Greetings and welcome to National Energy Services Reunited Third Quarter 2019 Earnings Call. [Operator Instructions]. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference service to your host Mr. Chris Boone Chief Financial Officer. Please go ahead.

Good day and welcome to the National's Third Quarter 2019 Earnings Call. With me today is Sherif Foda Chairman and Chief Executive Officer of NESR. On today's call we will comment on our third quarter results and overall performance. After our prepared remarks we will open up the call to questions. Before we begin I'd like to remind our participants that some of the statements we'll be making today are forward-looking. These matters involve risks and uncertainties that could cause our results to differ materially from those projected in these statements. I therefore refer you to our latest earnings release filed earlier today and other SEC filings. Our comments today may also include non-GAAP financial measures. Additional details on reconciliations to the most directly comparable GAAP financial measures can be found in our press release which is on our website. Finally some of you may calling for the first time. So please feel free to contact us after the call with any additional questions you may have. Our Investor Relations contact information is available on our website. Now hand the call over to Sherif.

Thanks Chris. Ladies and gentlemen thank you for participating in this conference call. We are excited to report on this quarter results and on some of the back-breaking work which our teams on the ground have done. The seminal effort operationally and commercially will set the stage for us for the coming quarter and the near-term future. Additionally we have greater visibility on achieving our very aggressive target next year and beyond. This quarter we grew our revenue 11% year-over-year despite the geopolitical turbulence in the region. As reported I was on the ground when the incident happened in Saudi. And we quickly put our emergency response plan in action. As well as informed our team customer that we would be ready to help in any manner they require. Our operations equipment personnel we're ready to perform any needed task. As you all have witnessed Saudi Aramco with the world-class processes and system managed to bring production back online in record time. Coming back to some numbers our production group revenue increased by approximately 10% year-over-year. Most of the growth came from our core countries of operations. We managed to start and all the new countries in the later part of the quarter. The delay was mainly due to the extended holiday season in July and August. We started providing coiled tubing services in chat and did our first job successfully. Similarly we executed the first cementing jobs in flawlessly during September. This process will further accelerate in Q4 as we would see the full weight of these additions throughout the quarter as well as part of some of new operation. I can comfortably say that the production group is poised for some significant growth and the near term and will grow very rapidly in 2020. We are perceived by…

Okay thanks Sherif. This morning we filed our earnings release reporting our results for the third quarter. Third quarter revenues were $162 million an increase of 11% over the prior year quarter. We were pleased to see year-over-year revenue growth in both the production group and drilling group. Adjusted EBITDA is $48 million for the third quarter of 2019 with adjusted EBITDA margins increasing sequentially to nearly 30% from less than 29% in the prior quarter. Year-to-date our adjusted EBITDA is $134 million which is 20% higher than the first nine months of 2018 for the combined companies. EBITDA adjustments of $4.8 million for the quarter are primarily for integration costs as well as start-up costs for the new products and locations. The sequential increases in these adjustments are primarily related to higher restructuring cost SOX implementation planning and new country entry expenses. Adjusted net income is $16.2 million or $0.19 per diluted share as compared to $16.4 million or $0.19 per diluted share reported in the second quarter. Despite higher sequential EBITDA adjusted net income was impacted in the third quarter primarily due to increased depreciation of $1.2 million as we deploy the new capital expenditures during the third quarter. We note that our net income both down in future quarters will include amortization charges of $3.8 million resulting from the purchase accounting of last year's business combination. In addition we would expect to see a similar increase in the sequential depreciation in the fourth quarter as we finalize the 2019 capital spending program. Moving to our segment our Drilling and Evaluation segment revenue for the third quarter is $64 million growing 13% over the same quarter last year. Results for D&E were led from our market-leading position in Oman where our drilling services and rental business which provides…

Thanks Chris. In closing Q3 was another strong quarter and I'm happy that we are on the path to deliver on our objectives this year and for the future. This quarter with the transition and very important for us as we started a lot of new contracts in new countries and put in place structures for a few more. We ramped up our investment significantly and improved our infrastructure to prepare for the coming business. Our customers are extremely pleased to see the commitment we have put in place. They trust that we will exceed all their expectations in terms of delivery time and quality. We are confident to reap the benefit and hard work that the entire organization have put in place in the coming quarters. Our future is very bright and we are working on exceeding all the financial goals. We have placed on ourselves. The MENA region will continue to grow at a stable rate and we are confident to at least double that rate for the foreseeable future. With this I would like to take this opportunity to thank everybody for joining this earning call and we'd be very happy to address all your question now. Thank you.

[Operator Instructions]. Your first question comes from Byron Pope from Tudor Pickering Holt & Co. Please go ahead.

Good morning. Sherif, just wanted to -- at a high level for detail but just at a high level just given the way you characterize the region is having a steady growth and with the project that you have ramping up could you just frame for us at a high level how we should think about the primary growth drivers for NESR as you head into 2019 whether it's by business segment or by a few key countries? Again just trying to frame what will be the growth drivers for you guys next year.

So as I explained the growth for us is across all the countries. I would say you have the core countries where we are growing on our main business segment Drilling Evaluation Production segments and we are growing significantly on those by adding the latest wins on the contracts. We are adding a lot of those businesses to serve the customer. We secured most of the contracts for the next three to four years. So you will see a lot of addition with the market and we are adding some of the other segments. If you look at the new countries where we just entered we have a very small position in those countries. So definitely the growth as a percentage is much more than the four countries because we didn't exist before or we were very small. If you look at the driver of those countries as we said before all these countries have very stable and significant growth plan. So if you look at offshore which I've been saying and you saw the market you have Kuwait that is drilling for the first time ever in their history offshore prospect. The drilling started and they -- the initial indication from even the size may look very promising. You have Oman that is going through exploration offshore you have obviously the increase of activity in Qatar you have UAE that is just actually announced discovery and they are going through their island they are going through a lot of other projects. In all this additional offshore and the normal business you have this unconventional monster that is coming to the region which is going to be at least 5x of what used to be. So if you look at the fracturing business if you look at the number of stages that the region -- entire region has been doing before what's coming into the future it's the magnitude at least 5x to 10x of the number of stages for that region. So overall you have the gas which is very strategic you have the new frontiers which is on the offshore projects and you have the normal business that is growing at this stable 6% to 8% to 9%. So you can arguably say that the minimum growth of that region will be in my opinion not less than 10% year-over-year.

And then just one follow-up question is as I think about the growth opportunities on tap for you guys particularly in unconventionals I think you're going to be a relatively unique position among service companies in terms of having opportunities to invest growth capital as we step into next year and so it's early to really frame how you guys are thinking about CapEx next year? Just some of these growth opportunities that you guys are going to have?

So no I can tell you I mean obviously we've been planning this as I try to explain. We started this from the second quarter to get ourselves qualified. So we've been engaged with the -- full in four countries to get qualified and I can tell you comfortably that we will be qualified at least in two of them before the end of the year. Which means that to get qualified you need to demonstrate how you're going to get qualified. Which means what's -- where are your -- is your chemistry coming from you have to demonstrate some -- even a pilot project you have to show commitment on CapEx you have to show commitment on personnel etc etc. So we already started investing this year and that. And we will continue to invest next year and our CapEx plan based on the opportunistic view we look at it and the partnership we want to maintain as if light and we want to maintain within the framework of the $100 million per year spend despite the fact that we are going to grow significantly. So taking the opportunity of definitely the slower growth in North America and how to position ourselves in a favorable way to -- not to spend the same way the U.S. spend when they grow these unconventional resources. So in a very simplistic way we want to maintain the $100 million spend per year this year and next year.

That's great. Thanks, Rita. Appreciate it. Thank you.

Thank you. Your next question comes from Sean Meakim from JPMorgan. Please go ahead.

Thanks a Good morning. So Sherif this much in your prepared comments but I think it's a fair meeting particularly as we have headlines this morning suggesting other OPEC cut could be on the way something that investors have been expecting for probably -- at least the first half of 2020 and this is a topic that comes up quite a bit when your stock is being discussed. How should investors think about the relationship between upstream CapEx activity versus production? Could you maybe just elaborate on that as it pertains to your outlook for next year?

Yes sure it's completely decoupled. I mean it's the production cut of OPEC it's basically closing the tap on the oil has absolutely nothing to do with the activity. So if you look at across the region and if you look at the number of rigs the number of regular sites it's actually keep growing. If you look at how many rigs are being added or being contracted with a 4 to 5 year's plan. It's exactly the same and that is zero difference in activity. What would happen if they cut -- like significantly going forward usually what happens is you have some delay of what we call the rig less activity. So if you have for example the normal production from the biggest reservoirs and you have some activity like that being higher rate stimulation etc. they would delay that because they don't need the oil production. But the majority of the spend today in most of the countries are as I said is for guide that has absolutely nothing to do with the upper-cut and had to do a lot with the offshore and liquidation of the Frontier and this is all going as planned. If you look at their plan and I just came a couple of days ago each country they have actually exactly the same budget plan for next year that's obviously going to get approved and sanctioned by their government toward the next month but it's all based on the same level of activity and the growth next year.

Got it. I think folks will find it helpful. Bigger competitors in the region have been talking more about capital discipline and margins over market share. If you look it's a bit of a shift in the rhetoric and could you be just indicate have you seen a shift in those dynamics on the ground just with review on the competitive landscape recently?

Yes I mean obviously I'm not going to point on any one of that specifically. The difference obviously between us and the big service companies we are growing at a much faster pace and we are very small. So we are putting a lot of capacity in place to make sure that we can take much bigger projects. So definitely the level of spend that we have as a percentage to our size it's much higher than anybody else because we are at a much -- at a big growth path and we have a big contract that we just one on that definitely wanted to make sure that we -- as we say we hit the floor running and being able to capture that. If you look at it from a disciplined approach on some of the tendering as I said before the market is -- I would say getting -- I wouldn't say getting tighter but I think similarly to my last quarter comments when the project is a huge -- it's very big it's huge and it is in LNG side you do not see the discipline yet. Some of it is coming which is very positive but on the smaller stuff yes people are more disciplined in making sure that they do not -- I would say buy the work at any price and which is very positive sign for the region.

Got it. Thank you. One last one if I could just will be a presentation as we know as you think about the collections disruption in the quarter could you just talk about how you see seasonality and working capital on a normalized basis particularly given the pace at which you're growing top line it'd be helpful to see and maybe Chris can offer some comments on how you see normalized seasonality in working capital as it pertains to what we saw so far this year.

This is Chris, I think we -- part of the as we said some of this is not just -- some of it was seasonal. I think probably the summer months are usually always the slowest period. Just there is a lot of people on holidays and getting approvals done but we also had our own growing pains of new contracts and then on our side as well. All of that obviously being worked hard to be resolved and cleared up in the fourth quarter. So I think the normal seasonality will probably look more like slow -- a little slower collections in the summer just because less of people around to do approvals; but I think that would be the normal cycle.

Is there a working capital to sales metric or some will be should be used to be cognizant of how your working capital needs will grow as you continue to drive top line growth?

Sure. I mean I think we've stated long time but at least on our balance sheet when we thought up receivables of the actual invoice the unbilled and the retention. We look at all of that together as our total amount of receivables something in the targets we are working hard to get us back to 100 -- maybe 110 days max. That's the level of receivables inventory will move a little bit but a lot of our inventory is for equipment spare parts in those small it's not a direct correlation to revenue like you would have a manufacturing type environment.

That's very helpful. Thanks a lot.

Thank you. Your next question comes from Greg Colman from National Bank. Please go ahead.

Thanks a lot guys. I just wanted to start by talking a little bit about earnings seasonality in the prior years we obviously the great sequential growth from Q1 through Q4 which is good to see. And in the prior years and we don't have a lot of history but in prior years we've seen substantial upticks in Q3 this year we did see one of the growth but it was a little bit more muted. Is that due to some of the nonsense we saw regionally in the quarter and should we expect the seasonal growth to accelerate going in a year end sort of resuming the overall annual average or is this sort of more muted growth from Q2 to Q3 I think we should be thinking will persist into year-end.

Thanks Greg. So as I try to explain so this quarter was characterized with two things. You had the month of Ramadan came in definitely in the quarter and then you had what we call extended holiday season with the pilgrimage in August. So it all came into effect July August then you had geopolitics that happened and the incidents across the region. So what happened is you had a lot of delay which you saw it actually in the international service company result it was exactly the same. So we have delays from moving from Q3 to Q4. So you would see this normalized if you take it H2 over H1. So basically whatever growth that was supposed to happen in Q3 will happen. But it will be added to Q4 so in a very simplistic way. So this is not -- is exactly the same it's just matters because of the extended vacation period couple of geopolitics so you have some of the -- I would say not the rig related the rig less related activity which shifted toward Q4. In addition to our size and for ourselves we had all the new contracts that were awarded for and we started them in Q3 we are supposed to start in July. Majority of them never did not start and waited until September. So you had only one month out of three in the quarter and in Q4 you will have the three month of quarter three. So you would see an huge uptick in Q4 as well due to that.

Got it.

So in a nutshell you will have the same H2 over H1 similarly to what we had before.

So we'll see a catch-up?

Yes in quarter exactly.

Then just to build on some of Sean's questions on the competitor side there with the continued challenges we're seeing in North America it seems like every day we are getting more challenges in sort of shale growth and relative economics there? It appears of the relative attractiveness of rest of the world regions like Middle East are getting much more apparent. So my question would be -- are you seeing any increased competition or focus from some of the super majors who operate in both regions who would look to try to augment stagnating North American revenue or margin pressures by trying to get more market share in your areas which are obviously relatively quite a bit more to try?

Yes absolutely I mean obviously the region is the best by far and has been the case but I can tell you quite frankly the barrier of entry is actually harder now than any time before right. So the in-country value local content the presence in the region. How to navigate the contract how to make sure that you have the all the requirements to operate is extremely complicated right. So with all due respect that you cannot just go there and say okay I'm the region is very good and I'm going to go and bring my 10 perusing giving units and 4 frac fleet because they're sitting doing anything in North America I'm going to go and get the contract in the Middle East. It's not going to happen right. So what is the best approach is definitely and that's what we are looking at is all the companies that have very unique position and have very strong I would say technology portfolio we are very happy to partner with and in some of the unique activities that we don't have and they don't have and obviously in that region. And we you go to get it there and that's what I would say the most optimum way. If you look at the big service company definitely they are present there for 80 -- 90 years very very strong and they definitely are the strongest players to reap the benefit. So between that I would say the national strong and local companies and the multinational they will be the major force in the region. It's not going to be a U.S. Canadian small company be able to operate in there it's not the.

Okay now got it. That makes perfect sense on those majors that have multi-decade got to a century of experience there. Are they coming down market for the sort of the smaller contracts that are very meaningful for you but less so for them simply because of the North American challenges are you not seeing them in big competitive ways in the areas you're shopping.

No it's everybody is going after every contract. I can tell you that nobody is leaving anything anywhere. So we are competing on all contract as I mentioned before we always maintain that we compete professionally and we are not like a little outfit of a local company. We had a national champion of the recent meaning that we operate very professionally when we compete on a service quality order delivery on projects we compete head to head and we perform when I put in my earlier remarks when we were perceived by one of the biggest clients at the best service quality provided in the quarter that was against everybody that was against all the multinational against all the small guys and we scored the best 99% efficiency which was the number one position against everybody else. So and that's how you maintain that market share and you maintain that leadership. The key there is not to take jobs that you cannot do. So when we cannot provide services in certain technology and we do not have it and obviously the multinational have it we are very honest and frank to the client to say we cannot provide that service we are not good at it and you should use X or Y right. So the discipline in the tendering and that's what I was trying to allude to you will see that some of the multinational service company which I'm very happy that they see them they are more disciplined than the past they do not by the word they price properly and which is a very good time. So they do not go just after everything with any price and lose money. They are doing --they are moving to a disciplined approach. So only undisciplined approach as I said is still some of LSTK project where people sometimes still buy the work.

Got it. Thanks for that. Then just wrapping up and sort of take a bunch of questions here on CapEx just to be clear you're still comfortable with us thinking about $100 million for total 2019 CapEx despite being through 90% of it in the first nine months?

Yes I would say I mean you might get $5 million $6 million more or something toward the year-end. But yes we are -- we front-loaded our CapEx that we all agree and we have this consciously like this to ensure that we serve the contract and we have capacity and we are comfortable we will end up the year maybe as I said maybe some of the CapEx would be received like in December $5 million $6 million from next year earlier that we should have the same and then next year we should maintain the same. CapEx level despite the fact that we're going to grow we're going to keep growing at that pace.

Got it. And this is absolute last one here. Just on the bid pipeline how is it looking moving into 2020? Are you expecting it to be as strong as it has been in the past sort of 12 to 18 months? And I'm focusing specifically on sort of incremental contracts you're not necessarily renewals but on the growth side.

Yes absolutely. I mean if you look at the majority of the mega contracts we got -- started them as I said in September. So definitely next year you're going to see the full 12 month of those of those contract. In addition we are negotiating a couple of huge contract and hopefully we will be able to close them before year-end which means that you're going to see the benefit of these contracts for the entire next year. So it's looking extremely positive for next year and we might break all records again.

Thanks very much for that. That's it from me.

Thank you. Your next question comes from Igor Levi from BTIG. Please go ahead.

Hey thank you. You guys just mentioned that the majority of the contracts you've got this year. You already started in September or are going to start shortly. So I wanted to ask how much of the expected growth in 2020 has already been booked and how much of that growth is expected to come from the two tenders you mentioned that you expect to announce before the end of the year.

Okay got it. So with that obviously going into almost give guidance like this but I can. Yes. The majority of the newly awarded new countries were started in September with the only exception of Bahrain where we started in October so you did not see any of those benefit in the numbers if you like this quarter at all almost. And he will only see in Q4 and then obviously the next year. Some of the announced contracts that we said before we'd like the Saudi is then the Oman etcetera. We had this contract and they were renewal but within needs before. So you already saw part of that growth this year. But you will see it at a much bigger numbers next year because obviously it gets matured and this will get figured. So I tried as well to explain for the company D&E portfolio where we won a lot of contracts outside and today we are established in Algeria in Saudi and Kuwait just entering other countries as well. And you will only see that because the drilling growth comes at a much slower pace than the production because the type of work you do when you run a fishing remedial with stocks. The downhole tools the truth tubing this stuff gets maturity with the longer time because the client has to be comfortable with you. That you can replace a multinational company and be able to do this professionally and the scope gets bigger but slower right on the Production segments you get exactly the opposite where because you are replacing someone. You've got the cementing contract for example or a giving contract you replace that other companies and you'll see the revenue immediately. I'm not sure if I answered your question but in a nutshell you will see a lot of the growth already booked with the contracts we have next year. So we have a very strong visibility on our growth next year based on the contract we won. The contracts that we are looking at in Q4 to secure will be an additional to that growth.

Great thank you. And shifting gears looking at how weak the U.S. oil services market has the guide are there some potential opportunities to acquire technology at a meaningful discount it's something you've done in the past but I imagine that discount has gotten a bit more attractive over the course of the year?

Yes I mean obviously there is a lot of things that comes attractive but as you know we do not just go and buy capacity and some that has no technology because you can just buy from your suppliers right? So if there is an opportunistic if we just want the contracts and we want to buy out someone with a very good equipment and add capacity at much lower CapEx spend we do it and we are actually in negotiation with a couple of those. But the key is to look at innovative business model with those some of the very strong companies in North America. And when I say innovative meaning we look at how we do it with the CapEx slide how we do it with the partnership how we share revenue and how can we grow our portfolio much bigger without buying anyone. So both of us can go together attract certain contract and do something unique in the region and it's a real win-win. So basically we take a benefit they take a benefit. They're very happy they trust us we trust them we have a very strong infrastructure in the region we can go together and service that contract without anyone buying anymore right. So this innovative business model we are negotiating today we have like three companies and hopefully based on the contract awards and based on how our customers perceive that relationship we will be able to come up with something very unique very shortly.

Great that's very helpful. I'll turn it back.

Thank you. [Operator Instructions] Your next question comes from Blake Gendron from Wolfe Research. Please go ahead.

Hey thanks good morning. Just one question for me. But it's two parts. You alluded to offshore and here. Probably more on this call them out in the past. I was just wondering what the timeline is for that work what the timeline is for your qualifying for that work and maybe some of the incremental investment that you need to make specifically in D&E to improve the technological efficacy of your portfolio and competing against these projects. And then secondly as it relates to technology thought about start-ups with companies in North America one of your larger diversified peers has talking more about technology access basically technology rental both in North America and internationally I imagine a good market for them to target. I was wondering if you do have access to some of the technology offerings in your larger diversified peers and maybe that will improve their competitiveness specifically on offshore and maybe unconventional gas moving forward.

Thanks Mike. So I address your first question on offshore. So as you know we operate onshore and offshore. All right. Today so the investment we need to do to operate onshore is nothing new for us. So we need to today our all our operation in the countries where it's like in Abu Dhabi Qatar Saudi we work offshore and we continue to work offshore no problem at all. Right. So for us there is nothing really that we need to do significantly to be able to operate offshore in some of the new countries very honestly if they started with the Frontier and exploration. I don't think they were not used right so they with use the multinational very understandably because it's an exploration phase. You need to run exploration logs and if I find the client that would definitely use actually one of the multinational for that matter. So there is no issue for us here but this is the Frontier on when I keep saying on the increase of activity what difference does it make because we make sure that we can be qualified when they could development and some of it because the increased spend gets you to operate actually both on land and offshore even because the PI is much bigger so and that's why I'm saying there is a huge activity increase offshore today which we're going to play a part of it. If I look at even our investment will just be on some of the CapEx to install some of the equipment. So as an example in Saudi Arabia we for example. Now with brand new cementing package is going to be able to put it on the newly offshore rigs that they just acquired. So we are qualified the guidance…

No that's very interesting and helpful. I'll turn it back.

Thank you.

Thank you. We have reached the end of the question and answer session. And I will now turn the call back over to the speakers for closing remarks.

Thank you very much. We really appreciate your time and very excited about our quarter very excited about the future. We are looking again extremely positive with the amount of contracts and the pipeline we have very comfortable on the growth targets and just one added point and I keep saying it our customers are the best in class in the Middle East and even if you see some receivable issue they will face and they are the best player in the world. So we are very comfortable on our cash flow and our receivables and looking forward for a very bright future. Thank you very much.