Good morning, ladies and gentlemen, and welcome to the Fourth Quarter 2020 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 . As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Ryan Hummer, CFO. You may begin.

Thank you, Jerome. And thank you for joining NCS Multistage’s fourth quarter and full year 2020 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 our future expectations for financial results and business operations, and are subject to known and unknown risks and uncertainties, including with respect to the COVID-19 pandemic and its impact on the global economy, oil demand and our company. I'd like to refer you to our press release issued last night, along with other public filings made from time to time with the SEC that outline those risks.

Thanks, Ryan, and welcome to our investors, analysts and employees joining our fourth quarter 2020 earnings conference call. I hope that everyone listening today is healthy and safe. Today, I'll review some of our key accomplishments during 2020, review our strategic priorities for 2021 and briefly discuss the outlook for each of the US, Canadian and international markets. After that, Ryan will discuss the fourth quarter results in more detail and speak to our guidance for the upcoming quarter. I'll then provide 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 navigate the challenging conditions that we faced during 2020, and it takes the effort of the entire team to position us to achieve our near and long term objectives. We continue to help our customers optimize their operations and maximize the value of their assets by bringing them efficiency enabling technologies supported by our service capabilities. Our focused product and service offerings deliver tangible value to our customers. Key examples from 2020 and early 2021 include the following. Within fractured systems, we recently set a record for NCS, completing a 250 states well in the Montney in a single tool run, utilizing our shift frac closed method to optimize profit placement. This was part of a three well pad with over 600 sleeves in which we helped our customer precisely place 99.5% of the planned profit volume. Our tariff sleeves for waterflood applications allow for greater control of water injection and therefore, sweep efficiency. Sales of these products have begun to increase in Canada recently, and we are actively working to expand the product line. Our PurpleSeal frac plugs from Repeat Precision provide customers with efficiencies and pump down and drill out times, while our factory assembled PurpleSeal Express system that combines our frac plug with a setting tool reduces on-site HSE risk during plug and perf operations. We have developed a new tracer deployment system, which is optimized for simul frac operations, allowing us to provide our customers with valuable information in these highly efficient completions. We've also seen continued uptake of our new value oriented tracer diagnostics offering that removes personnel from the location and reduces the overall cost of wellbore clearance diagnostics. Within well construction, our AirLock system provides our customers with greater assurance of landing casing and extended reach laterals, optimizing field development cost. The technology can also reduce case and running time, providing a net savings to the customer. We had our first AirLock system installations in Saudi Arabia in 2020, and we've been successful in Bundling AirLock systems with other well construction products in North America.

Thank you, Robert. As reported in our earnings release, fourth quarter revenues were $27.4 million, 47% lower than the prior year's fourth quarter. On a sequential basis, revenue in the fourth quarter was 68% higher than revenue in the third quarter, reflecting the continued recovery in completions activity in the US and the typical seasonal improvement in Canada. We delivered sequential revenue increases of 21% in the US and 279% in Canada, partially offset by 35% sequential decline internationally. Full year revenue for 2020 of $107 million represented a 48% reduction as compared to 2019. Gross profit, which we define as total revenue less total cost of sales, excluding depreciation and amortization expense, was $11.7 million in the fourth quarter or 43% of revenue. This compares to $26.1 million or 50% of revenue in the prior year's fourth quarter. However, for a sequential comparison, our gross profit was $6.1 million or 37% of revenue in the third quarter. Our gross margin percentage increased sequentially, primarily due to the increase in revenue, which led to better absorption of fixed costs and the benefits from actions taken to rationalize our field service footprint and to improve our manufacturing efficiency.

I'll now close with a couple of brief comments. Our industry continues to face significant challenges, especially in North America as customer activity remains low with customers prioritizing flat production and free cash flow generation over production growth. I believe NCS is positioned to succeed in this environment. We deliver a focused portfolio of technologies that help 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 continue to grow as a percentage of our total revenue in 2021. We are focused on maintaining the structural benefits from the cost reduction actions that we took during 2020 and our capital spending remains restrained. We maintain a capital light business model, which facilitates free cash flow generation and is supported by a strong balance sheet. We are prioritizing free cash flow and have the right capital structure and liquidity in place if cash and investments and working capital are required to support revenue growth. And bringing innovation to our customers, we have made substantial investments to develop our intellectual property, and we continue to work to enforce and defend our intellectual property to ensure we make a proper return on those investments that we've made. And with that, operator, we'd like to take some questions now.

Your first question comes from the line of Tyler Zurcher with Tudor, Pickering Holt.

First question is on the US. The Q1 guidance would imply some fairly meaningful top line degradation in Q1. And it sounds like part of that is Repeat Precision what you talked about in the prepared remarks and I suspect part of that is the winter storm year. So I was just hoping you could give us a little bit more color and kind of partially the moving pieces as to why the top line is expected to be down so much in Q1? Thanks.

Yes, that's exactly right. It's primarily Repeat Precision, and then we basically had lost a week because of the storms. And our Repeat revenue is primarily in the Permian, so it was primarily repeat. So there were a couple of things that I mentioned in the prepared remarks about Repeat Precision on the top line. And it was just those two items. I mean, pricing pressure in the fourth quarter increased actually from what we had seen. We were hopeful that pricing pressure had somewhat stabilized in the mid to late Q3 time frame. But then as we came into Q4, we began to see competitors that were driving price pretty extremely. And as I also said, we think that there's value beyond the sales price of our products to our customers. While we keep and maintain a very close eye on what the pricing is in the marketplace, we intend to continue to work with customers that appreciate the value. So we did lose some customers during the quarter. Now some of those customers we've worked with to bring them back online, but some of them, we haven't because they're working at substantially lower prices or we have competitors that are. Another thing that impacted that I mentioned, the beginning to impact the first quarter and part of the fourth quarter, was the new tool that we come out with. So we developed a new composite plug or a redesign, if you will, of our existing product. And we literally had thousands of runs of this tool and field. And we began to notice over time that we were having an issue. And it was a fairly small percentage of the runs that we had, but it's not something that we had experienced in the past. I mean, we virtually had zero of these types of events and they're real events for customers. So at that point, we had almost -- well, we were in the process of switching over from our pre product, the composite plug that we have been running before, to this new plug. So we had to make a pretty strong pivot and pull all of that inventory back in and ramp up manufacturing to get product of the previous product into the field. So that's mostly complete now, and we're just building back the customer base from that. So it was a fairly significant hit that we're going to be taking for the first quarter, but we've already seen come back from that. And as I said earlier, we expect to continue the sequential quarterly growth with Repeat Precision in the second quarter.

And maybe sticking with the US, it seems like the trend towards more simal fracs is continuing to increase. And I was wondering if you can maybe talk about how that impacts your business. I know you have a bunch of different products you offer in the US market. But just at a high level, how that trend kind of impacts your business? And then secondarily, in the US I imagine coiled tubing pricing has got to be somewhere near historic lows right now, which I suspect is a good read through towards your fracturing solution. So just curious if you could kind of comment on where coiled tubing pricing is at and how that might impact your business? And then secondarily, the trend towards more simul-fracs and how that might impact your business in the US moving forward?

For simul-fracs, that really affects our tracer product line and Repeat Precision to some extent. For the tracer product line, what we did is it's a very intensive operation. So it requires a number of things to happen at the same time on location, especially for the Tracer Diagnostics product line. So we would have two to three people on location at a time versus one in the past. And we're monitoring multiple flow streams to make sure that we're getting the right chemicals in the right concentrations in the right stages. So we developed, I think I mentioned in the prepared remarks that we had developed some technology to make that process easier. So that was very quickly developed in anticipation of our first job that we did. We put it out on the location and it's worked well. What simul-fracs have the opportunity to provide for us with Tracer Diagnostics and with composite plugs is that it's a more intensive revenue stream potentially. So as more customers switch over to simul-fracs. I mean, obviously, it's going to be more product sales in a shorter period of time. So we certainly look forward to that. And then on your comments around coiled tubing pricing, yes, I've never seen coiled tubing pricing as low as it is today. I mean it's just crazy at those prices. And it is a bit of a tailwind for us, but it's not the primary tailwind for us right now. I mean, oil prices are the primary tailwind. As I mentioned earlier, in sub $50 environment, the areas that benefit the most from using pinpoint stimulation and sliding sleeves in the completions, those are areas where there's not much activity going on. And so now as we find ourselves in an environment that is bumping 60 pretty regularly, we're seeing that activity pick up for multiple customers in multiple basins. So that's really the biggest tailwind for us is commodity prices.

Your next question comes from the line of John Daniel with Daniel Energy Partners.

Just one question, y ou noted in the prepared remarks about the raw material increases that you're seeing. Can you just walk us through sort of the drivers and the magnitude of these increases and then the time lag between when you can actually go back to customers to sort of recoup some of that?

Yes, so we haven't seen the increase in material prices affect us yet because we do buy in bulk. So we're good for now, and potentially through the end of the year. But we do expect to start seeing, market prices start to come up in the back half of the year. I mean if you just look at scrap prices right now, I think they're at historical highs. And there's demand factors that are driving it a bit. Just on supply shortages and shutdowns around the world and some of the plants or the mills. So for our business, we don't expect that we're going to get the impact from them probably not this year, but we do expect to see that impact hit the industry before the end of the year. And in some cases, I mean, it's speculation now and how much that's going to be. But based on the conversations that we're having, I mean, it could be in the teens, high teens of increase, in some cases for some of these materials.

And then I'll slip one more in, you noted a new tool that was introduced sort of a 30,000 foot question here, but like how is the customer willingness to look at new products, I mean, coming out of the down cycle, say they're interested in learning more or they're reticent and they want to stick with what they know for now?

Well, I can tell you that customers don't try things just because it's been technology anymore, and I think that's been the case for a number of years. So it really depends on what the potential price for the technology is and how good of a job that we do in creating that value proposition for the customers. So for instance, the new tool that I told you that we developed earlier that we had the hiccup on, that one customers took it almost immediately. It's a composite plug. It had less material in it than other composite plugs. There was also the hope that being able to eliminate something in the neighborhood of 15% to 25% of the plug material on each plug would speed up time between plugs and drill outs and things like that. Unfortunately, that particular design didn't work the way we had hoped that it would. So we quickly got it out of the market. But there is a design between that one and our existing design, there is an opportunity to get there. Just to get back in the market quickly, we made the decision not to develop that one. Let's just go back to what we have been doing with a couple of modifications to it and get back in the market. But customers are, I would say, for the most part, if there's an opportunity to become more economical for the customer, the customers will try the new technology as long as they believe that they can manage the risk.

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

Just want to check on the margins front. I think you guided to 35% to 40% in the first quarter. Just curious if you can describe what that might have been if it wasn't for the expected inventory adjustment and to help us think about what margins might get to in the second half of this year. Obviously, there's some 2Q headwinds with Canada. But just if you could just walk through some of those parts?

I'd say there are two factors really in thinking about the gross profit margin guide for Q1. There is one piece, obviously, associated with the inventory actions that we've taken. The other piece has to do generally with mix. So with the Repeat in the US being a slightly lower part of the revenue in the Q1 guide relative to Q4 actuals and with Canada being a slightly larger percentage, mix probably drives that, call it, maybe two thirds, one third of the difference between Q4 into Q1, two thirds of which would be mix, one third of which would be around the specific actions with Repeat and around the inventory. So with that, certainly, we do believe that as we get to the back half of the year that we can get back to a margin profile that's kind of mid to high 40% as the US business, particularly Repeat, continues to get on sequential growth path and as we get to the summer quarters, which are generally higher activity quarters for the international operations as well.

And then just curious if you can talk about the backdrop right now for M&A and combinations. Obviously, when activity is shifting in a big way, it gets tricky. But what's the tone of discussions right now in the industry?

Well, I can tell you there are discussions now, where in the first half of 2020 -- well, actually, most of 2020, we were all attendant to our businesses, trying to prop up our balance sheets, take care of whatever we need to take care of. But I think that for a large part of the industry has -- that's been completed, and now we're all starting to think about what needs to happen, which is consolidation. I mean I don't think anybody could disagree that there's too many service companies out there to support the business that we're going to have going forward. So it's just a matter of finding the right opportunities, the ones that make sense and that can be accretive. So I would expect to see those conversations continuing and start to see some activity around consolidation at some point this year.

I'm showing no further question at this time. I would like to turn the conference back to Robert Nipper.

Thank you, operator. 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 truly appreciate the enormous effort that our people are putting in and the sacrifices made by everyone at NCS to support the company and each other through this challenging market environment. We continue to operate safely with zero recordable incidents in 2020 and thus far in 2021. Our team continues to provide excellent service to our customers and is developing new products and services that will enable our customers to be more successful. While early, we are also pursuing opportunities to utilize our products and services in markets outside of oil and gas. Our people have done a tremendous job in managing the many challenges that come from the impacts of the COVID-19 pandemic on their lives, as well as its impacts on our industry and company. We are only as good as our people and I believe that we have the best team in the industry. We appreciate everyone's interest in NCS Multistage, and we look forward to talking again on our next quarterly earnings call in May. Thank you.

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