Greetings and welcome to the Nine Energy Service Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the presentation. [Operator instructions] And as a reminder, this conference is being recorded. I would now like to turn the conference over to Heather Schmidt.

Thank you, please go ahead..

Thank you. Good morning, everyone and welcome to Nine Energy Service earnings conference call to discuss our results for the second quarter of 2019. 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 reasons. Our comments today also include non-GAAP financial measures.

Additional details and a reconciliation to the most directly comparable GAAP financial measures are also included in our second quarter press release and can be found in the Investor Relations section of our website. I will now turn the call over to Ann Fox..

Thank you, Heather. Good morning, everyone. Thank you for joining us today to discuss our second quarter results for 2019. This quarter, both revenue and adjusted EBITDA, fell within the range of management’s original guidance and the increased cash flow from operations by approximately 95% quarter-over-quarter.

We anticipate cash generation will continue to increase throughout the remaining quarters in 2019 and into 2020. In fact, at close of business on Friday, August 9, our current cash position is up significantly from [quarter two] to approximately $59 million.

Additionally, we anticipate CapEx to be down materially in 2020, which should lead to significant free cash flow. Company revenue for the quarter was $237.5 million, net income was $6.1 million, and adjusted EBITDA was $38 million. Basic earnings per share was $0.21.

Adjusted net income for the quarter was $8.8 million or $0.30 per adjusted basic earnings per share. ROIC for the second quarter was 7%.

Despite volatile moves in WTI throughout the quarter, the market remains steady throughout the majority of regions and service lines during the second quarter with the exception of the Northeast, which began to see activity weakness in the back half of Q2. I will speak in greater detail about this during our Q3 outlook.

Our larger [oil levered] E&P customers have remained consistent with their activity plans. We saw increased activity across all of our service lines this quarter with strong performances from cementing, and completion tools, which continue to outperform the market.

Once again, our cementing division increased activity by approximately 1% quarter-over-quarter while simultaneously increasing profitability by increasing the average revenue per job by approximately 5%. This increase was despite U.S.

new wells drilled, declining by approximately 4% quarter-over-quarter and not receiving any incremental unit during the quarter. In the Permian, we increased our market share for the second consecutive quarter, while maintaining an industry leading on-time rate above 95%.

As a company, we increased our total stages completed by approximately 19%, despite total U.S. completions increasing by only 6%. In completion tools, we increased the number of stages completed by approximately 26%, and revenue by approximately 4% quarter-over-quarter. Our U.S.

wireline performed well winning market share and putting the four new wireline trucks we received at the end of Q1 to work in West Texas hoping to generate activity growth of approximately 4% quarter-over-quarter. Despite headwinds associated with our Canadian business, which had low utilization in Q2, due to typical Spring breakup seasonality.

In June, we did begin to see the effects of a Northeast slowdown on revenue and profitability. In Q2, our coiled tubing division performed well. This is due in large part to our technology, including downhaul memory tools and data collection, along with the expertise and execution at the well side.

Our large diameter utilization with flat quarter-over-quarter and our days work increased by approximately 2% quarter-over-quarter with more complex completions, including longer lateral and multi-well pad development coil drill-out remain extremely difficult, and can be one of the largest contributors of non-productive time if not executed perfectly.

This complexity has enabled us to differentiate in the market. As many of you know, one of NINE’s highest priorities for 2019 has been a development of a dependable, lower cost, low temperature dissolvable plug to penetrate the Permian in Northeast markets, which have lower bottom hole temperatures than other unit basins.

This development is a collaboration between our legacy NINE and Magnum teams to create both new IT design with a shorter design to bring the overall cost to manufacture, down through vast materials, as well as new material science to ensure consistent and predictable dissolution for every type of wellbore in a low-temp environment.

We have also successfully utilized data from our coiled tubing teams in the design of the tools. We remain confident that our Q1 2020 timeline for commercialization remains on track. After multitude of successful in-house R&D test to date, we have begun to run products downhaul with customers.

We are partnering with leading E&P companies who are willing to share information on performance such as water analysis, deployment [fees], treating pressures, and clean out results. With the low-temp dissolvable, we are simultaneously working on two other technologies, which we also anticipate having ready for commercialization in 2020.

Both of these products will leverage a similar shorter design similar to that of the low-temp for acquiring vast materials, ultimately lowering the manufacturing cost for NINE and for our customers.

The first is a high-temp dissolvable plug, which will utilize our existing high-temp materials, which are proven and have consistently performed flawlessly.

This new shorter design will allow us to lower the cost for operators in basin like the Bakken, Haynesville, Eagle Ford and other International markets so that they can move from a hybrid to wellbore dissolvable plugs, while maintaining consistent and reliable dissolutions.

We remain very confident in the continued performance of the materials that we’ve been running successfully for over four years in high-temperature environment. To be clear, for the high-temp plugs, the variable that changes is the plug design, not the already proven materials.

Second will be a shorter and cheaper all composite plug, while we dissolvables are the future, there is still a large addressable market for compositive plugs that we can continue to access and gain market share. We will be utilizing similar materials from our current Scorpion design and anticipate continued high-level performance from this product.

This new line of plug with the similar design with different applications will be known as the Scorpion Stinger product line. With all three technologies, NINE will be able to service the entire addressable plug market in the U.S., Canada, and abroad. Permian will be the largest growth market in North America with both the low-temp and composite plug.

So, we also anticipate the international market could potentially be a significant channel of growth as well for both the composite and high-temp plugs.

By mid-Q4, yield trials for the low-temp dissolvable plugs should be completed having run trials in all major low-temp basin, including the Permian and Northeast for multiple customer with unique wellbores.

We anticipate field trials for the high-temp plug to be completed in early Q1 and field trials for the composite plug be completed in mid-to-late Q1 2020. We expect all three plugs will be commercialized and ready for Q2 2020 with the low-temp being the first in Q1.

At this time, we are not providing any growth rates or 2020 outlooks for these tools, but based on what we know today, we are expecting very healthy growth for these new technologies even if 2020 market conditions and E&P CapEx spend remain consistent with current level.

As a reminder for tools, EBITDA has almost a 100% free cash flow conversion and we will simultaneously be able to drive revenue growth, margin, and cash flow while reducing our overall CapEx spend.

To conclude, this new product line will fundamentally reduce the cost to complete for our customers, provide a consistent and reliable technology and lower our company’s overall cost to manufacture, resulting in cheaper, better, and faster tools, which is the only way to win in North American shale.

With that, I would like to turn the call over to Clinton, to walk through the segments and other detailed financial information for the quarter..

Thank you, Ann. In our Completion Solutions segment, second quarter revenue totaled $215.9 million, compared to first quarter revenue of $209.1 million, an increase of approximately 3%. Second quarter adjusted gross profit was $49.8 million, compared to first quarter, our adjusted gross profit of $47.7 million, an increase of approximately 5%.

During the second quarter, we completed 1,156 cementing jobs, an increase of approximately 1% over the first quarter. The average blended revenue per job increased by approximately 5%. Cementing revenue for the quarter was $56.7 million, an increase of approximately 7% quarter-over-quarter.

During the quarter, we did not receive an incremental cementing units, but did pay for two units, which was reflected in the CapEx number for Q2.

During the second quarter, we completed 11,494 wireline stages, an increase of approximately 4% versus the first quarter, despite wireline stages in Canada be it down approximately 40%, due to typical seasonality around spring break-up. The average blended revenue per stage increased by approximately 2%. Wireline pricing in the U.S.

increased slightly, but the blended revenue per stage declined mostly due to less stages out of Canada, which has a higher stage pricing. Wireline revenue for the quarter was $64.2 million, an increase of approximately 1%.

We received two incremental growth capital wireline units towards the back half of Q2 bringing our unit count to 61 at the end of the quarter. In completion tools, we completed 32,888 stages, an increase of approximately 26% versus the first quarter. Completion tool revenue was 56.1 million, an increase of approximately 4%.

During the second quarter, our coiled tubing days worked increased by approximately 2%. The average blended day rate for Q2 decreased by approximately 1%. Coiled tubing utilization during the second quarter was 59%, which does include the small diameter unit we have parked. Coil tubing revenue was 38.9 million, an increase of approximately 1%.

In our Production Solutions segment, second quarter revenue totaled 21.6 million, compared to first quarter revenue of 20.6 million. Adjusted gross profit for the second quarter was 3.1 million, compared to first quarter adjusted gross profit of 3.4 million.

During the second quarter, well services had utilization of 61%, which was down approximately 1% quarter-over-quarter. Total rig hours for the quarter was 47,040, an increase of 2%. Average revenue per rig hour during the quarter was $460, an increase of approximately 3%.

The company reported selling, general and administrative expenses of 21.8 million, compared to 19.9 million for the first quarter. This increase was largely due to stock-based comp expense and professional fees. Depreciation and amortization expense in the second quarter was 18.5 million, compared to 18.2 million in the first quarter.

The company recognized income tax benefit of approximately 2.7 million in the second quarter, an overall income tax benefit year to date of approximately 2.2 million resulting in an effective tax rate of negative 10.8% against year-to-date results. The current year impact of our valuation allowance positions, as well as state and non-U.S.

income taxes are the primary components of our 2019 tax position. During the second quarter, the company reported net cash provided by operating activities of 11.5 million, an increase of approximately 95% quarter-over-quarter. The average DSO for the quarter, second quarter was approximately 64 days, compared to 62 days in Q1.

Total capital expenditures were 13.8 million, of which approximately 27% was maintenance CapEx. Our original full-year CapEx guidance of 60 million to 70 million remains unchanged with approximately 57% spent year-to-date using the midpoint of the provided range. Also, to reiterate Ann’s comments, we expect CapEx to be down considerably in 2020.

During the second quarter, we repaid all of our outstanding ABL credit facility borrowings in full. As of June 30, 2019, NINE's cash and cash equivalents were 16.9 million with 161.1 million of availability under revolving ABL credit facility, resulting in a total liquidity position of 178 million as of June 30, 2019.

As Ann mentioned, our cash balance has increased significantly since June 30. As of close of business on Friday, August 9, our cash position is approximately 59 million.

This increase is related to collections of past due receivables that we caused by changes to our MSAs with customers, as well as vendor set-up issue with certain customers online payment portals. I will now turn it back to Ann to discuss our Q3 outlook..

Thank you, Clinton. At NINE, we never anticipated a stronger back half for 2019, and we talked about a relatively flat quarterly run rate.

With so much uncertainty and volatility in the market in conjunction with operators unwavering commitment to staying within capital budgets, we do believe the rest of the year will be choppy from both an activity and pricing perspective, especially for specific regions and service lines.

As many of you know, approximately 30% of our total revenue comes from [indiscernible]. And the gas market has been extremely difficult with lower than expected demand this summer, sub $2.50 spot pricing and the EIA is projecting that natural gas prices could be the lowest summer average since 1998.

This is causing a number of operators in the Northeast to suspend activity and temporarily reduced frac crews for Q3 and in Q4. We are estimating that active frac crews could [draw from] approximately 55 to 60 crews at the end of Q1 to as low as 35 to 40 Q3, and potentially more following the Thanksgiving holiday.

This decline affects approximately 20% of the frac crews we follow in the region. We have been proactively working on navigating this activity decline and looking for work with new customers.

But this amount of activity decline will affect our back-half numbers from both a revenue and profitability perspective as pricing pressure increases with less work to grow around. As a reminder, we have approximately 20% of our revenue coming out of the Northeast with both wireline and completion tool exposure.

We are estimating revenue drop for this region quarter-over-quarter of 20% for both wireline and tools. Our coiled tubing division is very active in Haynesville and we do anticipate actual declines in this region as well, which could affect revenues for both Q3 and Q4 for our coiled tubing team.

Today, approximately 9% of our total revenue comes from Haynesville. Our customers in other regions, specifically the Permian, appeared to be moving forward with their plans as anticipated, but the environment today does not facilitate potential price increases.

On top of the activity declines in [gassy] regions, we have also begun to see pricing pressures within our composite plug tools due to less activity in the Northeast, as well as our current competition lowering prices to try and win market share.

We have made a conscious decision to lower our prices and temporarily, and feed margins for the short-term for strategic regions as we look into 2020. We feel it is imperative that we maintain these customer relationships and wellbore in order to eventually transition these customers to our new, cheaper, and higher margin tools in early 2020.

We are still able to maintain a strong margin and this strategy will facilitate adoption of our new technology in 2020. With that, for Q3, we expect total revenue between 215 million and 225 million, and consolidated adjusted EBITDA between 24 million and 29 million.

This decline is due to loss revenue and margin degradation in the Marcellus, Utica, and Haynesville region. Our 2019 priorities remain unchanged.

We are focused on the development of and commercialization of our new Scorpion Stinger plug line, delivering the company and reaching our goal of one-time net debt-to-EBITDA by Q4 2020 through free cash flow generation and evaluating our existing service lines and geographies to ensure they are accretive to margins, cash flow, and ROIC.

We still see a strong pathway in 2020 and beyond to increase free cash flow generation and margin expansion, as well as a positive trajectory in our ROIC for the medium-to-long term, despite difficult GAAP market conditions.

We anticipate a significant reduction in our CapEx spend for 2020, which will help generate significant free cash flow moving forward. We remain committed to our asset-like models that blend service and technology, helping our customers lower their overall cost to complete and being good stewards of capital for our shareholders.

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

Thank you. [Operator Instructions] Our first question is from the line of Sean Meakim with JPMorgan..

Thank you. Good morning. .

Good morning, Sean..

So, Ann, I would like to focus on some of the more idiosyncratic growth drivers that you’ve been investing in this year for 2020, and I think you gave a good amount of detail on the plans for tools, but could you also maybe talk about your confidence in the MidCon build after cementing given the landscaping now, among your [AP] customers?.

Yes. That’s a great question, Sean. We’ve been watching the MidCon closely, as you know, and just to remind the market we’re expecting delivery of eight new cement spreads and those will be largely in the back half. Candidly, the demand for our cement business in West Texas is extraordinary. We are short and [indiscernible] at the present time.

So, I think you will see us ship some of those [tons] to meet some of the West Texas demand, and this really has been – not only a record revenue year for us in cement, but also in possibility. So, this is market share gains and declining new wells drilled environment and I think we’re really hitting on all fronts out there in West Texas.

So, I think you can bank on the majority of that going to West Texas and slow walking and carefully walking the build-out of the MidCon as we wait to see operators spend plans specifically in that [year 2020]..

Okay. That makes sense. Thank you for that update.

Could you also maybe just talk about pricing in the completion service lines, you mentioned composite plugs, but can we talk maybe through cementing, wireline, and coiled tubing, you know you can spread it out geographically if you like, how do you think is the best way to characterize it, but even within those product lines that you are seeing differences in pricing between simple jobs you'll see more complex work that you try to focus on, we are ready to get an update of what you are seeing in the market for each of those service lines?.

Sure. I'll just start with cement, just since we just left off with what. And then again, we’ve talked many times about the deep notes around the business and the barriers to entry both technical and capital.

And we’re having tremendous success and our labs this year, developing some really forward meeting proprietary lightweight cement queries, so that’s been very helpful to us, and you couple that with the execution, it’s been great.

And so that allowed us to demand price from the operators, both for the differentiation and queries, as well as execution [on timely]. I would say that pricing is good Sean. We don't expect too much to change there, where obviously the whole market is watching.

CapEx spend for Q4, if you look at the Permian specifically, it looks from our analysis like most of the operators are kind of tracking 50% of the budget. So, I think perhaps the cliffs that we saw coming may not be as pronounced, as well as they.

But having said that, I do want to be cautious that I think our customer base is more focused this year than we have ever seen them be. On living them within their capital budget.

So, if those capital budgets increase for some reason or the spend, the pace of the spend increases you could see a [self] in Q4, but baring that, I think cement pricing is great. That service line is really panning out, I’m so tremendously pleased that we put those dollars work here.

Our shift to coiled tubing, specifically in [indiscernible] basin like the Haynesville very [indiscernible] we have a lot of incremental units coming on into North American land in the back half.

Certain public companies making a few hundred [indiscernible] EBITDA in any given quarter and that means that they are becoming very fierce with pricing, changing their kind of average pricing upwards of 50% down.

So, I think there are real challenges, not our ability to differentiate, but it’s really fighting off what I will call the slowdown in companies or folks that are on life support and that is something we are going to have to model through on OFS side for the next couple of quarters.

So, we see some companies that just don't recapitalize their equipment or don't have the cash flow to be sustainable entities. So, we’re certainly dealing with that. And we’ve obviously talked about that in the call. When you think about wireline pricing, this is one of the service lines that has a lower barrier to entry.

A lot more saturation of equipment in North American land, but it’s also not a capital-intensive business. So, you can beat your margin down a bit more and you can still maintain return hurdles in that business just because you don't have the CapEx need going into those units.

So, that’s something where for instance in the [gassy markets] in the Northeast, we’re willing to take a need for a couple of quarters because of where we see the market and our position in the market in 2020, but I would say pricing remains very challenging there.

It is very much a zero [defect] mentality from the operators without kind of significant premium and pricing.

What I mean by that specifically is the efficiency demand from our customer base are probably the toughest that we have ever seen them and you would anticipate pricing would move in conjunction with that, but I think given the volatility in the commodity prices we just haven't been able to garner increases in prices there, and I would not suspect, and I would not model any increases in prices for wireline in the back half of 2019.

Completion tools, we have a unique [indiscernible] on the composite plug side. We have not seen new entrants Sean, but we have seen a massive degradation in the pricing there as people fight for market share.

And if you look at some competitor tool companies, you can see margins that really aren’t reflective of completion tools, and so that again gives you an idea where people are going and the approach generally has been to gain market share and not hold profitability.

Now, we are doing that temporarily as I said, because we have products [indiscernible] wellbore where we think we are fundamentally going to be able to shift the profitability of the corporation and I wouldn't be surprised once we get a run rate going next year, if we could put 700 basis points on the margin from the mid-point of my guidance.

So, the midpoint of my guidance is about 12% adjusted EBITDA margin.

And given what we're doing with potentially doing with certain geographies in this company, as well as certain service lines plus the profile of the tools, our big focus for 2020 will be to really touch the profitability lever, as well as the cash flow generation, while [diving back to] CapEx.

And we certainly consummated a couple of transactions in 2018 that gave us the platform and foundation to do that.

We have some cleanup in the strategy and execution of the businesses, the year as it relates again to certain geographies in service line, which we hope – we hope you will see some progress on, and then again, we are very confident in the Scorpion Stinger line. So, couple of quarters of taking in easier and then very excited for 2020..

Very helpful recap. Thanks for that Ann..

Our next question is from the line of [Chris Roy] with Wells Fargo..

Good morning..

Good morning, Chris..

Just wanted to ask on CapEx first.

You mentioned it could be down considerably next year, and I think if I did the math right, it was about 10% maintenance CapEx last quarter 27%, this quarter, I think you’re on an annual rate about maybe 15 million this year, what kind of growth projects you had in mind next year on top of that kind of underlying rate for CapEx?.

You know, I’ll be candid with you. My Chief Operating Officer and I, when we look at the business over the next 12 to 24 months, we’re really looking at maintenance capital.

We’ve put a lot of growth capital into the business in 2019, we’re really building out that cement business, which we love, we put growth capital into wireline, as I’ve mentioned before, completion tools, which will be the greatest driver of profitability in 2020 doesn’t need CapEx.

So, my answer to you is, is this going to be a maintenance CapEx story for 2020 and likely for 2021..

Okay, that’s helpful. Thanks.

And then to follow up, I think last quarter you talked about maybe for $4 to $5 a share in cash flow from operations target, obviously it looks like you're taking the next couple of quarters in kind of regrouping, due to the market environment, can you give maybe an update at target for that this year?.

Yes. I don't think it’s unreasonable for you to think about the bottom-end of that range. And I think that’s still a reasonable forecast.

And again when we look at the back half of this year, we spend a lot of time building these teams positioning within the market and so the detrimental margin coming from Q2 to Q3 looks, you know it looks a bit obnoxious, but it’s purposeful and it’s because of what we see in 2020, where we need those wireline crews to help us pull through the tools and technology, but from a cash flow generation perspective, what is a great part of the story is in the declining price and activity environment, you can sell the very cash generative business.

And this has been part of our transformation of this business into the capital like model so that we can generate that cash flow and what we think could be a flat CapEx spend environment next year.

And so, when you think about this business, WTI remains between $50 and $60 and North American CapEx spend is flat, we want a business that high teens, normalized EBITDA margin is very cash generative, and very differentiated. And that’s where we plan to go. So, $4 [indiscernible]..

Thanks for the color. Turn it back..

Our next question is from the line of John Daniel with Simmons Energy..

Hi, guys.

Ann, you speak to your willingness to potentially buy assets from some of your struggling peers and they need to divest them to raise cash?.

Yes. I probably am not interested in that John.

I never like to be exclusive and we certainly have folks here that literally turn over every rock and consider everything deeply, but again there is, we’ve got enough growth capital with differentiated equipment in our capital intensive businesses, so it would have to be something very, very compelling because as you know my feeling on discounted assets and OFS is that number one they [rust], and number two the real value is, the collection of workforce.

So, it would be challenging for me to think about that..

Fair enough.

And then just as we go into the second-half choppiness, can you just speak to how you balance, headcount just given software utilization, but then an expectation for rebound in 2020?.

Sure. I mean, you’re obviously first and foremost looking at the liquidity profile, the cash generation of the business, we’re very focused on right sizing the balance sheet and hitting our one-times net debt-to-EBITDA target by Q4 2020, so we would not see anything to the business that we felt would impact our ability to get there.

And I think when you think about headcount and you think about talent, and you think about sitting around that 12% or 13% margin although we’re not crazy about that margin level we really see a path for success in 2020. So, we don't want to fundamentally impede that or our capability to rebound with the market in Q1.

So, we’re holding onto some cost that we would not have held on to in 2015 and 2016 when your operators had no clue whether they were every ever coming back to work. So, I would say, we're balancing that carefully.

I certainly entrust the team and the field to make those decisions, which they have been making very wisely, but my message to them is do not dismantle what you’ve built for years when you already know your customer's plans for Q1..

Okay. That’s just [indiscernible]..

Our next question is from the line of George O'Leary with Tudor Pickering Holt..

Good morning..

Good morning, George..

Talked a little bit out on the last quarters call, you know about customers very intently checking different metrics, operational metrics, I think there was comments that you guys were monitoring, things with the stopwatch, and I know you guys monitor efficiency and operational metrics very closely, wonder if you could share what areas your customers are most acutely focused on improving efficiencies, improving ops and what’s left to do there for you all?.

Sure. So, if you start with cementing, I mean there is a there is a number of metrics industry uses, but the primary metrics, the primary key performance indicator is the on-time rate. And that may sound simple, but the reality is, everything in North American shale now is time.

And so, if you are late for a cement job, the ripple effects all the way through the completion base of the well are significant. So, that’s the metric that I highlighted where we have over 95% on-time rate. We think some of our competition is down in the 70% mark, although we can't prove that.

And so, we think we’re really beating on that particular metric.

If you look at wireline, I think, I said in my last call, one of our great customers measures us on over 290 line items, and they are measuring not just efficiency rates, they are measuring flat times, they are certainly measuring non-productive times, but what they are there is efficiencies and [indiscernible] [do all your guns in a cluster of fire].

How long does it take for you to re-head cables? So, a number of things all related to the time, it takes you to complete the stage, and really the efficiency in which you do that, and wireline has been one of the more [scorecarded] service lines in the industry, so we’re actually getting quite good at that.

Completion tools, it’s really not drill time of the plug anymore, that’s kind of a thing of the past. Your plug better drill-out in a good amount of time, it’s really what we call on stump-to-stump or plug-to-plug time.

So, how well does that entire blog drill up and move from stage to stage and of course how does it drill out, what are the pieces and I'm talking about other [indiscernible] targets.

What are the pieces look like when they come back? So, for every different tool it is obviously a different metric, obviously your casing floating tools need to burst with the right pressure.

So, I could go on and on about different metrics, but they are parallel right now and they are the deciding factor for folks because everybody is looking at how much efficiency these operators can drive in a flatter commodity price environment and you know, of course it has been huge drilling efficiencies with your huge completion efficiencies, and I think every time folks think North American Shales just can't get any more efficient, it does.

And I think dissolvables will be a big contributor of that and days saved and time to get product to market..

Great. That’s super helpful and thank you. And then….

One other point on that george. If you think about efficiency, we’ve often said, we think the U.S.

market is anywhere between 10% and 15% of the stage count is dissolvables and if you think about, just think about say 850,000 stages next year in 2020, will you think about the Permian Basin, about 63% of North American stages are in what we call, cold or low temperature environments. And the Permian makes up 51% of that.

So, basically the bulk of the low-temp environment, which we think is still largely untouched by dissolvable technology. So, there is a lot of room for efficiency there and days to drill out per well. So, I’m excited for our customers for that evolution to come to that market..

That’s very interesting. Thank you.

Given all the different ways you guys touched the well construction and completion side of the equation, just curious, if you guys have noticed anything interesting with respect to changes in well designs or pad designs year-to-date, it seems like there have been a couple of issues in various basins and guide me after re-visit the way they [indiscernible] just curious what you all are seeing?.

Yes. I mean I think the age-old Frac heads and down-spacing is something the E&P community have talked a lot about and optimizing the down-spacing on those wells. I think one thing we have seen is, we have seen operators, some who were kind of three well pad folks, move to 6 to 8 well pads.

So, I think we are continuing to see operators increase the number wellhead per pad, but I think the biggest change or revolution for the E&P community and they would tell you better than me, but has been that down facing and ensuring that they are not stealing production from wellbores nearby with their frac design.

But if you're talking about are they changing from fleet to [plug and perf], we’ve not seen any massive shift change in completion, design that’s notable, like, I say, plug and perf shift. If that’s kind of where you're going..

Okay. Those were very helpful. Thank you, Ann..

Thanks George..

Thank you. [Operator Instructions] Our next questions are from the line of J.B. Lowe with Citi..

Hi, good morning Ann, good morning Clinton..

Clinton Roeder:.

Wanted to ask about kind of the dissolvable market uptake in general and it kind of dovetails into the new technologies that you guys are working on now.

Has there been, was the reason you guys are kind of working on a lower cost high-temp variance, is it, are you guys struggling to push the concept of using dissolvable across the entire wellbore, is it more a matter, is it competition coming into the dissolvable space, what is the – what was kind of the methodology behind coming up with the shorter high-term version?.

Yes. It’s a great question and specifically it is to reduce to switching cost. So, that completions engineer that’s looking at the upfront AFE, we are trying to get back completions engineer.

We are trying to get her to say, hey I am going to fill the wellbore with 100% dissolvable because I [indiscernible] IRR considerably because I get the product to market that much fast, and we have found the price point for which we need to at to do that and that is over launching. .

So, has there been any notable new entrants into the dissolvable space recently or maybe new offerings from existing players that you guys are keeping an eye on?.

Same players, if the time of acquisition is Magnum in October 2018. .

Okay.

Can you talk about your market share position both on the metallic and non-metallic side?.

Yes. And that is also J.B., remains roughly the same where we really are [indiscernible] in the [palmers] and we are working on obviously the low-temp, so we are really hoping to be a significant player once we launch these products.

And we have not given out our composite plug market share, there is obviously quite a bit more competition in the composite plug market and there have been a lot, we have had a lot more completion for a while, we have not new entrants, new significant entrants this year in that market with jut as I said, had a lot more pricing pressure from folks deciding to turn on the market share button..

Got you.

And one last quick one, just shifting gears to the mid-comp spending, I understand the rationale behind pushing more of those units towards the Permian, but have you guys spent any significant amount of money on facility built-out in the MidCon and what is the status of that if you are going to be shifting most of those spreads out to the Permian?.

Yes. We should be done with that for sure by the end of the year and it’s very immaterial and significant amount of capital. The real capital is in state pump..

Got it. Alright. Thanks..

Our next question is from the line of Chase Mulvehill with Bank of America..

Hi. Good morning.

I guess a follow-up on J.B.'s question on the MidCon build out, can you maybe just talk about the competitive landscape a little bit there, and maybe just kind of how fragmented the cementing market is in the MidCon?.

Sure. It’s actually not, it’s really not that fragmented Chase and that’s one of the beauties of cement.

Our choices there are just because we have some very large customers that we want to continue to gain incremental market share with and we need those pumps in areas where we are driving a lot of profitability that we think has a long way to run ahead of it.

So, our choice is to deploy those assets on in West Texas is really more organic to us and then also specifically because we think the spend from the customer base in the MidCon could be lower than anticipated not because there is incremental competition there or tightly fragmented.

You know, the large cap play in that area and there’s a really good small cementer in that area, but it’s a kind of area where once again you can count the number of competitors on your fingers..

Okay. Appreciate the color.

Coming back to wireline a little bit, you were talking with some of the larger players, it seems like that is used to be a big push to kind of have and integrate more Frac and wireline so kind of what’s your thought to integration of frac and wireline and maybe also talk to the impact of preassembled guns you're having on your wireline business?.

Sure. The bundling concept has been the one that has been in the oil patch for a decade and it is one that we have faced constantly and consistently as well as through the previous downturn, and I think some operators that have Frac that is the strategy that they take.

As you know I am – I don't intend to put Frac in the company for all the reasons that have just highlighted previously as it relates to a differentiated capital like model.

So, that won’t be something that we’re pursuing, and so, but again but it is something that certain companies to and some do it better than others do it, but that’s something that we’ve contended with the whole time. And what was the second part of your question? Oh, the integration. Those are great.

We love them and anytime you can take human hands out of gun building, you just reduced potential risk for misfire or err. So, we really like to integrate [guns assistance]. We think it has contributed a lot to efficiencies this year in completion. And I don't know if you had a further question on this, but we really like the assistant..

Okay. Great. A couple of other clean up questions for model.

SG&A in Q2 came in a little higher, was that more related to R&D and should we kind of run that number, that number through the income statement for the rest of the year?.

So, I think when you look at total SG&A, one of the things that drove with increase from Q1 was the [indiscernible] comps, so if you are including that.

That was an increase, because that is the issuance for 2019, but also when you look at it in Q2, if you look at some of the one-off items we talked about before, there are some transaction bonuses related to Magnum that flowed through there.

That will be declining as we go through the end of the year and as you get to the end of October it would not continue until in November and December..

But even if we removed some of that, there is still a big step up in SG&A, if we kind of back all that stuff out? And so….

The other item you highlighted was the professional fees. So, there were some one-time professional fees related to a few projects that are ongoing, those will not continue as we get to the latter half or the second half of the year. So, that will decline as well..

Okay.

Last one, just on inventories and how we should think about inventories as we go into the first half of the year with the build-out of the completion tools?.

So, one of the things we had talked about in the first quarter was that we had a build in our inventory in the first part of the year and that was related to as bringing in-house the assembly, so we purchased some of the remaining inventory from our suppliers. We will continue to work that down as we go throughout the end of the year.

If you look at one point in the first quarter, if you look at our days sales of inventory it was above 90. We are targeting to get that down as we get into 2020 to 45 days, so you will continue to see that decline.

Now, the one thing that I would highlight is the timing as we launch the new products, we will have an initial build that will incur as we launch new products in the early part of the year and will work through that as we build through [2020]..

Okay. Great. That’s helpful. I’ll turn it back over. Thanks..

Thank you. We have now reached the end of the question-and-answer session. I would like to turn the floor back to Ann Fox, CEO 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 the teleconference. You may disconnect your lines at this time. And thank you for your participation..