Q3 2021 NCS Multistage Holdings Inc Earnings Call
Okay.
Good day and thank you for standing by welcome to the Q3 2021 NCS Multistage earnings conference call. At this time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone please be advised that the these conference is being recorded if you require any further assistance. Please press star zero I would now like to hand the conference over.
To your speaker today Ryan.
Ryan Hummer. Thank you. Please go ahead.
Alright, Thank you Dale and thank you for joining the NCS Multistage third quarter 2021 conference call.
Our call today will be led by our CEO, Robert Nipper and I will also provide comments wed.
We'd like to caution listeners that some of the statements 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're relying on federal safe Harbor protections such.
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.
In 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 regard 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, which are both available on our website NCS multistage dot com <unk>.
Reconciliations of these non-GAAP financial measures to the most comparable GAAP financial measure I will now turn the call over to Robert Thank.
Thank you Ryan and welcome to our investors analysts and employees, joining our third quarter 2021 earnings conference call our.
Our performance in the third quarter was generally consistent at a consolidated level with the guidance. We provided in early August with some variations by region 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 $8 million in the third quarter of 2021 fell short of our guidance range provided on the last earnings call with reduced product sales at repeat precision and in our fracturing systems product lines, partially offset by improving performance within our well construction and tracer diagnostics product lines.
Historically, we have noted a correlation between oil prices and tracer diagnostics activity on a slightly lag basis that correlation appears to be holding as our job volumes increased in the latter part of the third quarter and have maintained so far at those higher levels early in the fourth quarter.
Our well construction business, which is more aligned with drilling the completion activity also improved sequentially, we expect future increases in wells drilled to outpace increases in wells completed as our customers in the U S are substantially reduce their inventory of drilled but uncompleted wells.
Well construction business has also benefited from our portfolio extension within our airlock casing buoyancy product line, providing customers with additional options, while retaining the unmatched reliability history that we've established as the innovator of cost effective casing buoyancy solutions.
We currently expect to deliver modest sequential growth in the U S. In the fourth quarter, which assumes normal holiday related field activity declines in the last couple of weeks of the year.
Our Canadian revenue of $22 $1 million in the third quarter, representing sequential growth of 140% as compared to the second quarter of 2021 outperforming the comparable sequential growth in the Canadian land rig count of 111%.
Canadian revenue for the quarter was within our guidance range of 21, 5% to $22 $5 million as activity in Canada continues to track at or above 2019 levels with a stronger industry recovery in Canada, thus far than in the U S with.
We continue to leverage our strong presence in fracturing systems in Canada to pull through opportunities for our other product lines.
We expect Canadian industry activity to continue to track 2019 levels for the remainder of the year.
There is one exciting operational accomplishment I would like to highlight in Canada. We recently worked with a customer to complete a zipper frac operation using our submitted multi cycle.
<unk> shifted sliding sleeves, there was one frac crew on site and two coiled tubing units, allowing for near continuous pumping operations.
Both wells had over 100 sliding sleeves and each well was completed in a single tool run using our ship close process, which provides additional flexibility during the completions operations and helps to maintain proppant in the formation minimizing sand flow back and post frac cleanup cost.
With zipper Frac operations, the customer was able to better maximize completions efficiency, while generating a complex fracture network.
Turning now to our international operations revenue during the third quarter of $2 $3 million was also within our guided range of one five to $2 $5 million.
Our activity accelerated as we progressed through the quarter with multiple crews working in the north Sea and operations resuming in Argentina and in September.
That momentum has continued into the fourth quarter as we have steady work on the North Sea ongoing operations in Argentina, and China and have first product sales of trials ongoing in two countries in the middle East our team is doing a great job of navigating the difficulties in staffing projects in several international markets due to COVID-19 related travel restrictions.
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With the increased revenue in the third quarter of 2021, we were able to deliver a gross margin of 46%, which exceeded the guided range of 40% to 45% for the quarter and is our highest gross margin percentage since the fourth quarter of 2019.
We remained very focused on managing our costs and have maintained discipline on SG&A and capital spending our SG&A for the third quarter of 2021 decreased by 12% as compared to the third quarter of 2020 and decreased 7% as compared to the second quarter of 2021.
Our net capital expenditures for the quarter were less than $100000 totaled.
And a total of three.
$100000 for the first nine months of the year, highlighting both the capital light nature of our business and our financial financial discipline.
We maintain a strong balance sheet with approximately $10 million of net cash as of September 32021, and the increase of $2 million from June 32021, the borrowing base for our revolver at the end of September was nearly $14 million.
We continued to experience the early impacts of cost inflation and supply chain stresses increases in employee wages still fueled in fiberglass cost as well as extended lead times for purchases and higher third party service charges.
We are selectively implemented price increases and surcharges and we'll continue to evaluate future price increases as input costs continue to rise. In addition, we are working with our largest customer to secure volume.
That will allow us to better plan purchases to strategically mitigate these cost increases.
Our spend on IP related litigation matters is expected to increase in the fourth quarter of 2021, and the first quarter of two them too as we approach trial dates for litigation related to our airlock casing buoyancy system in the U S and related to fracturing systems in Canada.
Finally, I'd like to share some exciting developments regarding our products serving.
Offshore market.
We've qualified our <unk> used in the North sea with a V zero rating, which means the sleeves. We're qualified through testing to be gas pipe when run into the Wellbore with testing performed under high load and through temperature cycles. We expect that the V. Zero rated sleeves will help us to grow our customer base and the north sea and other offshore markets over time.
Taking this even further we've recently contracted with an international oil company to develop an <unk>.
Our completion system to be run in a deepwater subsea application. We're early in the process and the system will take time to develop but the relationship with this customer clearly demonstrates our leadership in fracturing systems product lines from this product line.
I'll now ask Ryan to discuss our financial results in more detail.
Thank you Robert.
As reported in yesterday's earnings release, our third quarter revenues were $32 4 million, 99% higher than the prior year's third quarter on a sequential basis revenue for the third quarter was 51% higher than revenue during the second quarter with an increase of 140% in Canada, which was supported by seasonal activity increases offset.
A decrease of 13% in the U S and 25% and international markets.
Gross profit defined as total revenue less total cost of sales, excluding depreciation and amortization expense was $14 $8 million in the third quarter or 46% of revenue.
As compared to $6 1 million or 37% of revenue in the prior year's third quarter gross.
Gross profit for the third quarter of 2021 included approximately zero point $8 million in employee retention credit benefits net of associated bonus related accruals for a sequential comparison gross profit was $7 5 million or 35% of revenue in the second quarter of 2021.
Our gross margin of 46% during the third quarter of 2021 is our highest quarterly gross margin percentage since the fourth quarter of 2019. This demonstrates the operational leverage in our business as revenues increase due in part to structural cost reductions that we've made over the course of the last 18 months or.
Our SG&A costs were $11 million during the third quarter, which was $1 $5 million lower as compared to the $12 $5 million from the third quarter of last year. Our third quarter. SG&A was also zero point $8 million lower sequentially as compared to the second quarter.
I'll remind you that our reported SG&A includes share based compensation and certain nonrecurring expenses, including litigation costs in the third quarter, our nonrecurring litigation expenses totaled <unk> 9 million in noncash share based compensation expense totaled $1 million or.
Our SG&A expense in the third quarter of 2021 also included approximately $1 1 million in net employee retention credit benefits.
Our adjusted EBITDA for the third quarter was $4 2 million, which was a $6 $3 million improvement compared to the loss of $2 1 million in the prior year's third quarter and was an increase of $5 $8 million as compared to the second quarter of 2021.
Our depreciation and amortization expense for the third quarter was $1 $2 million.
Net income attributable to the Noncontrolling interest in repeat precision was <unk> 4 million for the quarter.
Turning now to cash flow items and to the balance sheet.
Our cash flow from operations and free cash flow for the third quarter were each $5 6 million our free cash flow for the first nine months of 2021 is $6 4 million.
On September 32021, we had $18 $4 million in cash and total debt of $8 $2 million, which was comprised entirely of capital lease obligations.
On September 30, our borrowing base under the credit facility was $13 $7 million. In addition repeat precision currently has access to over $4 million in borrowing capacity, which is separate from our revolver.
We had net working capital of $48 7 million on September 32021 as well.
Finally, a point a few points of guidance for the fourth quarter.
We currently expect our total revenue in the fourth quarter to be between 33% and $36 million.
Within this we expect our U S revenue to be eight five to $9 $5 million and our Canadian revenue to be between 25% and 21 $5 million. We also expect international revenue of 4 million to $5 million, which is an increase from the third quarter, primarily driven by higher activity in the north Sea.
We expect our gross margin to be between 30, sorry, 43, and 46% during the fourth quarter, reflecting the modest increase in quarterly revenue, including the additional activity in international regions, We expect.
Our reported SG&A inclusive of share based compensation and nonrecurring items to be between $12 million and $13 million in the fourth quarter. This.
This includes approximately $1 million in noncash share based compensation and approximately $1 3 million and litigation expenses.
We expect an increase in other income in the fourth quarter, primarily related to a technical services agreement and support agreement for tracer diagnostics activity in Oman.
While we expect that we would qualify for the ERC employee retention credit in the fourth quarter, our guidance excludes any potential benefit related to this in the fourth quarter as the provisions and a proposed infrastructure Bill would terminate the benefit as of September 30, if passed.
We expect our fourth quarter, depreciation and amortization expense to be approximately $1 3 million and our net interest expense to be zero point $2 million, primarily reflecting unused facility fees and the amortization of debt issuance costs.
I'll now hand, it over to Robert to update our full year 2021 guidance and for closing remarks. Thank.
Thank you Ryan.
Based on our year to date results and the guidance for the fourth quarter that Ryan mentioned, our updated full year guidance for 2021 is as follows.
We currently expect full year revenue of $115 million to $118 million in fully in full year, adjusted EBITDA of $8 million to $10 million consistent with the calculations in our earnings release.
This range does not include any net benefit from the employee retention credit, which we characterize as nonrecurring.
Our expected gross capital expenditures for 2021 is $1 million or less and we expect that we will be free cash flow positive in 2021.
Within this guidance, we expect our activity levels in the fourth quarter in the U S and Canada to be consistent with activity levels in the third quarter and activity increases in October and November offset by the typical holiday slowdown in the last two weeks of the year.
We anticipate that we will remain active in the international markets throughout the fourth quarter, especially in our North Sea operations with increased activity in the middle East and Argentina as well.
Before we open up the call to Q&A I'll close with a couple of brief comments.
We are well positioned to return to sequential growth in our U S operations with recent momentum in our well construction and tracer diagnostics product lines complemented by expected improvement at repeat precision.
We maintain a strong position in the Canadian market, where the industry has recovered faster than the U S and continues to track 2019 levels.
International activity for NCS is expected to increase in the fourth quarter with higher activity in multiple geographies and across multiple product lines.
Our team at NCS continues to do a tremendous job operationally and I am proud to say that we've continued our track record of zero recordable incidents from 2020 into 2021 with no reportable incidents thus far this year.
We continue to invest in technology to enhance our current products and services and bring new innovations to our customers and secure and protect our intellectual property.
Im encouraged by the recovery in global oil demand and the success of OPEC, plus and managing supply. We believe there is a possibility for a multi year cyclical industry recovery.
We have the infrastructure in place to support revenue growth in each of our markets, providing leverage to grow future earnings and our business and our strong balance sheet net 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.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound please.
Please standby will be compile the Q&A roster.
Your first question comes from the line of John Your line is open.
Hey, guys. Good morning, and thank you for putting in the Q&A.
I just have one question for you you made a comment about starting.
No.
To conclude in the middle East.
Just do a quick tutorial like once you start field trials.
What's the time to prove out product.
Would you expect to see orders just walk us through that process.
Yes, that's a great question.
In the Middle East it depends really on where one is so as an example, with Saudi Aramco. It took us probably two and a half years from start to finish to be able to get what's called catalogued. So that we could actually start selling products to them.
Each product that we that we feel trial.
Get accepted our catalog.
Audi Aramco does require going through a particular process.
But there are some other countries in the middle East and elsewhere around the world, where that's not that long of a process. So you could be from field trials.
<unk> into generating revenue so with the field trials that we have we have a bit of a mix and the timing on starting to see revenue as a result of these field trials should be within the next.
Conservatively within the next 12 months.
Okay, great. Thank you very much.
John.
Your next question comes from the line of Amit.
Your line is open.
Alright, thanks, guys. Thanks for those comments.
From Arrowhead.
Good morning.
So I just wanted to congratulate you on a good quarter and I just had some.
Just funding it could give some color on the eighth Avenue provided by geography.
Thank you.
Revenue growth in Canada, just wondering would you put this on a one time bounce back because of the Covid period.
You've got some projects in the Gulf or do you think that these revenue numbers are more sustainable I know you would expecting something in August the beam.
In Q4, but maybe if you could just expand it to the next four quarters.
And then I also have a follow up question on the U S.
You could answer that is better.
Yeah, sure Eddie and good morning.
I'll take that so I think with what we see in Canada certainly.
While the market has bounced back faster than in the U S.
I think what we're seeing is continued strong indications from our customers for a very active winter drilling season through the fourth quarter and into the first quarter of next year.
And at this point budgets are still being developed but we would certainly expect there to be activity growth.
More than double digit activity growth in Canada in 2022 as compared to 2021.
With where we sit within our various product lines with the market share that we have in fracturing systems.
We would certainly expect to participate in that and then be able to potentially grow faster than the market within the other product lines as we continue to execute on our cross selling strategies too.
Enhance the market share that we have across trace.
Tracer diagnostics, while construction and also pulling through some additional work for repeat precision and the plug and perf market in Canada over the course of 2022 as well.
Sure.
Thanks for that and then on the U S. I was just wondering.
Are you disappointed overall unit is concerned the deal performance I know Thats, all I had mentioned that Youre expecting a club deal.
The coming few quarters, how do you see things improving win rate is I believe still seems to be.
Burnt demand move to stabilize.
Hello, everybody.
No I wouldn't say that.
Worried about it but I'm certainly disappointed in the performance that we've had the last couple of quarters in the U S. While we've continued to grow.
In the U S market, we haven't grown it.
Right that we had hoped we would.
A couple of things that I mentioned, one fracturing services and the other being some product sales at repeat precision.
At repeat precision we had had a product launch earlier in the year of a product we had a lot of runs on it and then we found that there was an issue with the design, we had to pull that product off the market we have redeveloped.
We've addressed those issues that we learn.
Back into the market now with the improved product.
Our success rate is actually higher than the previous product that we had out there and we do expect to continue to grow the repeat precision business again in the U S market and we expect to again beginning in the first quarter continue to have sequential sequential growth in the U S market.
Thanks, Brian that's a handful.
Thank you.
As a reminder to ask a question you will need to press star one on your telephone.
There are no further questions at this time.
Thank you operator on behalf of our management team and our board, we'd like to thank everyone on the call today, including our shareholders and research analysts and especially our employees.
Truly appreciate the tireless effort of our employees and the sacrifices that have been made by everyone at NCS to support the company in each other I am excited to return to growth after our team.
He needs to provide excellent service to our customers and us in developing new products and services that will enable our customers to be more successful we are taking on the vessel.
We are taking on the demanding and technically challenging work and delivering results to our customers.
Our people have done a tremendous job in managing the many challenges that come with the continued impacts of COVID-19, we are only as good as our people and I believe we have the best team in the industry. We appreciate everyone's interest in NCS multistage, and we look forward to talking again on our next quarterly earnings call. Thank you operator that concludes our call.
This concludes today's conference call. Thank you for all parties.
This with BP you may now disconnect.
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