Q2 2021 NCS Multistage Holdings Inc Earnings Call
Good day, and thank you for standing by and welcome to the Q2 'twenty, 1 NCS Multistage earnings conference call.
At this time all participants are in a listen only mode.
After the Speakers' presentation, and it would be a question and answer session.
Asked a question during the session you will need to press star 1 on your telephone.
Please be advised that today's conference is being recorded.
If you require any further assistance. Please press star zero and I would now like to hand, the conference over to your Speaker today Ryan Hummer. Please go ahead.
Alright, Thank you for summer and thank you for joining the NCS multistage and second quarter 2021 conference call. Our call today will be led by our CEO, Robert Nipper and I will also provide comments.
We would like to caution listeners that some of the statements made on this call could be forward looking and to the extent that our remarks today contain information other than historical information. Please note that we are relying on federal safe Harbor protections.
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 the impact of the COVID-19 pandemic on the global economy oil demand and our company.
I would like to refer you to our press release issued last night, along with other public filings made with the SEC that outline those risks.
And today's 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 to 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, both of which are available on our website NCS multistage dot com provide reconciliations of these non-GAAP financial measures to the most comparable GAAP financial measure.
I'll now turn the call over to Robert Thanks.
Thanks Ryan.
Welcome to our investors analysts and employees joining our second quarter 2021 earnings conference call our performance and the second quarter was generally favorable to the guidance. We provided in early May I'll.
I'll briefly discuss our results and outlook for each of the U S, Canada and international markets.
Starting with the U S. Our revenue of $9.2 million and the second quarter represented a sequential increase of 18%, but fell below our guidance as activity at repeat precision was impacted by unanticipated white space and the large customers completions program. This.
And this customer restarted their completion program in June and is that steady activity planned through the third quarter.
And with WT I pricing of 65 to $75 a barrel, we've seen increased fracturing systems work and the U S and private operators have increased activity and the basins, where pinpoint completions using sliding sleeves have demonstrated operational benefits for our customers.
Our tracer diagnostics business has benefited as well with several multi well pad, our multi well pad projects underway.
As a result, we expect that sequential growth and the U S will continue and the third quarter.
Our Canadian revenue of $9.2 million and the second quarter exceeded our guidance range of $5 million to $6 million as warm dry conditions allowed our customers to begin and increasing their activity in early June.
Coming out of spring breakup this year, the Canadian rig count has been tracking closely with 2019 levels, indicating a stronger recovery and Canada. Thus far then and the U S. We expect for Canadian recovery to continue to track 2019 levels more closely outpacing activity growth and the U S through the remainder of the year.
This is also reflected and the most recent survey by the Petroleum Services Association of Canada, which recently increased their expectation for the number of wells to be drilled in Canada, and 2021 by 18% to for 250 as compared to their prior expectation of 3600 and April and as compared to just under 3000 wells drilled.
And 2020.
Although the international recovery has lagged that of North America, our international operations picked up significantly for us and the second quarter with revenue recovery to $3 million for the quarter up from only a half a million dollars and the first quarter and ahead of our guidance of 152 and $5 million.
We believe that international activity will continue to increase as we move into the second half of the year, though it remains difficult to staff projects in several markets due to COVID-19 related travel restrictions.
We remain very focused on managing our costs and have maintained discipline on the SG&A and capital spending our SG&A for the second quarter of 2021 decreased by 24% as compared to the second quarter of 2020 and decreased by 8% as compared to the first quarter of 2021.
Our net capital expenditures for the quarter were only $3 million highlighting both the capital light nature of our business and our financial discipline.
We have also retained our strong balance sheet with approximately $8 million and net cash as of June 32021, the borrowing base for our revolver at the end of June exceeded $10 million.
We are seeing signs of cost inflation and supply chain stresses impacting our business and employee wages still fiberglass cost as well as extended lead times for purchases and higher third party service charges were working with our customers to pass through some of these price increases or secure volume commitments and that allow us to mitigate these cost increases but we.
Not yet achieved net gain and pricing.
I'll also point out that we continue to add licensees for our intellectual property related to our airlock casing buoyancy system, providing for growing stream of royalty income we will continue to assert and defend our intellectual property as we become aware of competitors that we believe are infringing on our intellectual property.
Our team at NCS continues to do a tremendous job and I'm proud to say that we have continued our track record of zero recordable incidents from 2020 into 2021 with no reportable incidents thus far this year.
I'll now ask Ryan to discuss our financial results in more detail.
Thank you Robert.
As reported in yesterday's earnings release, our second quarter revenues were $21.5 million, 146% higher than the prior year second quarter.
On a sequential basis revenue and the second quarter was 25% lower than revenue and the first quarter with an increase of 18% and the U S and an increase of over 500% and international markets offset by a seasonally driven decrease of 55% and Canada.
Gross profit defined as total revenue less total cost of sales, excluding depreciation and amortization expense was $7.5 million and the second quarter or 35% of revenue. This compares to $2.3 million or 27% of revenue and the prior year second quarter.
And for sequential comparison gross profit was $10.2 million or 36% of revenue and the first quarter of 2021.
Our gross margin of 35% during the second quarter of 2021 as compared to 36% and the first quarter of 2021 demonstrated our ability to maintain our margin even with the impact of lower sequential revenue related to the seasonal spring breakup in Canada and additional costs incurred related to the product design changes that we implemented at repeat precision earlier.
And this year.
Selling general and administrative costs or SG&A were $11.8 million and the second quarter, which was $3.7 million or 24% lower as compared to $15.5 million from the second quarter of last year. Our second quarter. SG&A was also a $1 million lower as compared to the first quarter.
Our reported SG&A includes share based compensation and certain nonrecurring expenses, including certain litigation costs and the second quarter, our nonrecurring litigation expenses totaled $1 million and noncash share based compensation expense hold on $1.1 million.
Our adjusted EBITDA for the second quarter was negative $1.6 million. This is a $6.3 million improvement as compared to the prior year second quarter, and a decrease of $1.7 million as compared to the first quarter of 2021 our.
Our depreciation and amortization expense for the quarter was $1.1 million and our net income attributable to the Noncontrolling interest and our repeat precision was <unk> $3 million and the second quarter.
Turning now to cash flow items and the balance sheet.
Our cash flow from operations for the second quarter was $2.9 million and our net capital expenditures for the second quarter were zero point $3 million.
Resulting in free cash flow for the quarter, a $2.7 million free cash flow for the first 6 months of 2021 zero point $8 million.
On June 31, we had $13.9 million and cash and total debt of $6 million.
As of June 30, our borrowing base under the credit facility was $10.2 million with $10.1 million of that available, which is net of letter of credit commitments.
In addition repeat precision currently has access to over $4 million and borrowing capacity that is separate from our revolver.
NCS had net working capital of $49.2 million as of June 30 as well.
Turning now to a few points of guidance and the third quarter.
We currently expect our third quarter total revenue to be between 32% and $35 million.
We expect our U S revenue of $9 million to $10 million and international revenue of 1.5 to $2.5 million. We also expect Canadian revenue of between 21, 5% and $2$2.5 million, reflecting the seasonal increase in activity following spring breakup.
We expect our gross margin to improve to between 40% and 45%, reflecting the sequential increase in revenue and limited further costs related to the product designs at repeat precision.
We expect our reported SG&A inclusive of share based compensation and non recurring items to be between 10, 5 and $11.5 million and the third quarter. This includes approximately $1 million and noncash share based compensation and approximately <unk> 8 million and litigation expenses.
We expect that both our gross profit and reported SG&A will be favorably impacted by payroll tax benefits from the U S employee retention credit, which is part of the cares Act and the third quarter, we expect a benefit of approximately $1.8 million to $2 million, which is net of bonus accruals with over 70% of that benefit reducing our SG&A with the remainder.
Reducing our cost of sales.
We expect our third quarter, depreciation and amortization expense to be approximately $1.1 million and our net interest expense to be zero point $2 million.
Primarily reflecting unused facility fees and the amortization of debt issuance costs.
And I'll hand, it over to Robert to update our full year 2020 on guidance and for closing remarks. Thanks Ryan.
Our updated full year guidance for 2021 is as follows. We currently expect full year revenue of $118 million to $125 million, increasing the low end of the range from 110 million previously provided in May.
We currently expect full year, adjusted EBITDA of $8 million to $11 million consistent with the calculations and our earning release. This is an increase from the prior provided range of $5 million to $10 million.
I will note that this does not include any net benefit from the employee retention credit, which we expect to characters on characterize as non recurring.
We're reducing expected gross capital expenditures for 2021 to <unk> 8 to $1.5 million from the $1 million to $2 million range. We provided previously.
We expect that we will be free cash flow positive in 2021 with the underlying earnings and the benefit from the employee retention credit more than covering the required investments and working capital to support our growth.
Within this guidance, we expect a continued improvement and U S revenue and the second half of the year with contributions from fracturing systems tracer diagnostics and repeat precision.
We expect that activity in Canada, and the second half of the year will continue to be relatively consistent with 2019 levels.
We anticipate that we will remain active and international markets throughout the second half of the year, especially in our North sea operations with activity and the middle East increasing later in the year and still access improves.
Visibility remains limited however, and this guidance assumes a continuation of old demand normalization throughout 2021 as economies recover and vaccination progress enables more travel as well as continued OPEC plus support of the oil market among other things.
Before we open up the call to Q&A I'll close with a couple of brief comments.
We are well positioned for continued sequential growth and our U S operations and as activity at repeat precision increases and as fracturing systems activity and the U S continues to benefit from activity increases by smaller private operators.
We maintain a strong position and the Canadian market, which is exhibited much higher trough activity levels. This year as compared to 2020, and which has already recovered to activity levels consistent with the second half of 2019.
International activity for NCS rebound and the second quarter.
And we expect to remain active and international markets, especially on the North sea for the remainder of the year.
We continue to invest and technology to enhance our current products and services bring new innovations for our customers and secure our intellectual property.
I am encouraged by the recovery and global oil demand and the success OPEC plus and managing supply.
We believe that there is a strong possibility for a multi year cyclical recovery of activity for our industry.
We have the infrastructure in place to support revenue growth and each of our markets, providing leverage to grow future earnings and our business.
And our strong balance sheet working capital position and borrowing base are strategic assets for NCS and support working capital requirements associated with organic growth.
And with that we will welcome any questions.
Okay.
Thank you.
A reminder to ask a question you will need to press star 1 on your telephone.
So let's draw your question Chris.
Please standby, while we compile the Q&A roster.
Yes.
Yes.
And your first question comes from Ian Macpherson of Piper Sandler.
Thanks, Good morning, Robert and Ryan how are you.
And doing well thanks.
Good.
Pleasantly surprised by the bounce back and Canada.
And just for those of us over here, who don't follow those fundamentals quite as.
Closely are as familiar with it and as you are I was wondering if you could just.
Help us understand how much of.
And the retracing 2019 levels already this year, how much of that do you think is government supported or just fundamentally.
Structurally and a better recovery mode than the U S. So far and.
And.
That plays into your thinking for 2022 growth prospects as you compare your business and the U S to Canada.
Not not guidance for next year, but just thinking out loud with regard to the fundamental drivers.
Right well I mean.
Activity certainly has increased and we'll look at the rig count of over 150, right now versus I think it was 20 to 30. This time last year and we've got a <unk>.
Lot of support and the market, but 1 of the things I would say that prior to the pandemic, our Canadian customers and the.
Industry in general has learned to live in a way that the U S is now learning to live and we're generating free cash flow is.
And as King and not overspending, the way that we have and the U S for for years. So I think the use for the Canadian market is a little bit ahead of.
The U S market in terms of living within their means and so we're seeing now with recoveries and pricing demand starting to recover and we were almost at it.
Within a couple of million barrels of pre pandemic.
Level, so as we continue to see support and the market and price increases I think we will continue to see the Canadian customer base continue to increase.
And increased activity.
Okay, Okay and would you say that the Canadian market is recaptured.
More of that.
Theoretical upside a year earlier or do you think that there is just better organic.
Room for growth next year or is it just too.
Too difficult to call right now.
No I think.
I think it is not that far ahead of what it's captured I think I think again pricing.
A difference and.
So the Canadians are been enjoying better pricing and that they've had in the past and so that certainly that certainly helps but I think theres still.
And just organic activity that will continue to increase as demand increases.
Okay.
Okay.
Brian you have.
You said close to $50 million of net working capital.
On the balance sheet.
Large quantum and relative to your your balance sheet. So do you have any any levers in place too.
To augment the harvesting of that over the next couple of quarters or.
Just refresh us on any kind of rules of thumb on on Optum.
Optimized working capital relative to the business.
Yeah, absolutely. So we are running with a relatively high.
Net working capital balance relative to our historical revenue.
And I think what we've seen is once you get to mid or later cycle.
We can get to a net working capital of about 35% of revenue so that would be the target as we move forward and I'd say, we're in a very good position with respect to our receivables our collections have been strong and the team has done a great job there.
We manage our payables, but we don't overly manage the payables. So the biggest lever for us is going to be inventory and certainly we need volume and activity growth on the revenue side to be able to work down that inventory and with the growth that we see.
Throughout the year, I think will be very efficient with respect to our growth.
As far as what we what we add to stock on the inventory side, so as far as a lever for managing that net working capital ratio as compared to revenue down I think the biggest gains that youre going to see for us will be coming out of the inventory side.
Okay got it and that makes a lot of sense. Thank you Beth I'll pass it over.
Thanks Ian.
And again to ask a question and please press star 1.
Okay.
Okay.
It looks like we don't have any more questions that is Iraq Zimmer.
Yes, it does appear to be no more questions at this time.
And for clothing.
Okay. Thank you on behalf of our management team and our board, we'd like to thank everyone on the call today, including our shareholders and the research analysts who cover NCS and especially our employees are truly appreciate the efforts of our employees and the sacrifices that have been made by everyone and NCS to support the company and each other we'll continue to operate safely with zero and Rick.
Portable incidents this year our team continues to provide excellent service to our customers and is developing new products and services that will enable our customers to be more successful.
Our people have done a tremendous job on managing the many challenges that come with the continued impacts of COVID-19, we were only as good as our people and I'm. So proud of the team that we have here at NCS. We appreciate everyone's interest and NCS multistage and we look forward to talking again on our next quarterly earnings call. Thank you summer and that concludes our call today.
Thank you.
This concludes today's conference. Thank you for participating you may now disconnect.
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