NCS Multistage Holdings Inc (NCSM) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2018 NCS Multistage Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to turn the call over to Ryan Hummer, Chief Financial Officer. Please go ahead.

Thank you, Sarah, and thank you for joining NCS Multistage's Third 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 are relying on the safe harbor protections afforded by federal law.

Such forward-looking statements may include comments regarding future financial 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 said, I'll turn the call over to our Chief Executive Officer, Robert Nipper.

Thank you, Ryan, and good morning to our investors, analysts, employees that are joining our Third Quarter 2018 Earnings Conference Call.

Today, I'll review high-level third quarter results, and will touch on what we're seeing in our Canadian, U.S. and international 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, touching on some of our recent accomplishments.

Total revenue in the third quarter was $62.7 million, a 12% improvement over the year-ago period and 44% higher sequentially. Adjusted EBITDA in the third quarter of $18 million reflected a 29% adjusted EBITDA margin, and was 19% higher than in the third quarter of 2017.

Starting with our Canadian operations. Our revenue of $29.2 million for the third quarter was lower by 28% compared to the year-ago period, and our revenue through the first 9 months of $90.2 million was 8% lower than the first 9 months of 2017.

Our results in Canada in the third quarter underperformed the expectations provided on our last earnings call, and were the result of several factors including weather, widening commodity price differentials and the increased pricing pressure from our customers and competition in certain operating areas.

Speaking first to the weather, given a longer-than-expected breakup this year, achieving our guidance required strong customer activity through the end of the quarter, which didn't materialize as snowfall and subsequent warming throughout late September led to temporary road bans in certain areas for part of that month.

Another factor that impacted our Canadian operations during the quarter, and which we expect will continue to impact the Canadian market, is historically high crude oil differentials, which are materially impacting the realized prices received by our customers.

There's a significant amount of information generally available on this topic, but I'll provide a summary for those that don't follow Canadian market on a day-to-day basis.

With continued increases in Canadian production, both from oil sands and more conventional production, storage in the WCSB is currently near capacity and pipelines out of Canada are essentially full.

Historically, certain pipes were dedicated to heavy oil, with others dedicated to light oil, and a blowout in differentials in heavy oil would have had limited impact on light oil differentials.

This changed earlier this year, as heavy oil has been allowed on the pipes previously reserved for light oil, and now there's crude-on-crude competition for pipeline space, and light oil differentials have widened materially as well to levels that encourage shut-ins for heavy oil which negatively impact economic returns for light oil.

For example, the December contract for Edmonton mixed sweet crude, similar to WTI in quality, has a spot price of $30 per barrel, which is a USD 33 per barrel discount to WTI. This is being addressed in the market by higher volumes of crude by rail, and some additional pipeline capacity is expected to be brought online in late 2019.

However, we expect that it will take the completion of a Keystone XL or the TMX expansion to fully resolve the crude oil takeaway capacity constraints. And we're talking several years, as opposed to the relatively quick expected addition of pipeline capacity to service the Permian.

We believe that the current light oil differentials are unsustainably high, and will moderate over time, but are likely to remain above historical levels due to the change in the operation of the pipeline system and the time required to add sufficient incremental pipeline capacity.

However, not all customers are exposed to the current spot prices, as many have been able to hedge their exposure or price their crude at hubs where differentials are not as extreme.

The differentials and lower future cash flow expectations for our customers have led to increased pricing pressure from our customers and from lower price competition in certain markets, including the light oil plays in Saskatchewan and in the Cardium, which has reduced pricing for our products and services and could impact our market share. We have initiatives in place to address the current market dynamics in Canada, and that are designed to improve our performance over the coming quarters.

First, we've adjusted pricing in certain markets. We believe this will enable us to retain our customers, and has already proven successful with customers that have trialed lower price competing technologies.

Concurrent with the price reductions, we have re-prioritized certain of our R&D initiatives to advance specific sleeve technologies that are expected to reduce our cost of sales, and will also enable an increase in the density in sleeves that can be deployed in customer wellbores.

While this will result in lower gross margins, the deployment of the new sleeve designs, when commercialized, is anticipated to allow gross margin percentage to partially recover, and the increased sleeve density will allow customers to run more sleeves per well, offsetting some of the top line pressure from the pricing initiative.

In addition, we're increasing our sales effort around our well construction and composite frac plug products, which are currently under-penetrated in the Canadian market relative to the U.S.

We currently expect our Canadian revenue in the fourth quarter to be lower by 25% to 30% as compared to the third quarter, reflecting an expectation of reduced industry activity and the pricing adjustments we've made.

Looking forward, we anticipate that the first quarter of 2019 will be the most active quarter for the year, in our Canadian customers, consistent with historical seasonal patterns.

We note, however, that customer budgets are highly preliminary at this time, and are likely to be further refined in the coming months based on, in part, prevailing pricing differentials and that customer activity in 2019 may be lower than in prior years.

Turning now to the U.S. Our revenue for the third quarter of $26.3 million was 98% higher than in the year-ago period, but was 5% lower sequentially. For the fourth straight quarter, we delivered double-digit sequential growth and product revenues, with sequential growth in total U.S. product revenues of 11% and with strong unit growth and sliding sleeve and composite plug sales.

The sequential decline in our U.S. revenue was primarily attributable to services, including services provided during pinpoint completions and tracer diagnostics. Both of those services are provided during the well completion. And our activity level during the quarter was negatively impacted by both completion timing on NCS projects and by a general slowdown in completion activity in the U.S. and in the Permian basin, in particular.

This is different than our product sales, where our sliding sleeves and AirLock casing buoyancy systems are run during well construction, and therefore generate revenues soon after the well is drilled.

From a customer-account standpoint, the number of U.S. customers utilizing our pinpoint fracturing systems, over the last 12 months, remains at over 30. Consistent with last quarter, the majority of the customers are repeat customers.

As demonstrated by the increase in our product sales, during the quarter, the U.S. sales initiatives that we have in place have had continued success. And as overall completions activity in the Permian basin temporarily moderates, we have seen increased adoption of our technology in the Mid-Continent area and the Powder River Basin in the Rockies.

We believe the slowdown in completions activity that has impacted our services revenue for the quarter is market-driven.

While completions activity may be temporarily depressed, due to Permian Basin pipeline constraints and E&P budget exhaustion in late 2018, we expect our services activity and revenue to increase as industry completion activity increases in 2019 in advance our Permian pipeline commissioning.

We expect that we will continue to build on our performance in the third quarter, and that our U.S. revenue in the fourth quarter will be approximately flat on a sequential basis.

Our international revenue for the third quarter of $7.2 million was significantly higher than our revenue of $1.8 million from the second quarter, and exceeded the prior guidance for the quarter.

During the third quarter, we completed a handful of projects, which had shifted out of the second quarter and had strong execution in Argentina and China, and we were also able to deliver a high number of sleeves in support of our Aker BP Frame Agreement, pulling forward revenue we had expected and anticipated to occur in the fourth quarter.

We currently expect the fourth quarter of 2018 international revenue to be between $3 million and $4 million.

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

Thank you, Robert.

As reflected in yesterday's earnings release, our third quarter revenues were $62.7 million compared to $56 million in the prior year's third quarter, an increase of 12%. The increase in revenue was driven by significantly higher product sales in the U.S., a full quarter of tracer diagnostics operations and a significant year-over-year increase in international sales, largely driven by offshore activity.

This was partially offset by a decrease in our Canadian revenue. On a sequential basis, revenue in the third quarter was 44% higher than revenue in the second quarter, primarily reflecting the seasonal increase in activity in Canada as well as the strong performance internationally.

Gross profit, defined as total revenue less total cost of sales, excluding depreciation and amortization expense, was $33.9 million in the third quarter or 54% of revenue, compared to $30 million, also 54% of revenue in the prior year's third quarter, with higher margins from product sales, partially offset by lower margins on services revenue. For a sequential comparison, our gross profit of $23.5 million in the second quarter of '18 also generated gross margins of 54%.

In his earlier comments, Robert mentioned that we have reduced our pricing in certain markets in advance of implementing supply-chain initiatives, designed to partially mitigate the impact of the pricing reductions. We currently expect that the pricing actions as well as the lower anticipated activity in Canada in the fourth quarter will result in a reduction in our gross profit margin for the fourth quarter to a level between 46% and 50%.

Selling, general and administrative costs increased to $19.4 million in the third quarter from $17.6 million in the prior year's third quarter, but decreased from the second quarter's level of $22.1 million. 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, increases to share-based compensation and SG&A related to Spectrum's operations.

The reduction, relative to the second quarter, was primarily driven by a reduction in our bonus accrual as well as overall expense management.

For the fourth quarter, we expect a reported SG&A, inclusive of share-based compensation and nonrecurring items, to be between $21 million and $22 million.

Our third quarter 2018 depreciation and amortization expense totaled $4.4 million, and we expect the fourth quarter depreciation and amortization expense to be just slightly higher than in the third quarter, reflecting continued capital investments in the business.

Adjusted EBITDA for the third quarter was $18 million, as compared to $15.1 million in the prior year's third quarter. The adjusted EBITDA, as a percentage of total revenue, was 29% for the quarter.

A couple of other items to note with respect to our income statement in the third quarter. First, we recorded a noncash income of $1.9 million, which reflected a decrease to the liability we have on our balance sheet related to the contingent earnout provision associated with Spectrum. The value of the liabilities for Spectrum and Repeat Precision are measured quarterly with increases to the liability resulting in an income statement expense and any decreases to the liability, resulting in income statement income.

Second, our book effective tax rate for the quarter was 29%. The calculation of our book tax rate included adjustments related to U.S. tax reform.

Third, we had net income attributable to noncontrolling interests of $1.4 million in the quarter, reflecting positive net income at Repeat Precision.

We expect to continue to have positive contributions from Repeat for the remainder of the year and into the future.

When considering our net income and earnings per share in future periods, it's important to account for these contributions. In addition, the third quarter marks the first cash distribution from Repeat Precision, with NCS receiving $0.5 million out of a $1 million total distribution.

We expect the Repeat Precision will continue to make distributions as cash flow permits.

Our adjusted earnings per diluted share for the third quarter was $0.11, which compared to adjusted earnings per diluted share of $0.09 in the prior year's third quarter.

Turning now to cash flow items on the balance sheet. The cash flow from operations for the third quarter was $0.1 million, and it was $7.6 million over the first 9 months of the year. We expect an increase in cash flow from operations in the fourth quarter as compared to the third quarter, reflecting seasonal impacts from working capital, particularly receivables, through the end of the year.

Our net capital expenditures for the quarter were $6.1 million and were $9.6 million over the first 9 months of the year. We currently expect capital expenditures for 2018 to be between $13 million and $16 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 related to Spectrum and Repeat Precision. This CapEx range is slightly lower than prior guidance.

At September 30, we had $27.4 million in cash on hand and total debt of $25.6 million. This included $20 million that is drawn under our U.S. revolving credit facility. We also have up to $55 million in total available liquidity potentially under our revolving credit facilities, bringing total potential liquidity, at September 30, to approximately $82.4 million.

We expect our net interest expense to be $0.4 million and $0.5 million in the fourth quarter, and we expect our quarterly book effective tax rate for the fourth quarter to be between 24% and 28%.

We expect our book effective tax rate for the full year 2018 to be in the 15% to 17% range, primarily influenced by our book effective tax rate of 15.7% through the first 9 months of the year.

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

Thank you, Ryan. Before we open up the call for Q&A, I'd like to highlight some of our accomplishments during the last few months.

In Canada, we recently had a customer utilize our technology in a 227 stage well in the Montney, a new record for NCS. The well was completed in a single run, with a single frac isolation assembly used and over 18 million pounds of proppant placed into the customer's well in a consistent and efficient operation.

Following this record well, we completed 2 additional wells for the same customer, placing a total of 50 million pounds of proppant into 637 pinpoint completion stages over 3 wells. Each well was completed with a single run of our downhole frac isolation assembly, demonstrating superior technology that we deliver, the exceptional service we provide and the ability of our technology to operate efficiently in high-pressure environments.

Our tracer diagnostics business had its highest ever revenue quarter in Canada, as momentum continues to build in connection with the new local laboratory that we opened in October. We're now testing and storing samples locally, expediting reporting for our Canadian customers.

We sold more AirLock casing buoyancy systems in Canada during the third quarter than in any other previous quarter, as more and more customers see the significant value that the system provides. We're leveraging the success of the AirLock to grow our entire well construction portfolio in Canada, including liner hangers and toe sleeves in that market.

Turning to the U.S. We achieved our fourth consecutive quarter of sequential unit sales growth for each of our sliding sleeves and composite frac plugs and our fourth consecutive quarter of double-digit sequential product revenue growth.

In tracer diagnostics, we have successfully commercialized our water-soluble tracer product offering, a particulate tracer which interacts with formation water to provide long-term, stage-by-stage indications of formation water production. This differentiated offering demonstrates our ability to continue to innovate and expand the use cases for tracer diagnostics services.

At Repeat Precision, we achieved the first commercial sales of our PurpleSeal Express frac plug deployment system, a pre-assembled assembly system combining a disposable setting tool with our PurpleSeal frac plug to multiple operators in the Permian basin.

In our international operations, we delivered sleeves for use in several upcoming Aker BP wells in connection with our Frame Agreement and also completed a well for a second customer in the North Sea. We've made significant progress in establishing our local presence in Norway and continue to pursue additional customer opportunities in the region.

We successfully provided tracer diagnostics services outside of North America for the first time, opening up a new market and growth opportunity for us.

We are currently evaluating expansion of our tracer diagnostics offerings into additional international markets.

And finally, we've delivered NCS products for an upcoming trial in the Middle East, a first for NCS. This marks our first work in the Middle East, a region that we expect to provide growth opportunities for us over the medium term.

And I'll close with just a couple of brief comments. We remain committed to the strategies that we've been executing on over the past several years, and we believe that the future for NCS is as bright as ever. We continue to defend our strong position in the more mature Canadian markets, while continuing to grow our pinpoint stimulation and other products and services in the larger and more dynamic U.S. and international markets.

While we will face challenges along the way, resulting from market dynamics as we are experiencing today, in Canada, and from competitors, we continue to innovate to improve our existing offerings and bring new products and services to market that are highly valued by our customers. We believe we are well positioned to deliver long-term organic growth through increased adoption of our innovative completions' equipment and services.

The initiatives that we have in place to grow our U.S. business continued to deliver results as demonstrated through the growth in product sales.

We continue to grow our customer base in the U.S., adding to the number of repeat customers, while bringing in new customers for strategies that accelerate the path to continued adoption.

Our international business provides us with the opportunity for significant growth outside of North America, while international markets can take time to nurture and develop, the payoff can be significant.

We're especially encouraged by the opportunities ahead of us in Argentina, the North Sea, China and the Middle East. Finally, our capital light business model provides us with the ability to maintain a very strong balance sheet and with the optionality to allocate capital to high return investments and evaluate options for return of capital to shareholders over time.

With that, we'd be happy to take your questions.

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

The weakness in Canada doesn't come as any surprise, because we've all been tracking what's going on in Canada. And you made some good points about how long it'll last and transitory and all. One of the big things about owning you guys though was the growth in the U.S. And I find myself -- you said there's 4 quarters of double-digit growth. Is the U.S. market adopting the technology as quickly as you had expected a year or 2 ago? Or is it going more slowly? Is it a harder adoption than you expected? Is the runway not as good? Or is this a result of slowdown in the Permian and all, that'll pick back up in the second half? Can you address where you are in the U.S. sleeve market relative to your expectations a year ago?

Well, our expectations have been pretty high. We've been able to deliver performance that is -- has allowed us to have the consecutive quarterly growth with those sleeve sales in the U.S. We always want it to come faster, but we've got a strategy in place. We're focused on specific clients and specific areas to get adoption, and what we've been able to see, just over the last year even, is something that we saw earlier on in Canada, where as we began to work in a particular area for a certain customer, we used that relationship to grow the business in those particular areas. And to the extent that we've seen, where instead of field trials in these areas that we've been working in for some time, like certain areas of the Permian and the Mid-Continent area, and then in the Rockies, where instead of field trialing the technology, customers now are just calling us up and saying "Okay, this is how I'm going to start completing my well."

So it's biting the apple, one bite at a time.

Okay, so it's no longer "we'll try you out" it's whether or not we'll use you or not. So that would seem to indicate a very fine line, I'll grant you, but a different level of acceptance, instead of proving that sleeve technology works. You're just going to -- people are now saying "Okay, I'm going to use your sleeve." Is that how we should look at this?

Well, they're either going to use our sleeve or use pinpoint versus plug-and-perf. So our biggest competitor still is plug-and-perf. And, the market is really dynamic, we've had to -- we've made some changes that allowed us to decrease our cost, become cost competitive, because as frac prices began to increase, the total cost for a pinpoint job has increased in some cases. So we've been able to adjust that and get back to the area where we're cost competitive or even a little bit less cost to the customer than what they're doing today.

But, yes, as far as the dynamic of customer acceptance, in those areas where we're working for a particular customer, who's field trialed the technology and used it over a number of wells, typically, that's validation for other customers in the area that "Okay, I don't need to necessarily field trial it, I just need to decide if I want to use pinpoint or not." And so that's helped us -- that's why our customer count continues to grow. That's how our sleeve sales continue to grow on a quarter-to-quarter basis.

Okay, that's good. And you rattle off 4 international locations where you expect to see business pick up when you guys first came public, international wasn't really concerned because you were just considered an unconventional completion technology. Should we take this -- are the -- other than Argentina, I guess, the wells you're working on or hope to be working on internationally, are they -- is pinpoint just a better option for conventional? Or are these mainly unconventional? Do we have to wait for unconventional to pick up in all these countries in a meaningful way? Or can you grow your business internationally with the technologies that you have in conventional reservoirs?

Yes. So our work internationally is a mix of unconventional and conventionals. Argentina, obviously, is unconventionals. One of the things that we've noticed internationally is that doing multistage fracturing is fairly new in most of these markets. And so there's not this embedded technology of either plug-and-perf or some other technology. So customer is more open to think about pinpoint earlier on, because there's not this real strong incumbent technology. So that's -- I believe, that's helped us in the international markets.

But we've been -- while it wasn't a focus for us back 2 years ago on the international front, we've been operating in some of these international locations for a number of years. I mean, we've been operating in China for 5 years now. We've been in Argentina for almost 5 years. Low cost for us to be there in the beginning, but we wanted -- we targeted certain markets that we knew there was, at least, an opportunity in the future for business to scale. And that's what we've been able to see in Argentina. We've also seen that in China. And then, obviously, with the North Sea, with what we're seeing there. So, yes, to answer the question, we don't have to wait necessarily for unconventionals to take off in some of these other areas, because places like China and in places like Norway, I mean, a lot of the work there, it's conventional-type wells.

Okay. And the non-sleeve businesses, you talk about your seals and your plugs, is that a business -- well construction, how fast can that business grow over the next couple of years? We've all focused more on your primary sleeve technology, but well construction has been called out by a lot of companies these days as increasingly critical. Is that really another leg to the stool, we should all be paying more attention to?

I would. Because it is a way -- it is another way. It's another lever that we can pull. And I do pay attention to it. So talk a little bit about well constructions. So we've had well construction products for a number of years. We developed the AirLock product line. We've had -- we've developed a liner hanger product line. We had the toe sleeves. But it hasn't been a real big focus for us. So over the last few months, what we've done is we put together a well construction group in the company, and we put additional focus on it, we've got dedicated sales for it now and we're looking beyond just the U.S. markets. We had -- we've just recently introduced those products into Canada. So we're using our infrastructure that we have in basically throughout the world to be able to promote those products in other areas.

The PurpleSeal product line, at Repeat Precision, we've had continued quarter-on-quarter growth -- significant growth increases in those product lines, and we expect to continue to see that. And as we continue to develop other products, we're working on dissolvable technologies now to introduce into that product line. So that's another significant leg to -- leg to the stool as well. And then our tracer product line, when we acquired the company, they were primarily U.S., I mean, 85% to 90% of their revenue came from the U.S., But because of our presence in Canada and our presence in Argentina and in China and some of these other markets, we have the ability to move and scale that product line in some other areas. And we're executing strategies now to do that. So those are significant levers that we're pulling right now.

Our next question comes from the line of George O'Leary with Tudor, Pickering, and Holt.

I found the commentary on the Canadian cost reductions interesting. It makes sense that there is pricing pressure in that market, given what we're seeing from a differentials and a budget exhaustion perspective. I was just wondering if you could provide any more insight on to how specifically you're looking to reduce cost? Is it more changes in metallurgy? It sounded like there was a commentary around density and, kind of, spacing. Just curious as to anymore color you could provide on what specifically you're doing there because that was an interesting comment.

You bet. So we've -- I mentioned reprioritizing engineering projects. So we've had a project ongoing for some time, but it hasn't been at the top of the list, which was to engineer a very low-cost sliding sleeve. So our sliding sleeves, compared to our competitors' sliding sleeves, have typically been significantly longer. So more materials required, but the reason that we had built them that way, was because of the reliability. It's easier to find a sleeve that's longer than it is a shorter sleeve. And what -- the differentiation for us, aside just from our intellectual property is the reliability and -- that we bring to our customers.

I talked about the Montney -- the 3 Montney wells that we just did, that were over 200 stages a well. Being able to do those in 1 trip is that offered significant cost savings to our customers not having to make multiple trips to change out the assemblies. But what we've done in this particular engineering project is we've developed a new downhole isolation assembly that can work on very, very short sleeves. So we have a sleeve system that will be commercialized in the first quarter of next year that drops significant cost out of the system. And so that's -- we've re-prioritized that, and so that's something that we're going to be introducing into -- to the Canadian and the U.S. markets early next year. So the first one that we have coming out will be -- is designed for the Canadian market, and then after that, we'll have one for the U.S. market.

Great, that's very helpful color. And then, I'll pile onto one of Jim's questions that you guys are always looking at technological innovation, I mean, what we just talked about on the cost side is technological innovation. The dissolvables was an emerging hot topic, dissolvable frac plugs back in 2014, and there were some both technical, and I think, cost limitations that impacted the pervasiveness of dissolvables.

I guess, what are you seeing today that -- and I know you guys, this isn't the first you've looked into this or been working on it. But what are you seeing today that maybe causes you to try to pull that dissolvable investment or R&D effort forward? And is there something in the market, are you seeing an outsized growth rate versus what we saw the last few years beginning to emerge? Just curious for more color there.

Yes. I think, as an industry, the challenges that we've had are just what you said. Cost has been an issue on the dissolvables. The -- that market began with dissolvable metal materials, and to be able to get the cost down to where it could compete with plug-and-perf technology, was a challenge. The other challenge that we've had is reliability and dissolution rates, because different types of fluids, the amount of salinity in the fluid affected the dissolution rate, temperature greatly affected dissolution rates. So that was something else that had to be solved. And so now we're seeing people -- there's a lot of people charging after solving those 2 issues around dissolvables, we as well. So we've been working on dissolvable technology for just over a year now. It started as a project. It will be used in one of our sliding sleeve developments that we have coming out, hopefully soon, but now we're thinking about it in terms of dissolvable frac plugs. And so we believe that we may have solved all of those issues with this particular technology. It's a little bit different than what is generally available today in the marketplace. So still, we're excited about that, but we're not commercialized with it yet.

Our next question comes from the line of Jud Bailey with Wells Fargo.

Question on Canada. I think, Robert, you indicated -- you anticipated Canadian revenues, maybe, down as much as 25% to 30% in the fourth quarter. But 1Q's would still be the strongest quarter for next year, which makes sense. Is -- given the differential, kind of, overhang with activity, do you have enough visibility, at all, to try to help us think about how strong 1Q could be in '19 versus, say, the first quarter of '18? I'm assuming it wouldn't reach the same level, but it's always hard to gauge sometimes, given that most of your customers will spend a lot of their budget money in the first quarter. Do you have any insight or a way to help us think about maybe the first quarter of '19 for Canada, given where the commodity price is?

Yes. As I mentioned, it's still pretty fluid right now. I don't believe we have any customers that have a firm budget yet. There's preliminary budgets that are out, but it's -- they're revisiting them almost on a monthly basis, based on the differentials. But what we do have is a sense for the first quarter, again, being a very strong quarter -- the strongest quarter of the year for us. But we expect that customer activity in the first quarter is still a wildcard all the way through the end of the year. But we have more optimism than not around the first quarter. I know that probably doesn't help much, but there's a murky view right now.

Yes. No, I can appreciate that, I just thought I'd try. My follow-up is on looking at your G&A line. As you look at your G&A, relative to, kind of, the overall size of the organization, it's a pretty high number. And I know you're working on a lot of different technology initiatives and R&D. But given that where, kind of, your U.S. sales are relative to maybe where you thought they'd be a year or 2 ago, it is -- have you thought about your optimum G&A level? Is it possible -- does it makes sense to try to pare it back, given where the U.S. business is? Or would you anticipate keeping it there long term and trying to grow into that G&A number? Just, kind of, thinking about it given where EBITDA levels are this quarter and probably next quarter. How do you think about that?

Yes, fair question. So it -- the G&A number is a high number for a company our size. And it's a result of investment that we make in technology that we're developing. If we don't get a return on those investments that we're making, then we certainly will take a look at our G&A and make adjustments. But we still have a high level of confidence that we are going to continue to earn against that G&A and the business will accelerate growth, going forward, as a result of the efforts that come from having that level of G&A.

Okay. And then, if I could just squeeze one more in. You, kind of, alluded to some of this but -- looking at the U.S. business for the fourth quarter for kind of flattish revenue, is that going to be more driven by just continued share gains in Spectrum? Or help us think about the mix on getting that if completion activity is down, you're staying flat is that more on the plugs and Spectrum side? Or is it also sleeve sales, kind of, outpacing the market as well?

Yes. So we have some puts and takes there, I'll speak, specifically, to sleeve sales, we have some customers that -- their activity is declining through the rest of the year, but we have market share increases that we've made as well that'll show up. And so we think the net is going to be about flat for sliding sleeves sales in the fourth quarter.

And then, we expect activity to start increasing a bit, because we still -- even though we've de-levered the Permian, it's still a significant part of our business, so we expect that to start growing again in early 2019. We fully expect for -- saw that our -- composite plug sales to continue to increase at Repeat Precision as well as some of the completions work as we start completing some of these wells even in the fourth quarter, will help drive tracer sales increases as well. Increase across the board.

Our next question comes from the line of Marshall Adkins with Raymond James.

Robert, you've mentioned in -- the competitive landscape in Canada has gotten a little more significant. Yesterday, NOV on their call mentioned, or on their Analyst Day, specifically, pointed out pinpoint fracturing and their initiatives there. Could you frame on how you see the competitive landscape in that area right now? And is it good or bad for you if companies like NOV are starting to talk about pinpoint fracturing?

Yes. So what we see from a competitive standpoint, is primarily in Canada right now. And so there's a number of competitors who've developed some type of sliding sleeve, pinpoint coiled tubing shiftable technology. And they are able to perform at some level, in some of the shallower plays and some, to an extent, in some of -- maybe some of the Cardium wells. But the big differentiation between NCS and those competitors, today, is the reliability, and that comes from the experience that we had. And so, operationally, we deliver less cost than a competitor would at the same pricing.

But what we've seen is for a competitor to get a trial well from one of our customers, they have to be significantly less cost than we are. And so that's what our competitors' strategies appears to have been, is offering something at a very, very low cost, so that it gets a customer's attention and the customer says, "well, it costs $50,000 more to use you than one of your competitors, I can afford some downtime or some trouble time." So we've had to -- in some of those areas, we've had to adjust the pricing so that there's not as much differential between our competitors' and our pricing. We don't have to go to the same price, because our performance can deliver the cost benefit, but we weren't able to sustain the pricing in some of those areas.

To your question about companies like NOV talking about pinpoint, yes, I mean having other companies come out there and talk to customers about pinpoint is a good thing. If we have someone like an NOV, that can successfully work and not give pinpoint a bad name, then they can certainly help us grow adoption, and we're happy to compete heads-up with any company that's out there. So I like the remarks that NOV made yesterday and look forward to them helping us build a market.

Okay. Along that same line, you mentioned you have a steadily increasing number of customers in the U.S. Talk about how you see your share gains in pinpoint versus plug-and-perf. And the U.S. emerging next year, would you expect those customers that are trialing and starting to use your sleeves to increase, assuming activity can -- ramps up over the course of the year, which I think most of us are thinking happens?

Yes, we do expect it to increase. Some of the -- other than just blocking and tackling and getting out there and educating people around pinpoint, we're doing other things. I mentioned the low-cost sleeve that we're developing. What that will actually help -- we believe, help improve adoption or increase the rate of adoption in the U.S. because it'll -- what it'll do is it will allow us, even in the U.S. market, to have a lower cost completion for the customer, which gets more difference between us and plug-and-perf in terms of cost competitiveness. So if we can deliver even a more cost savings than we can today over plug-and-perf, I think, that's going to help drive adoption as well. And then, plus, there's other technologies, whether it's coiled tubing [less] type sleeves or whatever that we're working on, we think that those types of products into the market could also help drive further adoption, faster than what we're doing today.

All right. One last one for me. The industry has had a little bit of a slowdown here, a little air pocket, or whatever we want to call it. Is that good or bad for you?

Well...

I mean, I know activity is lower, but does the cost of things get more attractive and allow people to adopt your technology faster, I guess, is what I'm asking?

Yes, so one of the things that we have seen is that pricing has softened, which is somewhat neutral to us. As frac prices go down, the customer's completion goes down with either plug-and-perf, their cost go down with either plug-and-perf or with sliding sleeves. But one of the things that we have seen that affects our business, and is a tailwind for us, is the cost of coiled tubing has been -- that cost has gone down significantly. So that does help us, because even though the customer has to hire a coiled tubing unit to drill out their plugs in a lot of cases, we still have more time on location during a frac job with coiled tubing, so that's -- that does help us as well.

Our next question comes from the line of Ian MacPherson with Simmons Energy.

I wanted to probe a little bit more into the price adjustments that you've made, if you could speak to -- I don't know, I'm sure you don't want to be specific but whether you think that that is -- has been a onetime adjustment? Or you see that as a -- sort of, a specter going forward that you might have to continue to adjust? And, really, what you think you can descend with respect to your margins relative to the 45 -- I guess, 46% to 50% that you're looking at for Q4? If you're -- if we can draw a line there, if we should be prepared for further margin degradation next year.

Yes, Ian. So I believe that the adjustments that we have made now are what we need to do to continue to defend our customer base as well as gain additional market share. We've been adjusting on the way down over the last 2 to 3 months, and I think where we're at now, based on being able to regain customers from our competitors, being able to maintain customers that our competitors have done trial wells for, it's indicated that we -- that we're probably where we need to be right now. And then, what I think I also mentioned that when we get this new sliding sleeve development out in the first quarter, in Canada, then that should help offset some of the margin that we had that we lost by the price decreases.

Our next question comes from the line of Kurt Hallead with RBC Capital Markets.

So I understand, obviously, there's a lot of different moving parts and dynamics going on the industry. I think we're all kind of in tune to that. So as -- and I appreciate you giving the viewpoint that you have for the fourth quarter and trying to, kind of, bridge that out into the first quarter as well. So what if I were to say to you that we -- Canadian E&P spend could potentially grow by 10% to 12% in 2019? Do you think your revenue, your top line in Canada could exceed that growth or the competitive dynamics in Canada, such that you may not be able to outgrow the market?

No. I think we still have opportunities to outgrow the market, because of the light market share that we have in the Montney and the Duvernay still today. We're penetrating that market now. I talked about the 3 wells that we did, that were over 200 stages, and that's what we're seeing in those markets is when we get market share there, it's significant relative to gaining market share in the light oil plays. So the competition, right now, is primarily in the lower-end areas, because our competitors haven't gotten to the performance level yet where they can operate in some of these more challenging areas. And so we continue to penetrate those areas. So, yes, if you were to tell me that customer spend could grow by 10%, I would tell you that, yes, we believe that we can still outperform the market in Canada by taking market share in the deeper basins.

Yes, I think the one thing I'd add to that, Kurt, though, as I understand maybe Canadian activity up 10%, 12% may be the RBC house view at this point, but that environment is not consistent with what we're seeing with the preliminary budgets we're seeing from our customers, or some third-party industry reports, like TSAC and whatnot, which indicate Canadian activity, potentially, being flat to down next year in the aggregate.

Okay, and that's helpful. Appreciate that color. So then, obviously, in that dynamic, a flat to, kind of, down environment, I guess, it's safe to assume that these competitive pricing pressures will probably be sustained throughout 2019, right? So given that as a backdrop, what are some of the levers you could pull from -- in internal dynamic to beyond just adjusting your pricing, but what are some of the internal levers that you could pull to potentially offset and mitigate that dynamic, and help in, kind of, sustain margins through that process?

Right. So primarily through supply chain, managing our cost on the products, being able to commercialize this new sleeve is going to make a big difference for us, because it's taking a lot of cost out of the system. So being able to do that, we're -- we look at our service offering, when we're doing our downhole isolation work on location, we're doing the frac jobs for ways that we can be more efficient there and lower cost, our internal cost overall. And it's the same thing with all the different product lines. Even with chemical tracers, with our composite plugs, our wellbore construction. We are focused keenly on getting as much cost out of the system as we can.

And, Kurt, kind of 2 parts to your question there, one was what do we do to support revenue, and then the margin piece. So, yes, Robert mentioned in his remarks earlier, that we are bringing the well construction product line into Canada in a way where -- we hadn't really had as much focus before and the composite plugs as well. Spectrum has been taking share, the tracer diagnostics business has been taking share in Canada, in part, based on our customer relationships, in part based on the investments we've made in that local Canadian lab.

So growing some of the other businesses outside of fracturing systems will help support on the revenue side some of what we might see from a downturn in the market and some of the pricing adjustments and then on the margin side, as Robert alluded to, it's really around our engineering group with the new sleeve design and the supply chain to get the cost for those products as low as possible and recover from a gross margin percentage. Some of what we will be losing here in the short term in the fourth quarter and first quarter, until we get those fully online and recover those percentage margins.

All right. And if we were to just press you a little bit in a positive way, not a negative way, but when you look at the margin progression that you had through the first 3 quarters of 2018, where you had 52% to 54%, kind of, working off your 46% to 50%, where do you think the gross margin dynamic would settle out on a full-year basis on '19?

Yes, I mean, we're not in a position give a full-year guidance on that, but I think what you would see in the fourth quarter is a margin dynamic where we've made a price adjustment but haven't been able to fully implement the cost of sales initiatives. That likely extends through into the first quarter, and then as we get the new sleeve technology commercialized, there should be an uplift to margins and, specifically, in Canada from there as you move into the back half of the year.

Thank you. This concludes our question-and-answer session. I would now like to turn the call back to Robert Nipper for any further 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 our shareholders, employees and the research analysts who cover NCS.

I'd like to personally thank all of our 400-plus employees around the globe who put in an exceptional effort on a daily basis and allow us to achieve amazing results.

During the third quarter, we completed our 10,000th well, utilizing pinpoint completion technology, a great milestone for NCS. To think that our technology has evolved from sand tip perforating in the shallow Canadian Bakken to delivering a 220-stage frac job, placing 18 million pounds of sand in the Deep Basin with a single tool run is truly phenomenal.

As I've said before, 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 appreciate everyone's interest in NCS Multistage, and we look forward to talking again on our next quarterly call. Thank you, operator.

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