Heather Schmidt - Director IR Ann Fox - President & CEO Clinton Roeder - CFO.

James Wicklund - Credit Suisse John Daniel - Simmons & Co..

Greetings, and welcome to Nine Energy Service Third 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 Heather Schmidt, Director of Investor Relations. 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 third 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 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.

For today's call, we will begin with Q3 financial and operational results for the legacy Nine business only. Magnum Q3 numbers are so under review by their auditors and 9 month actuals as of September 30, 2018 will be filed on an 8-K by January 9, 2019 which is again, 75 days of the acquisition date of October 26 of this year.

All of Magnum's financial information from the acquisition date forward will be included in our consolidated results and reported our completion solution segment as part of our completion tool service lines. Finally, to end the call, we will provide an update on our technology trials, Q4 guidance and our 2019 outlook.

I will now turn the call over to Ann Fox..

Thanks, Heather. Good morning, everyone. Thank you for joining us today to discuss our third quarter results for 2018. We had another strong and differentiated quarter of growth, exceeding the midpoint of management's original revenue guidance by approximately 3%, and the midpoint of adjusted EBITDA guidance by approximately 8%.

All of our service lines across the Completion Solution segment outperformed this quarter adding approximately 4 percentage points to the adjusted gross profit margin in that segment.

Company revenue for the quarter was $218.4 million, an approximate 6% increase over Q2, net income was $13.7 million, an increase of approximately 51%, and adjusted EBITDA was $38.4 million, an increase of approximately 25%.

Incremental adjusted EBITDA margins for the company were approximately 60% and incremental adjusted gross profit margins in our Completion Solutions segment were approximately 90%. Cash flow from operations was $25.6 million, an increase of over 220% quarter-over-quarter, and we generated a cash flow yield of approximately 6% for Q3.

ROIC for the third quarter was 12%, up 400 basis points over Q2 ROIC of 8%.

We are very pleased with our performance this quarter and continue to see activity increases across almost all of our service lines with it's strongest increases in completion tools and wireline, as well as price increases across all of our service lines with the exception of completion tools with the strongest increases coming from coil tubing and wireline.

The outperformance this quarter is due in large part to the incredible team in the field who continue to execute day-in and day-out on the well side by providing both, the best technology and service to our customers. Throughout the year we have seen profitable market share gains. At the end of Q3, our U.S.

wireline and Completion Solutions participated in 16% of stages completed in the U.S., an increase of over 160% since 2014, and increase our total stages completed as a company by approximately 9% quarter-over-quarter.

In cementing, we have increased our total jobs by quarter since the end of 2017 by 36% without adding any incremental equipment until the back half of this quarter while simultaneously increasing our average revenue per jobs.

We continue to hear from operators about their focus on reducing cycle times and increasing efficiencies, and they have begun measuring service providers down to the minute. All of these trends Nine as we solidify partnerships with our customers, we always try to provide a value proposition that is built and sustained on performance.

For example, our Scorpion Composite plug is reducing cycle time and saving operators more than two days per well. Recently an operator in the northeast drilled out 144 of our Scorpion plugs with a single drill bed eliminating the costly process of tripping in and out of the well and replacing the bed.

We also provided the wireline work on this well and completed all 144 stages of numerous runs. At Nine, we thrive on working with the most forward leaning operators and completing the most complex wells across North America.

Moving forward, we will remain focused on providing technology and service to push the limits on completion, to help our customers reduce cost and increase production. As we have previously discussed, labor has been a bottleneck in the industry, and we saw significant wage inflation in the first half of this year.

This quarter wage inflation was relatively flat, contributing to margin expansion quarter-over-quarter. We anticipate the majority of wage inflation for the company in 2018 was taken during the first half of the year and I will speak more to 2019 later in the call. During Q3 we increased our headcount by approximately 3% versus 7% in Q2.

And since the end of 2017, we have added over 300 incremental employees, an increase of headcount by approximately 18%. Our average stages per employee per month in Q3 was approximately 14.5 stages, an increase of approximately 164% over 2014.

We anticipate this trend continuing as more operators transition to manufacturing mode on their multi-well pads. I'm extremely excited to welcome Magnum to Nine. Later in the call, we will also be discussing another team we are thrilled to have join us during acquisitions we've completed in October.

As a reminder, we successfully closed the acquisition of Magnum Oil Tools on October 25, positioning Nine as one of the premier providers of completion-focused technology, combined with excellence in both service execution and conveyance capability.

We now have a strong first-mover advantage in dissolvable [ph] technology and a proven internal R&D team to ensure we are staying ahead of trends.

With this transaction we've put a new capital structure in place with long-dated maturities and enhanced financial flexibility, including a private offering of $400 million in aggregate principal amount of 8.75% senior unsecured notes due in 2023, and we closed this new $200 million 5-year AVL credit facility.

I want to reiterate our conservative approach to debt and believe that onetime net debt to EBITDA is the optimal leverage profile. With the company becoming so much more cash generative, we still anticipate a reasonable pathway to reach our target leverage within the next 12 to 24 months.

We were extremely pleased with the continued growth and execution this quarter earning confidence in the team we have in place and our ability to differentiate. With that, I would like to turn the call over to Clinton to walk through the segment and other detailed financial information for the quarter..

Thank you Ann. As a reminder, all financial information and operational metrics are for the legacy Nine business only and do not include any Magnum numbers or metrics. In our Completions Solutions segment, third quarter 2018 revenue totaled $196.6 million, an increase of approximately 6% compared to second quarter revenue of $185.1 million.

Third quarter 2018 adjusted gross profit was $49.4 million, an increase of approximately 26% over Q2, and an incremental adjusted gross profit margin of approximately 90%. During the third quarter of 2018, we completed 1072 cementing jobs, an increase of approximately 30% over the second quarter.

The average blended revenue per job increased by approximately 2%. Cementing revenue for the quarter increased by approximately 5%. Towards the back half of Q3 we received one double and one single prong unit and expect to receive delivery of one single prong and one double pronged stage [ph] in Q4.

During the third quarter of 2018, we completed 10,698 wireline stages, an increase of approximately 6% versus the second quarter. The average blended revenue per stage increased approximately 4%. Wireline revenue for the quarter increased by approximately 10%.

We received two incremental growth capital wireline units towards the back-half of Q3 and will not receive any additional units this year. For completion tools, we completed 18,620 stages, an increase of approximately 11% versus the second quarter. Completion tool revenue increased by approximately 8%.

During the third quarter, our coil tubing days were decreased by approximately 6% due to a unit man down from maintenance for 30 plus days this quarter. We continue to see strong demand for our large diameter coil units with the average blended day rate for Q3 increasing by approximately 8%. Coil tubing utilization during the third quarter was 79%.

Coil tubing revenues increased by approximately 2%. We did complete the conversion of our 208 units at the end of September which provided no revenue contribution this quarter. We will not be adding any additional units this year.

In our Production Solutions segment, third quarter 2018 revenue totaled $21.8 million, an increase of approximately 7% compared to second quarter 2018 revenue of $20.4 million. Adjusted gross profit for the second quarter was $3.1 million compared to second quarter adjusted gross profit of $2.8 million, an increase of approximately 12%.

During the third quarter, well services had utilization of 65%, an increase of 5%. Total rig hours for the quarter was 49,665, an increase of approximately 3%. Average revenue per rig hour during the ta was $439, an increase of approximately 4%.

During the third quarter, the company reported net income of $13.7 million or $0.56 per diluted share compared to net income of $9 million or $0.37 per diluted share in the second quarter of 2018. The company reported selling, general and administrative expenses of $21.8 million compared to $16.1 million for the second quarter.

This increase was largely due to transaction expenses in professional and legal costs. Depreciation and amortization expense in the third quarter was $15.5 million, compared to $15.1 million in the second quarter. During the third quarter of 2018, the company's effective tax rate was 7.6%.

The effective tax rate for the quarter was primarily attributable to changes in pre-tax book income and valuational allowance positions; as well a tax liabilities in state where income is expected to exceed available net operating losses.

During the third quarter, the company reported net cash provided by operating activities of $25.6 million compared to $7.9 million in Q2, an increase of approximately 224%. The average DSO for the third quarter was 62 days compared to 59 days in Q2, and is averaged approximately 59 days for the full year.

We estimate DSO increase of approximately 2 days due to major customer implementing a system change which has been resolved. Total capital expenditures were $11.5 million, of which approximately 22% was maintenance CapEx. This compares to total capital expenditure of $11.6 million in Q2.

We anticipate full year CapEx to be within original guidance of $53 million to $57 million with a significant portion being taken during Q4. As of September 30, 2018, Nine's cash and cash equivalents totaled $86.5 million; with a revolver capacity of $49.5 million, Nine's total liquidity position was $136 million on September 30, 2018.

I will now turn it back to Ann to discuss our technology trials and guidance..

Thank you, Clinton. Throughout the year we have been trailing a number of downhole completion source through either strategic alliances or develop through internal R&D.

We have said many times, we do not feel in anyway gap with our competition, with our current technology portfolio but as an industry, we need to develop reliable completion tools and methodologies that will continue to allow our customers to extend lateral links without compromising production while reducing overall risk, cycle time and intervention in the well-bore [ph].

All three of the tools we will discuss today are designed for this purpose. At Nine, we have been searching for reliable, intervention-less cemented leave application which was the catalyst for our distribution agreement for the EON Fleet System.

As a reminder, the EON System is an intervention list, single sized ball, activated pinpoint frac sleeve system which Nine has exclusive distribution rights for in the U.S. and Canada. During the year, the team at Nine ran a number of trials, the majority of which took place in Canada.

While some trials were successful, the tool did experience challenges downhall and will need further developments before being ready for commercialization. We will continue to work with our strategic partner on the evolution of the EON system.

Dissolvable technology will play a significant role and a reduction of cycle time, risk and intervention in the wellbore. We believe that having a reliable, dissolvable offering is imperative; today dissolvables are anywhere from 10% to 15% of the total plugs sold and will grow to 35% to 50% in the next 3 to 5 years.

While still in the early innings of dissolvable technology, we've recognized how important it was to participate in this growing market. This year we started working on our own internal magnesium dissolvable plug and experienced firsthand the barriers to entry.

When the opportunity to partner with Magnum presented itself, we knew this would allow Nine to capture growing addressable market and dissolvable technology. Magnum has a proven dissolvable portfolio, including a plastic offering, and number two, market share in the overall dissolvable market.

We believe dissolvable technology will be prolific and necessary, and the total adjustable market will expand as stages are forecasted to grow and lateral links extend.

Magnum introduced a low temperature plastic dissolvable plug this year which is well suited for the Permian and Northeast, and our internal teams are already working on the next-generation of this dissolvable technology for the future.

Our final technology is the breakthrough casing flotation tool designed and developed by a Norwegian company called Frac Technology; this team is focused on the development of downhole technology and has introduced a number of patents throughout the 30-year history in the industry.

The trials have been extremely successful, because of this success and what we see as a large and growing addressable market combined with an incredible team, Nine acquired frac technology and oil-related IT and patents in October.

The team will remain in Norway but operationally will fall under Claire Hall [ph], our Chief Technology Officer, and will work in conjunction with Nine and Magnum's R&D teams to continue to work on tool development. The breakthrough of tool provides a durable and cost-efficient method for floating casing in bottom in long lateral wells.

To-date, we have run over 70 trials with no failures in the Northeast, Permian, Eagle Ford, DJ and MidCon with the first runs in Canada scheduled for Q4 this year. The system is unique and that it allows operators to reach total depth by eliminating components added to the casing strengthen commonly used with conventional techniques.

The highly engineered plug in the device uses the material barrier to shatter at a precise differential pressure and eliminates the need for debris trap and significantly shortens the shoe trap.

The tool not only helps to ensure casing will reach bottom efficiently and reliably, but by eliminating the debris trap, the operator receives money and can access more of the laterals potentially increasing EUR. We receive substantial growth for the tool in the U.S., Canada and abroad.

The tools are sold per well and are most applicable for longer laterals. We feel confident that we will be able to not only take market share from similar products in the market but also propel adoption with those operators not currently using a flotation device. The reliability and assurance the tool provides far exceeds the upfront cost.

While we are excited about the potential of the breakthrough tool, as always we are focused on the tools of the future. The Frac Technology team has deep expertise in completions and are currently working on the next-generation of tools throughout the wellborne.

We are extremely excited about what we will be able to do for our customers by combining the Nine, Magnum and Frac Technology R&D teams with the knowledge, intel and execution abilities of our service teams in fields. Lastly, I would like to talk about Q4 and what we see for 2019.

Please note, Q4 guidance is consolidated for Nine and Magnum, and includes the legacy Nine business, and only two months and six days of Magnum contribution reflecting the close of the transaction on October 25. For Q4, we expect total revenue between $225 million and $235 million, and consolidated adjusted EBITDA between $40 million and $45 million.

I want to emphasize that Q4 is not an accurate proxy for the run rate for OFS and every year we see slowdowns related to weather, holidays and budget exhaustion. While operators are being more cautious about seeing within budget this year, we remain very positive on the overall fundamentals for the industry and outlook for 2019 and 2020.

We have been working with our customers to reduce the cost for lateral foot, they are doing more with less, allocating capital towards more large deal development with mega well pads and longer laterals with a more balanced, consistent approach to 2019.

Customer completion efficiencies translate to both OpEx and capital efficiencies within Nine, as well as the ability to differentiate and gain market share and price. Operators are seeking the best service providers to ensure production timing, cost predictability and safety at the well site.

Those are the type of customers we work for today and will continue to focus on in the future. We are currently working with our customers on their 2019 plan with most indicating increases in those activity and production.

While we will not provide formal 2019 guidance on this call, we have already ordered a portion of our 2019 gross capital equipment within our completion solution service line because demand for our work is there. Because of these conversations we expect another year of growth for Nine in 2019.

We will continue to monitor labor, and are anticipating another year with wage inflation. Similar to 2018, our 2019 capital plan will prioritize returns while maintaining our brand and service execution.

With the addition of Magnum Oil Tools, Frac Technology, and operational and capital efficiencies we continue to gain through multi-well pad development, Nine is a less capital and labor intensive and much more cash generative with higher barriers to entry.

Because of this in 2019, we see a pathway to margin expansion, increased free cash flow generation, as well as a positive trajectory in our ROIC as we can invest less while increasing profitability.

Our ultimate goal is to go to sustainable oilfield service platform, better able to service our customers while mitigating financial risk and increasing return for our shareholders. Today, we believe we have the right blend of service and technology with the best teams focused on being good cumulative [ph] capital for our shareholders.

We will now open up the call for Q&A..

[Operator Instructions] Our first question is from James Wicklund with Credit Suisse..

Ann, you're obviously positive on dissolvables; dissolvable technologies were first introduced about 4 or 5 years ago into the market, they were first done as just dissolving balls, now we're upto completing dissolving plugs.

The chemistry has changed, some people have complained that it's great for further out, it's not for close rent on the laterals and after 4 or 5 years we're only at 10% to 15% of the market.

Can you tell us where you expect to be in a couple of years and why you expect an acceleration in the adoption of dissolvables?.

I think one thing to keep in mind is, we think the majority of the traction in 10% to 15% has been gained in the past 18 months, so when we entered the decline beginning in 2015 and then it got obviously much worse through '15 and '16, that two years really saw; one, a lot of Completion's engineers are getting fired across North America, a great level of unwillingness to sign any upfront AFE that would increase relative to what composite plug can be.

So I think that really timing the adoption rate. We also had a large job that occurred in Canada, early in 2015 with early dissolvable technology, not Magnum technology, that was a real disaster and that shook a lot of Completion's engineers.

So I think we've seen a huge proliferation of dissolvables again, beginning in 2017, as the market backdrop became healthier, we also have seen a radical shift in multi-well pad movement and lateral links in the Permian from 2014, it was very rare for us to get up on the two-well pad in 2014.

So that concentration of risk on the multi-well pad and the extension of the lateral link has really deferred growth into dissolvable technology, again '17 into this year. We have not seen a tool climb so quickly across the field as we have with dissolvables and over the past 6 months.

And I would say we've also seen a lot of operators playing around with full wellbore dissolvables. So I'm not sure if that answers your question, I'm happy to go into more detail but count out 2 years there in that 4 years that you're talking about..

That's very helpful, I appreciated it. It makes a huge amount of sense and every technology has gotten better overtime. My follow-up if I could; you just demonstrated with the acquisition of Magnum you're willingness to step out and grow in an area where you don't currently play.

Where is another area that you don't currently play that you wouldn't mind stepping out to?.

I think we've said many times, a lot of geography and terrain for us to concur here in North America, a lot of 2019 will be marked by disciplined organic growth for the company.

We have now a very established management team in these services lines, we've got a lot of work to do to really leverage the tools and technology in Magnum and Frac Technology. So we'll be combining both of those and growing across North America but I would say that 2019 will be very marked by disciplined organic growth.

And at this time we don't feel gap in service line and/or technology, we're obviously always looking for nice strategic alliances in technology, as well as any bolt-on acquisitions that may make sense but there is not some service line hanging out there that we're keen to get into that we don't have exposure to right now..

So we should expect the beefed up exposure in place of like the MidCon and the Rockies from an organic basis as opposed to adding new product lines?.

Yes. I mean we never want to say never Jim but again, we find it hard to justify the premium when we're sitting here with such a talented team. So we've often always said publicly that we're underexposed in the Mid-continent and the Rockies area, and obviously, we'll be focused on those areas..

Our next question is from Martial Atkins [ph] with Raymond James..

You guys seem to almost every sub-segment be posting higher revenue per unit or per stage or whatever.

That implies you're getting pricing improvement or is that a mix issue or technology adoption? What I'm really asking is talk about pricing because it seems like you're an outliner in terms of your ability to realize price like across the board and almost every one of your segments last quarter.

And if, indeed that's the case, how does that look going into '19?.

Yes, we did. The only service line where we didn't show an increase in price was Completion tools and that's just relative to the mix, you're going to see that fluctuate on a quarterly basis.

Some of our tools obviously carry different prices than others but you are absolutely correct, every other service line including production inclusions increased price quarter-over-quarter, as well as activity gains. So we're very proud of that.

I think we've said many times that combining the technology with the service execution is paramount [ph], the tolerant-fleet operators that we're working with more mistation/misruns [ph], just -- I don't want to say it's zero defect but it's pretty darn close to that.

And our team out in the field is just continuing to execute every single day and -- so we've seen our CC improve significantly, we've seen our operational efficiencies continue to improve significantly, sometimes that facilitated by throwing centers all over our equipment, sometimes it's facilitated by good industrial process that we're infusing in Nine, but mostly it's the differentiation at the supervisor level, up through the district manager level of which we have over 5.7-year tenure.

We really do feel we've got the most exceptional folks out there, we think they're very motivated, well incented, and certainly extremely differentiated. So we're allow -- we are able to continue to provide service execution for our customer partners.

I would also say that we select into customers that have learning cultures and have a relentless focus on reducing the cost to complete.

If we were mismatched or misaligned, then you wouldn't see that but those incremental prices increases for our customers are just pale in comparison to them being able to reduce their cost per lateral foot and reliably predict when they're going to bring that well online, as well as predict their cost to complete going forward.

I think when you think about 2019, it will be very, very activity driven. As we've said many times this year, we dripped twice and did some value proposition.

So every time we put a tool downhole that creates tight efficiency, every time we execute and we're creating a service execution efficiency, we're providing a value proposition and that's when we'll say here is the economics, here is what you're saving or here is rotating flotation tool, and here is your incremental 20-feet of lateral you get per well.

So we're always talking in terms of value proposition with price but I would definitely say '19 will be driven by activity..

Second question; I know you've had it in-house for a whopping 2 or maybe even 3 weeks here.

Now that you have Magnum onboard, any surprises, anything as you've gotten to know the people that you didn't think before or insights that may be useful for us to understand how this will fit going forward?.

Yes, I mean I think the big surprise is we knew the team was excellent we knew that through diligence. But obviously we weren't able to contact with the broader team.

And I think what's been very surprising is how these two teams have gelled so quickly, they have connected on what I'll call to as a self-starter basis, it's not like the type to throw down so needed, it's an integration plan to get people to pick up the phone and talk to each other.

So the integration is already in it's first few weeks has been a lot more seamless and even I would have anticipated.

And so I think that isn't very surprising to us with joint customer calls already, and we're obviously in a very heavy planning phase with the engineering teams to figure out how to attack it's North American land market in the most successful and efficient way next year but it's just -- I'll be honest, the team is even better than I had expected..

[Operator Instructions] Our next question is from John Daniel with Simmons & Co..

Annual, Q4 guidance; is it possible to get a breakdown between the Magnum contribution and the legacy Nine business?.

No, we're not breaking that down. We will be reporting Magnum under completion tools, and so we will be breaking down that consolidated topline as it relates to the percentages driven from -- for instance, cementing, wireline, completion tools, etcetera but we will not be breaking out this two lines anymore going forward; one team, one site here..

2019 CapEx, you mentioned disciplined organic growth; so just on that point.

Have you placed any orders for new equipment to be delivered next year? And if so, can you walk us through what some of those orders might include?.

At this time we're not walking you through what these orders are but we absolutely did put equipment on order, there is still very real supply chain bottlenecks as you know in the industry.

So we were very keen to get that on order, and I would say obviously, you know, the service lines that were within and the ones that we're not anticipating supplying a lot of growth capital to you, I would say the one service line that won't be receiving a lot of growth capital is production but every [indiscernible] within our completion solutions businesses, can you get attention from the senior management team relatively to their margin contribution, and the demand and call on their work.

So lot more market out there for us to grab for sure. So again, we'll be more detailed on that plan as time goes on, John, but safe to say that yes, we've put a chunk of equipment on order..

You're making great progress on transitioning Nine to a higher tech less labor intensive business. But one business as you know that doesn't really fit that model is well servicing.

So I'm just curious how do you look at that business going forward?.

Well, I've said this year that I'm relatively new to the well service business, and so I'm taking my time to get to know that business. We have often and open stated that does not have the differentiation of Completion Solutions.

And so we're still evaluating it, we've got some tools out there that we maybe to cross pony investor [ph] refine but I would say we're obviously always evaluating that industry or that segment of our business..

On that segment, some of the larger peers have talked about efforts to continue pushing pricing; are you saying to do that?.

I think we've all been pushing pricing together, and we increased our pricing in the service line, 4% quarter-over-quarter; so we're all working on pushing that pricing and it needs to be pushed. As you know, we're in an inflationary environment on wages and so that's critically important that we keep doing that.

I think a lot of our survey -- a lot of customers have also come out and acknowledged that they will have service inflation next year. And as you've said it's a very labor intensive business..

We have reached the end of our question-and-answer session. I would like to turn the call back over to management for any closing remarks..

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

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation..