NCS Multistage Holdings, Inc. (NCSM) Q4 2018 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and thank you for standing by. Welcome to the Fourth Quarter 2018 NCS Multistage Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mr. Ryan Hummer. Sir, please begin.

Thank you, Howard, and thank you for joining NCS Multistage's fourth 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 the 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 results and are subject to several 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 outlined 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, adjusted net earnings per diluted share and free cash flow, 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 cost associated with our current capital structure and in a manner that we believe better reflects our ongoing operating performance. Our press release from yesterday and the updated investor presentation posted yesterday both of which are available on our Web site ncsmultistage.com provide reconciliations of these non-GAAP financial measures to the nearest GAAP financial measure. In addition, during today's discussion, we will refer to several slides in the presentation that we posted last night. With that said, I'll turn the call over to our Chief Executive Officer, Robert Nipper.

Thank you, Ryan. Welcome to our investors, analysts and employees during our fourth quarter 2018 earnings conference call. Today I'll review high level fourth quarter and full year results and we'll discuss what we're seeing in our Canadian, U.S. and international operations and I will discuss how our business has evolved over the last two years 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 highlighting some of our recent accomplishments. Total revenue in the fourth quarter was $50.2 million consistent with the year ago period and 20% decline sequentially. Full year revenue for 2018 of $227 million represented a 13% increase compared to 2017. Adjusted EBITDA in the fourth quarter of $7.8 million reflected a 15% adjusted EBITDA margin. Full year adjusted EBITDA in 2018 was $49.7 million reflecting a 21.9% margin and compares to $49.5 million in 2017. Starting with our Canadian operations, our revenue of $19.3 million for the fourth quarter was lower about 34% compared to the year ago period and our revenue for the year of $109.5 million was 14% lower than in 2017. The announced E&P customer budgets for 2019 are materially lower than what was spent in 2018 and the effects can already be seen in the Canadian land rig count. Through the first nine weeks of 2019, the average rig count is approximately 33% lower than at the same time last year and is only 4% higher than the first nine weeks of the fourth quarter of 2018. Based on our conversations with our customers, we believe that capital budgets for 2019 will be more heavily weighted to the second half of the year than in prior years due to high commodity price differentials when the initial budgets were set and the mandatory production curtailments in Alberta. Last quarter, we discussed pricing actions that we had initiated in the Canadian market and certain initiatives that we have in place to try to gain market share and increase the penetration of our full suite of products and services in the Canadian market. I'm pleased to be able to say that while it's still early, these initiatives are showing tangible signs of success. Our Canadian sales and operations teams are highly motivated and are excited about the winds we're seeing in the field. Within fracturing systems, our strong track record and operational excellence have enabled us to win back business from customers that have trial competing technologies. Within well construction, our new dedicated sales effort is resulting in higher sales of our AirLock casing buoyancy system and liner hangers in the Canadian market. Our tracer diagnostics business continues to leverage the investment we made in the Calgary lab to win additional work and we just secured the largest multi-well pad tracing job in our history. And we introduced our purple seal frac plugs with a large operator in the Canadian market. The plugs performed very well during the trial and the customers has placed repeat orders. In addition to these initiatives, we've secured several field trials for our new lower costs sleeve design for high pressure markets. We're on track to have the sleeves and isolation assemblies for this family of products ready for commercialization in Q3 when we emerge from spring breakup. We currently expect our Canadian Revenue for the first quarter to be approximately 20% to 30% higher than in the fourth quarter of 2018 reflecting outperformance relative to the rig count environment as a result of our initiatives. The wide range is due to the uncertainty of timing related to the beginning of spring breakup. Turning now to the U.S., our revenue for the fourth quarter of $27.5 million was 36% higher than in the year ago period and 4% higher sequentially. Full year U.S. revenue in 2018 of $103.4 million was 62% higher than in 2017. For the fifth straight quarter, we delivered sequential growth and product revenues with 7% growth in the fourth quarter. U.S. services revenues declined 2% sequentially primarily reflecting the continued reduction in completions activity in the U.S. during the second half of 2018 impacting our tracer diagnostics business. From a customer count standpoint, the number of U.S. customers utilizing our pinpoint fracturing systems over the last 12 months has remained stable between 25 and 30 with the majority of our customer base and revenue coming from repeat customers. In the U.S., we continue to pursue market share growth across each of our product and service lines executing our targeted sales initiatives within fracturing systems leveraging the success of the AirLock casing buoyancy system within well construction offering solutions within tracer diagnostics to help our customers evaluate and implement strategies to optimize well spacing and avoid frac heads and bringing performance and [indiscernible] benefits to customers utilizing our proprietary Purple Seal Express which integrates a composite plug with a disposable setting tool. We plan to continue to capitalize on these opportunities and expect that our U.S. revenue in the first quarter will increase modestly from fourth quarter levels driven primarily by another quarterly increase in product sales. Our International revenue for the fourth quarter of $3.5 million was in line with our guidance for the quarter. We currently expect the first quarter of 2019 international revenue to be between approximately $2.5 million and $3 million reflecting a seasonal slowdown in certain geographies in the northern hemisphere partially offset by robust activity in Argentina. I'd like to spend a few minutes reviewing NCS' business portfolio and market positions and how we are positioned to continue to leverage our portfolio of products and services to help our customers reduce their costs, improve well productivity and their return on capital. By supporting our customers in these objectives, we will continue to be positioned to drive profitable growth, generate free cash flow and improve our return on capital. In this discussion, I'll be referencing slides 4, 11 and 15 in the investor presentation that we uploaded last night. Starting with Slide 4. I want to remind everyone on the call that we are leaders in each of the product and service lines that we participate in. Within fracturing systems we are the worldwide leader in pinpoint completions having surpassed 10,000 wells completed during 2018. We're the second largest provider of chemical and radioactive tracer diagnostic services in North America and are successfully introducing that platform to enter international markets. Our well construction offering is anchored by AirLock casing buoyancy system. We have over 6,500 successful AirLock installations and are leveraging our success with the AirLock to access additional revenue opportunities for our liner hanger system, toe sleeves and other well construction products. Repeat Precision is growing rapidly as we demonstrate the performance capabilities of our composite plug and as customers experience the operational and safety benefits of the Purple Seal Express system. As you can see on Slide 11, we have grown and transformed the company over the last two years. We've grown our fracturing systems and well construction business invested in Repeat Precision and acquired Spectrum Tracer Services. Through these organic and inorganic actions, we have expanded our addressable market more than doubled our customer base and reduced our exposure to any single product or service. In addition as Slide 15 demonstrates, we have balanced our geographic exposure as well with over 50% of our revenue in 2018 coming from the U.S. and markets outside of North America. This broader exposure and more balanced geographic mix will let us better weather the industry driven downturn that we expect in Canada this year positioning us for continued growth in the U.S. and international markets while preserving the upside from an eventual recovery in the Canadian activity. I'm very encouraged by the recent focus industry investors have placed on free cash flow and return on capital. NCS has always thrived to balance the investments required to innovate and drive above market top-line growth with a capital like business model that can produce significant free cash flow. While Ryan will spend a bit more time on this in a few minutes, I'd like to reiterate how the investments that we've made over the past several years organically and through our joint venture Repeat Precision and the Spectrum Tracer Services acquisition provide us with multiple long-term opportunities for capital efficient growth in each of the markets in which we operate. Through disciplined growth and free cash flow generation, we strive to continue to improve our return on invested capital and create value for our shareholders earning returns that exceed our cost of capital. Now I will turn the call over to Ryan to discuss our financial results in detail.

Thank you, Robert. As reflected in yesterday's earnings release, our fourth quarter revenues were $40.2 million unchanged compared to $50.2 million in the prior year's fourth quarter. We saw a significant increase in our U.S. revenue of 36% and our international revenue of over 400% as compared to last year's fourth quarter. These were fully offset by a decrease in our Canadian revenue. On a sequential basis, revenue in the fourth quarter was 20% lower than revenue in the third quarter with a sequential increase in the U.S. revenue of 4% more than offset by sequential declines in Canada and international markets. Gross profit defined as total revenue less total cost of sales excluding depreciation and amortization expense was $24.2 million in the fourth quarter or 48% of revenue compared to $25.6 million or 51% of revenue in the prior year's fourth quarter with higher margins for product sales offset by lower margins on services revenue. This gross margin percentage was in line with the midpoint of the guidance we provided for the quarter and reflected the pricing actions that we initiated in the Canadian market during the quarter. For sequential comparison, gross profit was $33.9 million or 54% of revenue in the third quarter of 2018. As we move into the first quarter of 2019, we continue to expect our gross margins to be between 46% and 50%, before we see the benefit from the full commercialization of our lower cost family of sleeves in the second half of the year. Selling, general and administrative costs increased to $20.3 million in the fourth quarter from $18.1 million in the prior year's fourth quarter and increased from the third quarter's level of $19.4 million. As a reminder, our reported SG&A includes share-based compensation as well as certain non-recurring expenses. The year-over-year increase was primarily driven by headcount additions as well as increases to share-based compensation. The increase relative to the third quarter was primarily driven by a smaller reduction to our bonus accrual in the fourth quarter as compared to the reduction that we made in the third quarter. For the first quarter of 2019, we expect our reported SG&A inclusive of share-based compensation and non-recurring items to be between $22 million and $23 million. The increase compared to the fourth quarter will primarily be driven for the positive accrual of bonuses under our 2019 plan as compared to the reversal in each of the third and fourth quarter of 2018, which we made as market conditions deteriorated. We also expect to incur higher costs related to ongoing litigation matters, higher share based compensation expense and support costs related to our recent ERP system implementation. NCS management is committed to ensuring that our costs are aligned with our current operating environment and it is managing SG&A to ensure that we are getting the appropriate return from the investments we are making in our sales infrastructure and research and development efforts. Our fourth quarter 2018 depreciation and amortization expense totaled $4.5 million. We expect our first quarter depreciation and amortization expense to be between $2.5 million and $3 million with higher depreciation expense offset by reduced amortization related to the impairment charges to intangible assets, which I'll discuss in more detail in a second. Adjusted EBITDA for the fourth quarter was $7.8 million as compared to $10.4 million in the prior year's fourth quarter. Adjusted EBITDA as a percentage of total revenue was 15% in the fourth quarter of 2018. A couple of other items to note with respect to our income statement in the fourth quarter. First, as indicated in our pre-release, we recorded a non-cash impairment charge totaling $227.5 million during December. This included over $70 million in impairments to intangible assets. As a result of the impairments, our annual amortization expense will be reduced by nearly $9 million to an estimated $4.5 million for the full year 2019. We also recorded impairments to goodwill totaling over $150 million which will not impact the income statement going forward. Second, we recorded non-cash expense of $0.1 million in the quarter which reflected an increase to the liability that we have on our balance sheet related to the contingent earn out provision associated with Repeat Precision. At the end of the year, we determined that Repeat Precision earned the full earn out amount of $10 million with NCS making a $10 million contribution to the joint venture, which was subsequently distributed to our partner in January of 2019. Third, our book effective tax rate for the quarter was a benefit of 11.5%. The calculation of our book tax rate included adjustments related to our impairments as well as U.S. tax reform. Fourth, we had net income attributable to non-controlling interest of $1.5 million in the quarter reflecting positive net income at Repeat Precision. We expect to continue to have positive contributions from repeat in 2019 and into the future. When considering our net income and earnings per share in future periods, it's important to account for these contributions. For calibration, the net income attributable to non-controlling interest has been approximately 5.5% of our U.S. revenue in the last two quarters. And we expect it to maintain at that level or perhaps increase slightly with the continued success of the purple seal product line and the Purple Seal Express offering. Finally, the remaining outstanding exchangeable shares were converted into common shares in February of 2019. This will increase our basic share count going forward. We expect our basic share count to average just under 46 million shares of common stock for the first quarter. These shares were included in diluted share count and periods of earnings so should not have an impact on our diluted share count. Our adjusted loss per diluted share for the fourth quarter was $0.06, which compared to an adjusted earnings per diluted share of $0.01 in the prior year's fourth quarter. For the full year, our 2018 adjusted earnings per share was $0.20, which was unchanged from $0.20 in 2017. Turning now to cash flow items and the balance sheet. Cash flow from operations for the fourth quarter was $6.4 million and it was $14 million for the year. Our net capital expenditures for the fourth quarter were $5.8 million and were $15.4 million for the year. Our free cash flow for the year was negative $1.4 million which was impacted by both specific working capital items and large tax payments during 2013. We currently expect our capital expenditures for 2019 to be between $9 million and $13 million a reduction of approximately 30% versus 2018 at the midpoint. Capital expenditures for 2019 include investments in manufacturing capacity at Repeat Precision to support the Purple Seal Express product line, investments in our tracer diagnostics business to improve field processes and the customer experience and limited investments in other parts of the business. As with G&A expense, we will continue to review opportunities to reduce our capital spending including leveraging supply chain partners and we are increasing internal capacity when possible. At December 31, 2018, we had $25.1 million in cash and total debt of $25.7 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 December 31 to approximately $80.1 million. We expect our net interest expense to be between 0.5 million and 0.6 million in the first quarter and we expect our book effective tax rate for 2019 to be in the 10% to 15% range. As I mentioned briefly earlier, we implemented a new ERP system at the beginning of January. As part of the conversion process, we significantly reduced our payables during the fourth quarter to support our vendors and facilitate the transition. In addition, part of the ERP implementation process included keeping our books open a bit longer than usual to ensure we captured all invoices in the system. As a result our actual G&A came in slightly higher than the unaudited range that was included in our preannouncement from a few weeks ago. In 2019, we are incurring expenses that had previously been capitalized to support prior to going live on the new system. We have capitalized expense. We're now incurring expenses to support the new system that we expect those costs to moderate over time as we support the system internally. While any system transition includes a multitude of challenges, I'm very proud of the broad base team and NCS that has worked diligently over the past year to prepare for the implementation and to support the businesses we have made the transition In time, we believe that the new ERP system will provide managers across the organization with better and more timely visibility into financial and operational metrics which will support decision-making. We also expect that we'll be able to better improve or improve our working capital management and that the system will better facilitate future changes to our business. I'd like to take the next few minutes to talk about NCS' ability to generate free cash flow in 2019 and I refer you to Slide 17 of the investor presentation we posted last night. As we have not provided any full year EBITDA or adjusted EBITDA guidance, we'll simply bridge from an illustrative EBITDA to walk through sources and uses of cash to arrive at free cash flow. Several of these bridge items have a range and any summary figures will utilize the midpoint of the ranges provided. Starting from EBITDA, we add $12 million to 14 million in share-based compensation which we currently expect for the year. From there, we deduct approximately $5 million in cash interest, cash taxes and other items, which includes the litigation matters which we would categorize as non-recurring in nature. In our earnings release from last night, we note that the cash flows in the cash flow statement that we paid $22.4 million in cash taxes in 2018. This included the payment of taxes in both the U.S. and Canada which were deferred from 2017 into 2018 as well as the tax payments made during the year in 2018. For 2019, we find ourselves in a position where we are in an overpaid situation and therefore expect cash taxes to be minimal in 2019. Year-end working capital for NCS typically runs at approximately 30% of full year revenue. This may increase slightly by the end of 2019; market conditions are more favorable in the second half of the year than they were at the end of 2018, especially in Canada. As a result, we've shown a slight increase in net working capital here which we may be able to offset through normalization of accounts payable relative to the low levels at the end of 2018. I'll know that this part of the bridge does not include the $10 million contingent consideration amount, which I'll discuss in a minute, which is included as a current liability at December 31, 2018. The next bar represents net CapEx which we discussed earlier. The sum of all of these items would result in a free cash flow before the repeat earn out payment of EBITDA less approximately $4 million. Incorporating the earn out payment that we made in January results in free cash flow which will be calculated as EBITDA less approximately $14 million at the midpoint. I'll also note that over the last four months of 2018, Repeat Precision made cash distributions of $4.6 million of which $2.3 million went to our J.V. partner and our reflected in cash flow from financing activities. Following the earnout payment. The joint venture will direct its cash flow to funding near-term capital expenditures and also reducing some modest debt balance at Repeat Precision prior to resuming distributions. We do expect that repeat precision will be able to resume distributions later in 2019. I'll hand it over to Robert now for closing remarks.

Thank you, Ryan. Before we open the call up for Q&A, I'd like to highlight a couple of our accomplishments during 2018 and early 2019. First, in Canada, we have field trials underway for our new lower cost sleeves. We continue to benefit from the opening of our Calgary tracer diagnostics lab; we recently moved our engineering team into a new tech center where we have extensive testing capabilities. We increased AirLock sales in 2018 by over 80% as compared to 2017. We made the first sale of purple seal composite plugs to a Canadian customer in January and we recently completed two wells, which set records for NCS for our longest lateral length completed to-date at over two miles each with each well completed in a single tool run. In the U.S., total revenue increased by 62% as compared to 2017. We just completed our fifth straight quarter of sequential increase in product revenue and we posted record sales of composite plugs and AirLocks with AirLock sales up by more than 40% as compared to 2017. Internationally, we experienced year-over-year revenue growth of 43%. We worked in the North Sea for the first time and have established a local entity to support our work in the region. We introduced our tracer diagnostic services into Argentina and expect to expand into other countries in 2019. And we are working with a dedicated sales representative in the Middle East and expect our first work in the region in 2019 across multiple product and service lines. From a corporate perspective, we recently implemented our new ERP system, which we believe will deliver operational and financial benefits over time and we've taken steps to ensure that we have a focused and nimble sales organization that is incentivized to maximize the market penetration of all of our products and services leveraging our competitive strengths in each geography. I will close with just a couple of brief comments. We're committed to the strategies that we've had in place for the past several years and we believe that our prospects are as strong as ever. We have leadership positions in the product lines and services now in which we compete. We've expanded our product and service offering over time and have invested in our sales force and international infrastructure to allow us to capitalize on our revenue opportunities across the globe. As a technology driven company, we continue to innovate to bring new products and services to market that are highly valued by our customers improving efficiency, reducing cost, enhancing recoveries and improving their financial returns. As a result, we believe that we're well-positioned to deliver capital efficient, long-term organic growth through increased adoption of our innovative completions and equipment services. Our capital light business model provides us with the ability to generate free cash flow while maintaining a very strong balance sheet. This provides us with the optionality to allocate capital to high return investments and evaluate options for the return of capital to shareholders over time. And with that, we'd be happy to take your questions.

[Operator Instructions] Our first question or comment comes from the line of George O'Leary from TPH and Co. Your line is open.

Morning guys.

Hello, George.

The international growth sort of was really strong last year and I realize that a small piece of the portfolio today, there is a place where you guys are continuing to allocate capital. Just curious if you think about the 2019 as a whole kind of frame the revenue opportunity in that international market. And maybe last year there was some lumpiness, so also maybe any help on the trajectory of that revenue outlook in the international markets and what new markets you may be targeting there, or if it's more kind of growth in legacy markets?

So, we're in a number of markets now as you know. We generate revenue in Russia, China, Argentina, the U.K. and so our strategy going forward is really expanding in those markets that we're in. We've recently introduced tracers into Argentina. We're in the process of introducing tracers into other countries as well as some of the other products and services that we're pushing out. I would say that international revenue will probably continue to be lumpy as contracts come in and large orders are placed. Typically, we see large orders at a time in the international markets than we do in the North American markets. So I think it will continue to be lumpy but it will continue to grow.

Great. That's helpful. And then, in Canada, just trying to think through how this all -- I realized we were off to a softer start than usual typically thought about for you guys just based on your historical financials Q2 being about 40% of Q1 from a revenue standpoint. But, given all the moving pieces, I realize it maybe early, but even if just directionally do you expect a drop off quarter-over-quarter in Canada to be more pronounced than usual, less pronounced because you're starting off a lower base in Q1. Any framing there would be super helpful.

Well, as we said earlier, as I said earlier we expect the second quarter to be up and but what we do believe is that the second half of the year is, that's when the majority of the activity is going to be coming in for us. There's still uncertainty in the market. But the customer budgets are pretty much established now and they definitely are skewed towards the back half of the year.

Okay, great. And then, I'll sneak in one more if I can. You guys spend a lot of time on the R&D front and helping customers solve various problems, the AirLock business had very nice growth year-over-year last year, of some of the newer products that you guys have rolled out and commercialized in last six to twelve months, the purple seal working on their disposable setting tool et cetera. What are you most excited about growing outside of the core kind of multi-stage [indiscernible] product.

I think the thing I'm most excited about is the opportunity that we have right now to take advantage of the channel that we've created into the market. NCS has great brand recognition. We have been primarily focused from a sales standpoint on pinpoint stimulation up until last year. And now we've been able to take some of the other products and services that we've developed over time and acquired over time and will push them through those same sales channels. And while this is fairly fresh for us, I think we've fully implemented Canada with full product lines -- with the full breadth of the product lines just in the last quarter. What we're seeing is an enthusiasm that I haven't seen in quite some time in the sales force not just in Canada, but in the U.S. as well as the sales force has more opportunities to touch more customers. And what this has done is, it's also doubled the number of customers that we have over the last couple of years. So taking advantage of the sales channel that we have for all these products. I mean the purple seal express has more than exceeded our expectations the purple seal plug itself has as well. Our tracer diagnostics business we're very enthused about what we've seen being able to push that out internationally. And then, our well construction products and services as we continue to expand that get more products in the offering there as well as pushing that out through our sales channels. We're seeing uptake on that. That's exceeding our expectations. So we're pretty excited.

Great. Really appreciate the color Robert.

Thanks George.

Thank you. Our next question or comment comes from the line of Sean Meakin from JPMorgan. Your line is open.

Thank you. Hey, good morning.

Hi, Sean.

So Robert, when do you start-off strong product volumes in the fourth quarter. I was curious if can you give us a little more detail of the incremental mix to what extent that was driven more by sleeves versus plugs versus the AirLocks. And I'm trying to figure out how we can translate that into higher experiencing that mix in the first quarter both in Canada -- both in Canada and the U.S.

Yes. So in Canada as I mentioned earlier, we're still really early days. We've just recently pushed out composite plugs into that market. So the financial impact was negligible basically in Canada. The AirLocks, we did have a significant growth year-over-year in Canada, but we've also just recently introduced liner hangers in Canada. So we haven't really seen the full impact from those new products yet in Canada. In the U.S., the growth came basically across the board from all of our [indiscernible] products. We were down a bit in services, it was attributable to activity declines and completions which affected our pressure diagnostics business. But as far as our salable products go, we saw gains in virtually across the board there.

Okay. That makes sense. I appreciate that. So then on services, yes, while spending is going to be down in both the U.S. and Canada that products or services that grow faster or the business overall in '19. And given the increased focus on solving parent child issues in the U.S., can you maybe give us a little more granularity on how that's impacting tracer opportunities?

Sure. In fact, that impacts more than just tracer opportunities for us. A number of the customers that are using our fracturing services for pinpoint now are using them specifically to address that issue. So we see that as a potential tailwind for fracturing services this whole issue around the parent child relationships in the frac hits. But it also -- we've seen that it has the potential to increase the job size for our customers when we're doing diagnostic tracer services. So what we see is a full patch studies coming online that are significantly more than just a standard average for a ticket on a diagnostic pressure services. So that's a pretty big tailwind force as well. So what we believe is that with that issue highlighted the way it is today that even with down activity that we continue to grow through market share gains and just market penetration in the trace product lines as well as pinpoint.

Got it. Just a comment, do you have a sense of which area you'd expect to grow faster in '19, products versus services, is it on a percentage basis?

Yes. I think that products probably will grow faster just because we have more new products coming in than services coming in. So I would expect that that would grow faster.

Right. Okay, great. Thank you.

Thanks.

Thank you. Our next question or comment comes from the line of Ian Macpherson from Simmons. Your line is open.

Thanks. Good morning, Robert and Ryan.

Hi, Ian.

Good morning, Ian.

Still making lemonade out there in this market. You spoke specifically to the back half weighting of Canadian spending and obviously in the U.S. you're much more tethered to a smaller customer group that doesn't necessarily always reflect the bigger market a few dozen important customers. But based on your most meaningful customers, how would you shape the outlook for spending and activity levels in the Permian and I guess U.S. more broadly. But, I think specifically the Permian for you guys. And really just, I'm trying to feel out what the upside could be for later quarters throughout the year because there's -- we've definitely gotten mixed narratives from some of your service peers with regard to their expectations for how the subsequent quarters unfold after the softer Q1.

Right. Well, experienced growth in Q1. We expect to experience some growth in Q1. We think would be probably about in the first quarter somewhere around where we saw Q4 maybe slightly up a bit. But we expect that again it'll be a little bit year end weighted. So coming into the second quarter and beyond we think that at least from our customer base we see increasing activity going through later in the year.

Okay. That's pretty non-committal, but I hear you. With regard to your low cost sleeves that you're rolling out in Canada, I assume that that is basically you're marking that on kind of a margin neutral basis given the needs to deliver lower cost solutions to the customers in this environment. Is that the right way to think about it? Or on a unit basis with these actually be accretive to your margin that you're selling in Canada today.

Yes. So the way to think about that is that in the fourth quarter of last year we made pricing adjustments to reflect what the pricing will be on the lower costs sleeve. So, we took a hit on gross margins there. So when we get the sleeves rolled out and basically after a breakup in the third quarter, we expect that to be slightly accretive to gross margins.

Okay, good. Last one, if I can please. Ryan, my initial take was to take your Slide 17, your illustrative bar chart on cash flows more literally with regard to deriving what the starting EBITDA number was. And I know that wasn't your intent of the slide, but can you just maybe speak to the scaling of those bars and how literal or non-literal we should interpret them -- in terms of starting EBITDA.

Sure, Ian. I think as you can tell on this call, we are really speaking as far as outlook and guidance goes, really just to the first quarter and not putting anything out there as far as any sort of company endorsed full year EBITDA. I think if you -- several of the analysts have done kind of the ruler test and come to the conclusion that it looks like the scaling is relatively similar to where the street would have been prior to this call and I think that's a fair way to look at it. The intent though is really to understand where to bridge from a starting EBITDA standpoint based on factors that are under our control and as we look a year from now we look back at this slide, will be perfect? No, probably not but there are certain things that we can manage within this if the business develops in a more positive manner and we get some EBITDA growth and some revenue growth above and beyond maybe where the Street consensus is. There might be more of an investment in working capital. But you'd have a higher EBITDA starting point there from the bridge. If market conditions deteriorate what do we have in our control part of that would be better working capital performance and part of it would be to adjust our CapEx and minimize that so that we can still deliver cash flow. So some of the items are fairly fixed their items that are in our control and we expect to be able to deliver relatively strong free cash flow throughout 2019 and deliver that whether we're a little bit above where the street is or whether we're a little bit below where the street is.

That's a good helpful answer. Thank you both. I'll turn it over.

Okay. Thank you.

Thank you. [Operator Instructions] Our next question or comment comes from the line of Kurt Hallead from RBC Capital Markets. Your line is open.

Good morning. Hello?

Good morning, Kurt.

Yes. Good morning.

Just to make sure, I'm on the live line here, okay. Thanks. Appreciate the color provided so far. Robert, maybe one or two [indiscernible] additional inputs or color around the market penetration. I know you gave your customer base been using the buoyant stimulation and a majority of revenues coming from Repeat customers. Actually it looks like a pretty good performance given the decline in overall frac activity that occurred going into year-end. What's the buzz in the field with the pinpoint stimulation and can you talk about, can you give us an update on the value proposition that you've been providing for the customer base.

So, the value proposition hasn't changed. It's still -- customers are using this for a number of different reasons. There's some customers that are using this because they see better results in terms of production. Other customers as I mentioned earlier frac hits are a big issue right now with our customers and as an industry, we're still trying to figure out why frac hits affect wells differently in different areas. And one of the things that customers are using is pinpoint because they can better predict the performance of the actual fracture itself using pinpoint. And so we have customers that -- they're using that just to be able to control the frac hit situations in multiple basins. And there's cost savings in a number of areas, the customers are taking advantage of using pinpoint. So it's the same as it's been for the last year. There are a number of reasons that customers are using this. We can continue to push out into the new basins, different areas and find other ways that customers can save money or get better well performance using pinpoint.

Okay. And then, in the context of selling that value proposition, can you speak to whether there's been any kind of a pricing pressures given the fact that pricing on frac hits come vis-à-vis the service you're trying to sell?

Sure. Yes. There's certainly market conditions that have prompted pricing pressure. We've been able to hold our pricing fairly stable. We talked last quarter about adjustments that we had to make specifically in the Canadian market just because the conditions were such that our customers were really, really pushing hard on price and that was part of the reason that we accelerated the development of our pressure sleeve, the lower cost high pressure sleeve. So, to try to be able to reclaim some of the margin that we've lost due to the pricing pressures, but so far in the U.S., we've been able to hold fairly tight on pricing, but it's a more competitive market that's for sure.

Okay. Appreciate that. And then maybe Ryan on your end, I think gave the amortization guidance for the full year about $4.50 million. When you think about the depreciation dynamic, is it safe to effectively take your first quarter run rate on depreciation, and then, kind of hold that constant through the year?

Hold that, may be increase a little bit from there, but it'd be modest as we bring some of the capital that we're bringing in for Repeat, for the Purple Seal Express manufacturing in the first quarter. Some of the equipment from the 2019 capital plan goes in service. You will see a little bit of an up tick on the NCS, we went through the year, really been depreciation side, sorry.

Okay. With respect to the SG&A in your slide deck and commentary you guys suggested there is a slight increase on SG&A. However, if you annualize the first quarter SG&A, it's going to get a pretty substantial increase. So, I guess you're assuming that SG&A will come down from the first quarter levels as you get through second, third and fourth quarter?

Well, really Kurt the way that we're looking at that is within the G&A line in both the third and fourth quarter of 2018, as I've mentioned briefly on the call. We had the reversal bonus accruals that we'd been making earlier in the year, so kind of an apples-to-apples comparison. Unfortunately, if I have to go back to the second quarter of 2018, we are about $22 million in G&A in the midpoint of our guide is $22.5 million. So, we've been holding the line on G&A as much as possible. There have just been some things that have come in and out of the number over the course of the year.

Yes. On a full year basis though are you going to be able to keep SG&A under $90 million for the full year, I guess is what I'm trying to get at?

Yes. We're certainly managing -- you have the Q1 levels and we're certainly managing G&A based upon what we see in the business.

Okay. All righty. Thank you.

Thanks Kurt.

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

Good morning, gentlemen. First of all, I want to thank you for the Q1 guidance that's certainly helpful and running the bridge on cash flow is also helpful. I did have my ruler, protractor, compass -- not surely helped me. So, as you probably know, I'm not really that good of math. I was just triangulating some of the guidance here that you had and taking [Canada] [ph] you added ate up 20%, 30 % on revenue higher in Q1. When I -- and then, the rig count of course is down 33% year-over-year so far. The guidance suggests more like a 50% year-over-year reduction from where you were in Q1 of last year. So I'm just trying to bridge the difference there between say that $24 million midpoint of your guidance versus the rig count only being down 33%, is there -- are we seeing year-over-year price and duration share mix or do I just have crappy math?

You're looking at it in a relatively fair way. So, certainly the activity being down 33% so far this quarter on a year-over-year basis. We did initiate the pricing initiatives in the fourth quarter of last year, so that would not have been in first quarter 2018 numbers. So that impact is showing up in the first quarter of 2019. And the other component there is FX. So the average FX rate was closer to point 0.79, I believe maybe 0.8 in the first quarter of 2018. And it's closer to 0.75 this year. So those are the components there that you can kind of get to that 50 % year-over-year from a U.S. dollar reported basis. We're encouraged by those if you look at the rig count in the first quarter being up only about 4% versus what it was in the fourth quarter when we had already initiated the price initiatives, we're guiding 2 plus 20%, 30 % revenue on a rig count that's only modestly up for the fourth quarter. So that that speaks to a bit about what Robert was saying about how enthusiastic we are about the recent performance in the Canadian business and success in pulling through additional products and service lines to our established customer base in that market.

Right. Well, that's all I was trying to get to because of your commentary seemed pretty positive than the math. You explain -- that makes sense. You have a lot of confidence in the back half, I guess a lot of it is the share gains you're seeing in those new products. But I'm thinking more just broader the Canadian market. What gives you confidence in that back half on a lot of us didn't look at that as closely as obviously you do? So just give us your thoughts there if you could.

Yes. It's really it's around what our customers are saying that they're going to be doing in terms of activity. We've seen what feels like a bottom in the Canadian market. I mean the macro outlook there is not good, but it seems that we're pretty close to the bottom now and our customers have stabilized a bit they're starting to understand the curtailments a bit more and it's really just driven about by what the customers are telling. They're going to be doing. And we actually believe it.

Perfect. One more for me. There's a lot more talk about dissolvables and using those in the plugging and perfing process. Are you sensing or seeing any impact on your composite plug from the push towards more dissolvables or how should -- how should we think about the competitive landscape between those different products.

Right. So there's a lot of buzz around dissolvables right now in the market. It hasn't affected our composite business. And we continue to on a quarter-by-quarter basis significantly grow that product line. I think one of the ways to think about it Marshal is, our customers tell us that drilling out our composite plug takes four to seven minutes, most of the dissolvables that are being run today there's some sort of cleanout dripets that's occurring anyway. So it's not incrementally that much more expensive. But, we do believe that that going forward that dissolvables will have a place in this market. I'm not as enthusiastic about the timeline as some other folks are. But, I do think that there will be a -- there will be once we develop the technology to a place where it's more predictable around this solution and we have the ability to work in these lower temp environments. I think that's where dissolvables will play a role. So that's why, we've invested in developing composites or dissolvable products not just composite plugs -- or dissolvable plugs, but other dissolvable products and we expect to have that commercialized this year. So it's not the metallic type plugs, it's a polymetric type formulation. It's something that we've seen the early results are just astounding to us and we want it. One of the challenges that we have is trying to slow down the dissolution right because it is also well. So it's something that we're really excited about. We're hedging that into the market, so that if that -- if we are able to develop that type of technology that is reliable and that becomes the new norm and I think it could five plus years, we could see a significant market share with solvable plug. So we fully intend to participate in that.

It sounds like you're attacking from both ends, so you're covered there. Right?

I think so. Yes.

Thank you all for the comments. Thanks.

Thank you Marshall.

Thank you. [Operator Instructions] I'm sure no additional audio questions in the queue at this time. I'd like to turn the conference back over to Mr. Nipper for any closing remarks.

Thank you, sir. So on behalf of the entire management team and our Board, I'd like to thank everyone that joined us on the call today including our shareholders, our employees and the research analysts who cover NCS. I'd like to personally thank our 400 plus employees around the globe whose efforts allow us to achieve amazing results. 2018 marked the second consecutive exceptional year for NCS from a safety perspective with nearly one million hours worked in 2018. We worked incident free in Canada for each of the last several years and we've achieved nearly one and a half years without a single incident in our U.S. manufacturing operation. The work that we do is hard and can be dangerous at times. And our top priority is to make sure that each of our people return home safe at each time. Our ability to work safe gives us our license to operate for our customers and we have a company-wide behavioral based safety culture that is one of the cornerstones of our promise to our employees, our customers and our other stakeholders. This is just one example of why I continue to believe that 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 appreciate everyone's interest in NCS Multistage and we look forward to talking again on our next quarterly call in May. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone have a wonderful day.