Good morning, ladies and gentlemen, and welcome to the First Quarter 2019 NCS Multistage earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Ryan Hummer, Chief Financial Officer.

Thank you, Isabella. And thank you for joining NCS Multistage's first quarter 2019 conference call. Our call today will be led by Robert Nipper, our Chief Executive Officer, and I will also provide comments. Before we begin our call today, we would like to caution listeners that some of the statements that will be made on this call could be forward-looking statements. And to the extent that our remarks today contain information other than historical information, please note that we are relying on the Safe Harbor protections afforded by federal law. Such forward-looking statements may include comments regarding future financial results, and are subject to several known and unknown risks. I'd like to refer you to our press release issued last night along with other public filings made from time to time with the Securities and Exchange Commission that outline those risks. I also need to point out that, in our earnings release and in today's conference call, we have discussed and will refer to adjusted EBITDA, adjusted EBITDA margin, adjusted EBITDA less share-based compensation, adjusted net income, adjusted net earnings per diluted share, 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 our performance consistently over various periods without regard to costs associated with our current capital structure and in a manner that we believe better reflects our operating performance. Our press release from yesterday, which is posted on our website, ncsmultistage.com, provides reconciliations of these non-GAAP financial measures to the nearest GAAP financial measure. With that said, I'll turn the call over to our Chief Executive Officer, Robert Nipper.

Thank you, Ryan. And welcome to our investors, analysts and employees during our first quarter 2019 earnings conference call. Today, I'll review high-level first quarter results and will discuss what we are seeing in our Canadian, US and international operations, and I'll discuss how we are executing on some of our key strategic initiatives. After that, Ryan will discuss the quarterly results in more detail. I'll then provide some closing remarks, highlighting some of our recent accomplishments. Total revenue in the first quarter was $52.9 million, 25% below the year-ago period and a 5% increase sequentially. Adjusted EBITDA in the first quarter of $7.4 million reflected a 14% adjusted EBITDA margin. Starting with our Canadian operations, our revenue of $25 million for the first quarter was 30% higher than the fourth quarter of 2018, coming in right at the high end of the guidance range provided in last quarter's call. The 30% sequential revenue growth was achieved despite a rig count that increased by only 3% over the same time frame. While part of that performance was related to our customer mix, we believe that the primary driver of that outperformance relative to industry activity is due to the strength of our Canadian franchise, our people and our ability to execute on the initiatives that we outlined on the last quarter's call. A few highlights from the quarter's Canadian results include winning back business with customers that have trialed competing technologies, successful trials of our new lower-cost high pressure sliding sleeves, the highest revenue quarter in our history for our Canadian-based tracer diagnostic service line with a 14% year-over-year revenue improvement, the first sales of our Purple Seal frac plugs in Canada during the quarter and the first installation of our new Terrus water injection frac sleeves, and our new…

Thank you, Robert. As reported in yesterday's earnings release, our first quarter revenues were $52.9 million, 25% lower than the prior year's first quarter. We increased our US revenue by 15% and our international revenue by 66% as compared to the last year's fourth quarter. These increases were more than offset by a decrease in our Canadian revenue of 47%, resulting from reduced market activity levels, pricing adjustments that we made in late 2018 and a weaker Canadian dollar as compared to the US dollar. On a sequential basis, overall revenue in the first quarter was 5% higher than revenue in the fourth quarter of 2018, with a 30% sequential increase in Canadian revenue, partially offset by sequential declines in the US and international markets. Gross profit – defined as total revenue less total cost of sales excluding depreciation and amortization expense – was $26.1 million in the first quarter or 49% of revenue. This compared to $37.1 million or 52% of revenue in the prior year's first quarter, with higher margins from product sales offset by lower margins on services revenue. The gross margin percentage was slightly above the midpoint of the guidance that we provided for the quarter. For a sequential comparison, gross profit was $24.2 million or 48% of revenue in the fourth quarter of 2018. Selling, general and administrative costs increased to $23 million in the first quarter from $21 million in the prior year's first quarter and also increased from the fourth quarter of 2018's level up to $20.3 million. As a reminder, our reported SG&A includes share-based compensation as well as certain non-recurring expenses. The year-over-year increase was primarily driven by head count additions, support services related to our new ERP system, increases to share-based compensation, as well as $0.6 million in bad debt…

Thank you, Ryan. Before we open up the call for Q&A, I'd like to highlight some of our accomplishments so far in 2019. In Canada, we completed initial field trials for our new lower-cost sleeves and expect more work as we exit spring breakup. Our tracer diagnostics business continues to perform well and set an all-time quarterly revenue record in the first quarter. We are fully moved into the new Technology Center and hosted a Customer Day there with over 125 customer attendees. Well construction sales continued to outperform overall market activity. We've had several repeat orders for our Purple Seal composite plugs that we first brought into the market in January and we have successfully installed our first Terrus water injection frac sleeves and our first Qumulus Ultimate Recovery system, further expanding the addressable market for NCS technology. In the US, we just completed our sixth straight quarter of sequential increase in product revenue and we posted record quarterly sales of composite plugs, toe sleeves and AirLocks in the first quarter. Internationally, we've delivered strong year-over-year revenue growth. We expanded our tracer diagnostics customer base in Argentina and are evaluating tracer diagnostics opportunities in multiple additional geographies and we shipped our first order to the Middle East. And I'll close with just a couple of brief comments. We continue to execute on the strategies that we've had in place for the past couple of years. We have leadership positions in product lines and services in which we compete. We've expanded our product and service offering over time and have invested in our sales force and the international infrastructure to allow us to capitalize on our revenue opportunities across the globe. As a technology-driven company, we continue to innovate, bring new products and services to market that are highly valued by our customers, improving efficiency, reducing cost, enhancing recoveries and improving their financial returns. As a result, we believe we are well positioned to deliver capital-efficient long-term organic growth through increased adoption of our innovative completions equipment and services. Our capital-light business model provides us with the ability to generate free cash flow while maintaining a strong balance sheet. This provides us with the optionality to allocate capital to high-return investments and evaluate options for the return of capital to shareholders over time. And with that, we'd be happy to take your questions.

[Operator Instructions]. Your first question comes from the line with George O'Leary with TPH & Co. Your line is open.

Good morning, guys.

Good morning, George.

Decent bit of investors, at least a lot of the questions we get are just around the cadence of US completions versus US drilling activity. And you provided some color on that during the call. I wonder if you could just expand on that a little bit and just maybe discuss what you're seeing on a leading-edge basis or what you saw in April in both of those buckets, completions and well construction versus what you saw in March and then maybe versus what you saw in January and February, just so we can get a sense for the progression of activity through the year thus far?

Yeah. Generally, we saw a pretty slow start to the year. Most of the products that we have in the US, the product lines, we have pretty low market shares in outside of just some of the well construction products. So, think about the completions around fracturing systems, so our sliding sleeve systems, a lot of our customers in the US are smaller independents who operate out of cash flow and we saw a later start to the year for those customers, which affected the sales for our frac sleeves. We expect that that activity – based on what we've seen so far in the quarter, we expect that activity is going to continue to increase into the second quarter and into the latter half of the year. Now, overall, I wouldn't say that I believe that we are going to see a big change in activity or this big recovery in the second half of the year, but when we look at some of the customers that we have in our customer base, we believe that those customers will have increased activity. But, generally, I don't really see a lot of increase in activity. Our plug sales were very robust in the quarter. We continue to see higher performance in that product line. But that's really driven primarily by market share gains because, again, we're a new entrant into that business, being fully commercialized only just over a year now. I think we're in our fifth quarter of commercialization or into our sixth quarter now. So, that's mostly driven by market share gains. And then, wellbore construction, that's driven primarily – or the largest revenue generator is our AirLock product line. And we see what's driving that market, or the increases in that market, is primarily more adoption. So, there's a lower percentage of the wells that are using some type of casing buoyancy system today. However, we do see the adoption rate of that type of technology is increasing, and so that's helped to drive that performance as well. But, again, generally, in terms of market conditions, we see no real green shoots for a big recovery in the second half of the year. We remain hopeful that that could change, but right now we're not counting on that. But I think we're in a pretty [Technical Difficulty] position because of the low market shares that we can continue to perform throughout the year. And you didn't ask about that, but, internationally, one of the things that we see is increasing activity. I think I mentioned earlier that we had some things slip in China and Argentina into the second quarter and the third quarter. However, in the fourth quarter, or in the second half of the year, our European activity in the North Sea is increasing. And we expect to see something in the magnitude of 2.5 times to 3 times increase in the second half of the year versus the first half year internationally.

That's very helpful color. And then, maybe just tacking on in a slightly different topic, although I guess it is related to the North Sea, just on the offshore side, it does seem like we're in the nascent stages of an offshore recovery. Wondered if you could just talk generally about [indiscernible] or bidding opportunities that you're seeing out there in the market and if there might be anything outside of the North Sea that's caught you all's attention on where folks are trying to rope you into prospects there.

Right. Well, as you know, right now, primarily our offshore effort is in the North Sea. We were awarded the contract last year there. It was a multiyear contract. It's activity that's ramping over time. We expect to see the majority of the activity in 2020 and 2021. However, there is work ongoing now. The project that we're on started – it started earlier. We had shipments last year for work that's being performed this year that went into country. We'll have more shipments later in the year. But the project did get delayed a bit. There were some issues with fracturing fluid that the customer had to work through. Those have been resolved, so that the project is moving ahead again. When we think about opportunities outside of the North Sea, we're looking at potential activity in the Gulf of Mexico, but that's a longer-term play. That's something that we haven't identified as a for-sure thing for us yet. However, some of the work that we're doing in Alaska now is similar work to what we would see in the Gulf of Mexico. So, we continue to evaluate that, but, primarily, we'll see this contract we have with Aker BP in the North Sea. But there is interest from a number of other parties in the North Sea for work that would be in the out years.

Great. That's super helpful color. I'll sneak in one more if I could. I realize you guys had some payments around the Repeat Precision joint venture early this year and that will fade. Could you just talk about the outlook for cash flow from operations and free cash flow as we progress forward, given that's also another hotbed topic with investors today?

Sure, George. This is Ryan. Look, I think we still feel comfortable in our ability to generate free cash flow on the year. Part of that has to do with the fact that our EBITDA and really our adjusted EBITDA translates pretty cleanly to cash in the year where we have very nominal interest expense and expect limited cash tax payments. We had a seasonal working capital build in the first quarter, which is normal for us, given the Q1 activity in Canada. It's primarily receivables growth. We expect that will release on a net basis over the course of the rest of the year. Typically, we'll see some working capital release in Q2. It will build again a bit in Q3 and then release in Q4. I'd also say that we can expect a moderation in the level of CapEx as we move through the year. We had close to $3 million in the first quarter. We've got a range of $8 million to $12 million with, I think, some opportunities to move that lower. So, I think the cadence of capital spending reduces during the year as well.

Great. Thanks very much, guys. I'll turn it back over.

Thanks, George.

Your next question comes from the line of Ian MacPherson with Simmons. Your line is open.

Thanks. Good morning, guys.

Hello, Ian.

Hello, Robert. It's too early to tell for sure, but so far it looks like there's just not a lot of CapEx elasticity, the oil prices here. But I sort of inferred from your opening comments that you thought that might be a little bit different in Canada. Can you expand on that?

Yeah. Just what I said, more around costs are pretty low in Canada compared to where they have been in prior years. [Technical Difficulty] costs are low. The bidding wars are just crazy up there in terms of the frac fleets and the pricing our customers are seeing. So, cash flow – and with some of the exchange rates and some of the other issues that our customers are seeing with oil prices kind of stabilized, the differentials closing up, what we're seeing is that their cash flows are a bit better than they projected. So, we're fairly optimistic that budgets could actually increase a bit from what the original budget levels were [Technical Difficulty] the recent conversations that we're having with customers up there.

Okay. It's hard to benchmark your Canadian revenue seasonality because it hasn't really been stable for the past few years. Obviously, last year was significantly front-half loaded, but in the past couple of years, 55% to 65% of your full year Canada revs have been in the second half. Do you think that that would be -- 55% plus would be a reasonable starting point for us to think about your second half weighting for Canada?

Yeah. We do think that the second half will be more heavily weighted than the first half.

Okay. And then – so, how material is EOR today to your business? I'd imagine it's quite small and early. But maybe you could talk about, if you don't mind, what you think the opportunity is there going forward and the materiality of the EOR market relative to new well construction for your suite of products.

So, the Canadian market is a lot more advanced, I'd say, in EOR than the US market just because we've been producing longer, as an industry we've been using water flood longer. And so, there's a bit of history there. And customers have had success with EOR. There is a number of Canadian operators who talk about increasing ultimate recoveries by large percentages through water flooding activities. And so, we've watched that over time. We've participated in that market with our multi-cycle sleeves. Our customers have been using multi-cycle sleeves for the past few years where they would run multi-cycles, so that they'd have the option of being able to, without compartmentalizing the wellbore with additional products and services and additional equipment in the well, they could use the multi-cycle sleeves to close off areas that they thought that needed to be injected into because there was breakthrough and they weren't effectively sweeping through those areas. The problem that we've seen with that, though, is that it's very difficult, number one, to determine which areas of the wellbore we need to stop injecting in and we need to increase injection in. So, the two products that I mentioned earlier, the more economical product, basically, it's a sliding sleeve, that gives the customer the ability to produce through it, frac through it, but also to be able to put it into a position where there's a metered flow that goes through the sleeve. So, gas or water can be injected down the well and create backpressure across every sleeve that's open in this particular position, so that they can effectively control how the fluid goes through the entry points, but not necessarily control which entry point to go in – that fluid goes into without physically going into the wellbore with…

Your next question comes from the line of Praveen Narra with Raymond James. Your line is open.

Hi Good morning, guys.

Good morning.

I guess, to the same point, on the R&D side, you guys have obviously introduced a lot of products. Can you talk about how you think of it moving forward in terms of – as you're developing new products, does the R&D go more towards new products or does it go more towards improving existing products? How do you think about how it goes – how it moves going forward?

So, it's both, as you would imagine. We have a group in engineering now that that's all –it's product performance and 100% of what they work on is just improvements to existing products, whether that be fracturing services or composite plugs, or whatever the product line is. One of the things that – and we think about the balance of investing for longer-term products versus got-to-have-today kind of products. What we look at and think about in the near-term development that we're doing is we're almost focused 100% around efficiency from a time-saving standpoint. So, working on developing products that help our customers save time and dollars on the location where, at the end of that installation of whatever product or service it is, that the customers can see, all right, this is how much money I save versus something that's a longer-term play. And we've been focused on that for quite some time. As we look down the road, we think it's important that we are investing in some longer-term products like the two EOR systems I've discussed earlier. Those are products that we started development on almost two years ago. And so, now they're just now turning into revenue generators, and we've got two more of the Qumulus systems sold that are scheduled for installation. So, we see that that is not going to be something that affects the revenue in 2019 significantly. But in the out years, we see that as being very important that we have those types of products. But it's just the balance of the shorter-term projects and the longer-term projects as we think about SG&A spend and R&D spend, we just have to think about the balance of – and the investment that we're making and how that return is coming back to us.

Right. I guess, if we can follow on on just the rollout, so when we even – I guess maybe taking the EOR as a proxy, how do you think about introducing that and then getting that to kind of good run rate in terms of rollouts and commercialization And should we think of it as a Canadian rollout initially and then followed by US further adoption or how do we think about that actually becoming a material part of the business?

Yeah, it's – I think we have to think about it as a Canadian rollout just because the Canadian market is so far ahead of the US market in terms of secondary recovery in the unconventionals. We see areas of the Permian where there is starting to be a focus, so we think that that would probably be the first areas in the US that we move into. But it's certainly – there's a few years gap between where the Canadian market is in terms of secondary recovery and the US market.

Okay. That's helpful. Thank you very much, guys.

Thank you.

Your next question comes from the line of J.B. Lowe with Citi. Your line is open.

Good morning, guys.

Good morning.

In your prepared remarks, you kind of mentioned your factory-assembled plug-in setting system. I was just wondering if you could expand on that a little bit more. What are the benefits of that system? Is it beyond just the safety that it provides? Is there a cost or pricing benefit you guys – what's kind of the value proposition to the customer?

Yeah. It's a cost savings primarily for the customer through efficiency and in real dollars. So, the cost for the customer to use what we call the Purple Seal Express, which is the -- it's basically a bridge plug, the device that connects the bridge plug to the setting tool and a setting tool. That's assembled in the factory environment. It's not put together on location in the middle of the night by somebody who's just got – is doing stage after stage after stage. And so, the cost for the customer to do that versus what they were doing, which is a composite plug on a electric setting tool for wire line that's rerun over and over and redressed with some frequency, the cost is about the same, if not a little bit cheaper to be able to buy the Purple Seal Express and just toss away the setting tool and the adapter kit. But the real savings for customer is the efficiency and the reliability around the setting tool itself. So, what our customers have been telling us, and the whole reason that this product is done so well in the market, is because there's a high percentage of time where there are failures with the setting tool because they were improperly redressed, they weren't redressed, or they weren't properly applied and run in in the wellbore. And so, one of the things that we can do is it's a brand new setting tool. It's dressed in the factory environment. So, we know it's dressed properly. So, the failure rate has been almost nothing on these disposable setting tools.So, that means real dollars for the customers. And so our customer – the uptake for the customers is pretty high right now. These setting tools have been run for probably about a year-and-a-half on a standalone basis where they would – the setting tool is thrown away, but it's not delivered to the location with a plug installed on it. So, the customers have become accustomed to these disposable setting tools, but what we've been able to do with the Purple Seal Express is be able to have the setting tool already preassembled on to the plug and that whole unit delivered to the location. So, that removes an operation on location, which is a serviceman having to install the plug on a setting tool, so it removes the cost of that serviceman to do that, and it also takes some of the risk out of having the proper maintenance and QA/QC done to the tool. So, we believe that that is why that tool is being successful and it's used in that combination of a low percentage of wells today, but we see that continuing to grow on a quarter-to-quarter basis.

Yeah. Yes, I was wondering if you could just put kind of a magnitude around the market opportunity and if there's competing offering in the marketplace. Are you guys doing this alone? Just maybe some kind of qualitative market analysis on that would be helpful.

Well, depending on which analyst you talk to and look at the work that they've done, there's somewhere around 700,000 frac stages that are done in the US on an annual basis. So, just say it's 500,000. That's what the total opportunity is. And today, we're the only company that is providing a complete assembled unit with the frac plug and the setting tool all assembled and delivered to location. So, we're the only one doing that and it's done on a very small percentage of the wells. So, the opportunity is quite large.

All right. Excellent. Thanks guys very much.

Thank you.

[Operator Instructions]. I'm showing no further questions at this time. I would now like to turn the conference back to Robert Nipper, Chief Executive Officer, for closing remarks.

Thank you, operator. On behalf of the entire management team and our board, we'd like to thank everyone that joined us on the call today, including our shareholders, employees and the research analysts who cover NCS. I'd like to personally thank our 400-plus employees around the globe whose effort allow us to achieve amazing results. I continue to believe that we have the best team in the industry and we're committed to preserving the culture of the employee development and innovation that has supported us from the beginning. We appreciate everyone's interest in NCS Multistage and we look forward to talking again on our next quarterly earnings call in August. Thank you, operator.

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