NCS Multistage Holdings Inc (NCSM) 2024 Q1 法說會逐字稿

Good day and thank you for standing by, and welcome to the Q1 2024 NCS Multistage earnings conference call. (Operator Instructions) Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mike Morris and CFO. Please go ahead.

Thank you, Jason, and thank you for joining the NCS Multistage first quarter 2024 conference call for call today will be led by our CEO, Ryan Hummer, and I will also provide comments.

I want to remind listeners that some of today's comments include forward-looking statements such as our financial guidance and comments regarding our future expectations for financial results and business operations. These statements are subject to many risks and uncertainties that could cause our actual results to differ materially from any expectation expressed herein.

Please refer to our most recent annual report on Form 10-K and our latest SEC filings for risk factors and cautions regarding forward-looking statements. Our comments today as well as the results of operations, including our earnings release, contain the following non-GAAP financial measures, adjusted EBITDA, adjusted EBITDA margin, adjusted gross profit, adjusted gross margin, free cash flow less distributions to noncontrolling interest in net working capital.

The underlying details and reconciliations of these non-GAAP measures to the most comparable GAAP financial measures are provided in our first quarter earnings release, which can be found on our website, NCS, multi-stage.com. I'll now turn the call over to Ryan.

Thank you, Mike, and welcome to our investors, analysts and employees joining our first quarter 2024 earnings conference call. NCS is off to a strong start in 2024. Our first quarter revenue of $43.9 million exceeded the high end of our guided range by nearly $4 million. The strength was broad-based as we achieved or exceeded the high end of our guided revenue range for each of our US, Canadian and international markets with the largest relative outperformance coming from Canada.

Our adjusted gross margin of 40%, which excludes depreciation and amortization expense, was within our guided range for the quarter. Our SG&A expense of $13.8 million for the quarter was $2.3 million lower than in the first quarter of 2023, resulting from cost savings measures that demonstrate our commitment to control expenses and a year-over-year reduction in litigation related professional fees.

We also benefited from an increase in other income as compared to the first quarter of last year, primarily royalty income related to licensing our intellectual property and the benefits from a technical services agreement with a local partner in Oman for adjusted EBITDA for the first quarter of $6.1 million exceeded our estimate of $3 million to $4 million and represents a year-over-year improvement of $1.2 million and a sequential improvement of $3.5 million.

In prior earnings calls, I've referenced NCS as core strategies for creating value for our modeling. We've included a new slide in our investor presentation, which is available on our website, slide 13 that helps to illustrate our strategy and provide examples of our progress.

The first core strategy is to build upon our leading market positions. We've demonstrated our commitment to this strategy in Canada thus far in 2024, our Q1 revenue in Canada of $32 million increased by 3% as compared to the first quarter of 2023, despite a reduction in the average rig count in Canada of 6% for the same period.

This performance reflects the initiatives to leverage the strength of our market position and customer relationships developed over time in our fracturing systems business and to pull through additional revenue opportunities across our other product lines.

In particular, we continued to capture additional well construction opportunities with our fracturing systems customers and to grow the customer base for our Purple Seal frac plugs and fracture Express systems and plug-and-perf completions in Canada.

Our second core strategy is to capitalize on international and offshore opportunities. We previously discussed our efforts to grow our customer base in the North Sea and to position the Company for long term growth opportunities in the Middle East in particular, we are now benefiting from these strategic investments for off to a good start so far this year, having sold sliding sleeves to a new North Sea customer in the first quarter.

As we move to the second quarter, we expect activity in the North Sea to improve on a seasonal basis with installation and completion activity increasing, including the expected delivery of sliding sleeves to yet another new North Sea customer. In addition, we are experiencing a meaningful increase in tracer diagnostics activity in the Middle East in April, we completed tracing the first of multiple pads for a leading national oil company in the Middle East, supporting development plans for their unconventional resource base. We expect to participate in at least two similar projects over the remainder of 2024.

In addition, NCS has been awarded the opportunity to trace additional conventional wells for the same customer supporting activity between the unconventional well pads. This is only possible because of the tireless effort of individuals across our organization to educate our customer on the value that our tracer diagnostics services can bring to tackle the procurement and logistical challenges of the work and to provide outstanding customer service throughout the jobs and for the reporting process.

Including the expected midpoint for our international revenue guidance for the second quarter, our international revenues would approximate $7.2 million for the first half of 2024. This compares to $3.3 million in the first half of 2023 and would exceed our full year 2023 international revenue of $6.5 million. As a reminder, full year international revenue for NCS exceeded $10 million for each of 2018 through 2021, reaching a high of over $15 million during that period, highlighting our opportunity outside of North America.

Our third more strategy for NCS is to commercialize innovative solutions to complex customer challenges. We have internal objectives this year tied to obtaining field trials for new products and successfully entering new markets and regions. I spoke to this extensively on our prior call, so I'll just briefly highlight some of these exciting projects. We had a successful onshore trial during the first quarter for a completion system designed for deepwater operations.

This was developed in conjunction with an international oil company with potential applications in the Gulf of Mexico and other deepwater regions. We've completed initial field trials for our pinpoint oriented perforating gun system at Repeat Precision, and we continue to advance further testing and validation aligned with an influential customer's requirements. In the second quarter, we expect to install a well that will represent our highest ever sleeve count in the US at over 200 sleeves.

Well, we'll be utilizing fiber-optic technology to help the customer optimize our horizontal waterflood program. We had a successful entry into the Sag D market in Canada for our fracturing systems technology earlier this year. This is a first for NCS, and we expect to utilize our technology for additional applications and customers in this market over time.

In addition to these projects, we have several other technology developments underway across our various product lines, which I'm looking forward to discussing as they roll out. Mike will now review our results for the first quarter and our guidance for the second quarter.

Thank you, Ryan. As reported in yesterday's earnings release, our first quarter revenues were $43.9 million, a 1% increase year over year, with our Canadian and international revenues up 3% and 39% respectively, and our US revenues down 12%. Despite a slight decrease in the average rig count, we saw a modest increase in our Canadian revenues.

Additionally, our international revenues experienced growth driven by the sale of a frac systems to a customer in the North Sea. Our US revenues continue to be impacted by lower natural gas prices that have curtailed some customer activity. Sequentially, our revenues in the first quarter increased by 24%, with Canada up 27% in the US, up 10%, while international revenues nearly doubled.

Our adjusted gross profit defined as total revenues less total cost to sales, excluding depreciation and amortization expense, was $17.6 million in the first quarter of 2024. Our adjusted gross margin was 40% down compared to our adjusted gross margin of 43% for the same period in 2023, but up sequentially from 37% for the fourth quarter of 2023.

Selling, general and administrative costs were $13.8 million for the first quarter, down by $2.3 million compared to the same period last year. The significant reduction was due in part to our restructuring efforts in 2023 to streamline operations and better leverage.

Our SG&A spend for the first quarter reported net income of $2.1 million or diluted earnings per share of $0.82 compared to a net loss of $15 million or loss per share of $6.10 for the same period in 2023. Our prior year net loss was impacted by a $17.5 million litigation provision were recorded in the first quarter of 2023 that was later settled and reversed in the fourth quarter of 2023. Adjusted EBITDA for the first quarter was $6.1 million, an improvement to the $4.9 million in the same period in 2023.

Now turning to cash flow items in the balance sheet, cash flow from operating activities and free cash flows less distributions to noncontrolling interest were uses of cash of $1.9 million and $2.5 million, respectively. Our forecast for the full year of 2024 is to be free cash flow positive. However, similar to the first quarter of 2023, our negative cash flow was primarily due to an increase in net working capital of approximately $6 million.

This was due in part to an increase in our accounts receivable, partially offset by a reduction in our inventory balances. On March 31, we had $14 million in cash and total debt of $8.9 million, which consists primarily of finance lease obligations resulting in a positive net cash position of $5.1 million. At the end of March 2024, the borrowing base availability under our undrawn ABL facility was $20.4 million and repeat had $6 million of outstanding borrowings. Under a promissory note that was repaid in full in April.

Now turning to a few points of guidance for the second quarter. We currently expect second quarter total revenue in the range of $27 million to $30 million. We expect Canadian revenue in the range of $12.5 million to $13.5 million, US revenue of $10 million to $11 million, and international revenues of $4.5 million to $5.5 million.

We expect our adjusted gross margin to be between 36% and 38%, an improvement to our adjusted gross margin for the second quarter of 2023 due to the Canadian seasonal impact of spring breakup, we expect our adjusted EBITDA to be between breakeven and a negative $2 million in our second quarter depreciation and amortization expense to be approximately $1.2 million.

With that, I'll hand it back over to Ryan to discuss our 2024 full year guidance and for closing remarks.

Thanks, Mike. And we're making only slight adjustments to our full year guidance for 2024. At this time, we currently expect full year revenue of $150 million to $160 million. This guidance increases the low end of the revenue range by $5 million and maintains the top end of the range.

As a reminder, we expect our revenue growth will primarily result from increased sales and Repeat Precision and our fracturing systems product line in the US and in international markets, the North Sea and Middle East in particular, we're cautiously optimistic about Canadian activity as well.

Their fundamental drivers supporting customer activity in Canada, including the TMX oil pipeline coming online this quarter and the Canada LNG facility due to come online in '25, which is driving activity increases to support increased natural gas production in advance of this facilities commissioned.

In addition, the strong US dollar supports Canadian activity as our Canadian customers have operating expenses in Canadian dollars but can sell oil and condensate prices linked to the strong US dollar. These positive fundamental factors are tempered by the drought conditions that continue to exist in Western Canada.

If we have a dry spring or an active wildfire season like we did in 2023, access to freshwater for our customers could be reduced, which could reduce in lower could result in lower completions activity as firefighting and agricultural activity would have preferential access to freshwater.

At this point, our guidance incorporates at least some disruption from the drought conditions and wildfire prospects. There could certainly be more favorable Canadian customer activity levels if we continue to benefit from a wet spring as we have thus far and a less active fire season, we've increased our adjusted EBITDA range to $14.5 million to $17.5 million with a midpoint of $16 million.

The increase to the midpoint of the range of $1 million with increases to both the bottom and top end due to the seasonality of our business. And consistent with prior years, we anticipate that the achievement of our annual adjusted EBITDA guidance range will be weighted to the second half of the year.

The $4 million year-over-year increase in adjusted EBITDA at the midpoint of the current range represents an incremental adjusted EBITDA margin of over 32% on the $12.5 million increase implied by the midpoint of our revenue guidance range, reflecting the impact of the business optimization initiatives undertaken by NCS in 2023 and our relatively fixed operating expenses.

We expect our gross capital expenditures for the year to be between $1.5 million and $2.5 million, and we expect to generate over $5 million in free cash flow in 2024 after distributions to noncontrolling interests. Despite the modest investment in net working capital that could result from supporting our revenue growth. We believe that our expectation for revenue and earnings growth in the current industry environment paired with our strong balance sheet positions us favorably amongst other publicly traded oilfield services and equipment peers.

This is illustrated on slide 19 of our investor presentation, which benchmarks analyst consensus revenue and EBITDA growth for 2024 for us and a group of publicly-traded peers with a market capitalization of below $1 billion. The charts illustrate that NCS is expected to generate revenue and earnings growth that is above the median of the peer set.

Another chart on the slide demonstrates that our debt to capitalization ratio at December 31, 2023, was below the median for the peer set, reflecting our resilient balance sheet. However, this favorable growth and balance sheet profile is not reflected in our trading multiple, which at 3.4 times enterprise value to 2024. EBIDTA was one multiple turn below that of the peer with the next lowest multiple and approximately two multiple turns below the peer median before we open the call to Q&A.

I'll close with a couple of brief comments. We're benefiting from the core strategies that we put in place in 2022, aimed at generating value for our stakeholders through organic growth and technology development. We have the infrastructure in place to support revenue growth in each of our geographic markets, providing leverage to grow future earnings as demonstrated by KIRK by our current guidance for 2020 for achieving the midpoint of our guidance range would grow annual revenue by 9% and our adjusted EBITDA by over 30%.

We maintained a strong balance sheet and liquidity position with a cash balance of over $14 million at the end of the first quarter. In addition, we expect to add to that cash balance by generating positive free cash flow in 2024, providing us with financial and strategic flexibility.

Finally, we continue to benefit from successful introduction of new technologies that meet the needs of our customers, adding to our portfolio and expanding our addressable market.

With that, we'd welcome any questions and thank you.

(Operator Instructions) Dave Storms, Stonegate.

Just hoping we could start with the top line guidance, just great to see that you've raised the low end of what would you need to see either in the international markets or elsewhere to also raise the top end.

Sure. Thanks. Thanks, Dave. Appreciate the question.

I think for us, the biggest thing right now is that we are taking a relatively conservative approach to the Canadian market I outlined during the call, what we think is a really, really strong fundamental backdrop for Canada, and I think that will persist throughout the year. However, we certainly are aware that coming into 2024, you had a couple of years of extended drought conditions. There was a very active wildfire season last year.

We're fortunate that there's been a relatively wet spring so far, but it's easy. So I think we're just being a little bit cautious right now around the potential prospects for some potential reduced activity on the completion side. If our customers find that it's a bit more difficult to access freshwater for their completions as you move into the summer months.

But I think as we move through the second quarter and understand whether a feel for the extent of that impact will be, if any. I think that's where we have a bit more confidence in really assessing whether there's some upside to the top end of the range as well.

Understood. Very helpful. And then you mentioned international markets use too, operate around $15 million or so a year. What's the pathway to get back to that, is that going to be getting cataloged with current companies? Is that going to be addressing new markets? What does that look like?

Yes, is another great question, Dave.

I think the path to that is the path we're on, quite frankly, and there are two components to it. I think versus during that period, we had one customer who was very active in the North Sea. And Aker BP, who we've referred to is kind of our anchor customer in the North Sea over time. And as you know, and as we've discussed, we've been really active in adding to our customer base for the North Sea.

We think we'll work with at least five different companies this year and what we're really looking forward to is both Oscar and one of the other customers have field development projects that they're looking to bring online as we move forward into '25 and 2026, which would represent more consistent work and would look a lot more like the level of activity that we saw back in those months or those prior years and you pair that with the work that we've been doing in the Middle East, and we're in a really good spot right now with tracer diagnostics in the Middle East.

We're getting additional well construction products qualified to be call it out there. So with the North Sea back to historical activity levels that we saw during that period tied to tied together with the additional opportunities in the Middle East, I think we are on the path towards hitting those sorts of that revenue profile that we saw in those prior years.

(Operator Instructions) Blake McLean, Daniel Energy Partners.

Hey, guys, thanks for. Thanks for taking my call.

Yes, absolutely.

So I was hoping you could provide a little bit more color on kind of how we should think about the offshore opportunity set timing associated with that and kind of what that sort of path forward to incremental revenue looks like over the next year or two or whatever, whatever timeframe works.

Sure. Yes, happy to do the best I can there. So again, this year, we're going to work for more customers in the North Sea than we ever have before. It will not be a large well count with any customers individually, but I think that sets the stage for some more work going forward.

And I mentioned that there are two customers in particular operating in the North Sea, really one on the Norwegian side, one on the UK side, they have some larger development programs that we would expect to participate and we would see the work on those programs starting to ramp up more so next year, but that could represent pretty consistent work for multiple year time frame.

And we pair that with the technology development project that we have for the deepwater application, that's a little bit longer to develop. And I'd say the number of wells per year is not necessarily at the same scope the North Sea is, but they're very attractive well opportunities for us on a single well basis. So that could move forward and be a small handful of wells per year on.

But those individual well opportunities would be pretty impactful for us as a company. And again, that would develop develop over a longer-term timeframe. I don't think you'd see that ramping up really until yes, we may have a first well in 2025, but that would pick up more in 2026 and beyond.

That's helpful. Thank you. And maybe just one more just building on the last set of questions. And again, maybe zooming out a little bit, how should we think about the opportunity set internationally and specifically in the Middle East? And how do you sort of see yourselves up to be successful there? What does that and what is the sales and business development, sort of team look like, how do you how you sort of execute well over there? Do you have that team in place? You have a plan to kind of build that out and where do you think that that and the tracer diagnostics and some of the things you guys are doing out there? Where do you think it really makes sense if we think about it from a sort of multiyear perspective?

Yes, another really good question. So what I'd say is that at the highest level, we've got the right teams and strategies in place. When we think about the leadership for our IT and international group and the business development teams from the international group.

We are aligned with what we think are very strong local partners in the various geographies in Oman and in Saudi, particularly and who are helping us to navigate that process of getting each of our product lines cataloged and in a position where the asset managers in the various international regions can kind of call out our work very quickly and without getting additional approvals from procurement and whatever the case may be.

So moving it from holiday, a technology trial into having our products and services utilized in production mode on the big opportunity for us that we're executing on this year. Are these unconventional tracer projects for a Middle East customer, I'd say there that customer is very early in their development of their unconventional resource and the opportunity there with is that really that period where utilizing tracer diagnostics, in particular, it's very, very valuable for a customer to help them understand their resource and optimize their development plans.

So I think there's a good runway there where we'll probably need to support that development over time will be with additional operations personnel. And right now we're mobilizing people from North America from Argentina from China to service some of that work in the Middle East. So we'll probably need to make some more investments in personnel, both within our own headcount, but also some folks within our local partners.

And over time, we may look to make some strategic investments in the region as well, whether that's a what I'd call sort of a relatively light footprint, tracer lab or some other types of investment there. But we'd only do that once we've established the track record and have sort of several years of relatively robust revenue and earnings in those markets before we deploy additional capital into supporting that business.

Got it. Thanks for walking through that in some detail. I've got just one more if you don't mind, could you provide a bit more color on the fleet that you guys highlighted in your prepared remarks?

Sure, I think you're talking about the one in the US with the fiber optics? Is that right?

Yes, yes, yes.

And that's a pretty interesting project. So what we're able to do there on the customer wants to run a fiber optic line in that well, and it's the really the somewhat unique project, especially in the US where historically waterflood projects have used some vertical injectors. This is an area that was developed horizontally. So they're looking to execute a horizontal waterflood program and optimize that well, that's going to be installed will have a very large number of sliding sleeves and no have a fiber optic cable clamp to it.

And part of the reason the customer would use sleeves for that is one to be able to have as many well known access points along that lateral. But more importantly, as opposed to if you were going to plug and perf that, well, there's a risk of having your perforation if it's not aligned properly accidentally shoot that cable and cut off your ability to acquire the data.

So we're able to channel that fiber in between the ports of our sleeves to take that risk off the table or so, the customer will benefit in a number of ways. And the other piece with that by installing sliding sleeves and specifically our reclosable sleeves, if the customer sees water break through in parts of that?

Well, that's indicated by the fiber. What we can do is go in and help the customer and manipulate those sleeves to shut off water breakthrough in certain areas and again, just maximize the value for that area through the deployment of the technology.

Okay. Thanks for that detail. Yes, I'll kick it back to line.

(Operator Instructions) And I'm showing no further questions. I would now like to turn the call back over to Ryan Hummer, CEO for closing remarks.

All right. Thank you, Justin.

On behalf of our management team and board, we'd like to thank everyone on the call today, including our shareholders, analysts and especially our employees I truly appreciate the tremendous work and dedication demonstrated by our team here at NCS and Repeat Precision as we implement our long-term strategy for only as good as our people and I believe we have the best team in the industry.

Our team continues to provide excellent service to our customers and developing new products and services that will enable our customers to be more successful. We appreciate everyone's interest in NCS multi-stage, and we look forward to talking again on our next quarterly earnings call.

This concludes today's conference call. Thank you for participating. You may now disconnect.