Ann Fox - President and CEO Clinton Roeder - SVP and CFO Heather Schmidt - Director, IR and Marketing.

Sean Meakim - JPMorgan Judson Bailey - Wells Fargo Securities George O’Leary - Tudor, Pickering, Holt & Co. Blake Hancock - Scotia Howard Weil John Daniel - Simmons & Company Waqar Syed - Goldman Sachs.

Greetings, and welcome to the Nine Energy Service First Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Heather Schmidt. Thank you. You may begin..

Thank you. Good morning everyone and welcome to the Nine Energy Service earnings conference call to discuss our results for the first quarter of 2018. With me today are Ann Fox, President and Chief Executive Officer; and Clinton Roeder, 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 view 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 reasons.

Our comments today also include non-GAAP financial measures, additional details and a reconciliation of the most directly comparable GAAP financial measures are also included in our first quarter press release and can be found in the Investor Relations section of our Web site. I will now turn the call over to Ann Fox..

Thanks, Heather. Good morning, everyone. Thank you for joining us today to discuss our first quarter results for 2018. We had another strong quarter of growth, exceeding the midpoint of management’s revenue guidance by approximately 4% and the midpoint of adjusted EBITDA guidance by approximately 5%.

This was due in large part to the strong financial and operational performance in Completion Solutions. Company revenue for the quarter was 173.8 million, a 13% increase over Q4 2017 and adjusted EBITDA was 24.1 million, an increase of 29% over Q4 2017.

Incremental adjusted EBITDA margins for the company were 28% and incremental adjusted gross profit margins in our Completion Solutions segment were 37%. We were also very pleased to see strong cash flow generation from operations of 17.3 million for the quarter, despite an increase in working capital in conjunction with double digit revenue growth.

This puts our free cash flow yield at approximately 7% for the quarter. As we continue to strategically increase price utilization, we expect our cash flow generation to continue to increase throughout the year. We also saw an improvement in ROIC which was 3% for the quarter.

While still not at 2014 levels of 16%, we like how this is trending and we remain on track to hit our 2018 target of 8%. During the quarter, we grew revenue across all of our Completion Solutions service lines. Without adding any additional equipment during the quarter, we increased revenue in the Completion Solutions segment by 15%.

We think this is a positive indicator of not only the secular trends that directly benefit Nine, but also our ability to gain market share and work for the most efficient operators across all North American basins.

For example, our wireline group completed approximately 11% more stages this quarter than last and completion tools stages increased by over 23%. On the cementing side, we increased our market share this quarter in the Eagle Ford by 7 points, all of this despite U.S. rig count increasing by approximately 7%.

This industry continued to see supply chain constraints in Q1 with labor remaining the largest challenge for Nine. During Q1, we increased our headcount by approximately 7% and averaged approximately 12.2 stages per employee per month.

This is more than double the average stages per employee per month for 2014 and an increase of approximately 19% over Q4. These efficiencies are driven in large part by the significant increase in completion tools stages and wireline efficiencies from working on multi-well pads for the most adept operators.

The majority of these new employees came in to allow us to increase utilization within our existing equipment and we have already begun sourcing new employees to fuel our CapEx, the majority of which will come on line in the second half of the year.

Again, Nine has been purposeful in putting a conservative CapEx plan in place to order to manage the labor constraints and ensure we are able to continue to field the best crews for our customers. Lastly, we remain focused on sourcing and commercializing new technology through our three-pronged strategy.

This includes internal development, IP acquisitions and exclusive strategic alliances with technology partners. Our Scorpion Plug sales have increased every quarter since the acquisition in Q3 2015 with both our composite and extended range plugs. We are also working on the next generation of these technologies, including dissolvable options.

We have had a number of additional field trials and still plan to provide an update in Q3 on the potential commercialization of the EON sleeve system and casing flotation tools. With that, I would like to turn the call over to Clinton to walk through segment and other detailed financial information..

Thank you, Ann. In our Completion Solutions segment, first quarter 2018 revenue totaled 154.6 million, an increase of 15% compared to fourth quarter 2017 revenue of 134.7 million. First quarter 2018 adjusted gross profit was 33.2 million, an increase of 29% compared to Q4 2017 of 25.8 million.

The revenue increase was driven in large part by significant activity gains in cementing, wireline and completion tools as well as price increases within wireline. During the first quarter of 2018, we completed 933 cementing jobs, an increase of approximately 18% over the fourth quarter of 2017.

The average blended revenue per job is down slightly from Q4 due to job mix during the first quarter. Cement revenue for the quarter increased by approximately 13%. During the first quarter of 2018, we completed 8,126 wireline stages, an increase of approximately 11% versus the fourth quarter of 2017.

The average blended revenue per stage increased by approximately 16% over Q4. Wireline revenue for the quarter increased by approximately 29%. For completion tools, we completed 12,515 stages, an increase of approximately 23% versus the fourth quarter of 2017. Completion tool revenue increased by approximately 25%.

During the first quarter of 2018, our coil tubing days were decreased by approximately 2% over Q4. The average blended day rate for Q1 increased by approximately 3% over Q4. Coil tubing utilization during the first quarter was 79% which was flat quarter-over-quarter. Coil tubing revenue increased by approximately 1%.

In our Production Solutions segment, first quarter 2018 revenue totaled 19.2 million, a decrease of approximately 2% compared to fourth quarter 2017 revenue of 19.6 million. Adjusted gross profit for the first quarter of 2018 was 2.4 million compared to fourth quarter 2017 adjusted gross profit of 2.9 million.

During the first quarter, well services had utilization of 62% which was flat versus Q4. Total rig average for the quarter was 46,297, a decrease of approximately 1% versus Q4 2017. Average revenue per rig hour during the first quarter was $414, which was flat over Q4.

The decrease in revenue for well services was driven by activity decline [indiscernible] weather as well as Wyoming due to decline in operator activity and weather.

During the first quarter of 2018, the company reported net income of 1.7 million or $0.08 per diluted share compared to a net loss of 29.8 million or $1.89 per diluted share in the fourth quarter of 2017. The company reported selling, general and administrative expenses of 15.4 million compared to 11.9 million for the fourth quarter of 2017.

This increase was largely due to stock-based compensation and reevaluation of the Scorpion liability and loss. During the first quarter, the company reported net cash provided by operating activities of 17.3 million compared to 1.9 million in Q4. Total capital expenditures were 6.5 million, of which approximately 45% was maintenance CapEx.

This compares to 15.2 million from Q4 2017. As a reminder, the majority of Nine’s 2018 capital expenditures will be incurred in the second half of the year. As of March 31, 2018, Nine’s cash and cash equivalents totaled 72.9 million with our revolver capacity of 49.4 million, Nine’s total liquidity position is 122.3 million.

Our DSO also decreased from 60 days in Q4 to 57 days in Q1. During the first quarter of 2018, the company’s effective tax rate was 5%.

The effective income tax rate was primarily attributable to changes in pre-tax book income and valuation allowance positions as well as tax liability in states where income is expected to exceed available net operating losses. I will now turn it back to Ann to discuss Q2..

Thank you, Clinton. As we look ahead to Q2, we anticipate the sixth sequential quarter of growth both on top line revenue and adjusted EBITDA. We expect total revenue between 185 million and 195 million and consolidated adjusted EBITDA between 27 million and 29 million. Completion Solutions will continue to be the driver of growth for the company.

We feel our geographic footprint and portfolio mix coupled with a favorable macro environment position us to capitalize on a continued increase in activity and completion intensity in North American shale.

We expect our differentiated technology and service offerings to allow us to continue to increase utilization and strategically discuss pricing with our customers. Full year CapEx guidance remains unchanged and we still anticipate to live within cash flows and be cash flow positive for 2018. We are on track to hit our 2018 ROIC target of 8%.

I want to remind everyone that ROIC is one of the largest metrics used for bonus targets for executive compensation and is the single most important measure of the business when deciding where to deploy capital and evaluating potential M&A opportunities, both of which are an important part of Nine’s growth strategy moving forward.

I will continue to reiterate that the entire management team is focused on being good stewards of our investors’ capital. We will now open up the call to Q&A..

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions]. Our first question is from Sean Meakim from JPMorgan. Please go ahead..

Thank you. Good morning..

Good morning, Sean..

So, Ann, we’re about halfway through the second quarter here.

Just curious, within your Completions portfolio, which product or service lines would you say carry the most operating momentum as we exit the second quarter and move into the back half, particularly given the incremental assets you plan to deploy more back half weighted, just curious where you see the most potential there?.

Sure. Great question. So when you look at Q2, as you mentioned, most of our capital will be coming on in Q3 and Q4, most of our capital equipment. So for Q2, we think the most operating momentum is going to come out of first our completion tools division and then very closely followed by our wireline and then cement.

So very big pickup there in those two lines is what we’re seeing with again the increased activity out there. So lots of room to grow even within the existing platform even before we put new equipment on..

Got it. Thank you for that. And earlier in the year, it sounds like it you were getting pricing traction in a number of product lines on the Completions side, perhaps even net of cost.

Just curious, is that a fair assessment how things have progressed in the second quarter? And just curious how tight asset utilization is for your fleet and just kind of how you think about market share headroom opportunities given the amount of capacity that you have for your fleet today?.

Yes. So again, if you think about coil tubing that utilization is so tight right now and I think if we were not putting on incremental units, it would be really tough to move market share due to how utilized that equipment is. When you look at cement, not a lot of room for market share growth after that 7 point gain in the Eagle Ford.

However, we do see a double digit potential expansion of the job count that we’re doing in West Texas. So lots of room still there to answer your headroom question. And then as you well know, wireline and completion tools are so driven by the staging below, so it’s really how utilized those trucks are at surface and how efficient our operators are.

So we see multi-well pad growth continuing. We see lateral length continuing to push as well as completion intensity which is going to continue to drive, for instance, those plug sales and the margins that we get from those trucks. So we’re very excited about that. We think about 30% of the U.S.

market right now is a multi-well pad environment and that just demonstrates lots of room to grow on those multi-well pads. And that’s really just as important of a driver for the company as is stage count growth. So let me know if that didn’t answer your questions. But again, cement and wireline still lots of room there..

No, that was very helpful. Thank you for that. Just one more question I had just thinking about Scorpion. It looks like you’re seeing good results there.

Could you just give us a sense of how much of market penetration you’re getting within your existing customers that utilize you for other service lines? Just thinking about the ability to, I wouldn’t say bundle, but the opportunity to leverage some of the other relationships to drive share relative to new customers for those types of – for those plugs?.

Sure. What drives share in a most proficient manner is when a tool performs beautifully. And so that’s what’s really the primary driver behind the Scorpion isolation tool product growth. As you well know, this team never ever likes to bundle or try to justify cross sales through one service line.

So these products and these services absolutely have to sell themselves. And so Scorpion does that.

What is a very powerful combination of kind of like pouring an accelerant on something is when you’ve got, for instance, excellent wireline service execution and you can couple that with the technology that for instance at the plugs really not as well as in how fast they drill out, but that drill bit where the lack of it is what’s still relevant there saving operators time.

So when you can combine best technology with best service execution, for us that’s a real winner..

Got it. That makes sense. Thanks a lot..

Jud Bailey from Wells Fargo, please go ahead..

Thanks. Good morning..

Good morning, Jud..

Wanted to follow up on the discussion on Scorpion, if I could, and completion tools always was ahead of our model.

Could you maybe talk a little bit about kind of what you’re seeing there? Is the growth across a wide number of products there? Is it primarily the plugs or maybe just go into a little more detail on the big growth you saw there and kind of where you’re seeing it in just a little more color would be great?.

Sure. So actually we’re seeing that product line grow share most – most importantly we saw a lot of new growth in the MidCon. We’re continuing to see growth with new customers in West Texas as well as new customers in the Northeast, so really across the basin. But we’re also seeing a lot of increased total [ph] sales.

So that’s been a big driver as well for completion tools. We are going to talk to you all in detail in Q3 about casing floatation and the EON sleeve, so I’ll leave that conversation for Q3. But to answer your question, it has not been exclusive to the isolation tools. We’ve also seen that growth in the toe of the well..

Okay, super. Thank you. And second question is, you guys have been pretty vocal that your – part of your strategy is looking at M&A opportunities out there. Could you comment maybe on how the landscape looks in your perspective now as activity improves? I’m just curious if you’re seeing anything interesting from an M&A perspective..

We see a lot of interesting opportunities. We’ve had relationships with quite a few great teams, folks and technologies for a period of time. So, again, this is an important part of our strategy this year.

I will say that my own view is I think you’ll see valuations push up and it will be our team’s responsibility to be disciplined in how we deploy capital relative to M&A. As I’ve often said, it is a key piece of our strategy but it is also the one place where a management team can destroy capital the fastest. So you’ll see us be very disciplined.

The best partnerships for us are usually win-win and that means very fair valuations upfront and so that’s what we’ll be focused on and we’re really very excited about the conversations we’re having..

Okay, I appreciate it and I’ll turn it back..

Our next question is from George O’Leary from Tudor, Pickering, Holt. Please go ahead..

Good morning, guys..

Good morning, George..

Just kind of curious, Ann, as you – given your presence in wireline and coil tubing on the cementing side of the equation as well, so kind of completions and well construction, what is some of the more interesting trends you’re seeing from – what operators are looking to do to change their well designs going forward? Is it spacing, down spacing, something we’re not even thinking about, more well, larger quantity of wells on zipper fracs, just curious given your broad presence geographically and across multiple business lines?.

Sure. So I think we’ve talked about earlier the percentage of the multi-well pads. I would certainly say that the increase in the multi-well pads will continue. You’re seeing some operators come out and talk about construction of 20 to 21 well pads.

So I think we’ll continue to see the number of well heads increase which is a great trend for this company, because again you’re moving your capital equipment across well heads which drives a lot of efficiency and also helps you keep that optics in check.

I think generally for the industry as we look out over the next three to five years, what you’ll see is the massive change in how the construction is done and we also here at Nine think you’ll start to see some changes in the surface equipment that we’re using to complete the wells..

Okay, that’s very interesting. And then you guys have the three labs on the cementing side and most recently opened the Hobbs, New Mexico facility last year.

Curious how that’s benefitting you in the Permian and if you guys are leveraging that to win more production stream work which is what that Hobbs facility in particular has done for your cementing business?.

So I think if we had not make the decision to put Hobbs in place when we did which I’ll just remind you is a difficult decision because that was Q4 of '16, so very uncertain times. But if you look at New Mexico permitting, just year-over-year it’s up 65%. So that’s a really good indicator. And month over month, that permitting number is up 29%.

So that indicates to this team that there’s still a lot of work coming in that Delaware basin. What’s really critical to operators is not only that they come in and audit your lab capabilities but they’re really looking at distance to acreage.

So had we not come early with that facility up, we think it may have precluded us from getting into the rig programs of some of the large operators out there over the next year or two that are making service selections and thinking about their service providers now and through back half.

So really that time distance to the well site is critically important to implement. And if you’ve been out there lately, you know that the two lane roads are already difficult. So this isn’t as the crow flies and often times you’re making 10 plus trips just to location to move your materials.

So to answer your question, that was really again not to my credit but to this team’s credit really thinking forward, looking at the operators’ program, where they would be and making a very surgical choice to place capital and that would be a massive differentiator for us not just now but going forward..

Thanks so much for the color, Ann..

Thank you..

Our next question is from Blake Hancock from Howard Weil. Please go ahead..

Thank you. Good morning..

Good morning, Blake..

Maybe first – maybe we’ll change topics here and go over to the Production Services.

Can you maybe talk about what you’re seeing in oil servicing going forward here in 2Q and maybe how that progresses throughout the year here?.

Yes, I think there was one thing that we’re still mystified by is when does well service really turn on. And I think a lot of folks thought that the well service market would really ramp up at a commodity price that was much lower than what we were seeing now.

So I think you’re seeing and we’ve said this many times before, this is a commoditized space. It doesn’t have the motes [ph] around the business that certainly we see on the Completion side. So we’re starting to rethink the way we approach this business.

And as of late, we’re working on talking to some technology partners and using our national well service footprint to potentially pull through technologies that could facilitate driving more revenue into the same – over the same labor base. So when I think about it, that’s really the only way I can think about putting a mote up around that business.

So it’s yet to be seen. Again, that is not what we saw as the primarily driver of the businesses here. However, it doesn’t mean that the team is not putting their ear to the ground and thinking about how to fundamentally change that space.

I do think if production phase of the well is then largely ignored and any time you have a phase of the well that’s ignored that way, there’s room for opportunity. So it is – the work of our business looks very similar to how it did 10 years ago, 20 years ago, 30 years ago and that means this team is now shifting to put some real thoughts to this.

And so there could potential be some very exciting things for us that come out of this business..

That’s great. And the secondly, maybe it sounds like M&A maybe more of a 2019 event and obviously some healthier free cash flow between now and then.

How do you think about capital allocation if maybe M&A doesn’t heat up for 12 more months or so? Would there be a plan to maybe do a buyback or a dividend and provide that for shareholders?.

Yes, sure. I would be shocked if M&A didn’t heat up until 2019 and we absolutely see that as a 2018 event to be clear. So I think when you look at the cash on the balance sheet, the team has no intention of holding that cash balance on our balance sheet. So we’ve got again a few things that we’re looking at doing and hopefully those come to fruition.

I would be disappointed if we were in a position where we were even thinking about dividends as an emerging growth company..

Great. Thank you, guys..

Our next question is from John Daniel from Simmons & Company. Please go ahead..

Hi, guys. Thanks for filling me in..

Good morning, John..

Good morning. I want to follow up on all these nice M&A questions. As you know, there are a myriad of good small private companies out there that compete across a number of your different segments.

I’m curious what the appetite is to consolidate some of those players and potentially deal with the cultural challenges versus looking at the larger more consequential deal? Do you have a strong view on either of those options and what would you consider more likely if you are willing to opine?.

Sure, yes. I think we were honestly pretty clear about this in December but this team will be focused on acquiring geographies this year. So as we have said many times, we’re underserved in the Mid Continent. We’re also very much underserved in the DJ-Rockies area.

And if you look at Colorado permitting month-over-month, we’re up 56%, 50% year-over-year. So that’s certainly in this area of opportunity and when you start to look at takeaway capacity and the discount that operators are taking in the Permian, we’ve said many, many times we’re building a sustainable OSS platform.

So it’s important for us to spread out and be in these geographies. So again, we’re very keen to fulfill those geographies. And to me, that means the focus is tuck-in for the geography inside of service lines that we like, that we think have strong barriers to entry with excellent teams. So that’s where you’ll see us focus.

I would be surprised if this team would do some big swing for the fences, although I’m obviously always open to anything that comes our way. But we’re not – we would be very careful with that because we have built an incredible management team with an excellent culture and a very good ability to deploy capital organically.

So you want to be really careful about paying a premium where you don’t need to..

Got it. Thank you. And within workover space, a follow up there as well, I don’t know if you pay attention to what the guys have said during earning season but some of them have been a bit more outspoken about rating increases, et cetera.

And I’m just curious what your team has actually seen on the frontlines from the larger peers? And just gut feel, how much upside to rates do you think, if any, exists within this segment assuming no consolidation unfolds?.

Yes, so that’s a great question. And again, this is out of all of our service lines, this is a little bit more opaque because as we’ve said, we thought many people called this incorrectly and called for strong price increases. So when we forecasted this business, we were really conservative thinking about price movements.

So we wouldn’t expect a lot of pricing traction. Where we’re going to get movement in the margin here is just in the activity pick up. We have already seen some pricing traction within this business in Q4 and into Q1. But I wouldn’t expect this to have any kind of the torques that you would see in completions.

I’ve also always been a big believer that I just don’t understand how a consolidation or too much consolidation in the well service business facilitates price as the segment is constructed right now.

And so I’d have to see a fundamental shift in the technology being used in the production phases of well to believe that consolidation would really drive price..

Thanks. And the last one for me is just a housekeeping one.

With respect to the adjusted EBITDA guidance, is that excluding the equity-based comp?.

Yes..

We adjust out for equity-based comp. So all of our forecast will adjust that out, yes..

I’m just making sure there’s an actual number contemplated for equity-based comp in Q2, that’s all, which sounds like there is, right?.

Yes, we do. Yes..

Thanks, guys..

Thank you, John..

[Operator Instructions]. Our next question is from Waqar Syed from Goldman Sachs. Please go ahead..

Thank you.

And just to clarify, the non-cash comp component is going to be within that $2.2 million to $2.4 million kind of range for the second quarter?.

Yes, I think what we’ve talked about before if you look at the SG&A with and without the stock-based comp. So I think we should look at it as in the ballpark, that range kind of for the full year where we’re looking at about 1.5% is the way I’d think about it on this stock-based comp..

Okay, all right. It sounds good.

And outside of – are you seeing any pickup in activity outside of the Permian as well, any interest on customers there?.

Yes, we are.

And I think again when you see Continental Resources take only a $4.30 discount per barrel for their North Dakota crude, that’s a real indicator to us and I think $2 in Oklahoma that as the commodity price moves, these operators are going to look at that and we see a lot of potential activity coming forward in the basins outside of the Permian which again is important for service companies because you also don’t have the same level of competition within the basin.

So we’ve said that many, many times and we have held out footprint and we fought very hard to hold that footprint throughout the downturn. It’s a really important footprint not just because of these kind of issues when operators pick up activity but also for our technology partners and to drive volume there.

So we’re really getting excited about some of these other basins..

So if you were to rank the basins outside of the Permian in terms of customer inquiries and interest, how would you rank them?.

Well, for us we’re big – we love the Northeast, we love the Utica. So Utica is a big basin for us with lot of potential drivers there and we love the SCOOP/STACK. We’re also – again, we see – as I said earlier, we see a lot of activity potentially coming forward in Colorado and that’s something we need to get after and get exposure to.

So to be clear, we would say the Northeast for us relative to our context and position and then the SCOOP/STACK..

Okay. And final question just on the cementing business.

Has the competitive landscape changed much in the last couple of months and how you see pricing in that market?.

It’s a great question, Waqar. We haven’t seen our operators publicly come out and do anything to massively change their CapEx programs. But we are still looking into the originally announced CapEx programs.

So that means that we’re going to walk into additional rigs coming online and that’s going to really tighten things down for cementing where I think the existing cementers will really struggle to service the operators and that means there’s room for pricing increases.

So we see room for activity increases as well as pricing increases for that service line..

Great. Thank you very much. That’s all I have..

Thanks, Waqar..

Thank you. This concludes the question-and-answer session. I’d like to turn the floor back over to Ann Fox for any closing comments..

Thank you for your participation in the call today. We appreciate the partnerships with all of our constituents and remain focused on driving value for our customers, investors and employees. Thank you..

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you again for your participation..