NCS Multistage Holdings Inc (NCSM) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2017 NCS Multistage Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference, Ryan Hummer, CFO. You may begin.

All right, thank you, Glenda. And thanks for joining NCS Multistage's Third Quarter 2017 Conference Call. Our call today will be led by Robert Nipper, our Chief Executive Officer, and I will also provide comments. Also joining us this morning our Corporate President, Marty Stromquist; our Chief Operations Officer, Tim Willems; and our Chief Accounting Officer and Treasurer, Wade Bitter.

Before we begin our call today, we'd like to caution listeners that some of the statements that will be made on this call could be forward-looking statements. And to the extent that our remarks today contain information other than historical information, please note that we are relying on the safe harbor protections afforded by federal law. Such forward-looking statements may include comments regarding future financial results and reflect a number of known and unknown risks. I'd like to refer you to our press release issued last night along with other public filings made from time to time with the Securities and Exchange Commission that outline those risks.

I also need to point out that in our earnings release and in today's conference call, we have discussed and will refer to adjusted EBITDA, adjusted EBITDA margin and adjusted net earnings per diluted share. Adjusted EBITDA, adjusted EBITDA margin and adjusted net earnings per diluted share are non-GAAP measures of operating performance. We use these measures because they allow us to compare performance consistently over various periods without regard to costs associated with our current capital structure and in a manner that better reflects our ongoing operating performance. Our press release from yesterday, which is posted on our website ncsmultistage.com, provides reconciliations of these non-GAAP financial measures to net income, the nearest GAAP financial measure.

With that said, I'll turn the call over to our CEO, Robert Nipper.

Thanks, Ryan, and good morning to our investors, analysts and employees joining our third quarter 2017 earnings conference call. Today I'll review some of the highlights from the third quarter and will touch on what we are seeing in both our U.S. and Canadian operations, after which I'll turn it over to Ryan to discuss the quarterly results in a bit more detail. I'll also provide some closing remarks, including a discussion regarding our strategic acquisition of Spectrum Tracer Services.

Our results in the third quarter reflect the continued execution of our strategy. Total revenue in the third quarter was $56 million, a 95% improvement over the year ago period and up 52% sequentially. Revenue for the 9 months ended September 30, up $151.5 million represents a 140% increase compared to the year ago period, with increases of over 100% from each of our U.S., Canada and international geographic areas. This performance is also demonstrated through our adjusted EBITDA performance. Adjusted EBITDA in the third quarter of $15.1 million reflected a 27% adjusted EBITDA margin and was an increase of 120% as compared to the year ago period. Adjusted EBITDA of $6.9 million. Adjusted EBITDA for the 9 months ended September 30 of $39.1 million reflected a 26% adjusted EBITDA margin in comparison to $7.1 million for the first 9 months of 2016.

The total number of sliding sleeves sold for the 9 months ended September 30, 2017 increased by over 125% as compared to the same period in 2016. We've also completed over 110% more wells over the first 9 months of 2017 than we did in the year ago period. These growth rates are in excess of the growth in the overall market, indicating that our market share has improved relative to last year. In the U.S., our revenue for the third quarter was up $13.3 million and was 116% higher than last year, but was lower by approximately $2.1 million sequentially. Our U.S. revenue for this quarter included just under $3 million related to Spectrum's business, which is reflected in our service revenue. The primary driver of the sequential decline U.S., in revenue, was a reduction of product sales during the quarter. As we've discussed on prior calls, the progression of the growth in our U.S. business is likely to experience significant variability on a quarterly basis. This shows up most prominently in the product sales line, which can be influenced by multiwell orders for sliding sleeves and the timing of sleeve installations in customer's wells. We believe that the drop in product sales in the U.S. in the third quarter, is temporary in nature, and we have already sold more sliding sleeves in the U.S. in the fourth quarter, as of the end of last week than we did in the entire third quarter. Notably, our service revenue, excluding Spectrum, was higher sequentially in the U.S. and we have already completed more than twice the number of wells then we did in U.S. in all of last year.

In discussions with analysts and investors, we tend to get a lot of questions regarding our customer profile in the U.S. and the execution of our growth plan. We look at a number of different factors in evaluating our performance in the U.S. and the progress that we are making in growing our market presence. Through the first 9 months of 2017, we have completed wells for over 15 customers across multiple basins in the U.S, with the Permian representing the most active area. These customers range from super majors and large independents, to private companies that are family owned or backed by private equity. To give you a sense of perspective, these customers collectively were running a total of over 150 rigs in the U.S. as the end -- at the end of October of 2017. Though not all of those rigs are running in the specific areas where we have been working for these customers. We have a number of repeat customers that we worked for on the majority of their operations in a given area or for which we are in secondary phases of trials. We've had initial success in cross-selling existing customers, securing trials in additional operating areas. We've had several customers complete their initial trials with pinpoint technology during 2017 and those customers are currently evaluating production results. While not every trial will lead to repeat work, we are able to learn from every trial that takes place. We have customers that are making changes to their approach with our technology as they migrate from use on single wells or partial pads to full pads, taking advantage of the unique pressure and temperature data that is collected on each job by NCS. We also learn more about individual customer drivers, which helps us as we develop the next generation of our technology.

We also get asked if our technology works better in certain basins or operating areas as compared to others. We have not found any particular formation or operating environment where pinpoint simulation isn't effective in providing a controlled and repeatable completion for our customers. This year, we've worked with customers in the Midland basin, the Delaware basin, East Texas, STACK, Powder River Basin, the Bakken and the Marcellus as well as in Alaska and California. We have found that some customers are placing significant value in the ability to utilize our technology to deliver a completion that eliminates the need for post-completion intervention. This is especially true in normally or lower-pressured areas where drilling out plugs can create significant operational risks and cost.

Looking forward, we will complete wells for an additional -- for additional new customers later this year and into 2018 for which we have sleeves already installed in customer's wells. We also look to the level of customer quoting activity and the number of master services agreements that we have in progress as leading indicators for our business. Both of those internal indicators give us confidence in our ability to continue to grow our market share domestically into 2018 and beyond.

For the fourth quarter, we expect our U.S. revenue, inclusive of a full quarter contribution from Spectrum, to be higher by approximately 40% to 50% on a sequential basis from third quarter levels.

Turning now to our Canadian operations, where we had another very good quarter. Revenue for the quarter of $40.4 million was up by 105% compared to the year ago period and was up by 145% sequentially, reflecting the seasonality associated with spring breakup that reduces activity for us in the second quarter. The strength was consistent across both product sales and services revenue. I'll note that we had revenue in the third quarter that was over 90% of what we achieved in Q1 in Canadian dollar terms, while the average number of active drilling rigs in the third quarter in Canada was 207, or approximately 30% below the average of 294 rigs that ran during the first quarter. In addition, through the first 9 months of 2017, our revenue of $98.5 million is 118% higher than during the same period in 2016. This speaks to the success our team has had in growing our market position, especially in the deep basin plays that we have increasingly been targeting over the past several years. However, based on our conversations with our customers, some of the strength in Q3 may represent a pull forward of activity from Q4. And we believe that the rig count in Canada could decline on a counter seasonal basis during the fourth quarter, especially in the light oil plays outside of the deep basin, which continues to represent most of our business in Canada. Rig activity in the fourth quarter in Canada has declined from levels at the end of the third quarter, due in part to weather conditions. And also to low spot prices for natural gas that has resulted from infrastructure constraints, though spot pricing has firmed in the last 2 weeks. In addition, several customers have indicated that they are likely to exhaust their 2017 drilling budgets in November, which would result in the decline in the rig count into December, unless 2018 budgets get pulled forward in a material way. As a result, we currently believe that our revenue in Canada in the fourth quarter could be lower by approximately 35% to 45% on a sequential basis. Despite this current and expected near term weakness in the Canadian rig count, our expectation is that capital budgets once set for 2018 will be in line with 2017. And that drilling activity is likely to ramp up quickly as we move into calendar year 2018.

Our international revenue of $2.3 million trailed our results from the third quarter of 2016 and the results from the prior quarter. We were active in our core international markets of Argentina, China and Russia during the quarter. And also made sales into the U.K, where our sleeves will be installed in the first onshore well to be drilled there in several years. Given what we see in both the U.S. and Canada in Q4, we believe that the sequential revenue declines in Canada will offset -- more than offset the sequential growth we expect in our U.S. operations, and that our consolidated revenue in the fourth quarter will be lower than in the third quarter.

I'll now turn the call over to Ryan to discuss our financial results in more detail.

Thanks, Robert. As reflected in yesterday's earnings release, our third quarter revenues were $56 million compared to $28.7 million in the prior year's third quarter, an increase of 95%. The increase in revenue was driven by a combination of higher overall industry activity, increased completions intensity, increased market share for NCS and 1 month of contribution from Spectrum. On a sequential basis, revenue in the third quarter was 52% higher than the revenue in the second quarter, in part driven by typical second quarter seasonality associated with spring break up in Canada. Gross profit, which we define as total revenue less total cost of sales excluding depreciation and amortization expense, increased to $30 million in the third quarter or 54% of revenue, compared to $13.9 million or 49% of revenue in the prior year's third quarter due to higher revenues and better utilization of our fixed operating cost base. For a sequential comparison, gross profit was $18 million or 49% of revenue in the second quarter of 2017.

SG&A costs increased to $17.6 million in the third quarter from $8.5 million in the prior period and from $16.2 million in the second quarter. As a reminder, our reported SG&A includes share-based compensation as well as a number of nonrecurring IPO and acquisition related expenses. The year-over-year increase was driven by a growing headcount in support of the growth of our business, increased salaries, higher bonus accruals, increases to share-based compensation, acquisition-related expenses and 1 month of SG&A related to Spectrum's operations. Excluding the Spectrum related costs, our SG&A was slightly below the low end of guidance we provided last quarter. SG&A as a percentage of total revenue was 32% for the third quarter as compared to 30% in the prior year's third quarter and 44% in the second quarter of 2017. For the fourth quarter, we expect our reported SG&A inclusive of share-based compensation and nonrecurring items, to be between $18.5 million and $19 million, with the increase compared to the third quarter primarily resulting from the inclusion of Spectrum for the full quarter.

Our third quarter 2017 depreciation and amortization expense totaled $7.3 million and we expect our fourth quarter depreciation and amortization expense to be approximately $8.5 million, with the increase primarily related to the amortization of intangible assets booked related to the Spectrum acquisition. Adjusted EBITDA for the third quarter was $15.1 million, an improvement of $8.2 million as compared to the $6.9 million that we posted in the prior year's third quarter. Adjusted EBITDA as a percentage of total revenue was 27% in the third quarter, which compared to 24% in the prior year's third quarter. The second quarter of 2017, adjusted EBITDA of $4.8 million was 13% of revenue. Comparing our third quarter to our second quarter, our incremental adjusted EBITDA margin was 54%.

Couple of other items to note with respect to our income statement in the third quarter. First, we recorded a noncash income of $0.2 million, which reflects a decrease in the liability we have on our balance sheet related to the contingent earn-out provisions associated with Repeat Precision and Spectrum. The value of these liabilities will be measured quarterly with increases to the liability resulting in an income statement expense and any decrease to the liability having the opposite effect. Second, we recognized a loss on foreign currency exchange of $0.8 million during the quarter. This is primarily noncash in nature and relates to intercompany balances impacted by the movements in the U.S. and Canadian dollar exchange rate.

Our diluted earnings per share for the third quarter was $0.07, which compared to a loss of $0.01 in the prior year's third quarter. Adjusting for certain items including professional fees, contingent liability and net FX-worth items increased our diluted earnings per share for the third quarter to $0.09.

Turning now to cash flow items in the balance sheet. Cash flow from operations for the third quarter was negative $4.2 million, bringing the total cash flow from operations to $2.9 million for the 9 months of this year. Our net capital expenditures, excluding acquisitions for the third quarter, was $1.4 million, bringing total net CapEx for the year to $5.2 million. We have also made significant investments in working capital throughout the year and expect to reduce our accounts receivable and inventory balances in the fourth quarter. During the quarter -- during the third quarter, we funded the Spectrum acquisition, utilizing $76.3 million in cash and $6.9 million in equity. In connection with the transaction, we borrowed $20 million on our U.S. revolver, while increasing the size of the U.S. revolver from $25 million to $50 million. The size of the Canadian revolver remained unchanged at $25 million. We also booked a liability of approximately $350,000 related to the earn-out provision in the Spectrum transaction. At September 30, we had $20.2 million in cash and total debt of $24.3 million. We also have up to $55 million in total availability under our revolving credit facilities, bringing our total potential liquidity to $75 million. We expect our net interest expense to be between $0.6 million and $0.7 million in the fourth quarter, with the increase from the third quarter reflecting our revolver borrowings. Our book effective tax rate in the third quarter was 18% and we expect our rate for the full year to be between 26% and 30%. We currently expect consolidated capital expenditures for the year to be between $6.5 million and $8.5 million, which includes spending for NCS, Repeat Precision, Spectrum and initial spending related to the development of our tech center in Calgary. One additional note from a tax standpoint is that we had expected to make a U.S. income tax payment of approximately $7.5 million in September, which was primarily related to the realized gain on debt retirement that was recognized when we repaid our term loan in May. Following Hurricane Harvey, the IRS has permitted the deferral of certain tax payments and we expect to make this payment as well as the tax payment that would otherwise be made in December, in January of next year.

I'll hand it over to Robert for closing remarks.

Thanks, Ryan. I'll give a quick review of how our recent acquisition of Spectrum fits into our strategy. As you know, our strategy is centered on increasing the market penetration for our core technology, especially in high-impact markets, including Deep Basin in Canada, the United States and in selected international markets. We pair this significant growth opportunity with an asset-light business model that provides us with significant operational flexibility and has limited maintenance and growth capital requirements. We strive to be a trusted adviser to our customers, providing them with the technology and insights they need to improve not just their completion designs but their field development strategies so that they can maximize financial returns. Our customers are increasingly focused on demonstrating that they can produce a robust return on capital and that they can profitably grow within cash flow over the long term. We believe that our technology and the technology offered by Spectrum are both important tools to help our customers achieve these objectives.

We announced the Spectrum acquisition at the end of August, while much of the Gulf Coast was still wrestling with Hurricane Harvey and right before the long Labor Day weekend. So we wanted to take an opportunity to briefly revisit why we believe this combination is so compelling. Spectrum, which was founded in 2010, has grown rapidly into what we believe as the industry's second largest provider of chemical and radioactive diagnostics and reservoir characterization services, having traced approximately 650 wells in 2016 and nearly 5,000 over its history. Spectrum's largest service category is the provision of chemical tracer diagnostic services, which includes over 42 frac fluid identifiers, 34 oil soluble tracers and 17 natural gas tracers. Spectrum has been an industry innovator, introducing its patented particulate based oil soluble tracers in 2013. By deploying the oil tracers as a particulate, as opposed to a fluid, the tracers get distributed throughout the prop fracture network enabling enhanced diagnostic capabilities. In addition to chemical tracer diagnostics, Spectrum also has a fleet of logging tools for use with radioactive tracers, which can be deployed on stick pike, coil tubing or wire line. Tracer studies are well known, and a reliable tool utilized by E&P companies to improve well performance, from evaluating landing zones to completion designs to field development strategies, which is entirely consistent with both NCS and our Anderson Thompson reservoir strategies team. The studies can range from something as simple as providing an indication that all stages are producing, to detailed multiwell studies in connection with well spacing pilots, where customers are running complex analysis to assess interwell communication and make decisions about how they capitalize their fields. Over time, Spectrum has seen higher percentages of its jobs utilizing multiple tracer types. For example, both water and oil tracers, and has experienced an increase in the number of individual stages traced per well, consistent with general industry trends towards increased completions intensity.

We're excited about the ability to leverage our respective customer bases. Approximately 85% of Spectrum's revenue is from U.S. customers. And so far this year, Spectrum has worked for approximately 70 customers in the U.S. In addition, NCS will have an opportunity to introduce Spectrum to our extensive customer base in Canada to drive growth there. In addition to opportunities within the customer bases, we believe there is an opportunity for the use of tracer diagnostic services to accelerate adoption of pinpoint stimulation and multicycle sleeves, based on both current tracer applications as well as future applications that are under development. Finally, Spectrum has a financial profile similar to NCS's. Spectrum provides a service that our customers value highly. The business is capital-light in nature, without the need for significant investments and fixed assets.

We were able to complete the acquisition largely with cash on hand, together with a draw on our U.S. revolver and common stock. And we view the transaction as a tactical use for our balance sheet and expect the transaction to be immediately accretive to our earnings. We're pleased with the progress that we've been able to make on the integration front so far, which has been facilitated by an alignment of the cultures of the 2 companies.

Before we open the call up for Q&A, I'd like to highlight a couple of our accomplishments during the quarter and during the year. In our international operations, as I mentioned earlier, we will be completing our first well in the U.K. in the coming weeks. And we have also recently completed our first well in Kazakhstan. We also successfully completed a 30-stage well with sliding sleeves in China, our highest stage count there today. And successfully completed another well in China, in which the sleeves had been run more than 2 years ago.

In Canada, we've set new records for the number of sleeves completed in a single run in the Montney, a well that utilized over GBP 16 million of profit. In addition, we issued a press release a few weeks ago highlighting the work for a customer in the Cardium that is used to dial-in stage spacing. In which they ran 135 sleeves with stage spacing alternating between single joints and 2-joint spacing in a 10,000 foot lateral. In the U.S., we recently completed a 155 stages in a single run in a well in the Bakken, a current record for NCS. We also performed our first job for a customer in California and are working with several customers that are employing innovative stimulation strategies in the Permian. Spectrum recently commissioned a set of memory-based Gamma ray logging tools, which can be run on cold tubing, with over 15 successful runs since delivery. With this success, a second set of tools has been ordered. These tools enhance the company's capabilities in radioactive tracing, which can be performed as a standalone service or bundled together with chemical tracing.

I'll close with just a quick -- a couple of quick comments. First, NCS has the ability to continue to deliver on differentiated growth through our leverage-to-completions activity, completions intensity and our ability to drive further market share gains relative to traditional completion methodologies. The addition of Spectrum provides another growth opportunity for NCS and we believe that the combination has an opportunity to enhance the growth profile of NCS's business in the U.S. over time. Second, we are focused on creating long-term value for our shareholders. We are and will continue to be responsible stewards of capital.

And finally, I'd like to give a note of personal thanks to all of our employees, who have put in exceptional effort to ensure that we deliver a quality product and service to our customers as we have grown throughout the year. Our employees have truly lived up to the NCS promise, which is the cornerstone of our culture as so many of them donated their time and money to help coworkers who were impacted by the hurricane. We were very fortunate as a company to have sustained only minor disruption from the storm, but the outpouring of support from our people during this time underscores the strong sense of community that we have at NCS. As I've said before, I truly believe that we have the best team in the industry and we're committed to preserving the culture of employee development and innovation that has supported us from the beginning. And with that, operator, we'd like to take questions.

(Operator Instructions) And our first question comes from the line of Scott Gruber from Citigroup.

So the backdrop here has been changing within energy, ENPs focusing more on trying to improve their returns. And I was wondering if you're seeing that come through with regard to demand for some of your products and services. It just strikes me that you have a few solutions that can help them improve returns, reducing frac variability and now it's Spectrum assessing frac effectiveness. So are you seeing any early change in customer appetite for the Multistage system or for tracers or even your consulting services in this new environment?

Yes, Scott. We're seeing the same thing that you just described. We're seeing a change in appetite, the conversations are changing with our customers. Now they're talking about more -- they're talking more about optimization. Trying to understand how they can design the frac jobs to be more cost effective, but yet, still provide the same types of production. So the conversations that we're having with our customers have certainly began to change over the last 3 or 4 months. And we're very encouraged by that.

And are you seeing a change in the outlook for the number of pilots you're running in the U.S? Is that going up or is it staying about the same?

So the number of pilots do continue to increase. I wouldn't say it increases with a fervor, but they are increasing over time. One of the things that we're seeing that we hadn't seen earlier in the year is when customers typically trial our technology. They will use a frac design that was used on a previous type of completion methodology. And this generally is not the most optimum frac job. So as we go through field trials, where our customers now are doing is looking and trying to understand better, how can I design this frac job differently to work with pinpoint and get better results from what I was getting with a different type of completion methodology. So what that -- effect of that has been is that we're seeing field trials where we're going through multiple iterations with our customers. So the field trials seems to be longer but they seem to be more -- feel more like ongoing business.

Got it. And then you also replaced a key competitor on a pilot program with one of the large Midland operators. Where do you stand on that pilot program? And when would you expect to hear back from the operator with regard to well results and whether they would move forward with a larger work program with NCS?

Yes, so as you said, we completed that project some time ago. Operationally, I believe the company performed well on that. And so the operator is waiting for well results. As early as last week, the operator has said they're still early, looking at production. That they expect to see some results early in late 2017, early 2018. But we're already in conversations with that particular client on additional field trials to begin in early 2018.

Okay, so just because we're getting the production results later in the year, early next year, wouldn't preclude them from doing more work with you in '18? Is what it sounds like?

That's correct.

And our next question comes from the line of Marshall Adkins from Raymond James.

I'm going to keep beating this U.S. horse here. You've had, I think you said 15 wells that you've completed in the U.S. and the interest in trials continues to go up, orders are increased, I guess, or are moving up. Can you give us any specifics on U.S. successes? Or is it just too early, and I recognize you're still very early in the market penetration. But is there anything on the success side that you can share with us?

Sure. You're right, it is still early. But what we can point to are we have customers that are in what we call adoption for the technology. So when we think about a customer, whether they've adopted or not, for us that means that they're using our completions technology substantially in a particular geographic operating area for the customer. So that's what we would call total adoption. We also have customers who've adopted our technology in a single geographic area who have, and/or are in process of trialing that technology in other geographic areas in which they operate. We have a number of customers now who have either completed field trials and are waiting to frac the wells or have completed field trials and are -- have already fracked the wells and waiting for results. As I mentioned to one of Scott's questions, one of the thing that we've seen, is that our customers are starting to take more advantage of the optimization during the field trials, where we know that the frac designs that were used with -- that they had on previous types of completions are not the optimized frac designs for pinpoint. So the customers are starting to take advantage of some of the data that we provide in truly custom fitting those frac designs for the capabilities of pinpoint. And then we still have a number of customers that we're in early conversations with, who have either committed to field trials for running sleeves in the ground and subsequently fracking them or are anticipating being able to do that. So I'll just sum that up, and that we're pleased with the progress that we've made. We started the business in Canada in 2008. So we grew that business over time, it was a market that we understood very, very well, like the U.S. market. We believed then and we still believe now that it's a market that was better for trying to get the uptake of new technology, just because of the way the industry is different in Canada than it is in the U.S. And so we've seen that -- we've seen this adoption cycle in 1 country already and we're seeing it in the U.S. now. And so we are pleased with where we are today.

Okay, so just a little more detail on when you say the completion methodology is evolving. Does that mean, they're starting out with their normal 30, 40 stages per well? And once they get into yours they're saying, "wait a minute, we should be doing 80, 100 stages per well that are tighter spaced, with smaller volumes." Is that what you're referring to?

I would say it's a couple of things. It's probably not so much that. So in one case, customers would -- their initial reaction is let's completely emulate the number of clusters that we have in a wellbore. So if we're running stages with 5 clusters, we think that we should place a sleeve at every single cluster and completely emulate that. And then we should just take the total volume that we would pump in this well and divide it by the number of stages that we're going to pump and that's our frac design. And we'll pump it the same way, the same rates per entry point and that thing. So -- but what we know over time we've learned when working with other customers, that that's not the optimal way to do it. That we don't necessarily have to, at least in most of the plays that we've worked in, we don't have to put a sleeve where every single perforation cluster was, because of the ways the fracs propagate from pinpoint versus limited entry. So as over time, we can work with the customers to try to reduce some of the density of the frac sleeves, still a lot more stages than they currently had, but not necessarily one for where every cluster is. And the other thing that -- I'll just give an example for, one customer that we worked for in the Permian, who -- we did a well earlier in the year or we did a pad, and they employed a number of diagnostic tools. So they had chemicals tracers, they did frac imaging logs, they even had fiber optics on the pad. And so some of the things that they learned during that, or they believe that they learned, was that the near wellbore connectivity was the majority of the contribution for the frac. And the frac jobs had been designed to basically emulate plug-and-perf, which were really large frac jobs with a lot of rate through each entry point. And so the next pad that they did, they believe there strongly enough that they went in and they downsized the frac jobs. So less sand and less fluid, trying to optimize the near wellbore connection where they believe that they were getting the majority of the contribution from production. And what the ultimate goal was would be to eliminate some of the cost by downsizing the frac job, but yet, still getting a similar type of production profile. So those wells have just been recently put on and we're waiting the results from that. But those are the types of things that our customers are doing to try to optimize through the field trial periods.

Perfect. Last one for me. You've clearly gained a share in Canada or it appears that you're getting a share in Canada. Is it a penetration to these newer basins or that tend to be deeper? Or is it further share gains in the basins where you've already been pretty dominant?

It's further -- it's penetration into the deeper basins, Marshall. So the Cardium was the first deep basin that we started working in. We have a very strong presence in the Cardium now. And our technology seems to be the go-to technology in that particular basin. Then we went into the Montney. And we're making great strides in the Montney as well, getting market share there. I mentioned in my prepared comments that we had a record-setting well in the Montney. So as we continue the Montney and the Duverney, that's where the market share gains are coming from. And it's more impactful there as we gain market share, because as you know, the majority of our business traditionally has been in the light oil plays. They are shorter laterals, lower number of stages, the service jobs are shorter period of time. But as we move into the deep basins, each well we gain there is exponentially more in terms of revenue and profit for the company because there is a significantly larger number of frac stages and we're on location longer because the fracs are larger.

And our next question comes from the line of George O'Leary from TPH and Company.

Just -- first question, I guess, you mentioned that most of the revenue is coming from the Permian, which makes sense. I guess, could you maybe quantify what percentage of your revenue stream is coming from the Permian and how that's evolved as we've progressed through 2016? Has it stayed constant, is that increasing? And then maybe, I know you mentioned some other basins where you're doing work, but any basins where you're seeing a more notable increase in activity or a more notable rate of customer adoption as you look at U.S. basins?

Yes, sure George. This is Ryan. Just to start off with the Permian. What we've seen so far this year has been pretty consistent throughout the years. The Permian's been the single largest basin for us, and it's been about 55% to 65% depending on the quarter of our revenue in the U.S. in any given period. And what we have is in other regions that will move that around a little bit. We've certainly seen good traction there, we've seen good traction in the Powder River Basin. Robert mentioned the trials that we had in the Bakken recently, we're hopeful around those and being able to market our operational success there with other operators in the area. And then we've had some good opportunities in the Northeast in the Marcellus and some of the liquids rich areas there, where customers have done a small trial and come back to do larger trial programs as well. So it's really broad-based from a trial standpoint. But the Permian does remain the single biggest note for us.

Okay, that's super helpful. And then on the U.S. revenues up 40% to 50% quarter-on-quarter in the fourth quarter, and thanks for providing that. I guess, could you quantify how much of that you expect to be growth from having a full quarter of Spectrum? And then what percentage of that growth comes from, I guess I'll call it the legacy NCSM business?

Sure, I think as we talked about Spectrum, when we introduced them back at the end of August, we talked about a $30 million revenue rate for the year. And that's probably a bit more weight in the second half of the year versus the first half. We actually did file our 8-KA, which gives pro formas for Spectrum for the 6 months, yesterday as well. But you can -- you'll get the full quarter of Spectrum which you can think about as being $7.5 million, $8 million total revenue, of which about 90% of that will be in the U.S.

And our next question comes from the line of Kurt Hallead of RBC.

Just wanted to get one more additional point of clarification. So you went through U.S. and Canada on the revenue progression, and I then believe you guys said that revenues will be down sequentially, it's obviously a mathematical fact, with how big Canada is relative to the U.S. What -- if you may, I didn't catch what you said about the non-North America or international revenue progression?

Yes, for the fourth quarter, we'd expect the international business to be roughly in line with where we were in the third quarter. And there's -- that's a geographical area that's obviously even lumpier than the U.S. in the way that product sales hit. But from what we can see today, we had expected it to be roughly in line with Q3.

Okay, great. Thanks, Ryan. And just one other housekeeping item before I ask a question to Robert. So on the SG&A piece you mentioned, Ryan, that, that includes stock-based comp plus nonrecurring type items. Can you give us some general sense of what the level of magnitude of those nonrecurring items may be in the fourth quarter?

Between the 2, we think it's about $2.5 million. So it will be over $2 million of share-based compensation. It'll be slightly higher than what we saw in the third quarter because there was a little bit of equity issued to -- in the form of restricted stock units to some Spectrum employees in connection with the deal. And then its -- we don't see anything material from a nonrecurring standpoint right now. But those things can always pop up.

Okay, thanks Ryan. So Bob, for on the market share dynamics, when you guys came out of the gate, there was obviously a lot of enthusiasm, still continues to be enthusiasm for the opportunity set in front of you. I think you mentioned, may be having or targeting 1% market share and can you give us an update on that dynamic? And how do you feel about the opportunity into 2018? Do you think it's a much better opportunity than when you came out of the gate? If you could give us some color on that, that would be great.

Yes, so we're still very, very excited about the opportunity coming out of 2018. And a lot of that's because of what we've learned over the last year. We continue to have strong demand for field trials, customers are understanding the opportunity with being able to optimize using our technology. And we're learning some things, an example, I talked about one customer using the technology to try something based on some of the learnings that they had with diagnostics, which could make a significant impact to their business if they could get similar production with a significantly smaller frac job design. But there's other things that some of our customers are seeing. For instance, we're in the Marcellus, who's using our technology on pads for infill drilling. And what they're seeing is, they're actually seen better results for those pinpoint wells in terms of production than they were seeing for infill drilling using their conventional plug-and-perf technology. So as we -- and that's just one example, but we've seen that in multiple places, in both the U.S. and in Canada. So we've got an effort in the company inside Anderson Thompson reservoir strategies to help our customers better understand why that's occurring and how that -- we can take more advantage of it. So we're still very excited about opportunities to grow. And yes, we're -- the enthusiasm has not dampened at all. It's just increased.

And our next question comes from the line of Sean Meakim from JPMorgan.

And our next question comes from the line of Ian MacPherson from Simmons.

So just last question here to follow up on the guidance. Canada, you said, down 35% to 45% in the fourth quarter. Is that correct?

Yes.

Okay. So we're looking at a consolidated sound turn in the fourth quarter in the range of, I'd say, 10% to 20%, if my calculator works, is that consistent?

That's right, yes.

Okay. So I guess my question, Ryan, is how should we think about your margin decrementals, that type of context. You gave us some of the other P&L elements, but we saw stronger-than-expected incrementals in Q3, weren't expecting this type of reduction for Q4. How do you think, particularly, with the integration of Spectrum into a more material-than-expected revenue mix? How should we think about the gross margin decrementals?

Yes, so -- yes, we gave some guidance around SG&A. What I'd say is for the fourth quarter, on the gross margin side, we'd expect it to not be quite as strong as the 54% that we had in the third quarter. But that -- probably something in the low 50s is fair.

Okay. Well I think that would certainly highlight your -- the strong operating leverage of your business. I should say, lack of operating leverage on the downside, so that would be encouraging. All my other questions have been asked and answered. So thanks for all the good color today.

And our next question comes from the line of Scott Gruber from Citigroup.

Yes, so just had a quick follow-up. As we think through market penetration potential for NCS, one of the impediments seems to be getting the EMP's to use less horsepower, when fracking with your tool, to get the overall costs of deployment down? Is that a fair characterization? And how do you help propel the reduction of horsepower when using your tool, now that -- are the EMP's willing to actually push the pumpers make the request that they have to cut the horsepower down on site?

Yes, we've seen that. So a couple of things I'll say about that, one is, we started about 1.5 years ago, a pretty strong effort, working directly with the pumping companies, helping them understand what it is that we do, and help them sort of think about how that could actually affect their business, that it might not affect their business in a bad way, it could affect their business in a good way. And so as a result of that, there's a number of pumping companies that have actually set up frac spreads, specifically for this type of simulation treatment. So the other thing -- the biggest impediment I would say would be in field trials with customers. Because a big part of the cost neutrality proposition that we have with pinpoint versus what our customers are doing today is because of the horsepower savings. A lot of contracts that customers have with their pumping providers are based around a specific amount of horsepower. And in field trials, sometimes it's difficult, if not impossible, for our customers to get those contracts modified so that they can have less horsepower or less horsepower without the higher horsepower cost on location. But what we have seen, and I believe, every case is once customers move more toward more extensive field trials or into adoption, that they're able to get to the point where they do have the less horsepower on location, the appropriate amount of horsepower and get those cost savings and get to that cost neutrality.

And I'm showing no further questions over the phone lines at this time. I would like to turn the call back over to Robert Nipper for closing remarks.

Thank you very much. On behalf of the entire management team and our board, we'd like to thank everyone that joined us on the call today, including all of our shareholders, the research analysts who cover NCS. And especially our employees, whose hard work has positioned us to deliver these results. We certainly appreciate your interest in NCS Multistage, and we look forward to talking again on our next quarterly earnings call.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program, and you may now disconnect. Everyone, have a great day.