Q1 2020 Earnings Call
Thousand 20, NCS multi stage earnings conference call.
At this time all participant lines are in a listen only mode.
As a reminder, this conference is being recorded if require any further assistance. Please press star zero.
I'd now like to hand, today's conference over to your speaker for today Ryan Hummer. Please go ahead.
Thank you Stephanie and thank you for joining NCS multi stages first quarter 2020 conference call. Our call today will be led by our CEO Robert number and I will also provide comments.
Before we begin todays call, we would like to caution listeners that some of the statements that will be made on this call could be forward looking into the extended 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 our future expectations for financial results in business operations and are subject to known and unknown risks and uncertainties, including with respect to the coded 19 pandemic and its impact on the global economy oil demand in our company.
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 in today's conference call. We refer to adjusted EBITDA adjusted EBITDA margin adjusted EBITDA less share based compensation free cash flow and net working capital, which are all non-GAAP measures of operating performance.
We use these measures of operating performance because they allow us to compare performance consistently over various periods without regards to the costs associated with our current capital structure and in a manner that we believe better reflects our operating performance.
Our press release and the updated Investor presentation posted yesterday, which are both available on our website NCS multistage dot com.
Provide reconciliations of these non-GAAP financial measures to the nearest GAAP financial measure.
With that said I will turn the call over to Robert.
Thank you Ryan and welcome to our investors analyst as employees, joining our first quarter 2020 earnings conference call.
Today I'll review our accomplishments during the first quarter, how the co with 19.
Endemic has impacted our business in the initiatives Ngs has taken to reduce cost and improve liquidity.
I'll also briefly discuss our outlook for each of US Canada in international markets.
After that I'll turn the call over to Ryan to discuss the quarterly results and our liquidity position in more detail after which I'll provide some closing remarks.
Before discussing our results I'd like to express our hope that everyone listening as well as your families are safe and these challenging times I'll start by briefly touching on our results from operations in the first quarter.
We increased our Q1 revenue by 3% on a year over year basis in 5% sequentially. We saw the continuation of two positive trends for NCS in the quarter first our momentum in Canada was maintained with a 17% year over year increase in the first quarter compared to a 7% increase in rig count.
Okay.
This momentum reflects market share gains in fracturing systems and continued pull through of our other product and service offerings.
Second we continue to grow our international business, our international revenue in the first quarter increased by 68% as compared to the prior year.
In the mid twenties, the lowest level ever reported and the beggar Hughes Red count.
Many north American M. piece of instituted what some are calling frack holidays for several months and are shutting in high cost production.
As a result, we expected industry completion activity in North America can be lower by 75% to 85% sequentially and the second quarter and remain at low levels through at least the end of 2020. In addition, we believe that drawing completion activity in Canada or made it historically low levels for the second quarter with only a muted Rick.
Covering in the second half as weeks that exit Ah spring break up.
We believe activity in the international markets, we participate in will be reduced as well with overall activity for 2020 expected to decline as compared to our par expectation for modest growth.
The date the international regions experiencing the greatest there were disruption friends, yes have been China in Argentina with activity in other areas ongoing but subject quarantine measures for our personnel.
We cannot reasonably estimate the duration or the disruption to economic activity and all demand related to cope with 19 pandemic Andy elevated global.
Crudele storage levels.
As a result, and she has management has undertaken multiple initiatives to make structural changes to our costs bayes limit our capital expenditures and enhance our liquidity.
These measures are listed in detail in earnings release issued yesterday evening and I'll highlight a few of the most impactful measures we've taken.
Over the course of the last 40 days, we have reduced over one third of our workforce in the U.S. in Canada, representing a reduction of over 130 employees.
All remaining employees are working 100 decreased hours through furloughs or that their salaries were days, including reductions in executive salaries, averaging 20%.
And doing so we have better aligned are filled service capability with current market activity levels and significantly reduced or S.G.N.A. expense.
We reduced our bonus accruals and eliminated the employer match for our retirement plans.
We're benefitting from government initiatives in the U.S. in Canada, including the cares Act and expect to receive a U.S. income tax refund of over $1 million in the second half of 2020.
We borrowed $5 million under our credit facility at the end of the quarter to fun severance obligations related to the reduction in the workforce.
We increase the barn quit capacity it would be precision, which is part of a separate credit group from our credit facility and we have reduced our plan capital expenditures for the year.
With the actions outlined above as well as other initiatives that we've executed on we expect that we will this are reported S.G.N.A. expense in 2020 by were $20 million as compared to 22019.
We've been successfully converting our networking capital, which was in excess of $70 million at March 31st into cash with a consolidated cash balance in excess of $25 million at the end of April.
On last quarter's call, we highlight of the value that we bring to our customers for our product and service offering bringing differentiated technology to our customers that saves in time and cost is important today more important than it has been before.
We remain committed to leveraging our technology to continue to improve our market share across the U.S., Canada and international markets. We also remain highly focused on free cash flow benefiting from our capital Y. model and on our liquidity as Rhine will speak to in a moment.
Follow the next several quarters will be challenging for our industry and our company. We're committed to taking decisive action. So that we will be well positioned to participate in increasing activity that inevitably follows a downturn.
Before I had to call back over to Ryan I'd like to speak to an ongoing litigation matter that we have brought up before.
As the technology company. It is important for us to defend our intellectual property, including any intellectual property that we have license from others.
In early April the U.S. District Court for the Western District of Texas issued a final judgment in connection with the litigation with Dahmer back industries incorporated awarding repeat precision approximately $40 million plus attorney's fees and connections with our claims for diamond backs breach of the exclusive license patent infringement <unk>.
Interference and it's ruling the district court validated the terms of will pay precision as exclusive license with respect to the setting too old technology and enjoying diamond back from selling its infringing line of setting tools.
On April 21st.
<unk> for chapter 11 bankruptcy.
Involve it's notice of appeal late to the judgment.
While the judgment remain subject to a pill and any monetary.
Award subject to collection, we intend to vigorously challenged to appeal and try to enforce our rights.
<unk> Ryan to discuss for financial results more detail.
Thank you Robert.
Reported in yesterday's earnings release, our first quarter revenues were $54.6 million, 3% higher than the prior years first quarter.
On a sequential basis revenue in the first quarter was five per cent higher than revenue in the fourth quarter with a seasonally driven increase in Canada offset by declines in the U.S. and in international markets.
Gross profit to find a total revenue less total cost a sales excluding depreciation and amortization expense was $23.9 million in the first quarter or 44% of revenue.
Compare so $26.1 million or 49 per cent of revenue in the prior years first quarter.
Per sequential comparison or gross profit was $26.1 million are 50 per cent of revenue in the fourth quarter of 2019.
Selling general an administrative costs are S.G.N.A. expense was $20.8 million in the first quarter as compared to $23 million in the prior years first quarter and it was also lower than fourth quarter 2000 nineteens level.
$22.2 million.
Are reported S.G.N.A. include Sharebased compensation, and certain nonrecurring expenses, including certain litigation costs and southern France expenses.
And the first quarter or nonrecurring litigation expenses totaled $1.4 million and our severance expense totaled $1.3 million.
Adjusted even die for the first quarter was $9.2 million as compared to $7.4 million into prior years first quarter or.
Are adjusted here, but on the first quarter as a percentage of our total revenue was 17%.
We recorded noncash impairment charges totaling $50.2 million during the quarter, which included approximately $9.7 million related to property and equipment and $40.5 million related to intangible assets.
Or depreciation and amortization expense for the quarter totaled $2.6 million.
Reduced going forward due to the impairments I just mentioned.
We had net income attributable to non controlling interest of $2.6 million during the quarter, which reflects positive net income at repeat precision.
Our average basic entirely to share accounts for the quarter, where both 47 million.
Turning out of the cash flow items on the balance sheet.
Casual from operations for the first quarter was $3.6 million.
And our net capital expenditures for the first quarter or zero point $4 million, resulting and free cash flow for the quarter of $3.2 million.
At March 31st 2020, we had $15.5 million in cash and total data of $17.7 million, which included $15 million drawn under a revolving credit facility with 10 million drawn in the U.S. and 5 million drawn in Canada.
I will not be providing revenue or gross margin guidance for the second quarter, but do have the following points of guidance.
We expect are reported S.G.N.A. inclusive sharebased compensation nonrecurring items and severance to be between 17, and 18 and a half million dollars.
Includes approximately $1.8 million in sharebased compensation $3.6 million and severance expense and approximately zero point $5 million in litigation expenses.
We expect our second quarter, depreciation and amortization expense to be approximately $1.5 million and we expect our net interest expense to be approximately zero point $4 million for the quarter.
Are expected gross capital expenditures for the full year 2020 have been revised to arrange of $2.5 million to $4 million. A further reduction from our guidance in early March and at the midpoint nearly 50 per cent below our gross capital expenditures of $6.4 million in 2019.
I'll take the next few minutes to discuss NCSL liquidity position and our revolving credit facility.
And C.S. ended March with $15.5 million in cash and $17.7 million in total debt for net debt of 2.2 million.
But it is comprised of the 15 million drawn under our senior secured creditors revolving credit facility with the remainder being short and long-term capital cases.
We were in compliance with our credit facilities financial covenants at March 31st 2020.
We've you the most restrictive covenant under this facility to be a maximum total debt to trailing 12 months, even even dot covenant 2.5 times.
If current depressed market conditions continue or worse and it will have the material negative effect on the company's financial performance, which would be expected to result in a breach of the covenants and a default under the credit agreement, which could occur as early as the third quarter of 2020, and a depressed market environment.
Event of a default thunders may elect to declare all outstanding borrowings under the facility immediately due and payable.
To address this the company is currently engaged in preliminary discussions with its minders regarding a possible amendment to the credit agreement.
We are in the process of determining whether a cash on hand in cash flows from operations will be sufficient to find her capital expenditures liquidity requirements for next 12 months, including a potential acceleration of amounts outstanding under the credit facility.
Houses includes the actions company is taken as described by Robert earlier to reduce costs and enhance liquidity, we expect to finalize this analysis in connection with the filing of our form 10 Q.
With this it's important to know that N.C.S. had networking capital of $70.4 million at March 31st 2020, which as well in excess of the current borrowings under the revolver.
With strong collections performance since the end of the quarter as Robert mentioned earlier and she has had over $25 million in cash on hand at the end of April but no change to the revolver balance at March 31st I'll hand, it over to Robert for closing remarks. Thank you run.
Before we open up the call for Q. and they all close with a couple of brief comments.
Our industry is facing unprecedented challenges, especially in North America is our customers are rapidly reducing activity in the face of storage limitations and an economic all price environment.
And she has delivers a focused portfolio of technologies help our customers operate more efficiently and optimize the value of their asset the right technologies for this market.
Our international footprints, while we're still relatively small provides us with exposure to Markus exhibiting greater strength in North America.
We're focused on adjusting our costs structure in capital spending for the current environment, we've reduced our U.S. and Canadian head count by over one third and are targeting $20 million.
Function in S.G.N.A. compared 2019, we maintain the capital like business model, which facilitates free cash flow generation I want to think on employees.
We've been through two very difficult reductions in recent weeks, we have a world class workforce in every employed in C.S. is currently making sacrifice on behalf of their coworkers and stakeholders associated with NCS. Your hard work dedication and ingenuity or key drug companies access to the credible outcomes, we deliver for our.
Customers now and in the future.
That we'd be happy to take your questions.
Thank you to ask a question you need to <unk> I'm Gonna telephone keypad once again that it's Taiwan for I phone question.
And yet first questions in the line up and Macpherson upsetting.
In your line is okay.
<unk>.
I E. guys hear me now.
<unk>.
Hi, Robert Sorry, I was not on you that was a it was another glitch, but thanks for the.
Thanks for the comments I I hear you loud and clear you're not in the.
The hope camp for activity rebounding this year.
Perfectly reasonable if you did if we did have a different type of signal from the come out of the day <unk> would you wage or a bad as to what which market might be a little bit more sensitive to.
A recovery between your your Canadian business in your your U.S. business.
Yeah, if we're speculating here I would say probably the U.S. market the Canadian market will rebound, obviously I mean right now we're break up recounts at a low that we've never seen before I mean, [laughter] almost 20 rigs give me a break but but no I I think the U.S. market could route rebound.
If a if we got something that was completely unexpected.
Yeah.
On the the litigation collection, what what what's your legal team advising with regard to the timeframe. It was all be that in any sort of risk adjusted assessments that you're getting with in terms of collectability.
Yeah, so not gonna Handicap Collectability part of the deal as I mentioned before they Diamondback is filed for bankruptcy. Our legal team believes that that is exactly those place that we need to be at this point for maximum advantage and collectability.
Based on all the facts that are in place today, so as far as handicap in when there's gonna be collection and how much is going to be.
I can't comment on that.
Okay, well good luck with it's obviously a hugely material to use now relative to.
Capitalization and liquidity a endpoints that we're that we're contemplating so I'll stay tuned for the Q. and the resolution on the credit facility and then pass it over a certain other questions. Thanks.
<unk> I think.
There next question, it's in the line up <unk>.
<unk>.
Hey, good morning, <unk> <unk> just wanted to follow up on on ends question and it strikes me that the the business mix it and yes. It has changed quite a bit since since the last downturn. So.
As you enter this downturn are there any products or services within the portfolio today that you think might hold up better than others at least within North America, I mean, I realize everything is going to get whacked, but I just given that the different product mix that you have today relatives in the last downturn. It does anything stand out as holding up a bit better than others.
Yeah, well, that's really good point in the last downturn, we were primarily you know sliding sleeve company in the U.S. and now labore construction as a as a big part of our business as well as treasure diagnostics in in fact plugs. So the products that we offered today.
Versus what we had back then.
Products. The reading used every day on wells that are being completed.
And so the difference is that you know we were trying to push a technology into a market that wasn't very receptive four and a lot of different places with some of the sliding sleeve products that we had and today. These products are already accepted as just a matter of you know getting more market share.
And we believe that aren't call structures, such that we can compete price is not that much of an issue for us we have in anticipation of closings from the Cobra virus, we increase manufacturing capacity, we started building a inventory and so we're we're in a good spot to be able to take.
Advantage of whatever activity that there is we think.
Okay. That's helpful. In the fall up as on working capital it sounds like at least through April that night collections have.
Proven you've been able to generate some some more cash had a working capital.
Out of these things are are hard to predict but anyway to any kind of goal post it to think about it relates to potential cash a generation out of working capital over.
All of 2020 or is it still a bit too early to say right now.
I think it's still too early to say I typically what we will see from seasonal patterns in the business would actually be some some modest and negative free cash will in the first quarter. We we out perform that a bit typically we we generate free cash flow in the second in fourth quarter and with the a resumption of activity in Canada.
How to break up and revenue picking up we build receivables and build working capital you know there for a working capital being a use of cash typically in the third quarter. So I'd say this year, we see you know the second quarter being probably stronger than normal with respect to free cash flow generation and working capital early east probably still a bit too early to determine.
<unk>.
You know the magnitude of any you know working capital outflows in Q3 and inflows in Q. for.
Just depending on how.
Activity shapes up in about half of the year.
Okay understood. Thanks, guys.
Yeah.
Your next question, it's been a line <unk>, let's see.
Hey come on guys.
I was I'm just curious rank it can you could you run through the the actual covenants again on your debt.
Sure. There there are two financial covenants. The first is maximum debt to trailing 12 months he but on the facility a maximum of 2.5 times.
And then there's an interest coverage covenant with a minimum of 2.75 and and of those really the one that we view as being you know the most operative if you will wouldn't be the the total that diva dot covenant.
Okay.
Appreciate that I'm curious I I'm I'm sure there's been a lot of <unk> conversations with customers lately that are just.
Just guys during their hands on the air but at this point have you do you have any way to dimension pricing conversations you've had for for the conversations have you actually have had on on activity.
The I'm sorry, the price in conversations on activity or yeah, like how how much how much <unk> pricing concessions are guys asking for it.
They're asking for a lot we've <unk>.
Yeah.
So I I would say the the price in conversation started.
Probably close to a month ago and it was in terms of.
We had several customers sending letters out to us we had customers.
Them down calls and you know they were asking for 25% to 30% reduction.
We've seen that paper off I think that the industry has responded the service company industry has responded in a way that.
We.
We were pretty well maxed out on discounts and there's not much more to give a there has been some some pricing degradation, but not nearly to the extent it's customers were asking for I. We what we have seen is that there are companies that have inventory in stock and.
They're trying to release cash and we see a we see spots of of highly discounting products, but generally pricing is holding in kind of where it is right now, but I do expect that I do expect we're going to see some <unk> brushing <unk> degradation going forward, but not to the extent that we had in the past.
I I thought that that any conversation that we have with our customers around pricing will also involved bundling up more and more of our products and services into the mix.
Okay make sense <unk> last one for me just can you got to talk about your exposure to the gasior basins that might see activity hold up a little bit better.
Yeah, So we <unk>.
We're primarily our activity in the U.S. I'll talk about that first primarily in the U.S. were exposed to to the oil place.
<unk> and something in a in the mid con, but we do have we do have a presence in the Rockies, which there's a gas play you know there's.
Guess exposure there the northeast we also actually have work that's increasing there were not in the Haynesville shell right now, but that's a another area that we're looking at but the products and services that we have and they.
The way we're set up in the U.S.. We can go just about just about anywhere.
In Canada, we were working across all the place there and you know hopefully hopefully gas has some legs on it maybe if it does then you know that that'll help for sure.
Alright, guys <unk> appreciate the answers good luck in stay safe out there.
Thanks <unk>.
Once again to act an audio question. Please star one.
And at this time there no further questions are trying to call back to Robert Knipper closing remarks.
Thank you Stephanie on behalf of our management team in our board, we'd like to think everyone on the call today, including their shareholders in the research analyst to cover in C.S., but especially our employees I extend my appreciation to are more than 250 employees around the globe as well as a team that really precision I continue to believe that we have the best team in the industry in our performance.
Set up.
Through the talents effort and dedication to this team that N.G.S. was able to provide exemplary customer service and drive innovations that we bring to the industry. We appreciate everyone's interested in C.S. multi stage and we look forward to talking again or next quarterly earnings call in August. Thank you very much.
Ladies and gentlemen disk includes today's conference Hall, you may now disconnect.
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