NCS Multistage Holdings, Inc. (NCSM) Q2 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Second Quarter 2018 NCS Multistage Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Mr. Ryan Hummer, Chief Financial Officer. Sir, you may begin.

Thank you, Joelle. And thank you for joining NCS Multistage’s second quarter 2018 conference call. Our call today will be led by Robert Nipper, our Chief Executive Officer; and I will also provide comments. Before we begin our call today, we’d like to caution listeners that some of the statements that will be made on this call could be forward-looking statements and to the extent that our remarks today contain information other than historical information, please note that we are relying on the safe harbor protections afforded by federal law. Such forward-looking statements may include comments regarding future financial risks, and are subject to a number of known and unknown risks. I’d like to refer you to our press release issued last night along with other public filings made from time to time with the Securities and Exchange Commission that outline those risks. I also need to point out that in our earnings release and in today’s conference call, we have discussed and will refer to adjusted EBITDA, adjusted EBITDA margin, adjusted net income and adjusted net earnings per diluted share which are non-GAAP measures of operating performance. We use these measures of operating performance because they allow us to compare performance consistently over various periods without regard to costs associated with our current capital structure and in a manner that we believe better reflects our ongoing operating performance. Our press release from yesterday, which is posted on our website, ncsmultistage.com, provides reconciliations of these non-GAAP financial measures to net income, the nearest GAAP financial measure. With that said, I’ll turn the call over to our Chief Executive Officer, Robert Nipper.

Thanks, Ryan, and I’d like to welcome our investors, analysts and employees joining our second quarter 2018 earnings conference call. Today I’ll review some of the highlights from the second quarter and will touch on what we are seeing in our Canadian, U.S. and International operations, after which I’ll turn it over to Ryan to discuss the quarterly results in more detail. I’ll also provide some closing remarks touching on some of our recent accomplishments. Our results in the second quarter while reflective of seasonal impact of our business in Canada demonstrate the continued execution of our strategy. Total revenue in the second quarter was $43.4 an 18% improvement over the year-ago period. Adjusted EBITDA in the second quarter of $5.3 million reflect a 12% adjusted EBITDA margin and was 12% higher than in the second quarter of 2017. Starting with our Canadian operations, we saw a longer-than-expected spring breakup, and as a result, our revenue of $13.9 million for the second quarter was lower by 16% compared to the year-ago period. Our Canadian revenue for the first six months of the year of $61 million was higher by 5% than in the year-ago period. For context, the average rig count in Canada was 9% lower during the first half of 2018 than during 2017. As a reminder, the second quarter is typically the lowest revenue quarter for our Canadian business due to spring breakup. Business activity in Canada began to pick up late – in mid to late July and continues to firm up today. Despite adjustments to the drilling schedules of certain of our customers and a lower FX rate in 2018, we currently expect revenues from our Canadian operations in the third quarter of 2018 to be similar to the $40 million in revenues that we had in the third quarter of 2017. This reflects the success we’ve had in adding customers and growing our completions market share in high-value markets such as the Cardium as well as continued increases in completions intensity in the Canadian market. One item to note is that in late July, we filed a lawsuit in Canada against one of our competitors that we believe is infringing on several of our Canadian patents related to our fracturing tools and methods. We filed this lawsuit because we have made and continue to make significant investments to develop and protect the intellectual property that enables our technology to support the differentiated offering we provide to our customers. We will continue to monitor competitors that may be infringing on our IP and we’ll take steps we deem necessary to protect our intellectual property and continue to benefit from the innovations that our people have worked so hard to develop. Turning now to the U.S. Our revenue for the second quarter of $27.7 million was 80% higher than in the year-ago period and was 26% higher sequentially. For the third straight quarter, we delivered sequential unit growth in each of our primary product categories, sliding sleeves, AirLock casing buoyancy systems and composite plugs. Sequential growth in total U.S. product revenues of 20% was in excess of any measure of increased industry activity during the same period. Our service revenue in the U.S. improved by 35% sequentially, reflecting strong tracer diagnostics performance and the alleviation of supply chain bottlenecks that impacted the industry completion activity in the first quarter. As we indicated on the last quarter’s call, we’ve been able to grow our customer base in pinpoint fracturing systems over the last quarter and have now worked for more than 30 customers over the last 12 months, with the majority of those customers being Repeat customers. This success is directly linked to specific initiatives to target applications where pinpoint completions can offer significant operational advantages and flexibility as compared to traditional completion methods. We expect that we will continue to build on our strong momentum for the second quarter and that our U.S. revenue in the third quarter will grow over 10% on a sequential basis, primarily driven by increased product sales. I know that the topic of pricing differentials in the Permian has been a popular one this earnings season. While we have not seen any indications of reductions in activity within our customer base at this time, we do anticipate that there could be a potential slowdown in the rate of growth and completions activity generally in the Permian Basin as we move into late 2018 and 2019, until the pipelines under construction are commissioned. While significant amount of our activity in the U.S. is generated in the Permian Basin, our capital and the personnel-like business model allows us to quickly react to changes in industry activity. I’ll remind you that for us to provide service for a job utilizing our fracturing systems or tracer diagnostics services, all we typically need is one person for the day shift, one for the night shift and a pickup truck for our tools or services. Additionally, as a provider of technologies that enable our customers to increase efficiencies and to optimize skill development programs, we can continue to grow through increased market penetration of our products and services, both in the Permian and in other place. Our international revenue for the second quarter of $1.8 million was slightly higher than our revenue of $1.5 million from the first quarter. While this trailed our expectations for the quarter, the shortfall was due to project delays and we anticipate that our international revenue will strengthen during the second half of the year with additional offshore work in the North Sea, which I’ll address further in my closing remarks. We currently expect 3Q 2018 international revenue to be between $4 million to $5 million. Based on our year-to-date results and what we’re seeing in each of the countries in which we operate, we are revising our full year revenue guidance to a growth rate of 35% to 40% in 2018 as compared to 2017. The reduction to the top end of the guidance range is a result of a handful of factors including our actual revenue performance through the first half of the year, weakening of the Canadian dollar relative to the U.S. dollar since the time of our initial guidance and caution regarding potential reductions to customer activity based on basin level crude oil price differentials related to takeaway constraints in the Permian Basin and in Canada. We continue to anticipate that most of this year-over-year growth will come from our U.S. operations. I’ll now turn the call over to Ryan to discuss our financial results in more detail.

Thank you, Robert. As reflected in yesterday’s earnings release, our second quarter revenues were $43.4 million, compared to $36.9 million in the prior year second quarter, an increase of 18%. The increase in revenue was driven by higher industry activity, increased completion intensity, the inclusion of our tracer diagnostic services and strong performance from Repeat Precision. On a sequential basis, revenue in the second quarter was 39% lower than revenue in the first quarter, as the 26% sequential increase in revenue in the U.S. was more than offset by the seasonal decline in revenue from Canada. Gross profit, defined as total revenue less total cost of sales excluding depreciation and amortization expense, was $23.5 million in the second quarter or 54% of revenue compared to $18 million or 49% of revenue in the prior-year second quarter. This is due to higher revenues, mix in our product sales contribution and also the increased contributions from Spectrum and Repeat Precision in 2018 as compared to 2017. For a sequential comparison, gross profit was $37.1 million or 52% of revenue in the first quarter of 2018. Selling, general and administrative cost increased to $22.1 million in the second quarter from $16.2 million in the prior years’ second quarter and $21 million in the first quarter. As a reminder, our reported SG&A includes share based compensation as well as certain non-recurring expenses. The year-over-year increase was driven by headcount additions to support the growth of our business, increased salaries, higher bonus accruals, increases to share based compensation, and SG&A related to Spectrum’s operations. For the third quarter, we expect our reported SG&A inclusive of share-based compensation and nonrecurring items to be between $23 million and $24 million. This includes investments we are making in certain international markets and legal costs related to the actions Robert described earlier to enforce our intellectual property. Our second quarter 2018 depreciation and amortization expense totaled $4.4 million and we expect our third quarter depreciation and amortization expense to be just slightly higher than in the second quarter, reflecting the capital investments we’re making in our business. Adjusted EBITDA for the second quarter was $5.3 million, as compared to $4.8 million in the prior years’ second quarter. Adjusted EBITDA as a percentage of total revenue was 12% in the second quarter of 2018. A couple other items to note with respect to our income statement in the second quarter. First, we recorded noncash expense of $0.2 million, which reflected an increase in the liability we have on our balance sheet related to the contingent earn-out provisions associated with Repeat Precision and Spectrum. The value of these liabilities are measured quarterly with increases to the liability, resulting in an income statement expense and decreases to liability having the opposite effect. Second, our book effective tax rate for the quarter was a benefit of 27%. The calculation of our book tax rate included adjustments related to U.S. tax reform and discrete items. Third, we had net income attributable to non-controlling interests of $1.2 million in the quarter, reflecting positive net income at our Repeat Precision joint venture for the second straight quarter. We expect to continue to have positive net income and positive contributions from Repeat Precision for the remainder of the year and into the future. When considering our net income and earnings per share in future periods, it’s important to account for these contributions. Our diluted loss per share for the second quarter was $0.09, which compared to a diluted loss of $0.11 in the prior-year second quarter. Turning now to cash flow items in the balance sheet. Cash flow from operations for the second quarter was $15.8 million and was $7.5 million over the first six months of the year. We expect a decline in cash flow from operations in the third quarter as compared to the second quarter, reflecting seasonal impacts from working capital, particularly receivables as our Canadian revenues increased following spring breakup. Our net capital expenditures for the second quarter were $2.5 million and have been $3.6 million over the first six months of the year. We currently expect consolidated capital expenditures for 2018 to be between $15 million and $18 million, inclusive of the build out of our tech center in Calgary, spending related to the implementation of a new ERP system and growth capital investments related to our Spectrum and Repeat Precision. At June 30th, we had $33.5 million in cash and total debt of $25 million, which included $20 million drawn under our U.S. revolving credit facility. We also have up to $55 million in total availability under our revolving credit facilities, bringing our total potential liquidity at June 30th to approximately $88.5 million. We expect our net interest expense to be between $0.5 million and $0.6 million in the third quarter. We expect our quarterly book effective tax rates for the remainder of the year for the third and fourth quarters to be between 25% and 29%. Given the modest income tax benefit through the first six months of the year, we expect our book effective tax rate for the full year 2018 to be in the range of 18% to 22%. I’ll now hand it over to Robert for closing remarks.

Thank you, Ryan. Before we open up the call for Q&A, I’d like to highlight a couple of our accomplishments during the last few months. In Canada, we continue to make significant progress and growing our business with customers operating in the Cardium and Deep Basin. These are high value wells in areas with growing completions intensity exhibited by longer laterals, higher stage counts and higher profit loadings. In addition, Canada is a growing market for our well construction offering and specifically our AirLock casing buoyancy systems. This technology continues to provide operators with assurance and being able to get their casing to bottom, while providing net cost savings through a reduction in casing running time. In the last call, we highlighted an area in the U.S. where five customers had utilized our fracturing systems in eight wells through April. The big driver for these customers has been the ability to control the fracture network for operational issues. I’m proud to say that as of today, our customer count in that basin is approaching 10 and growing. Our business development team has done a terrific job of understanding the needs of our customers in the area and aligned the value proposition of pinpoint stimulation with those needs. We’re also spending a significant amount of time understanding customer challenges related to infill drilling, including well interference and child well performance issues. Our tracer diagnostics offering with both liquid and particular tracers is ideally positioned to help customers better understand the nature of well interference. Our Reservoir Strategies team helps customers assess potential changes in well spacing and completion designs and our fracturing systems provide the ability to provide more consistent frac placement along the lateral of a child well potentially reducing frac interference issues. In tracer diagnostics, we’re currently tracing the first well of a multi-well program in Argentina. We believe that this is a clear demonstration of the synergies from the acquisition of Spectrum last year. In addition, we expect to have full service – a full service tracer lab in Calgary operational by the end of the third quarter. This will accelerate the testing and reporting timeline for our Canadian customers. Over the course of the second quarter, we successfully commercialized our line of water soluble tracers, a tracer embedded in a particulate much like our old soluble tracers, but designed for long-term performance and produced oil and formation water. This is yet another innovation that keeps our tracer diagnostics offering at the forefront of the industry. Repeat Precision had another quarter of impressive growth. We have now qualified our PurpleSeal all-composite frac plug for use in 10K psi environments, expanding the addressable market for the product. We have also begun commissioning additional manufacturing capacity, which will support the production of the disposable setting tool, which we pair with our composite frac plugs in our PurpleSeal Express offering. We believe that the combination of a factory-assembled frac plugs together with the adaptor kit and setting tool provides our customers with a significant operational and health-safety and environmental advantage at a very attractive price point and have had strong interest in the product. On the international front, as I mentioned in more detail in our earnings and press release issued last night, we’ve entered into a five-year frame agreement for stimulation support services with Aker BP in the North Sea. Work for NCS under the agreement is subject to individual purchase orders with purchase orders issued for several wells that are expected to be completed in 2018 and 2019. We’re excited to have the opportunity to continue to work with Aker BP and support their well completions efforts. Aker BP has been a great partner for us as we have taken the important step of commercializing our fracturing systems for offshore applications and we look forward to building on our relationship. Finally, we recently unveiled a new branding initiative intended to leverage the strength of the NCS Multistage brand and to clarify the breadth of our product and service capabilities for our customers. Fracturing systems encompasses our core pinpoint fracturing technology plus additional products or services for fracturing or refracturing. Well construction includes the AirLock casing buoyancy system, liner hangers, toe sleeves and related products. Tracer diagnostics is comprised of the activities of Spectrum-tracer services and our Reservoir Strategies group includes capabilities in reservoir engineering, geoscience and completions engineering. I’ll close with just a couple of brief comments. First, we continue to be well positioned to deliver organic growth through increased adoption of our innovative completion systems and equipment. Second, the initiatives that we have in place to grow our U.S. business are delivering results. We’ve successfully grown our customer base in the U.S., adding to the number of Repeat customers while bringing in new customers through strategies that accelerate the path to a continued adoption. We expect to continue to grow our U.S. business sequentially at a rate that is faster than the growth in completions activity. Third, we are very excited about the opportunities we are developing in international markets. Our ability to leverage our existing presence in Argentina that introduced our tracer diagnostics offering and the work that we have begun in the North Sea are just a couple of the many initiatives we have in place to participate in the expected coming uptick in international activity. Finally, our capital-light business model provides us with the ability to maintain a very strong balance sheet and with optionality to allocate capital to high return investments and evaluate options for return of capital to shareholders over time. And with that, operator, we’d like to open it up for questions.

Thank you. [Operator Instructions] Our first question comes from Jim Wicklund with Credit Suisse. Your line is now open.

Good morning, guys. For a Canadian company that does a low pressure gas Aker BP is a hell of an achievement, congratulations. A little bit of drill down on that, if I could. Your revenues internationally were just over $1 million, you’ve obviously gained significantly higher number for Q3. How many wells did you do in the quarter and are you doing anything differently in these North Sea wells, is the technology, the application, is there something inherently different about what you’re doing in the North Sea versus what you’re doing inside the Permian or the Cardium?

Yes. So the way we think about the North Sea opportunity, Jim, is – and we think it’s very, very similar to the unconventionals in the U.S. So we’ve known for decades that there were hydrocarbons trapped there, but as an industry, it’s just been in the last 10 years that we’ve been successful and being able to economically access those reserves. And that’s the same thing that we see in the North Sea. The hydrocarbons have been there and we’ve known about it as an industry, but it just hasn’t been economical to access those reserves. So what we’ve done is, we started this project with Aker BP just over three years ago, developing a variant of our sleeve technology to work in the North Sea. Now I’m not suggesting that the formations are similar or the same as the unconventionals in the U.S., but what I am suggesting is that the cost structure in the North Sea was such that with conventional completion techniques, they weren’t able to economically develop those resources. So in terms of the number of wells that we’ve done, we’ve done one well, which we talked about in previous conference calls. Before that well was completely completed, we were already in negotiations with Aker BP for a longer-term contract. And so what we’ve been able to do is give them with our offer to – offer technology for Aker BP that allows them to complete their wells in a fraction of the time that they can complete them using their traditional completion techniques. So the cost savings are significant. I mean, it’s in the range of what a couple of big wells in the Permian might cost would be the cost savings that they’re seeing from this. So we have already started receiving purchase orders. Those purchase orders will be for work in late 2018 and early 2019. There’s one rig running in the Waha field now, they expect to be up to three rigs by the end of the year or early next year. So there is no – because this process of awarding this work to NCS only started in late May, early June, it’s still pretty early on in terms of understanding what the full scope is. The customer is still trying to understand with this technology, what else can we do with it. So we’re not sure what the full scope of is yet, but we’ll try to keep you guys updated as we learn more.

Having worked on the rocks of the North Sea, both UK and Norway side, I know that the operations in Norway are obviously complicated, but the rocks aren’t particularly novel in either basin and that’s the same around the world. So should your – what you’re doing for Aker BP in the North Sea, couldn’t that reasonably be expected to be able to expand in other offshore or even onshore international opportunities?

Yes, we believe it can. In fact, today, we are on a job on the Denmark side, so not on Norway, but for another customer in the North Sea, where we utilizing our technology, but it’s a different type of – a different variant of the technology, if you will to address the specific issues that they had around cost on that part of the field. So we’re pretty excited about this opportunity. We don’t view it as being particularly impactful in 2018 but we book view at 2019 and beyond, there could be potential there for sure.

We’re focused on 2019 and beyond [indiscernible] right. My follow-up, if I could, and others is premature, you guys are still a small company, you’re still obviously growing very quickly in the U.S., your free cash flow is significant because your CapEx is so low, what do you do next – the Tracer Spectrum has been fabulous, you’re putting capital into Repeat Precision, is there another leg to the stool that one day you aspire to, I mean, when I one day like, in the investment horizon over the next couple of years?

Yes. So our strategy that we’ve talked about before that we started in 2017 was around – not focused on selling – trying to sell our products and services down to customers throughout – everywhere in the U.S. – and have the same value proposition. The strategy became more around trying to get a better understanding of the rocks, focusing on different opportunities to help our customers become either more efficient or make better wells. So as we move forward that tracers fit right into that strategy for us, because it was a diagnostics tool that allows us to better understand how the wells are performing as we optimize going forward. Our Reservoir Strategies grew. We have enhanced the capabilities and that grew significantly over the last year with a focus on geotechnical sciences expertise. And so now we’re working very closely with our customers to understand their rock specifically, understand their challenge and that’s one of the reasons that we’re seeing our revenues increase and our adoption rate increase in the U.S. is because we’re really keenly focused and we’re getting these relationship with customers where we’re becoming the trusted advisor for them. So as we think about what’s next, how do you grow this company outside just a significant runway that we have for organic growth now, there’s lots of opportunities out there, potentially in M&A, we are evaluating a lot of different things that we can look at for that will help us understand more about the completions, if there’s an opportunity for us to get more technical expertise through different product lines. Those are the types of things that we’re looking for and we’re really focused on opportunities that are higher margin, not very capital intensive, very similar to the business model that we have today.

All right. So thank you very much. Good luck.

Thank you. Our next question comes from Byron Pope with Tudor, Pickering, Holt. Your line is now open.

Good morning, guys. So the customer count continues to grow quite nicely. I was wondering if you could just update us on, in ballpark terms, the pinpoint sleeve customer adoption by basin. Is it skewed toward the Permian at this point? Or is it more broad-based in that? Just any update and color you could provide there will be helpful?

Yes. So what I would say about that, Byron, is that, if we go back to coming into 2017, about 60% of our revenue is based in the Permian Basin. And then coming out of the third quarter of 2017, we had been able to get more penetration outside the Permian Basin, so that dropped down to about 50% of our revenue was in the Permian. And if we look at our business today, about 40% of our revenue is actually in the Permian and it’s not because reduction in the Permian business, it’s more as a result of further penetration into other basins, such as the Eagle Ford, the stacked in the midcon, the Rockies and in the northeast and the Marcellus and the Plays in northeast. So we still have exposure in the 40% range to the Permian, but as we find these other opportunities to focus on and help our customers get more efficient on their wells, we’re able to target in other areas outside of the Permian.

That’s helpful. And then just a quick additional question. With regard to the Q3 guidance for U.S., revenues up again nicely and is it fair to think that – it seemed like the Q2 growth was fairly broad-based in terms of product sales, seems like that should be the case again in Q3 between sleeves, AirLock and frac plug. Is that a reasonable way to think about that Q3 products driven growth in the U.S.?

Yes, it is. That’s exactly the way to think about it.

Okay. Thanks, guys. I appreciate it.

Thank you. Our next question comes from Ian Macpherson with Simmons. Your line is now open.

Hi, thanks. Good morning, guys. The 54% gross margin this – second quarter stood out and can you give us an update there, if you’re expecting above that from the low 50s. Is there a structural improvement towards low to mid-50s that could be reasonably expected? Or are you going to add us back down to something more historically relevant in the low 50s line?

Yes, Ian. So look, we’re very happy with what we’re able to achieve in the second quarter from a gross margin standpoint and I guess what I’d say is, you saw the product margin pickup in the second quarter 2018 from historical levels and part of that has to do with mix, which is I know in a lot of ways, an unsatisfying answer. But as we had lower revenue in Canada in the second quarter with the breakup, we’ve talked historically about sort of the Shale Oil Plays in Canada being some of the most competitive areas in which we operate, both from customers and competition. So you had a higher mix of U.S. and international revenue in the quarter, which helped to bring up the project – product margins. So looking forward to the second half of the year, we would say that the second quarter may be a little bit above what we’d expect for the average for the full year. So something still in the low 50s is probably more appropriate at this point as we look forward towards the third and fourth quarters.

Okay, good. Thanks. With the revision to your full year revenue guidance, you cited Canadian well break up and then also weaker Canadian dollar and also flattening Permian growth. And given the magnitude of the revision, it would strike me that the Canada factors would explain most, maybe even close to all of that. Is it correct to interpret that most of your revenue guidance revision for this year is Canada and a smaller part of it is U.S. related?

The way we think about it is that it’s primarily Canada for break up and FX rate. We think there is a possibility that there could be some slowdown in the Permian, but as I mentioned earlier, we’re not having direct conversations with our customers where there’s – our customers are anticipating any slowdowns in activity or slowdowns in their plans that they have so far, but we think the potential is there and we believe that what we guided would include that potential impact if it did happen.

Okay, got it. Thanks Robert. Thanks guys.

Our next question comes from Scott Gruber with Citigroup. Your line is now open.

Good morning. Robert, can you update us on your effort to drive greater market penetration of your tracer diagnostic services in the Canadian market and how that could accelerate with the opening of your new lab?

Sure. So the first step was to add some sales resources in Canada. So we’re in the process of doing that. And the second and doing a conjunction – in conjunction with that bolstering of the salesforce has been to put a Canadian lab in. That’s been one of the issues that that we’ve had in Canada is not having a local lab and it delaying the analyzing of the samples coming back in. So that’s almost complete, as I said earlier. We expect later this quarter that will be opened and open for business there. And then the third thing I’d say is that integrating the sales force from Spectrum into NCS that also is going to be a big benefit because we’re seeing the benefit of that in the U.S. Just as using the U.S. as an example, the sales teams are fully integrated in the U.S. now into one sales group with common leadership and we’ve seen the impact from that where not only are the NCS customers adopting tracers, but we’re actually seeing tracer customers who were running sleeves for now, and we’re seeing that earlier than we expected to see that. So taking that same strategy and move it into Canada is the plan.

And then maybe if you could dimension for us, even with a broad range, how do you see the revenue growth potential for the entire tracer business in 2019 versus 2018, as you grow the Canadian business, as you help customers address this well interference issue in the U.S.? Is this is a pretty easy double-digit grower for you in 2019 versus 2018?

In Canada or in – as a whole?

In total, in total?

Yes, I mean, we expect – we had fairly significant growth as a percentage in 2018 and we don’t see that slowing down going forward into 2019 because we have – there still a big opportunity and not just market share gains because we do have market share gain opportunity here that’s significant, but further adoption by the customers as they start using tracers more and more to help with the infill drilling issues. So what I can say is that the growth that we’re seeing for 2018, I don’t expect that to drop.

I think, Scott, just to further that, you’re right that there a couple of other legs just between – just beyond using tracers in that infill application. There’s room to grow in Canada. We’ve talked about some initial jobs that we’re working on using tracers in Argentina. We’re looking at opportunities to take those into other geographies in which we have a presence as well. And then Robert mentioned from a technology standpoint that our tracer diagnostics group introduced water soluble tracers earlier this year, where we’re building up to a full portfolio of those and that’s differentiated from water tracers that are used today, which are typically in a liquid form and just used for assessing flowback and don’t really show any sort of long-term results in those tracer studies. So the water soluble tracers deployed on a stage-by-stage basis where customers understand long-term water production and water cut and ties together nicely with the value proposition of our multi-cycle sleeves. So we think there are a lot of opportunities for the tracer diagnostics group to grow sort of well beyond just a straight U.S. completion count going forward.

Very interesting. One last one from me, there is a breakup on the line, at least on my line, during prepared remarks. what was the international revenue growth outlook again for 3Q?

For the third quarter, we guided to a range of $4 million to $5 million.

Got it. Thank you.

Thank you. Our next question comes from Marshall Adkins with Raymond James. Your line is now open.

Good morning, gentlemen. So staying on that same international thing, that’s obviously a big uptick, as Jim had mentioned, but it sounds like the uptick that you’re expecting next was not really Aker stuff, is that the Argentina stuff; give us some color on why the confidence in the substantial growth next quarter in international?

Yes. So it includes Aker. It also includes North Sea work that’s not Aker BP, but there’s also Argentina, both for sleeves and for tracers. As I mentioned earlier, we are on our first project in Argentina with tracers and it’s a multi-well project and we believe that we’re about to be awarded a second contract now. We’re also about to start a frac job in England. The approvals have just come through this week and so that’s imminent. So there is quite a bit of activity and then there was – I mentioned that there was a delay in projects which caused our revenues to be lower than what we had internally forecasted for and so we expect to see the benefit from those delays in three and four.

Okay. Helpful. Then on coming back to Repeat and Spectrum, you kind of gave us a good view of what the longer-term potential is. I’m just curious as to this last quarter, how – give us some color on how much contribution came from those and has that been progressing in line with what you were thinking when you bought them ahead or behind this – give us your thoughts on how that’s progressing and the actuals from last quarter?

I’ll speak to how we’re thinking about it and how they’re performing relative to what we thought and then Ryan can pull something little bit more specific for you but – so, Spectrum is actually outperforming what we expected by a reasonable amount – by a sizable amount actually. We’ve talked about increasing the accrual for earn out, so they’re performing – outperforming the base case. So we’re very, very pleased with what we’re seeing with Spectrum, not only from the revenue growth, but the way that they’re continuing to innovate and add some new products. We have new technologies that we’ll be announcing over the next two quarters that we expect coming out of Spectrum. When we think about Repeat Precision, it is performing to our expectations, but we had very, very high expectations for that product line. If you recall, Repeat Precision was originally established to secure low-cost, high-quality manufacturing force. Manufacturing force leaves that we use in the shallow basins in Canada and we decided to develop a product – a composite plug product inside Repeat Precision early in 2017. So we spent all of 2017 developing it and trialing it and doing what we needed to do so, we only had our first launch commercially of the product in the first quarter of this year; it was the first full quarter that we had. So it’s growing every quarter, it’s growing at a rate that’s about what we expected. But what we’re really excited about is the addition of the, what we’re calling the PurpleSeal Express, which is not just selling a composite plug out but delivering to the location a composite plug that’s installed on a wireline setting tool with the customer or that the wireline company just drop a power charge in put a firing head on and screw the perforating guns on, and then when that plug is set and the stage is perforated when the wireline comes out the whole, everything that’s left just gets thrown away and there is another one already assembled on location. So the demand that we see out there and the interest from customers has been stunning. So we’re going as fast as we can to get this capacity in place so that we can start manufacturing that product line or in the product – right in the middle of introducing that into the marketplace today.

Sorry, with respect to the contribution from Spectrum just kind of looking in the earnings from the quarter, on the U.S. side, you saw greater growth in service revenue in the second quarter relative to the first even then in the product side, and as we had mentioned in last quarter’s call, Spectrum – the tracer diagnostics business was impacted a bit by just the access to sand and some of the completions bottlenecks in the first quarter. So sequential growth through the services line was primarily driven in the U.S. by Spectrum in the second quarter. And then as you think about Repeat and how that kind of track that through the financials, I’d take you back to that line around non-controlling interests and look at how that’s growing over time, because that has a view to the overall health of the Repeat Precision business.

Perfect. Thank you. That’s helpful and lot of stuff going on guys. Thank you.

Our next question comes from Sean Meakim with JPMorgan. Your line is now open.

Thanks, good morning. Could you talk a little bit about how you see incremental margins going forward, maybe across products versus services and just thinking about the mix impact as we are seeing shifts in your portfolio and geographies? It would be great to hear your updated thoughts on that.

Yes. I think what I’d say is with respect to the products as we move forward from a – just say from a narrow focus to our second quarter, third quarter, as we’re taking – moving from the period where spring breakups impacting the second quarter for us in Canada to relatively full activity in the third quarter, you’ll see pretty good incrementals probably above what we saw in the second quarter on the service side of the business; incrementals on products in Canada might be a little bit lighter as a result. If we think about some of the international opportunities that we’re looking at what I’d say is, we’ll probably be a little bit stronger on the margin front within products versus services there. We’ve got to get folks. We’re currently serving a lot of the international activity with a group that also helps out with U.S. service. There are some folks that are dedicated solely to international, but we also mobilize people out of our U.S. services group to do that. And if you think about just the logistics internationally, a lot of times the supply chain is not as efficient as it is for North American unconventional activity and you’ll have time waiting on equipment breakdown or even in the North Sea, you’ll have time waiting on high seas. So there’s a few more, call it, standby days which are low-margin days for us versus full on revenue days. So does that give a little bit of a picture on how some of the puts and takes as far as activity can translate?

Yes, I think that’s helpful. The other topic I was hoping to get an update on, just thinking about – and you’ve had some good traction with some shallower applications in the U.S., maybe could you just talk about how you characterize some of the different types of applications, say, within the Permian – how that’s going over the last quarter or so and how you see that outlook in the second half?

Yes, as I said earlier, Sean, we’re really pleased with the way the execution is going on the strategy that we’ve got in place, and it’s targeting certain applications, it’s not targeting depths of wells or lengths of laterals or things like that. So today one of the big focuses that we have is – where controlled frac intensity is required and we think about the applications for that and the applications typically are reservoirs that have low geological barriers to the water that maybe close to it, where if an uncontrolled frac were to breakthrough that it could cause the economics of the well to change. So we’ve identified a number of those areas around the U.S., the first one was in the Permian and the second one is in the Permian, and then we have other areas outside of that where we’ve targeted. And so those are the areas that we’re penetrating now. Also another application that we’ve identified that we’re actually executing the strategy on today is the infill issues with the parent-child well issues. So we’re actually working on a project now with a number of operators in the stack. So I mean, those are deeper wells than some of the ones that we’re working on the Permian, not all of them, but these are applications where we’re working very closely with customers, not just from the fracture system standpoint, but also we have our Reservoir Strategies group engaged in it and we’re working with those guys to try to understand do we need to change the well spacing or can we just generally affect the issues that we have with the parent-child relationships by user-controlled frac intensity and so we’ve seen – in fact, there was one customer that made a comment earlier this week in their earnings release around NCS and the work that we’re doing there. So as we continue to execute that strategy, I see that will grow beyond some of the applications that you were talking about.

Very helpful. Thank you.

Thank you. Our next question comes from Jed Bailey with Wells Fargo. Your line is now open.

Thank you. Good morning. You guys gave a lot of color on kind of what you’re doing internationally and in Argentina, it sounds like in the North Sea. Could you maybe talk a little bit about other markets that you may be testing or kind of evaluating that you see as good opportunities over the next, I don’t know, six to 12 months or other markets you may be testing in today?

Yes. So there is other areas that we’re working in today as well. There’s other opportunities that we’re pursuing. But the focus for us primarily is Argentina, China and the North Sea. However – and when I say focus that’s focus on existing business and ongoing work. But we have an opportunity in the Mideast right now that has recently presented itself and it’s a shorter versus longer-term opportunity. So that’s one that we are highly focused on, don’t have a clear view on when that will kick in, but we think it’s a near-term than longer-term.

Okay. All right. I appreciate that. And then my follow-up is, as you work with more customers in the U.S. with your pinpoint stimulation system and you get more feedback and your customer base broadens, can you talk about kind of your modifications or changes that you’re looking at? Or kind of the next generation of pinpoint system and then kind of the progress there?

Yes. So the next generation of pinpoint system is something that we’ve talked about a couple of times this year. It’s a system that doesn’t require coiled tubing to open the sleeve to place the frac. And we think the application for that could be obviously the longer laterals where coiled tubing has a bit of an issue accessing the toe of the well. But also we think there can be potential for full well applications where there is an aversion to coiled tubing by the customer. But we’re also looking at it is an alternative to some of the toe sleeves that are existing in the industry. So that project is moving forward and we’re still hoping to have something commercialized to some extent in 2018. And as we work with more customers, one of the things that we’re focused on is having a very, very clear understanding of the rocks that the customers are working on. I mean, they know those rocks better than we do, but we want to make sure that we have as clear understanding as we can, because to break in to some of the areas in the Permian that are fairly mature where we’ve been in factory mode for some period of time to get those customers to trial the technology is very, very difficult. And what’s going to be required is to be able to go in and say, here’s what we think we can do for you. Here’s how we think the efficiency will help, how the production will be different. And the way we get to that and what we’ve seen so far is that the more we learned about these individual wells and how different stimulation techniques using pinpoint specifically affect the production or the efficiency then it makes us better able to go into other types of formations. And with the information that we’ve gotten and the models that we have now be able to give more predictions around the results that we can achieve. I mean, just as an example, we’ve been able to, from an efficiency standpoint, go into a particular area outside of the Permian that’s a more challenging area and where we’ve been able to be more efficient because of some things that we’ve learned in other areas to the extent that our customers are telling us that the cost is more economical than plug-and-perf. So without any of the efficiency gains that they get just from using pinpoint they have the efficiency from being less cost than they were with plug-and-perf. So we’ll see more of that as we learn more.

Okay. All right. I appreciate the update. I’ll turn it back. Thanks.

Thank you. [Operator Instructions] Our next question comes from Ian Macpherson with Simmons.

Thanks. My follow-up was also on the intervention, so I’m good.

Thank you. I’m not showing any further questions at this time. I’d now like to turn the call back over to Robert Nipper for any closing remarks.

Thank you. On behalf of the entire management team and our board, we’d like to thank everyone who joined us on the call today, including all of our shareholders, research analysts who cover NCS. Finally, I’d like to give a personal note of thanks to all of our employees who put in an exceptional effort on a daily basis and allow us to achieve amazing results. I’ve said it before and I’ll keep saying it, I truly believe we have the best team in the industry and we’re committed to preserving the culture of employee development and innovation that has supported us from the beginning. We certainly appreciate everyone’s interest in NCS Multistage. And we’ll look forward to talking again on our next quarterly call. Thank you, operator.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. And you may all disconnect. Everyone have a great day.