NCS Multistage Holdings, Inc. (NCSM) Q3 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q3 2018 NCS Multistage Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the call over to Ryan Hummer, Chief Financial Officer. Please go ahead.

Thank you, Sarah. And thank you for joining NCS Multistage’s third 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 would 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 good morning to our investors, analysts, employees that are joining our third quarter 2018 earnings conference call. Today, I’ll review high-level third results 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 a bit more detail. I’ll also provide some closing remarks touching on some of our recent accomplishments. Total revenue in the third quarter was $62.7 million, a 12% improvement over the year ago period, and 44% higher sequentially. Adjusted EBITDA in the third quarter of $18 million reflected a 29% adjusted EBITDA margin and was 19% higher than in the third quarter of 2017. Starting with our Canadian operations, our revenue of $29.2 million for the third quarter was lower by 28%, compared to the year ago period and our revenue through the first nine months of $90.2 million was 8% lower than the first nine months of 2017. Our results in Canada in the third quarter underperformed the expectations provided on our last earnings call and were the result of several factors, including weather, widening commodity price differentials and an increased pricing pressure from our customers and competition in certain operating areas. Speaking first to the weather, given a longer than expected break-up this year, achieving our guidance required strong customer activity through the end of the quarter, which didn’t materialize as snowfall and subsequent warming throughout late September led to temporary road bans in certain areas were part of that month [ph]. Another factor that impacted our Canadian operations during the quarter and which we expect will continue to impact the Canadian market is historically high crude oil differentials, which are materially impacting the realized prices received by our customers. There is a significant amount of information generally available on this topic, but I’ll provide a summary for those that don't follow Canadian market on a day-to-day basis. With continued increases in Canadian production both from oil sands and more conventional production storage in the WCSB is currently near capacity and pipelines out of Canada are essential full. Historically, certain pipes were dedicated to heavy oil with others dedicated to light oil and a blowout in differentials in heavy oil would have had limited impact on light oil differentials. This changed earlier this year as heavy oil has been allowed on the pipes previously reserved for light oil. And now there is [crude-on-crude] competition for pipeline space and light oil differentials have widened materially as well to levels that encourage shut-ins for heavy oil which negatively impact economic returns for light oil. For example, the December contract for Edmonton mixed sweet crude similar to WTI in quality has a spot price of $30 per barrel, which is a US$33 per barrel discount to WTI. This is being addressed in the market of higher volumes of crude by rail and some additional pipeline capacity is expected to be brought online in late 2019. However, we expect that it will take the completion of a Keystone XL or the TMS Expansion to fully resolve the crude oil takeaway capacity constraints. And we’re talking several years as opposed to the relatively quick expected addition of pipeline capacity to service the Permian. We believe that the current light oil differentials are unsustainably high and will moderate over time, but are likely to remain above historical levels, due to the change in the operation of the pipeline system and the time required to add sufficient incremental pipeline capacity. However, not all customers are exposed to the current spot prices as many have been able to hedge their exposure or price their crude at hubs where differentials are not as extreme. The differentials at lower future cash flow expectations for our customers have led to increased pricing pressure from our customers and from lower price competition in certain markets, including the light oil place in Saskatchewan and in the Cardium, which has reduced pricing for our products and services and could impact our market share. We have initiatives in place to address the current market dynamics in Canada and that are designed to improve our performance over the coming quarters. First, we’ve adjusted pricing in certain markets. We believe this will enable us to retain our customers and has already proven successful with customers that have trialed [ph] lower pricing competing technologies. Concurrent with the price reductions, we have re-prioritized certain of our R&D initiatives to advance specific sleeve technologies that are expected to reduce our cost of sales and will also enable an increase in the density in sleeves that can be deployed in customer wellbores. While this will result in lower gross margins, the deployment of the new sleeve designs when commercialized is anticipated to allow gross margin percentage to partially recover and the increased sleeve density will allow customers to run more sleeves per well, offsetting some of the top line pressure from the pricing initiative. In addition, we are increasing our sales effort around our well construction and composite frac plug products, which are currently underpenetrated in the Canadian market relative to the U.S. We currently expect our Canadian revenue in the fourth quarter to be lower by 25% to 30%, as compared to the third quarter, reflecting an expectation of reduced industry activity and the pricing adjustments we’ve made. Looking forward, we anticipate that the first quarter of 2019 will be the most active quarter for the year and our Canadian customers, consistent with historical seasonal patterns. We know however that customer budgets are highly preliminary at this time and are likely to be further refined in the coming months based on in-part prevailing pricing differentials and that customer activity in 2019 may be lower than in prior years. Turning now to the U.S. Our revenue for the third quarter of $26.3 million was 98% higher than in the year ago period, but was 5% lower sequentially. For the fourth straight quarter, we delivered double-digit sequential growth in product revenues with sequential growth in total U.S. product revenues or 11%. And with strong unit growth and sliding sleeve and composites plug sales. The sequential decline in our U.S. revenue was primarily attributable to services, including services provided during pinpoint completions and tracer diagnostics. Both of those services are provided during the well completion and our activity level during the quarter was negatively impacted by both completion timing on NCS projects, and by general slowdown in completion activity in the U.S. and in the Permian Basin in particular. This is different than our product sales where our sliding sleeves and AirLock casing buoyancy systems are run during well construction. And therefore, generate revenue soon after the well is drilled. From a customer count standpoint, the number of U.S. customers utilizing our pinpoint fracturing system over the last 12 months remains at over 30. Consistent with last quarter, the majority of the customers are repeat customers. As demonstrated by the increase in our product sales during the quarter, the U.S. sales initiatives that we have in place have had continued success and its overall completions activity in the Permian Basin temporarily moderates. We have seen increased adoption of our technology in the midcontinent area and the Powder River Basin in the Rockies. We believe the slowdown in completions activity that has impacted our services revenue for the quarter is market driven. While completions activity may be temporarily depressed, due to Permian Basin pipeline constrains and E&P budget exhausted in late 2018, we expect our services activity and revenue to increase as industry completion activity increases in 2019 in advance of Permian pipeline commissioning. We expect that we will continue to build on our performance in the third quarter and that our U.S. revenue in the fourth quarter will be approximately flat on a sequential basis. Our international revenue for the third quarter of $7.2 million was significantly higher than our revenue of $1.8 million from the second quarter and exceeded the prior guidance for the quarter. During the third quarter, we completed a handful of projects, which had shifted out of the second quarter and had strong execution in Argentina and China, and we were also able to deliver a high number of sleeves in support of our Aker BP frame agreement pulling forward revenue we had expected and anticipated to occur in the fourth quarter. We currently expect the fourth quarter of 2018 international revenue to be between $3 million and $4 million. I’ll now turn the call back over to Ryan to discuss our financial results in more detail.

Thank you, Robert. As reflected in yesterday's earnings release, our third quarter revenues were $62.7 million, compared to $56 million in the prior year's third quarter, an increase of 12%. The increase in revenue was driven by significantly higher product sales in the U.S., a full quarter of tracer diagnostics operations, and a significant year-over-year increase in international sales, largely driven by offshore activity. This was partially offset by a decrease in our Canadian revenue. On a sequential basis, revenue in the third quarter was 44% higher than revenue in the second quarter, primarily reflecting the seasonal increase in activity in Canada, as well as the strong performance internationally. Gross profit, defined as total revenue was total cost of sales, excluding depreciation and amortization expense was 33.9 million in the third quarter or 54% of revenue, compared to 30 million also 54% of revenue in the prior year's third quarter, with higher margins from product sales, partially offset by lower margins on services revenue. For a sequential comparison, our gross profit of $23.5 million in the second quarter of 2018 also generated gross margins of 54%. In his earlier comments, Robert mentioned, that we have reduced our pricing in certain markets in advance of implementing supply chain initiatives designed to partially mitigate the impact of the pricing reductions. We currently expect that the pricing actions, as well as the lower anticipated activity in Canada in the fourth quarter will result in a reduction on our gross profit margin for the fourth quarter to a level between 46% and 50%. Selling, general and administrative costs increased to $19.4 million in the third quarter from $17.6 million in the prior year's third quarter, but decreased from the second quarter's level of $22.1 million. As a reminder, our reported SG&A include 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, increases to share-based compensation, and SG&A related to Spectrum's operations. The reduction relative to the second quarter was primarily driven by a reduction in our bonus accrual, as well as overall expense management. For the fourth quarter, we expect our reported SG&A, inclusive of share-based compensation and nonrecurring items to be between $21 million and $22 million. Our third quarter 2018 depreciation and amortization expense totaled $4.4 million and we expect the fourth quarter depreciation and amortization expense to be just slightly higher than in the third quarter, reflecting continued capital investments in the business. Adjusted EBITDA for the third quarter was $18 million as compared to $15.1 million in the prior year's third quarter. The adjusted EBITDA as a percentage of total revenue was 29% for the quarter. Couple of other items to note with respect to our income statement in the third quarter. First, we recorded a non-cash income of $1.9 million, which reflected a decrease to the liability we have in our balance sheet related to the contingent earnout provision associated with spectrum. The value of the liabilities for spectrum and repeat precision are measured quarterly with increases to the liability, resulting in an income statement expense and any decreases to the liability resulting in income statement income. Second, our book effective tax rate for the quarter was 29%. The calculation of our book tax rate included adjustments related to U.S. tax reform. Third, we had net income attributable to noncontrolling interests of $1.4 million in the quarter, reflecting positive net income at repeat precision. We expect to continue to have positive contributions from repeat 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. In addition, the third quarter marked the first cash distribution from repeat precision with NCS receiving $0.5 million out of the $1 million total distribution. We expect the repeat precision will continue to make distributions as cash flow permits. Our adjusted earnings per diluted share for the third quarter was $0.11, which compared to adjusted earnings per diluted share of $0.09 in the prior year's third quarter. Turning now to cash flow items and the balance sheet. Cash flow from operations for the third quarter was $0.1 million and it was $7.6 million over the first nine months of the year. We expect an increase in cash flow from operations in the fourth quarter as compared to the third quarter, reflecting seasonal impacts from working capital, particularly receivables through the end of the year. Our net capital expenditures for the quarter were $6.1 million and were $9.6 million over the first nine months of the year. We currently expect capital expenditures for 2018 to be between $13 million and $16 million, inclusive of the buildout 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. This CapEx range is slightly lower than prior guidance. At September 30, we had $27.4 million in cash on hand, and total debt of $25.6 million. This included $20 million that is drawn under our U.S. revolving credit facility. We also have up to $55 million in total available liquidity potentially under our revolving credit facilities bringing total potential liquidity at September 30 to approximately $82.4 million. We expect our net interest expense to be 0.4 million and 0.5 million in the fourth quarter and we expect our quarterly book effective tax rate for the fourth quarter to be between 24% and 28%. We expect our book effective tax rate for the full-year 2018 to be in the 15% to 17% range, primarily influenced by our book effective tax rate of 15.7% through the first nine months of the year. I'll 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 some of our accomplishments during the last few months. In Canada, we recently had a customer utilize our technology in a 227-stage well in the Montney, a new record for NCS. The well was completed in a single run with a single frac isolation assembly used and over 18 million pounds of proppant placed into the customers well in a consistent and official operation. Following this record well, we completed two additional wells for the same customer, placing a total of 50 million pounds of proppant into 637-pinpoint completion stages over three wells. Each well was completed with a single run of our downhole frac-isolation assembly demonstrating superior technology that we deliver, the exceptional service we provide and the ability of our technology to operate efficiently in high-pressure environments. Our tracer diagnostics business had its highest ever revenue quarter in Canada as momentum continues to build in connection with the new local laboratory that we opened in October. We are now testing and storing samples locally, expediting reporting for our Canadian customers. We sold more AirLock casing buoyancy systems in Canada during the third quarter than in any other previous quarter, as more and more customers see the significant values that the system providers. We are leveraging the success of the AirLock to grow our entire well-construction portfolio in Canada, including liner hangers and toe sleeves in that market. Turning to the U.S., we achieved our fourth consecutive quarter of sequential unit sales growth for each of our sliding sleeves and composites frac plugs and our fourth consecutive quarter of double-digit sequential product revenue growth. In tracer diagnostics, we have successfully commercialized our water-soluble tracer product offering, a particular tracer, which interacts with formation water to provide long-term stage-by-stage indications of formation water production. This differentiated offering demonstrates our ability to continue to innovate and expand the used cases for tracer diagnostic services. At Repeat Precision, we achieved the first commercial sales of our Purple Seal Express frac-plug deployment system, a pre-assembled system combining a disposable setting tool with our Purple Seal frac plug, to multiple operators in the Permian Basin. In our international operations, we deliver sleeves for use in several upcoming Aker BP wells in connection with our frame agreement, and also completed the well for a second customer in the North Sea. We’ve made significant progress in establishing our local presence in Norway, and continue to pursue additional customer opportunities in the region. We successfully provide tracer diagnostic services outside of North America for the first time, opening up a new market and growth opportunity for us. We are currently evaluating expansion of our tracer diagnostics offering into additional international markets. And finally, we’ve delivered NCS products for an upcoming trial in the Middle East, our first for NCS. This marks our first work in the Middle East, a region that we expect to provide growth opportunities for us over the medium-term. And I’ll close with just a couple of brief comments. We remain committed to the strategies that we’ve been executing on over the past several years and we believe that the future for NCS is as bright as ever. We continue to defend our strong position in the more mature Canadian markets, while continuing to grow our pinpoint stimulation and other products and services in a larger and more dynamic U.S. and international markets. While we will face challenges along the way, resulting from market dynamics as we are experiencing today in Canada, and from competitors, we continue to innovate to improve our existing offerings and bring new products and services to market that are high value for our customers. We believe we are well-positioned to deliver long-term organic growth through increased adoption of our innovative completion’s equipment and services. The initiatives that we have in place to grow our U.S. business continued to deliver results as demonstrated through the growth in product sales. We continue to grow our customer base in the U.S. adding to the number of repeat customers, while bringing in new customers for strategies that accelerate the path to continued adoption. Our international business provides us with the opportunity for significant growth outside of North America, while international markets can take time to nurture and develop, the payoff can be significant. We’re especially encouraged by the opportunities ahead of us in Argentina, the North Sea, China, and the Middle East. Finally, our capital-light business model provides us with the ability to maintain a very strong balance sheet and with the optionality to allocate capital to high return investments and evaluate options for return of capital to shareholders over time. With that, we’ll be happy to take your questions.

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

Morning guys. The weakness in Canada doesn’t come as any surprise because we all have been interacting what’s going on in Canada. And you made some good points about how long it will last and transitory and all. One of the big things about earning you guys though is the growth in the U.S., and I find myself, you said there is four quarters of double-digit growth, is the U.S. market adapting their technology, as quickly as you expected a year or two ago or is it going more slowly, is it a harder adoption than you expected? Is the runway not as good or is this a result of slowdown in the Permian and all that will pick back up in the second half? Can you address where you are in the U.S. sleeve market relative to your expectations a year ago?

Well our expectations, excuse me, our expectations have been pretty high. We’ve been able to deliver performance that is – has allowed us to have the consecutive quarterly growth with our sleeve sales in the U.S. We always wanted to come faster, but we’ve got a strategy in place. We are focused on specific lines and specific areas to get adoption and what we’ve been able to see just over the last year even is something that we saw earlier on in Canada where as we began to work in a particular area for a certain customer, we use that relationship to grow the business in those particular areas. And to the extent that we’ve seen, where instead of field trials in these areas that we’ve been working in for some time like certain areas of the Permian and the midcontinent area, and then in the Rockies, where instead of field trialing the technology, customers now are just calling us up and saying, okay, this is how I’m going to start completing my well. So, it’s, bite an apple, one bite at a time.

Okay. So, it is no longer we’ll try you out, it’s whether or not we’ll use you or not. So that would seem to indicate very fine line, I’ll grant you, but a different level of acceptance instead of proving that sleeve technology works, you're just going to – people are now saying, okay, I'm going to use your sleeve, is that how we should look at this?

Well, they are either going to use our sleeve or use pinpoint versus plug plug-and-perf. So, our biggest competitors still is plug-and-perf and the market is really dynamic. We’ve had to, we’ve made some changes that allowed us to decrease our cost to become cost competitive because as frac prices began to increase, the total cost for our pinpoint job has increased in some cases. So, we’ve been able to adjust that and get back to the area where we are cost competitive or even a little bit less cost to the customer than what they're doing today, but as far as the dynamic of customer acceptance, in those areas where we're working for a particular customer, whose field trial the technology and use it over a number of wells, typically that’s validation for other customers in the area that, okay, I don't need to necessarily field trial, I just need to decide, if I want to use pinpoint or not. And so, that’s helped us, that’s why our customer count continues to grow, that’s how our sleeve cells continue to grow on a quarter-to-quarter basis.

Okay. That sounds good. And you rattle off four international locations where you expect to see business pick-up when you guys first came public, international wasn't really concerned because you were just considered an unconventional completion technology, should we take this other than Argentina, I guess, the wells you are working on or hope to be working on internationally, are they – is pinpoint just a better option for conventional or these mainly unconventional, do we have to wait for unconventional pick-up in all these countries in a meaningful way, or can you grow your business internationally with the technologies that you have in conventional reservoirs?

Yes. So, our work internationally is a mix of unconventional and conventional. Argentina obviously is unconventional. And one of the things that we’ve noticed internationally is that doing multistage fracturing is fairly new in most of these markets. And so, there’s not – there is embedded technology of either plug-and-perf for some other technology, so customers are more open to think about pinpoint earlier on because there’s not real strong incumbent technology. So, I believe that’s helped us in the international markets. But we’ve been, while it wasn’t a focus for us back two years ago on an international front. We’ve been operating in some of these international locations for a number of years. I mean, we’ve been operating in China for five years now. We’ve been in Argentina for almost 5 years. Low-cost, first to be there in the beginning, but we wanted, we targeted certain markets that we knew there was at least an opportunity in the future for business to scale and that’s what we’ve been able to see in Argentina. We’ve also seen that in China, and then obviously with the North Sea with what we're seeing there. So, yes, to answer the question, we don't have to wait to necessarily for unconventional to take off in some of these other areas because places like China and places like Norway, I mean a lot of the work there is, it’s conventional type wells.

Okay. And the non-sleeve businesses, you talk about your seals, your plugs and – is that a business well construction, how fast can that business grow over the next couple of years. We’ve all focused more on your primary sleeve technology, but well construction is being called out by a lot of companies these days is increasingly critical. Is that really another leg to the stool, we should all be paying more attention to?

I would. Because it is a way – it is another leg, it is another lever that we can pull, and I do pay attention to it. So, talk a little bit about well construction. So, we’ve had well construction products for a number of years. We developed the AirLock product line, we developed a liner hanger product line, we have the toe sleeves, but it hasn't been a really big focus for us. So, over the last few months what we’ve done is, we have put together a well construction group in the company and we out additional focus on it, we’ve got dedicated sales support now and we are looking beyond just the U.S. markets. We have just recently introduced those products into Canada. So, we're using our infrastructure that we have basically throughout the world to be able to promote those products in other areas. The Purple Seal product line at Repeat Precision we’ve had continue quarter-on-quarter growth, significant growth increases in those product lines and we expect to continue to see that. And as we continue to develop other products, we're working on dissolvable technologies now to introduce into that product line. So that’s another significant leg to the stool as well. And then our tracer product line, when we acquired the company, they were primarily U.S. I mean 85% to 95% of the revenue came from the U.S., but because of our presence in Canada and our presence in Argentina, and in China, and some of these other markets, we have the ability to move and scale that product line in some other areas and we are executing strategies now to do that. So, those are significant levers that we are pulling right now.

Okay. Gentlemen, thank you very much. Appreciate the help.

Thanks, Jim.

Thank you, Jim.

Thank you. Our next question comes from the line of George O'Leary with Tudor, Pickering, Holt. Your line is now open.

Good morning, guys.

Good morning, George.

I found the commentary on the Canadian cost reductions interesting. It makes sense that there is pricing pressure in the market, given what we're seeing from differentials and budget exhaustion perspective. I was just wondering if you could provide any more insight on to how specifically you are looking to reduce causes and more changes in metallurgy, it sounded like there was a commentary around density and kind of spacing, just curious as to any more color you could provide on what specifically you are doing there, that was an interesting comment.

You bet. So, I mentioned re-prioritizing engineering projects. So, we’ve had a project ongoing for some time, but it hasn't been at the top of the list, which was to engineer a very low-cost sliding sleeve. So, our sliding sleeves, compared to our competitors sliding sleeves have typically been significantly longer. So, more materials required, but the reason that we had built them that way was because of the reliability. It’s easier to find a sleeve that’s longer than it is, a shorter sleeve. And the differentiation for us, aside just from our intellectual property is the reliability that we bring to our customers. I talked about the third Montney wells that we just did there were over 200-stages of well, being able to do those in one trip is – that offered significant cost savings for our customers not having to make multiple trips to change out the assemblies. But what we’ve done in this particular engineering project is, we’ve developed a new downhole isolation assembly that can work on very, very short sleeves. So, we have a lease system that will be commercialized in the first quarter of next year that drops significant cost out of the system. And so that’s, we’ve reprioritized that and so that’s something that we’re going to be introducing into the Canadian and the U.S. markets early next year. So, the first one that we have coming out will be, it’s designed for the Canadian market and then after that we’ll have one for the U.S. market.

Great. That’s very helpful color, and then I’ll pile on to one of Jim’s question that you guys are always looking at technological innovation, I mean what we just talked about on the cost side, is technological innovation, the dissolvables was an emerging hot topic, dissolvable frac plugs back in 2014 and there were some – both technical and I think cost limitations that impacted the pervasiveness of dissolvables I guess. What are you seeing today that – and I know you guys assume the first you’ve looked into this or have been working on it, what are you seeing today that maybe causes you to try to pull that dissolvable investment or R&D effort forward? And is there something in the market or are you seeing an outsized growth rate versus what we saw in the last few years beginning to emerge? Just curious some more there.

Yes. I think as an industry the challenge is that we’ve had – just what you said, cost has been an issue on the dissolvables, you know that market began with dissolvable metal materials and to be able to get the cost down to where it could compete with plug-and-perf technology was a challenge. The other challenge that we’ve had is for liability in dissolution rates, because different types of fluids, the more [ph] salinity in fluid affected the dissolution rate temperature greatly effected dissolution rates. So that was something else that had to be solved, and so now we’re seeing people – there’s a lot of people charging after solving those two issues around dissolvables, we as well. So, we’ve been working on dissolvable technology for just over a year now. It started as a project, it will be used in one of our sliding sleeve developments that we have coming up hopefully soon, but now we’re thinking about it in terms of dissolvable frac plugs. So, we believe that we may have solved all of those issues with this particular technology. It’s a little bit different than what is generally available today in the marketplace. So, still, we are excited about that, but we're not commercialized with it yet.

Awesome. Thanks very much for the color. I’ll turn it back over.

Thanks George.

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

Thanks. Good morning guys. Hi. Question on Canada, I think Robert you indicated you anticipated Canadian revenues may be down as much as 25% to 30% in the fourth quarter, but 1Q would still be the strongest quarter for next year, which makes sense is – I mean given the differential kind of overhang with activity, do you have enough visibility at all to try to help us think about how strong 1Q could be in 2019 versus say the first quarter of 2018? I’m assuming it wouldn't reach the same level, but it’s always hard to gauge sometimes given that most of your customers will spend a lot of their budget money in the first quarter, do you have any insight – a way to help us think about maybe the first quarter of 2019 for Canada given where the commodity price is?

Yes. I mentioned it is still pretty fluid right now. I don't believe we have any customers that have a firm budget yet. There is preliminary budgets that are out, but they are revisiting them almost on a monthly basis based on the differentials, but what we do have is a sense for the first quarter, again being a very strong quarter – the strongest quarter of the year for us. But we expect that customer activity in the first quarter is still a wild-card all the way through the end of the year, but we have more optimism than not around the first quarter. I know, it probably doesn't help much, but that’s a lucky view right now.

No. I can appreciate that. I just thought I would try. My follow-up is on looking at your G&A line, looking at your G&A relative to kind of your role size of the organization it is a pretty high number and I know you are working on a lot of different technology initiatives in R&D, but given that where kind of your U.S. sales are relative from anywhere you thought they would be a year or two ago. Have you thought about your optimal G&A level, is it possible, does it make sense to try to pair it back, given where the U.S. business is or would you anticipate keeping it there long-term and trying to grow into that G&A number? Just kind of thinking about it, given where EBITDA levels are this quarter and probably next quarter. How do you think about that?

Yes. Fair question. So, the G&A number is a high number for a company our size. And it’s a result of investments that we make in technology that we’re developing. If we don't get a return on those investments that we're making then we certainly will take a look at our G&A and make adjustments, but we still have a higher-level confidence that we are going to continue to earn against that G&A and the business will accelerate growth going forward as a result of the efforts that come from having that level of G&A.

Okay. And if I could just squeeze one more in, you kind of alluded to some of this, but looking at the U.S. business for the fourth quarter for kind of flattish revenue, is that going to be more driven by just continued share gains in spectrum or help us think about the mix on getting that if completion activity is down, you're staying flat, is that more on the plugs and Spectrum side or is it also sleeve sales, kind of outpacing to market as well?

Yes. So, we have some puts and takes there, specifically the sleeve sales. We have some customers that their activity is declining through the rest of the year, but we have our market share increases that we’ve made as well that will show up. And so, we think that net is going to be about flat for sliding sleeve sales in the fourth quarter, and then we expect activities to start increasing a bit, because we’re still, even though we’ve delivered the Permian it’s still a significant part of our business, so we expect that to start growing again in early 2019. We fully expect for our composite plugs sales to continue to increase at Repeat Precision, as well as some of the completions work as we start completing some of these wells even in the fourth quarter will drive help drive tracer sales increases as well.

Okay. I’ll turn it back, thanks.

And clearly across the board.

Okay. Great, Thanks Robert.

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

Good morning. Robert you mentioned in the competitive landscape in Canada has gotten a little more significant, yesterday NOV on their call mentioned, or on their Analyst Day specifically pointed out pinpoint fracturing and their initiatives there. Could you frame how do you see the competitive landscape in that area right now? And is it good or bad for you if companies like NOV are starting to talk about pinpoint fracturing?

Yes. So, what we are seeing from a competitive standpoint is primarily in Canada right now, and so that is a number of competitors who have developed some type of sliding sleeve pinpoint coiled tubing [indiscernible] technology. And they are able to perform at some level and some of the shallower place. And some, to an extent in some of the maybe some of Cardium wells, but the big differentiation between NCS and those competitors today is the reliability. And that comes from the experience that we had. And so, operationally we deliver less cost than a competitor would at the same pricing, but what we're seeing is that for a competitor to get a trial well from one of our customers, they have to be significantly less cost than we are. And so, that’s what our competitor’s strategy appears to have been as offering something at a very, very low cost, so that it gets a customer’s attention and the customer says well it costs $50,000 more to use either one of your competitors. I can afford some down time or some trouble time. So, we’ve had to, in some of those areas, we’ve had to adjust the pricing so that there’s not as much differential between our competitors and our pricing. We don't have to go to the same price because our performers can deliver the cost benefit, but we weren't able to sustain the pricing in some of those areas. To your question about companies like NOV talking about pinpoint, yes, I mean, having other companies come out there and talk to customers about pinpoint is a good thing. If we have someone locked in NOV that can successfully work in not get pinpoint a bad name then they can certainly help us grow adoption and we are happy to compete heads up with any company that’s out there. So, I like the remarks that NOV made yesterday and look forward to them helping us build the market.

Okay. Along that same line you mentioned you have a steadily increasing number of customers in the U.S., talk about how you see your share gains and pinpoint versus plug-and-perf in the U.S. emerging next year, would you expect those customers that are trialing and starting to use your sleeves to increase – assuming activity can ramp up over the course of the year, which I think most of us would think can happen?

Yes. We do expect it to increase. Some of the, other than just blocking and tackling and getting out there and educating people around pinpoint, we’re doing other things, I mentioned the low-cost sleeve that we’re developing. What that will actually help, we believe help improve adoption or increase the rate of adoption in the U.S. because what it will do is, it will allow us even in the U.S. market to have a low-cost completion for the customer, which gets more difference between us and plug-and-perf in terms of our cost competitiveness. So, if we can deliver even a more cost savings then we can today with plug-and-perf, I think that’s going to help drive adoption as well. And then plus, there is other technologies, whether it is coiled tubing less type sleeves or whatever that we’re working on, we think that those types of products enter the market could also help drive further adoption faster than what we’re doing today.

Alright. One last one from me. The industry has had a little bit of slow down here at AirLock [ph] or whatever we want to call it, is that good or bad for you?

Well…

I know [indiscernible] but do the cost of things get more attractive and while people adopt your technology faster, so I guess what I'm asking.

Yes. So, one of the things that we have seen is that pricing has softened, which somewhat neutral to us. As frac prices go down, the customer's completion goes down with either plug-and-perf their cost go down with either plug-and-perf or with sliding sleeves. But one of the things that we have seen that affects our business and there is a tailwind for us is the cost of coiled tubing has been – that cost has gone down significantly. So, that does help us because even though the customer has to hire a coiled tubing unit to drill of their plugs in a lot of cases, we still have more time on location during the frac job with coiled tubing. So that does help us as well.

Alright, thank you.

Thank you, Marshal.

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

Thanks, good morning guys. I wanted to probe a little bit more into the price adjustments that you’ve made, if you could speak to, I don’t know, I am sure you don’t want to be specific, but whether you think that that is – has been a one-time adjustment or you see that as a sort of a Spector going forward that you might have to continue to adjust? And really what you think you can defend with respect to your margins relative to the 46% to 50% that you are looking at for Q4, if you are – I mean, if we can draw a line there, we should be prepared for further margin degradation next year? Thanks.

Yes, Ian. So, I believe that the adjustments that we have made now are what we need to do to continue to defend our customer base, as well as gain the list of market share. We’ve been adjusting all the way down over the last two to three months and I think we’re at now based on being able to regain customers from our competitors being able to maintain customers that our competitors have done trial wells for. It’s indicated that we’re probably where we need to be right now. And then, what – I think I also mentioned that when we get this new sliding sleeve development out in the first quarter in Canada, then that should help offset some of the margin that we had that we lost by the price decreases.

Got it. Okay. That’s all from me. Thanks Robert.

Thanks.

Thank you. Our next question comes from the line of Kurt Hallead with RBC Capital Markets. Your line is now open.

Hi, good morning.

Good morning, Kurt.

Good morning.

Hi guys. So, I understand obviously there is a lot of different moving parts and dynamics going on the industry, I think we are all kind of in tune to that. So, as – and I appreciate you giving the points that you have for the fourth quarter and trying to kind of bridge that, out into the first quarter as well. So, what if I were to say to you that Canadian E&P spend could potentially grow by 10% to 12% in 2019, do you think your revenue, your topline in Canada could exceed that growth or the competitive dynamics in Canada such that you may not be able to outgrow the market?

No, I think we still have opportunities to outgrow the market because of the light market share that we have in the Montney and Duvernay still today. We’re penetrating that market now. I talked about the three wells that we did that were over 200-stages and that’s what we’re in seeing in those markets as – as when we get market share there significant, relative to gaining market share in the light oil place. So, the competition right now is primarily in the lower end areas because our competitors haven’t gotten to the performance level yet where they can operate in some of these more challenging areas. And so, we continue to penetrate those areas. So, yes, if you were to tell me that customer spend could grow about 10%, I would tell you that we believe that we can still outperform the market in Canada, by taking market share in the deeper basins.

I think the one thing I would add to that Kurt though is, I understand maybe Canadian activity up 10%, 12% maybe the RBC has few of this point, but that environment is not consistent with what we’re seeing with the preliminary budgets we are seeing from our customers or some third party industry reports like PSAC and whatnot, which indicate Canadian activity potentially being flat to down next year in the aggregate.

Okay. And that’s helpful. Appreciate that color. So, then obviously in that dynamic, you know flat to kind of down environment, I guess it is safe to assume that these competitor pricing pressures will probably be sustained throughout 2019, right, so given that as a backdrop what are some of the levers you could pull from – in internal dynamic to beyond just adjusting your pricing, but what are some of the internal levers that you could pull to potentially offset and mitigate that dynamic, and help kind of sustain margins through that process?

Right. So, primarily supply chain managing our cost on the products, being able to commercialize this new sleeve is going to make a big difference for us because it’s taking a lot of cost out of the system. So, been able to do that. We look at our service offering when we’re doing our downhole isolation work on location, we’re doing the frac jobs for ways that we can be more efficient there, and lower cost, our internal cost over all. And it’s the same thing with all of the different product lines, even with chemical tracers, with our composite plugs were more construction, we were focused keenly on getting as much cost out of the system as we can.

And Kurt kind of two parts to your question there. One was that do we do to support revenue and then the margin piece, so Robert mentioned in his remarks earlier that we are bringing the well construction product line into Canada in a way where we really had as much focus before and the composite plugs as well. Spectrum has been taking share, the tracer diagnostics business has been taking share in Canada in-part based on our customer relationships, in-part based on the investments we’ve made in that local Canadian Lab. So, growing some of the other businesses outside of fracturing systems will help support on the revenue side some of what we might see from a downturn in the market and some of the pricing adjustments and then on the margin side, as Robert alluded to, it’s really around our engineering growth with a new sleeve design and supply chain to get the cost for those products as low as possible and recover from a gross margin percentage, some of what we will be losing here in the short-term in the fourth quarter and first quarter until we get those fully online and recover those percentage margins.

Right. And if we were to just price you a little way in a positive way not a negative way, but when you look at the margin progression did you have through in the first three quarter of 2018 where you had 52% to 54% kind of working off your 46 to 50, where do you think the gross margin dynamic would settle out on a full-year basis on 2019?

Yes, I mean, we’re not in a position to give a full-year guidance on that, but I think what you would see in the fourth quarter is a margin dynamic where we’ve made a price adjustment, but haven’t been able to fully implement the cost of sales initiatives. That likely extends through into the first quarter and then as we get the new sleeve technology commercialized there should be an uplift to margins and specifically in Canada from there as you move into the back half of the year.

Okay. Alright. That’s great guys. Appreciate all that color. I’ll catch you offline.

Thanks Kurt.

Thanks Kurt.

Thank you. This concludes our question-and-answer session. I would now like to turn the call back to Robert Nipper for any further remarks.

On behalf of the entire management team and our board, we would like to thank everyone that joined us on the call today, including our shareholders, employees and the research analyst who cover NCS. I would like to personally thank all of our 400 plus employees around the globe who put an exceptional effort on a daily basis and allow us to achieve amazing results. During the third quarter we completed our 10,000th well utilizing pinpoint completion technology. A great milestone for NCS. To think that our technology has evolved from sand-jet perforating in the Shale of Canadian Bakken to delivering a 220-stage frac job placing 18 million pounds of sand in the deep basin with a single tool run is truly phenomenal. As I’ve said before, I truly believe we have the best team in the industry and we’re committed to preserving the culture of employee development an innovation that has supported us from the beginning. We appreciate everyone’s interest in NCS Multistage, and we 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. You may all disconnect. Everyone, have a great day.