Q3 2020 NCS Multistage Holdings Inc Earnings Call

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Multistage earnings conference call at this time, all participants are in a listen only mode.

Did the speaker presentation, there will be a question and answer session to ask a question. During the session you wouldn't need to press star one on your telephone. Please be advised that todays conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to Mr. Ryan Hammer.

<unk> Financial Officer NCS Multistage. Please go ahead Sir.

Thank you Andrea and thank you for joining NCS multistage as third quarter 2020 conference call our.

Our call today will be led by our CEO, Robert Knepper, and I will also provide comments bill.

Hello measures to the nearest GAAP financial measure.

I will now turn the call over to our CEO Robert Nipper.

Thank you Ryan and welcome to our investors analysts and employees joining on third quarter of 2020 earnings Conference call I hope that everyone listening today is healthy and safe and.

<unk> performance in the third quarter demonstrates the resilience of our team the strength of our business model and technology and the effectiveness of cost reduction in liquidity enhancement measures we've enacted over the last several months during.

During the third quarter, we saw a trough in U S rig counts with a gradual increase over the last several weeks. In addition, there was a strong recovery and the number of Frack spreads working in the US in August and September.

The Canadian rig count rebounded from multi decade lows, but the seasonal recovery in the third quarter was much more muted than in prior years.

Activity in international markets declined slightly with meaningful variations across markets.

As we benefited from market recovery NCS was able to deliver sequential revenue growth of 87% in the third quarter as compared to the second quarter with sequential growth of 103%, 146% and 25% in the U S, Canada and international markets respectively.

The improvement in U S revenue was primarily driven bar completion oriented offerings that repeat precision and in our tracer diagnostic service line.

We believe that we are continuing to gain share in the competitive composite plug market through Pete precision, where our plugs provide excellent performance that our customers value with fast running speeds reliable isolation and quick and consistent drill outs.

We've seen continued uptake of our new value oriented tracer diagnostics offering that removes personnel from the location and reduces the overall cost of Wellbore Clarence diagnostics.

We are cautiously optimistic about activity in the U S. In the fourth quarter. While completion activity has continued to increase thus far in the fourth quarter, we believe that a seasonal slowdown will occur at the end of this quarter or at the end of this year as it has in past years. In addition, we were all reminded in the second quarter of this year, how fast completion Act.

<unk> can be curtailed if commodity prices deteriorate further.

In Canada, the seasonal rebound in the third quarter occurred later and was much more muted than in prior years, especially for light oil directed activity in southern Alberta, and Saskatchewan with an average rig count for the quarter of only 46.

As with the U S. Canadian activity has continued to increase from historical lows with 85 active Briggs as of last Friday as compared to approximately 135 rigs this time last year.

We've seen an increase in our activity levels in Canada recently with the improvement in the rig count and with growing activity in the light oil plays.

International continue to be a bright spot for us in the third quarter with international revenue, representing 20% of our total revenue and growing sequentially as activity increased in Argentina, and we remained active supporting our largest customer in the north sea.

While certain international projects have slipped out of 2020, and the 2021, primarily due to COVID-19, we continue to make progress to execute on our largest opportunities in the north sea in the middle East.

Significant amount of our engineering resources are currently devoted to building out our product and service portfolio for these regions and we recently on boarded our country manager in Norway, who will oversee our operations in the North Sea and business development in Europe.

Our efforts to improve the efficiency of our supply chain and reduce our fixed cost base were evident in the quarter are gross margin of 37% in the quarter was 10 percentage points higher than in the second quarter and represented an incremental margin of nearly 50%.

In addition, we were able to reduce our SG&A about $3 million versus the second quarter and by $8 million as compared to last year's third quarter. We remain on track to reduce our reported SG&A by over $25 million in 2020 as compared to 2019.

We are further reduced are kept capex forecast for the year $225 million.

We have also generated $1 million in cash proceeds from asset sales primarily related to vehicles utilized and filled operations.

The next several quarters will likely continue to be challenging for our industry and for our company, though we believe that the second quarter representative trough in the industry activity followed by the modest rebound we experienced in the third quarter with the structural cost reductions to our operations in SG&A, an increase in use completions activity from the trough and the seasonal winter activity in Canada.

We believe that we are positioned to return to positive adjusted EBITDA on a quarterly basis in the fourth quarter of 2020 or the first quarter of 2021.

In addition, we expect that our free cash flow will improve in the fourth quarter relative to the third quarter and then we will generate significant free cash flow for the year.

I'd like to touch on a couple of matters related to our intellectual property.

NCS is dedicated significant time and resources over the years to bring meaningful innovations to our customers that allow them to operate more efficiently and reduce their cost. We currently hold 68 patents Ah costs across 28 distinct inventions and have over 90 pending patent applications.

We respect the intellectual property of our competitors and at times will negotiate.

We pursue these patents and these rights to allow us to make an economic return on the investment required to develop and commercialize technology.

We take many steps to ensure the strength of our IP portfolio and that our IP position is not infringed upon while we prefer settling matters commercially we will pursue our rights in court if needed.

Yesterday's earnings release referenced several settlement agreements related to the ongoing litigation with Diamondback industries. We're pleased that repeat precision has reached a settlement with Diamondback industries, and Derek jury, which we hope will bring her closure to a matter of that has consumed significant Tom and financial resources over the last two years.

We also noted that we have entered into agreements with several parties to license patents related to our Air-lock cases <unk> system. We recently received our first royalty payment associated with one of those licenses.

As a technology company, we will continue to pursue innovation on behalf of our customers and will continue to defend our intellectual property from infringement.

I will now ask Ryan to discuss our financial results in more detail.

Quarter.

Ah reported SG&A include share based compensation and certain nonrecurring expenses, including certain litigation costs and severance expenses and the third quarter non-recurring severance expenses totaled zero point $8 million, while litigation expenses were $1.2 million.

Our adjusted EBITDA for the third quarter was negative $2.1 million as compared to $13 $6 million and the prior year's third quarter. This represented an improvement of five $8 million as compared to the second quarter of 2020. However.

Depreciation enamored amortization expense for the quarter was $1.1 million and our net income attributable to the Noncontrolling interest was zero point $7 million during the quarter, reflecting profitability it repeat precision.

Turning now to cash flow items in the balance sheet.

Our cash flow from operations for the third quarter was negative five $6 million in our net capital expenditures for the third quarter for zero point $6 million, resulting in free cash flow for the quarter of negative $6.2 million.

Free cash flow for the first nine months of the year was a positive $13.3 million.

And share based compensation and approximately $1.2 million in litigation expenses.

We expect our fourth quarter, depreciation and amortization expense to be approximately $1.1 million and our net interest expense to be zero point $3 million, primarily reflecting unused facility fees and the amortization of debt issuance costs.

As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound or hash key please standby, while we compile the Q and a roster.

And your first question comes from the line of George O'leary with TPH and company.

Hey, guys.

George warning.

The the the guidance color you guys provided was was very helpful. I guess, you know that the incremental margins were strong 50% incremental margins in the third quarter. If I remember correctly, you guided to 40% plus I guess what are the puts and takes that could pull that back up closer to.

Third quarter Incrementals any color there would be super helpful.

Okay.

Yes, George this is Ryan.

I think in the last quarters call, we guided to Incrementals being 40% plus and we ended up coming in a bit ahead of that and part of that has to do with the mix of revenue in the third quarter. So we are a little bit stronger in the U.S., particularly and tracer diagnostics and repeat which have.

Pretty strong incremental margin profile.

This year has improved a year to date over the last few years Sydney way to help us think about market share for y'all and that composite bug business would be helpful.

Yeah. So if you recall, our first quarter of our first full quarter of commercialization with our composite plug product line was in the first quarter of 2018, and so we've been we've been able to successfully grow market share overtime on a quarter by quarter basis.

When when we came into the downturn.

Earlier this year.

Because of our customer mix, we saw what appeared to be a decline in market share.

And it was it was a fairly significant decline, but as those those operators came back to work and our customer mix got back closer to normal we saw our market share increase to beyond where it was before that downturn. So we believe that we are in the top five in terms of market share for composite plugged in.

In the U S and and continuing to grow market share.

And please press Star then the number one and your next question comes from the line of Kurt Hallead with RBC.

Hey, good morning.

Morning.

Hey, I appreciate all the color commentary as always.

So just wanted to from a back back around to the reference you made and to.

To be Pat.

Lawsuit settlement.

So you expect to get a $15 million upfront cash payment.

General sense as to when you could reasonably expect that to come across.

Yes, Kirk keep.

Yeah, well as as we mentioned earlier.

We've had a pretty slow start for activity in the third quarter coming out break up and that's that's not common for the industry. So we believe that the activity increase will come in from the rig count standpoint.

One of the things that has a little uncertainty around it is what what's going to be the availability of frat cruise in Canada, how many frack spreads are actually going to be on the market and can.

The the current Frack spreads handle the amount of activity that we see coming in to the to the fourth quarter. So that's that's kind of a wildcard horses are they are going to be enough frack spreads, we think that there will be.

But our customer mix is we feel very good about the about.

About the guidance that we gave for revenue in the fourth quarter.

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