NCS Multistage Holdings, Inc. (NCSM) This fall 2023 Earnings Name Transcript

NCS Multistage Holdings, Inc. (NASDAQ:NCSM) This fall 2023 Earnings Convention Name March 8, 2024 8:30 AM ET

Firm Individuals

Mike Morrison – Chief Monetary Officer

Ryan Hummer – Chief Government Officer

Convention Name Individuals

Dave Storms – Stonegate

John Daniel – Daniel Vitality Companions

Operator

Good day and thanks for standing by. Welcome to the NCS Multistage Fourth Quarter 2023 Convention Name. [Operator Instructions] Please be suggested that right this moment’s convention is being recorded.

I might now like handy the convention over to your first speaker right this moment, Mike Morrison, Chief Monetary Officer. Chances are you’ll start.

Mike Morrison

Good morning. That is Mike Morrison. Sorry for the delay. Thanks for becoming a member of the NCS Multistage fourth quarter and full 12 months 2023 convention name. Our name right this moment can be led by our CEO, Ryan Hummer, and I can even present feedback.

I wish to remind listeners that a few of right this moment’s feedback embody forward-looking statements reminiscent of our monetary steerage, feedback relating to our future expectations for monetary outcomes and enterprise operations. These statements are topic to many dangers and uncertainties that might trigger our precise outcomes to vary materially from any expectation expressed herein. Please consult with our most up-to-date annual report on Kind 10-Okay and our newest SEC filings for threat elements and cautions relating to forward-looking statements.

Our feedback right this moment in addition to our outcomes of operations included in our earnings launch, include the next non-GAAP monetary measures, together with adjusted EBITDA, adjusted EBITDA margin, adjusted gross revenue and margin, adjusted internet loss adjusted loss per share, free money movement and free money movement much less distributions to non-controlling curiosity. The underlying particulars and reconciliations of those non-GAAP measures to essentially the most comparable GAAP monetary measures are supplied in our fourth quarter and full 12 months earnings launch which will be discovered on our web site, ncsmultistage.com.

I will now flip the decision over to Ryan.

Ryan Hummer

Thanks, Mike, and welcome to our traders, analysts and staff becoming a member of our fourth quarter and full 12 months 2023 earnings convention name. I will overview our efficiency in 2023 and the way our efforts and accomplishments all through 2023 have positioned us for company-specific development alternatives in 2024. I will additionally define our strategic aims for this 12 months. Mike will comply with and canopy the monetary outcomes for the quarter.

2023 turned out to be far more difficult than we had anticipated at the moment final 12 months for our trade and for NCS. Exercise within the U.S. declined all year long with the anticipated bottoming of the rig depend slipping additional because the 12 months progress. In Canada, whereas exercise began robust within the first quarter of 2023, we noticed an identical development of declining year-over-year exercise within the second half of final 12 months.

The decline in exercise ranges and the ensuing impression on the aggressive atmosphere restricted our pricing energy, leading to a year-over-year decline in income of 8% in 2023, with income declines for every of our U.S., Canada and worldwide operations. In response to the altering market atmosphere, we took significant motion by consolidating sure operations districts within the U.S. and manufacturing amenities in Mexico. We additionally diminished head depend and aligned our U.S. and worldwide operations groups underneath widespread management. These actions, together with the tireless work of our provide chain staff and technical personnel and tracer diagnostics allowed us to keep up our adjusted gross margin of 39% in 2023, in step with the prior 12 months regardless of the decline in income.

We additionally proactively diminished our SG&A spend, leading to a $1.8 million discount in SG&A expense in 2023 as in comparison with 2022. A significant discount given the inflationary stress on wages and the general price atmosphere. We anticipate that our price discount actions will lead to an annualized profit of roughly $4 million of which we realized lower than half throughout 2023 as a result of timing of these actions.

Adjusted EBITDA in 2023 was almost $12 million in comparison with roughly $15 million in 2022. We improved our free money movement efficiency by roughly $5 million in 2003 in comparison with — 2023 in comparison with 2022. Particularly, we generated $2.6 million in free money movement after distributions to our JV companion final 12 months in comparison with damaging free money movement of $2.1 million in 2022.

For 2024, we anticipate an extra decline in annual common exercise trade ranges in North America in comparison with 2023, with exercise ranges within the U.S. projected to be decrease by as a lot as 10%. We at present imagine that exercise ranges in Canada will not be prone to decline by the identical magnitude, pushed partly by each the TMX growth and the LNG Canada undertaking nearing completion, which ought to assist exercise. That is tempered by attainable water restrictions for producers in Canada in the course of the summer time months as a consequence of ongoing drought circumstances and low present water ranges.

Regardless of these exercise declines, we anticipate to develop our income in 2024 in comparison with 2023 because of the numerous progress made in 2023 to develop our presence in new markets and to raised align our product and repair providing with sure prospects, together with massive independents within the U.S. and Canada, worldwide oil corporations and nationwide oil corporations. I will spotlight just a few of those company-specific efforts and alternatives throughout our product and repair traces.

Starting with fracturing methods, as beforehand mentioned, we proceed to develop our buyer base within the North Sea. For 2024, we anticipate to put in or present service for a minimum of 5 prospects in the course of the 12 months, together with our first sleeve installs for 2 of those prospects.

In Canada, we just lately efficiently accomplished our first fracturing methods job for a focused utility within the oil sands as a part of a SAGD growth. This work prolonged from a long-standing buyer relationship of their extra typical oil and gasoline operations. We anticipate to construct on the success for this buyer by means of extra high-temperature purposes and can look to copy the success with different SAGD producers.

Within the U.S., we efficiently accomplished an onshore trial effectively with a strategic companion, working to develop a system to be used in deepwater environments such because the Gulf of Mexico. This follows profitable floor testing accomplished earlier in 2023. This lease for this trial effectively have been put in in late 2023 with service exercise occurring in early 2024. The profitable trial validates a brand new sleeve design and utility for NCS, positioning us to take part within the technically demanding deepwater market.

As well as, now we have a really attention-grabbing undertaking plan for the U.S. within the second quarter, whereby a buyer plans to put in over 200 sleeves within the effectively to guage enhanced restoration methods for its asset base. This would be the most ever NCS sleeves run in a effectively within the U.S. and essentially the most ever NCS 5.5-inch sleeves working a effectively globally.

Inside effectively development, we efficiently expanded the working envelope for our airlock casing buoyancy methods. Constructing on the voice of the client to allow operation at larger temperatures, larger pressures and in addition to accommodate the extra torque enabled by premium connections. As well as, we proceed so as to add new measurement classes of those methods to fulfill the very buyer purposes within the area.

We just lately launched our SlimStim refrac liner hanger system at a commerce present close to Houston. This new expertise will allow high-intensity refracs and beforehand understimulated wells. This product was designed with vital buyer enter and supplies sure contingencies and operational advantages that we imagine are distinctive to our system. We anticipate to conduct area trials of this method over the following a number of months.

In tracer diagnostics, we anticipate 2024 to be a 12 months of significant development in worldwide markets. We plan to enter two new markets this 12 months, every of which required extra testing of our chemical compounds. Testing in a single such area is full, and we anticipate to finish testing within the different market in the course of the first half of 2024.

Maybe most significantly, we anticipate a major growth of our tracer diagnostics enterprise within the Center East this 12 months. We’re finalizing the small print of a multi-pad undertaking, which might place the Center East to be our second largest tracer market this 12 months, solely behind the U.S.

At Repeat Precision, we have had good successes as effectively. A well-respected E&P firm determined to run our fracture categorical system with a number of Permian Basin frac crews after an in depth check of a number of composite cloud suppliers. The check utilized a number of totally different diagnostic instruments to guage key plugs options reminiscent of how effectively that plugs maintain stress in the course of the frac job, drill out time and wash time. Our work with this buyer started final December and is ramping up all through the primary quarter of 2024.

On the product growth entrance, Repeat has had preliminary profitable area trials of its pinpoint internally oriented perforating gun system, which is designed to regulate varied oriented perforating patterns of practices changing into extra prevalent throughout the E&P buyer base in North America. The pinpoint system maintains the advantages of the purple fireplace perforating gun methods, which embody preassembly and a producing atmosphere, ease of use within the area, diminished HSE threat and compatibility with a buyer’s most well-liked formed cost.

I will present a fast replace on just a few authorized issues now. Relating to the beforehand disclosed authorized matter in Texas in December 2023, NCS, the plaintiff and our insurance coverage service reached a settlement the place the insurance coverage service agreed to pay the settlement quantities to the plaintiff leading to no money funds by NCS. Consequently, we reversed our beforehand reported litigation provision of $40.8 million in the course of the fourth quarter of 2023.

As for the beforehand disclosed patent infringement case in Canada, the events attended a mediation assembly in late February 2024. Whereas no settlement has been reached, each events have expressed curiosity in persevering with with settlement discussions. Nonetheless, if the settlement can’t be reached, we imagine that relevant legislation helps robust grounds for enchantment on the choice. Nonetheless, the litigation course of might proceed on for a number of years.

Lastly, our objectives for 2024 are simple and are aligned with the long-term technique that I mentioned at size in final quarter’s name. In 2024, we intention to develop income in a flat or declining market and enhance our adjusted EBITDA margin, all whereas producing free money movement. We intention to acquire area trials for our new choices and efficiently enter new markets. We’ll constantly enhance our worker engagement and guarantee office security. And at last, we’ll enhance our processes and collaboration inside the firm in order that we will be extra environment friendly and efficient.

Mike will now overview our outcomes for the fourth quarter and our steerage for the primary quarter of 2024.

Mike Morrison

Thanks, Ryan. As reported in yesterday’s earnings launch, our fourth quarter revenues have been $35.2 million, a 12% lower in comparison with final 12 months’s fourth quarter. Our Canadian revenues have been up by 1%, whereas our U.S. and worldwide revenues have been down 33% and 40%, respectively.

Decrease pure gasoline costs within the U.S. negatively impacted buyer exercise ranges, whereas the timing of exercise with our prospects within the North Sea negatively affected worldwide revenues. Sequentially, revenues within the fourth quarter decreased by 8%, with Canada down by 11%, Worldwide down by 45%, however U.S. revenues elevated by 14%. The advance within the U.S. was pushed by larger gross sales of sliding sleeves and repeats composite plugs. And the lower in Canada was primarily associated to regular year-end seasonality.

Our adjusted gross revenue, outlined as whole income much less whole price of gross sales, excluding depreciation and amortization expense was $12.9 million within the fourth quarter of 2023, representing an adjusted gross margin of 37%, down in comparison with our adjusted gross margin of 40% for a similar interval in 2022. The decline in adjusted gross margin was primarily attributable to an general decline in revenues and income combine, with a bigger portion of the consumer coming from our higher-margin service revenues.

Our revenues for the total 12 months of 2023 have been $142.5 million, a decline of 8% in comparison with the total 12 months of 2022. Regardless of this decline in full 12 months revenues, our adjusted gross margin of 39% was in step with the prior 12 months.

Promoting, basic and administrative prices have been $13.2 million for the fourth quarter, remaining flat in comparison with the identical interval final 12 months. For the total 12 months of 2023, our SG&A prices have been $56.5 million, a decline of roughly $2 million in comparison with 2022. For the fourth quarter, we reported internet revenue of $39.6 million or diluted earnings per share of $15.80 in comparison with internet revenue of $2 million or diluted earnings per share of $0.81 for a similar interval in 2022.

For fourth quarter — our fourth quarter internet revenue was positively impacted by the settlement of the Texas authorized matter leading to no money fee by NCS. Excluding this profit, our adjusted internet loss for the fourth quarter of 2023 was $900,000 or an adjusted loss per share of $0.36. Adjusted EBITDA for the fourth quarter was $2.5 million, a decline in comparison with adjusted EBITDA of $6.4 million for a similar interval in 2022. For the total 12 months of 2023, our adjusted EBITDA was $11.9 million, a decline of $3.2 million in comparison with 2022.

Turning now to money movement gadgets and the steadiness sheet. Through the fourth quarter, we generated money movement from our operations and free money movement after JV distributions of $6.2 million and $5.6 million, respectively. Our full 12 months 2023 free money movement after JV distributions was $2.6 million.

On December 31, we had $16.7 million in money and whole debt of $8.2 million, which consisted completely of finance lease obligations, leading to a optimistic internet money place of $8.6 million. On the finish of December, the borrowing base availability underneath our undrawn ABL facility was $16.4 million and Repeat had no excellent borrowings underneath their promissory observe.

Turning now to some factors of steerage for the primary quarter. We at present anticipate first quarter revenues within the vary of $36 million to $40 million, with the low finish of the vary, exhibiting a slight enchancment sequentially and the excessive finish exhibiting a modest enchancment in each Canada and the U.S. We anticipate U.S. revenues within the vary of $9 million to $10 million, worldwide income of $1 million to $2 million and Canadian income of $26 million to $28 million. We anticipate our adjusted gross margin to be between 38% and 41%, an enchancment to our adjusted gross margin in comparison with the fourth quarter of 2023. We anticipate our adjusted EBITDA to be between $3 million and $4 million and our first quarter depreciation and amortization expense to be roughly $1.2 million.

With that, I will hand it again over to Ryan to supply our full 12 months 2024 steerage and for closing remarks.

Ryan Hummer

All proper. Thanks, Mike. So our full 12 months steerage for 2024 is as follows; we at present anticipate full 12 months income to be between $145 million and $160 million and full 12 months adjusted EBITDA in a spread of $13 million to $17 million. We anticipate that our income development will primarily outcome from elevated gross sales of Repeat Precision within the U.S. and in worldwide markets, the North Sea and the Center East, specifically. We anticipate gross capital expenditures for 2024 of $2 million to $3 million. Whereas working capital could signify a modest use of money in the course of the 12 months, we anticipate free money — to be free money movement optimistic once more throughout 2024, additional strengthening our sturdy steadiness sheet and offering us with strategic flexibility.

We anticipate to attain income and adjusted EBITDA development, although we imagine that the general market exercise can be decrease in North America for 2024 than in 2023, reflecting each trade effectivity positive factors and a cautious view on pure gas-directed exercise. We do anticipate trade spending and exercise in markets exterior of North America to extend modestly in 2024. And in addition simply with respect to our steerage as a result of seasonality of our enterprise and in step with prior years, we had anticipated that the achievement of our annual adjusted EBITDA steerage vary can be weighted to the second half of the 12 months.

Earlier than we open to Q&A, I will shut with a few temporary feedback. I am pleased with the way in which the staff at NCS navigated the challenges that we confronted throughout 2023. We made the required changes to adapt to the market atmosphere, superior our expertise portfolio and stay targeted on the enterprise regardless of a number of exterior distractions. We stand to learn from multiyear investments that we have made to place ourselves for development in worldwide markets and the efforts to align our firm and our expertise with sure massive prospects, together with the massive independents, worldwide oil corporations and nationwide oil corporations.

We maintained the infrastructure required to assist the income development we’re anticipating this 12 months. On the midpoint of our steerage ranges, we anticipate income development of seven%, however we develop our adjusted EBITDA by 25%, delivering robust incremental margins as we leverage our mounted price base and profit from the price discount efforts we enacted in 2023. The applied sciences that we’re commercializing this 12 months are aligned with the wants of our prospects, including to our portfolio and increasing each our market presence and our addressable market.

And at last, we entered 2024 with a powerful steadiness sheet liquidity place. Ending 2023, the money steadiness of almost $17 million. As well as, as we anticipate so as to add to that money steadiness by producing optimistic free money movement once more in 2024, we’ll have extra monetary and strategic flexibility.

With that, we’ll welcome any questions.

Query-and-Reply Session

Operator

[Operator Instructions] Our first query comes from the road of Dave Storms with Stonegate.

Dave Storms

You are guiding to a pleasant development year-over-year, particularly given the present market atmosphere. I do know you talked about a number of the places and takes in your ready remarks. Simply hoping you can go a little bit extra intimately on what might be a number of the optimistic upside surprises on the Trans Mountain pipeline? Is it possibly a restrengthening in your combine? Simply any extra data we might get on that may be useful.

Ryan Hummer

Sure, completely. We’ll speak to that at a fairly excessive stage. I feel as we have been type of concluding the ready remarks, the 2 huge items for us that we anticipate will enable us to develop sooner than the market as we transfer ahead in 2024, actually should do with Repeat Precision and the client relationship and alternative that developed late final 12 months after that intensive testing of the plugs. With that, we’re beginning to work with the client on two totally different crews within the Permian Basin. We anticipate that might decide up from there a bit additional. In order that work simply began in December, so that you get actually the total year-over-year impression of that buyer win as we transfer by means of 2024.

The Canadian enterprise, we’re anticipated to be comparatively flat year-over-year at this level from a income standpoint in a market that is flat to down a little bit bit so far as potential upsides to the Canadian market. We have talked a little bit bit previously round how we’re enabling prospects to essentially change the way in which they do enterprise in sure areas. So we have had some actually good wins within the deep basin with prospects which can be working extra sleeves in a given lateral size, so larger sleeve density. And as that kind of program and completion design, if that takes maintain with different operators within the area that might be a supply of upside for us.

There’s additionally a brand new space that we began working with a buyer who’s been a long-standing buyer throughout a few totally different corporations. Who purchased some property and has a brand new firm, who’s pushing extra high-intensity and sophisticated completions design in one other space of the Deep Basin. So between these after which additionally upsides in persevering with to develop our market share with the PurpleSeal plugs, the Repeat Precision portfolio in Canada, I feel there’s most likely some upside there. However at this level, we’re comparatively flat year-over-year in Canada and hopefully, you can begin to execute on a few of that upside to drive outperformance versus the plan.

However so far as type of what’s baked into the steerage and the upside along with Repeat, which I discussed earlier, the opposite huge half is worldwide. So with having grown that buyer portfolio to 5 prospects that we’ll be working with both on an set up or service foundation, we’ll see a pleasant development within the North Sea. After which moreover, the expansion within the tracer work within the Center East. We talked earlier than about how we thought that area and one nationwide oil firm, specifically might flip into our third largest working — alternative for tracers in time. That is being accelerated a bit and will even be the second largest for us, surpassing Canada and trailing solely the U.S.

So actually, it is flattish baseline within the U.S. with upside from a few particular alternatives at Repeat. Flattish in Canada and actually executing internationally on the alternatives that we have been actually working arduous to safe over the previous few years.

Dave Storms

After which only one extra, if I might. It sounds such as you’ve achieved a variety of price financial savings initiatives during the last 12 months, ’23, gave you a chance to give attention to that. What number of extra levers do it’s important to pull right here? And I suppose type of what’s your urge for food to proceed engaged on that?

Ryan Hummer

So that you’re definitely proper that with 2023 and the discount in exercise, particularly within the U.S. from a market standpoint that gave us the impetus to essentially take a tough have a look at our price base from an operational standpoint. We did that by means of consolidating some amenities within the area. And in addition within the manufacturing work at Repeat that helps our enterprise globally. So we make sure that we’re working as effectively as attainable.

We will at all times be targeted on steady enchancment, driving prices out of the system, whether or not that is working by means of our provide chain staff and engineering to cut back the usual price of our merchandise or whether or not it is persevering with to take a tough have a look at each greenback on the SG&A aspect. However — what I will say is we’re rising in 2024. Inside that, there are going to be some strategic investments that we make each on the capital aspect and the personnel aspect to assist that development.

So I feel it’ll be extra of a balanced 12 months from a price standpoint. We’ll be as environment friendly as we will. However I do not know that we’ll be seeking to take that very same stage of price out of the system as we transfer ahead. We’re simply going to make it possible for we’re capable of justify and leverage the price base that now we have.

Operator

[Operator Instructions] Our subsequent query comes from the road of John Daniel from Daniel Vitality Companions.

John Daniel

This could be a tender query. It is really not meant to be. However such as you talked about some area trials that you’ve got kicked off, I am curious if you happen to might present some extra descriptive shade as to when are you aware if the trials are profitable in your steerage, do you assume that it is profitable and there is development from that? Or is that potential upside as you concentrate on the following couple of years? Simply any shade can be useful.

Ryan Hummer

And internally, we’re monitoring a major variety of area trial alternatives, and we have got, clearly, totally different measures of success for every of these. If you get to the sector trial stage, you’ve got gone by means of a fairly prolonged product growth effort. You have gone by means of your manufacturing design effort. And also you anticipate that if you get out in that area trial, there could also be some extra earnings as effectively. So what I would say is for the issues which can be inside that area trial class, we anticipate some contribution right here in 2023, however not an amazing quantity of contribution. I feel it actually does extra set the stage for the longer-term development trajectory. So if we execute on these area trials, both we have nailed it the primary time after we go straight into manufacturing or we make another iteration and get again on the market and it is one thing that might be extra of a income generator down the highway. .

So we have talked previously, proper, we type of pulled again a few of our growth effort in 2020 and ’21 and ramp that again up in 2022 and ’23. And that is actually beginning to bear fruit. We have a variety of actually attention-grabbing expertise that we’re getting on the market, a variety of good buyer interplay and engagement across the merchandise that we’re bringing to market.

John Daniel

The following one I had Ryan was — and I apologize, I am driving, so I wasn’t capable of write down copious notes. However you talked about getting on two crews. I feel it was the Permian you talked about. If you win that — what do they see in your product that they like? And the way do you unfold the gospel if you’ll, on the success of one thing like that?

Ryan Hummer

In order that buyer, I might view them as being one of many expertise leaders within the E&P area. And now and again, they’re going to do one thing like they did in 2023, the place they check out numerous the totally different suppliers in a sure area. On this case, it was the frac plugs, and we have been considered one of — I feel it was six or seven totally different rivals that have been evaluated there.

As I stated, there was a variety of work that was achieved together with fiber optics, tracers and different diagnostic instruments for them to find out throughout a set of efficiency standards, proper, which plug carried out the perfect. So we’re definitely inspired with the outcomes there and them beginning to work with us. And sure, we have kicked off with a few crews with them within the Permian. I feel there’s an opportunity to develop in that space.

How do you unfold the gospel? I feel it is internally that buyer. They have another working areas as effectively. That buyer can be one which’s very — clearly very effectively linked within the West Texas group they usually’re keen to share to some extent, proper, why they made a number of the selections they made about going with us long-term.

So we’re definitely working each angle there and taking that — the work that was achieved, proper, that sense of kind of testing and technical work that was achieved by that one buyer and ensuring that, that may type of translate and be utilized by extra prospects within the space to assist us develop the enterprise.

Operator

Presently, I am exhibiting no additional questions. I would like to show the convention again over to Mr. Ryan Hummer, Chief Government Officer for closing remarks.

Ryan Hummer

All proper. Thanks, Norma. On behalf of our administration staff and our board, we might wish to thank everybody on the decision right this moment, together with our shareholders, analysts and particularly our staff. I really admire the depth and breadth of the experience of our folks at NCS and Repeat Precision and the eagerness and energy that our folks deliver to their work. Our staff continues to supply glorious service to our prospects and is commercializing new services and products that may allow our prospects to be extra profitable. We’re taking up demanding and technically difficult work in delivering outcomes. We admire everybody’s curiosity in NCS Multistage and we look ahead to talking once more on our subsequent quarterly earnings name.

Operator

This concludes right this moment’s convention name. Thanks to your participation. Chances are you’ll now disconnect. Everybody have an exquisite day.