Good day and thank you for standing by. Welcome to the Q2 2023 NCS Multistage Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Mike Morrison, CFO. Please go ahead.

Thank you Didi and thank you for joining the NCS Multistage second quarter 2023 conference call. Our call today will be led by our CEO, Ryan Hummer, and I will also provide comments. I want to remind listeners that some of today’s comments include forward-looking statements such as comments regarding our future expectations for financial results and business operations. These statements, including our financial guidance and expectations are subject to many risks and uncertainties that could cause our actual results to differ materially from any expectation expressed herein, including the impacts of inflation, Central Bank’s actions to combat inflation, distress at U.S. regional banks, the Canadian wildfires and Russia’s ongoing invasion in Ukraine on the global economy, oil and natural gas demand and our company. Please refer to our most recent annual report on Form 10-K and our latest SEC filings for risk factors and cautions regarding forward-looking statements. Our comments today also include non-GAAP financial measures, including adjusted EBITDA, free cash flow and net working capital. The underlying details and reconciliations of non-GAAP measures to the most comparable GAAP financial measures are included in our second quarter earnings release, which can be found on our website, ncsmultistage.com. I will now turn the call over to Ryan.

Thank you, Mike, and welcome to our investors, analysts and employees joining our second quarter 2023 earnings conference call. Our performance in the second quarter of 2023 was mixed relative to the guidance we provided in early May, with revenue below the low end of the range, but adjusted EBITDA near the higher end of the range. I’ll briefly discuss our results and the outlook for each of our U.S., Canadian and international markets. Starting with the U.S. Our revenue of $9.4 million in the second quarter fell below the low end of our guidance of $12 million to $13 million and represented a sequential decline from the first quarter of 2023. The sequential revenue decline in the U.S. reflected the impact of falling industry and drilling and completion activity, which affected all NCS product lines, except for Repeat Precision, for which revenues improved by 13% sequentially. We expect to return to sequential growth in the third quarter, particularly in our fracturing systems and tracer diagnostics product lines. A customer of ours that operates in the Northeast recently discussed that they had set a new record by drilling out 262 plugs in a single run in a 3-mile lateral. We’re proud to have been a part of that success and believe that the customers’ use of our technology in that well speaks to the robust performance of our plugs, which pumped down efficiently, securely hold pressure during the fracturing treatment and have fast and consistent drill out and wash time performance. I’ll also highlight one interesting project for the quarter. We were engaged by a customer in West Texas to provide our sliding sleeves for using a project to assess the capacity to permanently store CO2 in an undergrad reservoir. For this project, we were able to modify our sliding…

Thank you, Ryan. As reported in yesterday’s earnings release, our second quarter revenues of $25.4 million, an 8% decrease compared to last year’s second quarter. While our revenues in Canada increased by 11%, this was more than offset by declines in our U.S. and international revenues of 23% and 32%, respectively. On a sequential basis revenue in the second quarter decreased by 42%, with Canada declining by 53% and the U.S. declining by 17%. The decrease in Canada was primarily related to the normal seasonal decline due to spring breakup and the decrease in the U.S. was due to a decline in rig and completion activity driven by lower commodity pricing, especially for natural gas. Our revenues for the first half of 2023 were $68.9 million, up 4% compared to the first half of 2022, primarily due to higher product sales in Canada. Our gross profit, defined as total revenues less cost of sales, excluding depreciation and amortization expense was $8.5 million in the second quarter of 2023, representing a gross profit percentage of 33%, similar to our gross profit percentage for the same period in 2022. Despite the decline in revenues, we maintained our gross margin percentage due to improved pricing of our products and services, which countered the effect of the decline in volumes and the increased cost of our operations. Our first half of 2023, our gross margin percentage improved to 39%, up from 36% in the first half of 2022. Selling, general and administrative costs were $14.5 million in the second quarter, up by $700,000 compared to the second quarter of last year. The increase was primarily due to salary and wage-related expenses resulting from increases in our headcount and merit raises partially offset by a reduction in our professional fees compared to 1 year ago.…

Thank you, Mike. So we are adjusting our full year guidance for 2023 as follows. We currently expect full year revenue to be between $160 million and $175 million and full year adjusted EBITDA to be between $18 million and $22 million, consistent with the calculations in our earnings release. The midpoint of this new revenue range is $10 million below the prior range and the midpoint of the adjusted EBITDA range has been reduced by $2.5 million. These adjustments primarily reflect lower expected industry activity levels in North America and the deferral of certain expected work in international markets into 2024. We expect gross capital expenditures for 2023 of $2 million to $3 million, reducing the midpoint of the range by $1.5 million. We will continue to exercise capital discipline and retain our asset-light business model with very low maintenance capital requirements we expect our capital spending to support our growth. We continue to expect to be free cash flow positive in 2023 after accounting for both capital spending and investments in net working capital, again, to support our growth. We expect our spending on litigation matters to moderate in the second half of 2023, so we will incur some cash severance and relocation costs in the second half of the year related to our operational and corporate restructuring efforts. As these costs abate, we would expect to convert a higher percentage of our adjusted EBITDA to free cash flow going forward. Underpinning our revenue expectations is an anticipated year-over-year decline in average annual industry activity of 5% to 10% in the U.S. and an increase in year-over-year average annual industry activity in Canada of up to 5%. We continue to expect international industry activity to grow by at least 10% in 2023. We expect our revenue growth to…

Thank you. [Operator Instructions] And our first question comes from John Daniel of Daniel Energy Partners. Please go ahead.

Hi, good morning. Thanks for including me, Ryan.

Yes, good morning.

You cited what was one of the most impressive sort of D&C efficiencies this earnings season, the drill out with, I think, 262 or 266 plus, I can’t remember the exact number. As you all know, you didn’t have the customer, but it’s one of the more respected operators up in that area who is likely going to be doing more longer laterals as well as all the other operators in that area. I’m just curious sort of what that quick commercial for you. When do you get the phone call for the next well like that? And knowing how this industry tends to copy some stuff over time, like where would you expect other operators to see what worked well on that for that project and try to replicate it? And how do you see that playing out for benefiting you guys?

Sure. Thanks, John. Yes, a couple of points there. I think, one, that operator, in particular, is continuously operating, I believe, two completion crews they had built up some DUCs heading into the year. So activity was pretty heavy coming into the first half and may slow down a bit in the second. But with continuous activity there, we’ve got a line of sight to continue to provide them with plugs throughout the remainder of their program. And as you know, there is continued M&A activity and consolidation activity taking place. There is a chance that their completion program that they are utilizing our plug port, is expanded to a broader scope of operations. There are a couple of things that are unique about the program there, one that they uses a size configuration that’s a little bit different than most of the operations in the U.S. So most operators are using 5.5-inch casing for completions. These are somewhat specialized, and they utilize 6-inch casing, but that’s proven to be a very efficient methodology for this customer in particular. The other thing that’s somewhat unique about this project, if you just do the math, it’s a 3-mile lateral with 262 plugs. So stage spacing of about 60 feet, which is tighter than a lot of other operators would be doing. So there is a chance that as you get learnings and other operators see how efficient and effective this completion was that you could see stage spacing by others in the region, move a bit tighter to kind of mimic the operations as well.

Okay. I don’t want to – well, I do want you to give the numbers, but I don’t think you will. How would you compare the margins on a project like that with other business that you would generate in the states? Like if you get more of that, assume a margin uplift to you? I don’t know.

So I think the biggest benefit to us, John, is with the size of that program and with the number of stages that they are able to complete in a day. It’s really that we’re selling into a known quantity, and we can be very efficient in supplying that as opposed to working with, call it, a handful of operators on the private side that may be running half a completion crew and going from well to well, where it’s a bit less efficient to supply them. But once in operational like that gets up and going, it’s good business for sure.

Okay. That’s all I got. Thanks for including me.

I appreciate it, John.

[Operator Instructions] And our next question comes from Dave Storms of Stonegate. Please go ahead.

Good morning.

Good morning Dave.

Good morning. Just hoping to get maybe a little additional color on some of the expansion plans you have beyond North America. Great to hear that it sounds like you got a little traction in the tracer diagnostics section in the Middle East. But just wondering if you could talk a little more about maybe what that means going forward? And additionally, any additional growth in I believe it was Black Sea as well?

Sure. Yes. So, we have really concentrated our international growth efforts over the last year or 2 years on two regions in particular. The first is the Middle East, and in there, we have some good ongoing activity in Oman, and it’s taken a little bit of a while for us to go through the process of getting qualified with some of the other NOCs in the region. And with – what I would say is the largest NOC in the Middle East, we now have multiple products that are cataloged and which we can – we have gone through successful field trials and are available for revenue-generating sales going forward. That would include our tracer diagnostics product line as well as a couple of products within our well construction portfolio. So, with the good performance in the first tracer diagnostics job here that concluded in July, we see a good scope to deploy that tracer diagnostic service across a number of different regions for them, including some conventional activity, but also some unconventional activity. And that’s good, high-volume work for us. We have got the logistics worked out now where we have got enough chemical in the region to support multiple jobs through the end of the year and have that process worked out where we can serve them on a continuous basis. So, we expect to see good uptake on that through the back half of the year and really set the stage for us to grow into 2024 with the tracer diagnostics product line there in the Middle East. The other primary international growth focus area for us has been the North Sea. We started working there several years ago. Over the course of the last 4 years to 5 years, Aker BP has been our primary…

That’s very helpful. Thank you. And I think I called it the Black Sea, but clearly, I meant the North Sea. The other question I just wanted to ask real quick, I know you don’t have a lot solidified around some of the litigation. I know you mentioned that there is some non-binding mediation that will probably take place at the end of August. Is there any guesses around when there may be more answers around either insurance payments or the appeals process? Anything logistical would be very helpful.

Yes. I mean there are certainly – there is the timeframe associated with when we and our insurance carrier would indicate that we would plan to appeal the case. That would be in the coming months, assuming that we – if we are not successful in reaching an agreement through the mediation or direct settlement, we would go down the appeals process, and that would be within the coming months. But with that, any appeal once filed, it could be up to a year until that appeal gets scheduled. So, uncertainty – unfortunately, if we are not successful through mediation, the timeline for the matter could take, again, several quarters up to a few years. So, we are – that’s really the best I can give you from a timeline standpoint right now. So unfortunately, we have the charge that we have taken and the balance sheet liability. However, we continue to believe that the judgment will be reduced upon appeal, and that we will continue to have any final resolution will be covered up to most, if not all of it, will be covered through insurance proceeds. So, we don’t believe that it will have a material impact on our liquidity, on our business, but it’s just hanging out there as a charge right now, and we will look to do everything we can, together with our insurance carrier to move that towards settlement or to make sure that we are in a position to be able to recognize the benefit of insurance when we can. But that’s really a GAAP matter, and it’s something that will take time.

Understood. Thank you very much for taking my questions.

Thank you, Dave.

Thank you. [Operator Instructions] Our next question comes from Jeff Robertson of Water Tower Research. Please go ahead.

Thanks for taking my questions. Ryan, just a follow-up on the question about – that John asked, does the applications that you will use in the Northeast have other applications in other basins where operators continue to push lateral lengths?

Yes. Absolutely, it does, right. And I think one of the things that’s certainly interesting about that project is it’s a 3-mile lateral that was completed completely with composite plugs, right, and repeat precision composite plug. So, there is a notion out there that as you get to extended lateral depths, you might need to utilize dissolvables or some other technology. But I think this helps to prove that you can use composites out to the lateral lengths that leading-edge operators are pushing wells today. The other thing I would say is that well – while that plug is in a 6-inch casing, the base design of the plug is no different than our 5.5-inch plug that gets used in regions all across the U.S. So, yes, I mean it’s got applications for operators in any basin. In addition, we have seen certain operators utilize that larger casing size in the Eagle Ford and start to experiment with it in the Permian as well. So, I think the short answer is yes. And I think the performance of the plug would extend to any geography.

Great. Thank you.

Thank you. I would now like to turn the conference back to Ryan Hummer, CEO, for closing remarks.

Alright. Thank you, Didi. So, on behalf of our management team and our Board, we would like to thank everyone on our call today, including shareholders, analysts and especially our employees. I truly appreciate the depth and breadth of the expertise of our people at NCS and Repeat Precision and the passion and efforts that our people bring to their work. I look forward to the continued accomplishments made possible by this great team. We continue to believe that we are in a multiyear cycle of improved growth and earnings prospects for our industry globally despite the reduction in the U.S. rig count this year. I am excited by how NCS is positioned to participate in that growth and deliver benefits to our employees, customers, shareholders and other stakeholders as we execute on our strategic plans. We remain focused on delivering on our core strategies of building upon our leading market positions, capitalizing on international and offshore opportunities and commercializing innovative solutions to complex customer challenges. We appreciate everyone’s interest in NCS Multistage, and we look forward to updating you again on our next quarterly earnings call.

This concludes today’s conference call. Thank you for participating and you may now disconnect.