Q4 2022 NCS Multistage Holdings Inc Earnings Call
Speaker 2: Good day and welcome to the NCS multi-stage fourth quarter 2022 earnings conference call.
Speaker 2: All participants will be in listen-only mode.
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Speaker 2: After today's presentation, there will be an opportunity to ask questions.
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Speaker 2: I would now like to turn the conference over to Mike Morrison, Chief Financial Officer. Please go ahead, sir.
Speaker 3: Thank you Rocco, and thank you for joining NCS multi-stage fourth quarter and full year 2022 conference call.
Speaker 3: Our call today will be led by our CEO Ryan Hummer, and I will also provide comments.
Speaker 3: I want to remind listeners that some of today's comments include forward-looking statements such as comments regarding our future expectation for financial results and business operations.
Speaker 3: These statements, including our financial guidance, are subject to many risks and uncertainties that could cause our actual results to differ materially from any expectations expressed herein, including the impacts of inflation, central banks' action to combat inflation, and Russia's ongoing invasion of Ukraine on the global economy.
Speaker 3: oil and natural gas 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.
Speaker 3: Our comments today also include non-GAAP financial measures, including adjusted net income, adjusted EBITDA, free cash flow, and networking capital.
Speaker 3: The underlying details and reconciliations of non-GAAP to the most comparable GAAP financial measures are included in our fourth quarter and full year earnings release, which can be found on our website, ncsmultistage.com. I will now turn the call over to Ryan.
Speaker 4: Thank you, Mike, and welcome to our investors, analysts, and employees joining our fourth quarter in full year 2022 earnings conference call.
Speaker 4: I will review our performance and accomplishments during 2022. Our actions during the year have positioned us to capitalize on the growth opportunities ahead and our strategic objectives for 2023.
Speaker 4: Mike will follow and cover the financial results for the quarter.
Speaker 4: 2022 represented a year of meaningful growth for our industry and for NCS, as demand for oil and natural gas continue to rebound from the lows reached during the pandemic.
Speaker 4: We believe that we are still in the early stages of this multi-year recovery, with a moderating rate of industry activity growth in North America, paired with robust opportunities for further growth in international markets as national oil companies execute expansions of their productive capacity.
Speaker 4: Against this backdrop, we were able to increase our revenue to $155.6 million in 2022, an increase of 31% as compared to 2021.
Speaker 4: Primarily driven by the strength of our performance in Canada and the US, which experienced year-ever-year revenue growth of 38% and 32% respectively.
Speaker 4: We made significant progress in each of our key product and service lines in 2022, adding to our portfolio of technologies that support our customers while expanding our addressable market.
Speaker 4: We made significant progress in each of our key product and service lines in 2022, adding to our portfolio of technologies that support our customers while expanding our addressable market, beginning with fracturing systems.
Speaker 4: We've successfully grown our customer base in the North Sea.
Speaker 4: We first started working with our current anchor customer in the North Sea in 2017.
Speaker 4: During 2022, a second customer purchased sliding sleeves from us with completion activity to begin in 2023.
Speaker 4: Also, in early 2023, we were awarded a trial well with a third customer in the North Sea. As we continue to build on our success, helping customers in the region execute highly efficient completions that enhance the economics of their operations.
Speaker 4: We've also combined our enhanced recovery product line into fracturing systems.
Speaker 4: highlighting the potential opportunities for our sliding sleeves to support customer operations throughout the producing life of the well.
Speaker 4: through controlled fracturing, solids control, and preferential production.
Speaker 4: in addition to enhanced recovery operations that support water, gas, and CO2 injection.
Speaker 4: Within bulk construction, we challenged our sales and operations teams in Canada to grow this product line and they've responded.
Speaker 4: We grow our liner hanger business in Canada by more than 200% in 2022 as compared to 2021 and expect further growth next year.
Speaker 4: With this growth, we are expanding our operations footprint and will be moving into a new facility during the second quarter of 2023.
Speaker 4: For 2023, a key focus for the well construction product line is to further develop our casing buoyancy offering to meet customer specific applications in North America and international markets.
Speaker 4: Our Tracer Diagnostics product line produced strong results in all core geographies in 2022, with year-over-year revenue growth of over 40% on a global basis, which included growth of more than 30% in each of the U.S. and Canada, and growth of over 60% outside of North America.
Speaker 4: We expect to continue to expand our tracer diagnostics business in international markets in 2023 and to convert first welds and trials with customers into repeatable work in the future.
Speaker 4: We're investing in all aspects of the Tracer Diagnostics product line, advancing our R&D efforts to introduce new service offerings, to reduce chemical usage, and also to further optimize our injection and sampling equipment to provide better and more actionable results to our customers.
Speaker 4: At repeat precision, the existing portfolio of frack plugs and setting tools continues to perform very well, exhibiting higher reliability.
Speaker 4: REPEAT is supported by the efforts of the NCS team in Canada, where we continue to grow our customer base and gain new trial opportunities.
Speaker 4: We've officially commercialized our purple fire factory assembled modular perforating gun system in late 2022 following extensive field trials.
Speaker 4: We have since grown our customer base with an initial focus on the Permian Basin.
Speaker 4: As a reminder, the Purple Fire provides us with the opportunity to participate in a larger addressable market and is fully compatible with our factory assembled Purple Seal Express system, which combines a disposable setting tool and a composite Fract Plug or Bridge Plug.
Speaker 4: This combined offering, which we call the PurpleFire Express, is an ideal system for efficient plug-and-perf operations.
Speaker 4: I want to touch briefly on our margin performance in 2022 and how we're responding to the inflationary pressures of the last few years.
Speaker 4: For the full year in 2022, our gross margin percentage was 39%. Slightly below our 41% gross margin in 2021.
Speaker 4: The lower margin reflects significant cost increases, especially related to oil field tubulars, such as casing, which are utilized in the production of our products, as well as other cost items such as elastomers, chemicals, and transportation.
Speaker 4: These cost increases were partially offset by higher volumes and by pricing increases achieved with our customers, from which we began to benefit in late 2022.
Speaker 4: Moving into 2023, we're implementing additional price increases across our business.
Speaker 4: As with 2022, we expect the full benefit from these price increases to be realized in the second half of the year.
Speaker 4: We remain very focused on managing our costs, especially our SG&A expenses, which fell from 41% of revenue in 2021 to 37% of revenue in 2022.
Speaker 4: We expect our SG&E expense to rise in 2023 as compared to 2022 levels, reflecting annual cost of living increases for 2023, the investments that we're making to attract and retain the great people we need to support our growth expectations, and a more normalized annual bonus program. Thanks to the National Energy Alliance, tech measure and industry thatulator.
Speaker 4: Our spend on IP-related litigation matters, which falls within SGNA, is expected to begin to moderate in 2023 as compared to 2022, where we had two patent infringement trials in the U.S. related to our airlock casing buoyancy system, where the jury awarded us damages against the accused infringing parties, and a patent trial in Canada where we are still awaiting results.
Speaker 4: We have one more patent infringement trial related to a different product line scheduled for the end of the first quarter of 2023 and certain post-trial matters for other cases.
Speaker 4: Putting this together, as a result, we believe our total SG&A expense could increase by 10 to 12 percent in 2023 relative to 2022 levels, but that SG&A as a percentage of revenue will continue to decline, supporting EBITDA margin expansion.
Speaker 4: We're very proud of NCS's track record of free cash flow generation over time and through cycles.
Speaker 4: We invested heavily in working capital on 2022 to facilitate our growth, leading to negative free cash flow of $2.1 million. We expect to generate positive free cash flow in 2023, as the cash generated from operations is expected to fund both working capital increases, supporting further revenue growth.
Speaker 4: and strategic capital investments will make in our business. I want to reiterate NCS's long-term strategy and to briefly discuss our corporate goals for 23.
Speaker 4: The Vision Forensiest is to be globally recognized as a trusted partner and bold innovator, enabling our customers resource development strategies through technology-driven solutions and reliable expertise. Aligned with this vision are three core strategies that we are following over the next five years to drive growth.
Speaker 4: and increase profitability in the business.
Speaker 4: The first core strategy is to build upon our leading market positions. This is most evident in our fracturing systems product line where we continue to take our technology into new market segments, to leverage leading positions in certain geographies like Canada to sell additional products and services, and where we are continually working to expand the functionality of our completion systems to provide value to our customers throughout.
Speaker 4: thereafter, particularly as we capitalize on our growing customer base in the North Sea and expand our opportunities in the Middle East.
Speaker 4: The third core strategy is to commercialize innovative solutions to complex customer problems.
Speaker 4: Through this course strategy, we are utilizing our strong customer connections from the field to the office.
Speaker 4: using the voice of the customer to feed our new product development process and refine the technology vision for each product line.
Speaker 4: We are also leveraging our position as a global leader in fracturing systems to work directly with our customers to develop new technology in a collaborative manner, whereby we retain the rights to this new technology with the ability to market the products to a global customer base.
Speaker 4: These core strategies are supported by our guiding principles of upholding the NCS promise, which embodies our values and outlines how we treat our key stakeholders, as well as our other guiding principle of maximizing financial flexibility, which is supported by our Capital Light Business Model.
Speaker 4: Our goals for 2023 are fully aligned with our long-term strategy at the corporate, regional, and product line levels, which has been a significant undertaking over the last few months.
Speaker 4: Broadly speaking, our goals in 2023 are built around enabling our outstanding people, empowering our future through a commitment to innovation centered on the voice of our customers, and growing profitably from our strong existing base. I'll now ask Mike to discuss our financial results in more detail.
Speaker 3: Thank you, Ryan. As reporting yesterday's earnings release, our fourth quarter revenues were 40.2 million, 11% higher than the prior years fourth quarter. Our U.S. and Canada revenues increased by 34 and 15% respectively, which were partially offset by decline in our international business for which sales can be lumpy.
Speaker 3: 155.6 billion and increase of 31% compared to 2021.
Speaker 3: Gross profit defined as total revenues less costless sales, excluding depreciation and amortization expense with 16.1 million in the fourth quarter. Our gross profit percentage was 40% compared to 44% from the same period one year ago and 42% sequentially.
Speaker 3: Selling general and administrative costs were 13.1 million for the fourth quarter, which was approximately 300,000 lower than the same period in 2021, primarily due to lower professional fees related to litigation matters, which was partially offset by an increase in our payroll expense associated with salary increases from earlier in 2022.
Speaker 3: For the fourth quarter, we reported net income of 2.0 million or 81 cents per diluted share, which was an improvement of 13 cents per diluted share compared to the same period in 2021. Our adjusted net income was 1.6 million or 64 cents per diluted share in improvement of 16 cents per diluted share to the fourth quarter last year.
Speaker 3: Adjusted EBITDA for the fourth quarter was $6.4 million, consistent with the same period in 2021 and a decline of $2 million sequentially.
Speaker 3: Compared to the fourth quarter guidance provided on our last earnings call, we were approximately $2 million below our revenue range, but in the range of our expected gross profit percentage and adjusted EBITDA. While revenues fell short of our expectations, we saw an improvement in the mix of revenues and had lower SG&A costs than anticipated.
Speaker 3: Turning now to cash flow items in the balance sheet. Cash flow from operations and free cash flow for the fourth quarter with 7.6 million and 7.4 million respectfully.
Speaker 3: Our free cash flow for the four year 2022 was a negative 2.1 million, which was primarily the result of an increase in networking capital of 7.2 million, which totaled 55.2 million into the year.
Speaker 3: On December 31st, we had 16.2 million in cash in total debt of 7.9 million, resulting in a positive net cash of 8.3 million.
Speaker 3: As of December 31st, the borrowing base under our undrawn ABL facility was $18.6 million.
Speaker 3: Turning now to a few points of guidance for the first quarter of 2023. We currently expect first quarter total revenue of $43 to $47 million, an improvement over both the first and fourth quarters of 2022.
Speaker 3: We expect US revenue of $12 to $13 million.
Speaker 3: Canada of $30 to $32 million and international revenue of $1 to $2 million.
Speaker 3: We expect our gross margin percentage to be between 38 and 41 percent, which is similar to the gross margins we experienced in the first and fourth quarters of 2022.
Speaker 3: We expect our adjusted EBITDA to be between $4 to $5 million.
Speaker 3: We expect our first quarter depreciation in members' business expense to be approximately 1 million.
Speaker 4: We'll hand it over to Ryan to provide our full year 2023 guidance and for closing remarks. Thanks Mike. Our full year guidance for 2023 is as follows. We currently expect full year revenue to be between 175 and 190 million dollars and full year adjust to the bidah to be between 20 and 25 million dollars.
Speaker 4: with the justice of the consistent with the reconciliations in our earnings release.
Speaker 4: We expect our gross capital expenditures for 2023 to be between $4.5 million.
Speaker 4: As stated before, we expect networking capital to be a use of cash in 2023 supporting our anticipated growth, but do expect that we will generate positive free cash flow during the year.
Speaker 4: In addition, at an adjusted EBITDA level of $20 to $25 million, we would expect to generate positive net income for the year.
Speaker 4: Underpinning our revenue growth expectations, this anticipated year-over-year average annual industry growth of up to 10% in both Canada and the US. Though activity in the US is expected to be below the levels reached in the fourth quarter of 2022.
Speaker 4: Furthermore, we expect international industry activity to grow by at least 10% in 2023. We expect our revenue growth to exceed that of the underlying industry activity by achieving market share increases in selected product and service lines, our growth in international markets, and continue to adoption of newly introduced technologies across our product and service lines.
Speaker 4: We also expect the full impact of the price increases that we achieve with our customers to offset cost inflation will provide a positive impact especially in the second half of the year. Due to the seasonality of our business and consistent with prior years, we would anticipate that the achievement of our annual Adjusted Dug Guidance range will be weighted to the second half of the year.
Speaker 4: Before we open up the call to Q&A, upload us with a couple of brief comments.
Speaker 4: We had strong performance in 2022, growing total annual revenue by 31%. And improving our Adjusted EBITDA margin from 8% in 2021 to 10% in 2022.
Speaker 4: We have the infrastructure in place to support revenue growth in each of our geographic markets, providing leverage to grow future earnings.
Speaker 4: As demonstrated by our guidance for 2023, achieving the midpoint of our guidance range would grow our annual revenue by over 15% and further increase our Adjust VBDA margin to 12%.
Speaker 4: At the midpoint of the guidance range, we would grow revenue by approximately 27 million and adjusted EBITDA by 7 million, reflecting incremental adjusted EBITDA margins of approximately 25%.
Speaker 4: We continue to successfully introduce new technologies that meet the needs of our customers, adding to our portfolio and expanding our addressable market. And finally, we enter 2023 with a strong balance sheet and liquidity position.
Speaker 4: ending 2022 with a cash balance of over $16 million. In addition, we expect to add to that cash balance by generating positive free cash flow during the year, providing us with financial and strategic flexibility.
Speaker 4: With that, we would welcome any questions from the audience.
Speaker 2: Thank you. We will now begin the question of the answer session.
Speaker 2: To ask a question you may press start then one of your touchdowns on.
Speaker 2: If you're using a speaker phone, we ask you to please pick up your hands up before pressing the keys.
Speaker 2: To withdraw your question, please press star then 2. Pause momentarily to assemble our roster.
Speaker 2: And ladies and gentlemen, once more, if you have a question, please press star 1 at this time. Ahh!!
Speaker 2: And today's first question comes from Bill Austin, at Daniel Energy Partners. Please go ahead.
Speaker 5: Hey guys, good quarter and nice finish to the year.
Speaker 5: Thanks Bill. I want to just touch on a little bit on the
Speaker 5: Just a little on working capital. I know you guys talked about, you know, increased last year a little bit. So I'm going to talk, and then they're touching a little bit there at the end, but just kind of how do you see that going throughout the year and then how that kind of generates. How as 23 kind of plays out, how that helps you go.
Speaker 4: was we did get a lot more efficient with our working capital. So while networking capital did increase by just over $7 million between the end of 2021 and the end of 2022, our networking capital is a percentage of our trailing 12 months revenue came down from about 45% to 35%.
Speaker 4: And that really gets us back to the ratio, kind of networking capital as a percentage of sales that we had in 2018-2019 prior to the downturn.
Speaker 4: And I think there was even more accomplishment in there given the fact that we've seen cost inflation or inventory base. So we've been really doing a great job in managing absolute inventory levels, but the cost of inventory has been increasing at the same time. So for 2022, we had good underlying earnings in the business.
Speaker 4: you know, the underlying earnings in the business are higher. Um, and you know, the, the level of growth, the rate of growth while still, you know, good at more than 15% is moderating a bit, which will allow us to convert that, you know, sort of operating cashflow before working capital build into true free cashflow for the business this year.
Speaker 5: Great, thanks. And then just one, I'm switching just a little bit on that. Just on the on the fire, the modulator, preparing gun system, how is it? You mentioned a little bit in your comments, how is the traction going on that? And when do you start really seeing?
Speaker 4: kind of good generation of revenue from that system in 23. Yeah, thanks Bill. It's a great question. So, we were really through in the field trial process for most of 2022. When we brought the purple fire out, we had an anchor customer and for us that...
Speaker 4: Channel to market is a little bit different. Most of our products and services we sell directly to the E&P company with perforating guns. You are selling through the wireline company. So we're our channel to market is through another service provider, although we we certainly do.
Speaker 4: kind of pull through marketing to the ENP customer bases as well. But we worked with one wireline company who certainly saw the advantages of our system to get through the field trial process. There were a lot of learnings there. As we got into late in the third quarter of 2022, we are very comfortable with where that product was and started to take that out and sell purple fires through.
Speaker 4: of the year. The process that we go through with the Purple Fire in some ways, and this is getting a little bit into the weeds, but there's a process called a tow prep for some bug and perf wells, where we can introduce that system with the wireline company in a very low risk basis, get them comfortable with the system, and then they can...
Speaker 4: because we were building and assembling the purple fire systems in the Permian base, and we're starting out, you know, taking that product to the Permian so we can provide, you know, very responsive field service to both, you know, the NDNP customer, but also our wireline customers through that trial process as it gets adopted.
Speaker 4: We were building and assembling the purple fire systems in the Permian base and we're starting out, you know, taking that product to the Permian so we can provide, you know, very responsive field service to both, you know, the NDNP customer, but also our wireline customers through that trial process as it gets adopted. Great, that's all for me. Thank you.
Speaker 2: All right. All right. Ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to the management team for the final remarks.
Speaker 4: All right, thanks, Rocco. 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.
Speaker 4: I truly appreciate the tremendous work and dedication demonstrated by our team here at NCS in repeat precision. We're only as good as our people and I'm fortunate to be able to work with the best team in the industry.
Speaker 4: Just yesterday, our COO and I visited with our supply chain and manufacturing team in South Houston to celebrate that team's accomplishment of achieving over 2,000 days of working safe, with no recordable incidents and manufacturing over that time.
Speaker 4: Our team continues to provide excellent service to our customers and is commercializing new products and services that will enable our customers to be more successful. We're taking on demanding and technically challenging work and we are delivering results. We believe that we're still in the early stages of a multi-year cycle of improved prospects for our industry.
Speaker 4: And I'm excited by how NCS is positioned to participate in that growth and to deliver benefits to our employees, customers, shareholders, and other stakeholders. We appreciate everyone's interest in NCS multi-stage, and we look forward to talking again on the next quarterly earnings call. Thank you.
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Speaker 2: Good day and welcome to the NTS Small Test Stage 4th quarter 2022, Arne and Conference Karl.
Speaker 2: All participants will be in listening only mode.
Speaker 2: Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.
Speaker 2: After today's presentation there will be an opportunity to ask questions. To ask a question you might start in one of my touchdowns from.
Speaker 2: To withdraw your question, please press star then 2. Please note today's event is being recorded.
Speaker 3: I would now like to turn the conference over to Mike Morrison, Chief Financial Officer. Please go ahead, sir. Thank you, Rocco, and thank you for joining NCS multi-stage fourth quarter and full year 2022 conference call.
Speaker 3: Our call today will be led by our CEO , Ryan Hummer, and I will also provide comments. I want to remind listeners that some of today's comments include forward-looking statements such as comments regarding our future expectation for financial results and business operations.
Speaker 3: The statements, including our financial guidance, are subject to many risk and uncertainties that could cause our actual results to differ materially from any expectations expressed herein, including the impacts of inflation, central banks' action to combat inflation, and Russia's ongoing invasion of Ukraine on the global economy, oil and natural gas demand, and our company.
Speaker 3: Please refer to our most recent annual report on Ford Tinkay and our latest SEC filings for risk factors and cautions regarding Ford-looking statements. Our comments today also include non- GAAP financial measures including adjusted net income, adjusted EBITDA, free cash flow, and networking capital.
Speaker 3: The underlying details and reconsolations and non-GAP to the most comparable GAAP financial measures are included in our fourth quarter in full year earnings release, which can be found on our website, mcsmultistage.com. I will now turn the call over to Ryan.
Speaker 4: Thank you, Mike, and welcome to our investors, analysts, and employees joining our fourth quarter in full year 2022 earnings conference call. I will review our performance and accomplishments during 2022, how our actions during the year have positioned us to capitalize on the growth opportunities ahead, and our strategic objectives for 2023. Mike will follow and cover the financial results for the quarter.
Speaker 4: 2022 represented a year of meaningful growth for industry and for NCS. As demand for oil and natural gas continued to rebound from the lows reached during the pandemic.
Speaker 4: We believe that we are still in the early stages of this multi-year recovery, with a moderating rate of industry activity growth in North America paired with robust opportunities for further growth in international markets as national oil companies execute expansions of their productive capacity.
Speaker 4: Against this backdrop, we were able to increase our revenue to $155.6 million in 2022, and increase of 31% as compared to 2021, primarily driven by the strength of our performance in Canada and the US, which experienced year-to-year revenue growth of 38% and 32% respectively.
Speaker 4: We made significant progress in each of our key product and service lines in 2022, adding to our portfolio of technologies that support our customers while expanding our addressable product, beginning with fracturing systems.
Speaker 4: We've successfully grown our customer base in the North Sea. We first started working with our current anchor customer in the North Sea in 2017.
Speaker 4: During 2022, a second customer purchased sliding sleeves from us with completion activity to begin in 2023.
Speaker 4: Also, in early 2023, we were awarded a trial well with a third customer in the North Sea. As we continue to build on our success, helping customers in the region execute highly efficient completions that enhance the economics of their operations. We've also combined our enhanced recovery product line into fracturing systems.
Speaker 4: highlighting the potential opportunities for our sliding sleeves to support customer operations throughout the producing life of the well.
Speaker 4: Through controlled fracturing, solids control, and preferential production, in addition to enhanced recovery operations that support water gas and CO2 injection.
Speaker 4: Within bulk construction, we challenged our sales and operations teams in Canada to grow this product line and they've responded. We grew our liner hanger business in Canada by more than 200% in 2022 as compared to 2021 and expect further growth next year.
Speaker 4: With this growth, we are expanding our operations footprint and will be moving into a new facility during the second quarter of 2023.
Speaker 4: For 2023, a key focus for the well-construction product line is to further develop our casing buoyancy offering to meet customer specific applications in North America and international markets. Our Tracer Diagnostics product line produced strong results in all core geographies in 2022, with year-to-year revenue growth of a work 40% on a global basis.
Speaker 4: which included growth of more than 30% in each of the US and Canada, and growth of over 60% outside of North America. We expect to continue to expand our tracer diagnostics business in international markets in 2023 and to convert first welds and trials with customers into repeatable work in the future.
Speaker 4: We're investing in all aspects of the Tracer Diagnostics product line, advancing our R&D efforts to introduce new service offerings, to reduce chemical usage, and also to further optimize our injection and sampling equipment to provide better and more actionable results to our customers.
Speaker 4: At repeat precision, the existing portfolio of frack plugs and setting tools continues to perform very well, exhibiting higher reliability. Repeat is supported by the efforts of the NCST and Canada where we continue to grow our customer base and gain new trial opportunities. We've officially commercialized our purple fire factory assembled modular perforating gun system in late 2000s.
Speaker 4: Express system, which combines a disposable setting tool and a composite frack plug or bridge plug.
Speaker 4: This combined offering, which we call the Purple Fire Express, is an ideal system for efficient plug-in-perf operations. I want to touch briefly on our margin performance in 2022 and how we're responding to the inflationary pressures of the last few years.
Speaker 4: For the full year in 2022, our gross margin percentage was 39%, slightly below our 41% gross margin in 2021.
Speaker 4: The lower margin reflects significant cost increases, especially related to oil field tubulars, such as casing, which are utilized in the production of our products, as well as other cost items such as elastomers, chemicals, and transportation. These cost increases were partially offset by higher volumes and by pricing increases achieved with our customers, from which we began to benefit in late 2022. Moving into 2023, we're implementing additional price increases across our business.
Speaker 4: reflecting annual cost of living increases for 2023, the investments that we're making to attract and retain the great people we need to support our growth expectations and a more normalized annual bonus program. Our spend on IP related litigation matters, which falls within SGNA, is expected to begin to moderate in 2023 as compared to 2022, where we had two patent infringement trials in the US related to our airlock casing buoyancy system.
Speaker 4: where the jury awarded us damages against the accused and fringing parties and a patent trial in Canada where we are still awaiting results. We have one more patent and infringement trial related to a different product line scheduled for the end of the first quarter of 2023 and certain post trial matters for other cases.
Speaker 4: Putting this together as a result, we believe our total S-GNA expense could increase by 10 to 12 percent in 2023 relative to 2022 levels, but that S-GNA is a percentage of revenue will continue to decline, supporting EBITDA margin expansion.
Speaker 4: We are very proud of NCS's track record of free cash flow generation over time and through cycles. We invested heavily in working capital in 2022 to facilitate our growth, leading to negative free cash flow of $2.1 million. We expect to generate positive free cash flow in 2023 as the cash generated from operations is expected to fund both working capital increases supporting further revenue growth and the
Speaker 4: and strategic capital investments we'll make in our business.
Speaker 4: I want to reiterate NCS's long-term strategy and to briefly discuss our corporate goals for 23. The vision for NCS is to be globally recognized as a trusted partner and bold innovator. In April , our customers resource development strategies through technology-driven solutions and reliable expertise. Aligned with this vision are three core strategies that we are following.
Speaker 4: to sell additional products and services, and where we are continually working to expand the functionality of our completion systems to provide value to our customers throughout the producing life of their wells.
Speaker 4: The second core strategy is to capitalize on our growing set of international and offshore opportunities. We've been investing time and effort to position NCS to participate in meaningful growth in select international markets. We believe this hard work will begin to pay off in 2023 and thereafter, particularly as we capitalize on our growing customer base in the North Sea and expand our opportunities in the Middle East.
Speaker 4: The third core strategy is to commercialize innovative solutions to complex customer problems. Through this core strategy, we are utilizing our strong customer connections from the field to the office using the voice of the customer to feed our new product development process and refine the technology vision for each product line.
Speaker 4: We are also leveraging our position as a global leader in fracturing systems to work directly with our customers to develop new technology in a collaborative manner, whereby we retain the rights to this new technology with the ability to market the products to a global customer base. These core strategies are supported by our guiding principles of upholding the NCS promise.
Speaker 4: which embodies our values and outlines how we treat our key stakeholders, as well as our other guiding principle of maximizing financial flexibility, which is supported by our capital-life business model. Our goals for 2023 are fully aligned with our long-term strategy at the corporate, regional, and product line levels, which has been a significant undertaking over the last few months.
Speaker 4: Broadly speaking, our goals in 2023 are built around enabling our outstanding people, empowering our future through a commitment to innovation centered on the voice of our customers, and growing profitably from our strong existing base.
Speaker 3: I'll now ask Mike to discuss our financial results in more detail. Thank you, Ryan. As reporting yesterday's earnings release, our fourth quarter revenues were 40.2 million, 11% higher than the prior years fourth quarter. Our U.S. and Canada revenues increased by 34 and 15% respectively.
Speaker 3: which were partially offset by decline in our international business for which cells can be lumpy. As expected, on a sequential basis, our fourth quarter revenues were down 18% compared to the third quarter, due in part to seasonality and customer budget exhaustion, primarily in Canada. For the full year 2022, our revenues were 155.6 billion.
Speaker 3: an increase of 31% compared to 2021. Gross profit, defined as total revenues less cost of sales, excluding depreciation and amortization expense with $16.1 million in the fourth quarter. Our gross profit percentage was 40% compared to 44% from the same period one year ago and 42% sequentially.
Speaker 3: Selling general and administrative costs were $13.1 million for the fourth quarter, which was approximately $300,000 lower than the same period in 2021, primarily due to lower professional fees related to litigation matters, which was partially offset by an increase in our payroll expense associated with salary increases from earlier in 2022.
Speaker 3: For the fourth quarter, we reported net income of $2.0 million, or 81 cents per diluted share, which was an improvement of 13 cents per diluted share compared to the same period in 2021. Our adjusted net income was $1.6 million, or 64 cents per diluted share, an improvement of 16 cents per diluted share, to the fourth quarter last year.
Speaker 3: Adjusted EBITDA for the fourth quarter was $6.4 million consistent with the same period in 2021 and a decline of $2 million sequentially.
Speaker 3: Compared to the fourth quarter guidance provided on our last earnings call, we were approximately $2 million below our revenue range, but in the range of our expected gross profit percentage and adjusted EBITDA. While revenues fell short of our expectations, we saw an improvement in the mix of revenues and had lower SG&A costs than anticipated.
Speaker 3: Turning now to cash flow items in the balance sheet. Cash flow from operations and free cash flow for the fourth quarter was $7.6 million and $7.4 million respectfully.
Speaker 3: Our free cash flow for the four year 2022 was a negative 2.1 million, which was primarily the result of an increase in networking capital of 7.2 million, which totaled 55.2 million into the year. On December 31st, we had 16.2 million in cash in total debt of 7.9 million.
Speaker 3: resulting in a positive net cash of 8.3 million. As of December 31st, the borrowing base under our Underon ABL facility was 18.6 million. Turning now to a few points of guidance for the first quarter of 2023. We currently expect first quarter total revenue of 43 to 47 million.
Speaker 3: in improvement over both the first and fourth quarters of 2022. We expect U.S. revenue of 12 to 13 million, Canada of 30 to 32 million, an international revenue of 1 to 2 million.
Speaker 3: We expect our gross margin percentage to be between 38 and 41%, which is similar to the gross margins we experienced in the first and fourth quarters of 2022. We expect our adjusted EBITDA to be between 4 to 5 million.
Speaker 3: We expect our first quarter depreciation and amortization expense to be approximately $1 million. I'll hand it over to Ryan to provide our full year 2023 guidance and for closing remarks.
Speaker 4: Thank you Mike. Our full year guidance for 2023 is as follows. We currently expect full year revenue to be between 175 and 190 million dollars and full year of the Duh to be between 20 and 25 million dollars.
Speaker 4: with the Justice EBITDA consistent with the reconciliations in our earnings release. We expect our gross capital expenditures for 2023 to be between $4.5 million. As stated before, we expect networking capital to be a use of cash in 2023 supporting our anticipated growth, but do expect that we will generate positive free cash flow during the year.
Speaker 4: In addition, added an adjusted EBITDA level of 20 to 25 million dollars we would expect to generate positive net income for the year. Underpinning our revenue growth expectations.
Speaker 4: is anticipated year-to-year average annual industry growth of up to 10% in both Canada and the US. The activity in the US is expected to be below the levels reached in the fourth quarter of 2022. Furthermore, we expect international industry activity to grow by at least 10% in 2023.
Speaker 4: We expect our revenue growth to exceed that of the underlying industry activity by achieving market share increases in selected product and service lines, our growth in international markets, and continue to adoption of newly introduced technologies across our product and service lines. We also expect the full impact of the price increases that we achieve with our customers to offset cost inflation.
Speaker 4: will provide a positive impact especially in the second half of the year. Due to the seasonality of our business and consistent with prior years, we would anticipate that the achievement of our annual Adjusted the Dog Guidance range will be weighted to the second half of the year. Before we open up the call to Q&A, I'll close with a couple of brief comments. We had strong performance in 2022, growing total annual revenue by 31%.
Speaker 4: and improving our Adjusted EBITDA margin from 8% in 2021 to 10% in 2022. We have the infrastructure in place to support revenue growth in each of our geographic markets, providing leverage to grow future earnings. As demonstrated by our guidance for 2023, achieving the midpoint of our guidance range would grow our annual revenue by over 15%, and further increase our Adjusted EBITDA margin to 12%. At the midpoint of the guidance range, we would grow revenue by approximately 27 million, and Adjusted EBITDA by 7 million.
Speaker 4: reflecting incremental adjusted EBITDA margins of approximately 25%. We continue to successfully introduce new technologies that meet the needs of our customers, adding to our portfolio and expanding our addressable market, and finally we enter 2023 with a strong balance sheet and liquidity position, ending 2022 with a cash balance of over $16 million.
Speaker 4: In addition, we expect to add to that cash balance by generating positive free cash flow during the year, providing us with financial and strategic flexibility. With that, we would welcome any questions from the audience. Thank you. I'll begin the question and answer session.
Speaker 2: To ask a question, you may press star then one of your touchdown phones. If you are using a speaker phone, we ask you please pick up your hands up before pressing the keys. To which are your question, please press star them to.
Speaker 2: We'll pause momentarily to assemble our roster. And ladies and gentlemen, once more, if you have a question, please press star them one at this time.
Speaker 2: And today's first question comes from Bill Austin at Daniel Energy Partners. Please go ahead.
Speaker 5: Hey guys, good quarter and nice nice finish to the year.
Speaker 5: Hey guys, good quarter and nice nice finish to the year Thanks Bill
Speaker 5: So I want to just touch on a little bit on the, just a little on working capital. I know you guys talked about, you know, the increase last year a little bit. So I'm going to talk, and then they're you touch on a little bit there at the end, but just kind of how you see that going throughout the year and then how that kind of generates.
Speaker 4: How as 23 kind of plays out how that helps you guys generate your free cash flow or more positive free cash flow for 23? Sure, I'll take that at the start and then my consupplement. One of the things that was actually an accomplishment for us during 2022 was we did...
Speaker 4: And that really gets us back to the ratio, kind of network and capital as a percentage of sales that we had in 2018-2019 prior to the downturn.
Speaker 4: And I think there was even more accomplishment in there, given the fact that we've seen cost inflation or inventory base. So we've been really doing a great job in managing absolute inventory levels, but the cost of inventory has been increasing at the same time.
Speaker 4: So for 2022, we had good underlying earnings in the business, but we grew revenue by 30%. So the cash that went into building networking capital slightly overcame the cash generated from just normal business operations, leading us to slightly negative free cash flow for the year.
Speaker 4: But as we turned to 2023, the underlying earnings in the business are higher. And the level of growth, the rate of growth, while still good at more than 15% is moderating a bit, which will allow us to convert that operating cash flow before we're in capital build.
Speaker 4: into true free cashflow for the business this year. Great. Thanks. And then just one of the, I'm switching just a little bit on that. Just on the on the provider, the moderator, offering gun system, how is it? Maybe mention a little bit in your comments. How is the traction going on that? And when do you start really seeing kind of good generation of revenue from that, from that system in 23? Yeah, thanks Bill. It's a great question. So, we were really through in the field trial trial process for most of 2022 when we brought the purple fire out. We had an anchor customer and for us that
Speaker 4: Channel to market is a little bit different. Most of our products and services we sell directly to the E&P company. With Perforating Guns, you're selling through the Wireline company, so our channel to market is through another service provider, although we certainly do market for, kind of pull through marketing to the E&P customer bases as well. But we worked with one Wireline company who certainly saw the advantages of our system to get through the field trial process. There were a lot of learnings there. As we got into late in the third quarter of 2022, we are very...
Speaker 4: but there's a process called a tow prep for some plug and perf wells where we can introduce that system with a wireline company in a very low risk basis, get them comfortable with the system, and then they can start taking that out to regular stage work with customers. So as we grow the customer base, it starts with, you know,
Speaker 4: relatively low stage count trials. And then we grow that into full stage work and take it from there. And again, because we were building and assembling the purple fire systems in the Permian Basin, we're starting out taking that product to the Permian so we can provide.
Speaker 4: You know, very responsive field service to both, you know, the NDP customer, but also our wireline customers through that trial process as it gets adopted. Great. That's all for me. All right. Thank you. Ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to the management team for the final remarks. All right. Thanks, Rocco.
Speaker 4: 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.
Speaker 4: I truly appreciate the tremendous work and dedication demonstrated by our team here at NCS and repeat precision. We're only as good as our people, and I'm fortunate to be able to work with the best team in the industry.
Speaker 4: Just yesterday, our COO and I visited with our supply chain and manufacturing team in South Houston to celebrate that team's accomplishment of achieving over 2,000 days of working safe, with no recordable incidents in manufacturing over that time. Our team continues to provide excellent service to our customers and is commercializing new products and services that will enable our customers to be more efficient and more efficient
Speaker 4: benefits to our employees, customers, shareholders and other stakeholders.
Speaker 4: We appreciate everyone's interest in NCS Multistage and we look forward to talking again on the next quarterly earnings call. Thank you. Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.