Michael Morrison; Chief Financial Officer; NCS Multistage Holdings Inc
Ryan Hummer; Chief Executive Officer, Director; NCS Multistage Holdings Inc
Dave Storms; Analyst; Stonegate Capital Partners
John Daniel; Analyst; Daniel Energy Partners
Operator
Good day, and thank you for standing by. Welcome to the Q4 and full year 2024 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, sir.
Michael Morrison
Thank you, Michelle, and thank you for joining the NCS Multistage fourth quarter and full year 2024 conference call. Our call today will be led by 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 our financial guidance and expectations for future financial results and business operations. These statements are subject to many risks and uncertainties that could cause our actual results to differ materially from any expectation expressed on this call.
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 as well as our results of operations included in our earnings release contain the following non-GAAP financial measures: adjusted EBITDA, adjusted EBITDA margin, adjusted gross profit, adjusted gross margin, free cash flow and free cash flow less distributions to noncontrolling interest.
These non-GAAP measures and reconciliations to the most comparable GAAP financial measures are provided in our fourth quarter and full year earnings release, which can be found on our website at ncsmultistage.com.
I'll now turn the call over to Ryan.
Ryan Hummer
Thank you, Mike, and welcome to our investors, analysts and employees joining our fourth quarter and full year 2024 earnings conference call. I'll begin by reviewing NCS' vision and core business strategies, including a discussion of our complementary product and service portfolio and certain accomplishments in 2024 and early 2025 in alignment with our strategies.
I'll also outline our strategic objectives for 2025. Mike will follow covering the financial results for the quarter. NCS' vision is to be globally recognized as a trusted partner and bold innovator, enabling our customers' resource development strategies through our technology-driven solutions and reliable expertise.
In practice, we pursue this vision through a cohesive product and service offering designed to enable our customers to reliably maximize the value of their unconventional assets. This applies across diverse markets in the more mature markets in North America, emerging high-growth unconventional developments in Argentina and the Middle East and in more conventional geographies like the North Sea, where we're successfully deploying unconventional technologies and techniques.
We are collaborating with our customers to open new markets for our products and services in technically demanding environments, including innovative solutions for SAGD, deepwater and geothermal. As we've discussed before, we have three core strategies that are supported by twowo guiding principles. I'll review each, including recent progress to demonstrate how we are enabling long-term value creation for our stakeholders.
The first core strategy is to build upon our leading market positions. This includes strengthening our comprehensive product portfolio in Canada and extending our proven track record in fracturing systems technology globally. A notable success came in late 2024 when a customer operating in the liquids-rich area in the Montney formation disclosed plans to increase the use of single-point entry completions in the area to achieve production performance and financial returns that exceed comparable plug-and-perf completions.
We're working collaboratively with this long-standing customer in pursuit of continued operational optimization to further enhance the capital efficiency of their development program, utilizing our differentiated fracturing systems offering. 2024 was also a critical year for NCS in advancing the use of our fracturing systems technology and wells using threaded pipe for deployment of our service tools.
With this success, we've expanded our North Sea customer base and medium-term opportunity in that market, and we've also advanced our readiness for deepwater applications. The second core strategy that I'll speak to is capitalizing on international and offshore opportunities.
We've made investments over the last several years to position ourselves in strategic international markets that we believe represent long-term growth areas for NCS, including the North Sea, Argentina and unconventional activity in the Middle East.
Our results in 2024 speak for themselves as we achieved our highest ever revenue outside of North America, doubling from 5% of our total revenue in the prior year to 10% in 2024. Our international growth also helped to support a 250 basis point improvement in our adjusted gross margin in 2024 as compared to 2023.
Our final core strategy is to commercialize innovative solutions to complex customer challenges. This was a very successful and exciting year for us with several significant achievements. We commercialized frac systems and well construction products for the SAGD market in Canada. We enhanced the performance capabilities of our AirLock casing buoyancy system, which served to accelerate our receipt of a commercial purchase agreement with a key customer in the Middle East.
And at Repeat Precision, we've introduced high-value technologies, including our dissolvable frac plug and our new stage saver composite plug with features that mitigate issues that our customers can encounter during simul-frac operations, the use of which continues to expand in North America.
I'll now speak to the two guiding principles that underpin our long-term strategy. The first is to maximize financial flexibility. Our business model continues to be validated as we bolstered our net cash position at year end to nearly $18 million with an undrawn revolver.
During 2024, we generated approximately $12 million in free cash flow and $10 million in free cash flow after distributions to our noncontrolling interest. The $12 million in free cash flow was 54% of our adjusted EBITDA, reflecting material conversion, especially considering our 14% year-over-year revenue growth.
The $10 million in free cash flow after distributions in 2024 represents approximately 15% of our market capitalization on March 7, which was approximately $67 million. Our second guiding principle is to uphold the promise.
Our company values are embedded in the promise, which represents the commitments we make as a company to our employees, customers, vendors and other stakeholders related to how we conduct business, and it also speaks to our focus in the areas of technology, quality, health, safety and the environment. This is a continuous process at NCS. And during 2024, we took several actions reflecting our commitment to our stakeholders.
We enhanced our internal employee recognition programs, added a quality certification for a key facility, adopted a new product development workflow, and we improved our already impressive safety record. Our goals for 2025 are straightforward and are aligned with our long-term strategy.
In 2025, we aim to grow revenue in excess of the underlying market activity in each of our primary markets, including the Canada, the US and internationally. We aim to obtain field trials for new technology introductions and to drive further commercial success for our new product and service offerings and in recently entered markets.
We'll continuously improve our employee engagement and ensure workplace safety. We'll work to improve our processes and collaboration so we can be more efficient and effective, and we will also continue to generate free cash flow. Mike will now review our results for the fourth quarter and our guidance for the first quarter of 2025.
Michael Morrison
Thank you, Ryan. As reported in yesterday's earnings release, our fourth quarter revenues were $45.0 million, a 20% increase compared to the fourth quarter of last year. All regions contributed to our year-over-year increase with international up by 280%, Canada up by 20% and the US up by 18%. Our fourth quarter revenues were the highest of the year and sequentially increased by 2% with modest increases in Canada and international, partially offset by a slight decline in the US.
In Canada, we did not experience the normal customer holiday slowdown in activity, which is a positive indicator for early 2025. Our adjusted gross profit, defined as total revenues less total cost of sales, excluding depreciation and amortization expense, was $19.4 million in the fourth quarter, representing an adjusted gross margin of 43%, up compared to our adjusted gross margin of 37% for the same period in 2023.
This improvement was due in part to an increase in higher-margin international revenues. Our revenues for the full year of 2024 were $162.6 million, an improvement of over $20 million or 14% compared to 2023. All regions contributed to this revenue growth with international reaching an all-time high of $16.5 million.
Our adjusted gross margin for 2024 improved to 41% compared to 39% last year. Our selling, general and administrative costs were $15.0 million for the fourth quarter, up $1.8 million compared to the same period last year due to increased incentive bonus accruals resulting from our improved performance as well as increased share-based compensation expense associated with our cash settled awards, which we recognize expense as our stock price changes.
For the full year of 2024, our SG&A costs were $57.8 million, an increase of $1.3 million compared to last year. For the full year 2024, the increase in incentive bonus accruals and share-based compensation was partially offset by the favorable impact of cost savings initiatives implemented in 2023. Other income of $2.4 million for the quarter improved compared to the same period in the prior year, driven primarily by an increase in royalty income from licenses of our intellectual property.
In the fourth quarter of 2024, we changed our process for recognizing royalty income. Previously, we recognized royalty income in the period the cash was received effectively on a one-quarter lag. Given the increase in royalty income, we began to accrue for these royalties when earned rather than when received.
As a result of this change, our fourth quarter royalty income is elevated compared to both historical periods and future expectations. Beginning with the first quarter 2025, we expect our royalty income to normalize to approximately $1 million per quarter.
Our net income for the fourth quarter was $3.5 million or diluted earnings per share of $1.32, an improvement to last year's fourth quarter after adjusting for the noncash benefit of the legal settlement one year ago. Our net income for the full year of 2024 was $6.6 million or diluted earnings per share of $2.55, an improvement over the net loss of $3.2 million in 2023.
Adjusted EBITDA for the fourth quarter was $8.2 million, an increase compared to $2.5 million for the same period in 2023. For the full year of 2024, our adjusted EBITDA was $22.3 million, a significant improvement over the $11.9 million reported in 2023. Now turning to the balance sheet.
On December 31, we had $25.9 million in cash and total debt of $8.1 million, which consisted entirely of finance lease obligations, resulting in a positive net cash position of $17.7 million. The borrowing base under our undrawn ABL facility was $20.1 million, resulting in total liquidity of approximately $46 million, including cash and availability under our revolving credit facility.
Turning now to a few points of guidance for the first quarter. Currently expect first quarter total revenue in the range of $42 million to $46 million, the midpoint being consistent with the first quarter of 2024. We expect US revenue in the range of $8 million to $9 million, international revenue of $2 million to $3 million and Canadian revenue of $32 million to $34 million.
We expect our adjusted gross margin to be between 39% and 42%, a modest improvement at the midpoint compared to the first quarter of 2024. We expect our adjusted EBITDA to be between $4.5 million and $6.5 million and our first quarter depreciation and amortization expense to be approximately $1.3 million to $1.4 million.
With that, I'll hand it back over to Ryan to provide our full year 2025 guidance and for closing remarks.
Ryan Hummer
Thank you, Mike. Our full year guidance for 2025 is as follows: Our current expectation for overall customer activity for 2025 as compared to 2024 is flat to down in the United States, a slight increase in both Canada and in our core international markets, which include Argentina, the North Sea and unconventional development in the Middle East.
We currently expect full year revenue to range from $165 million to $175 million and our full year adjusted EBITDA to be in the range of $20 million to $23 million. We expect balanced revenue growth with contributions from Canada, the US and our international markets.
I'll note that the year-over-year revenue growth and adjusted EBITDA are both negatively impacted by the strengthening of the US dollar relative to the Canadian dollar, which accelerated in the fourth quarter of 2024. By way of example, in 2024, each dollar of revenue generated in Canada translated to USD0.73 in US dollars. We currently expect this conversion rate to move 4% lower for 2025 to $0.70.
The net impact to NCS of these FX movements is reflected in our 2025 guidance and would be a reduction of approximately $4 million in revenue and $2.5 million to $3 million in adjusted EBITDA. Our financial guidance does not incorporate any meaningful impacts from threatened or enacted trade actions, including the imposition of new retaliatory tariffs involving the US, Canada and Mexico.
We are currently monitoring the evolving landscape as it relates to these potential actions and are actively engaged in planning to partially mitigate the impact of these actions, if enacted. We've already implemented plans to partially mitigate the increased tariffs imposed by the US on China and believe we will be able to at least partially pass through increases in raw material costs related to steel tariffs as our customers will see a larger and leading impact on their purchases of casing and other tubulars for their wells.
As Mike discussed earlier, also impacting our adjusted EBITDA guidance is an overall forecasted year-over-year reduction in other income. Turning to capital expenditures.
We expect gross capital expenditures for the year to be between $1.5 million and $2 million, and we expect our free cash flow after distributions to our joint venture partner of $7 million to $10 million, further strengthening our robust balance sheet and positioning us to pursue strategic investment opportunities.
Due to the seasonality of our business and consistent with prior years, we would also anticipate that the achievement of our annual adjusted EBITDA guidance range will be weighted towards the second half of the year and that our free cash flow will be weighted to the end of the year. Before turning to Q&A, I'll close with a couple of brief comments.
I'm very proud of what the team at NCS accomplished in 2024. We grew our revenue, adjusted EBITDA and free cash flow in a challenging market environment, delivering the benefits that we expect as we execute on our strategic plan. We expect to continue to benefit from multiyear investments made to position ourselves for growth in international markets and our efforts to position our product and service portfolio to ensure customer success and position NCS for growth in new market segments.
We have the people and infrastructure in place to support further revenue growth, and we maintain our focus on controlling operating expenses, positioning us to benefit from the resulting operating leverage. And finally, we entered 2025 with a strong balance sheet and liquidity position, ending 2024 with a cash balance of nearly $26 million.
We expect to add to that cash balance by generating positive free cash flow again in 2025, further enhancing our financial and strategic flexibility. With that, we'll welcome any questions.
Operator
(Operator Instructions) Dave Storms, Stonegate.
Dave Storms
Just wanted to to try to get a sense of the cadence for the year. Is there any early indication on the spring breakup in Canada? I know you mentioned Canada had a more robust holiday season than was expected. Do you think maybe that might be a bit of a pull forward in revenues into Q4 of last year? And maybe any other seasonal variance that we should be aware of going into 2025?
Ryan Hummer
Maybe I'll speak big picture first in that we would expect the impacts of seasonality in 2025 to mimic for the most part, what you saw in 2024. Then moving specifically into Canada, I think it's right that Mike mentioned that we got off to a strong start in that first week of January, maybe stronger than we would in other years.
We're in an environment right now where we are heading into breakup. Some of the activity in Saskatchewan and Southern Alberta is already tailing off. You've got road bans going into place.
However, the rig count in some of the more northern areas is holding in there for the time being. So at this point, I'd say we'll expect pretty typical seasonality with respect to the Canadian operations. I will point out that 2024 ended up being a very favorable year from a weather condition standpoint.
We came into the year concerned about the potential for drought conditions and water shortages, which did not materialize as we move through the second quarter. Operating conditions were pretty favorable throughout the year.
So we'll just have to see how spring breakup plays out. It's different every year, and it's just not predictable. Typically, we do see activity start to move lower here in the last two, three weeks of March and start to pick up again in June, but we've got to just deal with what Mother Nature delivers on that front.
Dave Storms
Understood. That's very helpful. And then just one follow-up for me. Consolidated margin seemed to really expand year over year.
It sounds like that was mostly due to the increase in mix with international really leading the charge there. Is there anything else we should maybe be aware of here that might be driving margin expansion?
Ryan Hummer
Yes. So with respect to the growth in 2024, I think there are really three components to it. The international expansion was certainly the largest. The second was just overall operating leverage. So we did grow revenue 14%.
And while we have a supply chain that's highly variable on the cost of sales side. We do have some fixed costs on the cost of sales side of the ledger that we can leverage as we grow. And then the third component, we did take some cost reduction actions throughout 2023, but really in the last two quarters of 2023.
So we had some year-over-year full year benefit of those, which we recognized in 2024. So you pull all of those together, and that contributed to that 250 basis point increase.
So as we look to 2025, we do expect to continue to grow the top line. However, the FX impact in Canada has a bit more weight. So right now, we're forecasting gross margin to be relatively flat year over year, where we do expect to see some continued benefits through just general operating leverage of the business as we grow, offset by some margin compression driven by the FX environment.
Operator
John Daniel, Daniel Energy Partners.
John Daniel
Ryan, as you continue to build cash, I'm just curious, are there any little small tech-type related businesses that would be good plug-ins to your business? And are you actively looking at anything along those lines?
Ryan Hummer
Yes, John, great question. So the short answer is yes, right? Because I think some of the same attributes as far as the benefits of organic revenue growth for NCS would also apply on the M&A front. Again, with our business model, we've got really good operating leverage to organic revenue growth, but it also positions us, we operate in multiple product lines and in multiple geographies.
So it opens up a lot of potential good opportunities on the M&A front where we might be able to bring in a business that, as you said, may have a technology that started to have some traction in the US, but we can work with that management team to take it and grow it into Canada and other international markets.
So we are actively looking at M&A opportunities. What I'd say is we'll certainly look at ones where the the strategic fit and the operational logic of that would be very, very clear. and where we would expect to generate some synergies in the combination such that you pay a reasonable price for the business and have a view towards post synergies having it be a very attractive transaction.
John Daniel
Right. Okay. Got it. And then the final one for me is just on the R&D front. Is there anything that you guys are working on today that could come to market later this year, early next year that gives you some excitement. Just elaborate on what might be in the pipeline?
Ryan Hummer
So the answer is, obviously, yes, there's some stuff we're working on that's exciting to us. I'd say for most of that, we're either just finishing up some of the engineering work to where we're going to be building the prototypes and take it out. So I don't want to get too far ahead of myself. Those products need to make it through field trial. We need to see whether there are any adjustments we need to make.
But you go back to the prepared remarks that we made, and we are looking to open up some new market segments for NCS. There are technologies that are wholly developed internally by NCS, and we've got some areas where we're partnering with other companies to incorporate their technology inside NCS technology that could drive some growth for us, right, once if they find the home in the market that we think they will.
Operator
And I would like to hand the conference back over to Ryan Hummer, CEO, for closing remarks.
Ryan Hummer
All right. Thanks, Michelle. On behalf of our management team and our Board, we'd like to thank everyone on the call today, including our 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 effort that our people bring to their work. Our team continues to provide excellent service to our customers and is commercializing new products and services that will enable our customers to be more successful.
We are taking on demanding and technically challenging work, and we're delivering results. We appreciate everyone's interest in NCS Multistage, and we look forward to speaking again on our next quarterly earnings call. Thank you.
Operator
This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.
