NCS Multistage Holdings, Inc. (NCSM) Q4 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. And welcome to the Fourth Quarter 2019 NCS, Multistage Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Ryan Hummer, CFO. Please go ahead, sir.

Thank you, Katherine. And thank you to everybody joining NCS Multistage's fourth quarter and full year 2019 conference call. Our call today will be led by our CEO, Robert Nipper, and I will also provide comments. Before we begin today's call, we would like to caution listeners that some of the statements that will be made on this call could be forward looking 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 the 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 refer to adjusted EBITDA, adjusted EBITDA margin, adjusted EBITDA less share-based compensation and free cash flow, all of 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 operating performance. Our press release and the updated investor presentation, which was posted yesterday on to our website are both available at ncsmultistage.com, where it provide reconciliations of these non-GAAP financial measures to the nearest GAAP financial measures. With that said, I'll turn the call over to Robert.

Thank you. Ryan. Welcome to our investors, analysts and employees joining our fourth quarter 2019 earnings conference call. Today I'll review some of our key accomplishments for 2019 and discuss our strategic priorities for 2020. I'll also briefly discuss our outlook in each of the U.S., Canadian and international markets. After that, I'll turn it over to Ryan to discuss the quarterly results in more detail and provide guidance for the upcoming quarter, after which I'll provide some closing remarks. First, I want to thank our employees. It is through the hard work, dedication and ingenuity of our people that we were able to achieve so much in 2019. And it takes the effort of the entire team to position us to achieve our near and long term objectives. During 2019, we continue to pair our efficiency, enabling technologies with our service capabilities to help our customers optimize their operations and maximize the value of their assets. Our focused offerings of products and services delivers tremendous value to our customers. Key examples include, within fracturing systems, [Indiscernible] put out a press release in December highlighting how the use of our technology saves them significant time and money on completions, accelerates production and may enable additional projects. Our PurpleSeal frac plugs from Repeat Precision have gained significant market share by outperforming competing products. Customers gained efficiencies in pump down and drill out times with this product. Even more impressive has been the market acceptance of our PurpleSeal Express system. A factory assembled unit that combines our frac plug with a limited use setting tool, reducing onsite HS&E [ph] risk during plug and perf operations. Our tracer diagnostic service line helps operators access parent childhood [ph] well relationships and strategies to mitigate well-to-well interference. Customers use these learnings to adjust their well spacing and development plans to maximize financial returns and capital efficiencies, which is critical in the current environment. Within well construction, our airlock system provides our customers with greater assurance of landing, casing and extended reach laterals, optimizing the cost of their field developments. The technology can also reduce casing running time providing a net savings to a customer. We deliver all these products and services through an exceptional and highly trained field operations team, and support our customers operations. We operate in a safe and efficient manner, and all we do with a commitment to safety that extends to our employees and our customers. I'm incredibly proud of our team and our safety record. Our total recordable incident rate has been between 0.3 and 0.4 in each of the last three years, which compares very favorably to industry benchmarks. The value that we bring to our customers across the portfolio allowed us to outperform underlying industry activity levels in each of our operating regions. Our U.S. revenue was flat year-over-year in 2019. This compares to a decline in the average U.S. horizontal rig count of 8% and EIA estimates of a decline in the U.S. well drills of 5%. International revenue grew by 11% year-over-year outperforming the 8.5% growth in the average international land rig count. In Canada, our revenue fell by 21% year-over-year far outpacing both the Canadian or the average Canadian land rig count, and the [Indiscernible] wells drilled in Canada, both of which decline by 25% to 30%. The last thing I want to touch on regarding our performance in 2019 is our cost discipline and free cash flow generation. We made several adjustments through the year as market conditions deteriorated. We did this to right size the business and to maximize free cash flow. We implemented a reduction in force in July that had an immediate impact on reducing our cost base by approximately $5 million on an annualized basis. We also reigned in our capital spending through the year. Our net CapEx for the year of $5 million was well below the initial range we laid out at this time last year of $9 million to $13 million. As a result, we generated free cash flow of approximately $13 million. We utilize this free cash flow and cash on hand at the beginning of the year to pay the $10 million onetime earn out to our joint venture partner and Repeat Precision and to reduce our debt balance by nearly $13 million. As a result, we have a very strong balance sheet with net debt of only $1.7 million at the end of the year. Our 2019 free cash flow as a percentage of our current equity market capitalization or free cash flow yield is 25%. We also evaluate free cash flow as a percentage of our enterprise value which is 18%. These calculations are derived from our page -- from page 4 of our presentation. Our focus on and ability to generate free cash flow continues to be one of the cornerstones of the NCS story. As page 7 of the presentation demonstrates, we have grown our free cash flow each year since 2015 with the sole exception being 2018, when we renovated our technology center in Calgary and implemented a new and robust ERP system. Those two strategic investments totaled over $11 million and we don't expect investments of a similar magnitude in the near future. Our strategic priorities for 2020 are straightforward. First, we will continue to bring tangible value to our customers through our differentiated product and service offerings. In this, we plan to commercialize new products that will facilitate both near-term opportunities and set the stage for longer term growth. Second, we will continue to strive to have revenue performance that exceeds underlying industry activity trends in each of the U.S. Canada and international markets. We are highly focused on our international business. International business increased from our international revenues as a total, as a percentage of the total increase from 6% to 8% of our total revenue last year, and we expect international revenue to exceed 10% of our total revenue in 2020. Finally, we aim to increase our free cash flow generation in 2020. Our Capital Light business model facilitates free cash flow generation. This free cash flow will allow us to further enhance our strong balance sheet and provide flexibility to capitalize on potential strategic opportunities. I'll now briefly review the market environment and our current strategies in each of our geographic markets, starting with Canada. Our current expectation for full year industry activity would be flat to lower by 5%. Drilling activity in Canada is off to a stronger start in 2020 than to 2019, but we haven't seen indications of increases in full year capital budgets. We believe, we are well-positioned to grow our revenue in Canada in 2020 as compared to 2019 outperforming industry activity. Our team in Canada continues to impress me with what they have of accomplished in a challenging market environment. The group continues to deliver on our business strategies in that market, growing our market share and fracturing systems and cross-selling our products and services across our customer base. The momentum we've seen in recent quarters continued in the fourth quarter. During Q4, we grew our revenue by 24% as compared to the fourth quarter of 2018. The average comparative rig count was lower about 23%. Let me repeat that, 24% growth in a market that declined 23%. That is differentiated performance. This can't happen without a true team effort between sales and operations. The team is delivering excellent execution in the field, supporting our sales efforts and strengthening our customer relationships. The quality and efficiency of our field operations continue to differentiate us from our competitions. We are benefiting from the technology center we opened in 2019, nearly 140 customers from over 35 companies toured the tech center during 2019. These tours highlight the breadth of our capabilities, as well as the rigorous testing that supports our current product, service and service offering and new product development initiatives. The technology center has been a great investment for us. We're also encouraged by positive regulatory developments related to major projects underway to improve pipeline egress for Canadian crude. If these projects are completed, they should improve the relative economics for our Canadian customers who have been operating in a constrained environment for some time now. For the U.S. our current expectation is the customer capital spending will fall by 10% to 15% as compared to 2019. We would expect the impacts to well count and completion count to be less severe, likely lower by single digits, reflecting increased efficiencies and lower pricing in some product and service lines. We believe, we are well-positioned to outperform the overall market in the U.S. through continued share gains especially within fracturing systems and Repeat Precision. Within fracturing systems, we continue to target our sales efforts to specific applications where pinpoint stimulation delivers operational benefits and cost savings to our customers. Many of our fracturing systems customers are also key targets for our recently introduced enhanced all recovery offerings. Repeat Precision continues to grow its share in a very competitive space. This illustrates the robust performance of our PurpleSeal frac plug and the inherent HST [ph] advantages of a limited use setting tool. We believe that international markets are likely to significantly outperform North America in 2020 with customer capital spending increasing 5% to 10%. We continue to grow our international customer base, reducing our reliance on any single region, which was partially responsible for our international revenue improving from $4 million in the first half of 2019 to over $11.5 million in the second half. We expect that momentum to continue into 2020 despite some seasonality in the North Sea and China in the first quarter. On a positive note, activity in Argentina has rebounded after a period of slower activity in late 2019, related to the elections here in a period of significant inflation. The market there has stabilized considerably. We continue to learn more about the coronavirus and its impact on China and the world. Our thoughts go out to all those who are directly impacted by the situation, and we are hopeful that the international efforts to contain the spread of the virus and identify effective treatments are successful as possible. As each week passes, the impact of the virus on the world's economy and on all demand is becoming more acute and increases the risk of further activity reductions in North America. Specific to NCS operations, we currently expect to resume completions activity in China during the second quarter of 2020, and we have had a limited impact on our supply chain. While we believe that we can outperform the industry activity based on the value proposition of our products and services, we remain committed to cost discipline, supporting our gross margins and managing capital expenditures and SG&A. We believe the investments and initiatives of the past several years including our reinvestment, our investment in Repeat Precision in our technology center provides us with opportunities for capital efficient growth and increased free cash flow generation. Continuing to improve our cost position is critical given the current industry environment. We're in a very competitive industry and one in which activity levels for our customers continue to decline in North America. We have taken steps to right size our operations for the current market environment and won't hesitate to do so again if the industry conditions change. We have been and will remain good stewards of capital. We believe that we can deliver modest growth while improving our financial returns and growing free cash flow. I’ll now ask Ryan to discuss our financial results in more detail.

Thank you, Robert. As reported in yesterday's earnings release, our fourth quarter revenues were $52.1 million, 4% higher than the prior year’s fourth quarter and in line with the midpoint of the guidance we provided on last quarter's earnings call. In addition, our fourth quarter revenue in each of the U.S. Canada and international markets fell within the guidance that we provided on last quarter's call. On a sequential basis, revenue in the fourth quarter was 14% lower than revenue in the third quarter, with seasonally driven sequential decreases in each of the U.S; Canada and international markets. Full year revenue for 2019 of $205 million represented a 9% decrease as compared to 2018. Gross profit defined as total revenue, less total cost of sales excluding depreciation and amortization expense, was $26.1 million in the fourth quarter, or 50% of revenue compared to $24.2 million or 48% of revenue in the prior year’s fourth quarter. This gross margin percentage was above the high end of the guidance we provided for the quarter. For a sequential comparison, gross profit was $28.6 million or 47% of revenue in the third quarter. Selling, general and administrative costs were $22.2 million in the fourth quarter, as compared to $20.3 million in the prior year’s fourth quarter and were also higher than the third quarter’s level of $20.4 million. During the quarter, we recorded provision for bad debt expense of approximately $1.8 million related to a single customer, which was the primary driver for the increase and for SG&A to be above the guidance for the quarter. Our reported SG&A include share based compensation and certain non-recurring expenses including certain litigation costs. Non-recurring expenses totaled $1.2 million in the fourth quarter. Adjusted EBITDA for the fourth quarter was $8.3 million as compared to $7.8 million in the prior year’s fourth quarter. Adjusted EBITDA as a percentage of total revenue was 16% in the quarter. Our full year adjusted EBITDA in 2019 was $28.2 million reflecting 14% of revenue and compares to $49.7 million in 2018. For the fourth quarter, our depreciation and amortization expense totaled $2.6 million. We had net income attributable to non-controlling interest of $2.2 million in the quarter, reflecting net income at Repeat Precision. Our average and basic diluted share accounts for the quarter were both $46.9 million. Turning now to cash flow items in the balance sheet. Cash flow from operations for the fourth quarter was $13.1 million and it was $17.9 million for the full year. Our net capital expenditures for the fourth quarter were $0.6 million and $5.0 million for the full year. As a result, our free cash flow for the quarter was $12.6 million and it was $12.9 million for the full year in 2019. At the end of the year, we had $11.2 million in cash, and total debt of $12.9 million which included $10 million which was drawn under our U.S. revolving credit facility with the remainder being capital leases. We reduced our debt balance by $3.4 million during the quarter and by $12.8 million during the year. I'll close with a few points of guidance for the first quarter. We currently expect total revenue in the first quarter to be $56 million to $62 million. We expect our U.S. revenue to be between $22 million and $24 million reflecting the relatively slow pace for increased activity during the first quarter, which we believe could accelerate through the middle of the year. In Canada, we expect a seasonal, sequential increase in revenue to $31 million to $34 million driven by a strong start to activity in 2020 and continued market share gains. The range remains wide due to uncertainty regarding the timing of the onset of weather driven spring breakup. We expect our international revenue to be approximately $4 million to $5 million as we benefit from on-going work we have across multiple geographies, offset by seasonal winter declines in the North Sea and in China, with China also impacted by a slowdown related to the coronavirus. We expect our gross margin to be between 44.5 % and 47.5% reflecting a decrease relative to the fourth quarter, primarily driven by geographic mix impacts. We expect our reported SG&A inclusive of share based compensation and non-recurring items to be between $22.5 million and $23.5 million. This includes approximately $3.3 million in share based compensation and over $1.5 million in litigation expenses. SG&A typically increases in the first quarter relative to the fourth quarter due to higher payroll taxes and full accruals for incentive compensation in the New Year. We expect our share based compensation expense to decline during the year, as our pre IPO options will be fully expensed in May leading to a reduction in the second quarter and beyond. In addition, we expect our non-recurring litigation expenses to decline in the second quarter and thereafter as we expect to conclude the trial phase with respect to a U.S. matter. I will note that significant percentage of incentive compensation under our 2020 plan utilizes cash settled awards. This minimizes dilution for our shareholders, but may introduce more volatility into our reported share based compensation expense as cast several awards are subject to quarterly re measurement. We expect our first quarter depreciation and amortization expense to be approximately $2.7 million and we expect our net interest expense to be $0.3 million in the first quarter. Our expected gross capital expenditures for 2020 is between $3 million to $5 million, a further reduction from 2019. We continue to evaluate business opportunities that may support additional capital investment, especially at Repeat Precision. If we were to move forward with such opportunities, they would have attractive cash on cash return profiles and enhance the earnings power of our business. I'll take the next few minutes to discuss NCS’s free cash flow generation in 2020. I would refer you to slide 22 of the investor presentation that we posted last night. As we are not providing any full year EBITDA or adjusted EBITDA guidance, we'll simply bridge from an illustrious EBITDA to walk through sources and uses of cash to arrive at the free cash flow for this illustrative adjusted EBITDA, less share based compensation. Several of these bridge items have a range, and any summary figures we’ll utilize the midpoint of the ranges provided. Beginning with our adjusted EBITDA less share based compensation. We add $10 million to $12 million in share based compensation for the year. This number excludes potential impacts from the re-measurement related to cash settled awards, as the cash impact for those during 2020 would be minimal. From there, we deduct $5 million to $7 million that comprises cash interest, cash taxes and other items including the non-recurring litigation expenses. Year-end working capital for NCS typically runs at approximately 30% to 35% of annual revenue, and with our focus on cash flow, we are working towards achieving the lower end of that range in 2020. The next bar represents the net CapEx that I spoke to earlier of $3 million to $5 million. The sum of these items results in free cash flow equalling adjusted EBITDA less share based compensation, minus approximately $3 million. This bridge is very similar to 2019 when our adjusted EBITDA less share based compensation of $16 million as provided in our earnings release translated to free cash flow of $12.9 million. 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 accomplishments. In Canada, our team is executing on our strategy to increase our market share and cross-sell products and services to fully capitalize on our strong market presence. We increased fourth quarter revenue on a year-over-year basis by 24% despite a 23% reduction in rig count. In addition, we completed more wells for our customers in 2019 than we did in 2013, demonstrating our market share gains. In the U.S. we continue to see strong performance of Repeat Precision and we had increased activity in fracturing systems in the second half of 2019, which has continued into the first quarter. We continue to grow our presence in international markets, which we believe have a more stable near and medium term outlook than do North America. We have on-going work in Argentina, Oman and the North Sea, which should each have steady activity throughout the year. We have trials for multiple products and services upcoming in the Middle East later this year. I'll close with a couple of brief comments. Our industry continues to face significant challenges especially in North America as customers continue to reduce spending and activity levels. I believe, NCS is positioned to succeed in this environment. We deliver a focused portfolio of technologies that helps our customers operate more efficiently and optimize the value of their assets. We are pursuing accretive growth including in international markets which we expect to grow to more than 10% of our revenue this year. We are focused on optimizing our cost structure and capital spending for the current environment. One example of this is that we recently consolidated our Houston area footprint from three facilities to two, allowing us to reduce our rent expense with minimal additional capital. We maintain a Capital Light business model, which facilitates free cash flow generation and is supported by a strong balance sheet. Our top financial priority is free cash flow growth. With that, we'd be happy to take your questions.

Thank you. [Operator Instructions] And our first question comes from Ian MacPherson with Simmons. Your line is open.

Thanks. Good morning Robert and Ryan, congratulations on the really strong Canadian performance there especially among other things. You mentioned in your three strategic priorities Robert, number one, commercializing new products. Can you expand on that a little bit? I know we've heard from some of the other downhole completions technology companies talking about increasing, cluster intensity on the plug-and-perf side. Can you talk about how that translates on sleeves? Or what other new product rollouts speak to that point that you made?

Yes, sure. There's a few things that we're not going to talk about today that leads forth -- that would lead toward -- sorry about that. That touches on cluster efficiency. But what I would say is, some of the products that were coming out with are newer versions of our sliding sleeves that give customers, number one, a cost savings from where they are today. So, even improved over some of the recent -- the more recent ones that we've had, sliding sleeves that have a three position system. So they have a position that's closed. So the sleeve can be running the well, submitted in place. It can be open, frac through. And then as the customer decides if that they want to use that well project for injector in future applications, the sleeve can be move to a third position which provides a choke in the well. So that lateral could be used once all the sleeves are placed in that choke position, it can be used for injection. And the injection can be controlled with very little if any additional capital expense to be able to make that conversion. Some of the other things that we're looking at and working on and expect to come out in the near term are some changes in our composite plug line, which makes our composite plugs even more efficient than they are today. We're also working on in tracer diagnostics, some additional new tracers, as well as some support products for the tracer product lines. And then finally, our EOR project that we've talked about in the past, we continue to make progress with that as we've said in the past when we first introduced it to you guys, it’s a longer term project. We expect --we've generated some revenue with it last year and we have additional field trials already scheduled this year for some of those products and we expect to have additional trials schedule later in the year. That's more of a play for down the road. But we're investing in the near-term opportunities as well as the learn long-term opportunities.

That's right. Thanks for all the color. And then maybe on the international side, can you expand a little bit on which markets are keying the above average growth profile that you see for this year outside of North America?

Yes. I think internationally the two markets that we're most focused on in terms of opportunities for growth would be in the North Sea and in Argentina. As we continue to come online with Aker BP project, the whole team -- the other service companies that were working with and our BP has gotten more efficient, and we hope to see increased activity there for that project. We're also having conversations with several other operators in the area that has been spurred by the success that Aker BP has had using this type of technology. So that's an area that's pretty exciting for us. And it looks like it's going to be more longer-term -- not longer-term and being able to achieve revenue, but longer-term in terms of how long it last. And then Argentina, as I mentioned in the comments, it was a pretty rough second half of the year. Last year in Argentina with the political environment and the hyperinflation, but we've seen that that turned the corner in the first quarter this year having conversations with customers now about annual programs. In the last half of the year the industry was virtually shut down with the exception of the local E&Ps, the international operators that were in joint ventures with the locals just -- there was just basically no activity. But we're seeing that turned the corner now and in fact we have work awarded Argentina that that we didn't have before. So we think that that's the pickup as well for us. But we also have a number of other areas that we've been making progress over the last couple years in where we field trials and we have actual work scheduled in new areas for us internationally. So that's -- it's a growth opportunity for us, and as I said earlier, we're investing in it.

Well. Thanks for all the good color this morning and good luck for 2020. Appreciate it.

Thanks. Ian.

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

Good morning, guys.

Good morning, George.

Just from a broad brush strokes perspective, I wondered if you could frame the geographic mix for your fracturing systems in the U.S. in 2019? And then, any -- how that's changing as we progressed into 2020? Are there any moves or any basins where you're seeing more notable adoption of your systems in the U.S. in 2020?

Sure, George. As we've talked before, we found specific applications in the U.S. market where pinpoint stimulation works well and add value and in many cases more value than competing completions technology, so we focused on those. And geographically those areas are in multiple basins. So parts of the Permian, both in Texas and in New Mexico, and the Rockies, there are a few basins up there where the technology works really well. And then, in some areas in the Mid-Con, we also see -- starting to see some areas of interest in the Appalachia. So I would say primarily, we think about it more from the Permian areas and the Rockies, but we're also seeing some areas where we maybe able to get increased activity as well. One of the things that we struggled with in the past and we struggle with when we first came into the U.S. market was with plug-and-perf being predominant completion methodology; the infrastructure was set up for plug-and-perf setup to support it. And the frac fleets were sized for horsepower that was more than double the requirements for doing pinpoint. So when we would go out and do a pinpoint job, a frac fleet that was twice -- more than twice as big as it needed to be, also with the built more than twice as big as it needed to be would show up. And that's something that we struggle with from day one. Its a cost disadvantage to us if we can't reduce the horsepower cost on location, because its not required. But more recently over the last few months, we found frac companies more willing to work with us and size their frac fleets to the size that we actually need and price it accordingly. And so, we're working with that with a couple of frac companies now that are pretty advanced with. We've already started doing job jointly with them where we're packaging the coiled tubing, the frac spreads and the pinpoint stimulation technology together. And it looks like we're getting a little bit of momentum with that. So, if that does continue then that may open up other opportunities that we don't have today. But we have seen that it does make pinpoint more competitive with plug-and-perf especially in single well applications.

That's very helpful color, Robert. Thank you. And then next question is on the margin side of the equation. The margins were very strong from a gross margin respected in the fourth quarter. And the guidance were down sequentially in the first quarter of 2020, I think you cited mix. So, one that mostly just think on the cost side of the equation that drove the better margins in the fourth quarter? And then as we look forward to the first quarter. And can you peel back the onion a little bit on what, in terms of mix? Is that geographical product mix is driving that change in gross margins?

Yes. Sure, George. This is Ryan. With respect to the margin in the fourth quarter, we certainly did have very good performance there. There was a bit of that that was driven just through some as advantageous relationships that we had with vendors that impacted the quarter. And I think those are specific to the quarter and don't necessarily fully flow-through into 2020. Although we expect certain of those arrangements to provide benefits on a continuing basis. And really from the mix standpoint it has to be more geographic than it does product line. As you can see with the guidance that we gave, there is very, very strong growth in the Canadian market. And we've been growing our revenue there and doing a great job taking market share. But that market has been very competitive for a long time and the operators there have been faced with a very low-cost environment for a long time. So, the margins tend to be a little bit skinnier. So we see growth in the Canadian share in Q1 that drives the margin down a bit. The other piece to that is that quarter-over-quarter international is going to be down slightly and therefore, a lower part of the mix. The international, I guess product and service lines that we participate in tend to build a less competitive as far as the number of competitors that we see in the market as compared to North America. So that's really it from a geographic standpoint, nothing specific to product or service mix.

Okay. That's super helpful. I'll just sneak in one more quick one if I could. Can you frame your market share up in Canada on the fracturing system side of the business even if in broad brush strokes may be not an exact number? But seems like you guys have taken notable share there especially in the fourth quarters. So where do you guys think you sit from a market share perspective up in Canada?

Yes. We believe our market share is there now are in the range of 20% to 25%.

All right. Great. I'll turn it back over. Thanks.

Thanks, George.

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

Thanks. Good morning.

Good morning.

So, on SG&A, I'm curious what other cost out scenarios you've run, if we remain in the current E&P spending environment in North America? Or maybe even if we see a decline in the back half of 2020 into 2021. So, I mean, I understand that your position to outgrow the market, but the delta is pretty modest at the moment just given the limitations of the environment. So it seems like that's an area where you could boost free cash? I'm just curious how you're balancing holding on to upside optionality versus trying to boost that cash flow near-term? Or are we satisfied with free cash at current levels?

Yes, Sean. This is Robert. So, no, we never satisfied. We -- as we said earlier, as Ryan said early, we intend to grow free cash flow in 2020 versus 2019. We -- as you know, last year we had a restructuring and we made some adjustments. We restructured the organization in terms of personnel. We took out some layers of management, and we achieved about an annual costs savings primarily in SG&A of about $5 million annually. We believe that we're right sized for the market right now based on what our expectations are to continue to outgrow the market. But if we are not able to perform at levels that that we think we are or the market turns in a way that's not expected now then we're fully prepared to reevaluate and make changes as required. They'll required more structural changes.

Okay. Fair enough. I appreciate that. Can you talk a little about the tracer's business. So, I know, you mentioned the new products in the works. Are you seeing more intensity of demand in the US from those customers? Maybe as they're slowing down. Sometimes there's more willingness to look at new adoption of technology. Or a finding that tracer is a more of a discretionary spend? Just curious how you're seeing that in the field today?

Yes. I'd say, that we're seeing a bit of a pullback, and customers are using Tracers as broadly. So I would say that some of the market for Tracers has progressed a bit from some of the smaller operators that we've worked with. They view that as almost like a science budget in some cases. So we have seen some pullback there. However, some of the larger customers who use customer or use Tracers for different reasons, we really haven't seen a pullback and we continue the same activity levels with those customers. There is a few competitor still in the market. It just like any other service line. It's very, very competitive right now. But we're still holding our terms our own in terms of market share. We have new Tracers in terms of additional Tracer signatures that we've recently introduced. We have more than underdevelopment and we will continue to refine the way that customers can use Tracers to look at inter-well interference. And we think that's really going to be the driver for Tracers adoption going forward in the marketplace is being able to have more capabilities to be able to better understand inter-well interference.

Got it. Great. Thanks Robert.

Thank you.

Thank you. And we have a question from Kurt Hallead with RBC. Your line is open.

Hey, good morning.

Good morning, Kurt.

Good morning, Kurt.

Hey. Kudos again on great performance up in Canada especially. So, any dovetails maybe into a line of questioning from where I sit. The strength of your performance over time in Canada is remarkable. The challenges in the U.S. are I think pretty obvious given the competitive nature. So as we move forward here, Robert, what kind of things can you potentially take from the lessons you've learned up in Canada and look down here in the U.S. and potentially at the same sort of market share success? I know you mentioned the number of new different product offerings that got coming and you are making market penetration. So I don't want to make light of that at all. But I just want to get a kind of general sense from you as to what you could take from Canada down here in the U.S. and how could potentially accelerate market penetration?

One of the really big success stories for Canada has been the cross-selling that's occurred there. So the Canadian market through 2018 was primarily fracturing systems and then Tracers, whenever we brought STS Tracers in. But really the focus was almost 100% on fracturing systems. But as the current market seem to persist in Canada through 2018 and it was a really difficult market. We were coming off of a couple years of market share declines in Canada. The team made the decision in Canada to really get focused on cross-selling opportunities. So getting some of the other products and services that we have from NCS, getting those in the Canada, getting the customers involved with it, and that getting the interest high enough that we could actually go up and start doing that. So that's been part of 2018 and in 2019 that's been a strong focus for them. And that is one big reason for the successes, because they've been very successful in cross training. We had cross -- formal cross training sessions with our sales team. The guys that we -- the sales folks that we have in place or had in place, they were experts in fracturing systems. But most of them didn't really have exposure to some of the other products and services that we offer. So we made them aware of that. And at the very least have them in a spot where they could at least recognize opportunities. And now are seeing more diverse product opportunities there. So, if we would still be focused 100% on fracturing systems in Canada it would be a bit of a different story. So what we did in 2019 is we took that same training and we did the same thing with our sales force here in the U.S. So, we just wrap that up around the end of -- around the end of 2019, the first wave of it, because it truly is an ongoing process. And now we're already starting to see the benefits from that of the U.S. where we got salespeople that are selling multiple product lines to the same customers that they've been calling on for years. So I think that coupled with additional products and services that we're introducing is the way that we're going to continue to accelerate market share growth in the U.S. as well.

It's great color. Thank you for that. I just kind of curious to in the context of as you're doing this cross-selling and you're introducing new products and services. I wonder if you can of frame the competitive pricing environment for us in both the U.S. and Canada.

Well, it's very competitive. I'm not sure exactly what you're looking for. But it is super competitive in both Canada and the U.S.

I mean, relative to the last couple of years, is it stabilizing to a certain extent? Is it just as intense as it has been? Just some incremental color along that be really helpful?

Yes. I would say in Canada, the -- it is -- the driver for the bottom has slowed down a lot. It is at least flat down in Canada. So a year ago it was every day we were having conversations about pricing with our customers. So it feels like its flattened out. In Canada, we haven't seen the pressure over the last several months that we had before. In the U.S. it seems the same thing. We saw several months ago significant pressure on almost every service line, not just the ones that we provide, but not some of our competitors as well. But that seems to have tapered off a little bit now as well. Is it over? I don't know. Are we're going to another wave of it? It's always possible. If we see the U.S. market change adversely more than what we expect. I mean, it could be our customers come back to us again. But so far it seems to have leveled off.

Okay, great. Thank you. Appreciate that.

Thank you.

Thank you. And I'm showing no further questions. At this time, I'd like to turn the call back to Robert Nipper for closing comments.

Thanks Catherine. On behalf of our management team and our board, we'd like to thank everyone on the call today including our shareholders and the research analysts who cover NCS, but especially our employees. I extend my appreciation to our nearly 400 employees around the globe, as well as the team at repeat precision. I continue to believe that we have the best team in the industry and our performance backs that up. 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, our earnings call in May.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.