NCS Multistage Holdings, Inc.  (NASDAQ:NCSM)

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Q4 2018 Earnings Conference Call
March 08, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

See all our earnings call transcripts.

Prepared Remarks:

Operator

Good day, ladies and gentlemen and thank you for standing by. Welcome to the Fourth Quarter 2018 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 Mr. Ryan Hummer. Sir, please begin.

Ryan Hummer -- Chief Financial Officer

Thank you, Howard. And thank you for joining NCS Multistage's fourth quarter 2018 conference call. Our call today will be led by Robert Nipper, our Chief Executive Officer and I will also provide comments.

Before we begin the 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 (ph) 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 net income, adjusted net earnings per diluted share and free-cash flow which are non-GAAP measures of operating performance.

We use these measures of operating performance because they allow us to compare 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 ongoing operating performance. Our press release from yesterday, and the updated investor presentation posted yesterday, both of which are available on our website, ncsmultistage.com, provide reconciliations of these non-GAAP financial measures to the nearest GAAP financial measure. In addition during today's discussion we were referred to several slides in the presentation that we posted last night.

With that said, I'll turn the call over to our Chief Executive Officer, Robert Nipper.

Robert Nipper -- Chief Executive Officer and Director

Thank you, Ryan. And welcome to our investors, analysts and employees joining our fourth quarter 2018 earnings conference call. Today I'll review high level fourth quarter and full year results and we'll discuss what we're seeing in our Canadian, US and international operations. And I'll discuss how our business has evolved over the last two years, after which I'll turn it over to Ryan to discuss the quarterly results in a bit more detail. I'll also provide some closing remarks highlighting some of our recent accomplishments.

Total revenue in the fourth quarter was $50.2 million consistent with the year-ago period and a 20% decline sequentially. Full year revenue for 2018 of $227 million represented a 13% increase compared to 2017. Adjusted EBITDA in the fourth quarter of $7.8 million reflected a 15% adjusted EBITDA margin. Full year adjusted EBITDA in 2018 was $49.7 million reflecting a 21.9% margin and compares to $49.5 million in 2017. Starting with our Canadian operations, our revenue of $19.3 million for the fourth quarter was lower by 34% compared to the year-ago period and our revenue for the year of a $109.5 million was 14% lower than in 2017.

The announced E&P customer budgets for 2019 are materially lower than what was spent in 2018 and the effects can already be seen in the Canadian land rig count. Through the first nine weeks of 2019, the average rig count is approximately 33% lower than at the same time last year and is only 4% higher than the first nine weeks of the fourth quarter of 2018. Based on our conversations with our customers we believe that capital budgets for 2019 will be more heavily weighted to the second half of the year than in prior years due to high commodity price differentials when the initial budgets were set and the mandatory production curtailments in Alberta.

Last quarter we discussed pricing actions that we hadn't initiated in the Canadian market and certain initiatives that we have in place to try to gain market share and increase the penetration of our full suite of products and services in the Canadian market. I'm pleased to be able to say that while it's still early. These initiatives are showing tangible signs of success. Our Canadian sales and operations teams are highly motivated and are excited about the wins we're seeing in the field. Within fracturing systems our strong track record and operational excellence have enabled us to win back business from customers that have trialled competing technologies.

Within well construction, our new dedicated sales effort is resulting in higher sales of our airlock casing buoyancy system and liner hangers in the Canadian market. Our tracer diagnostics business continues to leverage the investment we made in the Calgary lab to win additional work and we just secured the largest multi-well pad tracing job in our history. And we introduced our Purple Seal frac plugs with a large operator in the Canadian market. The plugs performed very well during the trial and the customers were placed -- has placed repeat orders.

In addition to these initiatives, we have secured several field trials for our new lower cost sleeve design for high pressure markets. We're on track to have the sleeves and isolation assemblies for this family of products ready for commercialization in Q3 when we emerge from spring break up.

We currently expect our Canadian revenue for the first quarter to be approximately 20% to 30% higher than in the fourth quarter of 2018 reflecting outperformance relative to the rig count environment as a result of our initiatives. The wide range is due to the uncertainty of timing related to the beginning of spring breakup. Turning now to the US, our revenue for the fourth quarter of $27.5 million was 36% higher than in the year-ago period and 4% higher sequentially. Full year US revenue in 2018 of a $103.4 million was 62% higher than in 2017. For the fifth straight quarter, we delivered sequential growth in product revenues with 7% growth in the fourth quarter.

US services revenues declined 2% sequentially primarily reflecting the continued reduction in completions activity in the US during the second half of 2018 impacting our tracer diagnostics business. From a customer count standpoint the number of US customers utilizing our pinpoint fracturing systems over the last 12 months has remained stable at between 25 and 30 with the majority of our customer base and revenue coming from repeat customers. In the US, we continue to pursue market share growth across each of our product and service lines executing our targeted sales initiatives within fracturing systems leveraging the success of the airlock casing buoyancy system within well construction offering solutions within tracer diagnostics to help our customers evaluate and implement strategies to optimize well spacing and avoid frac heads and bringing performance and (inaudible) benefits to customers utilizing our proprietary Purple Seal Express which integrates a composite plug with a disposable setting tool.

We plan to continue to capitalize on these opportunities and expect that our US revenue in the first quarter will increase modestly from fourth quarter levels driven primarily by another quarterly increase in product sales. Our international revenue for the fourth quarter of $3.5 million was inline with our guidance for the quarter. We currently expect the first quarter of 2019 international revenue to be between approximately $2.5 million and $3 million reflecting a seasonal slowdown in certain geographies in the northern hemisphere partially offset by robust activity in Argentina.

I'd like to spend a few minutes reviewing NCS' business portfolio and market positions and how we are positioned to continue to leverage our portfolio of products and services to help our customers reduce their costs, improve well productivity and their return on capital. By supporting our customers in these objectives we will continue to be positioned to drive profitable growth, generate free cash flow and improve our return on capital. In this discussion I'll be referencing slides 4, 11 and 15 in the investor presentation that we uploaded last night.

Starting with slide 4, I want to remind everyone on the call that we are leaders in each of the product and service lines that we participate in. Within fracturing systems we are the worldwide leader in pinpoint completions having surpassed 10,000 wells completed during 2018. We're the second largest provider of chemical and radioactive tracer diagnostic services in North America and are successfully introducing that platform to enter international markets. Our well construction offering is anchored by our airlock casing buoyancy system. We have over 6,500 successful airlock installations and are leveraging our success with the airlock to access additional revenue opportunities for our liner hanger system, toe sleeves and other well construction products.

Repeat Precision is growing rapidly as we demonstrate the performance capabilities of our composite plug and as customers experience the operational and safety benefits of the Purple Seal Express system. As you can see on slide 11, we have grown and transformed the Company over the last two years. We've grown our fracturing systems and well construction business, invested in Repeat Precision and acquired Spectrum Tracer Services. Through these organic and inorganic actions, we have expanded our addressable market more than doubled our customer base and reduced our exposure to any single product or service.

In addition as slide 15 demonstrates we have balanced our geographic exposure as well with over 50% of our revenue in 2018 coming from the US and markets outside of North America. This broader exposure and more balanced geographic mix will let us better weather the industry-driven downturn that we expect in Canada this year positioning us for continued growth in the US and international markets while preserving the upside from an eventual recovery in the Canadian activity.

I'm very encouraged by the recent focus industry investors have placed on free cash flow and return on capital. NCS has always dropped to balance the investments required to innovate and drive above market top line growth with a capital-light business model that can produce significant free cash flow. While Ryan will spend a bit more time on this in a few minutes, I'd like to reiterate, how the investments that we've made over the past several years organically and through our joint venture Repeat Precision and the Spectrum Tracer Services acquisition provide us with multiple long term opportunities for capital efficient growth in each of the markets in which we operate. Through disciplined growth and free cash flow generation we strive to continue to improve our return on invested capital and create value for our shareholders earning returns that exceed our cost of capital.

Now I'll turn it -- call over to Ryan to discuss our financial results in more detail.

Ryan Hummer -- Chief Financial Officer

All right. Thank you, Robert. As reflected in yesterday's earnings release our fourth quarter revenues were $50.2 million unchanged compared to $50.2 million in the prior year's fourth quarter. We saw a significant increase in our US revenue of 36% and our international revenue of over 400% as compared to last year's fourth quarter. These were fully offset by a decrease in our Canadian revenue. On a sequential basis revenue in the fourth quarter was 20% lower than revenue in the third quarter with a sequential increase in the US revenue of 4% more than offset by sequential declines in Canada and international markets.

Gross profit defined as total revenue less total cost of sales excluding depreciation and amortization expense was $24.2 million in the fourth quarter or 48% of revenue compared to $25.6 million or 51% of revenue in the prior year's fourth quarter, with higher margins from product sales offset by lower margins on services revenue. This gross margin percentage was in line with the midpoint of the guidance we provided for the quarter and reflected the pricing actions that we initiated in the Canadian market during the quarter. For a sequential comparison gross profit was $33.9 million or 54% of revenue in the third quarter of 2018.

As we move into the first quarter of 2019 we continue to expect our gross margin to be between 46% and 50% before we see the benefit from the full commercialization of our lower cost family of sleeves in the second half of the year. Selling, general and administrative costs increased to $20.3 million in the fourth quarter from $18.1 million in the prior year's fourth quarter and increased from the third quarter's level of $19.4 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 headcount additions as well as increases to share based compensation. The increase relative to the third quarter was primarily driven by a smaller reduction to our bonus accrual in the fourth quarter as compared to the reduction that we made in the third quarter.

For the first quarter of 2019 we expect our reported SG&A inclusive of share based compensation and non-recurring items to be between $22 million and $23 million. The increase compared to the fourth quarter will primarily be driven for the positive accrual of bonuses under our 2019 plan as compared to the reversal in each of the third and fourth quarter of 2018 which we made as market conditions deteriorated. We also expect to incur higher costs related to ongoing litigation matters, higher share based compensation expense and support costs related to our recent ERP system implementation. NCS management is committed to ensuring that our costs are aligned with our current operating environment and is managing SG&A to ensure that we are getting the appropriate return from the investments we are making in our sales infrastructure and research and development efforts.

Our fourth quarter 2018 depreciation and amortization expense totaled $4.5 million. We expect our first quarter depreciation and amortization expense to be between $2.5 million and $3 million with higher depreciation expense offset by reduced amortization related to the impairment charges to intangible assets, which I'll discuss in more detail in a second. Adjusted EBITDA for the fourth quarter was $7.8 million as compared to $10.4 million in the prior year's fourth quarter. Adjusted EBITDA as a percentage of total revenue was 15% in the fourth quarter of 2018.

A couple of other items to note with respect to our income statement in the fourth quarter. First, as indicated in our pre-release we recorded a non-cash impairment charge totaling $227.5 million during December. This included over $70 million in impairments to intangible assets. As a result of the impairments, our annual amortization expense will be reduced by nearly $9 million to an estimated $4.5 million for the full year 2019.

We also recorded impairments to goodwill totaling over $150 million which will not impact the income statement going forward. Second, we recorded non-cash expense of $0.1 million in the quarter which reflected an increase to the liability that we have on our balance sheet related to the contingent earn-out provision associated with Repeat Precision. At the end of the year, we determined that Repeat Precision earned the full earn-out amount of $10 million with NCS making a $10 million contribution to the joint venture which was subsequently distributed to our partner in January of 2019. Third, our book effective tax rate for the quarter was a benefit of 11.5%. The calculation of our book tax rate included adjustments related to our impairments as well as US tax reform.

Fourth, we had net income attributable to non-controlling interest of $1.5 million in the quarter, reflecting positive net income at Repeat Precision. We expect to continue to have positive contributions from Repeat in 2019 and into the future, when considering, our net income and earnings per share in future periods, it's important to account for these contributions. For calibration, the net income attributable to non-controlling interest has been approximately 5.5% of our US revenue in the last two quarters. And we expected to maintain at that level or perhaps increase slightly with the continued success of the Purple Seal product line and the Purple Seal Express offering.

Finally, the remaining outstanding exchangeable shares were converted into common shares in February of 2019. This will increase our basic share count going forward. We expect our basic share count to average just under 46 million shares of common stock for the first quarter. These shares were included in diluted share count and periods of earnings, so it should not have an impact on our diluted share count. Our adjusted loss per diluted share for the fourth quarter was $0.06 which compared to an adjusted earnings per diluted share of $0.01 in the prior year's fourth quarter. For the full year, our 2018 adjusted earnings per share was $0.20 which was unchanged from $0.20 in 2017.

Turning now to cash flow items and the balance sheet. Cash flow from operations for the fourth quarter was $6.4 million and it was $14 million for the year. Our net capital expenditures for the fourth quarter were $5.8 million and were $15.4 million for the year. Our free cash flow for the year was negative $1.4 million which was impacted by both specific working capital items and large tax payments during 2018. We currently expect our capital expenditures for 2019 to be between $9 million and $13 million, a reduction of approximately 30% versus 2018 at the mid-point. Capital expenditures for 2019 include investments in manufacturing capacity at Repeat Precision to support the Purple Seal Express product line, investments in our tracer diagnostics business to improve field processes and the customer experience and limited investments in other parts of the business.

As with G&A expense, we will continue to review opportunities to reduce our capital spending including leveraging supply chain partners in lieu of increasing internal capacity when possible. At December 31st, 2018 we had $25.1 million in cash and total debt of $25.7 million which included $20 million drawn under our US revolving credit facility. We also have up to $55 million in total availability under our revolving credit facilities bringing our total potential liquidity at December 31st to approximately $80.1 million. We expect our net interest expense to be between $0.5 million and $0.6 million in the first quarter and we expect our book effective tax rate for 2019 to be in the 10% to 15% range.

As I mentioned briefly earlier we implemented a new ERP system at the beginning of January. As part of the conversion process, we significantly reduced our payables during the fourth quarter to support our vendors and facilitate the transition. In addition part of the ERP implementation process included keeping our books open a bit longer than usual to ensure we captured all invoices in the system. As a result, our actual G&A came in slightly higher than the unaudited range that was included in our pre-announcement from a few weeks ago.

In 2019, we are incurring expenses that had previously been capitalized to support prior to going live on the new system, we have capitalized expense. We're now incurring expenses to support the new system that we expect those costs to moderate over time as we support the system internally. While any system transition includes a multitude of challenges, I'm very proud of the broad base team at NCS that has worked diligently over the past year to prepare for the implementation and to support the businesses as we have made the transition. In time, we believe that the new ERP system will provide managers across the organization with better and more timely visibility into financial and operational metrics which will support decision making. We also expect that we will be able to better improve our working capital management and that the system will better facilitate future changes to our business.

I'd like to take the next few minutes to talk about NCS' ability to generate free cash flow in 2019 and I refer you to slide 17 of the investor presentation we posted last night. As we have not provided any full year EBITDA or adjusted EBITDA guidance, we'll simply bridge from an illustrative EBITDA to walk through sources and uses of cash to arrive at free cash flow. Several of these bridge items have a range and any summary figures will utilize the mid-points of the ranges provided. Starting from EBITDA, we add $12 million to $14 million in share-based compensation which we currently expect for the year.

From there, we deduct approximately $5 million in cash interest, cash taxes and other items which includes the litigation matters which we would categorize as non-recurring in nature. In our earnings release from last night, we note that the cash flows in the cash flow statement that we paid $22.4 million in cash taxes in 2018. This included the payment of taxes in both the US and Canada which were deferred from 2017 into 2018 as well as the tax payments made during the year in 2018. For 2019, we find ourselves in a position where we are in an overpaid situation, and therefore expect cash taxes to be minimal in 2019.

Year-end working capital for NCS typically runs at approximately 30% of full year revenue. This may increase slightly by the end of 2019 if market conditions are more favorable in the second half of the year than they were at the end of 2018 especially in Canada. As a result, we've shown a slight increase in net working capital here which we may be able to offset through normalization of accounts payable relative to the low levels at the end of 2018. I'll know that this part of the bridge, does not include the $10 million contingent consideration amount which I'll discuss in a minute which is included as a current liability at December 31st, 2018.

The next bar represents net CapEx which we discussed earlier. The sum of all of these items would result in a free cash flow before the repeat earn-out payment of EBITDA less approximately $4 million. Incorporating the earn-out payment that we made in January results in free cash flow which would be calculated as EBITDA less approximately $14 million at the mid-point. I'll also note that over the last four months of 2018, Repeat Precision made cash distributions of $4.6 million of which $2.3 million went to our JV partner and are reflected in cash flow from financing activities.

Following the earn-out payment, the joint venture will direct its cash flow to funding near-term capital expenditures and also reducing some modest debt balances at Repeat Precision prior to resuming distributions. We do expect that Repeat Precision will be able to resume distributions later in 2019.

I'll hand it over to Robert now for closing remarks.

Robert Nipper -- Chief Executive Officer and Director

Thank you, Ryan. Before we open the call up for Q&A I'd like to highlight a couple of our accomplishments during 2018 and early 2019. First, in Canada, we have field trials under way for our new lower cost sleeves. We continue to benefit from the opening of our Calgary tracer diagnostics lab. We originally moved our engineering team into a new tech center where we have extensive testing capabilities. We increased airlock sales in 2018 by over 80% as compared to 2017. We made the first sale of Purple Seal composite plugs to a Canadian customer in January and we recently completed two wells which set records for NCS for our longest lateral length completed to-date at over 2 miles each with each well completed in a single tool run.

In the US, total revenue increased by 62%, as compared to 2017. We just completed our fifth straight quarter of sequential increase in product revenue and we posted record sales of composite plugs and airlocks with airlock sales up by more than 40% as compared to 2017. Internationally, we experienced year-over-year revenue growth of 43%. We worked in the North Sea for the first time and have established a local entity to support our work in the region. We introduced our tracer diagnostic services into Argentina and expect to expand into other countries in 2019. And we are working with a dedicated sales representative in the Middle East and expect our first work in the region in 2019, across multiple product and service lines.

From a corporate perspective, we recently implemented our new ERP system, which we believe will deliver operational and financial benefits over time and we've taken steps to ensure that we have a focused and nimble sales organization that is incentivized to maximize the market penetration of all of our products and services leveraging our competitive strengths in each geography.

Now I'll close with just a couple of brief comments. We are committed to the strategies that we've had in place for the past several years and we believe that our prospects are as strong as ever. We have leadership positions in the product lines and services now in which we compete. We've expanded our product and service offering over time and have invested in our sales force and international infrastructure to allow us to capitalize on our revenue opportunities across the globe.

As a technology-driven Company we continue to innovate to 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 that we're well-positioned to deliver capital efficient long-term organic growth through increased adoption of our innovative completions and equipment services.

Our capital-light business model provides us with the ability to generate free cash flow while maintaining a very 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.

Questions and Answers:

Operator

(Operator Instructions) Our first question or comment comes from the line of George O'Leary from TPH & Co. Your line is open.

George O'Leary -- Tudor, Pickering, Holt & Co. -- Analyst

Good morning, guys.

Robert Nipper -- Chief Executive Officer and Director

Good morning, George.

George O'Leary -- Tudor, Pickering, Holt & Co. -- Analyst

The international growth story was really strong last year and I realized that a small piece of the portfolio today. It is a place where you guys are continuing to allocate capital just curious if you think about the 2019 as a whole kind of frame the revenue opportunity in that international market and maybe last year there was some lumpiness, so also maybe, any help on the trajectory of that revenue outlook in the international markets and what new markets you may be targeting there or if it's more kind of growth in legacy markets?

Robert Nipper -- Chief Executive Officer and Director

So we're in a number of markets now as you know. We've generated revenue in Russia, China, Argentina, the UK, and so our strategy going forward is really expanding in those markets that we're in. We've recently introduced tracers into Argentina we're in the process of introducing tracers into other countries as well as some of the other products and services that we're pushing out. I would say that international revenue will probably continue to be lumpy as contracts come in and large orders are placed. Typically, we see large orders at a time in the international markets than we do in the North American markets, so I think it will continue to be lumpy, but it will continue to grow.

George O'Leary -- Tudor, Pickering, Holt & Co. -- Analyst

Right. In Canada, just trying to think through how this all -- I realized we were off to a softer start than usual, typically thought about for you guys just based on the historical financials Q2 being about 40% of Q1 from a revenue standpoint but given all the moving pieces, I realize it may be early, but even if just directionally do you expect a drop off quarter-over-quarter in Canada to be more pronounced than usual, less pronounced, because you're starting off lower based in Q1, any framing there would be super helpful?

Robert Nipper -- Chief Executive Officer and Director

Well, as we said earlier -- as I said earlier, we expect the second quarter to be up and but what we do believe is that the second half of the year is, that's when the majority of the activity is going to be coming in for us. It's -- there's still uncertainty in the market, but the customer budgets are pretty much established now and they definitely are skewed toward the back half of the year.

George O'Leary -- Tudor, Pickering, Holt & Co. -- Analyst

Okay. Great. And then I'll sneak in one more if I can. You guys spend a lot of time on the R&D front in helping customers solve various problems. The airlock business had very nice growth year-over-year, last year of some of the newer products that you guys have rolled out and commercialized in the last six to 12 months of Purple Seal working on their disposable setting toward, et cetera. What are you most excited about growing outside of the core kind of multistage frac sleeve product?

Robert Nipper -- Chief Executive Officer and Director

I think, the thing I'm most excited about is the opportunity that we have right now to take advantage of the channel that we've created into the market. NCS has great brand recognition. We have been primarily focused from a sales standpoint on pinpoint stimulation up until last year and now we've been able to take some of the other products and services that we've developed over time and acquired over time, and we push them through the same sales channels. And while this is fairly fresh for us, I think we've fully implemented Canada with four product lines with the full breadth of the product lines just as in the last quarter what we're seeing is an enthusiasm that I haven't seen in quite some time and the sales force not just in Canada but in the US as well, as a result or has more opportunities to touch more customers.

And what this has done is -- it's also doubled the number of customers that we have over the last couple of years. So, this -- taking advantage of the sales channel that we have for all these products, I mean the Purple Seal Express has more than exceeded our expectations. The Purple Seal plug itself has as well our tracer diagnostics business, we're very enthused about what we've seen, being able to push that out internationally. And then our well construction products and services as we continue to expand that, get more products in the offering there, as well as push in that outdoor, our sales channels, we're seeing uptake on that, that's exceeding our expectations. So we're pretty excited.

George O'Leary -- Tudor, Pickering, Holt & Co. -- Analyst

Great. Really appreciate the color, Robert.

Robert Nipper -- Chief Executive Officer and Director

Thank you, George.

Operator

Thank you. Our next question or comment comes from the line of Sean Meakim from J.P. Morgan. Your line is open.

Sean Meakim -- J.P. Morgan -- Analyst

Thank you. Hi, good morning.

Robert Nipper -- Chief Executive Officer and Director

Good morning, Sean.

Sean Meakim -- J.P. Morgan -- Analyst

So, Robert when will you start off with some strong product volumes in the fourth quarter, just curious if you could give us a little more detail of the incremental mix to what extent was that driven more by sleeves versus plugs versus the airlocks? And I'm trying to figure out how we can translate that into higher experiencing that mix in the first quarter, both in the Canada -- both in Canada and the US?

Robert Nipper -- Chief Executive Officer and Director

Yeah. So, in Canada as I've mentioned earlier, we're still really early days we've just recently pushed out composite plugs into that market. So the financial impact was negligible basically in Canada. The airlocks, we did have a significant growth year-over-year in Canada, but we've also just recently introduced liner hangers in the Canada, so we haven't really seen the full impact from those new products yet in Canada. In the US, the growth came basically across the Board from all of our salable products. We had -- we were down a bit in services attributable to activity declines and completions which affected our tracer diagnostics business, but as far as our salable products go, we saw gains in virtually across the Board there.

Sean Meakim -- J.P. Morgan -- Analyst

Okay. That makes sense. I appreciate that. And so then -- on services, overall spending is going to be down about the US and Canada backed products or services that grow faster or the business overall in '19 and given the increased focus on solving parent child issues in the US, can you maybe give us a little more granularity on how that's impacting tracer opportunities?

Robert Nipper -- Chief Executive Officer and Director

Sure. In fact, that impacts more than just tracer opportunities for us, a number of the customers that are using our fracturing services for pinpoint now are using them specifically to address that issue. So we see that as a potential tailwind for fracturing services, this whole issue around the parent child relationships and the frac hits. But it also -- we've seen that it has the potential to increase the job size for our customers when we're doing diagnostic tracer services. So what we see is, full patch studies coming online that are significantly more than just a standard average for a ticket on the diagnostic price for services. So that's a pretty big tailwind for us as well. So what we believe is that -- with that issue highlighted the way it is today that even with down activity that we can continue to grow through market share gains and just market penetration in the tracer product lines as well as our pinpoint.

Sean Meakim -- J.P. Morgan -- Analyst

Got it. And so just to come back, do you have a sense of which area you'd expect to grow faster in '19 products versus services, just on a growth basis -- percentage basis?

Robert Nipper -- Chief Executive Officer and Director

Yeah. I think that products probably will grow faster just because we have more new products coming in than services coming in. So, I would expect that would grow faster.

Sean Meakim -- J.P. Morgan -- Analyst

Right. Okay. Great. Thank you.

Robert Nipper -- Chief Executive Officer and Director

Thanks.

Operator

Thank you. Our next question or comment comes from the line of Ian Macpherson from Simmons. Your line is open.

Ian Macpherson -- Simmons Energy -- Analyst

Thanks. Good morning, Robert and Ryan.

Robert Nipper -- Chief Executive Officer and Director

Hi, Ian.

Ryan Hummer -- Chief Financial Officer

Good morning, Ian.

Ian Macpherson -- Simmons Energy -- Analyst

Still making lemonade out there in this market. You spoke specifically to the back half weighting of Canadian spending and obviously in the US, you're much more tethered to a smaller customer group that doesn't necessarily always reflect the bigger market, a few dozen important customers. But based on your most meaningful customers, how would you shape the outlook for spending and activity levels in the Permian and I guess US more broadly, but I think specifically -- for you guys. And really just, I'm trying to feel out what the upside could be for later quarters throughout the year, because there's -- we've definitely got mixed narratives from some of your service peers with regard to their expectations for how the subsequent quarters unfold after the softer Q1?

Robert Nipper -- Chief Executive Officer and Director

Right. Well, we experienced growth in Q1. We expect to experience growth in Q1. We think would be probably about in the first quarter somewhere around where we saw Q4 maybe slightly up a bit, but we expect that again it'll be a little bit year in weighted. So coming into the second quarter and beyond, we think that at least from our customer base, we see increasing activity going through later in the year.

Ian Macpherson -- Simmons Energy -- Analyst

Okay. That's pretty non-committal, but I -- well, with regard to your low cost sleeves that you're rolling out in Canada I assume that is basically, your marking that on kind of a margin neutral basis given the needs to deliver lower cost solutions to the customers in this environment. Is that the right way to think about it or on a unit basis would these actually be accretive to your margin that you're showing in Canada today?

Robert Nipper -- Chief Executive Officer and Director

Yeah. So, the way to think about that is that, in the fourth quarter of last year, we made pricing adjustments to reflect what the pricing will be on the lower cost sleeve. So we took a hit on gross margins there. So when we get the sleeve rolled out and basically after a breakup in the third quarter we expect that to be slightly accretive to gross margins.

Ian Macpherson -- Simmons Energy -- Analyst

Okay, good. Last one if I can please, Ryan, my initial take was to take your slide 17, your illustrative bar chart on cash flows, more literally with regard to deriving what the starting EBITDA number was and I know that wasn't your intent of the slide. But can you just maybe speak to the scaling of those bars and how literal or non-literal we should interpret with them for in terms of starting EBITDA?

Ryan Hummer -- Chief Financial Officer

Sure, Ian. I think as we can tell on this call, we're really speaking as far as outlook and guidance goes really just the first quarter and not putting anything out there as far as any sort of Company-endorsed full year EBITDA. I think, if you -- several of the analysts have have done kind of the load test and come to the conclusion that it looks like the scaling is relatively similar to where the street would have been prior to this call. And I think that's a fair way to look at it.

The intent though is really to understand where to where to bridge from a starting EBITDA standpoint based on factors that are under our control. And as we look a year from now when we look back at this slide we'll be perfect, no, probably not, but there are certain things that we can manage within this, if the business develops in a more positive manner and we get some EBITDA growth and some revenue growth above and beyond maybe where the street consensus is, there might be more of an investment in working capital but you'd have a higher even starting point there from the bridge. If market conditions deteriorate what do we have in our control. Part of that would be better working capital performance and part of it would be to adjust our CapEx and minimize that so that we can still deliver cash flow.

So some of the items are fairly fixed. There are items that are in our control and we expect to be able to deliver relatively strong free cash flow throughout 2019 and deliver that whether we're a little bit above where the street is or whether we're a little bit below where the street is.

Ian Macpherson -- Simmons Energy -- Analyst

That's a good helpful answer. Thank you, both. I'll turn it over.

Robert Nipper -- Chief Executive Officer and Director

Okay. Thank you.

Operator

Thank you. (Operator Instructions) Our next question or comment comes from the line of Kurt Hallead from RBC Capital Markets. Your line is open.

Kurt Hallead -- RBC Capital Markets -- Analyst

Good morning. Hello.

Robert Nipper -- Chief Executive Officer and Director

Good morning, Kurt.

Ryan Hummer -- Chief Financial Officer

Yeah. Good morning.

Kurt Hallead -- RBC Capital Markets -- Analyst

I want to make sure I don't a lifeline here. Okay. Thanks. Appreciate the color provided so far, Robert, maybe wanted to see if can try some additional inputs or color around the market penetration, I know you gave your customer base, you know been using the pinpoint stimulation and majority of revenue coming from repeat customers. Actually looks like a pretty good performance given the decline in overall frac activity that occurred going into the year end. What's the buzz in the field with the pinpoint stimulation and can you talk about, give us an update on the value proposition that you've been providing to the customer base?

Robert Nipper -- Chief Executive Officer and Director

Yeah. So, the value proposition hasn't changed. It's still, you know, customers are users for a number of different reasons. There are some customers that are users, because they see better results in terms of production. Other customers as I mentioned earlier frac hits are a big issue right now, with our customers. And as an industry we're still trying to figure out why frac hits affect wells differently in different areas. And one of the things that customers are using is pinpoint, because they can better predict the performance of the actual fracture itself using pinpoint. And so we have customers that they're using that just to be able to control the frac kit situations in multiple basins. And there's cost savings in a number of areas that the customers are taking advantage of using pinpoint. So it's the same as it's been for the last year. There's a number of reasons that customers are using this. We can continue to push out into new basins, different areas and find other ways that customers can save money or get better work performance using pinpoint.

Kurt Hallead -- RBC Capital Markets -- Analyst

Okay. And then in the context of selling a value proposition, you know, can you speak to whether there's been any kind of a pricing pressures, given the fact that you know pricing on frac has come down vis-a-vis, the service you're trying to sell.

Robert Nipper -- Chief Executive Officer and Director

Sure. There's certainly market conditions that have prompted pricing pressure. We've been able to hold our pricing fairly stable. We talked last quarter about adjustments that we had to make specifically in the Canadian market just because of the conditions were such that our customers were really pushing hard on price and that was part of the reason that we accelerated the development of our pressure sleeve, the lower cost, our pressure sleeve. So, to try to be able to reclaim some of the margin that we had lost -- due to the pricing pressures. But so far in the US we've been able to hold fairly tight on pricing, but it's a more competitive market that's for sure.

Kurt Hallead -- RBC Capital Markets -- Analyst

Okay. Appreciate that. And then maybe, Ryan on your end, I think you gave the amortization guidance for the full year at about $4.5 million. When you think about the depreciation dynamic, is it safe to effectively take your first quarter run rate on depreciation and then kind of hold that constant through the year.

Ryan Hummer -- Chief Financial Officer

Hold it, maybe increase a little bit from there. But it'd be modest as we as we bring some of the capital that we're bringing in for Repeat for the Purple Seal Express manufacturing in the first quarter. So, if some of the equipment from the 2019 capital plan goes in service, you'll see a little bit of an uptick on DNA as we move through the year, really the depreciation side, sorry.

Kurt Hallead -- RBC Capital Markets -- Analyst

Okay. And with respect to the SG&A in your slide deck and commentary you guys suggested there's a slight increase on SG&A. However you know if you annualize the first quarter SG&A, it's going to get a pretty substantial increase. So I guess you're assuming that SG&A will come down from the first quarter levels as you get through second, third and fourth quarter.

Robert Nipper -- Chief Executive Officer and Director

Well, really Kurt, the way that we're we're looking at that is within the G&A line in both the third and fourth quarter of 2018, as I've mentioned briefly on the call we had the reversal of bonus accruals that we had been making earlier in the year. So, kind of an apples to apples comparison. Unfortunately kind of have to go back to second quarter of 2018 when we're about $22 million in G&A and the mid-point of our guide is $22.5 million. So we've been holding the line on G&A as much as possible, there have just been some things that have come in and out of the number over the course of the year.

Kurt Hallead -- RBC Capital Markets -- Analyst

Yeah. On a full year basis though you are going to be able to keep SG&A under $90 million for the full year. I guess is what I'm trying to kind of get at.

Robert Nipper -- Chief Executive Officer and Director

Yeah. We're certainly managing, you have you have the Q1 levels and we're certainly managing G&A based upon what we see in the business.

Kurt Hallead -- RBC Capital Markets -- Analyst

Okay. All right. Thank you.

Robert Nipper -- Chief Executive Officer and Director

Thanks, Kurt.

Operator

Thank you. Our next question or comment comes from the line of Marshall Adkins from Raymond James. Your line is open.

Marshall Adkins -- Raymond James -- Analyst

Good morning, gentlemen.

Robert Nipper -- Chief Executive Officer and Director

Good morning.

Marshall Adkins -- Raymond James -- Analyst

First of all I want to thank you for the Q1 guidance, that's certainly helpful. And Ryan, the bridge on cash flow is also helpful. I did have my ruler, protractor, compass (inaudible) and that surely helped me. So, as you probably know, I'm not really that good at math. But I was just triangulating some of the guidance here that you had and I was thinking, in Canada, you added up 20% to 30% on revenue higher in Q1. When I -- and the rig count of course is down 33% year-over-year so far. The guidance suggests more like a 50% year-over-year reduction from where you were in Q1 of last year. So I'm just trying to bridge the difference there, between say the $24 million midpoint of your guidance versus the rig count only being down 33%. Is there -- are we seeing year-over-year price in duration share, mix or did I just have crappy math?

Robert Nipper -- Chief Executive Officer and Director

No, if you're -- you're looking at it in a relatively fair way. So certainly the activity being down 33% so far this quarter on a year-over-year basis. We did initiate the pricing initiatives in the fourth quarter of last year. So that would not have been in first quarter 2018 numbers. So that impact is showing up in the first quarter of 2019. And the other component there is FX. Yeah. So the average FX rate was closer to 0.79, I believe maybe 0.8 in the first quarter of 2018 and it's closer to 0.75 this year. So those are the components there that you can kind of get to that 50% year-over-year from a US dollar reported basis.

We're encouraged by those if you look at the rig count in the first quarter being up only about 4% versus what it was in the fourth quarter when we had already initiated the price initiatives. We're guiding to plus 20%, 30% revenue on a rig count that's only modestly up for the fourth quarter. So that speaks to a bit about what Robert was saying about how enthusiastic we are about the recent performance in the Canadian business and success in pulling through additional product and service lines to our established customer base in that market.

Marshall Adkins -- Raymond James -- Analyst

Right. Well that's all I was trying to get to, because of your commentary seemed pretty positive and the math, that you say you explained that's -- that makes sense. You have a lot of confidence in the back half. I guess a lot of it is the share gains you're seeing in those new products. But I'm thinking more just broader the Canadian market. What gives you confidence in that back half -- a lot of us don't tend to look at that as closely as obviously you do. So I'm just give us your thoughts there if you could?

Robert Nipper -- Chief Executive Officer and Director

Yeah. It's really it's around what our customers are saying that they're going to be doing in terms of activity. You know, we've seen what feels like a bottom in the Canadian market. I mean the macro outlook there is not good, but it seems that we're pretty close to the bottom now and our customers are stabilized a bit, they're starting to understand, the curtailments a bit more. And it's really just driven by what the customers tell us that they're going to be doing, and we actually believe it.

Marshall Adkins -- Raymond James -- Analyst

Perfect one more from me. You know, there's a lot more talk about dissolvables and using those in the plugging in perfect process. Are you sensing or seeing any impact on your composite plug from the push toward more dissolvables or how should we think about the competitive landscape between those different products.

Robert Nipper -- Chief Executive Officer and Director

Right. So there's a lot of buzz around dissolvables, right now in the market. It hasn't affected our composite business. I mean, we continue to -- on a quarter-to-quarter basis significantly grow that product line. I think one of the ways to think about it Marshall is, our customers tell us that drilling out our composite plug takes four to seven minutes. Most of the dissolvables that are being run today, there's some sort of clean out drip that's occurring anyway. So it's not incrementally that much more expensive. But we do believe that going forward that dissolvables will have a place in this market. I'm not as enthusiastic about the timeline as some other folks are, but I do think that there will be a -- there will be once we develop the technology to a place where it's more predictable around this solution and we have the ability to work in these lower temp environments.

I think that's where dissolvables will play a role. So that's why we've invested in developing our dissolvables products not just composite plugs but our dissolvables plugs, but other dissolvable products and we expect to have that commercialized this year. So it's not the metallic type plugs, it's a poly metric type formulation.

It's something that we've seen the early results are just astounding to us. I mean, one of the challenges that we have is trying to slow down the dissolution right because they dissolve so well. So it's something that we're really excited about. You know we're hedging into that market so that if we are able to develop that type of technology that is reliable and that becomes the new norm. And I think it could -- you know over you know five plus years we could see a significant market share with dissolvable plugs. So we fully intend to participate in that.

Marshall Adkins -- Raymond James -- Analyst

It sounds like you're attacking from both end, so you're covered there right.

Robert Nipper -- Chief Executive Officer and Director

I think so. Yeah.

Marshall Adkins -- Raymond James -- Analyst

Thank you, all for the comments. Thanks.

Robert Nipper -- Chief Executive Officer and Director

Thank you, Marshall.

Operator

Thank you. (Operator Instructions) I'm showing no additional audio questions in the queue at this time, I'd like to turn the conference back over to Mr. Nipper for any closing remarks.

Robert Nipper -- Chief Executive Officer and Director

Thank you, sir. So on behalf of the entire management team and our Board I'd like to thank everyone that joined us on the call today including our shareholders, our employees and the research analysts who cover NCS. I'd like to personally thank our 400 plus employees around the globe whose efforts allow us to achieve amazing results. 2018 marked a second consecutive exceptional year for NCS from a safety perspective, with nearly 1 million hours worked in 2018. We've worked incident free in Canada for each of the last several years and we've achieved nearly one and a half years without a single incident in our US manufacturing operation.

The work that we do is hard and can be dangerous at times. And our top priority is to make sure that each of our people return home safe at each time. Our ability to work safe gives us our license to operate for our customers and we have a companywide behavioral based safety culture that is one of the cornerstones of our promise to our employees, our customers and our other stakeholders. This is just one example of why I continue to believe that we have the best team in the industry and we're committed to preserving the culture of employee development and innovation that has supported us from the beginning. We appreciate everyone is interested in NCS Multistage and we look forward to talking again on our next quarterly call in May. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone have a wonderful day.

Duration: 52 minutes

Call participants:

Ryan Hummer -- Chief Financial Officer

Robert Nipper -- Chief Executive Officer and Director

George O'Leary -- Tudor, Pickering, Holt & Co. -- Analyst

Sean Meakim -- J.P. Morgan -- Analyst

Ian Macpherson -- Simmons Energy -- Analyst

Kurt Hallead -- RBC Capital Markets -- Analyst

Marshall Adkins -- Raymond James -- Analyst

More NCSM analysis

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