NCSM - NASDAQ

Thank you for standing by. My name is Janice and I will be your conference operator today. At this time I would like to welcome everyone to Q1 2025 NCS Multistage Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn over the call to Mike Morrison, Chief Financial Officer. Please go ahead.

Thank you, Janice, and thank you for joining the NCS Multistage first 2025 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 our 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 and free cash flow less distributions to non-controlling interest. These non-GAAP measures and reconciliations 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 will now turn the call over to Ryan.

Thank you, Mike, and welcome to our investors, analysts and employees who are joining our first quarter 2025 earnings conference call. Mike will cover our quarterly financial results in more detail and I'll speak to a few highlights. NCS is off to a strong start in 2025. Our first quarter revenue of $50 million exceeded the high end of our guided range provided on our last call by $4 million. This represents the highest quarterly revenue for NCS since the first quarter of 2020. While we exceeded the midpoint of the guided range in each geography, our performance in Canada was the standout for the quarter. Our adjusted gross margin of 44%, which excludes depreciation and amortization expense, exceeded the high end of our guided range for the quarter as well. We benefited from the operating leverage associated with the revenue outperformance with a robust contribution from our higher margin international activity. Our adjusted EBITDA of $8.2 million exceeded our estimated range for the quarter of $4.5 million to $6.5 million and represents a year-over-year improvement of $2.1 million. To reiterate, NCS is off to a strong start. In prior calls I've referenced NCS's core strategies for creating value for our stakeholders. Slide 13 of our investor presentation helps to illustrate our strategy with examples of our progress. The first core strategy is to build upon our leading market positions. Our progress toward this goal continues to be reflected in our year-to-date results in Canada. Our Q1 revenue in Canada of $38 million increased by 19% as compared to the first quarter of 2024, outpacing a 3% increase in the average rig count. This favorable performance was most prevalent for our fracturing systems product line, as more operators in the Montney have adopted our single-point entry frac technology and have experienced strong production results and increased operational flexibility. Our second core strategy is to capitalize on international and offshore opportunities. We're seeking to build on the success we achieved in 2024, a year in which international revenue reached 10% of total revenue, an important milestone for NCS. We expect continued success with customers in the North Sea as our growing customer base and operational track record have positioned us well for long-term growth in that market. In 2024 we signed commercial purchase agreements with a customer in the Middle East and we're encouraged by the pace of adoption of our well construction products in unconventional wells in the region. We recently installed an enhanced recovery system for a customer in Argentina, our first in that market, with another installation planned for later this year. We believe that this product line will provide an attractive additional market for us in the Latin American region, building on our existing tracer diagnostics business. The third core strategy for NCS is to commercialize innovative solutions to complex customer challenges. We have internal objectives this year that are tied to field trials for new products and for successfully entering new markets and regions. Some of these exciting products and projects include the first application of our 7 inch sliding sleeve and service tools for a remedial cementing application in Alaska which is scheduled for later this month; qualification of our fracturing system sleeves and service tools at higher temperature ratings to enable us to participate in certain offshore, SAGD, and geothermal applications. The deployment of our Lumen8 multi-day automated sampler for tracer diagnostics customers which reduces on-site service requirements. We're expecting field trials for our new rapidTrack tracer diagnostics flow assurance solution which will provide our customers with immediate tracer results at the well site. This data will provide value for our customers by allowing them to make cost saving decisions without having to wait for production sample analysis from our labs. We're expecting the commercialization of a broader portfolio of dissolvable frac plugs and our Stage Saver Composite plug at repeat precision. The Stage Saver is designed to de risk certain issues that can arise during Simulfrac operations. Finally, we expect to broaden our enhanced recovery portfolio to include solutions for preferential production control complementing our injection conformance offerings. 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 throughout the year and into the future. 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 50.0 million a year-over-year increase of 14% and 11% sequentially. This year-over-year increase was led by Canada contributing a 19% increase in revenue and our international results reflecting a 34% increase in revenue, primarily associated with activity in the Middle East and the North Sea. This was partially offset by a 6% decline in the US Our adjusted gross profit, defined as total revenues less total cost of sales excluding depreciation and amortization expense, was 21.9 million in the first quarter, representing an adjusted gross margin of 44%, up compared to our adjusted gross margin of 40% from one year ago. Selling general and administrative costs were 16.2 million for the first quarter, up by 2.4 million compared to the same period last year. This increase was primarily due to higher incentive bonus accruals associated with our improved operating performance, professional fees and an increase in stock-based compensation expense associated with our cash settled stock awards, which we recognize additional expense due to the increase in our stock price. Our other income of 0.9 million for the first quarter relates primarily to royalty income from licenses of our intellectual property. In prior periods, other income was benefited from the contribution of a technical services agreement with our local partner in Oman, which ended in November 2024. Our net income for the first quarter was 4.1 million, or a diluted earnings per share of $1.51, an improvement to last year's first quarter net income of 2.1 million or a diluted earnings per share of 82 cents. Our adjusted EBITDA was 8.2 million, an improvement compared to 6.1 million in the first quarter of 2024. Now turning to cash flow items in the balance sheet. Cash flow from operating activities and free cash flow less distributions to non controlling interest reflects uses of cash of 1.6 million and 2.1 million respectively for the first quarter. As Ryan will discuss in further detail shortly, our full year 2025 forecast is free cash flow positive. However, results for the first quarter reflect the payment of our incentive bonuses related to 2024 as well as the annual vesting and payment of our cash settled stock Awards. On March 31 we had 23.0 million in cash in total debt of 7.6 million, which consisted entirely of finance lease obligations, resulting in a positive net cash position of 15.4 million. The borrowing base under our undrawn ABL facility was 26.8 million and our total liquidity was approximately 50 million, including cash and availability under our revolving credit facility. Now turning to a few points of guidance for the second quarter Due to the seasonal spring break up in Canada, we currently expect second quarter total revenue in the range of 26 million to 29 million. We expect Canadian revenue in the range of 12 million to 13 million, US revenue of 10.5 million to 11.5 million and international revenue of 3.5 million to 4.5 million. We expect our adjusted gross margin to range from 37% to 39% and our adjusted EBITDA to range from negative $2 million to break even. Our second quarter depreciation and amortization expense is projected to be approximately 1.4 million. With that, I'll hand it back over to Ryan to discuss our 2025 full year guidance and closing remarks.

Thank you, Mike. We're making only slight adjustments to our full year guidance for 2025. For context, when we provided our initial full year guidance in March, it excluded the potential impacts from threatened or enacted trade actions. Our current guidance reflects the known impacts from certain tariffs, including tariffs imposed by the US on steel imports and on products from China. As a reminder, we've implemented initiatives to partially mitigate cost increases associated with the tariffs imposed by the US and we believe a portion of these costs can be recovered. Our guidance also reflects the current commodity price environment, which has weakened somewhat for both oil and natural gas since our last discussion in early March. We expect this lower commodity pricing will result in reduced customer and industry activity levels compared to initial budgets primarily impacting the second half of the year. There's currently a heightened level of uncertainty related to trade and the related impacts on economic growth. This is amplified by geopolitical uncertainty as well as announced and potential actions by OPEC+ countries to increase production levels at a time when global demand growth appears to be decelerating. Given that backdrop, we are maintaining our expectation for annual revenue of 165 million to $175 million in 2025, which represents year-over-year growth of 5% at the midpoint, led by Canada and product sales at repeat precision in the United States. We've modified our adjusted EBITDA range to $20 million to $24 million, a modest increase to the high end with a midpoint of $22 million. As with prior years, due to the seasonality of our business, we anticipate that the achievement of our annual adjusted EBITDA guidance range will be weighted to the second half of the year. We expect free cash flow after distributions to our joint venture partner of $7 million to $11 million, further strengthening our robust balance sheet and positioning us to pursue strategic investment opportunities. While NCS performed well during the first quarter of 2025, we are a bit more cautious regarding the second half of the year. Therefore, we are maintaining a wider than normal range for our annual operating guidance. We believe that our expectation for revenue growth in the current industry and macroeconomic environment paired with our strong balance sheet positions us favorably amongst other publicly traded oilfield services companies. Slide 19 of our investor presentation benchmarks our balance sheet through total debt to total book capitalization and our current enterprise value to estimated 2025 EBITDA based on analyst consensus figures which compare our performance to a group of publicly traded peers with a market capitalization below $1 billion. We believe that our favorable growth and balance sheet profile is not reflected in our trading multiple which at 3.5 times enterprise value to 2025 estimated EBITDA is a 20% discount to the pure median of 4.4. Although our shares have performed relatively well over the last year in which we have presented and discussed these measures, the improvement has been almost entirely due to the higher underlying adjusted EBITDA earnings and an increase in our net cash position. At this time last year we traded at a multiple of 3.4 times enterprise value to estimate 2024 adjusted EBITDA, which compares to the current multiple of 3.5 times that I discussed earlier. We believe that as NCES continues to perform well operationally and to deliver on the financial benefits of our growth strategy that I discussed earlier in the call that we can earn a higher multiple over time. Before we open the call up to questions, I'll close with a couple of brief comments. First, we are delivering on the core strategies that we put in place in 2022 that are designed to generate value for our stakeholders through both organic growth and continued technology development. We have the infrastructure in place to support revenue growth in each of our geographic markets, providing leverage to grow future earnings. We maintain a strong balance sheet and liquidity position with a cash balance of $23 million at the end of the first quarter in total liquidity, including availability under our revolver of $50 million. This is a $15 million increase from this time a year ago. In addition, we expect to increase our cash balance by generating positive free cash flow in 2025, providing us with incremental financial and strategic flexibility. Finally, we continue to benefit from the successful introduction of new solutions that meet the needs of our customers, adding to our technology portfolio and expanding our addressable market. With that, we welcome any questions at this time.

[Operator Instructions] Your first question comes from the line of Dave Storms of Stonegate Capital Partners Inc. Please go ahead.

Hey, good morning everyone and thank you for taking my questions.

Hi, Dave.

Just wanted to start -- good morning, it seems like this was a strong showing of really what the operating leverage is at NCSM. Thinking about the scale that you guys are able to achieve going forward, are there any break points that we should maybe be aware of in terms of capacity constraints or anything like that that may be on the horizon?

There's really not, Dave, and we think about that in two ways, right. One is through the supply chain where we have some vertical integration through the operations at Repeat Precision which supports us both in the Repeat Precision sales and in the US -- or sorry, the sliding sleeve business for Canada. But we generally operate an outsourced manufacturing model and believe there's plenty of capacity at our supply chain partners to continue to service as we grow without requiring additional investment or having to have anything that would impact our gross margin profile there. And then when we think about really the infrastructure that we have across our operating business, right, we've got a presence and a sales force in place to serve the US, Canada, Argentina, the North Sea, the Middle East that can accommodate significant additional growth. I think what you might see is in certain individual international markets, if we achieve scale, we might decide to have a little bit more in country presence there. An example of that is this year we are likely to set up an entity in the UK. We've got increased business on the UK side of the North Sea. We have an operating entity in Norway already. So we may do something there this year. And then as business grows in the Middle East, we may have more local service personnel that we decide to locate in country versus some of those jobs that we serve by rotating people from other regions as the work pops up. So, no real break point. We'll just find where we hit that critical mass of repeatable revenue, where it makes sense for us to put some additional investment into certain geographies.

Understood. Very helpful. And then I guess, thinking about the sales pipeline, I guess kind of what are you seeing there from a texture standpoint? Are you building more inbound calls as customers are trying to maybe beat some of this macro uncertainty, or are you seeing yourselves, folks sitting a little more idle as everyone's waiting for the dust to settle? Maybe just any color there would be very helpful.

Yeah. Yeah. Thanks, Dave. Obviously, I think there's a lot of scenario planning that's going on in real time within our customer base. We have seen over the course of the last, even just the last week or so, oil prices in particular start to come down a bit. So look, it's early, but we are anticipating that there will be decisions made here in the course of the next couple weeks that will pull some activity out of the market, especially if WTI hangs in there with a five handle. Again, I think that that starts to come into the market first through private operators and maybe some of the smaller publics. I think your larger public companies and international oil companies in North America, they plan a little bit differently, but certainly they will react to commodity prices, as they need to. So I'd say the discussions are fluid right now and that speaks to North America, especially in Canada, where we're sitting in breakup. So a period of lower activity right now where the customers are planning what their winter drilling activity will look like. So the conversations are ongoing. What I can say is I feel really good about our technology portfolio because our solutions are generally designed to provide customers with an ability to operate more efficiently, to save cost, or to generate more economic value through their resources. So I think we've got the right portfolio to help our customers win and survive through this environment, but we won't be immune to lower activity.

Understood. And then maybe just one more for me. I wanted to touch on the product sales in the US. I know you mentioned that you expect them to be kind of a strength going through the remainder of 2025. They also just followed up the quarter on the weaker end compared to the rest of your portfolio. Maybe any more you could give us here as to how you see that playing out for the remainder of 2025?

Sure, yeah. A couple things within that one is, despite the overall strong performance in Q1, we did have some opportunities within frac systems in particular in the US in the first quarter that got deferred into the second quarter and then within Repeat Precision, we've had a lot of, what I'd call, successful customer field trials that have taken place throughout the first quarter and those trials are starting to convert into more regular activity and that's across both the traditional composite plug and mentioned specifically on the call, the Stage Saver technology, which is a variation of the composite plug but brings some specific benefits around Simulfrac operations. And as more customers adopt Simulfrac, Trimal Frac, et cetera, the features built into that Stage Saver are ones that are certainly on the radar screen for customers. As we move that product through trials, we think that we can certainly grow that business through repeat in the US as well. So feel pretty good about where we think the product sale activity in the US will go during the remainder of the year.

Understood. Thanks for taking my questions and Good luck in Q2.

All right, thanks Dave.

Your next question comes from the line of John Daniel with Daniel Energy Partners. Please go ahead.

Good morning, guys. Ryan, it would seem that second half could get pretty dicey at least certainly here in the US. I'm just curious, given the strength of your balance sheet and which is about to get better, do you see yourself leaning more towards using market disruptions to go after tactical M&A deals, or do you think you lean more conservative and hoard cash and just ride this thing out?

Yeah. So John, we'll certainly be active in evaluating the M&A market. And I think one of the things that at least we've experienced in the past is when you have changes in the market environment and market opportunity, it takes a little bit of time for seller price expectations to adjust. So certainly we'll engage in discussions and think about deploying cash through M&A where, where it makes sense. We do expect the balance sheet to continue to continue to strengthen. And I also think that if we don't find that right M&A opportunity, we have a pretty outstanding investment opportunity within NCS as well. So again, if we don't find opportunities to deploy that capital externally, I think we and the Board will have conversations around what makes sense with respect to return of capital to shareholders or even kind of thinking through whether it makes sense to buy NCS stock back.

Sure. I guess going back to -- I guess this is an unknown question. I'll just pose it to kind of feel it out. But I mean, if activity goes lower second half, I'm assuming it doesn't come ramping back super fast in 2026, we'll see. Who knows? Would the opportunities be start presenting themselves in your view, in the second half or in the first half of next year? That makes any sense? I'm just trying to get the time.

Yeah, no, yeah, it’s a good question. And look, I think we're looking at the current market environment as one where there's I guess a reduction in anticipated demand, if we have the impact of tariffs on global economy. I think oil demand slows but doesn't crater. You pair that with the unknowns on the supply side with OPEC+. But I would see it more as a kind of U shaped, if you will, cycle or mini cycle where you come down potentially pretty quickly, stay at a bottom for a while and then recover. So it's a bit of a hard one to answer, but I think the general timing is right. Whether I can pin it to the second half of this year, first half of next year, but give it, call it six, nine months for the market to adjust and for expectations to recalibrate, that's probably fair.

Okay, that's all I got. Thank you for entertaining those questions.

All right, thanks, John.

Your next question comes from the line of Gauri Sri of Singular Research. Please go ahead.

Good morning, guys. Can you hear me?

We can hear you just fine out.

Yeah, well, thank you. The first question is that 3 million estimate for the international revenue for Q2. Is that tracer work to well construction? And what's the pipeline for the North Sea projects in Q2 and Q3 to compensate for any kind of project delays that you're seeing?

Yeah, this is Mike, appreciate your question. I would say part of the question you asked is that attributed to well construction? I would say yes, part of it is well construction in the Middle East with the agreement that we have and the throughput that we're seeing. It's also we have some tracer activity that we experienced last year that we continue to see activity in that. The North Sea, I would say North Sea, that is -- there are some opportunities. We continue to see those opportunities. I think for our guidance, there is some in the second quarter, but probably more weighted toward the back half of the year as we look to the North Sea.

Okay. And the Canadian activity might have been stronger than anticipated. Did you see any pull forward due to the current macroeconomic conditions, the current policy conditions? Is there any pull forward that we have to model into?

For Canada in the first quarter, it's hard to attribute much of that specifically to a pull forward. I think what we did see in the first quarter was some generally favorable or benign weather conditions. So we got off to a little bit stronger start in January. There was a pretty short holiday break towards the end of last year. And then we've had our customers kind of continue to work into past the first week in March and sometimes you do see activity fall off pretty quickly there. I think another piece of it that's maybe just a little bit more fundamental that's helped us in March has been a bit of a transition in activity where we picked up more work with customers that will work through breakup, whether that be on the frac system side, also the success we've had in building the composite plug business in Canada, a lot of the operators there will set up their well pads, they can work through breakup. So I don't think we're going to have as drastic a fall off typically through the second quarter as we've had in prior years. It'll still be a big reduction for us, but we're working to build up that base of customers that work through the second quarter and help to mitigate at least some of that seasonality.

Gotcha. Given the tariff and the price increases that you might have to pass through and as you're testing these new products in the north, especially in the US market, how well is the pricing environment or are there any pushbacks and are you able to maintain pricing discipline as you test these products, you think?

Yeah, so and there's, there's sort of two components to it. One is when we're bringing in a new technology, right, or that will have a benefit, that will help the operator save money or avoid a potential disruption, typically we can get paid for that. It's not a lot, right, but we can generally get a pretty good margin on new technology we bring to market. The question around pricing discipline and the question around passing through cost, I think this is going to be a bit more of a challenge certainly where we're seeing relatively low commodity prices, operators potentially dropping activity at the same time that we and other service companies will be facing increased costs. We'll see that in the form of steel. Others will see it and we'll see it a bit, still some pressure on the labor side. So it's going to be a more challenging environment to pass some of the costs that we're seeing on the tariff side through to customers. There will be areas where we're able to do it and areas where we'll strategically have to consider whether or not we try to really push that or not. But we will be as disciplined as we can. We're not going to lead the market down, but I can't speak to some of what our competitors will do on the pricing front, unfortunately.

Is the pricing environment different in Canada as opposed to the US? Is it vastly different or is it similar?

Well, I think the broad similarity and the broad truth is that when commodity prices come down, our customers will look to the service companies to help contribute and help them lower their well cost to maintain activity as much as possible. That's true in Canada, it's true in the US. I think part of it has to do really with the differentiation that you're able to provide through your products and services. And I think we're very well placed certainly with our frac systems product line in Canada. And from an operational standpoint, what we're able to enable in that market, we've got a pretty nice differentiation versus the peer set. So while there will be certainly price pressure coming from competitors, I think we do offer distinct advantages operationally that the competitors can't meet.

Thank you guys. That's all I had. Good luck with the rest of the year.

All right, thanks. Appreciate the call and appreciate the questions.

I will now turn the call back over to Ryan Hummer, Chief Executive Officer for closing remarks. Please go ahead.

All right, thank you, Janice. On behalf of our management team and Board, we'd like to thank everyone joining 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 strategies. We're only as good as our people who continually demonstrate why I believe we have the best team in the industry. This team continues to provide excellent service to our customers while developing new products and services that will enable our customers to be even more successful. We appreciate everyone's interest in NCS Multistage and we look forward to talking again on our next quarterly earnings call.