Q3 2022 NCS Multistage Holdings Inc Earnings Call

November 1, 2022

The conference will begin shortly.

Okay.

Good day and thank you for standing by welcome to the NCS Multistage third quarter 2022 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 this session you will need to press star one one on your telephone.

We will then hear an automated message advising your hand is rate. Please.

Please be advised that today's conference is being recorded.

I would now like to hand, the conference over to your Speaker today, Ryan Hummer Chief Financial Officer. Please go ahead.

Thank you Phil and thank you for joining the NCS Multistage third quarter 2022 conference call.

The call today, and Robert Nipper, our founder and retiring CEO will also provide comments.

We are also joined for the first time by Mike Morrison, who will soon take over for me as CFO .

Want to remind listeners that some of today's comments include forward looking statements such as comments regarding our future expectations for financial results and business operations.

These statements, including our financial guidance are subject to many risks and uncertainties that could cause our actual results to differ materially from any expectation expressed herein, including the impacts of the COVID-19 pandemic installation central bank actions to combat inflation in Russia's ongoing invasion of Ukraine.

Global economy oil demand and our company.

Please refer to our most recent annual report on Form 10-K, and our latest SEC filings for risk factors and cautions regarding forward looking statements.

Our comments today also include non-GAAP financial measures, including adjusted EBITDA free cash flow and net working capital.

The underlying details and reconciliations of non-GAAP to the most comparable GAAP financial measures are included in our third quarter earnings release can be which can be found on our website NCS multistage dot com.

With that said I'd like to welcome our investors analysts employees and other attendees to our third quarter 2022 earnings conference call. We.

We significantly exceeded the consolidated revenue guidance for the third quarter of 2022 that we provided in early August enabling us to generate over $8 million and adjusted EBITDA during the quarter.

I'll start by briefly discussing our results and outlook for each of Canada, The U S and our international markets.

Starting with Canada, our Canadian revenue of nearly $35 million in the third quarter exceeded the high end of our guidance range of 23 to $24 5 million. These.

These results reflect several factors, including favorable weather conditions during the quarter, which allowed for higher customer activity levels than we had anticipated in.

In addition, we added new customers for our fracturing systems product line, which contributed to incremental sales.

This is the result of our highly focused efforts by our sales team leveraging our strong performance in the field, where we drive operating efficiencies for our customers.

As an example, we recently participated in a unique simulcast <unk> project in Canada on a multi well pad with two wells being simultaneously fractured utilizing NCS sliding sleeves and shipped Frac closed operations from a single Frac spread.

Through that process, we help to enable greater operational efficiencies for our customer and look to repeat that in the future.

Our Canadian team continues to execute on opportunities to drive market share in other product lines as well for instance, we set an ambitious goal to triple the number of liner hangers that we install for our customers in 2022 as compared to the prior year and we are on track to achieve this goal.

Our growth in this technically demanding operation demonstrates the quality of our people and technology and provides us with additional opportunities to supply a full wellbore of NCS products to our customers, including toe sleeves, and float equipment centralizes sliding sleeves and the liner hanger.

We are also continuing to add to the Canadian customer base for our purple seal frac plugs and are delivering tangible value to our customers through the insights provided through our NCS tracer diagnostic service.

Activity in Canada has remained robust early in the fourth quarter. So we believe that the favorable operating conditions experienced over the last several months have accelerated the timing of customer activity, which is currently expected to lead to budget exhaustion for certain customers and lower activity as we head into the last two months of the year.

Turning to the U S. Our revenue of $11 5 million for the third quarter fell just below our guidance of 12% to $13 5 million.

Further sequential improvements in fracturing systems tracer diagnostics and Frac boat sales were offset by declines in well construction volumes and also lower volumes of perforating gun sales at repeat precision.

We're especially pleased with the performance of the tracer diagnostics business for the quarter as we participated in many high intensity projects for our customers, helping them to advance their understanding of completion performance and also well to well interaction.

The knowledge gained from these tracer diagnostics projects helps our customers to further optimize their completion strategies and to adjust field development planning to maximize hydrocarbon maximize hydrocarbon recovery and to optimize the financial returns on their assets.

Our U S. Tracer diagnostics revenue is 46% higher through the first nine months of 2022 as compared to the first nine months of 2021 with high activity continuing into the fourth quarter as our tracer field service crews are operating at nearly maximum capacity.

Ah repeat precision, we intentionally reduced our perforating gun sales activity starting in the second half of the third quarter as we implemented upgrades to components within the system.

We believe that these upgrades will further enhance the operating performance of our purple fire modular perforating gun system and the benefit of these upgrades has recently been demonstrated in the field.

During the quarter. We also had successful trials of our purple fire system with several additional wireline customers, which we anticipate will diversify our customer base customer base for this new product line setting the stage for further growth.

Our international activity approved again sequentially in the third quarter with revenue of $2 6 million, which.

Which was slightly below our expectations of $3 million to $4 million.

The sequential revenue improvement during the quarter was led by an increase in tracer diagnostics activity, primarily in Argentina, where we completed several projects.

This activity in the North Sea continues to be steady and we have received additional <unk> orders from our second North sea customer, which we expect to deliver during the fourth quarter.

On a consolidated basis, we began to benefit more fully in the third quarter from pricing increases that we implemented earlier this year, our gross margin percentage for the third quarter of 2022 was 42% the highest of any quarter. This year.

We continue to be impacted by rising costs across our supply chain, especially for the tubular that we utilized to build our fracturing systems in well construction products.

The pace of the cost increases is beginning to moderate.

To offset these cost increases we expect to initiate further pricing increases to recover our costs and to improve our gross margins ensuring that we are adequately compensated for the value that we bring to our customers.

I will now discuss certain financial results in more detail.

As reported in yesterday's earnings release, our third quarter revenues were $48 9 million, 51% higher than the prior year's third quarter with increases of 57%, 43% and 14% in Canada, The U S and international markets respectively.

On a sequential basis, our revenue in the third quarter was 78% higher than our revenue in the second quarter of 2022 with an increase of 171% in Canada due in part to normal seasonality and a 5% increase in international markets offset by a 5% decline in the U S.

Gross profit, which we define as total revenue less total cost of sales, excluding depreciation and amortization expense was $25 million in the third quarter or 42% of revenue.

This was in line with our guided range of 40% to 44% for the quarter and compared to $14 8 million or <unk> 46.

<unk> of revenue in the prior year's third quarter. The prior years third quarter benefited from the employee retention credit in the U S. And was also less impacted by cost increases in our supply chain.

For a sequential comparison, our gross profit in the second quarter of 2022 was $8 9 million or 33% of revenue.

The increase in gross margin percentage in the third quarter of 2022 as compared to the second quarter of 2022 was due primarily to the benefits, resulting from price increases achieved with our customers and also the increase in revenue.

Our selling general and administrative expenses or SG&A were $15 4 million in the third quarter of 2022 and were within our guided range of 14, 5% to $15 5 million, despite higher incentive accruals related to an improvement to our expected financial results for the year.

Our SG&A expense was $4 $4 million higher than the third quarter of last year, primarily due to increased head count and higher salary expense or SG&A in the third quarter of 2021 also benefited from the employee retention credits, which did not recur in 2022.

Our reported SG&A expense includes share based compensation and certain nonrecurring expenses, including litigation costs.

In the third quarter, our noncash share based compensation expense totaled <unk> 9 million.

And our nonrecurring litigation expenses totaled $1 7 million.

Which was an increase from the prior year, primarily due to a patent infringement trial, which I'll discuss further in a moment.

Our adjusted EBITDA for the third quarter of 2022 was $8 4 million as compared to $4 2 million in the prior year's third quarter. This.

This year over year increase of $4 3 million reflects an incremental margin of 26% on an increase in revenue of $16 5 million for the same period.

Our adjusted EBITDA for the trailing 12 months ending September 32022 was $15 2 million a 10% margin on our trailing 12 month revenue of $152 million.

During the third quarter of 2022, our depreciation and amortization expense was $1 $1 million and there was minimal income attributable to noncontrolling increased interest in repeat precision.

Turning now to cash flow items and the balance sheet.

Our cash flow from operations for the third quarter of 2022 was negative $3 8 million and our net capital expenditures for the third quarter was <unk> $1 million, resulting in free cash flow for the quarter of negative $4 million.

The negative free cash flow was primarily related to a seasonal increase in net working capital of $7 $3 million during the quarter.

Our net capital expenditures have totaled <unk> $4 million through the first nine months of 2022, highlighting both the capital light nature of our business and our continued financial discipline.

On September 32022, we had $9 $9 million in cash and total debt of $7 8 million for net cash of over $2 billion.

We also had a borrowing base of $23 $8 million on our Undrawn ABL.

Finally, NCS had networking capital of $56 9 million on September 32022, an increase from $48 million at the end of 2021.

We believe that the third quarter of 2020 to March the seasonal trough for our cash balance with strong collections activity occurring in the beginning of the fourth quarter by.

By the end of October our cash balance had already increased from $10 million to approximately $14 million.

Turning now to a few points of guidance for the fourth quarter and the full year for 2022.

We currently expect fourth quarter total revenue of $42 million to $46 million.

An increase as compared to the fourth quarter of 2021, but a decline from our robust third quarter we.

We expect our U S revenue to be between 13 and $14 $5 million.

We expect international revenue of $2 million to $3 million.

And we expect our Canadian revenue to be between 27, and $28 5 million impact.

Impacted by an expected seasonal slowdown in December due in part to customer budget exhaustion as well as the weakening of the Canadian dollar relative to the U S dollar, which accelerated in late September .

We expect our gross margin percentage in the fourth quarter to be between 39% and 43%, reflecting the seasonal reduction in revenue.

Sequential reduction in revenue cost pressures and FX impacts.

We expect our reported SG&A expense to be between $13, five and $14 5 million in the fourth quarter. This includes approximately $8 million of noncash share based compensation and approximately <unk> 9 million and litigation.

We expect our fourth quarter, depreciation and amortization expense to be approximately $1 1 billion.

As a result, our full year guidance for 2022 is as follows. We currently expect full year revenue of $157 million to $161 million in full year, adjusted EBITDA of $15 million to $17 million.

As compared to the guidance provided in August the midpoint of our revenue range has increased by $6 $5 million at the midpoint of our adjusted EBITDA range is increased by $1 $5 billion.

We expect our gross capital expenditures for 2022 to be between one and $1 5 million.

Which is a decrease of over $1 million from our initial expectations for the year.

We expect to generate positive free cash flow during the fourth quarter, but continue to expect modestly negative free cash flow for the whole year.

Before we open the call up to Q&A I'd like to make a few additional comments.

First I wanted to touch briefly on NCS as long term strategy.

Our leadership team has recently communicated our long term strategy to employees across the company.

We have three core strategies that we will follow over the next three to five years to drive growth and profitability in our business.

The first core strategy is to build upon our leading market positions. One example of this is the success that we're having in Canada and growing our liner hanger business.

By leveraging the core strengths and leading market share that we have in fracturing systems in Canada, we are able to deliver additional value to our customers by providing the full suite of equipment that they need for well construction and completions operations.

The second core strategy is to capitalize on our growing set of international and offshore opportunities.

Examples of how we are advancing this strategy includes growing our customer base in the north sea and expanding the suite of products products that we have qualified and available to be used by Saudi Aramco in Saudi Arabia, including tracer diagnostics, our airlock casing buoyancy systems and a unique composite centralize our product that reduces.

Friction is casing is being run.

The third core strategy is to commercialize innovative solutions to complex customer problems.

For example, we are working with an international oil company to develop a completion system for deepwater offshore applications.

Our solution is expected to enable this customer and likely others to enhance the economics of their deepwater wells by accessing additional deeper pay zones. They require an efficient system to hydraulically isolate and fracture multiple zones and highly deviated and the horizontal well bores.

These core strategies are supported by our guiding principles of up holding the NCS promise, which embodies our values and which outlines the commitments, we make to our key stakeholders and to our guiding our other guiding principle of maximizing financial flexibility, which is supported by our capital light business model.

We are working diligently to implement our strategy and to align our corporate regional and product line goals for 2023 with our long term objectives.

You'll hear more about our strategy and our progress in coming quarters.

Next we are pleased that a jury in a recent trial affirmed the validity of our patent utilized in our airlock casing buoyancy system and concluded that the patent had been infringed upon.

This is the second case, we have won this year related to our casing buoyancy intellectual property with total past damages awarded in those cases of approximately $2 4 million and the potential for future royalties with over 10 years remaining on the patents the awards remain subject to appeal.

We made meaningful investments in research and development and in securing and maintaining our intellectual property and we will continue to defend our intellectual property. If we believe that our competitors may be infringing upon it.

I'd also like to touch briefly on industry consolidation, we've been consistent in expressing our belief that our industry needs to consolidate we.

We see significant value in our organic growth strategy and opportunities, but we are very well positioned to drive industry consolidation as well leveraging our presence in multiple product lines and geographies, our strong balance sheet and the infrastructure that we have in place as a public company.

So to conclude we continue to execute on our strategy and our growth initiatives achieving the midpoint of our annual revenue guidance would result in revenue growth of approximately 34% in 2022 as compared to 2021.

We have the infrastructure in place to support revenue growth with leverage to grow future earnings as demonstrated by the 26% year over year incremental adjusted EBITDA margin achieved in the third quarter of 2022.

Achieving the midpoint of our annual adjusted EBITDA guidance would result in adjusted EBITDA growth of approximately 75% in 2022 as compared to 2021 more than twice the rate of revenue growth demonstrating the operating leverage in our business.

We continue to successfully introduce new technologies to meet the needs of our customers, adding to our product and service portfolio and expanding our addressable market we.

We are diligently managed managing through the supply chain challenges that we and others in our industry are facing and we are benefiting from price increases that we achieved earlier this year.

The work is not done however, we will continue to strive to be compensated for the value that we deliver to our customers.

Our team at NCS continues to do a tremendous job operationally with outstanding field execution and an excellent safety record.

We maintain a very strong balance sheet and liquidity position, providing with providing us with strategic flexibility.

And finally, we believe that we are in a favorable multi year cycle for our industry with strong fundamental supply demand dynamics paired with a measured and disciplined approach to growth.

I am excited by how ncs's positioned to participate in that growth and to deliver benefits to our employees our customers our shareholders and our other stakeholders.

With that we would welcome any questions.

Thank you.

At this time, we will conduct a question and answer session.

As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced.

Please standby, while we compile the Q&A roster.

Our first question comes from John Daniel with Daniel Energy Partners. John Your line is open.

Good morning, guys. Thank you for having me.

Just a couple of questions for you today first is.

On supply chain touched.

<unk> touched a little bit on the cost that youre seeing.

I'm just curious if you can elaborate more on areas, where our supply chain is impacting you and just what's the visibility and timing of improvement.

Hey, good morning, Thanks, John .

Obviously supply chain continues to be a bit of a challenge for us, especially with our sliding sleeves and for our casing buoyancy products.

We're matching the customers' coast post casing there with the properties. So one of the big inputs for us will be CTG or tubular.

And that's one of the areas, where we certainly haven't seen any reduction in pricing, although as mentioned in the call. We have seen the increases start to moderate.

For us we do order several months ahead of time right, we work with our customers to understand.

Their level of activity, so we're starting to see.

That level out, but because we order several months in advance increases over the last several months, we will continue to hit us as we move through the fourth quarter and into the first.

The other places we are seeing a bit of inflation with other components that go into our products, whether they be elastomers or just consumables.

However, we're doing good work through our supply chain to qualify additional vendors.

And also to be able to make sure that we have the availability happy to say that we havent missed an order we saw that increase in activity, especially in Canada in the third quarter, where we had revenue significantly ahead of what we had anticipated going into the quarter and we are able to meet every delivery for every customer during that quarter, which just as a testament to you.

The leadership of our supply chain group.

Okay.

That was helpful.

Next one I got here for you.

If you could remind me frankly on your U S customer base I'm curious how.

Further M&A could impact you guys, just good or bad larger enterprises acquire smaller enterprises very high level comment would be great.

Yes, John it's really a mix so in the U S. We serve our customers obviously through.

Our fracturing systems business, but across all product lines, including tracer diagnostics.

Wellbore construction and the products, we sell through repeat precision.

<unk> clubs and.

The emerging business, we have with perforating guns.

And I'd say, our customer mix really reflects the mix of rig count.

We have projects with large customers, especially in the tracer diagnostics business.

We have opportunities also where we have great relationships with smaller private e&ps.

So I wouldn't say that we're so heavily weighted to privates that.

If the if the large public start picking up share or acquiring private so if there is any of that business.

They are in.

Areas, where there'd be a little bit of risk, but areas, where there would be opportunity as the customer base evolves.

Got it fair enough, Okay. Robert I Hope you have a great time in retirement.

Congratulations.

You get really bored give us a call at TEP.

Thanks, John I'll keep that in mind.

Guys take care.

Alright, Thanks, Jeff.

And standby for the next question.

As a reminder to ask a question you will need to press star one on your telephone.

Yes.

At this time I would now like to turn it back over to Ryan Hummer for closing remarks.

Alright, Thank you hope.

We announced several weeks ago that Mike Morrison, who will be joining us as CFO , Mike started with US a few weeks ago and he will take on the CFO role here in a couple of days, Mike has extensive experience joining us from ion Geophysical, where he worked for 20 years, having been the CFO there since early 2020.

I'm excited to have Mike on board with us introduce him and to introduce him to our shareholders and to our analysts.

Thank you Ryan I am pleased to have joined NCS and I'm enjoying my first few weeks getting to know the people will come up to speed.

I am excited about the opportunity we have here, but I'm looking forward to getting to know and work with our investors analysts and other stakeholders.

Okay.

Thank you Mike.

Now on behalf of our board of directors and all NCS employees past and present I would like to express our gratitude to Robert Nipper, Ncs's founder who is retiring today as CEO .

It's truly amazing to look back at everything that NCS has been able to accomplish over the last 15 years under his visionary leadership.

His steadfast direction and commitment to advancing our technology and service capabilities and supported the voice of our customers has seen us through periods of tremendous growth and helped us to navigate the inevitable cycles that are industry basis.

In that time NCS has achieved leadership positions in each of our core product and service lines successfully out competing companies with much greater size and scale as we pushed outside of North America into international and offshore markets.

Robert together with co founders, Marty Stromquist and Don get flat.

Stablish a truly unique company in a phenomenal place to work with a people oriented culture that values innovation and continuous improvement and encourages our people to take calculated risks.

Is that opportunity and that culture that brought me here.

I've had the great pleasure to work with Robert for eight years ever since I joined NCS and I can't see myself anywhere else.

In that time, he has been a leader an adviser and a friend and a grown personally under his mentorship.

A tremendous amount from Robert and we'll continue to do so as he maintains its position on our board.

Together with everyone at NCS, we congratulate Robert on his well earned retirement and thank him for making Mcs multi stage the extraordinary company that it is today.

Well, thank you for the kind words Ryan.

I have to say these last 15 plus years have been something else I feel so fortunate to have been part of something that most people will never be able to experience.

Starting with an idea.

Finding like minded folks to engage with along the way and ending up with a world class completion and well construction company that is a global leader in many of the products and services that were conceived develop and commercialize internally.

For the portfolio that we have developed we have received more than 100 issued patents in multiple jurisdictions around the world and we have successfully defended our intellectual property several times over the last years with no losses to date and a positive return overall on the investments that we've made defending our intellectual property.

But it hasn't all been rising.

Just beginning this journey, we've had to have five reductions in workforce and then five times, we've had to rebuild the company back again.

So disruptive.

There was a time very early on when we didn't know if we're going to make it but through hard work and relentless desire to win we managed to work our way through those challenges and not lose any equity or caused losses for any of our debt holders and today, we have a pristine balance sheet.

<unk> been able to accomplish so many things because of the people who believed in and wanted to be part of what we're doing.

Many of those original people who were instrumental in us getting to this point have either retired or move on to other things people like George Carlin and Marty Stromquist, Don guests glass Wade bidder, John Legg and Doug Clark.

Some are still here, though Rob key Jeremy Van Matrix, Sean Daly on Tim Williams, James Ras and Darryl Kapner.

But since those early days there have been many more people that are joining the company and helped us to get to where we are now.

Does that term we have moved from a single product line company to multiple product lines operating in multiple geographies around the world and.

And in 2017, NCS multistage became a publicly traded company.

There is no way that we could have accomplished all of this that we have were it not for the amazing people that shared our vision and chose to be a part of the story.

As you can imagine I've been asked many times since we announced <unk> retirement in August of this year, while retiring out and Thats a fair question. So why now.

Well Theres two reasons. The first reason is in my view is selfish im ready to retire its been a long 15 plus years.

Sacrifice a lot of time with my family to help build this company.

Yeah.

Our target in 2015 for about eight months before I agreed to come back and help lead the company through an IPO process.

Our plan for that to be a two to three year period of time. Unfortunately, when I was ready to Lee began in 2020.

We know what happened then.

Didn't think it was fair for me to leave during such a disruptive and uncertain period of time.

I want to spend more time with my kids and grandkids catching up I feel so fortunate that I can do that now.

The second reason.

This is a non selfish reasons I believe as you all have heard me say many times over the last year that I believe we're entering into a multi year recovery for our industry.

Also believe that our industry should be less cyclical than the past due to what appears to be a more conservative view on growth by our customers, which hopefully will help moderate the cycles going forward.

The view of a multi year recovery going forward.

This is the perfect time for a new CEO and a new CFO to take over.

Hopefully they can get their legs under them before we must deal with any significant downturns. However, if that isn't the case I am very confident that our team with the new leadership can deal with whatever they are faced with.

Finally, I want to congratulate Ryan on his appointment as CEO effective today Brian .

Brian team to work for the company in 2014.

Very closely with him since that time since then Ryan have become closed not only professionally but also personally.

After working with Ryan for just the first year I knew that he would be a very strong candidate to replace me one day and have worked hard to try to make sure that that would happen.

One quick story about Ryan.

I was approached in 2016 to come out of retirement leaves the IPO effort I was very hesitant to do that but as is.

The board and our investors for a couple of days to think about it.

Ryan was our VP of corporate development at a time.

I wouldn't see Ryan the next morning. After I received that phone call and told them what was going on in Goldman. If we did this I wanted him to be our CFO going forward. He.

He was very hesitant as well, but agreed to think about it.

I couldn't see as going forward as a public company without human that roll. The next morning, Ryan agreed while he was still hesitant. He was all in and has done a fantastic job as CFO and I know he will do equally as well as CEO going forward.

It's with mixed feelings that I leave the building today for last time, a CEO , but it is time for me and I know that Ryan, It's Brian time to leave now as well.

So I want to thank our investors analysts vendors and customers for their support and friendship over the years, but most of all I want to thank our previous and current employees, where being part of something special.

None of this would've been possible if it weren't for our amazing people.

I'm not sure I know, how not to be the CEO for NCS going forward, but I think I'll figure it out.

Looking forward to supporting Ryan in the entire NCS team from our position as a board member going forward and I'm excited to watch the team move forward executing the strategic plan. Thanks.

Thanks, again, and I will turn it back over to Ryan.

Okay.

Well thank you Robert.

Barry.

Very appropriate works.

That will conclude today's call. We appreciate everyone's interest in NCS multistage and I look forward to speaking with you all again on our next quarterly earnings call.

Thank you.

Thank you for your participation in today's conference. This does conclude the program you may now disconnect.

The conference will begin shortly.

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Good day, and thank you for standing by and welcome to the NCS Multistage third quarter 2022 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.

Ask a question during this session you will need to press star one on your telephone you will then hear an automated message advising your handsets right.

Please be advised that today's conference is being recorded.

I would now like to hand, the conference over to your Speaker today, Ryan Hummer Chief Financial Officer. Please go ahead.

Thank you and thank you for joining the NCS Multistage third quarter 2022 conference call.

Will lead the call today, and Robert Nipper, our founder and retiring CEO will also provide comments.

We are also joined for the first time by Mike Morrison, who will soon take over for me as CFO .

Want to remind listeners that some of today's comments include forward looking statements such as comments regarding our future expectations for financial results and business operations.

These statements, including our financial guidance are subject to many risks and uncertainties that could cause our actual results to differ materially from any expectation expressed herein, including the impacts of the COVID-19 pandemic inflation Central bank actions to combat inflation in Russia's ongoing invasion of Ukraine all of them.

Global economy oil demand and our company.

Please refer to our most recent annual report on Form 10-K, and our latest SEC filings for risk factors and cautions regarding forward looking statements.

Our comments today also include non-GAAP financial measures, including adjusted EBITDA free cash flow and net working capital.

With that said I'd like to welcome our investors analysts employees and other attendees to our third quarter 2022 earnings conference call. We.

I'll start by briefly discussing our results and outlook for each of Canada, The U S and our international markets.

Starting with Canada, our Canadian revenue of nearly $35 million in the third quarter exceeded the high end of our guidance range of 23 to $24 5 million. These.

These results reflect several factors, including favorable weather conditions during the quarter, which allow for higher customer activity levels than we had anticipated in.

In addition, we added new customers for our fracturing systems product line, which contributed to incremental sales.

This is the result of our highly focused efforts by our sales team leveraging our strong performance in the field, where we drive operating efficiencies for our customers.

Through that process, we help to enable greater operational efficiencies for our customer and look to repeat that in the future.

Turning to the U S. Our revenue of $11 5 million for the third quarter fell just below our guidance of 12% to $13 5 million.

Further sequential improvements in fracturing systems tracer diagnostics and Frac plug sales were offset by declines in well construction volumes and also lower volumes of perforating gun sales at repeat precision.

Ah repeat precision, we intentionally reduced our perforating gun sales activity starting in the second half of the third quarter as we implemented upgrades to components within the system.

Our international activity approved again sequentially in the third quarter with revenue of $2 6 million.

Which was slightly below our expectations of 3% to $4 million.

The sequential revenue improvement during the quarter was led by an increase in tracer diagnostics activity, primarily in Argentina, where we completed several projects.

Service activity in the North Sea continues to be steady and we have received additional <unk> orders from our second North sea customer, which we expect to deliver during the fourth quarter.

We continue to be impacted by rising costs across our supply chain, especially for the tubular that we utilized to build our fracturing systems in well construction products.

So the pace of the cost increases is beginning to moderate.

I will now discuss certain financial results in more detail.

Gross profit, which we define as total revenue less total cost of sales, excluding depreciation and amortization expense was $20 5 million in the third quarter or 42% of revenue.

This was in line with our guided range of 40% to 44% for the quarter and compared to $14 8 million or <unk> 46.

For a sequential comparison, our gross profit in the second quarter of 2022 was $8 9 million or 33% of revenue.

Our reported SG&A expense includes share based compensation and certain nonrecurring expenses, including litigation costs.

In the third quarter, our noncash share based compensation expense totaled <unk> 9 million and our nonrecurring litigation expenses totaled $1 7 million.

Which was an increase from the prior year, primarily due to a patent infringement trial, which I'll discuss further in a moment.

Our adjusted EBITDA for the third quarter of 2022 was $8 4 million as compared to $4 2 million in the prior year's third quarter. This.

This year over year increase of $4 3 million reflects an incremental margin of 26% on an increase in revenue of $16 5 million for the same period.

Our adjusted EBITDA for the trailing 12 months ending September 32022 was $15 2 million a 10% margin on our trailing 12 month revenue of $152 million.

During the third quarter of 2022, our depreciation and amortization expense was $1 $1 million and there was minimal income attributable to noncontrolling increased interest in repeat precision.

Turning now to cash flow items and the balance sheet.

Our cash flow from operations for the third quarter of 2022 was negative $3 8 million and our net capital expenditures for the third quarter were <unk> $1 million, resulting in free cash flow for the quarter of negative $4 million.

The negative free cash flow was primarily related to a seasonal increase in net working capital of $7 $3 million during the quarter.

Our net capital expenditures have totaled <unk> $4 million through the first nine months of 2022, highlighting both the capital light nature of our business and our continued financial discipline.

On September 32022, we had $9 9 million in cash and total debt of $7 8 million for net cash of over $2 billion.

We also had a borrowing base of $23 $8 million on our Undrawn ABL.

Finally, NCS had net working capital of $56 9 million on September 32022, an increase from $48 million at the end of 2021.

We believe that the third quarter of 2020 to March the seasonal trough for our cash balanced with strong collections activity occurring in the beginning of the fourth quarter.

By the end of October our cash balance had already increased from $10 million to approximately $14 million.

Turning now to a few points of guidance for the fourth quarter and the full year for 2022.

We currently expect fourth quarter total revenue of $42 million to $46 million, an increase as compared to the fourth quarter of 2021, but a decline from our robust third quarter.

We expect our U S revenue to be between 13, and $14 $5 million, we expect international revenue of $2 million to $3 million and we expect our Canadian revenue to be between 27 and $28 5 million.

Acted by an expected seasonal slowdown in December due in part to customer budget exhaustion as well as the weakening of the Canadian dollar relative to the U S dollar, which accelerated in late September .

We expect our gross margin percentage in the fourth quarter to be between 39% and 43%, reflecting the seasonal reduction in revenue sequential.

<unk> revenue cost pressures and FX impacts.

We expect our reported SG&A expense to be between $13, five and $14 5 million in the fourth quarter. This includes approximately $2 million of noncash share based compensation and approximately <unk> $9 million in litigation.

We expect our fourth quarter, depreciation and amortization expense to be approximately $1 1 billion.

As a result, our full year guidance for 2022 is as follows. We currently expect full year revenue of $157 million to $161 million in full year, adjusted EBITDA of $15 million to $17 million.

As compared to the guidance provided in August the midpoint of our revenue range has increased by $6 5 million in.

At the midpoint of our adjusted EBITDA range is increased by one 5 billion.

We expect our gross capital expenditures for 2020 to be between one and $1 5 million.