Q2 2020 NCS Multistage Holdings Inc Earnings Call
This time participant lines on the listen only mode.
So to speak a presentation there will be a question and answer session.
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[music]. Thank you Victor and thank you for joining NCS multi stages second 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'd 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're relying on the safe harbor protections afforded by federal law.
Such forward looking statements may include comments regarding our future expectations for financial results and business operations and are subject to known and unknown risks and uncertainties, including with respect to the cobot 19 pandemic and its impact on the global economy oil demand and 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 want to point out that in todays conference call, we refer to adjusted EBITDA free cash flow and net working capital, which are non-GAAP financial measures.
We use these measures because they allow us to compare performance consistently over various periods without regards the costs associated with our capital structure and in a manner that we believe better reflects or operating performance.
Our press release any updated investor presentation posted yesterday, which are both available on our website and C. S. Multistage dotcom provide reconciliations of these non-GAAP financial measures to the nearest GAAP financial measure.
I'll now turn the call over to Robert.
Ryan and welcome to our investors analyst and employees during our second quarter 2020 earnings conference call Hope that everyone listening today is healthy unsafe and these challenging times.
The second quarter was by far the most challenging one that we faced the pace of magnitude of the decline in industry activity in response to the reduction in all demand and pricing related to the global Cobot 19 pandemic was extraordinary.
During the second quarter rig counts in the U.S., and Canada rigs multi decade lows and U.S. completions activity fell even more swiftly than the U.S. rig count.
This contributed to a reduction in revenue for NCS of 84%.
As compared to the first quarter, which included declines at 78% and 95% for our U.S. and Canadian operations, respectively.
Our performance in the U.S. and the second quarter was impacted by the weighting that we have to activity in the Permian basin through repeat precision where many of our customers quickly laid down completion crews and suspended completion operations for much of the quarter.
Are you asked performance was also impacted by reduction or tracer diagnostic services business, especially during the periods when oil prices worked or Lois given the more discretionary nature of the service.
Well starting from a low base I'm encouraged by the rebound to completion activity from the trough experience in the middle of the second quarter and so far in the third quarter, we've seen an increase in demand in the U.S. for our Frac plug product line as well as our treasurer diagnostic services.
The increase in tracer diagnostics work is also partially attributable to a new service, we're offering which provides a lower price point to our customers and reduces cost of service oriented.
NCS continues to be known for this type of adaptation and innovation to drive solutions the benefit us in our customers.
In Canada, the weakness in the second quarter was far greater than the typical coal that seasonality we experience as a result of spring break up the rig count began to fall in mid March and reached a multi decade low of only 12 rigs in late June.
Normally we would have expected the rig count to start picking up in early June as weather conditions permit.
As with U.S. Canadian activity has increased from the trough in the second quarter, but the rebound has been muted with 47 active rigs as of last Friday as compared to approximately 135 rigs this time last year.
International activity was a relative bright spot for us in the second quarter with international revenue, representing 30% of our total revenue, even with shutdowns in Argentina, and travel restrictions and other markets negatively impacting our business.
We remained active supporting our largest customer in the North Sea and we're also able to participate and tracer diagnostic projects in Latin America, and the Middle East.
We made progress during the quarter and qualifying more of our products and services with customers in the middle East paving the way for future opportunities in those markets consistent with our objective to continue to increase the share of our revenue generated from outside North America.
In response to the prevailing environment in our industry, we have taken swift and decisive action to lower our cost structure to align with the current and expected level of industry activity.
Our earnings release from last night details these actions, though I will touch on a few.
Since late March we made the difficult decision to reduce our workforce by over 45% in the U.S. and Canada, representing a reduction of over 190 employees.
In doing so we have better aligned our field service capability with current market activity levels and significantly reduced our as DNA expense, including changes that we believed to be structural in nature that will enhance our efficiency as an industry activity recovers.
We've reduced our assembly and filled facility footprint and we'll continue to look for additional opportunities to do so and we're continuing to reduce our third party spending across departments, including performing additional work more cost effectively in house.
With the actions outlined above as well as other initiatives that we have executed on already we expect that we will reduce our.
Reported EPS DNA expense in 2020 by over $25 million as compared to 29 team and over 30 million. If you work to exclude the approximately $6 million and severance expense that we expect incurred this year. This represents Bob a 5 million dollar increase to the cost reduction expectation that will provide on last quarter's call.
We've also taken actions to further enhance our liquidity, we've reduced our capex budget for the year to $2.5 million at the midpoint and expect to generate additional cash through vehicle sales to further reduce our net capital expenditures.
We are falling for tax refunds that we expect to receive in the second half of the year and most importantly, we were able to amend our revolving credit facility to a borrowing base structure that we believe will provide us with enhanced financial flexibility.
We generated free cash flow over $16 million in the quarter and over $19 million through the first six months of the year. This was in large part due to the impressive collections performance, especially during the second corner.
Operator.
While we expect that working capital will reverse from a benefit to a use of cash in the second half a year. We continue to expect that will be free cash flow positive for the full year 2020.
The next several quarters will likely continue to be challenging for our industry and our company, though we believed that the second quarter represented the trough in the industry activity and that the benefits from the actions. We've taken will be demonstrate this activity recovers from the trough levels.
Now I'll ask Brian to discuss our financial results in more detail.
Thank you Robert.
As reported in yesterday's earnings release, our second quarter revenues were $8.7 million, 78% lower than the prior year second quarter on a sequential basis revenue in the second quarter was 84% lower than revenue in the first quarter, reflecting the steep decline in completions activity in the U.S. and historically low rig count and activity levels.
Canada.
Gross profit defined as total revenue less total cost of sales, excluding depreciation and amortization expense was $2.3 million and the second quarter or 27% of revenue.
This compares to 16.7 million or 42% of revenue in the prior year second quarter.
First sequential comparison, our gross profit was 23.9 million or 44% of revenue in the first quarter.
Our gross margin percentage was lower during the second quarter of 2020, primarily due to the sharp decrease in revenue, which led to the under absorption of fixed costs, partially offset by our cost reduction actions that we've taken throughout the year.
Selling general and administrative costs were $15.5 million in the second quarter, and this was $7.4 million or 30, 32% lower as compared to the $22.9 million divest DNA, we had in the prior year second quarter, and it's also over $5 million lower than the first quarters level of $20.8 million.
Yes.
Our reported SGN, a includes share based compensation and certain nonrecurring expenses, including certain litigation costs and severance expenses.
During the second quarter are nonrecurring severance expenses totaled $3.5 million, while litigation expenses were a benefit of zero point $4 million due to a 1.1 million in proceeds that we received from our DNA No insurance reimbursing us for certain legal defense costs.
Our adjusted EBITDA for the second quarter was negative $7.9 million as compared to negative 1 million in the prior year second quarter.
Our depreciation and amortization expense for the quarter totaled $1.1 million and we had a net loss attributable to non controlling interest of zero point $1 million, reflecting a modest loss at our joint venture repeat precision.
Our average basic and diluted share counts for the quarter were both $47.3 million are set 47.3 million shares.
Turning now to cash flow items and the balance sheet.
Cash flow from operations for the second quarter was $16.5 million and our net capex for the second quarter was your point $2 million, resulting in free cash flow for the quarter of 16.4 million and 19 and a half million dollars through the first six months of the year.
At June Thirtyth 2020, we had $31.3 million in cash and total debt of $21.4 million, which included 15 million that was drawn under our revolving credit facility 10 million of which was in the U.S. and 5 million was drawn in Canada.
On August six we entered into an agreement to amend our existing cash flow based revolving credit facility into one that is governed by a borrowing base formula tied to our accounts receivable.
In doing so we eliminated certain financial covenants, including our maximum leverage and minimum interest coverage tests.
Amendment also reduced the total facility size from $75 million to $25 million and added a new minimum liquidity covenant.
In connection with the amendment, we repaid the full $15 million that we had outstanding under the facility at June 30.
Following the repayment, we had approximately $12 million and consolidated cash and a borrowing base of approximately $3 million under the amended credit facility.
In addition, NCS had net working capital of $48.6 million at June Thirtyth and repeat precision also has access to over $9 million and borrowing capacity that a separate from our revolver.
Further details with respect to the amendment are available in the 8-K that we filed yesterday.
As Robert mentioned, we expect to the second quarter represented a trough for us for revenue and we expect third quarter total revenue to increase by at least 75% as compared to the second quarter.
With increases in completions activity, especially in the Permian Basin, we expect our U.S. revenue to increase by at least 35% sequentially in the third quarter.
We expect our international revenue in the third quarter to be roughly in line with the second quarter with the remainder of the revenue increase related to our Canadian operations as activity increases from the second quarters historically low levels.
The increase in activity and the impact of additional cost reduction initiatives completed in July is expected to improve our gross margin in the third quarter relative to the second quarter with incremental margins expected to be an excess of 40% during the third quarter.
We expect our reported EPS gionee inclusive of share based compensation nonrecurring items and severance to be between 12, and a half in 13 and a half million dollars for the third quarter. This includes approximately $1.6 million and share based compensation $1 million and severance expense at approximately half a million dollars and litigation expenses.
We expect our third quarter, depreciation and amortization expense to be approximately $1.3 million and our net interest expense to be approximately 0.3 million.
Our expected gross capital expenditures for the full year 2020 had been revised to $2 million to $3 million a further reduction from our guidance in may and at the midpoint over 60% below our gross capital expenditures of $6.4 million in 2019.
Ill hand, it over to Robert for closing remarks. Thank you Ryan before we open up the call for Q and I'll close with a couple of brief comments, we continue to face an uncertain environment and we are focused on the aspects of our business that we can control.
We have taken actions to structurally reduce our cost structure, while preserving our ability to provide exceptional customer service and drive further innovation and value for our customers.
We're being very judicious with our capital, but continue to make targeted investments to advance and enhance near and long term opportunities for our business, we've taken steps to enhance our liquidity and preserve our strong balance sheet. Our revolver is undrawn and we have demonstrated our ability to generate free cash flow.
We are positioned to whether the current and.
Whether the currently industry downturn and benefit from a rebound in industry activity with that we'd be happy to take your questions.
As a reminder, ladies and gentleman asked a question you will need to press star one on your telephone.
To enjoy your question, Chris the Pelkey lease and finally composite can a roster.
And our first question will come from the line George O'leary from TPH and company you may begin.
Good morning, guys.
George.
The the the gross margin the decremental margins in the second quarter were pretty impressive given the magnitude at that revenue declined quarter on quarter, you guys put off that list of cost reductions that you made in the press release, which is very helpful. I wondered if you could walk through.
Some of the primary.
Kind of structural cost reductions on that on the Cogs side of the business, excluding the SGN a adjustments.
Things like relocating the U.S. Assembly operations I assume would be part of that but.
Any color on structural cost reductions would be.
Super helpful. And then it seems some of those costs may come back a little bit in the third quarter.
Is that part of the driver and.
More muted than usual incremental margins or is that more pricing headwinds and things like that.
Yes, so we have made a number of.
Moves that we talked about in the press release and you asked specifically about manufacturing what we've done with manufacturing is.
We lowered our cost because we were under absorbed in the manufacturing facility that we had we have a vendor that's been manufacturing components for assemblies for us for a number of years and they were under absorbed as well and so weve.
Weve constructed a deal with that particular vendor where now they've taken on the assembly with some of our employees in house there to oversee that so we still have full control over the the assembly.
But however, what we've done is now between both of both the companies were fully absorbed in the manufacturing facility that move has also reduced our cost our internal cost because of the under absorption. So we don't expect that to change for the next 12 to 18 months.
We look out into the future we believe that.
We may start seeing some recovery to something later next year, but full recovery, maybe 150, frac spreads and for mid four hundreds in rig count and so what we what we've done as we've assumed that thats the environment that we're going to live in and we've made these cost reductions assuming that.
Thats, where were going to be and so as far as the cost coming back. We don't we don't really expect that a lot of these costs will come back we.
We were.
In the quarter, because a lot of our our fixed costs are in cost of sales. We did have these decremental margins, but because of some of the moves that we made we were able to to control that that decrement.
Yeah, and maybe I'll just follow up a bit there George.
Our cost structure for the Canadian business has always been highly variable we do have in house.
Field hands, but we also use a contractor model in Canada, given the big swings on a seasonal basis. It's always it's always been a market, where we've utilized contractors, which has helped to soften the blow in the second quarter from a decremental margin perspective, but we did take additional actions in the US certainly in addition to what Robert mentioned, we have closed a couple of our.
Our field districts, one in Oklahoma City in one in Corpus Christi, So, we're really consolidating our U.S. footprint as much as possible.
And then we've also been working with both our our vendors on the call. It does feel good side as well as.
The contractors to make sure that our rates that we're paying are aligned with market conditions, which has also helped Q to preserve margins.
As far as turning forward into.
The commentary around Incrementals there a couple of things there certainly there has been some pricing pressure throughout the year. However, I think yes, that's that's by and large behind us what I will say is that were very focused on.
Using our inventory of the source of cash so we're really moving some of the goods that we have and you may see some.
Sales through inventory, which are slightly lower margins versus what we had seen historically as we work to harvest that source of capital and source of cash on our balance sheet.
Okay, Great. That's that's very helpful. Thank you bill for that and then.
Yes, the revenue increase on a sequential basis and that.
I appreciate that we're coming off a low base.
Given.
The activity rebound seasonal activity rebound in Canada was late to kick and it's still an eye popping percentage I wonder if focusing on.
The U.S. in particular.
The completions rebound you guys are seeing on the plug in the tracers side.
Fairly balanced or is this more of the Permian specific phenomenon at this point.
It's fairly balanced, but the Permian is weighted more in terms of activity.
As we look forward well looking back so for repeat precision specifically.
The customer mix.
That had declines in activity hit us, especially hard in the quarter.
Some of those customers are bringing in their customers that we had large market shares with so some of those customers are bringing activity back on adding additional frac spreads. So we're we're already seeing the benefit from that.
For the tracer business.
We've seen.
We went down pretty hard in the first quarter toward the end of the quarter, but then in the second quarter, we started seeing activity increases as well.
Another thing that drives those two products for us are those areas for us between tracers and.
And composite plugs is the duck activity. So we're seeing more DUC completions now and that's that's helping to drive activity increases as well.
Got it and then just one more if I could and on the free cash flow side has done an impressive job, thus far generating free cash flow.
And the guidance for full year 2020 to be free cash flow positive is helpful right.
Working capital is probably a headwind in the second half but.
There will be some tax benefits hopefully that you guys will get in the second after you alluded to on the call. How do you think that we are you targeting like our free cash flow neutral programs so that.
19 million is kind of once you get for the year is there a chance that your free cash flow positive in the back half as well.
Yes, so George.
I think.
Working capital as you said is likely to be a little bit of a headwind certainly in the in the third quarter.
Yes, and we're still working our way back from the profitability level in the second quarter towards something approaching EBITDA breakeven as we get towards the latter part of the year.
I would expect a little bit of negative free cash flow quarter in Q3 getting back to more or less breakeven for on a quarterly basis as we approach the fourth quarter.
So full year, albeit a bit lower than the $19 million or at right now.
Got it thank thank you, but very much.
Thanks.
And once again as a question now be star one.
Our next question will come from the line of lead from RBC.
To begin.
Hey, good morning, everybody.
Okay Kurt.
On the questions I have at least initially here was.
You mentioned your time at $21 million in debt exiting the second quarter at June 30.
Given the changes in the revolver given the changing your cash balance can we assume that the reduction year cash balances come back predominantly related to debt reduction.
Yeah, you can assume that with the $15 million reduction to the vault revolver associated with the amendment that the cash balance went down one for one associated with that.
That's a question yes that is that is appreciate that.
And yet the other thing that and Robert.
Good.
Kind of overview on what's driving the revenue dynamics in the us.
But I'm still sitting here scratching my head not specifically with NCS, but from from a number of other companies, where you're looking at average rig count average frac activity being down sequentially third quarter relative to second quarter.
Yes, you know prospect for revenues to be.
Improving on a quarter on quarter basis, usually activities going to be down on average.
And the exit rate on activity was lower than the entry rate.
Yes.
I guess I'm, just looking for a little bit more has really what's driving that sequential revenue increase given the fact that average activity and exit rates are going to cannot be lower.
Yes, as we get in third quarter, so any additional color around that be really help.
Yes for.
Just address Canada, we haven't talked about that yet so in Canada, we had.
The weather was pretty bad coming out of spring break up we had rain.
We got delayed about three weeks three to four weeks in activity increases there the rig count went down to the single digits. It was really really tough now it has rebounded low numbers, but its bids.
Four times higher than it was four to five times higher than it was at the low and so we the rigs that are coming back on our rigs that we've had higher market share with.
Customers that we have higher market share with in this in the same kind of dynamic in the US if you look at where we where we've gone and frac spreads from the mid Fortys.
Up around in the seventies.
The frac spreads that came off on the way down those were frac spreads that we had higher.
Our market shares with customers and in both tracer diagnostics and with.
Composite plugs and so as Frac spreads are coming back on its customers that we have our market share with just as an example, our market share for composite plugs went from the low teens down to about 5%.
As we as activity went down but now as those those frac spreads are coming back on the market shares actually increasing above where it was before so it's all about the customer mix and the activity increases. So our revenue is going up at a disproportional right because of that okay, correct, okay, yes or for us on the completion.
In side, we really we saw the activity really start to move meaningfully lower in early April. So we didn't have that slowed down that you might have seen if when you talked about completion spreads were very heavily weighted to people that went on frac holiday early and we are talking even about production curtailments within Texas and were being being quite vocal about it.
Got it Thats great color I appreciate that maybe one follow up here can you.
Is that right in your friend what is the liquidity covenant on the new revolver.
We need to maintain $7.5 million of liquidity and liquidity as defined as cash on hand, and the controlled accounts related to the facility as well as the unused portion of the borrowing base the combination of the too.
Okay great.
Yes, sure one more thing I'd I'd like to add so another another dynamic that we have for this year, we've talked about litigation expense over the last year.
We've had a lot of litigation expense and it's been on a number of different fronts Weve got intellectual property.
Weve.
Most of the technologies that we're using today are technologies that we've developed in house. They have been novel and we have high market shares with them and so there are another a number of companies that we believe maybe all sides on our IP. So we've we've made the decision to spend the money to defend our intellectual property. So we have a nimble number of loss.
It's ongoing around IP and Weve.
Just.
Just entered into a license agreement with one of the company's that so we're able to settle the lawsuit there and we're in discussions with a number of other companies. So we believe that.
Ultimately, we end up with the revenue stream from royalties that will offset some of the market share gains or losses that we've had over the last couple of years from some of these other companies. So we intend to continue to defend our intellectual property and independent stringently.
Got it thanks Robert.
Thank you.
Thank you and our next question comes line of Chris Rock ROI from Wells Fargo.
Maybe again.
Thanks, Good morning.
Morning.
First I was wondering if you could get an update on the product mix in North America. If we think about Frac plugs airlocks leads spec countries or can you maybe some kind of percentages are ranking of the size of those and what you expect going forward.
Okay.
Yes, Thats information that we really just.
Give out on an annual basis, that's obviously given the seasonality in Canada, it tends to move a lot quarter to quarter.
Sure that's there.
And then maybe think about the Capex budget, then two to 3 million could you help to think about.
How sustainable that specifically, we think about Frac plugs, which I think as a decent share the mix now.
There is that business and that lot of innovation and new products, New Marco times is that enough to keep.
Your product lines competitive.
Innovation product line going towards that Capex budget going to have to come up a little bit next year.
Well that that number is sustainable Chris.
So we think about Capex and we were really don't have a lot of capex. The majority of that Capex is machines that were buying for a new product line that we're starting so that's.
Ex that we'd be spending half million Bucks kind of thing I mean, we were bond vehicles that was that's been a big part of our Capex budget in the past we're not buying vehicles now in fact, we've got about 30 or 40 that were that we're selling right now. So it is somewhat sustainable yes, Chris I mean, we've maintained.
On to capital light business model intentionally really since the inception of NCS. So you can think of maintenance capex being a million dollars or less quite honestly, but theres, obviously, a distinction as far as product development between what's required for capex and the spending that we're doing on R&D and we're certainly continuing to.
Put forward very significant effort and research and development, both with our in house engineering team as well as the.
The relationships that we have with respect to third parties for testing that.
Ill goes into the developed the continuous development of new products. So the spending for both sustaining engineering as well as new product development, you really see in our operating expense line and not in the capital expenditures line.
Okay.
Well maybe to squeeze one more in.
You mentioned, maybe the 200, frac crew or less environment going forward essentially in lower 48, obviously, that's causing cost absorption issues for lot of companies. Just curious if you can give an update on what you're seeing more 40 in terms of.
Consolidation conversations what are you guys potentially be open to merger of equals type situation anything like that just an update.
Well my belief is that there are too many service companies out there today and I think theres a lot of people that I believe that as well there doesn't seem to be much of an appetite today.
To action things unless a company has begun to their head.
But it's going to have to happen there's too many management teams. There's there's too many service companies, but theres a lot of service companies I believe that are sitting on a lot of inventory and as they burn through that inventory profitability is going to matter and I think it's going to take getting that excess inventory out into the market and.
Once that happens and people have to get the profitability again I think there's lot of companies that are are going to have that proverbial gun to their head. So I think we'll see it.
We just won't see it anytime soon I don't believe.
But it will have to happen over time as far as our view on consolidation I.
Were opened anything that makes sense, we have liquidity that.
We will get us through the environment that earlier mentioned that I thought we were going to be in for the next 12 to 18 months, we've got liquidity enough to be able to get through that kind of environment.
We've got technology, we've got a growing business internationally.
So we have the wherewithal to stay we've got a new product pipeline that still still working albeit it's a little bit more muted pace than it has been in the past, but we do have new products that will be coming out over the next the next few months. So we intend to weather the storm if theres a situation that make sense, we're open to it but.
We're not going to do something silly.
Okay, great. Thanks, Thanks for taking my questions.
Thank you once again that star one for questions.
I am not showing any questions at this time I'd like to turn the call back over to Robert number for any closing remarks.
Thank you Victor on behalf of our management team and the board, we'd like to thank everyone on the call today, including our shareholders in the research analysts to cover NCS, but especially our employees in our former employees I'm very proud of our team and NCS, which has reacted swiftly to the changing in the industry environment. We've made significant adjustments to our head count and cost structure to me.
What's the current market activity level, we continue to operate safely was zero broker portable incident. So far this year, we're providing excellent service and continue to innovate in order to add value to our customers.
A large part our organization is working remotely and is taking on additional responsibility as result of the workforce reductions. The team has done a tremendous job and managing the myriad challenges that come with double whammy up cobot 19 on life in general as well as the direct impact on our industry and NCS, we only as good as our people and I believe we.
The best team in the industry. We appreciate everyone's interest in NCS multi stage and we look forward to talking again on our next quarterly earnings call in November. Thank you.
Ladies and gentlemen, this concludes todays conference call. Thank you hope participating you may now disconnect.
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