NCS Multistage Holdings Inc (NCSM) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2018 NCS Multistage Earnings Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the call over to Mr. Ryan Hummer, Chief Financial Officer. You may begin.

Thank you, Mark, and thank you for joining NCS Multistage's First Quarter 2018 Conference Call. Our call today will be led by Robert Nipper, our Chief Executive Officer, and I will also provide comments.

Before we begin our call today, we would 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're relying on the Safe Harbor protections afforded by federal law. Such forward-looking statements may include comments regarding future financial risks and results and are subject to 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, adjusted net income and adjusted net earnings per diluted share, which are non-GAAP measures of operating performance. We use these measures of operating performance 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 we believe 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, I'll turn the call over to our Chief Executive Office, Robert Nipper.

Thanks, Ryan, and welcome to our investors, analysts and employees joining our first quarter 2018 earnings conference call. This morning, I will review some of the highlights from the first quarter and will touch on what we are seeing in our Canadian, U.S. and international operations. After which, I'll turn it over to Ryan to discuss the quarterly results in more detail. I will also provide some closing remarks touching on some of our recent accomplishments.

Our results in the first quarter demonstrate that we are continuing to execute on our strategy. Total revenue in the first quarter was $70.7 million, a 21% improvement over the year ago period. Our ability to leverage the investments we have been making in our business is also demonstrated through our adjusted EBITDA performance. Adjusted EBITDA is -- in the first quarter of $18.7 million reflected a 26% adjusted EBITDA margin. Our incremental adjusted EBITDA margin, measuring the increase in adjusted EBITDA from the fourth quarter of 2017 to the first quarter of 2018 divided by the corresponding increase in revenues, was 40%, demonstrating the operating leverage in our business as we grow.

Starting with our Canadian operations, we had a very strong first quarter, as our revenue of $47.2 million was up by 13% compared to the year ago period and was 61% higher sequentially. For context, our Canadian team delivered this 13% year-over-year revenue increase despite the average rig count in Canada being 9% lower during this year's first quarter as compared to last year. 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. It also reflects the fact a higher percentage of the rigs that were operating during the quarter were targeting oil and liquids-rich gas, which has historically represented most of our Canadian work.

As a reminder, the first quarter is typically the highest revenue quarter for our Canadian business, with the second quarter being the lowest revenue quarter during the year. It's difficult to estimate our second quarter revenue in Canada as the timing and magnitude of the spring breakup varies from year to year. In contrast to last year, we currently anticipate that we may have an extended spring breakup in 2018 based on historically high levels of precipitation and snowpack, especially in Alberta and BC, pushing the resumption of customer activity into late May or early June in many areas. Based on the possibility of an extended breakup, we expect that revenues from our Canadian operations in the second quarter will be slightly below the $16 million in revenues that we had in the second quarter last year. If the extended spring breakup occurs, we don't believe that it will negatively impact our customers' full year budgets, and we don't expect that activity in the second half of the year would be unfavorably impacted.

Turning now to the U.S. Our revenue for the first quarter of $22 million was 46% higher than last year and was up 9% sequentially. During the first quarter, our business was impacted by some third-party completion-related logistical challenges which led to delays in completions, primarily impacting our tracer diagnostics business. This led to a sequential decline on our U.S. revenues for service. We believe these logistics issues were temporary in nature and do not expect them to impact our operations during the second quarter. Despite those logistical issues, we delivered sequential unit and revenue growth in each of our primary product categories, sliding sleeves, airlocks and composite plugs. It was our second straight quarter in which we had sequential growth in sliding sleeves sales in excess of 25%, which contributed to sequential growth in total U.S. product revenues of 59%, which is in excess of any measure of increased industry activity during the same period. Over the last couple of calls, we've outlined some specific strategies we're executing on to drive further adoption in the U.S. based on delivering upfront cost saving to our customers and also highlighting the operational advantages of our pinpoint technology. I'm pleased to say that these sales initiative are taking hold and impacting our results. Our pinpoint completion work in the U.S. in the first quarter was driven almost entirely by repeat customers, while we are on track to add several new customers in the second quarter.

In my closing remarks, I'll touch on the success of one of our specific initiatives in the U.S. We expect that we will continue to build on our strong momentum from the first quarter and that our U.S. revenue in the second quarter will grow by over 20% on a sequential basis. Our international revenue for the first quarter of $1.5 million trailed our results from the first quarter of 2017, but increased from the fourth quarter. Although the results of our international operations will continue to be both seasonal and volatile, we expect the second quarter international revenue to be $3 million to $4 million.

Based on what we're seeing in each of the countries in which we operate, we are maintaining our full year revenue guidance for an increase of 35% to 45% in 2018 as compared to 2017. We continue to anticipate that most of this growth will come from our U.S. operations.

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

Thank you, Robert. As reflected in yesterday's earnings release, our first quarter revenues were $70.7 million compared to $58.6 million in the prior year's first quarter, an increase of 21%. The increase in revenue was driven by higher industry activity, increased completions intensity, the inclusion of Spectrum and strong performance from Repeat Precision. On a sequential basis, revenue in the first quarter was 41% higher than revenue in the fourth quarter as we benefited from the seasonally strong first quarter in Canada and increased product sales in the U.S.

Gross profit, defined as total revenue less total cost of sales excluding depreciation and amortization expense, increased to $37.1 million in the first quarter or 52% of revenue compared to $29.3 million or 50% of revenue in the prior year's first quarter due to the higher revenues, better utilization of our fixed operating cost base and the contributions from Spectrum and Repeat Precision. For a sequential comparison, gross profit was $25.6 million or 51% of revenue in the fourth quarter of 2017. Selling, general and administrative costs increased to $21 million in the first quarter from $12.8 million in the prior year's first quarter and $18.1 million in the fourth quarter.

As a reminder, our reported SG&A includes share-based compensation as well as certain nonrecurring expenses. The year-over-year increase was driven by headcount additions to support the growth of our business, increased salaries, higher bonus accruals, increases to share-based compensation, costs related to operating as a public company that we didn't incur in 2017 and higher SG&A related to Spectrum's and Repeat's operations as they have grown or as Spectrum was added.

SG&A as a percentage of total revenue was 30% for the first quarter as compared to 22% in the prior year's first quarter and 36% in the fourth quarter of 2017. For the second quarter of 2018, we expect that our reported SG&A, which includes share-based compensation and nonrecurring items to be between $22 million and $23 million, with the increase compared to the first quarter primarily resulting from strategic headcount additions during the first half of the year in sales, engineering and technical services as well as an increase in noncash stock-based compensation related to long-term incentive compensation plans. We expect that SG&A will continue to move slightly higher from Q2 levels as we progress through the year as we make additional strategic hires to support our growth.

Our fourth -- first quarter 2018 depreciation and amortization expense totaled $4.4 million, and we expect our second quarter depreciation and amortization expense to be in line with to slightly higher than Q1, reflecting investments being made in the business.

Adjusted EBITDA for the first quarter was $18.7 million as compared to $19.2 million in the prior year's first quarter. Adjusted EBITDA as a percentage of total revenue was 26% in the first quarter of 2018. In the fourth quarter of 2017, adjusted EBITDA of $10.4 million was 21% of revenue. Our incremental adjusted EBITDA margin comparing Q1 of 2018 to Q4 of 2017 was 40%.

A couple of other items to note with respect to our income statement in the first quarter. First, we recorded noncash income of $1.4 million, which reflected a decrease to the liability we have on our balance sheet related to the contingent earnout provisions associated with Repeat Precision and Spectrum. The value of these liabilities are measured quarterly, with increases to the liability resulting in an income statement expense and decreases to the liability having an opposite effect. Second, our book effective tax rate for the quarter was 7%. The calculation of our book tax rate included several adjustments related to U.S. tax reform based on new administrative guidance during the quarter. Third, we had net income attributable to noncontrolling interests of $0.9 million in the quarter, reflecting positive net income at Repeat Precision. We expect to have positive contributions from Repeat for the remainder of the year as well.

Our diluted earnings per share for the first quarter was $0.23, which compared to $0.18 in the prior year's first quarter. Adjusting for certain items, primarily the decrease in contingent liabilities, reduced our adjusted earnings per share for the first quarter to $0.21.

Turning now to cash flow items and the balance sheet. Cash flow from operations in the first quarter was negative $8.3 million. As we have indicated previously, we made cash tax payments of $15.5 million in the first quarter related to FX gains realized in connection with the payment of our prior term loan during 2017, and also to true up estimated and actual taxes owed in Canada. We expect an increase in cash flow from operations in the second quarter, reflecting seasonal impacts from working capital, particularly receivables. Our net capital expenditures for the first quarter were $1.1 million, and we currently expect consolidated capital expenditures for 2018 to be between $15 million and $18 million, inclusive of the buildout of our tech center in Calgary, spending related to the implementation of a new ERP system and growth capital investments at both Spectrum and Repeat Precision.

At March 31, we had $23.7 million in cash and total debt of $27.7 million, which included $20 million drawn under our U.S. revolving credit facility. We also have up to $55 million in total availability under our revolving credit facilities, bringing our total potential liquidity at March 31 to approximately $79 million. We expect our net interest expense to be between $0.4 million and $0.5 million in the second quarter. We expect that our quarterly book effective tax rates for the remainder of the year, so quarter 2 through quarter 4, will be between 24% and 28%. With the 7% book effective tax rate in the first quarter, we expect our book effective tax rate for the full year during 2018 to be in the low 20% range.

One final item to point out before I turn the call over to Robert. You may note that last night we filed an S-3 shelf registration statement covering certain of our existing shareholders and up to $300 million in primary common stock. The S-3 is subject to SEC review and is not yet effective. The filing of the S-3 does not indicate a near-term capital need for NCS. We became S-3 eligible upon the 1-year anniversary of our IPO, and we view having a shelf registration in place a sound corporate practice to provide flexibility and to facilitate any future equity issuance.

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

Thank you, Ryan. Before we open up the call for questions, I'd like to highlight a couple of our accomplishments during the first few months of the year. There have been a lot of questions and discussions about our U.S. market penetration and customer base over time, but I'd like to call out the success of our Canadian sales and operations team at growing the customer base over time as we not only maintain our Canadian market share but grow in the deep basin as well.

Over the last 12 months, we had over 90 customers utilize our pinpoint completions technology in Canada, a number that was increased by over 30% from the end of the first quarter of 2017. We sold more sliding sleeves in Canada during the first quarter of 2018 than we did in the first quarter of 2017 despite a slightly earlier onset of spring breakup this year and a lower active rig count. As completions intensity and lateral lengths continue to increase in the Canadian market, we're seeing an increase of airlock sales in Canada as well. The Canadian team is truly firing on all cylinders in a challenging market environment.

In the U.S., we've had initial success with customers that are utilizing our technology in an application where the control of the fracture network is very important from an operational standpoint. We completed our first job for a customer for this application during the first quarter, and by leveraging that initial success, we had installed or completed 8 wells for 5 other customers in the surrounding area by the end of April. In addition, a customer operating in Alaska utilized NCS's technology with a screened version of our sleeves to complete a rigless multistage frac-pack operation, a first for NCS.

We've had several exciting projects under way at Spectrum. We're in the process of building a second lab, which will allow us to better serve our growing customer base in Canada. We're also preparing for Spectrum's first jobs in South America, a clear result of cross-selling efforts enabled by the combination of the 2 companies. Finally, we are continuing the rollout of water-soluble tracer product line, leveraging the success of our particulate-based oil-soluble tracer deployment methodology.

At Repeat Precision, we have secured a license to an innovative technology to pair with our composite plugs, which we believe can help to further differentiate our products by providing our customers with a solution that reduces the operational and safety risks currently associated with electric line setting tools at a lower cost to the customer. The license has an exclusivity provision ensuring that we are the only manufacturer of composite plugs with direct access to this technology.

I'll close with just a couple of brief comments. First, NCS is generating significant organic growth by capitalizing on our leverage to completions activity and completions intensity. Second, the strategies that we've put in place to increase the market penetration of pinpoint completion systems are working. We are leveraging the full breadth of the organization in an effort to capitalize on the tremendous market opportunity that we have in front of us. Third, we are making strategic investments to enhance our growth profile, and we continue to innovate our suite of completions technologies and apply them to new market segments. Finally, we remain focused on creating long-term share value for our shareholders. We are and will continue to be responsible stewards of capital. With that, we'd be happy to take your questions.

Operator, we'll open up for questions now.

(Operator Instructions) And our first question comes from the line of James Wicklund from Crédit Suisse.

Robert, what happened to the tests you were doing in the North Sea? Did that -- did I hear that right 3 months ago? Was there a test in the North Sea you were doing?

Yes, you did. So we're in the process of fracking that well right now. We expect to finish up sometime over the near term. There have been some operational issues on the platform that has caused some delays. But what we can tell you so far is that, just as an example, what was taking -- using previous types of frac completions on this platform in the North Sea, it would take approximately 4 days to complete a single frac stage. We were completing frac stages about 4 every 28 hours. So they've been able to see significant operational benefits from using our technology.

What -- this is kind of where I wanted to go with my first question. So I'm sorry, I wasted that one on that, but when we hear about the different technologies out there we tend to take a snapshot of what you can do. And then we listen for other people who are doing something newer or better. And it just strikes me, and I don't mean for this to be a softball, but you were talking about the projects you're doing in Alaska. You talked about what you're doing in the North Sea, which none of us look at as onshore U.S. conventional, unconventional work. Can you talk a little about what you're doing with technology these days to keep up? How do we get warm and fuzzies that you're not going to get technically surpassed in the next 2 years?

Well, as you know, we invest heavily in R&D. We are finishing up our research and development facility in Canada. We expect to be moved into that by late December of this year. What that will do is it will give us the ability to do a lot of testing in-house that we were having to farm out before. And it's not so much a cost benefit, but it's more the ability to get the testing done more quickly to be able to get the products commercialized more quickly. So when we talk about North Sea, when we talked about Alaska, those were technologies that had to be developed. That's not just the standard technology that we use for the Lower 48 and for Canada. It's a variant of that, that was designed to be specifically for the applications in the North Sea and in Alaska. And there's other applications for those same types of technologies that we developed elsewhere in the world. So we were able to turn those around in a fairly short amount of time and to be able to successfully deploy those technologies. When we look at our core technology in the U.S. and in Canada, we're working on and we've mentioned in the past that we're working on a solution whereby our customers would be able to take advantage of a pinpoint completion system without having to use coiled tubing to deploy the system, to manipulate the system over or to draw out anything after the frac job is completed. So we'd mentioned that our goal has been to get that system commercialized within 2018, and we believe that we're still on track to be able to do that. So there are a number of other projects that we're working on as well. One of the things that we've seen over the last couple of years are new entrants into the Canadian market, where we started. It's a market that's much more mature than anywhere else in the world right now for pinpoint. There's been a lot of experience that our customers have had with pinpoint there. And so there are people who had time -- other competitors who had time to be able to develop technologies to compete with us. So while we've been successful in maintaining our market share there, there is competition, and it's driving prices down. But what we've been able to do is we've been able to successfully take our technology and evolve it into more cost-effective solutions, either through engineering efforts or changes in our supply chain. So there's a number of technologies that we're working on today that are very close to deployment, some that have just recently been deployed and others that we're looking out for the next thing.

Okay. Well, that was a really good job. I very much appreciate that. And last, if I could ask, in terms of activity out there, the biggest concern is that we're going to overbuild capacity in pressure pumping and completion is going to roll over and die. Are you seeing a rational market in your work? Are you seeing an overheated market? Are you seeing a market where you're going to have challenges growing over the next couple of years? How do you guys today view your place in the overall market?

Yes, so what we're seeing out there is, there's a market that tends to be undersupplied in the Permian. There seems to be adequate supply in the other basins. And it looks like they'll be over time, probably through the end of this year before we reach anything close to equilibrium in the Permian, if even then. I think a scenario where the market gets overbuilt and completions roll over, if that happens, I think we're quite a ways away from that.

Next question comes from the line of Scott Gruber from Citigroup.

Kind of want to continue on with Jim's question. So you're under way in the North Sea on a job, you executed a job in Alaska, obviously your system allows for much improved efficiency, especially when operating in remote locations. What is the volume of opportunities in remote locations? Could this be another leg for the growth story or is it going to still be, kind of, very niche?

Yes, so it could be another leg. I don't think it's something that -- it's not something that we think about near term, for the next 6 to 8 months. But in the North Sea, over the next couple of years, it could be fairly significant for us in terms of our international revenues. But as we look at what we've done in the North Sea, and we also look at what we're doing in Alaska on a number of jobs there, we think that this potentially could have application in the Gulf of Mexico and deepwater plays throughout the world. But there's still a little bit more development that would have to occur for that to happen.

Got it. And when we look at activity in the states today, the rig count is being primarily driven by private operators, supplemented by a few of the majors and few of the public E&Ps. Is the growth in activity by private operators, is that an opportunity for you, with your suite of technologies? Is it more of a hindrance to see an improved market penetration? What's the impact of that trend?

Yes, so we don't see it as being a plus or a minus for us other than the fact that an increase in activity is good. There doesn't seem to be any difference in uptake between small operators and large operators. We look at the customer base that we were working for today in the U.S., call it 25 different customers that we've worked for over the last 12 months, there's a mix of really small, midsized and large independents and even super majors there so, no, it's transparent for us.

And is the customer count continuing to grow in the U.S.?

Yes, in the first quarter, we saw almost all of the jobs that we did were repeat jobs for existing customers. But as we said in the second quarter, we're adding customers, so we'll continue to grow over time.

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

So Robert, it sounds like your share in Canada continues to drift higher, certainly on a year-over-year basis. Couple of questions on that. I mean, first of all, is that accurate? And second, are you -- do you -- are you taking share? If it is, are you taking share from plug-and-perf or other types of sliding sleeves?

It's both. From plug-and-perf and other types of sliding sleeves. The majority of the market share increases are coming from the deep basin plays, Marshall. So it just depends on where in those basins we're taking the share, but we've taken both plug-and-perf and sliding sleeve share there.

And share does continue to go up, I presume?

Yes, it does.

Perfect. You mentioned that the U.S. success that you've had. Where is that happening? And presumably, there's not any geographic limitations here. But could you just address those issues?

Yes, the largest part of our business is still in the Permian. But we have work ongoing and multiple basins in the U.S. I mentioned that in Canada the number of customers that we're working for today versus the end of the first quarter last year was up 30%. In the U.S., that number is up 70% from the end of the first quarter last year to the end of the first quarter this year. So as we continue to grow those, we grow it through customers who are using us the first time. But also customers that are using us on a repeat basis. Just as an example, we've got a customer who started using us in 1 basin. We became the completion methodology of choice in that particular basin for the customer. They moved us into another basin, where they've -- we've done multiple wells for them in that basin. And now they're moving us into a third basin, which we expect to be in hopefully before the end of this quarter. So not only do we have new customers coming online and existing customers that we're getting more market share from, but we have customers that are moving us into additional basins. So same type of penetration story that we had when we started in Canada, just a different type of time line.

Perfect. Last one for me, you mentioned the logistical impact this -- in Q1. We've heard that from a lot of guys obviously with the rail and sand issues. I assume it's the same thing everyone else was talking about, number one. And is that getting better in Q2? Are we past that?

Yes, we -- it's getting better for sure. And what it -- the result was just delay on our customers completing the wells that they had already drilled. But we're starting to see that smooth out, and as I mentioned earlier, it primarily affected our tracer business.

And our next question comes from the line of George O'Leary from Tudor, Pickering, Holt & Co.

The Q1 results, Rob, they seem positive versus expectations. I guess in the -- you're leaving 2018 revenue guidance essentially unchanged. What -- just maybe could you help walk us through what gets you to the top end of that revenue guidance range? Or what would maybe push you to the low end? What are the puts and takes that create the gap in that range?

As you know, our business is not one that's driven by contracts like the pumping business for instance. So visibility in the near term is somewhat limited, especially in the long term. So what gives us the confidence of where we are going to be is the funnel that we have created so far with our customers, where we are with repeat customers and the momentum that we see with new customers coming online, and the success and results that our customers are getting from using the technology. So when we think about the sliding sleeve business, we have a very robust backlog of work. We have scheduled work coming up. We have installs done that haven't been completed yet, and we have repeat customers that are using us. But we're also seeing the tracer business grow as well. The last month of the quarter was a fantastic month in terms of revenue. And one of the things that's driving that business is as we see more customers using pad type completions, a significant number of increase in that type of completion in the U.S., that really drives the higher end jobs for our tracer business. And then the third thing I'd say is that, when we look at the composite plug business through Repeat Precision, that business, we're really happy with the results that we're seeing there. We spent most of the year -- last year developing and tweaking the product line. So we really only had about the last half of the fourth quarter that we will -- what we would call fully commercial with that product line. So we had a full quarter of initial results where we are seeing monthly growth in the product line, and significant monthly growth. Even though we had the -- we weren't fully commercial in the fourth quarter, the sales increase over 300% from the first quarter to the fourth quarter. So we expect that, that product line to continue growing, and then that license technology that I mentioned earlier, we think that, that's going to help drive further adoption. So sliding sleeves sales, the service from sliding sleeves, the tracer business, I think we've got the wind at our back on all those fronts. So the thing that I'm most concerned about that might move us from the midpoint down to something lower would be spring breakup, just the unknowns there. Where -- we have indications that are pretty strong that it looks like it's going to be longer breakup than we had last year. It's just not -- we just don't know how long it's going to be. But the good news is that based on our conversations with our customers in Canada, we believe that once breakup is over that we'll be coming out of the gate pretty fast and pretty hard and that the full year budgets, they won't have problems getting those spent for the year.

Really answered my second question with your first -- with your response. I was going to ask about the bridge plug business or the composite plug business. I'll just toss another one out there off the cuff. In the past you guys have kind of said, whether or not you think the forward quarter EBITDA guidance is in the right ballpark. That's why looking at estimates in the $4 million to $5 million ballpark for Q2, or Street estimate in that range. Feels like SG&A is maybe a little bit higher than at least we internally modeled for the second quarter. But the revenue growth rate is good. So I just wonder if you could comment on maybe Street second quarter numbers if they maybe a little too high just given all moving pieces, or if I'm misreading that.

So George, this is Ryan. Pulling it altogether, I mean we really haven't given guidance around EBITDA. We've been obviously giving some directional guidance around revenue. There is some variability with this being the second quarter with the revenue we'll see in Canada with respect to breakup. But I think where the Street is for the second quarter on the revenue side, I think we'll -- given sort of the components of the revenue guide we gave, we're probably at the slightly below where the Street is there. The Street from a margin -- gross profit margin standpoint, looks to be at 51% -- or 50%, sorry. We were 52% in the first quarter. Second quarter has lower volume, so we don't necessarily expect to be able to continue to grow the gross margin from there. But there may be a little bit of upside, versus the Street on gross margin, which would help to offset the G&A, which may be a little bit higher than what's baked into the estimates right now.

And our next question comes from Ian MacPherson from Simmons.

You touched on this a little bit, Robert, but I wanted to ask more about your exposure to other basins outside the Permian. Just given what's happening with $70 TI and widening Midland differentials. It seems like a cocktail for the other basins to blossom probably more than expected from a completions activity standpoint from here forward, and maybe the Permian could be a bit more constrained. Can you talk about your sort of next best current and prospective plays in Lower 48 if that mix shift does unfold according to how the, sort of the commodity levers would dictate that it should?

Yes, Ian. So as you know, we -- we're not primarily driven by activity. It's all market share from the other completions methodologies. So market -- the increase in activity in the other basins, if that occurs, that's really irrelevant to us on whether we penetrate those basins. So for us, we've focused on particular areas in -- or particular plays and then particular area in those plays. So in the Permian, obviously, that has our strongest focus. There's most opportunities there, we have the most infrastructure there. But we also see activity in the Mid-Con area SCOOP/STACK. In the Northeast, in the Marcellus, we're seeing activity increases there. We're even down in South Texas now. So there's multiple areas, we have focuses on particular areas in each of those basins. The work that we've done there is not as mature as the work that we've done in, say, the Permian or in the Mid-Con area. So we expect those to come online, it'll just not be immediate. But still -- there's still lots of growth opportunity in the Permian for us because we're still underpenetrated their compared to the other methodologies.

Got you, that's helpful. In Canada, it strikes me that the law of small numbers tells me that a really weak Q2 really couldn't upset your guidance too much given how small Q2 Canadian revs are relative to your full year expectation to begin with. So I guess we should be less concerned with that rather than a general slowdown in Canada for unforeseen reasons. I know Crescent Point has been a big, maybe the biggest customer for you in the past. They've been through recent proxy battle and some forced austerity and pending asset sales. Is there any -- can you talk about your customer mix and the other, sort of, extraordinary implications with customer mix that could, I guess, maybe impact the very strong growth that you had in Canada in Q1? If anything else could conspire to make that more challenging going forward this year?

So Crescent Point is still our largest customer in Canada. But as we penetrate deeper into the deep basins, they've become less as a percentage of our total revenues there. Some of the things about Crescent Point, yes, you mentioned the proxy battle, but there's other things that could actually drive us in the other direction than down. So Crescent Point acquiring acreage in other areas outside of the light oil plays, that's a big positive for us. As we have other customers who acquire acreage in different places and move us into those areas, that also helps drive increases. So we see more upside opportunity then just a mature market that has no place to go and only can go down. That's how we view the Canadian market. We're still pretty excited about it with all the opportunities that we have there. We still have -- we have to fight to keep our market share in the light oil plays, but we've been successful doing that so far.

And our next question comes from the line of Jud Bailey from Wells Fargo.

Question, I believe, Robert, you said that second quarter U.S. revenue is up about 20%. I was hoping could you give us a little more color in how we think about product sales versus service? I know service, as you said, lagged a little bit because of some of the completion-related activity. And also product sales were pretty strong in the first quarter. So could you maybe help us think about were there any kind of big orders in the first quarter that helped product sales? And then how to think about the second quarter progression between kind of those 2 segments in the U.S.

Well, we expect to see the Spectrum -- which the Spectrum business which drives the service side of the equation. We expect to see that recover from where it was in the first quarter and continue to grow there. There weren't any big lumpy large sleeve sales, if you will, for product sales in the first quarter. It was just those 25 customers that we've been working for placing ongoing work and additional orders. So no big orders that showed up, and we're not expecting anything like that in the second quarter. We do have some service revenue coming in from the North Sea that will impact our international revenues. But we're not expecting anything big, just more blocking and tackling.

Okay. And how big of an impact do you think new customers will be in the second quarter? Is there a way to help us think about incremental adds in terms of customer additions? It sounds like first quarter was all existing customers. Is there a way to help us think about the impact of any new customer additions in the U.S.?

Yes. So there are a number of new additions in the U.S. that we will have in the second quarter. In fact, we already have some of those today.

Okay. Would it be fair to think about could that drive, I don't know, a certain percentage of the revenue growth in the second quarter, or a way to think about just the impact of that?

It will drive more revenue growth, as we have some customers who -- some of the customers that we have are smaller customers that may not drill as many wells. They have 1 rig or 2 rigs running versus the customers that have 4 rigs running, so it just kind of depends on the mix. But we have a clear view for what we think the quarter is going to be on revenue, and it's backed up by stuff that's pretty much on the board.

(Operator Instructions) Our next question comes from the line of Kurt Hallead from RBC.

Just wanted to maybe get a little more clarity on the first question that you answered. Are you saying that you expect there to be a rollover in completion activity?

No. I'm not saying that Kurt. I'm saying if there were to be a rollover that we can't see it being anywhere in the next 1 to 2 years.

Okay, thanks for that clarity. And maybe a second follow-up, just make sure that I'm understanding some of the key elements of your business. So if there happens to be too much frac capacity added to the market, how does that impact -- I'm having a hard time connecting that dot. I don't see that impacting your business, but at the end of the day if you are doing more frac activity it is ultimately going to be positive to your business, irrespective if there's too much frac capacity. Is that correct?

Yes, so I think in the near term, that's right. I mean, the only way it would affect our business would be if there was too much capacity added, the market got too hot, oil prices were to pull back and then activity pulled back. And if activity pulled back for the customers who we're working for, that could impact us.

Yes, yes. Okay. So a lot of emphasis and focus here on the second quarter. It's a seasonal business. You got to look out beyond the second quarter dynamic. On a year-on-year basis you give your revenue growth dynamics. I was wondering if you guys might be able to give us some general range as to how to think about incremental EBITDA margins on a year-on-year. A lot of your peer group and other players kind of give us some general sense on how to think about incrementals. I was hoping you'd be able to help us out for that for '18 year-on-year.

Yes, we touched on that briefly in the last quarter's call. So with 2018, we've got some headwinds on -- from an EBITDA margin standpoint. When you look at it on a year-over-year basis, where part of the year from January through April was as a private company and before we made an adjustment with respect to some of our options, which drives share-based compensation expense. So within 2018, what we're seeing is incremental adjusted EBITDA margins in the high 20s, incremental EBITDA margins, backing out stock-based comp, probably in the low 20s. But don't think that, that '18 versus '17 comparison is really what the incremental margin opportunity is going forward. As you get into periods where you don't have that headwind of us moving from private company to public, as you move into -- looking at 2019, 2020, relative to the 2018 baseline, we see incremental EBITDA margin opportunities that are in the 30% to high-30% range.

That's great color. And then I wanted to also follow-up on the comment you made, Robert, about the Canadian dynamics. So thinking of market share, there's incremental competition, there's some pricing pressure. So I'm assuming, Ryan, in your comments about incremental margins, you were taking all those factors into account. So how much incremental share do you get and how much pricing do you have to give up in '18? How do you see that shaking out in Canada?

In Canada, really we look at that with our team from a bottoms up standpoint. We assume that we're able to effectively defend our market share in the light oil plays and gain a little bit of share in the deep basin. And as you know, the opportunities on a per well basis on the deep basin are never impactful. So relatively small increases in share there can drive growth in the overall Canadian business. And I think, Robert touched on the fact that we've had competition in the light oil plays for years. And we've had pressure from our customers on pricing for years as we moved through the downturn. And we've taken actions as a company to help address our cost structure. We're fortunate to have a outsourced manufacturing model, not have much in the way of fixed assets. So we're able to flex our capital -- or cost structure. And we've been able to engineer our products such that we can continue to not just compete with customers who have price as really their only weapon but to make good money in that environment as we continue to take our cost structure down.

And our next question comes from the line of James Wicklund from Crédit Suisse.

With the tracer technology and with the composite plug technology, we haven't heard much about Anderson Thompson. Are they still -- is that a business model having the engineering capabilities. Is that business model still working? Has it been able to translate anything in the U.S.?

Yes, it is very much working. It just doesn't generate revenue directly. So just remind everyone that we set up Anderson Thompson to help drive sleeve sales, and in turn we're using them to help drive more tracer sales. So what we've been able to do is some of the data that comes from the tracer jobs, take that data and integrate it with some of the frac data, with some of the data that we collect on the sleeve jobs. And Anderson Thompson is able to take that and drive that into more actionable things that our customers can do. So it's -- they have directly helped us secure tracer jobs that we hadn't gotten in the past. They've helped us to grow market share with our sliding sleeves where we have customers who are looking at -- one of the problems that we've had in the past is where customers have tried to take a frac design that was designed for plug-and-perf type applications and use that on pinpoint. And one of the challenges that we've had as a company prior to Anderson Thompson was, we knew that, that wasn't the right thing to do, but we couldn't give them an answer on here's how you should design that frac necessarily. We just could say, okay, let's go through an iterative process and try to get to an answer using the data that we collect. With Anderson Thompson, what we can do is we can get closer -- eliminate some of that iterations that we have to do and get closer to what the final solution looks like, and that helps drive customer adoption more. So yes, still a strong effort in the company and in fact, we continue to expand that group.

Okay. And the composite plugs. The manufacture, Mexico, are there any NAFTA concerns you guys have going forward?

We're not overly concerned about that. We've modeled that business with what we believe is the worst case that could happen and we still like the business.

I'm showing no further questions at this time. I would now like to call -- I would now like to turn the call back over to Robert Nipper, Chief Executive Officer, for closing remarks.

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 and the research analysts who cover NCS.

Finally, I'd like to give a note of personal thanks to all of our NCS Spectrum, ATRS and Repeat Precision, employees, who put in an exceptional effort on a daily basis and allow us to achieve amazing results. I've said it before, and I will keep saying it, I truly believe 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. We certainly appreciate everyone's interest in NCS Multistage, and we look forward to talking again on our next quarterly earnings call. And that concludes the call operator.

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