speaker 2

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. I'm in Calgary this morning, and after the call, we'll attend a breakfast event our technology can support our customers as they complete ever longer laterals to improve their capital efficiencies. This includes our AirLock casing buoyancy system As well as our proprietary AirLock Infinity solution, which pairs the AirLock with an innovative disruptor composite centralizer To reduce sliding friction, increase hook load and reduce drag to get casing to its intended depth in less time and without the need to rotate the casing strength. We'll also be highlighting the success of our fracturing systems technology in extended laterals, where we routinely work with customers to efficiently complete high stage Count wells with laterals exceeding 2 miles, including couple wells with lateral lengths of over 3 miles. Looking forward to spending time with our customers and And with that, we'll welcome any questions from the audience.

Operator

It appears as we have no further questions. I will turn it back to Brian Hummer, CEO of the company for any closing remarks.

Speaker 2

Okay. Thank you, Caroline. So 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. We're only as good as our people, and I'm proud to be a part of the best team in the industry.

Speaker 2

This team continues to provide excellent service to our customers cycle of improved growth prospects for our industry, and I'm excited by how NCS is positioned to participate in that growth and to deliver benefits to our employees, customers, Shareholders and other stakeholders, we appreciate everyone's interest in NCS Multistage and we look forward to talking again on our next quarterly earnings call. Thank you.

Operator

Thank you all for attending today's presentation. This conference is now concluded. You may now disconnect. Have a good day.

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