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Mike Morrison; Chief Financial Officer, Treasurer; NCS Multi-Stage Holdings, Inc.
Ryan Hummer; CEO; NCS Multi-Stage Holdings, Inc.
Juan Daniel; Analyst; Daniel Energy Partners
Operator
Good morning and thank you for sticking around and welcome to NCS Multistage’s Q3 2023 earnings conference call. (Operator Instructions) Please note that today’s conference is being recorded. Now I’d like to introduce you to your host of today’s call, Mike Morrison. Cfo. Please go ahead.
Mike Morrison
Thank you, Justin, and thank you for joining the NCS Multistage Q3 2023 conference call. Our call today will be led by our CEO, Ryan Hummer, and I will also provide feedback. I would like to remind listeners that some of today’s comments contain forward-looking statements, such as comments regarding our long-term expectations related to currency effects and business operations. These statements, together with our monetary forecasts and expectations, are subject to threats and uncertainties that may cause our actual effects to differ materially from any expectations expressed herein, including our pending litigation, inflation, measures taken through central banks to combat inflation, the difficulties of American regional banks, the forest fires in Canada, as well as the effects of the fighting in Ukraine and the Middle East. It’s about the global economy, the demand for oil and plant fuels and our business. Please refer to our most recent Annual Report on Form 10-K and our most recent filings with the SEC for disclosures and cautionary statements relating to forward-looking statements. Our comments today and in our earnings release also come with non-GAAP monetary measures, adding adjusted EBITDA, adjusted EBITDA, EBITDA margin, free cash flow and net working capital. The underlying key points and reconciliations of non-GAAP measures to comparable maximum GAAP monetary measures are included in our third quarter earnings release, which can be viewed on our online page ncsmultistage. com. Now I’ll turn it over to Ryan.
Ryan Hummer
Thank you, Mike, and welcome to our investors, analysts, and painters joining our Q3 2023 earnings call. Today’s call will be structured a little differently. I’ll provide my initial comments based on the core methods and guiding precepts that include our long-term trading strategy, and then Mike will review our monetary functionality later in the call. It was a very productive quarter for us in terms of advancing our strategy and positioning NCS to deliver pricing to our stakeholders, adding to our percentage shareholders. As a reminder, NCS’s vision is to be identified globally as a reliable component and ambitious innovator, enabling our consumers to implement resource progression methods through reliable generation responses and skills. We have three main methods helped by two guiding precepts. I will go through each of them and explain how the quarter’s confident achievements will enable long-term price creation. The first core strategy is to leverage our market leadership positions. Examples of this are the strength of the NCS business across our product lines in Canada and the track record we have established for our fracturing systems product line around the world. In Canada, early in the third quarter, we installed over 1,000 slipcovers on a four-well Montney rig with one of our consumers. These wells had good luck and were completed very effectively and showed strong initial production rates based on the third component data. Early in the fourth quarter, we had another significant accomplishment with the same visitor, pounding more than 23 million pounds of sand along a lateral that extends more than two miles. This well had 262 NCS sleeves installed and was completed in a single trip, further highlighting our operational efficiency. This is only imaginable thanks to the quality of our sliding sleeves, the design of our heavy-duty service tools and the qualified help provided through our case service technicians. Additionally, a visitor who helped us overcome the barriers of our generation of fracturing formulas in the Montney wells is now applying the lessons learned in those operations to reimagine the finishing touch of his wells and the Ellerslie formation in the Mannville region. Drill and complete two-mile laterals with approximately 150 slip sleeves in a drilling that has traditionally been completed with 50 stages or less. We continue to have good luck securing testing and assisting consumers who are also employing plug-and-perf finishing touches in Canada. We leveraged the verification capabilities of our Calgary Global Technology Center to verify the ability of our Purple Seal plugs to function in a casing with an internal coating designed to decrease downhole friction. With product functionality, local technical and cash support, and local verification features, we believe we are now one of the two most sensible suppliers of fracture plugs in Canada. We aim internally to secure the number one market share for fracture plugs in Canada, just as we did with sliding cuffs and tracer diagnostics. To further highlight our strategy to leverage our leadership position in the fracturing formulations market, I have an update on a multi-year task. We are working with a major foreign oil company to expand a version of our technology for use in deepwater marine applications. During the month of August, we participated in a verification [NA] that lasted approximately two weeks, during which our prototype sleeves and, more importantly, our service tool factors managed to fully hit over 6 million pounds of ceramic proppant, imitating the situations we would be expecting during deep water operations. We and our sponsor were happy with the effects of the check. In addition to this verification, the sponsor has also ordered us for sleeves to use in an onshore verification well in the United States by the fourth quarter of 2023, which is a precursor to a long-term offshore verification well that will also be can drill recently. 2020. We are very excited about the prospect of introducing our generation of fracturing formulations, which has been demonstrated in shallow water terrestrial and marine environments, into deep water marine environments where we would operate from a floating rate. The basic strategy I will talk about is to capitalize on foreign and offshore opportunities. I’ll start in the North Sea, where in September we fully installed and began operations to complete a well for a major E&P visitor to Norway. The shaft was 10 stories high and came with two different sleeve designs. We are very positive about the opportunities we have with this consumer in the long term. Additionally, we expect to gain fracturing formula paints with 3 additional consumers in the North Sea from 2024, each of which has the potential to become a component of multiple businesses. well programmed. We are actively working to introduce additional product lines into the North Sea to take advantage of the opportunities generated by the good fortune of our fracturing formulations business. In the Middle East, we completed our first tracer diagnostic task that generated revenue for a major national oil company in the region. The well was completed in July and reports were provided to the consumer in August. On the strength of this first well, we are in talks for two additional assignments and believe this can also become our largest tracer diagnostics market outside of North America. Our fundamental core strategy is to provide cutting-edge responses to complex and demanding visitor situations on Marketplaceplaceplaceplaceplaceplace. This is also a very fortunate and exciting quarter for us in this regard. After extensive verification, we have qualified a new edition of our AirLock casing buoyancy formulation that can be used in visitor applications, applying height torque to the casing string activated by semi-premium threads. This product is already in use at the checkout. We have also worked to expand the scope of functionality of our AirLock G Case buoyancy system to accommodate higher pressures than competitive formulas that target 14,000 PSI and higher temperatures, which target 400 degrees Fahrenheit. which would give us what we believe is the highest action casing buoyancy formulation employing a glass barrier available on the market today. At Repeat Precision, we have several new products available to check boxes. We have brought an edition of our Purple Seal fracture cap with a feature known as the Missing Execution Emergency Device. This feature on the cover can save the visitor time and money in the event that the downhole drilling guns fail to fire and a new set of guns is desired to be deployed. Repeat also has a dissolvable cap that we hope to have to check boxes during the final quarter. The design is optimized for downhole functionality and has been stress tested to 10,000 PSI. The arrival of a dissolvable plug with height functionality complements our composite plug offering at Repeat, providing consistent functionality and a good supplier for consumers who want to use dissolvable plugs for a long time on the sides. Finally, Repeat Precision has developed a targeted piercing gun formula in-house that was recently released to check boxes. This new formula allows for exact phasing of shot loads. We believe this formulation will be unique in the market by providing consumers with the benefits of the plug-and-play formulation of our Purple Fire modular piercing guns, which require minimal on-site assembly, unlike most other geared formulations. on the market with exact internal orientation. and the visitor’s ability to specify the loading form they wish to use. Now I will talk about the two guiding precepts that underpin our long-term strategy. The first is to maximize monetary flexibility. Our monetary style continues to validate itself as we maintained a net coin position with an undrawn revolver and generated higher Adjusted EBITDA and Adjusted EBITDA margin during the first nine months of 2023 than during the same period. was in 2022. During the quarter, NCS and our corporate insurance good fortune fully resolved one notable legal matter and made significant progress toward concluding another. We continue to hope that any of the issues will be resolved within the limits of our insurance coverage, with settlements paid in full through our insurance company. As part of the final settlement, NCS collected $600,000 in unpaid expenses related to unrelated wells that had previously been withheld by the plaintiffs. Our guiding principle at the moment is to keep the promise. The NCS Promise represents the commitments we make as a company to our painters, consumers, generation, suppliers, quality, health, safety, environment and other stakeholders. Our corporate pricing is also anchored in the promise. To further help deliver on this promise, we published our first ESG report in September, titled The Promise in Action. The report is available on our online page and I inspire you to read it. We are very pleased with how this has all unfolded and the Board and I appreciate the vital and varied contributions made through our painters, as well as the valuable conversations we have had with our consumers, suppliers, experts and other stakeholders across our process. the process. You may have noticed in our earnings release that we obtained an adverse ruling from the Federal Court of Canada in a patent infringement action. The ruling resulted in some of our patents being deemed invalid and NCS infringing another company’s patent. First of all, I must explain that we do not agree with the resolution and we were surprised by its effects. We intend to appeal the ruling and believe that the applicable law provides strong arguments that can also lead to the reversal of really extensive parts of the ruling. But more importantly, when it comes to our people and delivering on the promise, I also couldn’t be happier with the way the NCS team has responded to the news. Through a massive collective effort of our engineering, product line, production and sourcing. From channel, sales, technical facilities and operations, we were able to expand, verify and temporarily implement a solution compatible with resolution in a way that met the desires of our consumers in the existing era of high degrees of activity at the checkout . This is a testament to our exceptional staff, problem-solving spirit rooted in innovation, and the collective nature of the team that helped each other rise up and face this unexpected adversity. I am proud to have the opportunity to lead this exceptional team. In summary, I believe that we have made very vital and significant progress in our long-term strategic purposes in recent months, which has set us up for good fortune, not only in the next quarter or two, but also for years to come. I’ll now call Mike back to discuss our effects in the third quarter and our guidance for the fourth quarter.
Mike Morrison
Thanks, Ryan. As noted in yesterday’s release, our third quarter coins were $38. 3 million, a 22% reduction compared to the third quarter of last year. Our Canadian currencies are down 19%, our US currencies are down 30%, and our foreign currencies are down 18%. Our Canadian currencies were impacted by reduced rig counts during the quarter, due to volatile commodity prices and the lingering effects of the wildfires in Canada. Our U. S. sales continued to be impacted by decreased herbal fuel charges, which negatively impacted visitor activity. points. Sequentially, Q3 currencies were up 51%, with Canada up almost 100%, foreign currencies up 26%, and the US down 15%. The increase in Canada is basically related to the general seasonality associated with the spring interruption in the second quarter and the return of teams to work in the third quarter. Our gross profit, explained as general currencies less sales charge, excluding depreciation expense, was $15. 7 million in the third quarter of 2023, representing a gross profit consistent with a percentage of 41%. Slightly minimize our gross profit compared to the percentage a year ago. Despite the decrease in currencies, we are able to keep our gross margin consistent with the percentage thanks to the improvement in the prices of our products and facilities that offset the effect of minimizing volumes and increasing costs consistent with domestic charges. Our currencies for the first nine months of 2023 were $107. 2 million, a 7% cut compared to the first nine months of 2022. However, our percentage gross margin increased from 38% to 40%. compared to the same period last year. Selling, general and administrative expenses were $12. 7 million for the year. 3rd quarter, $2. 7 million less than last year’s 3rd quarter. The reduction was primarily due to reduced year-over-year annual incentive bonuses and reduced professional commissions, partially offset by severance and stock-based reimbursement expenses related to the exit from a previous framework in the third quarter . We report a net coin supply of $4. 4 million or coins at a diluted percentage of $1. 77. That’s an improvement over the net coin supply of $3. 9 million and diluted coins compared to the $1. 58 percentage a year ago. Our adjusted EBITDA for the third quarter was $6. 8 million, representing an adjusted EBITDA margin of 18%, an improvement over our adjusted EBITDA margin of 17% a 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 last year. Now let’s move on to the cash flow elements of the balance sheet. During the third quarter, our money flowed inconsistently and from loose cash flows or uses 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 joint venture distributions to be marginally positive for the full year 2023. As of September 30, we had $11. 4 million in money and a total debt of $8. 3 million. Pool consisting entirely of finance lease obligations, resulting in a positive net monetary position of $3. 1 million. At the end of September, the available borrowing base under our undrawn ABL credit facility was $19. 7 million. Also in the third quarter, Reppa repaid all significant borrowings arising from its note. Let’s now turn to some direction issues for the fourth quarter. Lately we expect fourth quarter coins of $37 million to $41 million, roughly the same coin point sequentially and compared to last year’s fourth quarter, which would bring our full-year number business between $144 million and $148 millions of dollars. We expect US coins of 9-10 million dollars, foreign coins of 2-3 million dollars, and Canadian coins of 26-28 million dollars. This represents a sequential buildup both in the United States and abroad. We expect our Canadian currencies to be stable or slightly down sequentially due to the typical holiday slowdown that begins in mid-December. We expect our gross margin to be consistent with a percentage between 40% and 42%, which is our gross margin consistent with our percentage from this quarter to the fourth quarter of 2022. We expect our gross margin to be consistent with a percentage between 40% % and 42%. our adjusted EBITDA will be between $4 million and $6 million, which will bring our expected full-year adjusted EBITDA to a range of $13. 5 million to $15. 5 million. We expect our fourth quarter depreciation expense to be approximately $1. 1 million. With that, I’ll hand it back to Ryan.
Ryan Hummer
Alright. Thanks, Mike. So before the questions and answers, I’ll end with a few brief comments. Although the third quarter turned out to be more challenging than expected from a business perspective, we made significant progress during the quarter in line with our core strategies, that is, on projects that will allow us to capture Company-specific expansion opportunities as our generation keep it up. marketed and deployed in North American and foreign markets. Although some challenging drilling activities will end in 2023, we continue on a multi-year cycle to achieve better expansion and profits for our industry customers globally. We appear to have reached the bottom of this recent correction, and the number of drilling rigs in the United States has remained strong over the past few weeks. We expect a modest expansion in US drilling rig activity in the fourth quarter, with prospects for further expansion from this base in 2024, reflecting recent increases in the price of crude oil and the need for increase the source of natural fuel expected to come from LNG facilities. online beyond next year and into 2025. Similarly, in Canada, our business will continue into 2024 and beyond as the TMX pipeline expansion comes online and as fuel production increases through herbal, Coastal GasLink pipeline and Canada LNG facility come onlineArray Through our continuous improvement efforts, we locate tactics to be more efficient, which supports our gross margin percentage, moderates our selling, general expenses and administrative and positions us for strong incremental profitability as we grow revenue. Finally, I reiterate how much I appreciate the way our workers have demonstrated, once again, that they can rise to the occasion in the face of uncertainty and challenges. And with that, we will answer all your questions.
Operator
(Operator instructions) John Daniel, Daniel Energy Partners.
Juan Daniel
Thank you. Hi, Ryan, hello.
Ryan Hummer
Hi John.
Juan Daniel
So here I am going to do a little question for beginners. But what intrigued me was his comment about developing deepwater products. Could you just take a step back and tell us about the evolution of how you got to deep water? ?So maybe it’s not necessary to quantify, but I’m looking at what this represents today and what this new generation could mean. Let’s say that in 3 to five years, if we put ourselves in the long-term cycle, what many talking heads are prophesying right now?
Ryan Hummer
Yes, that simple. I’m going to address this at a fairly high point and try to answer it as much as possible. Certainly we, with our generation, began to venture into shallow offshore waters several years ago. We work with Maersk, which has now been owned by Total for several years. We developed a relationship with Aker BP on the Norwegian side of the North Sea and have continued to expand this portfolio. I think as part of that, we’ve been able to draw attention to the functions of our formulations in those types of marine environments. Adding some designs we’re looking at that will literally require a round of fracking to achieve. just add the benefit of the well or our [closed sinking] generation to anything that can actually be a lifetime well production solution, adding, if desired, solids control functions into one aspect of it Chassis type of fracturing formulas. And we have a consumer, a foreign oil company, that had the vision to prospectively take our generation and use it. I would say the initial request is for. . . you may have heard of some operators in the deep waters of the Gulf of Mexico. I’m talking about the Paleogene now. So this is a purpose that is a little bit deeper than the classic purposes and where our formula could potentially be used as a simpler finishing touch formula given our single trip capability. We can do this with the service tool, which is capable of operating many more stages in a single pass than the typical single-movement multi-zone offshore formulas that exist. This is the opportunity our consumer is looking for. The challenge for us now is: we’re moving from deploying our service tool from a box or constant platform to a cellular platform, right? So this is a pretty significant challenge, requiring several years of expansion. But obviously we had the previous test this year, which demonstrated the strength of the sleeves and the usable factors that are migrating to a field test this year with prospects for sale next year. So, yes, I think it would be, to the point where there might be an opportunity for multiple wells annually within a few years. And (technical difficulty) let’s say this visitor has other components in those wells that point to some of the same applications. But anything done in deep water takes a little longer to expand, control and release. That’s why we’re excited about technological expansion. I think it will be a very smart opportunity for us. But I think we also want to be a little patient.
Juan Daniel
That’s fine with me. But assuming this materializes over time, is it to assume that, as a new generation like this, if it’s followed and has some scale with you, it’s a margin edition product over the main supply or not?
Ryan Hummer
Yes, absolutely, John.
Juan Daniel
Good, good. It’s all I’ve got. This seems very interesting. Thank you from me.
Ryan Hummer
Yes, absolutely. Thank you.
Operator
Dave Stone, Stonegate.
Hi there.
Ryan Hummer
Hi Dave. It’s actually wonderful to see you. EBITDA remained strong, despite the slight drop in revenue. It sounds like you’re doing more with less. Can you tell us what motivates this?What if some of the measures you put in place to be able to maintain those strong margins persist in the future?
Yes, absolutely, Dave. I’ll start there and let Mike chime in with everything I’m missing. But I will say that the team at all levels is committed to continuous improvement. During our second quarter, I think we saw some rationalizations of our facilities, both with production in Mexico and then across our entire tracer diagnostics business. They are definitely complicated. And then the source chain team that we have, as a component of a recent reorganization that we had, was to combine our source chain organization with our technical facilities organization, and that also started to bear fruit very temporarily, where the mix of our source chain is thinking about tactics for engineering pricing, as well as how we deal with the technical facilities team who can interact with engineering and think about doing prototyping and box testing temporarily. Yes, I think it’s something where we’ll continue to look at tactics to operate more successfully and maintain and grow gross margin. We’ve made some other adjustments to some aspects of the organization to try to design things so that they work a little better and more successfully, which has a real effect on the SG&A side and helps us maintain the capacity. to achieve adjusted EBITDA. This year, for the first nine months, it’s consistent. A little higher than last year despite the drop in profits. So we are operating with the existing market environment, where the number of US drilling rigs fell perhaps a little later than expected, and where Canadian activity has not emerged from the disintegration as strongly as we had imagined. We have been able to ensure that we continue to manage and measure prices in a way that maintains the greatest possible profitability. And we think it’s complicated to use your phrase, so when we get back to earnings growth, it will help us get strong incremental margins and increase average margin as we grow business.
Michael Morrison
Yes, that’s Mike. Big question. Nothing more to climb than SG
Juan Daniel
It’s incredibly useful. Merci. And one more, if I could. She continues to gain ground in the Middle East. Can you tell us about the bidding environment there, compared to the Canadian market, where you are already a major player?
Ryan Hummer
Of course, Dave. So for the Middle East, one country is a little bit other and that’s what we’ve been focusing on for the last few years. You saw some of our comments in our annual report. We have a long-term contract in Oman for diagnostic paints with tracers. We are looking to take advantage of this to be able to implement more product lines in addition to the tracers under this contract. But where we’ve made progress over the last year is with Saudi Aramco, and it’s a long procedure to qualify and all that. flames cataloged there. And usually that means: you provide hardware and necessarily for free as part of a free trial. Once the device is up and running and you confirm the price proposal for the visitor, you will be invited to participate in a cataloging process where other asset owners in the domain can use your device. In fact, you are a qualified supplier. And then, over time, you may be chosen to participate in multi-year tenders. And we are in this interim phase where we have several product lines that are listed and can be canceled through the Aramco asset owners and that is for our tracer diagnostics business and for some product lines in well construction. And we continue to work day after day to grow that relationship and be part or have the opportunity to be part of some of the multi-well tenders in which it has a presence. But for now, we are satisfied with the progress we have made. and the opportunity we have. We can engage in income-generating projects now, look to grow the business and pursue longer-term opportunities as they arise.
Juan Daniel
It’s very useful. Thank you for answering my questions and good luck with the fourth quarter.
Ryan Hummer
Very good, thanks Dave.
Operator
(Operator Instructions) And I’m asking other questions. I would now like to turn the floor over to Ryan Hummer for his closing remarks.
Ryan Hummer
It is ok. Thank you Justin. Listen, on behalf of our control team and board of directors, we would like to thank everyone who joined the call today, adding our shareholders, our analysts, and most importantly, our employees. I appreciate the intensity and breadth of the experiencia. de our people at NCS and Repeat Precision, and the love and effort they bring to their work. And I hope to talk to everybody, I guess, early next year.
Operator
And thank you. This concludes the convening of today’s convention. Thank you for participating. You can now log out.