NCS Multistage Holdings, Inc. (NCSM) Q3 2019 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Q3 2019 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 your host, Mr. Ryan Hummer. Please go ahead, sir.

Thank you, Stephanie. And thank you for joining NCS Multistage's third quarter 2019 conference call. Our call today will be led by Robert Nipper, our Chief Executive Officer, and I will also provide comments. Before we begin today's call, I would like to caution listeners that some of the statements that will be made on this call could be forward looking in nature 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 SEC that outline those risks. I also need to point out that in our earnings release and in today's conference call, we refer to adjusted EBITDA, adjusted EBITDA margin, adjusted EBITDA less share-based compensation and free cash flow, which are non-GAAP measures of operating performance. We use these measures 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 operating performance. Our press release from yesterday, which is posted on our Web site ncsmultistage.com, provides reconciliations of these non-GAAP financial measures to the nearest GAAP financial measures. I'll now turn the call over to our CEO, Robert Nipper.

Thank you. Ryan, and welcome to our investors, analysts and employees joining our third quarter 2019 earnings conference call. This morning, I'll review high level quarterly results and will discuss what we are seeing in our Canadian, U.S. and international operations. I will also outline the progress that we've made on the initiatives we have underway that aims to improve our gross margin performance and reduce our SG&A expenses. After that I will turn it over to Ryan to discuss the quarterly results in more detail and provide guidance for the upcoming quarter. I'll then provide some closing remarks highlighting some of our recent accomplishments. Total revenue in the third quarter was $60.8 million, 3% below the year-ago period and a 53% increase sequentially. Our total revenue was within guidance we provided in the last quarter's call. Adjusted EBITDA in the third quarter of $13.6 million reflected an adjusted EBITDA margin of 22%. Starting with our Canadian operations, our revenue of $26.1 million for the third quarter was 10% lower than the third quarter of 2018 and 127% higher sequentially in line with the guidance provided in the last quarter's call. Our 10% year-over-year decline in revenue in the third quarter was achieved in the face of 37% reduction in average rig count and in spite of the pricing adjustments we made in Canada late last year demonstrating continued improvements in market share. I'm proud of what our team in Canada is accomplishing in a very challenging market environment. The Group is delivering on the business strategies we have in place in that market. One highlight is that we are gaining share in the Deep Basin, including the Montney, an area we've been targeting for some time. We are strategically leveraging our market position in fracturing systems to grow our sales of Well Construction Products and Tracer Diagnostic Services, providing us with incremental revenue opportunities. One take away from this is that our Tracer Diagnostics revenue in Canada set a new quarterly record in the third quarter. The team is delivering excellent execution in the field supporting our sales effort and strengthening our customer relationships, the quality and efficiency of our field operations continues to differentiate us from our competition. We continue to benefit from the technology center we opened earlier this year, utilizing it to ensure that our customers appreciate the breadth of our capabilities, as well as the rigorous testing that supports our current product and service offering and the new product development initiatives. The overall market in Canada remains challenging, based on the customer conversations that we're having, we continue to believe that rig count in the fourth quarter will be significantly below last year. It's too early at this point to have a firm view on customer budgets and market activity for 2020 and we will know more as preliminary budgets are released later this year and early next year. Without additional pipeline capacity, there remains low incentive or ability for our customers to grow production. We believe the primary application of our customers' excess cash flows will continue to be to reduce debt and return capital to shareholders until capacity is added. Turning now to the U.S., our revenue for the third quarter of $28.5 million was 9% higher than in the year ago period and 7% higher sequentially. We delivered sequential growth in product revenues for the eighth consecutive quarter with 3% growth in the third quarter. The product sales growth was driven by Fracturing Systems and Repeat Precision. Repeat Precision is market share has increased and our Purple Seal Express is representing a higher mix of plug sales over time. Revenue from our Well Construction products fell during the quarter, reflecting a decline in volume and a competitive pricing environment. U.S. services revenue increased by 22% sequentially with increases in the activity in Tracer Diagnostics and Fracturing Systems service revenue. With the continued reductions in the active rig count and the active completion spreads customer activity in the fourth quarter is expected to decline significantly and we currently have limited visibility into customer activity for 2020. Our international revenue for the third quarter of $6.1 million, at the high end of our guidance and increased sequentially. During the third quarter we worked and sold products to customers in the North Sea, Argentina, China, the Middle East, Russia and the U.K. I'll now review our gross margin performance for the quarter and our ongoing efforts to operate more efficiently. Our gross margin for the third quarter was 47% up from 42% in the second quarter and above the high end of our guidance range. The primary drivers for the improved margin performance were improved utilization given the higher activity level of revenue across all geographies renegotiated rates with vendors and increased capacity at our new Repeat Precision facility in Mexico, allowing us to build a higher percentage of our sleeve components in-house. During the quarter, we were able to secure additional field trials on our shorter high pressure sleeve which we expect to have commercialized by the end of the year with positive contributions to gross margin in 2020. In addition, we have hired and trained personnel for a second assembly shift in Houston, which was put online at the end of October. This will allow us to have more in-house sleeve manufacturing capacity reducing third-party spending. Continuing to improve our cost position is critical given the current industry environment. We're in a very competitive industry and one in which the activity levels for our customers is declining in North America. This is apparently U.S. rig and completions counts and activity in Canada has been depressed at depressed levels for over a year. This has resulted in overcapacity and price competition across all oilfield product and service lines and we expect this to continue. In addition to the specific product and supply chain initiatives, we are focused on demonstrating the value that we bring to our customers to combat pricing pressure. We also have R&D projects underway in each of our product and service lines to drive innovation and bring solutions to market that allow our customers to operate more efficiently, reduce cost and improve profitability. Our total SG&A expense in the third quarter of $20.4 million was 11% lower than last quarter and was below the low-end of our guidance. The primary driver of our lower SG&A expense in the quarter is related to the reduction in force and executive salary reductions that we implemented in July. As we previously indicated, those actions resulted in approximately $5 million in annualized cost reductions with an increased overall focused on expense management providing further benefits beyond the $5 million. We believe the investments and initiatives of the past several years provide us with multiple opportunities for capital efficient growth and free cash flow generation. We have taken steps to right-size our operations for the current market environment and continue to make progress on the challenges that impact our gross margin earlier in the year. Through disciplined growth and free cash flow generation, we expect to improve our return on invested capital and create value for our shareholders. I'll now hand it over to Ryan to discuss our financial results in more detail.

Thank you, Robert. As reported in yesterday's earnings release, our third quarter revenues were $60.8 million, 3% lower than the prior year's third quarter and in line with the guidance we provided on last quarter's call. On a sequential basis, overall revenue in the third quarter was 53% higher than the revenue in the second quarter with sequential increases in each of the U.S., Canada and International markets. Gross profit, defined as total revenue less total cost of sales, excluding depreciation and amortization expense was $28.6 million in the third quarter or 47% of revenue compared to $33.9 million or 54% of revenue in the prior year's third quarter with lower margins on both product sales and services revenue. This gross margin percentage was above the high-end of the guidance we provided for the quarter for a sequential comparison. Gross profit was $16.7 million or 42% of revenue in the second quarter. Our SG&A costs were $20.4 million in the third quarter as compared to $19.4 million in the prior year's third quarter. There were also 11% lower than the second quarter's level of $22.9 million. As a reminder, our reported SG&A includes share-based compensation, as well as certain non-recurring expenses including litigation expenses. In the third quarter, our SG&A also included $0.7 million in one-time costs related to the reduction in workforce that we implemented in July. Adjusted EBITDA for the third quarter was $13.6 million as compared to $18 million in the prior year's third quarter. Adjusted EBITDA as a percentage of total revenue was 22% in the third quarter of 2019. During the quarter, our depreciation and amortization expense totaled $2.6 million. We had net income attributable to non-controlling interest of $3 million in the quarter, reflecting positive net income at Repeat Precision. Our average basic and diluted share counts for the quarter were both $46.9 million. Turning now to cash flow items in the balance sheet. Cash flow from operations for the third quarter was negative $1.3 million and has been a positive $4.8 million for the year through September 30. Our net capital expenditures for the third quarter were $0.3 million and have been $4.4 million for the year through September 30. As a result, our free cash flow for the quarter was negative $1.6 million and has been positive $0.4 million for the year-to-date through September 30. At September 30 we had $4.5 million in cash and total debt of $16.3 million which included $13 million drawn under our U.S. revolving credit facility. During the quarter, we reduced our cash balance by $3.2 million and we've reduced it by $9.4 million for the year through September 30. We also have up to $62 million in total potential availability under our revolving credit facilities, bringing our total potential liquidity at September 30 to approximately $66.5 million. I'll close with a few points of guidance for the fourth quarter. We currently expect fourth quarter revenue to be between $49 million and $55 million with U.S. revenue lower by 12% to 24% on a sequential basis, reflecting further reductions in rig count and completion activity. In Canada, we expect a seasonal sequential decline in revenue of 8% to 16% from the third quarter, primarily driven by the typical reduction in activity in the second half of December. We expect international revenue of approximately $5 million to $6 million as we benefit from the ongoing work we have across multiple geographies. Approaching the higher end of this range, we will primarily depend on consistent activity levels in Canada through early December and a moderation in the pace of the reduction of U.S. drilling and completion activity as we progress through the fourth quarter. We expect our gross margin to be between 44% and 47% reflecting a modest decrease relative to the third quarter. With negative absorption impacts related to the lower revenue, partially offset by continued progress in our company specific initiatives. We expect our reported SG&A inclusive of share-based compensation and non-recurring items to be between $20 million and $21 million including approximately $3 million in share-based compensation and over $1 million in litigation expenses. This amount excludes potential provisions for doubtful accounts related to customer-related events occurring during the fourth quarter. We expect our fourth quarter, depreciation and amortization expense to be approximately $2.7 million. We expect our net interest expense to be between $0.3 and $0.4 million in the fourth quarter. We have again reduced our expected gross capital expenditures for the full year of 2019 to a new range of $6 million to $7 million the midpoint of this range represents a reduction of over 50% from last year. I'll now hand it over to Robert for closing remarks.

Thank you, Ryan. Before we open up the call for Q&A, I'd like to highlight some of our recent accomplishments. In Canada, our team is executing on our strategy to increase our market share and cross-sell our products and services to fully capitalize on our strong market presence. We sold over 25% more sliding sleeves and completed approximately 25% more wells in Canada in the third quarter as compared to the third quarter last year, this in the face of a 37% year-over-year reduction in rig count. We also had our highest ever revenue quarter for our Tracer Diagnostics Services business in Canada. In the U.S., we had our eighth consecutive quarter of increased product sales driven by market share growth for our purple seal frac plugs and a sequential increase in sliding sleeve sales. We continue to grow our presence in international markets, which we believe have a more stable near and medium-term outlook than North America. We have recently set a record in Russia completing a well with over 50 sliding sleeves and have installed a well with over 50 sleeves for an upcoming completion in China. We are expanding the international presence for our tracer diagnostics offering, preparing for an upcoming Middle East work. We are currently supporting completions for multiple offshore wells simultaneously in the North Sea. I'll close with a couple of brief comments. We, along with others in our industry are facing significant challenges, especially in North America. Our customers are reducing activity levels, which limits growth opportunities and has resulted in increased competition amongst service companies. We are taking specific actions to address these challenges. We're executing on the strategies that we have had in place for the past several years, leveraging the leadership positions and the product lines and service lines in which we compete. We have tactically expanded our product and service offering over time and have invested in our sales force and international infrastructure to allow us to capitalize on revenue opportunities across the globe. We have made substantial progress addressing the company's specific challenges we faced in the second quarter and continue to take steps to optimize our supply chain. We have implemented cost reduction initiatives that included a 6% workforce reduction in order to better align our operations with the opportunities in the market. We expect to achieve run-rate savings of approximately $5 million from the workforce reductions and have already achieved additional savings in addition to that. We've reduced our expected CapEx throughout the year. 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 costs, enhancing recoveries and improving their financial returns. As a result, we believe we are well-positioned to deliver capital efficient, long-term organic growth through increased adoption of our innovative completion equipment and services. Our capital light business model provides us with the ability to generate free cash flow while maintaining a very strong balance sheet. This in turn, provides us with the ability to allocate capital to high return investments and evaluate options for the return of capital to our shareholders over time. Also I want to highlight that we welcomed Valerie Mitchell as a new member to our Board of Directors during the quarter. Valerie brings a breadth of experience from the E&P perspective to our Board, having served in a variety of roles while at Newfield Exploration as well as founding and serving as CEO of Corterra Energy. We believe that Valerie's perspective will be very valuable to NCS as we navigate the current market environment and as we develop and introduce new technologies to our customers. With that, we'd be happy to take your questions.

[Operator Instructions] Your first question comes from the line of Ian MacPherson with Simmons.

Thanks. Good morning. Robert, Ryan, it seems like you've done a good job of making [indiscernible] as it were so far this quarter. And I just wonder, when you look out to next year, we don't have great visibility. You have that there's going to be approximate swift recovery in the U.S. market, who knows. Assuming we discontinued to muddle along, do you think that you will continue on the path that you've demonstrated this year with regard to incremental product line expansion and geographic and other steps to just try to outperform your market top-line metrics? Or do you think that at this point worth exploring more I guess bolder expansions, or M&A possibilities to increase the company's relevance in a more challenging market? With regard to, I guess maybe more of an exposure to plug and perf than you currently have in your product line or something else that's just more radical than the commendable step out expansions that you've cobbled together over the past couple of years.

Great question. So 2020, I mean, our view on 2020 is that it's probably, you take the last half of 2019, annualize that and that's what we're looking at. So down a bit in 2020, that's what we think. And so, we still have some fairway left in our cost reduction initiatives. So we continue to chip away at that. We expect to see continued benefit from that going forward. We have a number of R&D projects that we're working on, as I said before, almost every -- all product line, we have our R&D projects going on in. So, there will be new products coming in. When we think about M&A, we certainly -- we have a focus on looking at opportunities. We think that there will be an opportunity somewhere, sometime. We haven't found the right one yet, but we continue to look at it. But, we've got a very clean balance sheet, low debt and we like being in that position. So, it's going to have to be something that's really interesting for us to do something from an M&A standpoint. But, I think that we do have the ability to execute, if that right opportunity comes along. But we have some technology developments that are pretty interesting, both at Repeat Precision and at NCS. So, I think we'll continue to focus on what we can control, which is not the market, but we can control customer adoption, market share gains, cost reductions and continue to bring new technology in and I don't know what transformational is as you described it, but I hope that we have that we continue to get better.

Okay. Well, I think you have been. I didn't mean to imply otherwise whatsoever. So thanks. You also talked about the shorter higher pressure sleeves that you're looking to roll out or commercialize early next year. What segment of the market is that specifically oriented towards, or is it just more of a kind of a broadly applicable improvement in your product suite?

Yes. That's something we're a little bit behind on right now. We expect to start getting full benefit from that in 2020, but it was originally, or the first version was the Canadian market because the pricing pressure that we started seeing just over a year ago in the Canadian market. We accelerated development of that, but we're rolling out the version for the U.S. market as well. Because what we're seeing is that -- because of the lower cost and the lower price point that we bring to our customers, it helps us better compete with plug and perf in the U.S. market.

Got it. All right. Well, thanks Robert. I will pass it over.

Thanks Ian.

Your next question comes from the line of George O'Leary with Tudor, Pickering, Holt.

Good morning, guys.

Good morning, George.

Good morning.

On the revenue guide for the U.S., I guess a couple of your peers have guided U.S. completions activity down sequentially in the fourth quarter about 20% to 30%. So, I wondered if you could speak to the kind of band that you outlined of down 12% to 24%. Is a 12% kind of imply that you guys capture some share and kind of what gives you confidence that you might be able to get there and is the 24% just kind of assume that you trend in line with the broader market. I guess, how do you think about that range for the U.S. that you guys framed on the revenue guidance front?

Yes. I mean, that's how we think about it is that, the upper end of our range is probably, the status quo that we don't gain a lot of market share. We think from what we're seeing with the customer base that we have that, it's probably down 25%. The lower end of our range of down-trending is continued adoption with some of the product lines that we're introducing in the U.S.

Great. And then, on the CapEx front, it's nice to see you guys find ways to cut CapEx out of the budget for 2019. As we think about 2020, is there the opportunity for CapEx to fall further or should we think about that 6 to 7 is kind of the bottom end of where you guys could sit from a CapEx standpoint going forward?

I probably think about 6 to 7 being about where we are. We're looking for opportunities to reduce CapEx spending, but I would say just look at 6 to 7 for now.

And then, I'll sneak in one more if I could. In this environment, I imagine you guys are trying to pick your spots from the R&D front, where you're willing to spend cash there, but that's obviously a very important component of the business as well. So what do you guys most focused on today from an R&D standpoint?

Yes, that's a really good question. So we've made a number of changes over the last 12 months to how we think about and execute on engineering, research and development, new product development, new product introduction. We shift the focus of the company to a product line management structure. So, we have product line managers for all of our different product lines now. And their role is to make sure that we're working on the right things that the scope of the project is very clear for engineering and engineering is directed by the product line management team on what they work for and prioritization is also made in that product line management group. So what we've been able to do is, we've been able to pull a lot of stuff out of engineering that we've been working on re-prioritize and clarify scope and plug back into the system. So we expect what we've seen so far this year is an increase in efficiency and what we're able to get out of engineering. Because we had to remove some costs and that was a way to do it without removing some of the benefits of being able to develop new technologies, we believe. And so I'm really happy with the results that we've seen from that effort so far. We're working on -- this is the first time in the history of the company over the last 6 months; the last 6 months is the first time that we've had engineering projects that we're working on internally for all of the different product lines that we have. So, we have our research and development projects for every product line. Some of those are incremental changes, some of them are significant changes and we've talked in the past about our EOR effort. So we're working on systems that allow our customers to better control their EOR activities. So that would be more of the step change, if you will. But we won't see the benefit from that until probably 2020 -- late 2020 or 2021. We've run one system. We've got other system going on the ground in December and both in Canada and then we have a project in the U.S. in 2021 as well. But, the other type projects that we're working on is their expansions of product lines. So with Repeat Precision, we will make changes to our selling tools that we sell there, we're looking at other opportunities for products that we aren't currently selling. So we're in the process of setting up a team inside Repeat Precision to expand the product offering there. We're making changes to some of our open-hole or well bore construction type products and services. So there is a lot of different things that we're doing and it's focused more around cost reductions, so that we can pass on some cost savings to our customers, but also new products that are coming out. So long answer and I hope I sort of answered your question.

No. That was very helpful. Thank you, Robert.

Your next question comes from the line of Kurt Hallead with RBC.

Hey, good morning.

Good morning, Kurt.

So Robert, I was wondering if you could -- just could give us some additional insights here on the type of feedback you've been getting from your customer base regarding the products and services that you've been introducing and I know it's always difficult to kind of make headway when the market trends are kind of going against you but your performance in the third quarter was extremely good. And so could you just give some color around that dynamic and the second element of that question would be, what kind of challenges are you facing with respect to pricing pressures that may be out there for some competing products and services?

Well, for the second part of the question on pricing pressure; it's probably about as strong as I've ever seen it before. There is a lot of capacity in the market, there are a lot of competitors that seem to be willing to work at levels that we don't believe are sustainable. But, it's really affecting the market and our customers are certainly driving everyone, all service companies to try to reduce costs. I mean, that's probably the biggest conversation we're having with customers is, how can you reduce our cost and what I will say is that the customers are not -- they are open still today to not looking at just the acquisition cost of our products and services, but also looking at how our products and services can help them reduce other costs and they take that into consideration. And so that's something that we focus on as much as possible, it's not so much reducing the cost of our products that we sell and the services that we sell, but also how the products and services that we sell, help our customers reduce cost. For instance, in our composite plug line with Repeat Precision our customers tell us that the composite plugs, drill out faster than any of the other plugs that they have and almost all of our customers that we talked about this are telling us that they have records with our plugs drilling out the plugs. And so it doesn't necessarily translate to a reduction in plug cost, but it does result in a cost reduction for our customers. Same thing with our the fracturing services in the US, there are places where our customers maybe the cost of the sliding sleeves is not decrease, but the cost for them because they are using sliding sleeves instead of set a plug and perf on in single well applications as reduced. So that's what we're trying to focus on now and manage the cost reduction. That's not to say that we haven't had to reduce cost. Our sales price on some of our products and services, tremendous amount of pressure that's out there, but we're trying to manage that way. Kurt.

Okay, great. That's great color. And then Ryan on your end, in the context of working capital, I wonder if you give us some insights on how that may progress here in the fourth quarter, give some insights on that would be great. Thanks.

Yes. So, Kurt, I think as you know, we have a fair amount of seasonality in our business and in our last quarter's call, we had given guidance that we believe that working capital would consume cash during the third quarter and it did. And that would be about where we are today and just a slightly positive free cash flow position for the year-to-date period. But, with that seasonality we do typically see a reduction in receivables, in the fourth quarter which brings cash to the bottom line as well for us. So we believe that free cash flow in the fourth quarter will be positive, will be call it in the high single digits and that will be a combination of both earnings and a little bit of a benefit from free cash flow during the quarter.

Okay, great. And then, maybe if I sneak another one in on the international front, you've done a pretty good job here to kind of expanding your presence into a variety of different markets. Given the fact that most expect the international market to continue to grow in 2020, do you see the opportunity to maybe get into some additional countries or is it going to be focused more on expanding your penetration in the existing areas that you're already operating.

Bob?

Would you like to expand on that?

Well, we've been investing pretty heavily in international for a number of years and we're starting to actually see the rewards from that now. Our contract with Aker BP will be in the sweet spot next year in 2020 for that. We're making progress in the Middle East, there's a number of countries in the Middle East that we're working on, and I think at one time last quarter we were operating in seven different countries. So, we see expansion into other countries, but also being able to push other product lines out, tracer services is one that we're really focused on right now and getting out in some of those other countries that seems to be getting traction faster than anything else other than fracturing services, but fracturing services compete very well internationally, compared to the U.S. market. So again, both by adding countries as well as expanding in the countries that we are in.

Yes. Thanks. I appreciate that.

Your next question comes from the line of JB Lowe with Citi.

Hey, good morning guys.

Good morning, Lowe.

I wanted to touch on the in-house manufacturing component on-the-sleeves that you guys are doing, what percentage of sleeves are you guys actually building in-house at the moment, and how you kind of optimize that, how much more gross margin can you squeeze out of bringing that more of that capability in-house?

Well, there is a little bit more that we can do. So, one of the issues that we had was that we opened up a new manufacturing facility this year in Mexico. So, if you recall, we had the Repeat Precision joint venture when we set up that joint venture that was one manufacturing facility in Mexico and the initial purpose for that joint venture was the manufacturer. It was low cost, high quality manufacturing for our sliding sleeves predominantly the sliding sleeves that we run in Canada, because they're all the same connects -- the thread connections are the same and we can stock equipment for the business that we do in Canada. We're in the U.S. it's more build-to-suit. So, as our business started to grow coming out of Q2 into Q3 of this year, we were caught out little bit off guard, we're in the process of opening up a new manufacturing facility in Mexico, but it wasn't completely -- we hadn't completely finished this facility and gotten everyone trained yet. So when we had this rush of activity at the end of the second quarter, caught off guard and we ended up having to go outside to use third-party machine shops in the U.S. to manufacture the products in Canada are for the Canadian market for the ramp that we had in our activity we didn't anticipate. So, we have as a result -- we've been able to get that second facility in Mexico up and running. We have, we still have some work to do and getting more manufacturing capacity there. We're not quite where we want to be yet and we still have some room to run there. And then we added the second shift that I talked about in Houston, so second shift in Houston. The Houston facility for us is not -- we call it a manufacturing facility, but really what it is a facility where we take the component parts that have been manufactured either in Mexico or in a third-party machine shop. We bring them into Houston and then the final products are assembled pressure tested and sent out to the customer locations. So, we had a little bit of a bottleneck there, which required us to go out to a third party in Canada to do some of the assembly for us where our costs are a little bit higher. So, we've added that second shift now got them trained up and so we have more capacity in Houston now. So we will still seek -- continue to see some improvement on the gross margin line, but we've gotten a lot of it already in this quarter or in the third quarter.

Okay, great. And then you guys -- tracer diagnostics penetration in Canada is improving guys had a record quarter up there. I guess is that one product line that you guys see the greatest potential market share gains going forward. And if not then what -- how would you kind of rank order your product lines in terms of greatest market share potential gains in 2020? Thanks.

Yes. So, we still have a little bit of room and in Canada to grow. We have some room in the U.S., but I mean we're the number according to Spears Research, we're the number one provider of tracer diagnostics on in North American land already but we still think there is some share to be gained, not necessarily from competitors, but what we're looking at is, we've got some R&D projects in tracer diagnostics that we think will help bring more value to our customers. And so, what we're trying to do is trying to move the adoption rate of tracers from the -- call it 15-ish percent of wells being trace today to something higher than that. And so as we are able to bring more value to our customers. We think it can drive higher adoption. Repeat Precision we think that we are number 4, number 5 in the U.S. market. So, we still have some room to run their. We're gaining market share on a monthly basis, so we think that there is some fair way to grow there. And our fracturing services. So, our sliding sleeve business in the U.S. market, we still think that there is some market share gains to be made there. One of the things that we've seen is that it's really difficult in this environment. But as the environment changes over the next year and a half to two years, we think there's going to be some market share gains there. And then, some of the new products and services that we're working on we think that the less value there, but I would say for today tracers being able to push those out because -- it's one of the product lines, it's relatively simple to push out in some of these international markets. And then, the Repeat Precision product line with the setting tools and the composite bridge plugs we still got room there.

Okay, great. And then last one from me is, you kind of mentioned, that annualized back half of ' 19 it's kind of a good proxy for what 2020 is going to look like. Is that the same for your international business on the top-line? That would kind of imply a pretty big jump next year, I'm just wondering kind of how to frame the international growth potential next year's Aker BP rolls on and then any of your other initiatives? Thanks.

Yes. When I made that comment that was directed specifically at the U.S. market. So, I think Canada, the market is probably going to be around flattish is sort of what we're hearing from our customers today. We continue to make market share gains there as we have over the last several quarters, but I think that market generally is about flat in Canada. I think the U.S. market is going to be probably down a bit, as I said you annualize this, the back half of 2019. And that's kind of what the U.S. market looks like. Again, we still have room to grow in a few areas, but I think that's the macro environment, but international markets we think that's going to be up a bit.

All right. Thanks very much.

Thank you.

Your next question comes from the line of Chris Voie with Wells Fargo.

Good morning guys.

Good morning, Chris.

Just following up on the prior question, so I think you guided margins to 44% to 47% in the fourth quarter. I think you're still working on costs. What is the margin outlook for 2020, how much can that improved compared to the 4Q guide?

Well, we've got some work left to do. I'm not going to commit to a margin, I mean 44% to 47% in the fourth quarter is assuming some an activity decrease, so not perfect absorption of some of our fixed cost so that I think there is a the ability to get a little bit better than that and get something closer to what we saw in the Q3 and 2020, if we're able to maximize our cost.

Okay. And then on the SG&A front, obviously you've taken out some costs, but is there more work to do there? Can that improve in 2020 as well?

Yes. It can. We're still working on that, again, not ready to commit to anything on that. As I said, we committed to the $5 million that we pulled out on an annualized basis in the cost reduction from the headcount reductions, but we've already seen some additional costs that we've taken out, and we'll have an update for you at the next quarter, but we're seeing some cost reductions there and want to make sure we can maintain it before I commit to it.

Okay. Thank you.

Thanks.

Your next question is a follow-up from Ian MacPherson with Simmons.

Thanks for the follow-up. I just wanted to make sure that I got the Q4 guidance that I understood it correctly for Canada because -- if so, it sounds like Canada at the midpoint, you're up close to 20% year-on-year, is that right. And especially in light of the pricing pressure that's been unfolding, is that all explained by Montney or what else is moving that?

Yes. Your math is right and in part of it, if you remember we took our pricing reductions in Canada in the fourth quarter of last year. So, for us kind of the year-on-year revenue comps get a little bit easier. But the big thing and Robert mentioned it in his prepared remarks is even third quarter '19 versus third quarter '18, our sliding sleeve sales were up more than 25% in our completions up about 25% with the market that we've described. So, we think we can continue that momentum with the market share gains that we have and what we've been doing in broadening the revenue activity beyond just fracturing systems and that market share increase as well as what you described kind of the increased value of the work that we're doing in the Montney, given the completion intensity there as opposed to some of the light oil plays continues through and allows us to deliver some differentiated performance in the Canadian market.

Yes. Not that at all. Thanks, Ryan.

All right.

I am showing no further questions at this time. I would now like to turn the conference back over to Mr. Robert Nipper.

Thank you on behalf of the entire management team and our Board. We'd like to thank everyone that joined us on the call today, including our shareholders, employees and research analysts who cover NCS. I'd like to personally thank our nearly 400 employees around the globe as well as the employees at our Repeat Precision joint venture. I continue to believe that we have the best team in the industry. It is through the talents effort and dedication of this team that NCS is able to grow our customer base, provide exemplary customer service and drive the innovations that we bring to the industry. We appreciate everyone's interest in NCS Multistage and we look forward to talking again on our next quarterly call next year. Thank you, Operator. That concludes the call.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and have a wonderful day. You may now disconnect.