NCS Multistage Holdings, Inc. (NASDAQ:NCSM) Q1 2024 Earnings Call Transcript

NCS Multistage Holdings, Inc. (NASDAQ:NCSM) Q1 2024 Earnings Call Transcript May 4, 2024

NCS Multistage Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: 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 Morrison, CFO. You may begin.

Mike Morrison: Thank you, Justin, and thank you for joining the NCS Multistage first quarter 2024 conference call. Our 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 included in our earnings release, contain the following non-GAAP financial measures, adjusted EBITDA, adjusted EBITDA margin, adjusted gross profit, adjusted gross margin, free cashflow less distributions to non-controlling interests, and 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, ncsmultistage.com. I’ll now turn the call over to Ryan.

Ryan Hummer: 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. Our 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’s core strategies for creating value for our stakeholders. 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 continue to capture additional well construction opportunities with our fracturing systems customers and to grow the customer base for our purple seal frack 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’ve 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. We’re 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 diagnostic 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 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. The third core 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 will just briefly highlight some of these exciting projects. We had a successful onshore trial during the first quarter for a completion system designed for deep water 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. The well will be utilizing fiber optic technology to help the customer optimize a horizontal water flood program.

We had a successful entry into the SAGD 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.

Mike Morrison: 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 continued 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%, and the US up 10%, while international revenues nearly doubled.

Our adjusted gross profit, defined as total revenues less total cost of 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, we reported net income of $2.1 million or diluted earnings per share of $0.82, compared to a net loss of $15 million or a 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 we 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 cashflow items on the balance sheet. Cashflow from operating activities and free cashflows less distributions to non-controlling 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 cashflow-positive. However, similar to the first quarter of 2023, our negative cashflow 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, and 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.

Ryan Hummer: Thanks, Mike. 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 at 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. There are 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 2025, which is driving activity increases to support increased natural gas production in advance of this facility’s commissioning.

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 at 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 fresh water for our customers could be reduced, which could result in lower completions activity, as firefighting and agricultural activity would have preferential access to fresh water. At this point, our guidance incorporates at least some disruption from the drought conditions and wildfire prospects. So, there can 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 is $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 $12.4 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 cashflow in 2024, after distributions to non-con controlling 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 oil field 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 in balance sheet profile is not reflected in our trading multiple, which at 3.4x enterprise value the 2024 EBITDA, 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 growth future earnings. As demonstrated by our current guidance for 2024, achieving the midpoint of our guidance range would grow our annual revenue by 9% and our adjusted EBITDA by over 30%. We maintain 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 cashflow in 2024, providing us with financial and strategic flexibility. Finally, we continue to benefit from the 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.

See also Anchor Capital Management’s Top 9 Stock Picks and Former Holdings in 2024 and Morgan Stanley’s Top 15 Stock Picks for 2024.

Q&A Session

Operator: [Operator Instructions] And our first question comes from Dave Storms from Stonegate. Your line is now open.

Dave Storms: Good morning. Just hoping we could start with the top-line guidance. It’s great to see that you’ve raised the low end. What would you need to see either in the international markets or elsewhere to also raise the top end of that guidance?

Ryan Hummer: Sure, 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’ll 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 fresh water for their completions as you move into the summer months.

So, I think as we move through the second quarter and understand whether – what 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 upsides to the top end of the range as well.

Dave Storms: Understood. Very helpful. And then you mentioned that international markets used to 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?

Ryan Hummer: Yes, thanks. 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 first is, during that period, we had one customer who was very active in the North Sea, an Aker BP, who we’ve referred to as 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 Aker and one of the other customers have field development projects that they’re looking to bring online as we move forward into 2005 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 called out there. So, with the North Sea back to historical activity levels that we saw during that period, 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.

Dave Storms: That’s very helpful. Thank you. I’ll get back in queue.

Operator: And thank you. And one moment for our next question and our next question comes from Blake McLean from Daniel Energy Partners. Your line is now open.

Blake McLean: Hey guys, thanks for taking my call. 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 timeframe works.

Ryan Hummer: 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, that have some larger development programs that we would expect to participate in, and we would see the work on those programs starting to ramp up, more so next year, but could represent pretty consistent work for multiple-year timeframe. 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 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, but those individual well opportunities would be pretty impactful for us as a company. And again, that would develop over a longer term timeframe. I don’t think you’d see that ramping up really until – we may have a first well in 2025, but that would pick up more in 2026 and beyond.

Blake McLean: That’s helpful. Thank you. 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 tee yourselves up to be successful there? What does the sales and business development sort of team look like? How do 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 the Tracer Diagnostics and some of the things you guys are doing out there, where do you think it really makes sense of if we think about it from a sort of multi-year perspective?

Ryan Hummer: Yes, no, 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 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 and in Oman and in Saudi particularly, 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, call it a technology trial into having our products and services utilized in production mode.