NCS Multistage Holdings, Inc. (NCSM) Q4 2022 Earnings Call Transcript

NCS Multistage Holdings, Inc. (NASDAQ:NCSM) Q4 2022 Earnings Conference Call March 7, 2023 8:30 AM ET

Company Participants

Ryan Hummer - CEO

Mike Morrison - CFO

Conference Call Participants

Bill Austin - Daniel Energy Partners

Operator

Good time and invited to nan NCS Multistage Fourth Quarter 2022 Earnings Conference Call. All participants will beryllium successful a listen-only mode. [Operator Instructions]. After today’s position location will beryllium an opportunity to inquire questions. [Operator Instructions]. Please statement today’s arena is being recorded. I would now for illustration to move nan convention complete to Mike Morrison, Chief Financial Officer. Please spell ahead, sir.

Mike Morrison

Thank you Rocco and convey you for joining NCS Multistage 4th fourth and afloat twelvemonth 2022 convention call. Our telephone coming will beryllium lead by CEO Ryan Hummer and I will besides supply comments.

I want to punctual listeners that immoderate of today’s comments see forward-looking statements specified arsenic comments regarding our early expectations for financial results and business operations. These statements, including our financial guidance, are taxable to galore risks and uncertainties that could origin our existent results to disagree materially from immoderate expectations expressed herein, including nan impacts of inflation, cardinal bank’s actions to combat inflation, and Russia’s ongoing penetration of Ukraine connected nan world economy, lipid and earthy state demand, and our company. Please mention to our astir caller Annual Report connected Form 10-K and our latest SEC filings for consequence factors and cautions regarding forward-looking statements.

Our comments coming besides see non-GAAP financial measures, including adjusted nett income, adjusted EBITDA, free rate flow, and nett moving capital. The underlying specifications and reconciliations of non-GAAP to nan astir comparable GAAP financial measures are included successful our 4th fourth and afloat twelvemonth net release, which tin beryllium recovered connected our website, ncsmultistage.com. I will now move nan telephone complete to Ryan.

Ryan Hummer

Thank you, Mike and invited to our investors, analysts, and labor joining our 4th fourth and afloat twelvemonth 2022 net convention call. I will reappraisal our capacity and accomplishments during 2022, really our actions during nan twelvemonth person positioned america to capitalize connected nan maturation opportunities up and our strategical objectives for 2023. Mike will travel and screen nan financial results for nan quarter.

2022 represented a twelvemonth of meaningful maturation for our manufacture and for NCS, arsenic request for lipid and earthy state continued to rebound from nan lows reached during nan pandemic. We judge that we are still successful nan early stages of this multiyear recovery, pinch a moderating complaint of manufacture activity maturation successful North America, paired pinch robust opportunities for further maturation successful world markets arsenic nationalist lipid companies execute description s of their productive capacity. Against this backdrop, we were capable to summation our gross to $155.6 cardinal successful 2022, an summation of 31% arsenic compared to 2021, chiefly driven by nan spot of our capacity successful Canada and nan U.S. which knowledgeable year-over-year gross maturation of 38% and 32%, respectively. We made important advancement successful each of our cardinal products and work lines successful 2022, adding to our portfolio of technologies that support our customers while expanding our addressable market.

Beginning pinch fracturing systems, we person successfully grown our customer guidelines successful nan North Sea. We first started moving pinch our existent anchor customer successful nan North Sea successful 2017. During 2022, a 2nd customer purchased sliding sleeves from us, pinch completion activity to statesman successful 2023. Also successful early 2023, we were awarded a proceedings good pinch a 3rd customer successful nan North Sea arsenic we proceed to build connected our success, helping customers successful nan region execute highly businesslike completions that heighten nan economics of their operations. We've besides mixed our enhanced betterment merchandise statement into fracturing systems, highlighting nan imaginable opportunities for our sliding sleeves to support customer operations passim nan producing life of nan well, done controlled fracturing, solids control, and preferential accumulation successful summation to enhanced betterment operations that support water, state and CO2 injection.

Within good construction, we challenged our income and operations teams successful Canada to turn this merchandise line, and they've responded. We grew our liner hanger business successful Canada by much than 200% successful 2022 arsenic compared to 2021 and expect further maturation adjacent year. With this growth, we are expanding our operations footprint and will beryllium moving into a caller installation during nan 2nd 4th of 2023. For 2023, a cardinal attraction for nan good building merchandise statement is to further create our casing buoyancy offering to meet customer circumstantial applications successful North America and world markets.

Our Tracer Diagnostics merchandise statement produced beardown results successful each halfway geographies successful 2022 pinch year-over-year gross maturation of complete 40% connected a world basis, which included maturation of much than 30% successful each of nan U.S. and Canada and maturation of complete 60% extracurricular of North America. We expect to proceed to grow our Tracer Diagnostics business successful world markets successful 2023 and to person first wells and tests pinch customers into repeatable activity successful nan future. We're investing successful each aspects of nan Tracer Diagnostics merchandise line, advancing our R&D efforts to present caller work offerings, to trim chemic usage, and besides to further optimize our injection and sampling instrumentality to supply amended and much actionable results to our customers.

Our Repeat Precision, nan existing portfolio of frac plugs and mounting devices continues to execute very well, exhibiting precocious reliability. Repeat is supported by nan efforts of nan NCS squad successful Canada, wherever we proceed to turn our customer guidelines and summation caller proceedings opportunities. We've officially commercialized our Purple Fire mill assembled modular perforating weapon strategy successful precocious 2022 pursuing extended section trials. We person since grown our customer guidelines pinch an first attraction connected nan Permian Basin. As a reminder, nan Purple Fire provides america pinch nan opportunity to participate successful a larger addressable marketplace and is afloat compatible pinch our mill assembled Purple Seal Express system, which combines a disposable mounting instrumentality and a composite frac-plug aliases bridge-plug. This mixed offering, which we telephone nan Purple Fire Express, is an perfect strategy for businesslike plug and perf operations.

I want to touch concisely connected our separator capacity successful 2022 and really we're responding to nan inflationary pressures complete nan past fewer years. For nan afloat twelvemonth successful 2022, our gross separator percent was 39%, somewhat beneath our 41% gross separator successful 2021. The little separator reflects important costs increases, particularly related to oilfield tubulars specified arsenic casing, which are utilized successful nan accumulation of our products, arsenic good arsenic different costs items specified arsenic elastomers, chemicals, and transportation. These costs increases were partially offset by higher volumes and by pricing increases achieved pinch our customers from which we began to use successful precocious 2022.

Moving into 2023, we're implementing further value increases crossed our business. As pinch 2022, we expect nan afloat use from these value increases to beryllium realized successful nan second-half of nan year. We stay very focused connected managing our costs, particularly our SG&A expenses which fell from 41% of gross successful 2021 to 37% of gross successful 2022. We expect our SG&A disbursal to emergence successful 2023 arsenic compared to 2022 levels reflecting yearly costs of surviving increases for 2023, nan investments that we're making to pull and clasp nan awesome group we request to support our maturation expectations, and a much normalized yearly prize program.

Our walk connected IP related litigation matters which falls wrong SG&A is expected to statesman to mean successful 2023 arsenic compared to 2022 wherever we had 2 patent infringement tests successful nan U.S. related to our airlock casing buoyancy system, wherever nan assemblage awarded america damages against nan accused infringing parties and a patent proceedings successful Canada wherever we are still awaiting results. We person 1 much patent infringement proceedings related to a different merchandise statement scheduled for nan extremity of nan first 4th of 2023 and definite station proceedings matters for different cases. Putting this together, arsenic a result, we judge our full SG&A disbursal could summation by 10% to 12% successful 2023 comparative to 2022 levels, but that SG&A arsenic a percent of gross will proceed to diminution supporting EBITDA separator description .

We're very proud of NCS's way grounds of free rate travel procreation complete clip and done cycles. We invested heavy successful moving superior successful 2022 to facilitate our growth, starring to antagonistic free rate travel of $2.1 million. We expect to make affirmative free rate travel successful 2023 arsenic nan rate generated from operations is expected to money some moving superior increases, supporting further gross growth, and strategical superior investments we will make successful our business. I want to reiterate NCSS's semipermanent strategy and to concisely talk our firm goals for 2023.

The imagination for NCS is to beryllium globally recognized arsenic a trusted partner and bold innovator, enabling our customers assets improvement strategies done exertion driven solutions and reliable expertise. Aligned pinch this imagination are 3 halfway strategies that we are pursuing complete nan adjacent 5 years to thrust maturation and accrued profitability successful nan business. The first halfway strategy is to build upon our starring marketplace positions. This is astir evident successful our fracturing systems merchandise statement wherever we proceed to return our exertion into caller marketplace segments, to leverage starring positions successful definite geographies for illustration Canada to waste further products and services, and wherever we are continually moving to grow nan functionality of our completion systems to supply worth to our customers passim nan producing life of their wells.

The 2nd halfway strategy is to capitalize connected our increasing group of world and offshore opportunities. We've been investing clip and effort to position NCS to participate successful meaningful maturation successful prime world markets. We judge this difficult activity will statesman to salary disconnected successful 2023 and thereafter, peculiarly arsenic we capitalize connected our increasing customer guidelines successful nan North Sea and grow our opportunities successful nan Middle East. The 3rd halfway strategy is to commercialize innovative solutions to analyzable customer problems.

Through this halfway strategy, we are utilizing our beardown customer connections from nan section to nan office, utilizing nan sound of nan customer to provender our caller merchandise improvement process and refine nan exertion imagination for each merchandise line. We are besides leveraging our position arsenic a world leader successful fracturing systems to activity straight pinch our customers to create caller exertion successful a collaborative mode whereby we clasp nan authorities to this caller exertion pinch nan expertise to marketplace nan products to a world customer base. These halfway strategies are supported by our guiding principles of upholding nan NCS promise, which embodies our values and outlines really we dainty our cardinal stakeholders arsenic good arsenic our different guiding rule of maximizing financial flexibility, which is supported by our superior ray business model.

Our goals for 2023 are afloat aligned pinch our semipermanent strategy astatine nan corporate, location and merchandise statement levels, which has been a important undertaking complete nan past fewer months. Broadly speaking, our goals successful 2023 are built astir enabling our outstanding people, empowering our early done a committedness to invention centered connected nan sound of our customers and increasing profitably from our beardown existing base. I'll now inquire Mike to talk our financial results successful much detail.

Mike Morrison

Thank you, Ryan. As reported successful yesterday's net release, our 4th fourth revenues were 40.2 million, 11% higher than nan anterior year's 4th quarter. Our U.S. and Canada revenues accrued by 34% and 15% respectively, which were partially offset by a diminution successful our world business from which income tin beryllium lumpy. As expected, connected a sequential basis, our 4th fourth revenues were down 18% compared to nan 3rd quarter, owed successful portion to seasonality and customer fund exhaustion, chiefly successful Canada. For nan afloat twelvemonth 2022, our revenues were 155.6 billion, an summation of 31% compared to 2021. Gross profit defined arsenic full revenues little costs of income excluding depreciation and amortization disbursal was 16.1 cardinal successful nan 4th quarter. Our gross profit percent was 40% compared to 44% from nan aforesaid play 1 twelvemonth agone and 42% sequentially.

Selling, wide and administrative costs were 13.1 cardinal for nan 4th quarter, which was astir 300,000 little than nan aforesaid play successful 2021, chiefly owed to little master fees related to litigation matters, which was partially offset by an summation successful our payroll disbursal associated pinch net increases from earlier successful 2022. For nan 4th quarter, we reported nett income of 2.0 cardinal aliases $0.81 per diluted share, which was an betterment of $0.13 per diluted stock compared to nan aforesaid play successful 2021. Our adjusted nett income was 1.6 cardinal aliases $0.64 per diluted share, an betterment of $0.16 per diluted stock to nan 4th fourth past year.

Adjusted EBITDA for nan 4th fourth was 6.4 million, accordant pinch nan aforesaid play successful 2021 and a diminution of 2 cardinal sequentially. Compared to nan 4th fourth guidance provided connected our past net call, we were astir 2 cardinal beneath our gross range, but successful nan scope of our expected gross profit percent and adjusted EBITDA. While revenues fell short of our expectations, we saw an betterment successful nan operation of revenues and had little SG&A costs than anticipated.

Turning now to rate travel items successful nan equilibrium sheet. Cash travel from operations and free rate travel for nan 4th fourth was 7.6 cardinal and 7.4 cardinal respectively. Our free rate travel for nan afloat twelvemonth of 2022 was a antagonistic 2.1 million, which was chiefly nan consequence of an summation successful networking superior of 7.2 million, which totaled 55.2 cardinal into nan year. On December 31st, we had 16.2 cardinal successful rate and full indebtedness of 7.9 million, resulting successful a affirmative nett rate of 8.3 million. As of December 31st, nan borrowing guidelines nether our undrawn ABL installation was 18.6 million.

Turning now to a fewer points of guidance for nan first 4th of 2023. We presently expect first 4th full gross of 43 cardinal to 47 million, an betterment complete some nan first and 4th quarters of 2022. We expect U.S. gross of 12 cardinal to 13 million, Canada of 30 cardinal to 32 million, and world gross of 1 cardinal to 2 million. We expect our gross separator percent to beryllium betwixt 38% and 41%, which is akin to nan gross margins we knowledgeable successful nan first and 4th quarters of 2022. We expect our adjusted EBITDA to beryllium betwixt 4 cardinal to 5 million. We expect our first 4th depreciation and amortization disbursal to beryllium astir 1 million. I'll manus it complete to Ryan to supply our afloat twelvemonth 2023 guidance and for closing remarks.

Ryan Hummer

Thanks, Mike. Our afloat twelvemonth guidance for 2023 is arsenic follows. We presently expect afloat twelvemonth gross to beryllium betwixt $175 cardinal and $190 cardinal and afloat twelvemonth adjusted EBITDA to beryllium betwixt $20 cardinal and $25 cardinal pinch adjusted EBITDA accordant pinch nan reconciliations successful our net release. We expect our gross superior expenditures for 2023 to beryllium betwixt $4 cardinal and $5 million.

As stated before, we expect nett moving superior to beryllium a usage of rate successful 2023 supporting our anticipated growth, but do expect that we will make affirmative free rate travel during nan year. In addition, astatine an adjusted EBITDA level of $20 cardinal to $25 million, we would expect to make affirmative nett income for nan year. Underpinning our gross maturation expectations is anticipated year-over-year mean yearly manufacture maturation of up to 10% successful some Canada and nan U.S., though activity successful nan U.S. is expected to beryllium beneath nan levels reached successful nan 4th fourth of 2022. Furthermore, we expect world manufacture activity to turn by astatine slightest 10% successful 2023.

We expect our gross maturation to transcend that of nan underlying manufacture activity by achieving marketplace stock increases successful selected merchandise and work lines, our maturation successful world markets, and continued take of recently introduced technologies crossed our merchandise and work lines. We besides expect nan afloat effect of nan value increases that we execute pinch our customers to offset costs ostentation will supply a affirmative impact, particularly successful nan second-half of nan year. Due to nan seasonality of our business and accordant pinch anterior years, we would expect that nan accomplishment of our yearly adjusted EBITDA guidance scope will beryllium weighted to nan second-half of nan year.

Before we unfastened up nan telephone to Q&A, I'll adjacent pinch a mates of little comments. We had beardown capacity successful 2022, increasing full yearly gross by 31% and improving our adjusted EBITDA separator from 8% successful 2021 to 10% successful 2022. We person nan infrastructure successful spot to support gross maturation successful each of our geographic markets, providing leverage to turn early earnings. As demonstrated by our guidance for 2023, achieving nan midpoint of our guidance scope would turn our yearly gross by complete 15% and further summation our adjusted EBITDA separator to 12%. At nan midpoint of nan guidance range, we would turn gross by astir 27 cardinal and adjusted EBITDA by 7 million, reflecting incremental adjusted EBITDA margins of astir 25%.

We proceed to successfully present caller technologies that meet nan needs of our customers, adding to our portfolio, and expanding our addressable market. And finally, we participate 2023 pinch a beardown equilibrium expanse and liquidity position, ending 2022 pinch a rate equilibrium of complete $16 million. In addition, we expect to adhd to that rate equilibrium by generating affirmative free rate travel during nan year, providing america pinch financial and strategical flexibility. With that, we would invited immoderate questions from nan audience.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. And today's first mobility comes from Bill Austin astatine Daniel Energy Partners. Please spell ahead.

Bill Austin

Hey, guys. Good 4th and a bully decorativeness to nan year.

Ryan Hummer

Thanks, Bill.

Bill Austin

So I wanted to conscionable touch a small spot connected nan -- conscionable a small connected moving capital. I cognize you guys talked astir it accrued past twelvemonth a small bit, and I cognize you touched connected a small spot location astatine nan end, but conscionable benignant of really you spot that going passim nan twelvemonth and past really that benignant of generates -- really arsenic 2023 benignant of plays out, really that helps you guys make your free rate travel aliases much affirmative free rate travel for 2023?

Ryan Hummer

Sure, I'll return that astatine nan commencement and past Mike tin supplement. One of nan things that was really an accomplishment for america during 2022 was we did get a batch much businesslike pinch our moving capital. So while nett moving superior did summation by conscionable complete $7 cardinal betwixt nan extremity of 2021 and nan extremity of 2022, our nett moving superior arsenic a percent of our trailing 12 months gross came down from astir 45% to 35%. And that really gets america backmost to nan ratio benignant of nett moving superior arsenic a percent of income that we had successful 2018 and 2019 anterior to nan downturn. And I deliberation location was moreover much accomplishment successful location fixed nan truth that we've seen costs ostentation successful our inventory base. So we've been really doing a awesome occupation successful managing absolute inventory levels, but nan costs of inventory has been expanding astatine nan aforesaid time.

So for 2022, we had bully underlying net successful nan business, but we grew gross by 30%. So nan rate that went into building nett moving superior somewhat overcame nan rate generated from conscionable normal business operations, starring america to somewhat antagonistic free rate travel for nan year. But arsenic we move to 2023, nan underlying net successful nan business are higher and nan level of growth, nan complaint of growth, while still bully astatine much than 15% is moderating a bit, which will let america to person that benignant of operating rate travel earlier moving superior build into existent free rate travel for nan business this year.

Bill Austin

Great, thanks. And past conscionable 1 I'm switching conscionable a small spot connected that, conscionable connected nan profile. The modulator propane weapon system. I cognize you mentioned a small spot successful your comments really is traction going connected that and erstwhile do you commencement really seeing benignant of bully procreation of gross from that strategy successful 2023?

Mike Morrison

Yeah. Thanks, Bill. It's a awesome question. So we were really done successful nan section proceedings process for astir of 2022. When we brought nan Purple Fire out, we had an anchor customer and for us, that transmission to marketplace is simply a small spot different. Most of our products and services we waste straight to nan E&P company. With Perforating Guns, you are trading done nan wireline company. So our transmission to marketplace is done different work provider. Although we surely do marketplace for benignant of propulsion done trading to nan E&P customer bases arsenic well.

But we worked pinch 1 wireline institution who surely saw nan advantages of our strategy to get done nan section proceedings process. There were a batch of learnings there. As we sewage into precocious successful nan 3rd 4th of 2022 we are very comfortable pinch wherever that merchandise was and started to return that retired and waste Purple Fires done different wireline customers. So that was benignant of nan travel we've gone through. It's still a comparatively mini contributor to nan wide gross floor plan correct now. We would expect that that starts to prime up a spot much done benignant of nan 2nd and 3rd 4th and deed much of a dependable authorities successful nan 2nd half of nan year. The process that we spell done pinch nan Purple Fire successful immoderate ways and this is getting a small spot into nan weeds, but there's a process called a tow prep for immoderate plug and perf wells wherever we tin present that strategy pinch nan wireline institution successful a very debased consequence basis. Get them comfortable pinch nan system, and past they tin commencement taking that retired to regular shape activity pinch customers.

So arsenic we turn nan customer base, it starts pinch comparatively debased shape count tests and past we turn that into afloat shape activity and return it from there. And again, because we're building and assembling nan Purple Fire systems successful nan Permian basin, we're starting retired taking that merchandise to nan Permian truthful we tin supply very responsive section work to some nan E&P customer but besides our wireline customers done that proceedings process arsenic it gets adopted.

Bill Austin

Great. That's each for me.

Operator

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I'd for illustration to move nan convention backmost complete to nan guidance squad for immoderate last remarks.

Ryan Hummer

Alright, thanks, Rocco. On behalf of our guidance squad and our Board, we'd for illustration to convey everyone connected nan telephone today, including our shareholders and investigation analysts, and particularly our employees. I genuinely admit nan tremendous activity and dedication demonstrated by our squad present astatine NCS and Repeat Precision. We're only arsenic bully arsenic our people, and I'm fortunate to beryllium capable to activity pinch nan champion squad successful nan industry.

Just yesterday, our COO and I visited pinch our proviso concatenation and manufacturing squad successful South Houston to observe that team's accomplishment of achieving complete 2000 days of moving safe pinch nary recordable incidents successful manufacturing complete that time. Our squad continues to supply fantabulous work to our customers and is commercializing caller products and services that will alteration our customers to beryllium much successful. We're taking connected demanding and technically challenging activity and we are delivering results. We judge that we're still successful nan early stages of a multi-year rhythm of improved prospects for our manufacture and I'm excited by really NCS is positioned to participate successful that maturation and to present benefits to our employees, customers, shareholders, and different stakeholders. We admit everyone's liking successful NCS Multistage and we look guardant to talking again connected nan adjacent quarterly net call. Thank you.

Operator

Thank you, sir. This concludes today's convention call. We convey you each for attending today's presentation. You whitethorn now disconnect your lines and person a awesome day.