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NCS Multistage Holdings, Inc. (NASDAQ:NCSM)
Q1 2019 Earnings Call
May. 07, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning ladies and gentlemen, and welcome to the first-quarter 2019 NCS Multistage earnings conference call. [Operator instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host Mr. Ryan Hummer, chief financial officer.

Ryan Hummer -- Chief Financial Officer

Thank you Isabella. And thank you for joining NCS Multistage's first-quarter 2019 conference call. Our call today will be led by Robert Nipper, our chief executive officer; and I will also provide comments. Before we begin our call today, we would like to caution listeners that some of the statements that will be made on this call could be forward-looking statements, and to the extent that our remarks today contain information other than historical information, please note that we are relying on the safe harbor protections afforded by federal law.

Such forward-looking statements may include comments regarding future financial results, and are subject to several known and unknown risks. I'd like to refer you to our press release issued last night along with other public filings made from time to time with the Securities and Exchange Commission that outline those risks. I also need to point out that in our earnings release and in today's conference call, we have discussed and will refer to adjusted EBITDA; adjusted EBITDA margin; adjusted EBITDA less share-based compensation; adjusted net income; adjusted net earnings per diluted share; free cash flow, all of which are non-GAAP measures of operating performance. We use these measures of operating performance because they allow us to compare our performance consistently over various periods, without regard to costs associated with our current capital structure and in a manner that we believe better reflects our operating performance.

Our press release from yesterday, which is posted on our website ncsmultistage.com, provides reconciliations of these non-GAAP financial measures to the nearest GAAP financial measure. With that said, I'll turn the call over to our chief executive officer, Robert Nipper.

Robert Nipper -- Chief Executive Officer

Thank you Ryan, and welcome to our investors, analysts and employees during our first-quarter 2019 earnings conference call. Today I'll review high-level first-quarter results and will discuss what we are seeing in our Canadian, U.S. and international operations, and I'll discuss how we are executing on some of our key strategic initiatives. After that, Ryan will discuss the quarterly results in more detail.

I'll then provide some closing remarks, highlighting some of our recent accomplishments. Total revenue in the first quarter was $52.9 million, 25% below the year-ago period and the 5% increase sequentially. Adjusted EBITDA in the first quarter of $7.4 million reflected a 14% adjusted EBITDA margin. Starting with our Canadian operations, our revenue of $25 million for the first quarter was 30% higher than the fourth quarter of 2018, coming in right at the high end of the guidance range provided in last quarter's call.

The 30% sequential revenue growth was achieved despite a rig count that increased by only 3% over the same time frame. While part of that performance was related to our customer mix, we believe that the primary driver of that out-performance relative to industry activity is due to the strength of our Canadian franchise, our people and our ability to execute on the initiatives that we outlined on the last quarter's call. A few highlights from the quarter's Canadian results included winning back business with customers that have trialed competing technologies; successful trials of our new lower-cost high pressure sliding sleeves; the highest revenue quarter in our history for our Canadian-based tracer diagnostic service line with a 14% year-over-year revenue improvement; the first sales of our Purple Seal frac plugs in Canada during the quarter and the first installation of our new Terrus water injection frac sleeves, and our new Qumulus Ultimate Recovery EOR system, which I'll discuss in more detail momentarily. I was recently in Calgary for the official unveiling of our new technology center when we hosted customers at the facility.

It was a fantastic event in which customers had the opportunity to tour the facility to see our current technology and certain R&D concepts we've been working on. We had dedicated rooms set up for our fracturing systems; well construction; tracer diagnostics; frac plugs; and enhanced hydrocarbon recovery products and services. Many customers were exposed to the full breadth of what NCS has to offer for the first time. Over the course of the day, we had more than 125 visitors from customer organizations through the Technology Center, and I had the opportunity to spend time with many of them.

I'm very excited about what our team in Canada is accomplishing and in the challenging market as well, and we're contributing to build on the unique franchise that we have in the Canadian market. Based on recent conversations with our customers, we continue to believe that their capital budgets for 2019 will be more heavily weighted to the second half of the year than in prior years. Current oil and condensate process, differentials in exchange rates, as well as historically low service cost have positioned our customers to benefit from higher cash flows than expected in initial budgets. While we believe that the primary application of excessive -- excess cash flow will be to reduce debt or return capital to shareholders, if current commodity prices and differentials persist, we believe that capital budgets could expand later in the year for the winter drilling season that extends into the first quarter of 2020.

Now turning to the U.S., our revenue for the first quarter of $25.3 million was 15% higher than an year-ago period, but was 8% lower sequentially. For the sixth consecutive quarter, we delivered sequential growth in product revenues, with 1% growth in the first quarter. The product sales growth was primarily driven by our well construction and composite plug products. We sold more airlock casing floatation systems in the U.S.

in the first quarter than in any quarter in our history, demonstrating robust demand for casing floatation systems. We have also had initial success in packaging additional wellbore construction products such as toe sleeves together with airlocks direct to E&P customers, reducing our lines on distributors. While we expect wellbore construction demand to remain strong, we may not reach the same activity levels in the second quarter that we saw in Q1. We had lower than expected activity in our fracturing systems business in the U.S.

during the first quarter. We expect fracturing systems activity to increase modestly in the second quarter before picking back up in the second half of the year. From a customer count standpoint, the number of U.S. customers utilizing our pinpoint fracturing systems over the last 12 months has remained stable at between 25 and 30.

U.S. services revenue declined by 28% sequentially, primarily reflecting a slow start to the year for completions activity, as well as a reduction in discretionary spend on technology which adversely impacted our tracer diagnostics business. Tracer diagnostics activity improved late in the first quarter and has continued to strengthen thus far in the second quarter. Pricing for our tracer diagnostics services business in the U.S.

has come under increased pressure as new competitors have entered into the market offering heavily discounted prices to gain traction. We expect to continue to retain a premium to these discounted offerings based upon our ability to offer particular tracers and the quality of our field service and laboratory services. We made a $10 million earnout payment to our joint venture partner in Repeat Precision during the first quarter and have no further earnout obligations. The $10 million was earned based on the business exceeding financial forecast that were established when we entered into the joint venture.

Repeat earned over $4 million in pre-tax income during the quarter, including contributions from third-party sales of composite plugs and Purple Seal Express systems, as well as machining work done for NCS sliding sleeve components. We believe that there's an opportunity for continued growth at Repeat Precision, especially for the Purple Seal Express system which integrates our Purple Seal composite plug with a disposable setting tool and an integrated, easy-to-use system that is factory-assembled. Just as customers see the efficiency and field safety benefits of integrated perf gun and charge systems for the perf part of plug and perf operations, our Purple Seal Express system brings similar efficiency and HST benefits to the plugs out of the equation. Over the last few quarters, an increase in percentage of our plug sales at Repeat Precision are of our Purple Seal Express system.

Our international revenue for the first quarter of $2.5 million was in line with the low end of our guidance range. As we moved through the quarter, we saw increased activity in Argentina and China, which we believe will continue into the second quarter before our work in Europe picks up later in the year. A few moments ago, I mentioned the successful field trials of our Terrus water injection frac sleeves and our Qumulus Ultimate Recovery system with customers in Canada. These new products represent a further extension of NCS' technology into production applications, and are exciting examples of the new technology being developed within NCS, leveraging the capabilities of our new Technology Center.

I'm excited about our participation in the secondary recovery and EOR space because it leverages several of our strengths as an organization, including our ability to design and deliver leading sleeve-based technology, our expertise in tracer diagnostics to assess water flood and EOR performance, and the detailed understanding of our customers' resources through our reservoir strategies team. In addition, our EOR offering can be utilized by customers across our North American and international geographies and both conventional and unconventional reservoirs. The products and systems we've developed aim to reduce some of the key risk operators may see as they begin to apply EOR using multistage horizontal wells and range from relatively simple applications to advanced systems that offer precise control. Our Terrus water injection frac sleeves utilize sliding sleeves for the initial completion and are designed to allow the customers to ship the sleeves after fracturing to configure that well as an injector in a manner that allows for more even injection profile along the lateral without the need for conventional tubing conveyed secondary completions to compartmentalize the wellbore.

The customer therefore can choose a frac sleeve that has a built-in water injection feature at a very reasonable cost. The Qumulus Ultimate Recovery system is expected to be our flagship offering in helping customers optimize long-term recovery and enhanced oil recovery applications. The system which is installed into a well when converted from a producer to an injector, or when beginning a miscible gas cycling operation allows customers to increase the efficiency of their EOR operations in horizontal wells. This is accomplished by facilitating the independent and interventionist control of several valves installed throughout the lateral with ceiling elements provided to compartmentalize the individual sections of the wellbore.

The individual valves can be controlled remotely in real time from virtually anywhere through a web-based system. By compartmentalizing the wellbore and controlling each compartment, the injector wells can be optimized to create more efficient drive patterns and mitigate premature injection fluid breakthrough through to the producing wells. The system is being engineered to facilitate injection and production. Therefore within an individual huff and puff well, the system can serve to ensure that the injected gas is evenly distributed along the lateral or focused into those intervals that the customer believes will yield more oil, reducing the requirements for the injected gas which is the largest operating expense for these operations.

These are just a couple of examples of why we see this technology as being broadly applicable to both legacy conventional and unconventional titled assets because there is a universal need to maximize the efficiency of EOR applications that utilize horizontal wells. We believe that as our customers continue to manage their business to grow production within cash flow, an important piece of that puzzle is mitigating the decline from the existing production base and that secondary and EOR applications, whether they be water flood, CO2 flood, miscible gas, injection or otherwise will be an increasingly important option for our customers to improve their capital efficiencies. We plan to complement the Terrus and Qumulus Ultimate Recovery systems with other innovative EOR technologies that will support our customers as they mitigate declines, maximize resource recovery and improve their financial returns. NCS continues to balance the investments like the investment we've made in developing the Terrus water injection frac sleeve and the Qumulus Ultimate Recovery system which are required to innovate and drive revenue growth with a capital-light business model that can produce free cash flow.

The investments that we've made in the past several years organically and through our joint venture and the Spectrum 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 plan to continue to improve our return on invested capital and create value for our shareholders. I'll now turn the call over to Ryan to discuss our financial results in more detail.

Ryan Hummer -- Chief Financial Officer

Thank you Robert. As reported in yesterday's earnings release, our first-quarter revenues were $52.9 million, 25% lower than the prior year's first quarter. We increased our U.S. revenue by 15% and our international revenue by 66% as compared to the last year's fourth quarter.

These increases were more than offset by a decrease in our Canadian revenue of 47% resulting from reduced market activity levels, pricing adjustments that we made in late 2018 and a weaker Canadian dollar as compared to the U.S. dollar. On a sequential basis, overall revenue in the first quarter was 5% higher than revenue in the fourth quarter of 2018 with a 30% sequential increase in Canadian revenue partially offset by sequential declines in the U.S. and international markets.

Gross profit defined as total revenue less total cost of sales excluding depreciation and amortization expense was $26.1 million in the first quarter or 49% of revenue. This compared to $37.1 million or 52% of revenue in the prior year's first quarter, with higher margins from product sales offset by lower margins on services revenue. The gross margin percentage was slightly above the midpoint of the guidance that we provided for the quarter. For a sequential comparison, gross profit was $24.2 million or 48% of revenue in the fourth quarter of 2018.

Selling, general and administrative costs increased to $23 million in the first quarter from $21 million in the prior year's first quarter and also increased from the fourth quarter of 2018's level up to $20.3 million. As a reminder, our reported SG&A includes share-based compensation, as well as certain nonrecurring expenses. The year-over-year increase was primarily driven by headcount additions; support services related to our new ERP system; increases to share-based compensation, as well as $0.6 million in bad debt expense in the quarter related to operations in Russia. Our first-quarter 2019 depreciation and amortization expense totaled $2.6 million.

Adjusted EBITDA for the first quarter was $7.4 million, as compared to $18.7 million in the prior year's first quarter. Adjusted EBITDA as a percentage of total revenue was 14% in the first quarter of 2019. We booked a valuation allowance of $9.8 million against our U.S. deferred tax asset during the quarter and absent that valuation allowance, we would have recognized an income tax benefit of $0.2 million.

We had net income attributable to non-controlling interests of $2.1 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. Our average basic share count for the quarter was 46 million and is currently approximately 46.7 million, reflecting the conversion of exchangeable shares during the quarter. Our adjusted loss per diluted share in the first quarter was $0.04, which compared to adjusted earnings per diluted share of $0.21 in the prior year's first quarter.

Turning now to cash flow items in the balance sheet. Cash flow from operations for the first quarter was negative $3 million, which included $3 million of the $10 million in contingent consideration paid to Repeat Precision. The remainder of that payment was booked in cash flow from financing activities. Our net capital expenditures for the first quarter were $2.8 million.

As a result our free cash flow for the quarter was negative $5.8 million, which was impacted by seasonal movements in working capital. At March 31, 2019, we had $12 million in cash and total debt of $26 million, which included $20 million drawn under our U.S. revolving credit facility. We also have up to $55 million in total availability under our revolving credit facilities, bringing our total potential liquidity at March 31 to approximately $67 million.

We amended and restated our revolving credit facility on May 1 on largely the same terms as the prior credit facility with a new maturity date of May 2023. I'll close with a few points of guidance for the second quarter. For the second quarter we currently expect revenue to be between $35 million to $40 million with U.S. revenue flat on a sequential basis; a seasonal sequential decline in Canadian revenue of between 55% and 65% from the first quarter of 2019; and international revenue of approximately $2 million to $2.5 million as offshore work slides a bit seasonally into the summer months.

Approaching the higher end of that range will primarily depend on favorable weather conditions in Canada related to spring breakup. We expect our gross margin to be between 46% and 50% as it has been in the last two quarters. We expect our reported SG&A inclusive of share-based compensation and nonrecurring items $2 million. The increase compared to the first quarter will primarily be driven by higher share-based compensation expense which is expected to be approximately $3.6 million for the second quarter.

We expect our second-quarter depreciation and amortization expense to be between $2.5 million and $3 million. We expect our net interest expense to be between $0.5 million and $0.6 million in the second quarter. And we expect our book effective tax rates for the remaining quarters of 2019 to be in the 10% to 15% range with a book tax expense benefit in periods of pre-tax losses. Additionally, we continue to expect that cash taxes will be minimal during the year.

We have reduced our expected capital expenditure range for 2019 by $1 million, with a new range of $8 million to $12 million. We will continue to review opportunities to reduce our capital spending, including leveraging our supply chain partners in place of internal capacity additions. I'll now hand it over to Robert for closing remarks.

Robert Nipper -- Chief Executive Officer

Thank you Ryan. Before we open up the call for Q&A, I'd like to highlight some of our accomplishments so far in 2019. In Canada we completed initial field trials for our new lower-cost sleeves and expect more work as we exit spring breakup. Our tracer diagnostics business continues to perform well and set an all-time quarterly revenue record in the first quarter.

We are fully moved into the new Technology Center and hosted a Customer Day there with over 125 customer attendees. Well construction sales continued to outperform overall market activity. We've had several repeat orders for our Purple Seal composite plugs that we first brought into the market in January, and we have successfully installed our first Terrus water injection frac sleeves and our first Qumulus Ultimate Recovery system, further expanding the addressable market for NCS technology. In the U.S., we just completed our sixth straight quarter of sequential increase in product revenue and we posted record quarterly sales of composite plugs, toe sleeves and airlocks in the first quarter.

Internationally, we delivered strong year-over-year revenue growth. We expanded our tracer diagnostics customer base in Argentina and are evaluating tracer diagnostics opportunities in multiple additional geographies and we shipped our first order to the Middle East. And I'll close with just a couple of brief comments. We continued to execute on the strategies that we've had in place for the past couple of years.

We have leadership positions in product lines and services in which we compete. We've expanded our product and service offering over time and have invested in our sales force and the international infrastructure to allow us to capitalize on our revenue opportunities across the globe. As a technology-driven company, we continue to innovate, bring new products and services to market that are highly valued by our customers, improving efficiency, reducing cost, enhancing recoveries and improving their financial returns. As a result, we believe we are well-positioned to deliver capital-efficient long-term organic growth through increased adoption of our innovative completions equipment and services.

Our capital-light business model provides us with the ability to generate free cash flow while maintaining a strong balance sheet. This provides us with the optionality to allocate capital to high-return investments and evaluate options for the return of capital to shareholders over time. And with that, we'd be happy to take your questions.

Questions & Answers:


Operator

[Operator instructions] Your first question comes from the line with George O'Leary with TPH & Company.

George O'Leary -- TPH and Company -- Analyst

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

Robert Nipper -- Chief Executive Officer

Yes. Generally we saw a pretty slow start to the year. Most of the products that we have in the U.S., the product lines, we have pretty low market shares in outside of just some of the well construction products. So we think about the completions around fracturing systems, so our sliding sleeves systems.

A lot of our customers in the U.S. are smaller independents who operate out of cash flow and we saw a later start to the year for those customers, which affected the sales for our frac sleeves. We expect that that activity -- based on what we've seen so far in the quarter, we expect that activity is going to continue to increase into the second quarter and into the latter half of the year. Now overall I wouldn't say that I believe that we're going to see a big change in activity or this big recovery in the second half of the year.

But when we look at some of the customers that we have in our customer base, we believe that those customers will have increased activity. But generally, I don't really see a lot of increase in activity. Our plug sales were very robust in the quarter. We continue to see higher performance in that product line.

But that's really driven primarily by market share gains because again we're a new entrant into that business, being fully commercialized only just over a year now. I think we're in our fifth quarter of commercialization or into our sixth quarter now. So that's mostly driven by market share gains. And then wellbore construction, that's driven primarily -- or the largest revenue generator is our airlock product line.

And we see what's driving that market or the increases in that market is primarily more adoption. So there's a lower percentage of the wells that are using some type of casing buoyancy system today. However, we do see the adoption rate of that type of technology is increasing and so that's helped to drive that performance as well. But again, generally in terms of market conditions, we see no real green shoots for a big recovery in the second half of the year.

We remain hopeful that could change, but right now we're not counting on that. But we're -- I think we're in pretty -- position because of the low market shares that we can continue to perform throughout the year. And just you didn't ask about that, but internationally, one of the things that we see is increasing activity. I think I mentioned earlier that we had some things slip in China and Argentina into the second quarter and the third quarter.

However, in the fourth quarter, or in the second half of the year, our European activity in the North Sea is increasing. And we expect to see something of the magnitude of 2.5 times to 3 times increase in the second half of the year versus the first half year internationally.

George O'Leary -- TPH and Company -- Analyst

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

Robert Nipper -- Chief Executive Officer

Right. Well, as you know, right now primarily our offshore effort is in the North Sea. We were awarded the contract last year there. It was a multiyear contract.

It's activity that's ramping over time. We expect to see the majority of the activity in 2020 and 2021. However, there is work ongoing now. The project that we're on started -- it started earlier.

We had shipments in last year for work that's being performed this year that went in the country. We'll have more shipments later in the year. But the project did get delayed a bit. There were some issues with fracturing fluid that the customer had to work through.

Those have been resolved so that the project is moving ahead again. When we think about opportunities outside of the North Sea, we're looking at potential activity in the Gulf of Mexico, but that's a longer term play. That's something that we haven't identified as a for-sure thing for us yet. However, some of the work that we're doing in Alaska now is similar work to what we would see in the Gulf of Mexico.

So we continue to evaluate that. But primarily we'll see this contract we have with Aker BP in the North Sea. But there is interest from a number of other parties in the North Sea for work that would be in the out years.

George O'Leary -- TPH and Company -- Analyst

Great. That's super helpful color. Sneak in one more if I could. I realize you guys had some payments around the Repeat Precision joint venture early this year and that will stay.

Could you just talk about the outlook for cash flow from operations and free cash flow as we progress forward, given that's also another hotbed topic with investors today?

Ryan Hummer -- Chief Financial Officer

Sure, George. This is Ryan. Well, I think we still feel comfortable in our ability to generate free cash flow on the year. Part of that has to do with the fact that our EBITDA and really our adjusted EBITDA translates pretty cleanly to cash in the year where we have very nominal interest expense and expect limited cash tax payments.

We had a seasonal working capital build in the first quarter, which is normal for us, given the Q1 activity in Canada. It's primarily receivables growth. We expect that will release on a net basis over the course of the rest of the year. Typically we'll see some working capital release in Q2.

It will build again a bit in Q3 and then release in Q4. I'd also say that we can expect a moderation in the level of capex as we move through the year. We had close to $3 million in the first quarter. We've got a range of $8 million to $12 million with I think some opportunities to move that lower.

So any of the gains of capital spending reduces during the year as well.

Operator

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

Ian MacPherson -- Simmons Energy -- Analyst

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

Robert Nipper -- Chief Executive Officer

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

Ian MacPherson -- Simmons Energy -- Analyst

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

Ryan Hummer -- Chief Financial Officer

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

Ian MacPherson -- Simmons Energy -- Analyst

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

Ryan Hummer -- Chief Financial Officer

So the Canadian market is a lot more advanced I'd say in EOR than the U.S. market just because we've been producing longer, as an industry we've been using water flood longer. And so there's a bit of history there, and customers have had success with EOR. I mean, there is a number of Canadian operators who talk about increasing ultimate recoveries by large percentages through water flooding activities.

And so we've watched that over time, we participated in that market with our multi-cycle sleeves. Our customers have been using multi-cycle sleeves in the past -- and for the past few years. They would run multi-cycle so that they'd have the option of being able to without compartmentalizing the wellbore with additional products and services and additional equipment in the well, they could use the multi-cycle sleeves to close off areas that they thought that needed to be injected into because there was breakthrough and they weren't effectively sweeping through those areas. The problem that we've seen with that though is that it's very difficult, number one, to determine which areas of the wellbore we need to stop injecting in and we need to increase injection at.

So the two products that I mentioned earlier, the more economical product, basically it's a sliding sleeve that gives the customer the ability to produce through it, frac through it, but also to be able to put it into a position where there's a metered flow that goes through the sleeve, so gas or water can be injected down the well and create backpressure across every sleeve that's open in this particular position, so that they can effectively control how the fluid goes through the entry points, but not necessarily control which entry point to go that fluid goes into without physically going into the wellbore with an intervention and completely closing sleeves or completely opening sleeves up. So the Qumulus system that I mentioned earlier, what that does is it gives the customer the ability to be able to understand temperature and pressure in every compartment that we place in the wellbore. So just as an example, let's say we put five compartments in a one-mile lateral, so there are five different places in the wellbore that injection can be controlled through. And so what customers are doing with the technology, so we have the one installation that has been installed for about a one and a half month to two months now.

And operationally, it was a total success, the system worked as designed. What the customer has is the ability to see pressure and temperature at each one of those compartments. So what they've done is they've closed all the compartments in the wellbore and then compartment by compartment they're going in and injecting into the well. And based on injection pressure, based on the amount of fluid that's going into the well and then they stop injecting and monitor the pressure and the temperature at that compartment, as well as the adjacent compartments.

And what they're able to determine is which compartments they should be injecting into and which ones they shouldn't inject into, and that changes over time as they inject into these wellbores, into the reservoirs, there's what we call short-circuits in the reservoir where there's a breakthrough of fluid, and this path is created or the water -- the injected water just moves through this path and it doesn't move any oil in front of it, it's moved all it's going to move. So that compartment needs to be closed, and we inject into other compartments and effectively change the injection regime. And so by having the ability to do this, the customer in real time sitting at their desk can manipulate these valves and understand how best to inject. And so what one of the things that we're doing is using artificial intelligence to learn from the injection at wells, as well as the production wells how different types of injection regimes affect the production.

And so over time we believe that we may be able to come up with an automated way that the wellbore or the computer can control the well in near real time. So how big is the opportunity? Well, there's a large percentage of our customers in Canada today that are using water flood for secondary recovery, and they're looking for ways to improve that because right now it's basically just inject down the wellbore, they can put some compartments in the well, but it's expensive to do, and there's not a lot of control, it's just one extra level. The products that we talked about are products that allow the customer to have a lot more control which they believe can help extend the life of the secondary recovery effort that they're doing. And as we look at what's going on in the U.S.

in the unconventionals and in the conventionals as well, we're seeing the same types of things that we saw a few years ago. So in the U.S., we have some customers that are running multi-cycle sleeves and second recovery so that they can do what the Canadian market was doing a few years ago, open and close the sleeves and redirect the injection effort. So we believe that over time that this will grow as customers as part of their being able to maintain production over time, part of that is going to be heavily dependent on how well they're able to execute on secondary recovery and tertiary recovery.

Operator

Your next question comes from the line of [Inaudible] with Raymond James.

Unknown speaker

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

Robert Nipper -- Chief Executive Officer

So it's both as you would imagine. We have a group in engineering now that that's -- all product performance and 100% of what they work on is just improvements to existing products, whether that be fracturing services or composite plugs, or whatever the product line is. One of the things that -- and we think about the balance of investing for longer term products versus got to have today kind of products. What we look at and think about in the near term development that we're doing is we're almost focused 100% around efficiency from a time-saving standpoint.

So working on developing products that help our customers save time and dollars on the location where at the end of that installation of whatever product or service it is that the customers can see, all right, this is how much money I save versus something with a longer term play. And we've been focused on that for quite some time. As we look down the road, we think it's important that we are investing in some longer-term products like the two EOR systems I discussed earlier. Those are products that we started developing almost two years ago.

And so now they're just now turning into revenue generators, and we've got two more of the Qumulus systems sold that are scheduled for installation. So we see that that is not going to be something that affects the revenue in 2019 significantly. But in the out years we see that as being very important that we have those types of products. But it's just the balance of the shorter term projects and the longer term projects.

As we think about SG&A spend and R&D spend, we just have to think about the balance of -- and the investment that we're making and how that return is coming back to us.

Unknown speaker

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

Robert Nipper -- Chief Executive Officer

Yes. I think we have to think about it as a Canadian rollout just because the Canadian market is so far ahead of the U.S. market in terms of secondary recovery in the unconventionals. We see areas of the Permian where there is starting to be a focus, so we think that that would probably be the first areas in the U.S.

that we move into. But it's certainly -- there's a few years gap between where the Canadian market is in terms of secondary recovery in the U.S. market.

Unknown speaker

OK. That's helpful.

J.B. Lowe -- Citi -- Analyst

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

Robert Nipper -- Chief Executive Officer

Yes. It's a cost savings primarily for the customer through efficiency and in real dollars. So the cost for the customer to use what we call the Purple Seal Express, which is the -- it's basically a bridge plug, the device that connects the bridge plug to the setting tool and a setting tool. That's assembled in the factory environment, it's not put together on location in the middle of the night by somebody who's just got -- is doing stage after stage after stage.

And so the cost for the customer to do that versus what they were doing which is a composite plug on a electric setting tool for wire line that's rerun over and over and redressed with some frequency, the cost is about the same, if not a little bit cheaper to be able to buy the Purple Seal Express and just toss away the setting tool and the adapter kit. But the real savings for customer is the efficiency and the reliability around the setting tool itself. So what our customers have been telling us, and the whole reason that this product is done so well in the market, is because there's a high percentage of time where there are failures with the setting tool because they were improperly redressed, they weren't redressed, or they weren't properly applied and run in the wellbore. And so one of the things that we can do is it's a brand new setting tool, it's dressed in the factory environment, so we know it's dressed properly.

So the failure rate has been almost nothing on these disposable setting tools. So that means real dollars for the customers. And so our customer -- the uptake for the customers is pretty high right now. These setting tools have been run for probably about one and a half years on a stand-alone basis where they would -- the setting tool is thrown away, but it's not delivered to the location with a plug installed on it.

So the customers have become accustomed to these disposable setting tools, but what we've been able to do with the Purple Seal Express is be able to have the setting tool already preassembled onto the plug and that whole unit delivered to the location. So that removes an operation on location, which is a serviceman having to install the plug on a setting tool. So it removes the cost of that serviceman to do that, and it also takes some of the risk out of having the proper maintenance and QA/QC done to the tool. So that's -- we believe that that is why that tool is being successful, and it's used, and that combination of a low percentage of wells today, but we see that continuing to grow on a quarter-to-quarter basis.

J.B. Lowe -- Citi -- Analyst

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

Robert Nipper -- Chief Executive Officer

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

So we're the only one doing that and it's done on a very small percentage of the well, so the opportunity is quite large.

J.B. Lowe -- Citi -- Analyst

All right. Excellent.

Robert Nipper -- Chief Executive Officer

Thank you.

Operator

[Operator instructions] I'm showing no further questions at this time. I would now like to turn the conference back to Robert Nipper, chief executive officer, for closing remarks.

Robert Nipper -- Chief Executive Officer

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

We appreciate everyone's interest in NCS Multistage and we look forward to talking again on our next quarterly earnings call in August.

Ryan Hummer -- Chief Financial Officer

Thank you, operator.

Operator

[Operator signoff]

Duration: 46 minutes

Call participants:

Ryan Hummer -- Chief Financial Officer

Robert Nipper -- Chief Executive Officer

George O'Leary -- TPH and Company -- Analyst

Ian MacPherson -- Simmons Energy -- Analyst

Unknown speaker

J.B. Lowe -- Citi -- Analyst

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