Q3 2019 Earnings Call
2019, Multistage earnings conference call.
At this time, all participants are in English and only note.
Later, we will conduct a question and answer session and instructions will follow at that time.
Anyone should require assistance during the conference. Please press Star then zero on your Touchtone telephone.
A reminder, this conference call is being recorded.
I would now like to turn the conference over to your host Mr. Weidenhammer. Please go ahead.
Thank you Stephanie and thank you for joining NCS multistage as third quarter 2019 conference call.
Call today will be led by Robert never our Chief Executive Officer, and I will also provide comment.
Before we begin todays call she'd like to caution listeners that some of the statements that will be made on this call could be forward looking in nature and to the extent that our remarks today contain information other than historical information. Please note that we are relying on the safe harbor protections afforded by federal law.
Such forward looking statements may include comments regarding future financial results and are subject to several known and unknown risks I'd like to refer you to our press release issued last night, along with other public filings made from time to time with the FCC that outline those risks.
I also need to point out that in our earnings release and in todays conference call. We refer to adjusted EBITDA adjusted EBITDA margin adjusted EBITDA less share based compensation and free cash flow, which are non-GAAP measures of operating performance.
We use these measures because they allow us to compare performance consistently over various periods without regard to costs associated with our current capital structure and in a manner that we believe better reflects our operating performance.
Our press release from yesterday, which is posted on our website and see us multistage Dot com provides reconciliations of these non-GAAP financial measures to the nearest GAAP financial measures I'll now turn the call over to our CEO Robert number.
Thank you Ryan and welcome to our investors analyst and employees during our third quarter 2019 earnings Conference call.
This morning, I'll review, how level quarterly results and we'll discuss what we're seeing in our Canadian U.S. and international operations I'll also outlined the progress that we've made on the initiatives. We have underway that aim to improve our gross margin performance and reduce or as DNA expenses.
After that I'll turn it over to Ryan to discuss the quarterly results in more detail and provide guidance for the upcoming quarter.
I will then provide some closing remarks, highlighting some of our recent accomplishments.
Total revenue in the third quarter was $60.8 million, 3% below the year ago period, and 53% increase sequentially. Our total revenue was within guidance, we provided in the last quarter's call.
Adjusted EBITDA in the third quarter of $13.6 million reflected an adjusted EBITDA margin of 22%.
Starting with our Canadian operations, our revenue of $26.1 million for the third quarter was 10% lower than third quarter of 2018, and 127% higher sequentially inline with the guidance provided in the last quarter's call.
Our 10% year over year decline in revenue in the third quarter was achieved in the face of a 37% reduction in average rig count and in spite of the pricing adjustments. We made in Canada late last year, demonstrating continued improvements in market share.
Out of what our team in Canada as accomplishing in a very challenging market environment. The group is delivering on the business strategies, we have in place in that market.
One highlight is that we're gaining share and the deep basin, including the Montney an area we've been targeting for some time.
We're strategically leveraging our market position in fracturing systems to grow ourselves well construction products and treasurer diagnostic services, providing us with incremental revenue opportunities.
One take away from this is that our treasurer diagnostics revenue in Canada set a new quarterly record in the third quarter.
The team is delivering excellent execution in the field supporting ourselves effort and strengthening our customer relationships the quality and efficiency of our field operations continues to differentiate us from our competition.
We continue to benefit from the Technology Center, we opened earlier this year utilizing it to ensure that our customers appreciate the breadth of our capabilities as well as the rigorous testing. This supports our current product and service offering and the new product development initiatives.
The overall market in Canada remains challenging.
Based on the customer conversations that we're having we continue to believe that rig count in the fourth quarter will be significantly below last year. It's too early at this point have affirmed view on customer budgets and market activity for 2020, and we will know more as preliminary budgets are released later this year in early next year.
Without additional pipeline capacity, there remains low incentive or ability for our customers grow production. We believe the primary application of our customers excess cash flows will continue to be to reduce debt and return capital to shareholders until capacity is at it.
Turning now to the U.S., our revenue for the third quarter of 28, and a half million dollars was 9% higher than in the year ago period, and 7% higher sequentially.
We delivered sequential growth in product revenues for eight consecutive quarter with 3% growth in third quarter. The product sales growth was driven by fracturing systems and repeat precision.
Repeat precisions market shares increased in our Purple Sill Express is representing a higher mix of plug sales over time.
Revenue from our well construction products fell during the quarter, reflecting a decline at volume and a competitive pricing environment.
You have services revenue increased by 22% sequentially with increases in the activity and tracer diagnostics in fracturing systems service revenue.
With the continued reductions in the active rig count and the active completion spreads customer activity in the fourth quarter is expected to decline significantly and we currently have limited visibility into customer activity for 2020.
Our international revenue for the third quarter of $6.1 million, where does at the high end of our guidance and increase sequentially. During the third quarter, we worked in or sold products to customers and the North Sea, Argentina, China Middle East, Russia, and the UK.
I'll now review, our gross margin performance for the quarter and our ongoing efforts to operate more efficiently.
Gross margin for the third quarter was 47% up from 42% in the second quarter and above the high end of our guidance range. The primary drivers for the improved margin performance, where improve utilization given the higher activity level and revenue across all geographies re negotiated rates with vendors and increase capacity at our new repeat precision facilities.
Mexico, allowing us to build a higher percentage of our sleep components in house.
During the quarter, we were able to secure additional field trials or shorter high pressure sleeve, which we expect to have commercialized by the end of the year with positive contributions to gross margin. In 2020. In addition, we have hired and trained personnel for a second assembly shift in Houston, which was put online at the end of October this will allow us to her.
More in house sleep manufacturing capacity, reducing third party spending.
Continuing to improve our cost position is critical given the current industry environment, we're in a very competitive industry and one in which the activity levels for our customers is declining in North America. This is apparently you as rig and completions counts and activity in Canada has been depressed at depressed levels for over a year. This.
Resulted in overcapacity and price competition across all feel product and service lines and we expect this to continue.
Addition to the specific product and supply chain initiatives, we're focused on demonstrating the value that we bring to our customers to combat pricing pressure.
We also have R&D projects underway in each of our product and service lines to drive innovation and bring solutions to market that allow customers to operate more efficiently reduce cost and improve profitability.
Our total as DNA expense in the third quarter of $20.4 million was 11% lower than last quarter and was below the low end of our guidance. The primary driver of our lower as DNA expense in the quarter is related to the reduction in force and executive salary reductions that we implemented in July as we previously indicated those actually.
This resulted in approximately $5 million, an annual annualized cost reductions with an increased overall focused on expense management, providing further benefits beyond the $5 million.
We believe the investments and initiatives of the past several years provide us with multiple opportunities for capital efficient growth and free cash flow generation, we've taken steps to rightsize our operations for the current market environment and continue to make progress on the challenges that impact on gross margin earlier in the year.
Through disciplined growth and free cash flow generation, we expect to improve our return on invested capital and create value for our shareholders on all handed over to Ryan to discuss our financial results in more detail.
Thank you Robert.
As reported in yesterday's earnings release, our third quarter revenues were $60.8 million, 3% lower than the prior years third quarter and in line with the guidance. We provided on last quarter's call on a sequential basis overall revenue in the third quarter was 53% higher than the revenue in the second quarter was the campus sequential increases in each of the U.S. Canada.
And international markets.
Gross profit defined as total revenue less total cost of sales, excluding depreciation and amortization expense was $28.6 million in the third quarter or 47% of revenue compared to 33.9 million were 54% of revenue in the prior years third quarter with lower margins on both product sales and services revenue.
This gross margin percentage was above the high end of the guidance, we provided for the quarter for sequential comparison gross profit was $16.7 million or 42% of revenue in the second quarter.
Our SDMA costs were $20.4 million in the third quarter as compared to 19.4 million in the prior years third quarter. There were also 11% lower than the second quarters level of 22.9 million.
As a reminder, our reported SGN a include share based compensation as well as certain nonrecurring expenses, including litigation expenses.
In the third quarter or SGN. A also included zero point $7 million and onetime costs related to the reduction in workforce that we implemented in July .
Adjusted EBITDA for the third quarter was $13.6 million as compared to 18 million in the prior years third quarter adjusted EBITDA as a percentage of total revenue was 22% in the third quarter 2019.
During the quarter, our depreciation and amortization expense totaled $2.6 million.
We had net income attributable to non controlling interest of $3 million in the quarter, reflecting positive net income at repeat precision.
Our average basic and diluted share counts for the quarter were both 46.9 million.
Turning now to cash flow items in the balance sheet.
Cash flow from operations for the third quarter was negative 1.3 million and has been a positive 4.8 million for the year through September Thirtyth, our net capital expenditures for the third quarter or 0.3 million and have been $4.4 million for the year through September thirtyth.
As a result, our free cash flow for the quarter was negative 1.6 million and has been positive 0.4 million for the year to date through September Thirtyth.
At September 30, we had $4.5 million in cash and total debt of 16.3 million, which included $13 million drawn under our U.S. revolving credit facility during the quarter, we reduced our cash balance by $3.2 million and we've reduced it by 9.4 million for the year through September Thirtyth, We also have up to.
To 62 million in total potential availability under our revolving credit facilities, bringing our total potential liquidity at September thirtyth to approximately 66.5 million.
Close with a few points of guidance for the fourth quarter.
We currently expect fourth quarter revenue to be between 49, and $55 million with us revenue lower by 12% to 24% on a sequential basis, reflecting further reductions and rig count and completion activity.
In Canada, we expect a seasonal sequential decline in revenue of 8% to 16% from the third quarter, primarily driven by the typical reduction in activity in the second half of December .
We expect international revenue of approximately $5 million to $6 million as we benefit from the ongoing work we have across multiple geographies.
Approaching the higher end of this range will primarily depend on consistent activity levels in Canada through early December and a moderation in the pace of the reduction of us drilling and completion activity as we progress through the fourth quarter.
We expect our gross margin to be between 44, and 47%, reflecting a modest decrease relative to the third quarter with negative absorption impacts related to the lower revenue, partially offset by continued progress in our company specific initiatives.
We expect our reported SGN day inclusive of share based compensation and nonrecurring items to be between 20, and $21 million, including approximately $3 million and share based compensation and over $1 million in litigation expenses. This amount excludes potential provisions for doubtful accounts related to customer related events occurring during the fourth quarter.
We expect our fourth quarter, depreciation and amortization expense to be approximately $2.7 million.
We expect our net interest expense to be between 0.30 point $4 million in the fourth quarter.
We began reduced our expected gross capital expenditures for the full year of 2019 to a new range of $6 million to $7 million. The midpoint of this range represents a reduction of over 50% from last year.
I'll now hand, it over to Robert for closing remarks. Thank.
Thank you Ryan.
Before we open up the call for Q and I'd like to highlight some of our recent accomplishments in Canada. Our team is executing on our strategy to increase our market share and cross sell our products and services to fully capitalize on strong market presence.
We sold over 25% more sliding sleeves and completed approximately 25% more wells in Canada, and the third quarter as compared to third quarter last year. This in the face of a 37% year over year reduction in rig count.
We also had our highest ever revenue quarter for our transfer diagnostic services business in Canada.
In the U.S., we had our eighth consecutive quarter of increased product sales driven by market share growth for our purposes. So.
Frac plugs and the sequential increase in sliding sleeve sales.
We continue to grow our presence in international markets, which we believe have a more stable near and medium term outlook than North America.
We have recently set a record in Russia, completing a well with over 50 sliding sleeves and have installed a well with over 50 sleeves for an upcoming completion in China.
We're expanding the international presence for our transfer diagnostics offering preparing for an upcoming middle East work.
We are currently supporting completions for multiple offshore wells simultaneously in the North Sea.
I'll close with a couple of brief comments, we along with others in our industry are facing significant challenges, especially in North America, our customers, reducing activity levels, which limits growth opportunities and has resulted in increased competition amongst service companies. We are taking specific actions to address these challenges we are executing on the strategies.
That we've had in place for the past several years leveraging the leadership positions in the product lines and service lines of which we compete we have tactically expanded our product and service offering over time and have invested in our Salesforce international infrastructure to allow us to capitalize on revenue opportunities across the globe.
We've made substantial progress addressing the company specific challenges we faced in the second quarter and continue to take steps to optimize our supply chain. We have implemented cost reduction initiatives that included a 6% workforce reduction in order to better align our operations with the opportunities in the market.
We expect to achieve run rate savings of approximately $5 million from the workforce reductions and have already achieved additional savings initiatives that.
We've reduced our expected capex throughout the year.
As a technology driven company, we continue to innovate to bring new products and services to market that are highly valued by our customers improving efficiency, reducing costs enhancing recoveries and improving their financial returns as a result, we believe we are well positioned to deliver capital efficient long term organic growth through increased.
The option of our innovative completions equipment and services our capital light business model provides us with the ability to generate free cash flow, while maintaining a very strong balance sheet.
This in turn provides us with the ability to allocate capital the high return investments and evaluate options for the return of capital to our shareholders over time.
Also want to highlight that we welcomed Valerie Mitchell as a new member to our board of directors during the quarter Valerie brings a breadth of experience from the MP perspective to our board having served in a variety of rolls, while it newfield exploration as well as founding and serving as CEO of quarter energy, we believe that values perspectives will be very valuable NCS as we navigate the current marketing.
Garment and as we develop and introduce new technologies to our customers.
With that we'd be happy to take your questions.
Ladies and gentlemen, if you have a question at this time. Please press star and then the number one on your Touchtone telephone. If your question has been answered or you wish to remove yourself on the Q. Please press the pound key.
Your first question comes from the line of Ian Ian Macpherson with Simmons.
Thanks, Good morning.
Morning elaborated.
Robert Ryan It seems like you've done a good job of making lemonade as it were.
So far.
This quarter and I just wonder when you look out to next year, we don't have great visibility yet that there's going to be.
Approximate swift recovery in the us market, who knows assuming we just continuing to muddle along do you think that you will continue.
Continue on the path that you've demonstrated this year with regard to incremental product line expansion and geographic another.
Steps to just trying to outperform your your market topline metrics or do you think that its.
At this point.
Worth exploring more.
I guess both Boulder.
Expansions or M&A possibilities to.
Increase the companys relevance in a more challenging market with regard to.
I guess, maybe more of an exposure to plug and perf than you currently have your product line or something up to this that's just more radical then the commendable sort of step out expansions that youve that youve cobbled together over the past couple of years.
Great question. So 2020, I mean, our view on 2020 is that it's probably take the last half of 2019 annualize that and that's what we're looking at so down a bit in 2020.
Thats, what we think and.
So we we still have some fairway left in our cost reduction initiatives. So we continue to chip away at that we expect to see continued benefit from that going forward.
We have a number of R&D projects that were working on as I said before almost every oil every product line, we have R&D projects going on and so there will be new products coming in.
When we think about M&A, we certainly.
We have a focus on on looking at opportunities, we think that there will be an opportunity somewhere some time, we haven't found the right one yet, but we continue to look at it but we've got a very clean balance sheet low debt and we'd likely in that position. So it's going to have to be something that's really interesting for us to do something from an M&A standpoint.
But I think that we do have the ability to execute.
Right opportunity comes along.
But we have some some technology developments that are pretty interesting both at repeat precision ended NCS. So I think we'll continue to focus on what we can control, which is not the market, but we can control customer adoption market share gains cost reductions and continue to bring new technology and.
I don't know what transformational is as you describe it but.
I hope that we.
We continue to.
Get better.
Well I think you have been I Didnt mean didn't mean to imply otherwise whatsoever. Thanks, you also talked about the.
The shorter higher pressure sleeve that you're looking to rollout merchandise early next year, what what segment of the market is that specifically oriented towards or is it just more of a.
Kind of abroad broadly applicable improvement in your and your product suite.
Yes that was that something were little bit behind on right. Now we expect start getting full benefit from that in 2020, but it was.
Originally.
Are the first version was for the Canadian market because the pricing pressure that we started seeing just over a year ago and the Canadian market, we accelerated development that but we were also.
We're rolling out the of the version for the us market as well.
Because what we've seen is that because the lower costs and lower price point that we bring to our customers. It's it helps us better compete with plug and perf in the us market.
Got it.
Alright, Thanks, Robert I'll pass it over.
Yes.
Your next question comes from the line of George O'leary with Tudor Pickering Holt.
Good morning, guys.
We're in Georgia.
On the.
The the revenue guide for the you asked I guess a couple of.
Appears have guided.
You asked completions activity down sequentially in the fourth quarter about 20% to 30%. So wondering if you could speak to that kind of band you outlined of down 12% to 24% did the 12% kind of imply that you guys.
After some some share and kind of what gives you confidence that you might be able to to get there into the 24% just kind of assume the trend in line with with the broader market I guess, how do you think about that range for the you ask that you guys framed on the revenue guidance Brian .
Yes, I mean, that's that's how we think about it is that the upper end of our range is probably.
The status quo that we don't gained a lot of market share we think from what we're seeing with customer base that we have that it's probably down 25%.
The lower end of our range of down trending is continued adoption with some of the product lines that we envisioned in the us.
Great and then on the Capex, Brent nice to see guys.
The ways to cut Capex out of the budget for 2018.
We think about 2020 is there the opportunity for Capex to fall further or should we think about that six to seven is kind of.
The bottom end of where you guys can sit from from a capex standpoint going forward.
I would probably think about six to seven being about where we are we're looking for opportunities to to reduce capex spending, but I would I would say just look at look at six to seven for now.
And then I'll sneak in one more if I could.
In this environment.
Can you guys are trying to pick your spots on the R&D front, where you're willing to spend cash there, but thats, obviously, a very important component of the business as well.
What do you guys most focused on today from an R&D standpoint.
Yes, that's a that's a really good question. So we've made a number of changes over the last 12 months to how we we think about and execute on engineering research and development new product development new product introduction.
We ship the folks the company to a product line management structure. So we have product line managers for all of our different product lines now and there their role is to make sure that that we're working on the right things that the scope of the project is very clear for engineering and engineering as directed by the product line.
Management team on what they work for and Prioritization is also a made in that product management group. So what we've been able to do is we've been able to pull a lot of stuff out of engineering that we've been working on reprioritize, and and clarify scope and plug back into the system. So weak.
Spec what we've seen so far this year is.
Increasing efficiency and what we're able to get out of engineering, because we had that we had removes cost and that was a way to do it without removing.
Some of the benefits of being able to develop new technologies, we believe and so I'm really happy with results we've seen from from that effort so far.
We're working on this is the first time in the history of the company over the last six months.
The last six months is the first time that that we've had.
Engineering projects that were working on internally for all the different product lines that we have so we have research and development projects for every product line. Some of those are incremental changes some of them are significant changes we've talked in the past about our email our effort. So we're working on our systems.
That allows customers to better control there are eel our activities.
So that would be more of the.
You know a step change if you will we will see the benefit from that till probably 2020 late 2020 or 2021, we've run one system. We've got other system one of the ground in December .
And Ken both in Canada than we have.
Project in the us in 2021 as well but.
The other the other type projects that were working on is there expansions or product lines, so with repeat precision.
And we're making changes to two are setting tools that we sell there we're looking at other opportunities for products that we aren't currently selling so we're in the process of setting up a team and cyber precision to expand the product offering there.
We're making changes to some of our open hole, our wellbore construction type products and services. So there is there's a lot of different things that we're doing and its focused more around.
Cost reductions so that we can pass on some some cost savings to our customers.
But also new for new products that are coming out so long answer and I hope not sort of answered your question.
No that was very helpful. Thank you Robert.
Your next question comes from the line of Kurt Hallead with RBC.
Hey, good morning.
Good morning part of Bert.
It's all Robert I was wondering if you could give us some additional insight here on.
The type of feedback you've been getting from your customer base regarding the products and services that you've been introducing and I know, it's always difficult to kind of make headway when when the market trends are kind of going against you, but your performance and third quarter was.
Extremely good.
And just give some color around that dynamic in.
And second element of that question would be what kind of.
Challenges are you facing with respect to.
Pricing pressures that may be out there for some comes from competing products and services.
Well for the second part of the question on pricing pressure, it's it's probably about as strong as I've ever seen it before.
There is a lot of capacity in the market. There are a lot of competitors that are seem to be willing to work at levels that we don't believe are sustainable.
But it's really affecting the market in our customers are certainly.
Driving everyone all service companies.
Try to reduce cost I mean, thats, probably the biggest conversation we're having with customers is how can you reduce our costs and.
What I will say is that the customers are not.
They are opened still today to not looking at just the acquisition cost of our products and services, but also looking at how our products and services can help them reduce other cost.
And they take that into consideration and so that's that's something that we focus on as much as possible is not so much reducing the cost of our products that we sell and the services that we sell but but also how the products and services that we sell help our customers reduce cost for instance in our in our composite plug line with repeat precision.
Customers tell us that that the composite plugs drill out faster than than any of the other plugs that they have and almost all of our customers that we talked about this are telling us that they have records with with our plugs drilling out the plugs and so that doesn't necessarily translate to a reduction in plug costs, but it does result in.
The cost reduction for our customers same thing with our.
Fracturing services in the US there are places where our customers you know maybe the cost of the sliding sleeves is not decrease but the cost for them because they are using sliding sleeves, instead of plug and perf on in on single well applications as as reduced so that's that's what we're trying to focus on now and manage the cost reduction thats not to.
Say that we havent had to reduce costs are the sales price on some of our products and services tremendous amount of pressure that's out there, but we're trying to manage it that way Kurt.
Okay, Great that's great color and then and Ryan on your end in the context of.
Capital.
Just wondering if you give us some insights on.
How that may progress here in the fourth quarter.
Give some insight on that'd be great.
Thanks.
Yes occurred I think as you note, we have a fair amount of seasonality in our business and on last quarter's call we did.
We had given.
Guys that we believe that working capital would consume cash during the third quarter and it did and that would be about where we are today and it just a slightly positive free cash flow position for the year to date period.
With that seasonality, we do typically.
See a reduction in receivables in the fourth quarter.
Which which brings cash into the.
To the bottom line as well for us. So we believe that free cash flow in the fourth quarter will be positive will be call. It in and the high single digits and that will be a combination of both earnings and a little bit of a benefit from free cash flow during the quarter.
Okay, Great and then maybe if I sneak another one in on the International fund you've done a pretty good job here to kind of expanding your presence into a variety of different markets.
Given the fact that most expect the international market to continue to grow in 2020.
Do you see the opportunity to maybe get into some additional countries or is it going to be focus more on.
Handing your penetration in existing areas that you're already operating.
Both.
Hi would you like to expand the moment.
Well, we've been investing pretty heavily and international for a number of years and we're starting to actually see that the the rewards from that now.
Our contract with Aker BP the will be in the sweet spot next year in 2020 for that.
We're making progress and the middle East and Theres number countries in the middle East that we're working on and.
I think I think at one time.
Last quarter, we were operating in seven different countries. So we see expansion into other countries, but also being able to push other product lines out Treasury services is one that we're really focused on right now getting out in some of those other countries. It seems to be getting traction faster than than anything else other than fracturing services, but fracturing.
Services compete very well internationally compared to the us market. So.
Again, both box, adding countries as well as expanding in the countries that we're in.
Thanks appreciate that.
Your next question comes from the line of JB Lowe from Citi.
Hi, good morning, guys.
And I wanted to touch on.
The in house manufacturing going on on the sleeves that you guys are doing what percentage of sleeves are you guys actually building in house at the moment and.
As you kind of optimize that how much more gross margin.
Can you squeeze out of out of bringing that more of that capability in house.
Well, there's there's a little bit more that we can do so.
One of the issues that we had was that we opened up a new manufacturing facility this year in Mexico.
So if you recall, we we had the repeat precision joint venture when we set up that joint venture. There was one manufacturing facility in Mexico and the initial purpose for that joint venture was to manufacture it was low cost high quality manufacturing for our sliding sleeves predominantly the sliding sleeves that we run in Canada, because they're all the the same connection.
Direct connections are the same and we can stock.
In stock equipment for the for the business that we do in Canada, where in the US it's more build to suit.
So.
As we as our business started to grow coming out of Q2 into Q3 of this year.
We were caught a little bit off guard. We're in the process of opening up a new manufacturing facility in Mexico, but it wasn't completely we hadn't completely finished the this facility and gotten everyone trained yet so when when we had this this rush of activity at the end of the second quarter.
Caught off guard and we ended up having to go outside to use third party machine shops in the us to manufacture the products in Canada are for the Canadian market for the ramp that we added activity that we didnt anticipate so we've as a result, we've been able to get that other that second facility.
In Mexico up and running.
We have we still have some work to do and getting more manufacturing capacity. There, we're not quite quite where we want to be yet and we still have some room to run there.
And then we added the second shift that I talked about in Houston second shift in Houston Houston facility for US is not a we call. It a manufacturing facility, but really what what it is a facility where we take the the component parts that have been manufactured either in Mexico or to third party machine shop, we bring them into Houston.
And then the the final products are assembled pressure tested and sent out to the customer locations.
So we we had a little bit of a bottleneck, there which required us to go out to a third party in Canada to do some of the assembly for US where costs are a little bit higher. So we've added that second shift now got them trained up and so we have more capacity in Houston now. So we'll we'll still see can continue to see some improvement on the.
Gross margin line, but we've gotten a lot of it already in this quarter are in the third quarter, Okay great.
Then you guys.
Tricia diagnostics.
Penetration in Canada is improving.
Record quarter up there I guess is that one product line that you guys see that the greatest potential market share gains going forward and if not then what how would you kind of rank order your your product lines in terms of greatest.
Market share potential gains in 2020. Thanks.
Yes, so we still have a little bit of room in in Canada to grow we have some room in the U.S., but I mean, we're the number according to Spears research. We're the number one provider of Treasury diagnostics on in North American land already but we still think there is some some share to be gain not necessarily from.
Competitors, but what we're looking at is we've got some R&D projects and tracer diagnostics that we think will help bring more value to our customers and so what we're trying to do is trying to move the adoption rate of tracers.
From the call. It 15 ish percent of wells being trace today to something higher than that and so as we are able to bring more value to our customers. We think it it can drive higher adoption.
The precision we think that were number four number five in the U.S market.
So we still have some room to run there, we're gaining market share on a monthly basis.
So we think that there is some fairway to grow there.
And our fracturing services, so our sliding sleeve business in the U.S. market, we still think that theres some market share gains to be made there.
One of the things that we've seen is that it's really difficult in this environment, but as the environment changes over the next year and a half to two years, we think theres going to be some market share gains there and then some of the new products and services that were working on we think that did less value there, but I would say for today tracers being able to push the.
Those out because there is what is one of the product lines. It's it's.
It's relatively simple to push out in some of these international markets.
And then and then the repeat precision product line with the the setting tools and the composite bridge plugs, we still got room there.
Okay, Great and then last one for me is.
You kind of mentioned that.
Annualized back half of 19 is kind of a good proxy for what 20 points going look like is that the same for your international business on the topline.
That was kind of imply a pretty big jump next year I'm, just wondering how to frame.
The international growth potential on next year's Aker BP rolls on.
Our initiatives thanks.
Yeah, when I made that comment that was directed.
Specifically at the you the U.S. market, So I think Canada.
The market is probably going to be around flattish is sort of what we're hearing from our customers today.
We continue to make market share gains there as we have over the last several quarters, but I think that market generally is about flat and in Canada. I think the U.S. market is going to be probably down a bit.
As I said you annualize this the back half of 2019, and Thats kind of what the U.S. market looks like.
Again, we still have room to grow in a few areas, but I think thats the macro environment within international markets, We think thats going to be up a bit.
Hi, Thanks very much.
Thank you.
Your next question comes from the line of crest volumes with Wells Fargo.
Hey, guys.
Chris.
Just following up on the prior question. So I think you guided margins to 44% to 47% in the fourth quarter.
I think you're still working on costs what is the margin outlook for 2020, how much can that improved compared to the Fourq you guide.
Well, we've got some work left to do I'm not going to commit to a margin.
44% to 47% in the fourth quarter is assuming some.
An activity decrease so not perfect absorption of some of our fixed costs. So that I think there's there's a the ability to to get a little bit better than that and get something closer to what we what we saw in the Q3 in 2020 were able to.
We're able to maximize our cost.
Okay, and then on the M&A front, obviously, taking out some cost but is there more work to do there can that improve in 2020 as well.
Yes. It can we're still working on that again not ready to commit to anything on that as I said, we committed to the to the 5 million that we pulled out on an annualized basis.
And the cost reduction from head count reductions, but we've already seen some additional costs that we've taken out and.
We'll have an update for you at the next quarter, but we're seeing some cost reductions there and want to make sure. We can maintain them before we commit to it.
Okay. Thank you.
Thanks.
Your next question.
Follow up from Ian Mcpherson with demand.
Thanks for the follow up I, just wanted to make sure that I got the Q4 guidance that I understood. It correctly for Canada, because I, if so it sounds like Canada the midpoint Europe .
Close to 20% year on year is that right and especially in light of the pricing pressure that's been.
Unfolding.
Is that all explained by Montney or what else is moving that.
Yes in your math is right and part of it if you remember.
We took our pricing reductions in Canada in the fourth quarter of last year. So for us kind of the year on year revenue comps get a little bit easier.
But the big thing and Robert mentioned it in his repair prepared remarks is even third COVID-19 versus third quarter 18, our sliding sleeves sales were up more than 25% in our completions up about 25% with the market that we've described.
So we think we can continue that momentum with the market share gains that we have and what we've been doing and broadening the revenue activity beyond just fracturing systems.
And that that market share increase as well as what you described kind of increased value of the work we're doing in the montney given the completion intensity there as opposed to some of the the light oil plays.
Continues through and allows us to deliver some differentiated performance in the Canadian market.
Yes, not bad at all thanks Ryan.
All right.
I'm showing no further questions at this time I would now like to turn the conference back over to Mr. Robert Baird.
Thank you on behalf of the into our management team and our board we'd like to thank everyone that joined us on the call today, including our shareholders employees and research analysts who cover NCS I'd like to personally think are nearly 400 employees around the globe as well as the employees that are repeat precision joint venture I continue to believe that we have the best team and the into.
It is through the talents effort and dedication of this team that NCS is able to grow our customer base provide exemplary customer service and drive the innovations that we bring to the industry. We appreciate everyone's interest and NCS multi stage and we look forward to talking again on our next quarterly call next year. Thank you operator that concludes the call.
Ladies and gentlemen. This concludes today's conference call. Thank you for your participation and have a wonderful day you may now disconnect.
And.