Good day, and welcome to your Q2 2022 Nine Energy Service Earnings Call. [Operator Instructions] At this time, it is my pleasure to turn the floor over to Heather Schmidt, Vice President, Strategic Development, Investor Relations and Marketing. The floor is yours.

Thank you. Good morning, everyone, and welcome to the Nine Energy Service earnings conference call to discuss our results for the second quarter of 2022. With me today are Ann Fox, President and Chief Executive Officer; and Guy Sirkes, Chief Financial Officer. We appreciate your participation. Some of our comments today may include forward-looking statements reflecting Nine's views about future events. Forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to review our earnings release and the risk factors discussed in our filings with the SEC. We undertake no obligation to revise or update publicly any forward-looking statements for any reason. Our comments today also include non-GAAP financial measures. Additional details and a reconciliation to the most directly comparable GAAP financial measures are also included in our second quarter press release and can be found in the Investor Relations section of our website. I will now turn the call over to Ann.

Thank you, Heather. Good morning, everyone. Thank you for joining us today to discuss our second quarter results for 2022. We had another very strong growth quarter with revenue of $142.3 million, which fell above our original guidance of $130 million to $140 million and reflects a 22% increase quarter-over-quarter. We generated adjusted EBITDA of $18.9 million, reflecting a 55% increase quarter-over-quarter and an adjusted EBITDA margin of 13%. Incremental adjusted EBITDA margins were approximately 26%. Overall, the market continues to improve from both an activity and pricing perspective. We estimate the average frac crew count in Q2 was approximately 250, an increase of approximately 8% quarter-over-quarter. EIA reported completions increased by approximately 3% and new wells drilled increased by approximately 15%. As I mentioned, our revenue increased by approximately 22% quarter-over-quarter versus the average rig count, which increased by approximately 13%. In the majority of our service lines, we have seen both activity and pricing improvements. We have and continue to implement net price increases, specifically in our cementing and coiled tubing service lines enabling us to drive strong incremental margins again this quarter. There continues to be a shortage of qualified labor and equipment in the industry, which has been the main catalyst for price increases for Nine and many of our peers. This will only be exacerbated by any incremental activity added throughout the remainder of 2022 and into 2023. And with what we know today, we anticipate price increases will continue. Labor and supply chain bottlenecks remain an issue, and the unemployment rate remains around 3.6%. Because of this, there is still very little new labor coming to the energy phase. Our cementing service line had another very strong quarter with revenue increasing by approximately 22% versus Q1. We have talked about the favorable competitive landscape in this service line and strong technical and capital barriers to entry. Because of this, we have seen the strongest pricing leverage in this service line thus far in 2022, coupled with increases in jobs completed across all of the basins in which we operate. Additionally, supply chain issues around the availability of raw cement have constrained some competitors, providing market share and pricing opportunities for Nine. We believe there is additional earnings power within the service line as we continue to move price and expand margins. Our completion tool division increased revenue by approximately 15% quarter-over-quarter, driven mostly by a 33% increase in Stinger dissolvable plugs sold. Our dissolvable technology continues to perform well, and we continue to believe in the adoption of the technology moving forward. Wireline revenue in the second quarter increased by approximately 23%, driven mostly by market share gains in the Permian and price increases. We are starting to see some traction in wireline pricing, but this continues to be our most challenging service line for generating net price increases. Coiled tubing revenue increased by approximately 28%, driven mostly by a combination of increased utilization and price increases. Recently, we began running coil operations in the Eagle Ford out of our cementing facility, which has helped propel revenue and earnings in the service line. Company revenue for the quarter was $142.3 million. Net loss was negative $1 million, and adjusted EBITDA was $18.9 million. Basic earnings per share was negative $0.03. ROIC for the quarter was 11.4%. I would now like to turn the call over to Guy to walk through detailed financial information.

Thank you, Ann. As of June 30, 2022, Nine's cash and cash equivalents were $22.4 million with $52.1 million of availability under the revolving ABL credit facility, resulting in a total liquidity position of $74.5 million as of June 30, 2022. On June 30, 2022, the company had $27 million of borrowings under the ABL credit facility. During the second quarter, revenue totaled $142.3 million with adjusted gross profit of $29.6 million, an increase of approximately 31% quarter-over-quarter. During the second quarter, we completed 1,148 cementing jobs, an increase of approximately 14% versus the first quarter. The average blended revenue per job increased by approximately 7%. Cementing revenue for the quarter was $55.2 million, an increase of approximately 22%. During the second quarter, we completed 5,441 wireline stages, an increase of approximately 10%. The average blended revenue per stage increased by approximately 11%. Wireline revenue for the quarter was $26.3 million, an increase of approximately 23%. For completion tools, we completed 29,342 stages, an increase of approximately 24%. Completion tool revenue was $33.1 million, an increase of approximately 15%. During the second quarter, our coiled tubing days worked increased by approximately 20%, with the average blended day rate increasing by approximately 6%. Coiled tubing utilization during the quarter was 50%. Coiled tubing revenue for the quarter was $27.7 million, an increase of approximately 28%. During the second quarter, the company reported general and administrative expense of $12.5 million. Depreciation and amortization expense in the second quarter was $10.3 million. The company's tax benefit for the second quarter was approximately $0.5 million and $0.4 million year-to-date. The benefit for 2022 is the result of our tax position in state and non-U.S. tax jurisdictions. The company reported net cash used in operating activities of negative $0.4 million. The average DSO for Q2 was 57 days. CapEx spend for Q2 2022 was $3.7 million, bringing total CapEx spend as of June 30 to $6.1 million. Our full year CapEx guidance is unchanged at $20 million to $30 million. The cadence of that CapEx will depend on delivery of equipment. This quarter, we also paid our senior note interest payment of approximately $14 million. Our second payment will be in October. I will now turn it back to Ann.

Thank you, Guy. We remain very optimistic on Nine's outlook for the second half of 2022 and into 2023. It is difficult to gauge the magnitude of any recessionary pressures that may impact the industry. However, we believe North American shale and short-cycle production will be vital for global supply. While we have seen our public customers remain committed to capital discipline, incremental activity will be needed to meet U.S. production forecast. Additionally, the $1 million per day per month from the strategic reserves will end in Q4. OFS companies are also adopting capital discipline, which has limited equipment in the market. For those that are allocating growth capital, orders are delayed up to 12 months. So the majority of new equipment will not arise until mid-2023 and will need to be accrued. This backdrop sets up quite well for OFS and Nine. Despite both wage and material inflation, we have increased our adjusted EBITDA margin 900 basis points over the last two quarters, and we are still focused on increasing prices, which we anticipate will continue to increase throughout the remainder of 2022 and into 2023. As I mentioned on our last call, we are bullish on the outlook for the dissolvable plug market and its continued growth, and I remain very happy with both the performance and adoption of the technology. We expect revenue for all of our service lines to increase in Q3, and we should continue to see net price increases. Looking into next quarter, we expect Q3 to be up sequentially versus Q2 with projected revenue between $145 million to $155 million. We also anticipate adjusted EBITDA and cash flow will improve sequentially for Q3. Nine's geographic and service line diversity positions us well for further growth. We, like our peers, are bullish on the cycle. Our asset and labor-lite strategy is working well. Our Q2 adjusted EBITDA margin is only 100 basis points below our full year 2019 margin with additional runway in moving price within our service lines as well as increasing volumes of our tools. We will now open up the call for Q&A.

[Operator Instructions] We'll take our first question from John Daniel with Daniel Energy. Sir, please go ahead.

Ann, I'd like to start on the cement market. You noted the cement challenges that existed, I think, late Q2 and early Q3, if I'm not mistaken, and how you've gained share? I'm just curious, this is the [indiscernible] question. if the rig count goes up another 1,500 rigs, which I think is sort of what conventional wisdom is, how does the cement supply? How does that play out?

We're concerned about it. And I think one of our folks on our team said, some of our customers are like, well, is this the little boy who cried wolf, but every single time we think we've solved for the situation, John, it gets tighter and tighter. And we come closer and closer to not being able to solve for it. So we're already working through customer list and kind of deciding who may get it and who may not base on efficiencies and kind of length of time with us, et cetera. I do think the U.S. market could run into a problem. We're clearly seeing a lot of our cement providers are doing -- seeming to do a lot more maintenance. We obviously also are seeing challenges with our imports from Turkey, that's where we import the largest amount of cement in the U.S. So I think it's a really -- very, very challenged situation, and I don't think we've seen the worst of it yet.

Okay. Fair enough. I'm going to turn to the dissolvables for a moment. I think you said 33% increase in units sold. I'm curious if you could just characterize how much of the gains are new customers versus existing stepping up their purchases, just any color.

Yes. Sure. I mean, I think we've seen, as we said, just to remind the market, too, where we've been for a minute. When we acquired the dissolvable technology in 2018, we estimate the U.S. market was somewhere between 10% to 15% dissolvable technology. And at the time, we said we had hoped that by 2023, it would be 35% to 50%. We're convinced that it's around 25% of the U.S. market today. And I would say that we're really split, John, in gaining traction with new customers as well as moving up the wellbore and gaining share within the market. So I think we're seeing both. We're seeing conversion of composite plug customers, and then we're seeing more rent, if you will, in the wellbore. I think also with the current potential SEC disclosure requirements around ESG and emissions, our customers are certainly going to have to try and push down those emissions wherever possible. And obviously, avoiding drill-outs is a very environmentally friendly option. So I think, again, we're pretty excited about this.

Okay. And then last one for me, and hopefully I don't mess this up as I ask it. But as we think about the dissolvable market, I kind of think of like a plant that's making these units, like where are we in terms of capacity, like how much could you -- how much more room for making more, if you will, exists? I don't know it's a dumb question, but just trying to understand where we are from a capacity standpoint?

No, no, it's not a dumb question. And actually, given your previous question on cement allocations, it's a very relevant one. I think we don't feel constrained right now. So at the moment, we feel like we've got capacity to serve the market. Now as you're aware, supply chain disruptions come to CEOs in a very unexpected ways with very little visibility. But at the moment, we don't see constraints there, like we see, for instance, in cement.

We'll take our next question from Waqar Syed with ATB Capital Markets. Please go ahead.

Thank you for taking my question. Good morning. Ann, the incremental gross profit margins were roughly around 30% in Q2. What's your expectations for Q3?

Yes, I think much stronger. I think you're going to see significant incremental margins coming into Q3 given the price increases that we're handing customers. So I think you're going to see a much stronger incremental margin.

So 40% to 50% kind of range, is that a doable number?

I think it could be in excess of that, Waqar. We're really starting to get some traction here and I think what folks are going to see is the back half margin profile is going to be very nice.

Okay. Great. And on the same lines, do you see us generating free cash flow -- positive free cash flow in Q3?

I think that's a very fair assumption, yes.

Okay. That seems -- that's certainly positive. And then for CapEx, I know you've not changed the guidance. The run rate seems to be very low for CapEx. So is it like fair to say like the lower end, $20 million is more realistic than the upper end?

Waqar, I think it's just going to depend on the pace of deliveries. So I think we'd like to maintain the full range, 20% to 30%. As you know, it's difficult to get things right now. And so we're working on fulfilling our program. It is going to be back-weighted. And the exact figure it lands will just depend on timing of these deliveries.

Okay. And in terms of the like -- what are your clients kind of generally saying about activity levels in the Haynesville for the second half and then in Permian as well? And also, like, are you having initial discussions about 2023 activity levels? And what are you hearing?

Yes. I mean I think the big question for the market is what happens with standard Q4 seasonality. And I think that could be very different this year given the fact that the trains are not running on time. Operators need to meet their production guidelines. We're all well aware of supply chain constraints. So I think it's a mixed bag, but I think you could see operators be a little bit more forward on their activity. I've already guided to the upper end of their CapEx range. For next year, many of them are indicating there'll be some level of growth, although single-digit growth. So I think for us, on an already constrained market that bodes very well for us, both from an activity and a pricing perspective. And as I said, the people and equipment are both very challenged right now. So any incremental activity of any significance. Again, I think it sets up very well for continued strong margin walks into next year.

Okay. And then just one final question on SG&A. It was around $4.5 million for Q2. Guy, what's the expectations for Q3 and Q4?

It should be similar going forward, Waqar. Generally similar.

We'll take our next question from Ben Piggott with EF Hutton. Please go ahead.

Hi, appreciate you guys taking the question. I just wanted to key off Waqar's margin question, Ann, maybe you could dial into it a little bit deeper. Your comments on the 50% incremental exceptionally bullish. Just kind of the sustainability of margin to work and maybe longer term, when you look at the mix of the portfolio, what kind of a peak margin for the business looks like, given all the kind of retooling that you guys have done?

Yes. I mean it's -- I think it's everybody's question, right, is what does the peak margin look like? If you look at 2018, obviously, a robust rig count at that time. The business had around a 17% adjusted EBITDA margin, which fell to about 14% in 2019. So I think we're certainly going to see back half margins that get very close to that level. And then the question will be in 2023, what kind of inflationary environment are we facing? What type of activity do our customers come forward with? And what's your ability to continue price? But I do not think it's out of the norm for us to see a margin profile that looks very similar to 2018 going forward. And, of course, a much more cash-generative business because we've got so much of our revenue derivation now from completion tools relative to where it was in 2018. So we're very pleased with that completion tools as a business when you think about it that maybe spend $0.5 million of CapEx a year, right? So you're talking about a very low capital outlay. And this was part of our strategic initiative when we came public was really to try and become more asset-light and labor light, both of which are achieved through completion tools, and that really balances off those heavier CapEx line. So we're pretty excited about both the margin traction we see as well as the cash flow generation for the business. And I hope that answers your question, if it doesn't, I'm happy to expand on it.

This concludes our question-and-answer session. I would now like to turn the call back over to Ann Fox for closing remarks.

Thank you for your participation in the call today. I want to thank our employees, our E&P partners and our investors. Thank you.

This does conclude today's teleconference. We thank you again for your participation. You may disconnect your lines at this time, and have a great day.