Greetings and welcome to the Third Quarter 2022 Nine Energy Service Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Heather Schmidt, Vice-President of Strategic Development and Investor Relations. Thank you, you may go ahead.

Thank you. Good morning, everyone, and welcome to the Nine Energy Service earnings conference call to discuss our results for the third 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 third 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 third quarter results for 2022. We had another very strong growth quarter with revenue of $167.4 million, which fell above our original guidance of $145 million to $155 million and reflects an 18% increase quarter-over-quarter. We generated adjusted EBITDA of $32.6 million, reflecting a 72% increase quarter-over-quarter and an adjusted EBITDA margin of 19%. Incremental adjusted EBITDA margins were approximately 54%. Nine generated free cash flow of $26.8 million before changes in net working capital and $9.2 million after changes in net working capital. We used this free cash flow to repurchase bonds. We repurchased $13 million par value of bonds for $10.1 million of cash or 77.7% of par. This leaves Nine with $307 million of bonds outstanding of the original $400 million issued. I am extremely happy with our team's ability to take over $90 million of debt off the balance sheet, bringing our net debt to adjusted EBITDA to approximately 2.4 times on a run rate basis, while also maintaining strong liquidity throughout one of the most volatile environments we have ever faced. With our strong operating and financial momentum, supportive macroeconomic outlook for 2023 and beyond and net debt to Q3 2022 adjusted EBITDA of approximately 2.4 times, we are actively considering our options for refinancing our capital structure in a constructive way. On the operations side, we saw a minimal rig and frac rate increases this quarter, with the majority of Nine's growth coming through price increases, specifically within cementing and coiled tubing as well as increased volumes and completion tools. We estimate the average frac crew count today is between 270 and 275, an increase of approximately 7% versus the end of June. EIA reported completions were flat quarter-over-quarter and new wells drilled increased by approximately 6%. As I mentioned, our revenue increased by approximately 18% quarter-over-quarter versus the average rig count, which increased by approximately 7%. Service line pricing drove the majority of Nine's growth this quarter evidenced in our strong incremental margin. Undersupply of both equipment and labor coupled with supply chain constraints has shifted pricing leverage back to service providers with customer [indiscernible] focused more on availability than just price. Our cementing service line has led Nine on the pricing side, and we had another extremely strong quarter in Q3. The consolidated competitive landscape coupled with strong technical barriers built through our cutting-edge R&D lab helps to push pricing. Since Q4 of 2020, cementing pricing has increased by approximately 58%. In the last several quarter this is been exacerbated by a shortage of raw cement, but our ability to innovate and execute is demonstrated in Nine's strong market share position in the basins we operate, where we estimate our total market share is approximately 20%. We are continuing to work on forward-leaning slurries to help navigate both supply shortages as well as help reduced emissions and provide a greener cementing option for our customers. I remain extremely optimistic and excited about our completion tool division. Today, we believe Nine holds a top market share position in the dissolvable plug market and that over 75% of the total U.S. dissolvable plug market -- of the total U.S. dissolvable plug market shares held amongst four competitors, including Nine. This is an extremely difficult space for competitors to enter due to the complexity of the material science, which demands predictable and repeatable dissolution in dynamic wellbores. The ability to scale this business and maintain quality control has been a key differentiator for Nine. We continue to estimate that the total U.S. dissolvable market will continue to grow over 35% by the end of 2023. Our composite plugs remain an important part of our portfolio, and we estimate our U.S. composite plug market share to be over 20% in Q3. There are a larger number of composite plug competitors in the U.S. market as this technology has been around for almost 10 years and the materials are more standardized across offerings. Along with the U.S. market, the international market should provide growth opportunities for Nine. Our R&D team in Norway recently completed and received API-Q1 certification for our multi-cycle barrier valve targeted for a large Middle Eastern national oil company. We have received approximately $10 million in purchase orders pursuant to an NOC bid process with opportunities to obtain additional purchase orders moving forward. It has been publicly stated that this NOC plans to accelerate production and increase activities to 2025. I am extremely proud of Nine's R&D capabilities, which have provided new opportunities in the international market. Our R&D and tools team are also focused on the North American refrac market through both strategic partnerships as well as in-house development of new tools. Wireline continues to be our most challenging [indiscernible] for generating net price increases, so it remains a very important piece of our portfolio. Our team has increased wireline stages completed by approximately 85% from Q3, 2020 to Q3, 2022 and has increased revenue per stage by approximately 28% since Q4, 2020 to Q3, 2022. This service line plays an important role in both R&D and sales process for completion tools, since Nine runs every type of plug down hole, which results in a quick understanding of any competitive offering. Our coiled tubing division has performed extremely well over the last couple of quarters, driven by recent price increases. Since Q4 of 2020, the coiled tubing day rate has increased by approximately 61%, while also increasing days worked by over 180% from Q3 2020 to this quarter. Company revenue for the quarter was $167.4 million. Net income was $14.3 million and adjusted EBITDA was $32.6 million. Basic EPS was $0.46. ROIC for the quarter was approximately 29%. I am extremely proud of our team's performance thus far in 2022 and their ability to capture growth without sacrificing service execution and maintaining a very strong safety record, ending Q3 with a 2022 year-to-date TRIR of 0.56. I would now like to turn the call over to Guy to walk through detailed financial information.

Thank you, Ann. As of September 30, 2022 Nine's cash and cash equivalents were $21.5 million with $66.7 million of availability under the revolving ABL credit facility, resulting in a total liquidity position of $88.2 million as of September 30, 2022. In the fourth quarter of 2022, we borrowed an additional $5 million net from the ABL. This quarter, we generated strong free cash flow of $9.2 million or $26.8 million before changes in net working capital. As Ann mentioned, we purchased $13 million par value of bonds for $10.1 million of cash or 77.7% of par during Q3, bringing the total bonds outstanding to $37.3 million. Using annualized Q3 adjusted EBITDA of $130.2 million brings our net debt to adjusted EBITDA to approximately 2.4 times on a run rate basis. During the third quarter, revenue totaled $167.4 million with adjusted gross profit of $44 million, an increase of approximately 49% quarter-over-quarter. During the third quarter, we completed 1,130 cementing jobs, a decrease of approximately 2% versus the second quarter. The average blended revenue per job increased by approximately 18%. Cementing revenue for the quarter was $63.9 million, an increase of approximately 16%. During the third quarter, we completed 5,701 wireline stages, an increase of approximately 5%. The average blended revenue per stage increased by approximately 6%. Wireline revenue for the quarter was $29.3 million, an increase of approximately 11%. For completion tools, we completed 34,214 stages, an increase of approximately 17%. Completion tool revenue was $40.8 million, an increase of approximately 22%. During the third quarter, our coiled tubing days worked increased by approximately 10% with the average blended day rate increasing by approximately 10%. Coiled tubing utilization during the quarter was 54%. Coiled tubing revenue for the quarter was $33.4 million, an increase of approximately 21%. During the third quarter, the company reported general and administrative expense of $13.5 million. Depreciation and amortization expense in the third quarter was $9.5 million. The company's tax provision for the third quarter of 2022 was approximately $0.5 million and less than $100,000 year-to-date. The provision for 2022 is the result of our tax position in state and non-U.S. tax jurisdictions. The company reported net cash provided by operating activities of $15.1 million. The average DSO for Q3 was 57.1 days. CapEx spend for Q3 2022 was $4.6 million, bringing our total CapEx spend year-to-date as of September 30, 2022, to $10.8 million. Our full year CapEx guidance is unchanged at $20 million to $30 million, though we do believe because of supply chain constraints that a portion of 2022 CapEx could fall back into [indiscernible]. We would like to provide some high-level guidance as we think about cash flows going forward. With what we know today, looking into 2023, we anticipate CapEx of $25 million to $35 million with approximately 85% of this being allocated towards maintenance capital. The majority of our growth CapEx will go towards the conversion of four additional wireline units to electric. Under our existing capital structure, our other large cash outflows will be annual interest payments totaling approximately $32 million and any changes in net working capital. Given our substantial net operating loss carry forward balance of $436.4 million as of December 31, 2021, we do not anticipate any meaningful cash taxes. We have laid out our thoughts on Nine's illustrative free cash flow based on our Q3 adjusted EBITDA run rate, as well as an illustrative free cash flow walk using different activity and pricing assumptions on pages 21 and 22 of our Q3 Investor Relations presentation, which can be found on our website. Using Nine's Q3 annualized adjusted EBITDA of $130 million as a benchmark and assuming approximately $32 million of annual interest based on our existing capital structure, approximately $30 million of annual capital expenditures and $4 million of other annual miscellaneous cash outflows, Nine would generate approximately $64 million of annual free cash flow before changes in net working capital. While we believe that we are poised for further growth in 2023, we believe that our business is well positioned to generate free cash flow even at current run rate levels. With our strong operating and financial momentum, supportive macroeconomic outlook for 2023 and beyond and net debt to Q3 2022 adjusted EBITDA of approximately 2.4 times, we are actively considering our options for refinancing our capital structure in a constructive way. I will now turn it back to Ann.

As you all know, the overall market has been extremely volatile. However, we remain very optimistic about Nine's outlook into 2023. There are and will continue to be numerous factors that will influence global supply and demand, but we believe North American shale production will be critical for the global supply moving forward. We do think capital discipline for both operators and oilfield service providers will continue into 2023, keeping the market very tight. Obviously, the macro drivers are out of our control. That said, when I look at Nine's business today, operating under the current rig count in Q3, we are sustainable and have generated adjusted EBITDA margins surpassing 2019 levels with strategies on how to grow. We have what we believe to be one of the top completion tool and cementing offerings in the United States with top market share positions and our service lines within the basins which we operate. I think the constraints on OFS equipment continue and incremental rig activity moving forward should put upward pressure on pricing and drive net margin. As we have strategically shifted more of our top line exposure to both completion tools and cementing, we are starting to see the impact this will have on our free cash flow generation. Our business has been designed to reduce our labor and capital needs, not only increasing cash flow, but reducing capital allocation risk in a cyclical business. Despite being a smaller company, our R&D team has designed and commercialized tools used by some of the largest NOCs in the world, as well as tools that compete against our largest peers here in the U.S. We have also developed and commercialized technology to reduce emissions and continue to invest money in electrifying our wireline units. Although we do anticipate activity growth in 2023, we have organic growth strategies in place to continue to expand both our top line and our margins. We are focused on market share gains, coupled with strategic price increases as well as develop our completion tool reach internationally. Visibility into Q4 slowdowns due to weather and budget exhaustion is still a bit blurry, but we do expect some seasonality into Q4. We also expect pricing to remain steady into Q4 with potential increases beginning again in early 2023 as budgets reset. Because of this, we expect Q4 to be relatively flat to Q3, with projected revenue between $160 million to $170 million. We do anticipate growth returning in Q1 of 2023 and that 2023 activity will increase from where we are today. Nine's geographic and service line diversity positions us well for further growth. We believe we have differentiation in the service lines in which we operate with a strategy towards profitable growth even within a more moderated growth environment in 2023. We will now open up the call for Q&A.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from John Daniel of Daniel Energy Partners. Please proceed with your question.

Thank you. Good morning. Good quarter Ann and team.

Good morning.

Ann, first question is just on the valve opportunity with the NOC in the Middle East. Can you potentially -- I mean, can you frame for us what the opportunity set would be over the next couple of years, if at all possible?

Yes. I can't -- I'm not going to quantify the number for you right here. But what I would say is, this is for the conventional market. So it's the first time that we've stepped off. And actually, this was an almost a two year process, John, where we had to get direct certification, do direct field trials with this NOC. So given that it is for the conventional market, which is quite a large market outside of North American shale, we think this could be a very significant opportunity for Nine and really reflects our ability to design from the start tools that our largest service providers do not offer internationally. So we're pretty excited about it, and we'll be exploring other niches like this. So this is -- it's a very big step for us and really starts to expand that completion tool profile. And this is for the completion phase of the well.

Right. Okay. The next one is just on OFS pricing. Broadly speaking, a lot of the E&P calls this quarter, companies speculate that another 5% to 10% type price increase from here next year. Do you kind of agree with those ranges? Or would you push that?

Yes. No, I think, again, if you go back to January of 2022, our customer base underestimated service inflation. I would say that those numbers are, again, another example of underestimating service inflation coming into 2023. Just because capital budgets reset for our customers doesn't mean that we have new equipment in place and certainly doesn't mean that the labor situation is any different. So I still -- and I know I sound like a broken record, I am still seeking 12 highly qualified wireline folks in the Northeast, 12. So this is a remarkably challenged labor market. We thought it would ease by now. Clearly, it has not. So I would be shocked if you saw an inflation number of 5%, I think that's way too low.

Okay. And I was referring to something -- where we are today as opposed to year-over-year, but that --

Yes, I think that's too low.

Okay. And then the last one is the additional investments in the four wireline units, making them electric. How much of that is customer driven versus you all being proactive on an ESG front and seeing the opportunity set? If that makes any sense.

Yes. I would say it's 100% customer-driven, and the customers are being proactive on the ESG front, which is filtering down to us. So yes, that's how I would answer that.

And how many will you have at the end of the year in '23 in terms of that are electric based off the current plan of the four? Is it six or seven?

Yes. It's going to be six that will be fully electrified, and then we have a seventh that has some options on a side-by-side basis to be electric. So, yes.

Cool. Okay. Thanks for letting me ask question.

Thank you.

Our next question comes from Waqar Syed with ATB Capital Markets. Please proceed with your question.

Thank you. First of all, congrats on a great quarter. I missed the cementing revenue number of stages. So just could you kindly repeat that, please?

Yes.

Sure. So the cementing revenue number is $63.9 million.

And the stages?

So, the completion tool stages?

No cementing -- There's one other data point that you gave as well, right, on cementing?

1,130 cementing jobs, the average blended revenue per job increased 18%. Yes.

18%. Okay. Great. Now -- and the orders that you received in the Middle East, $10 million, is that all converted to revenues? Or is that going to convert to revenues --

No. I'm sorry. No, those are just purchase orders.

Okay. So when would -- when do you expect them to convert to revenues?

That will convert over the course of next year.

Okay. So is that going to be kind of a typical kind of lead time, like 12 month conversion of purchase orders in the international markets?

Yes. I think it's -- for this tool specifically, Waqar, it's a longer lead time, and just the contracts are a little bit different. So it's going to be a longer lead time, but it's just -- it's product and contract specific.

Okay. Great.

It will be rolling over next year. And as Ann mentioned, we hope to get further orders. So it's just going to be a nice revenue stream for us going forward, we hope.

Okay. And would you be -- would you start reporting backlog then in your disclosures?

No, it's not so significant that it's like that, Waqar.

Okay. And then -- and in terms of pricing, thank you for your comments, are you -- have you started negotiating with the E&Ps already for next year? And are you seeing -- are you getting traction on pricing above that 8% to 10% that E&P is stating?

We have started conversations with some of our customers. And I would say, for some of our service lines we are moving, yes, in that direction. As you well know, any incremental rig activity is going to put enormous pressure on the OFS market. It's already extremely tight. So that's just quite a bit of incremental activity for us as a sector.

Okay. And the price increase number that you're giving, are those kind of net pricing? Or do you think a lot of that gets eaten up in your own inflation?

Well, the example that we gave in the IR deck, that is assuming net pricing. So I think the big challenge always for every CEO out there is trying to predict how inflationary pressures impact the cost lines. We've certainly had an enormous amount of inflation that everybody is aware of. And we've obviously been able to get really good net price added to the margin. So I think the last time we saw this margin might have been in Q4 of 2018. So we're surpassing that, very, very nice for us to see. I suspect this team is so good at managing their costs and managing this inflationary environment has been proven this year that -- those price increases, I would suspect you'll see net margin impact.

Okay. And then for Q4, you mentioned the revenues could be relatively flat. Do you expect EBITDA margins to be relatively flat as well?

Waqar, we're not guiding EBITDA margins. I mean, I think it's just a bit lumpy given the mix. So it's just going to be mix dependent.

Okay. And so in which business lines do you expect revenues to stay flat? Where you see growth? Where you see decline quarter-over-quarter into Q4?

Yes. I think the biggest change for us will just be our international orders will be -- will likely be down in Q4. So as you think about margin and as everybody thinks about margin, you can factor that in. Obviously, these are high-margin sales as you well know, Waqar. I think what we're -- and probably everybody in the sector, you're seeing that our operators are already having to increase budget just to cover down on their inflationary costs. They're extremely conscious of budget exhaustion this year. So again, I think they're waiting until that January 1 mark, and you're not going to want to see them run out too far ahead. You're also seeing a lot of our customer base coming in much softer than expected on production. This is something obviously that everybody should be watching. It came much sooner than our team thought it would come. And that's very good factor for the service sector.

Okay. And then as we look into Q1, incremental margins this quarter were very strong, above 50%. Do you expect the margins to start moderating -- incremental margins to start moderating in Q1 to a lower number?

I think a 54% incremental margin is definitely not something I would use as a run rate for 2022 over -- 2023 over 2022. But I do think that from this company, you're going to see very strong incremental margins next year coming into 2023. I think it will be a much better year certainly than 2022, and we're very excited about it. So I think it's going to be a great year for Nine.

And Waqar, I think if you want to see how we think about incremental margins and things like that, you can have a look at the cash walk slides that we've posted on -- in our investor deck. We've had -- we've put some assumptions in there, which are, again, purely illustrative. It's just going to depend on the dynamics in the market, but you get different incremental margins when it's activity-based or price based. So obviously, it's going to depend on what actually transpires next year.

Yes. I think also, Waqar, when you think about it, it's nice to see a business that we think in 2023 will outperform on an adjusted EBITDA margin basis where we were in 2018. And that really reflects the strategy that we started executing in 2018. So very nice to see that come to fruition. So very much looking forward to the start of this next year.

Great. Well, thank you very much and congrats again.

Thank you.

Our next question is from Ben Piggott with EF Hutton. Please proceed with your question.

Hi. Thanks. Congrats on a very strong quarter. Just Guy, maybe a little bit more color on the free cash flow walk. Can you guys just probably talk about scenarios where maybe you get more aggressive with growth capital? You talked about kind of 80% maintenance CapEx in '23. Maybe paint for us a picture where that would be -- where you could be more aggressive there?

Yes, Ben, good morning. I'll start with this, and then I'm going to flip it over to Guy. But I would just say generally, when you think about growth now at Nine versus in the past, remember, a big chunk of this revenue derivation is from completion tools, which is incredibly capital light. It's also very labor light. So when you think about expanding that top line and then also expanding the margin, just remember, we don't need to put in as many dollars into this machines to generate those types of margins. So, lots of growth there in that completion tool business for next year. So just as we think about the cash walk and the CapEx needs for the business, just remember that. And I think when you look at completion tools over a few year period, just so the market understands, you're talking about over a few year period, about $1 million there in capital. So where your capital spend is in pickup trucks and sometimes tin rooflines, but very, very capital light. And I'll flip this back to Guy.

Yes. I mean, not really much to add to that, Ben. I mean, we tried to lay out some guidance for 2023, just to help people think about the cash walk. Again, it's going to depend on the pace of deliveries and supply chain constraints. We're just seeing -- like all firms, it's just difficult to get equipment. So the exact pace of deliveries is going to be a little bit of a moving target as it has been this year, candidly.

Yes. Got it. What about -- with all that said, is there a way to think about just kind of working capital intensity of growth into '23 and beyond to the extent that you don't have to pull the CapEx lever as hard? The comments you made on kind of free cash flow framework for '23 was excluding variability in working capital, but is there a rule of thumb that we should think about for X dollars of growth on the top line, the working capital intensity should look like Y?

Yes. I think the best way to think about working capital intensity is just on a day's concept. So we reported 57.1 for our DSO. So that's going to be your biggest driver. So as revenue increases, if you kind of hold that DSO flat, that's probably pretty reasonable. We've been in that high 50s or 60 for DSO pretty regularly. You can also hold your days payable. You can see how those have trended and kind of trend those going forward. And inventories will rise a bit, but not as -- not perfectly linearly with the revenue. So if there is growth in revenue, you do expect working capital to be a use of cash and the magnitude of which is just going to depend on the revenue growth.

Ben, another point, not necessarily on your question, but just to think about as you think about our financials going forward, when you think about labor light, which is something we don't talk about as much as CapEx light, in 2018, think about this business as roughly $830 million, $140 million on the adjusted EBITDA line. When you think about going into 2023, if you look at our annualized EBITDA today at about $130 million, in 2018 to generate that, we had roughly 2,300 employees. Today, we have slightly under 1,200. So loss of efficiency there. So again, these are all the reasons that we're excited about this strategy being labor light and CapEx light. So I just wanted to make sure the market understands that as well.

That’s good color. I appreciate it guys. And again, congrats.

Thank you.

Our next question comes from John Daniel with Daniel Energy Partners. Please proceed with your question.

Hi, thanks for letting me back in. Ann, just -- I was rereading the press release there, and the plug sales really jumped out to me, I think, plus 34% quarter-over-quarter. So congratulations on that. My question is -- is that driven by one or two big customers saying, holy cow, this works right, we're loading up on it? Or are you getting broader penetration across more customers? Just any color there would be appreciated.

Yes. No, I think this is a very long, broad customer list, and it's actually very diverse as far as the basin that we're running these in and the commodity that's exposed to. As you know, we also run plugs internationally, and that has really started to pick up. So we're super excited about the momentum in the international market. So happy with our dissolvable plug performance recently in a couple of really interesting plays like Vaca Muerta as well as the Middle East. So that's lots of runway there for Nine. So that's been pretty awesome to see.

Okay. Thank you very much.

And also, John, just one more point on that, too, is just if you look in our IR deck, we did want to let the market know that we've sold 24% more dissolvables today than we have in 2018. So just as you kind of think about generally that growth -- and I keep referencing '18, because that was really a pretty strong year for the service sector. So we like to look at numbers relative to 2018, how are we doing. And that's been wonderful for us to stay.

Okay. Thank you all very much.

Awesome. Thank you.

There are no further questions at this time. I would now like to turn the floor back over to Ann Fox for closing comments.

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

This concludes todays teleconference. You may disconnect your lines at this time. Thanks for your participation.