Q3 2023 NCS Multistage Holdings Inc Earnings Call
Good day, and thank you for standing by and welcome to the Q3 2023 NCS Multistage earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to 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 hand is raised to withdraw your question. Please press star one one again please be advised that today's conference is being recorded I would now like to introduce your host for today's call Mike Morrison CFO. Please go ahead.
Thank you Justin and thank you for joining the NCS Multistage third quarter 2023 conference call. Our call today will be led by our CEO, Ryan Hello, 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 expectations for financial results and business operations.
These statements, including our financial guidance and expectations are subject to many risks and uncertainties that could cause our actual results to differ materially from any expectations expressed herein, including our ongoing litigation matters inflation Central bank actions to combat inflation distress that U S regional banks the Canadian wildfires.
As well as the impact of the conflicts in Ukraine, and the middle East on the global economy oil and natural gas demand and our company.
Please refer to our most recent annual report on Form 10-K, our latest SEC filings for risk factors and cautions regarding forward looking statements.
Comments today and in our earnings release also includes non-GAAP financial measures, including adjusted EBITDA adjusted EBITDA margin free cash flow and net working capital the underlying details of reconciliation to non-GAAP measures to the most comparable GAAP financial measures are included in our third quarter earnings release, which can be found on our website NCS multistage dotcom.
I'll now turn the call over to Ryan.
Thank you, Mike and welcome to our investors analysts and employees, joining our third quarter 2000.
Earnings Conference call.
Today's call will be structured a bit differently I'll be framing my initial comments and alignment with our core strategies and guiding principles that embody our long term corporate strategy and then Mike will review our financial performance later in the call.
This was a very productive quarter for us in terms of advancing our strategy and positioning NCS to deliver value to our stakeholders, including our shareholders.
As a reminder, the vision for NCS has to be globally recognized as a trusted partner and bold innovator, enabling our customers' resource development strategies through technology, driven solutions and reliable expertise.
We have three core strategies that are supported by two guiding principles I'll walk through each and discuss how certain accomplishments during the quarter will enable long term value creation.
The first core strategy is to build upon our leading market positions exam.
Examples of this include the strength of the NCS business across our product lines in Canada, and the track record that we've established for our fracturing systems product line worldwide.
In Canada early in the third quarter, we installed over 1000 sliding sleeves on our core well montney pad with one of our customers.
These wells were successfully completed in a highly efficient manner.
<unk> had strong initial production rates according to third party data.
At the beginning of the fourth quarter, we had another significant achievement with the same customer, placing over 23 million pounds of sand across the lateral that extends more than two miles.
This well had 262 NCS leaves installed and was completed in a single trip further highlighting our operational efficiencies.
This is only possible due to the quality of our sliding sleeves. The design of our robust service tools expert support provided by our field service technicians.
In addition, our customer who has helped us to expand the limits of our fracturing systems technology and wells in the Montney is now applying learnings from those operations to re imagine their well completions and the hours, we formation and demand Doe area drilling.
Drilling and completing two mile laterals with approximately 150 sliding sleeves and an area that has historically been completed with 50 or fewer stages.
We continue to have success in securing trials and supporting customers that are using plug and perf completions in Canada as well.
Leverage the testing capabilities of our global Technology Center in Calgary to confirm the reliability of our purple seal plugs to performing casing with an internal coding designed to reduce downhole friction.
Through product performance local field and technical support and local testing capabilities. We believe we are now a top two frac plug provider in Canada, we have an internal goal to secure the leading market share in Frac plugs in Canada, just as we have in siding sleeves in tracer diagnostics.
Further emphasizing our strategy to build upon our leading market position in fracturing systems I have an update on our multiyear project, we have underway with a leading international oil company to develop a version of our technology for use in deepwater offshore applications.
During August we participated in any test spanning nearly two weeks whereby our prototypes leaves and more importantly, our service towards components were able to successfully survived the placement of over 6 million pounds of ceramic proppant.
Making the conditions that we would expect to see during deepwater operations.
Both we and our sponsor we're pleased with the results of the testing.
In addition to this test the sponsor has also ordered sleeves from us for use in an onshore trial well in the U S for the fourth quarter of 2023, which is a precursor to a future trial, well offshore which could be drilled in 2024.
We're very excited about the prospect of taking our fracturing systems technology, which has been proven in onshore and shallow water offshore environments into the deepwater offshore environment, where we would operate from a floating rate.
The second core strategy that I'll speak to is capitalizing on international and offshore opportunities.
I'll start in the North Sea, where in September we successfully installed and began completion operations on a well for a leading E&P customer in Norway.
<unk> had 10 stages and included two separate sleeve designs, we're very optimistic.
Domestic about the opportunity we have with this customer going forward.
In addition, we expect to be awarded fracturing systems work with three additional customers in the North Sea beginning in 2024, each of which has the potential to be a multi well program.
We're actively working to bring additional product lines into the north sea to capitalize on the opportunities generated from success with our fracturing systems business.
In the Middle East, we completed our first revenue generating tracer diagnostics project for a leading national oil company in the region.
The well was completed in July and reports were provided to the customer in August.
With the success on this first well we are in discussions for two additional projects and we believe that this could become our largest market for tracer diagnostics outside of North America.
Our final core strategy is to commercialize innovative solutions to complex customer challenges. This was a very successful and exciting quarter for us in that regard as well.
Following extensive testing we have qualified a new version of our airlock casing buoyancy system that can be used in customer applications applying high torque to the casing strength enabled by semi premium threats. This product is currently being run in the field.
We've also worked to expand the performance envelope of our airlock casing buoyancy system to accommodate higher pressures than competing systems targeting up to 14000 Psi and higher temperatures targeting up to 400 degrees Fahrenheit, which will give us what we believe to be the highest performance casing buoyancy system utilizing a glass barrier available on the <unk>.
Today.
At repeat precision we have several new products available for field trial.
We've introduced a version of our Purple seal Frac plug with a feature known as a misrun contingency device. This feature integral to the plug can save a customer time and money in the event. The perforating guns downhole did not fire and a new gun string needs to be deployed.
Repeat also hasnt dissolvable plug that we expect to be available for field trials during the fourth quarter. The design is optimized for downhole performance and has been pressure tested at 10000 Psi.
The introduction of a high performance Dissolvable plug complements our composite plug offering at repeat providing consistent performance and a single provider for wells for customers that want around dissolvable plugs in the toe of extended reach laterals.
Finally repeat precision has developed an internally oriented perforating gun system that was recently released for field trials. This new system allows for precise phasing of the perforating charges. We believe this system will be unique in the market by offering customers the plug and play system benefits of our modular purple fire perforating guns, which required minimal onsite assembly. Unlike men.
The other oriented systems in the market with precise internal orientation and the ability for the customer to specify the shaped charge that they want to run.
I'll now speak to the two guiding principles that underpin our long term strategy.
The first is to maximize financial flexibility.
Our financial model continues to be validated as we've maintained a net cash position with an undrawn revolver and generated higher adjusted EBITDA and adjusted EBITDA margin for the first nine months of 2023 and during the same period in 2022.
During the quarter.
And our insurance carrier successfully settled one outstanding legal matter and we've made significant progress towards concluding another.
We continue to expect that those matters will be settled within our insurance coverage limits with the settlements paid in full by our insurance carrier.
As part of the one finalized settlement NCS collected $600000 in unpaid invoices associated with unrelated wells that had previously been previously withheld by the plaintiffs.
Our second guiding principle is to uphold the promise.
The promise at NCS represents the commitments that we make as a company to our employees customers technology vendors quality health safety the environment and other stakeholders.
Our company values are also embedded in the promise.
And further supportive uploading the promise we released our inaugural ESG report in September titled the promising action there.
The report is available on our website and I encourage you to read it we're very pleased with how it came together and the board and I appreciate the significant and broad based contributions made by our made by our employees as well as the valuable conversations that we had with our customers suppliers consultants and other stakeholders throughout the process.
You may have seen in our earnings release that we received an unfavorable ruling in the federal Court of Canada in our patent infringement action.
The decision resulted in certain of our patents being considered invalid and with NCS found to have infringed another company's patent.
First I want to be clear that we disagree with the decision and we were shocked by the results. We intend to appeal the decision and believe that applicable law support stronger hours that may lead to a reversal of substantial portions of the decision.
But more importantly, as it relates to our people and upholding the promise I couldnt be more pleased with the way that the team at NCS responded to the news with a tremendous collective effort from our engineering product line manufacturing and supply chain sales technical services and operations teams were able to quickly develop test and deploy <unk>.
<unk> that complies with the decision in a manner that supported our customers' needs. During the current time of high field activity levels.
This is a testament to our outstanding people the problem solving spirit rooted in innovation and the collective character of the team that supported one another to rise and face this unexpected adversity.
I'm proud to have the opportunity to opportunity to lead this exceptional team.
In summary, I believe we have made very important and meaningful progress on our long term strategic objectives over the past few months, which has positioned us for success not just in the upcoming quarter or two but for the years ahead.
I'll now pass the call back to Mike to discuss our results for the third quarter and guidance for the fourth quarter.
Thank you Ryan as reported in yesterday's earnings release, our third quarter revenues were $38 3, million% to 22% decrease compared to last year's third quarter, Our Canada revenues decreased by 19% U S revenues were down 30% and international revenues decreased by 18%.
Our Canadian revenues were impacted by a declining rig count during the quarter, resulting from commodity price volatility and the continuing effect of the Canadian wildfires ourselves in the U S continued to be affected by lower natural gas prices, which has had a negative impact on customer activity levels.
On a sequential basis revenues in the third quarter increased by 51% with Canada up almost 100% international up by 26% in the U S down by 15%.
The increase in Canada was primarily related to normal seasonality associated with the spring breakup in the second quarter with crews getting back to work in the third quarter.
Our gross profit defined as total revenues less cost of sales, excluding depreciation and amortization expense was $15 7 million in the third quarter of 2023, representing a gross profit percentage of 41% to slightly below our gross profit percentage compared to one year ago.
Despite decline in revenues, we were able to maintain our gross profit percentage due to improved pricing of our products and services, which countered the effect of the decline in volumes and higher operational costs.
Our revenues for the first nine months of 2023 or 100.
$7 2 million a decline of 7% compared to the first nine months of 2022, However, our gross margin percentage improved to 40% up from 38% compared to the same period one year ago.
Selling general and administrative costs were $12 7 million in the third quarter down by $2 7 million compared to the third quarter of last year. The decrease was primarily due to lower annual incentive bonus accruals year over year and lowering our professional fees, partially offset by severance and stock based compensation charges associated with the department.
<unk> of an executive earlier in the third quarter.
For the third quarter, we reported net income of $4 4 million or an earnings per diluted share of $1 77. This was an improvement over the net income of $3 9 million and earnings per diluted share of $1 58.
One year ago.
Our adjusted EBITDA for the third quarter was $6 8 million or an adjusted EBITDA margin of 18% an improvement over our adjusted EBITDA margin of 17% one year ago.
For the first nine months of 2023, our adjusted EBITDA was $9 4 million an improvement of 700000 compared to the same period one year ago.
Turning now to cash flow items in the balance sheet.
During the third quarter, our cash flow from operations and free cash flow were uses of cash of approximately 400000.
And 900, respectively, we expect to generate positive free cash flow in the fourth quarter and expect our full year free cash flow after JV distributions to be modestly positive for the full year of 2023.
On September 30, we had $11 4 million in cash and total debt of $8 3 million, which consisted entirely of finance lease obligations, resulting in a positive net cash position of $3 1 million.
At the end of September the borrowing base availability under our Undrawn ABL facility was $19 $7 million.
Also during the third quarter repeat repaid all outstanding borrowings under their promissory note.
Now turning.
So a few points of guidance for the fourth quarter.
We currently expect fourth quarter revenues of $37 million to $41 million about the same level revenue sequentially and as compared to the fourth quarter of last year, bringing our full year revenues between $144 million to $148 million.
We expect U S revenues in $9 million to $10 million international revenue of $2 million to $3 million and Canadian revenues of 26% to $28 million.
This represents a sequential increase in both the U S and international.
We expect our Canadian revenues to be equal to or slightly declined sequentially attributable to the typical holiday slowdowns starting in mid December.
We expect our gross margin percentage to be between 40, and 42% consistent with our gross margin percentage this quarter into the fourth quarter of 2022.
We expect our adjusted EBITDA to be between $4 6 million, bringing our full year expected adjusted EBITDA to a range of $13 five to $15 5 million.
We expect our fourth quarter, depreciation and amortization expense to be approximately $1 1 million.
With that I'll hand, it back over to Ryan.
Yes.
Alright, Thanks Max.
So before Q&A I'll close with a couple of brief comments.
While the third quarter proved to be more challenging than expected commercially we made significant progress during the quarter in alignment with our core strategies, especially on initiatives that we believe will enable us to execute on company specific growth opportunities as our technology is commercialized and deployed in North American and international markets.
Despite some challenging rig activity trends in 2023, we continue to believe that we are in a multiyear cycle of improved growth and earnings prospects for our industry globally.
We appear to have reached the bottom of this recent correction with the rig count in the U S holding steady over the last several weeks, we expect modest growth in rig activity in the U S. In the fourth quarter with the potential for further growth from that base in 2024, reflecting recent crude price crude oil price increases and the need to add natural gas supply for demand coming from LNG.
<unk> is expected to come online late next year and enter 2025.
Similarly in Canada, we believe industry activity will be supported in 2024 and beyond as the <unk> oil pipeline expansion is brought online and as natural gas production ramps into the commissioning a bicoastal gasoline pipeline in Canada LNG facility.
Through our continuous improvement efforts, we're finding ways to be more efficient, which supports our gross margin percentage moderates, our SG&A spend and positions us for strong incremental profitability as we grow our revenues.
Finally, I'll reiterate how much I appreciate the way that our people have once again proven how they can rise to the occasion in the face of uncertainty and challenges and with that I will welcome any questions.
And thank you.
As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again please.
Please standby will compile the Q&A roster and.
And one moment for your first question.
And our first question comes from John Daniel from Daniel Energy Partners. Your line is now open.
Thank you Hey, Ryan Good morning, Hey, good morning, John.
So I'm going to ask a little bit of a rookie question here, but the thing that really intrigued me was your commentary on the product development for deepwater.
Could you just take a step back and tell us sort of the evolution of how you got into deepwater. So maybe you.
You might not want to quantify it but I'll try like what it represents today.
What this.
The new technology could mean call it three to five years from now if we find ourselves in.
Long duration cycle, which a lot of talking heads or are processing right now.
So.
Ill tackle that at a pretty high level and try to respond to as much of that as I can okay.
Certainly we with our with our technology we started several.
Several years ago moving into shallow water offshore.
Some work with Maersk.
Which is now those properties are now owned by <unk> several years ago.
<unk> developed a relationship with Aker BP in.
The Norwegian side of the North Sea and have continued to develop that portfolio.
I think as part of that certainly.
We were able to garner some attention for the capabilities of our systems and those sorts of offshore environments, including.
Some some designs that we're looking at that will.
Really take a frac sleeve from something to just place proppant into the well or two or shift that closed technology to something that can be.
Truly a life of well production solution, including <unk>.
If you will solids control capabilities within that same sort of Frac systems chassis.
And we had one customer.
International Oil company, who had a vision for potentially taking our technology and using it.
Yes.
The initial.
Application is targeted actually four you've heard a few operators in the deepwater Gulf of Mexico talking about the Paleogene now so a target that's a little bit deeper than traditional targets and where our system could potentially be used as the lower completion system.
Given our single trip capability, where we're able to deal with the service tool wishes.
Able to.
Actuate many more stages in a single run than typical offshore multi zone single trip type systems that are out there.
So it's.
That's kind of the opportunity that our customers chasing now the challenge for US is we're moving from deploying our service tool.
Operator: Good day, and thank you for standing by and welcome to the Q3 2023 NCS Multistage earnings conference call. At this time, I'll participants on a listen only mode. After the speaker's presentation, there'll be a question and answer session. That's a question during the session. You'll need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again.
Off of either land are fixed platform too.
Moving rig rate.
So it's a pretty significant challenge.
And it's been a multi year development, but obviously we had the test.
Earlier, this year, which proved out the robustness of the sleeves in the service book, that's migrating towards a land trial this year with the potential for.
Operator: Please be advised that today's conference is being recorded.
Michael Morrison: I would now like to introduce your host for today's call, Mike Morrison, CFO. Please go ahead. Thank you, thank you, Justin, and thank you for joining the NCS Multistage Third Quarter 2023 conference call.
For sales next year so.
I think it would be.
To the point, where there could be a multi well opportunity on an annual basis, a few years down the road.
Ryan Hummer: 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 expectations for financial results and business operations. These statements, including our financial guidance and expectations, are subject to many risk and uncertainties that could cause our actual results to different materially from any expectations expressed herein, including our ongoing litigation matters, inflation, central bank actions to compound inflation, distress to US regional banks, the Canadian wildfires, as well as the impact of the conflicts in Ukraine and the Middle East on the global economy, oil and natural gas demand, and our company.
And the only thing I'd say is that this this customer has other partners on those wells are targeting some of the same applications, but anything in deepwater takes it takes a little bit longer to develop and test and get out. There. So we're we're excited about the technology development I think it'll be a really good opportunity for us.
I think we just need to be be a little bit patient with it as well.
Okay fair enough.
But assuming that does materialize over time is it safe to assume that like a new technology like this.
If adopted and has some scale with you is a margin enhancing product relative to the core offering or now.
Yeah, absolutely John Okay, Alright, Thats, all I got it sounds very interesting. Thank you for including me.
Michael Morrison: Please refer to our most recent annual report on 14K and our latest SEC violins for risk factors and cautions regarding forward looking statements. Our comments today and in our earnings release also include non-gap financial measures, including adjusted EBITDA, adjusted EBITDA margin, free cash flow, and networking capital. The underlying details and reconciliation and non-gap measures to the most comparable gap financial measures are included in our third quarter earnings release, which could be found on our website, ncsmultistage.com.
Yeah, absolutely. Thanks.
Thank you.
And one moment our next question.
And our next question comes from Dave Stones from Stonegate. Your line is now open.
Good morning.
Good morning.
So just great to see.
Ryan Hummer: I'll now turn the call over to Ryan. Thank you, Mike, and welcome to our investors, analysts, and employees joining our third quarter 2023 earnings conference call.
EBITDA has remained strong despite.
It will tick down in revenues here, it looks like you're kind of doing more with less.
Can you kind of talk us through what's driving that and if any of them.
Ryan Hummer: Today's call will be structured a bit differently. I'll be framing my initial comments and alignment with the core strategies and guiding principles that embody our long-term corporate strategy, and then Mike will review our financial performance later in the call. This is a very productive quarter for us in terms of advancing our strategy and positioning ncs to deliver value to our stakeholders, including our shareholders. As a reminder, the vision for ncs 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. We have three core strategies that are supported by two guiding principles. I'll walk through each and discuss how certain accomplishments during the quarter will enable long-term value creation.
Stuff that you've implemented to be able to maintain their strong margins are sticky going forward.
Yes, absolutely Dave I'll start on this and I'll, let Mike chime in with anything that I Miss.
But.
I will say that the team across the board is dedicated to continuous improvement.
In our in our second quarter I think we noted some facility rationalizations that we had made both with manufacturing in Mexico, and then across our tracer diagnostics business.
Those are certainly sticky.
As sticky and then.
The supply chain team that we have part of our recent reorganization, we had was putting our supply chain organization together with our technical services organization.
Ryan Hummer: The first core strategy is to build upon our leading market positions. Examples of this include the strength of the ncs business across our product lines in Canada and the track record that we've established for fracturing systems product line worldwide. In Canada, early in the third quarter, we installed over 1,000 sliding sleeves on a four well-mountain pad with one of our customers. These wells were successfully completed in a highly efficient manner and have exhibited strong initial production rates according to third-party data.
And that started to bear fruit very quickly is well aware of the combination.
Our supply chain, who is always thinking of ways too.
<unk> engineer cost out of the way that we do business together with the Tech services team, who can interact with engineering and think about getting things rapidly prototype and through field trial.
Yes, I think that's something where we're going to continue to chase ways to operate more efficiently and preserve and grow gross margin dollars.
Ryan Hummer: At the beginning of the fourth quarter, we had another significant achievement with the same customer, placing over 23 million pounds of sand across a ladder all that extends more than two miles. House. This well had 262 NCS sleeves installed and was completed in a single trip, further highlighting our operational efficiencies. This is only possible due to the quality of our sliding sleeves, the design of our robust service tools, and the expert support provided by our field service technicians.
There are some other changes that we've made across the organization to try to stir.
<unk> things to run a little bit more efficiently and a little bit more lean that really impact the SG&A side and help us to preserve the ability to.
Achieve an adjusted EBITDA.
This year through the first nine months thats, consistent a little bit better than last year. Despite the fact that revenues off so yes, we are.
Ryan Hummer: In addition, a customer who has helped us to expand the limits of our fracturing systems technology and welds in the mountain is now applying learnings from those operations to re-imagine their well-completions in the Ellersleaf Formation in the Manville area, drilling and completing two mile laterals with approximately 150 sliding sleeves in an area that's historically been completed with 50 or fewer stages. We continue to have success in securing trials and supporting customers that are using plug-and-perf completions in Canada as well.
Working with the current market environment, where the U S rig count trough, maybe a little bit later than we thought it would where the Canadian activity didn't come out of breakup quite as strong as we had thought it would.
But we've been able to make sure that we continue to manage and measure costs in a way that we can preserve as much profitability as possible and we do think that.
As sticky to use your phrase so that when we do pivot back to revenue growth that will help us with strong incremental margins and help to grow the average margin as we as we grow the top line.
Ryan Hummer: We leveraged the testing capabilities of our Global Technology Center and Calgary to confirm the reliability of our purple seal plugs to perform in casing with an internal coating designed to reduce downhole friction. Through product performance, local field and technical support, and local testing capabilities, we believe we are now a top two frag plug provider in Canada. We have an internal goal to secure the leading market share in frag plugs in Canada just as we have in sliding sleeves and trace or diagnostics.
Yes. This is Mike Great question, nothing more really further to add other than just SG&A Ryan on that but just continuing to focus on growing that how do we leverage it and how do we strategically.
Reduced that where it makes sense.
That's a long term effort and we're seeing those benefits.
That's incredibly helpful. Thank you.
Ryan Hummer: Further emphasizing our strategy to build upon our leading market position and fracturing systems, I have an update on a multi-year project we have underway with the leading international oil company to develop a version of our technology for use in deep-water offshore applications. During August, we participated in a test spanning nearly two weeks, whereby our prototype sleeves and more importantly, our service tool components were able to successfully survive the placement of over six million pounds of ceramic profit, mimicking the conditions that we would expect to see during deep-water operations.
One more if I could.
You continue to get gain traction in the Middle East you continue to gain a foothold there can you kind of talk about the bidding environment there.
Maybe in comparison to that.
Canadian market, where if you're one of the top players already.
Sure Dave.
So for the Middle East right each each country is a little bit different where we've been focused over the last few years.
<unk> seen in <unk>.
Some of our commentary in our annual report, we've got a long term contract in Oman for some tracer diagnostics work.
Ryan Hummer: Both we and our sponsor were pleased with the results of the testing. In addition to this test, the sponsor has also ordered sleeves from us for use in an onshore trial well in the US for the fourth quarter of 2023, which is a precursor to a future trial well offshore, which could be drilled in 2024. We're very excited about the prospect of taking our fracturing systems technology, which has been proven in onshore and shallow water offshore environments into the deep-water offshore environment where we would operate from a floating rate.
We're looking to to leverage that to be able to deploy some additional product lines beyond tracers through through that contract, but where we really made headway in the last year or so as with Saudi Aramco and that is a long process to get qualified in what you call catalogued there.
And typically it involves you provide some equipment and essentially for free and a free trial once the equipment works and proves out the value proposition for the customer.
Ryan Hummer: The second core strategy that I'll speak to is capitalizing on international and offshore opportunities. I'll start in the North Sea, wherein September we successfully installed and began completion operations on a well for a leading E&P customer in Norway. The well had ten stages and included two separate sleeve designs. We're very optimistic about the opportunity we have with this customer going forward. In addition, we expect to be awarded fracturing systems work with three additional customers in the North Sea, beginning in 2024, each of which has the potential to be a multi-well program. We're actively working to bring additional product lines into the North Sea to capitalize on the opportunities generated from success with our fracturing systems business.
Then you're invited to be part of a cataloging process, where the various asset owners in the region can can utilize your equipment youre effectively a qualified supplier.
And then in time you may be.
Selected to participate in multi year tenders and.
We're in that middle phase, where we have multiple product lines that are catalogued can be called off.
Bye bye the asset owners that Aramco and Thats for our tracer diagnostics business and for a couple of product lines within well construction.
Ryan Hummer: In the Middle East, we completed our first revenue generating tracer diagnostics project for a leading national oil company in the region. The well was completed in July, and reports were provided to the customer in August. With the success on this first well, we are in discussions for two additional projects, and we believe that this could become our largest market for tracer diagnostics outside of North America.
And we continue to work every day to kind of grow that relationship and become part of our <unk>.
The opportunity to participate in some of the multi well tenders, where you really specced in but for now we're happy with the <unk>.
Yes, we've made and the opportunity that we have we can we can participate.
Participate and revenue generating projects.
Ryan Hummer: Our final core strategy is to commercialize innovative solutions to complex customer challenges. This is a very successful and exciting core to for us and that regard as well. Following extensive testing, we have qualified a new version of our airlock casing buoyancy system that can be used in customer applications applying high torque to the casing string, enabled by semi-premium threats. This product is currently being run in the field. We've also worked to expand the performance envelope of our airlock to the casing buoyancy system to accommodate higher pressures than competing systems, targeting up to 14,000 psi and higher temperatures, targeting up to 400 degrees Fahrenheit, which would give us what we believe to be the highest performance casing buoyancy system utilizing a glass barrier available on the market today.
Now and look to grow the business.
And look for those longer term opportunities as they present themselves.
That's very helpful. Thank you for taking my questions and good luck in the fourth quarter.
Alright, thank you.
And thank you.
And again, if you have a question that is star one one again if you have a question that is star 111 moment.
And I am showing no further questions I would now like to turn the call back over to Ryan Hummer for closing remarks.
Alright, Thank you Justin.
On behalf of our management team and our board, we'd like to thank everyone, who joined the call today, including our shareholders analysts and especially our employees I truly appreciate the depth and breadth of the expertise of our people at NCS in repeat precision and the passion and the effort that these people bring to their work.
Ryan Hummer: At repeat precision, we have several new products available for field trial. We've introduced a version of our purple seal frag plug with a feature known as a mis-run contingency device. This feature, integral to the plug, can save a customer time and money in the event in the perforating guns downfall to not fire, and a new gun string needs to be deployed. Repeat also has a dissolvable plug that we expect to be available for field trials during the fourth quarter.
Forward to talking to everyone.
Early next year.
And thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
Ryan Hummer: The design is optimized for downfall performance and has been pressure tested to 10,000 psi. The introduction of a high performance dissolvable plug complements our composite plug offering at repeat, providing consistent performance and a single provider for wells for customers that want to run dissolvable plugs in the toe of extended reach laterals. Finally, repeat precision has developed an internally oriented perforating guns system that was recently released for field trials. This new system allows for precise phasing of the perforating charges.
[music].
Okay.
Okay.
Okay.
Okay.
Hum.
Ryan Hummer: We believe this system will be unique in the market by offering customers the plug and play system benefits of our modular purple fire perforating guns, which require minimal onsite assembly, unlike many of the other oriented systems in the market, with precise internal orientation and the ability for the customer to specify the shape charge that they want to run.
Sure.
Okay.
Okay.
Okay.
Yes.
[music].
Okay.
Ryan Hummer: I'll now speak to the two guiding principles that underpin our long-term strategy. The first is the maximize financial flexibility. Our financial model continues to be validated as we've maintained a net cash position with an undrawn revolver and generated higher adjusted EBITDA and adjusted EBITDA margin for the first nine months of 2023 than during the same period in 2022. During the quarter, NCS and our insurance carrier successfully settled one outstanding legal matter, and we've made significant progress towards concluding another.
Ryan Hummer: We continue to expect that both matters will be settled within our insurance coverage limits, with the settlements paid in full by our insurance carrier. As part of the one finalized settlement, NCS collected $600,000 in unpaid invoices associated with unrelated wells that had previously been previously withheld by the plaintiffs.
Ryan Hummer: Our second guiding principle is to uphold the promise. The promise at NCS represents the commitments that we make as a company to our employees, customers, technology, vendors, quality, health, safety, the environment and other stakeholders. Our company values are also embedded in the promise. In further support of upholding the promise, we released our inaugural ESG report in September, titled the Promise in Action. The report is available on our website, and I encourage you to read it.
Ryan Hummer: We're very pleased with how it came together, and the board and I appreciate the significant and broad-based contributions made by our employees, as well as the valuable conversations that we had with our customers, suppliers, consultants and other stakeholders throughout the process.
Ryan Hummer: You may have seen in our earnings release that we received an unfavorable ruling in the Federal Court of Canada in a patent infringement action. The decision resulted in certain of our patents being considered invalid and within CS found to have infringed another company's patent. First, I want to be clear that we disagree with the decision and we were shocked by the result. We intend to appeal the decision and believe that applicable law supports strong grounds that may lead to a reversal of substantial portions of the decision.
Ryan Hummer: But more importantly, is it related to our people and upholding the promise? I couldn't be more pleased with the way that the team at NCS responded to the news. With a tremendous collective effort from our engineering product line, manufacturing and supply chain, sales, technical services and operations teams. We are able to quickly develop, test and deploy a solution that complies with the decision in a manner that supported our customers needs during the current time of high field activity levels.
Ryan Hummer: This is a testament to our outstanding people, the problem-solving spirit rooted in innovation and the collective character of the team that supported one another to rise and face this unexpected adversity. I'm proud to have the opportunity to lead this exceptional team.
Ryan Hummer: In summary, I believe we've made very important and meaningful progress on our long-term strategic objectives over the past few months, which has positioned us for success, not just in the upcoming quarter or two, but for the years ahead.
Michael Morrison: I'll now pass the call back to Mike to discuss our results for the third quarter and guidance for the fourth quarter. Thank you, Ryan. As reporting yesterday's earnings release are third quarter revenues were 38.3 million, the 22% decrease compared to last year's third quarter. Our Canada revenues decreased by 19%, US revenues were down 30%, and international revenues decreased by 18%. Our Canadian revenues were impacted by a declining rate count during the quarter resulting from commodity price volatility and the continuing effect of the Canadian wildfires. Our sales in the US continued to be affected by lower natural gas prices, which has had a negative impact on customer activity levels.
Michael Morrison: On a sequential basis, revenues in the third quarter increased by 51% with Canada up almost 100%, international up by 26% and the US down by 15%. The increase in Canada was primarily related to normal seasonality associated with the spring break up in the second quarter, with crews getting back to work in the third quarter. Our gross profit defined as total revenues less cost the sales, excluding depreciation and name orization expense, was 15.7 million in the third quarter of 2023, representing a gross profit percentage of 41%, to slightly below our gross profit percentage compared to one year ago.
Michael Morrison: Despite the decline in revenues, we're able to maintain our gross profit percentage due to improve pricing of our products and services, which countered the effect of the decline in volumes and higher operational costs. Our revenues for the first nine months of 2023 were 107.2 million, a decline of 7% compared to the first nine months of 2022. However, our gross margin percentage improved to 40% up from 38% compared to the same period one year ago.
Michael Morrison: Selling general and administrative costs were 12.7 million in the third quarter, down by 2.7 million compared to the third quarter of last year. The decrease was primarily due to lower annual incentive bonus accruals year over year and lowering of professional fees, partially offset by severance and stock based compensation charges associated with the departure. Of an executive earlier in the third quarter, for the third quarter.
Michael Morrison: We reported net income of 4.4 million or an earnings per diluted share of $1.77. This was an improvement over the net income of 3.9 million in earnings per diluted share of a dollar and 58 cents one year ago. Our adjusted EBITDA for the third quarter was 6.8 million or an adjusted EBITDA margin of 18% an improvement over our adjusted EBITDA margin of 17% one year ago. For the first nine months of 2023 our adjusted EBITDA was 9.4 million an improvement of 700,000 compared to the same period on year ago.
Michael Morrison: Turning now to cash flow items in the balance sheet. During the third quarter our cash flow from operations and free cash flow were used as a cash of approximately 400,000 and 900,000 respectively. We expect to generate positive free cash flow in the fourth quarter and expect our full year free cash flow after JV distributions to be modestly positive for the full year of 2023. On September 30th we had 11.4 million in cash in total debt of 8.3 million which consists entirely of finance lease obligations resulting in a positive net cash position of 3.1 million. At the end of September the borrowing base availability under our under-owned ABL facility was 19.7 million. Also during the third quarter repeat repaid all outstanding borrowings under their promissory note.
Michael Morrison: Now turning to a few points of guidance for the fourth quarter. We currently expect fourth quarter revenues of 37 to 41 million about the same level revenues sequentially and as compared to the fourth quarter last year bringing our full year revenues between 144 to 144 million. We expect U.S, revenues of 9 to 10 million international revenue of 2 to 3 million and Canadian revenues of 26 to 28 million. This represents a sequential increase above the U.S, and international.
Michael Morrison: We expect our Canadian revenues to be equal to or slightly declined sequentially attributable to the typical holiday slowdown starting in mid-December. We expect our gross margin percentage to be between 40 and 42% consistent with our gross margin percentage this quarter into the fourth quarter 2022. We expect our adjusted EBITDA to be between 4 and 6 million bringing our full year expected adjusted EBITDA to a range of 13.5 to 15.5 million. We expect our fourth quarter depreciation and amortization expense to be approximately 1.1 million.
Ryan Hummer: With that I'll hand it back over to Ryan. Thanks Mike.
Ryan Hummer: So before Q&A I'll close with a couple brief comments. While the third quarter proved to be more challenging than expected commercially we made significant progress during the quarter in alignment with our core strategies especially on initiatives that we believe will enable us to execute on company specific growth opportunities as our technology has commercialized and deployed in North American and international markets. Despite some challenging reactivity trends in 2023 we continue to believe that we are in a multi-year cycle of improved growth in earnings prospects per industry globally.
Ryan Hummer: We appear to have reached the bottom of this recent correction with the recount in the US holding steady over the last several weeks. We expect modest growth in rig activity in the US in the fourth quarter with the potential for further growth from that base in 2024, reflecting a recent crude price, crude oil price increases, and the need to add natural gas supply for demand coming from LNG facilities expected to come online late next year and into 2025.
Ryan Hummer: Similarly, in Canada, we believe industry activity will be supported in 2024 and beyond as the TMX oil pipeline expansion is brought online and as natural gas production ramps into the commissioning of the Coastal GasLink pipeline and Canada LNG facility. Through our continuous improvement efforts, we're finding ways to be more efficient, which supports our gross margin percentage, moderates our SG&A spend and positions us for strong incremental profitability as we grow our revenues.
Ryan Hummer: Finally, I'll reiterate how much I appreciate the way that our people have once again proven how they can rise to the occasion in the face of uncertainty and challenges.
Operator: And with that, we'll welcome any questions. And thank you. As a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by, we'll be compiled to Q&A roster. And one moment for our first question.
John Daniel: And our first question comes from John Daniel from Daniel Energy Partners, your line is now open. Thank you. Hey, Ryan, good morning. Hey, morning, John.
Ryan Hummer: So I'm going to ask a little bit of a rookie question here, but the thing that really intrigued me was your commentary on the product development for deep water. Could you just take a step back and tell us sort of the evolution of how you got in the deep water, so maybe you might not want to quantify it, but I'll try like what it represents today. What this, the new technology could mean, call it three to five years from now, if we find ourselves in the long duration cycle, which a lot of talking heads are promising right now.
Ryan Hummer: Yeah, so I'll talk to that at a pretty high level and try to respond to as much of that as I can. Okay, certainly with our technology, we started, you know, called several years ago, moving into shallow water offshore. We had some work with MERSC, which is now, those properties are now owned by Total several years ago, developed a relationship with aqua BP in, you know, the Norwegian side of the North Sea and have continued to develop that portfolio.
Ryan Hummer: I think it's part of that, certainly, we were able to garner some attention for, you know, the capabilities of our systems in those sorts of offshore environments, including, you know, some designs that we're looking at that will really take a frag sleeve from something to just place profit into the well or do our shift frag close technology to something that can be, you know, truly a life of well production solution, including if you will, solids control capabilities within that same sort of fracked systems chassis. And we have one customer, you know, an international oil company who had a vision for potentially taking our technology and using it, you know, I'd say the initial you know, application is targeted actually for, you've heard a few operators in the Deepwater Gulf of Mexico talking about the paleo gene now.
Ryan Hummer: So a target that's a little bit deeper than traditional targets and where our system could potentially be used as the lower completion system, you know, given our single trip capability, what we're able to do with the service tool, which is You know, able to actually many more stages in a single run than typical offshore multi-zone single trip type systems that are out there. So that's kind of the opportunity that our customers chasing now.
Ryan Hummer: The challenge for us is, right, we're moving from deploying our service tool off of either land or a fixed platform to, you know, a moving rate, right? So it's a pretty significant challenge and it's been a multi-year development. But obviously we had the test earlier this year which proved out the robustness of, you know, the sleeves and the service components. That's migrating towards a land trial this year with potential for, you know, for sales next year.
Ryan Hummer: So, you know, I think it would be to the point where there could be a multi-well opportunity on an annual basis a few years down the road. And the other thing I'd say is that this customer, right, has other partners on those wells who are targeting some of the same applications. But anything in deep water takes a little bit longer to develop and test and get out there. So we're excited about the technology development.
Ryan Hummer: I think it'll be a really good opportunity for us, but I think we just need to be a little bit patient with it as well. Fair enough. But assuming that does materialize over time, is it safe to assume like a new technology like this, if adopted, and has some scale with you, is a margin-enhancing product relative to the core offering or no? Yeah. Absolutely, John. Okay. All right.
John Daniel: That's all I got. That sounds very interesting. Thank you for including me. Yeah. Absolutely. Thanks. And thank you.
Operator: And one moment for our next question.
David Storms: And our next question comes from Dave's stones from Stonegate.
Ryan Hummer: Your line is now open. More than. More than this. So just great to see, you know, EBITDA's remaining strong, you know, despite the little pectonum revenues here. It looks like you're kind of doing more with less. Can you kind of talk us through what's driving that, and if any of the stuff that you've implemented to be able to maintain their strong margins are sticky going forward? Yeah. Absolutely, Dave. I'll start on this.
Ryan Hummer: Now, Mike, I'm in with anything that I miss, but I will say that, right, the team across the board is dedicated to continuous improvement in our second quarter. I think we noted some facility rationalizations that we had made both with manufacturing in Mexico and then across our tracer diagnostics business. Those are certainly, you know, sticky. And then the supply chain team that we have part of a recent reorganization we had was putting our supply chain organization together with our technical services organization.
Ryan Hummer: And that started to bear fruit very quickly as well where the combination of our supply chain who's always thinking of ways to value engineer costs out of the way that we do business together with the tech services team who can interact with engineering and think about getting things rapidly prototyped in through field trial. Yeah, I think that's something where we're going to continue to chase ways to operate more efficiently and, you know, preserve and grow gross margin dollars.
Ryan Hummer: There are some other changes that we've made across the organization to try to structure things to run a little bit more efficiently and a little bit more lean that really impact the SG&A side and help us to preserve the ability to achieve and adjust at EBITDA. This year through the first nine months that's consistent a little bit better than last year despite the fact that revenues off. So we're working with the current market environment where the U.S, recount dropped maybe a little bit later than we thought it would where the Canadian activity didn't come out of breakup quite as strong as we had thought it would but we've been able to make sure that we continue to manage and measure costs in a way that we can preserve as much profitability as possible and we do think that is sticky to use your phrase so that when we do pivot back to revenue growth that will help us with strong incremental margins and help to grow the average margin as we grow the top line.
Ryan Hummer: Yeah this is this is my great question nothing more really further than that other than just SG&A Ryan to hit upon that but just continuing to focus on not growing that how do we leverage it and how do we strategically reduce that where it makes sense that's a long term effort and we're just going to focus.
Ryan Hummer: That's incredibly helpful thank you one more if I could you know you continue to get gain traction in the Middle East you continue to get a foothold there can you kind of talk about the bidding environment there you know maybe in comparison to the Canadian market where you're you know one of the top players already. Sure Dave you know so for for the Middle East right each each country is a little bit different where we've been focused over the last few years you'll you'll see in some of our commentary and our annual report we've got a long term contract in Oman for some tracer diagnostics work we're looking to to leverage that to be able to deploy some additional product lines beyond tracers through through that contract but where we that that is a long process to get qualified and what you call cataloged there and typically it involves you know you provide some equipment essentially for free in a free trial once the equipment works and proves out the value proposition for the customer then you're invited to to be part of a cataloging process where the various asset owners in the region can can utilize your equipment you're effectively a qualified supplier and then in time you may be you know selected to participate in in multi-year tenders and we're in that middle phase where we have multiple product lines that are cataloged and can be called off by you know by the asset owners at Aramco and that's for our tracer diagnostics business and for a couple of product lines within well construction and we continue to work every day to kind of grow that relationship and and become part of or have the opportunity to participate in some of the multi-well tenders where you really expect in but for now we're happy with the progress we've made and the opportunity that we have we can you know participate in revenue generating projects right now and look to grow the business and look for those longer-term opportunities as they present themselves.
Ryan Hummer: That's very helpful. Thank you for taking my questions and good luck on the fourth quarter. All right, thank you, Dan. And thank you. And again, if you have a question that is star 1-1, again, if you have a question that is star 1-1, one moment.
Operator: And I am showing no further questions.
Ryan Hummer: I've now like to turn the call back over to Ryan Hummer for closing remarks. All right, thank you, Justin. On behalf of our management team and our board, we'd like to thank everyone who joined the call today, including our shareholders, analysts, and especially our employees.
Ryan Hummer: I truly appreciate the depth and breadth of the expertise of our people, NCS, and repeat precision, and the passion and the effort that these people bring to their work. I'll look forward to talking to everyone, I guess, early next year.
Operator: And thank you, this concludes today's conference call. Thank you for participating. You may now disconnect. Thank you.