Greetings. Welcome to the Nine Energy Service 2019 Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator instructions] Please note, this conference is being recorded.

At this time, I will turn the conference over to Heather Schmidt, Vice President of Investor Relations. Mr. Schmidt, you may now begin. .

Thank you. Good morning, everyone and welcome to Nine Energy Service earnings conference call to discuss our results for the third 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 third quarter press release and can be found in the Investor Relations section of our website. I will now turn the call over to Ann Fox..

Thank you, Heather. Good morning, everyone, and a special thank you to all of the veterans for their service to the country. Thank you for joining us today to discuss our third quarter results for 2019. This quarter, revenue fell below management’s original guidance and adjusted EBITDA fell within the range of management’s original guidance.

The revenue was below guidance due primarily to the sale of our Well Services division, in which we lost a month of contribution and the closing down of our wireline operations in Canada, which I will speak to more later in the call.

Despite market conditions weakening throughout the quarter, we increased cash flow from operations by over six times quarter-over-quarter and our cash position is up significantly to $93.3 million as of September 30th. We expect our cash generation to remain strong through the remainder of the year and into 2020.

We also anticipate total CapEx to be down by over 60% in 2020. Company revenue for the quarter was $202.3 million. Net loss was $20.6 million, which includes a loss on a sale of our Production Solutions segment of approximately $15.8 million and adjusted EBITDA was $24.2 million. Basic earnings per share was negative $0.70.

Adjusted net loss for the quarter was $4.7 million or a negative $0.16 per share. ROIC for the third quarter was 4%. The market was challenged in Q3 and worsened throughout the quarter.

Our customers remain extremely focused on staying within capital budgets prompting many operators to scale back or slow down activity in the second half of the year to ensure they meet or come in under their budgets. With that, many of our competitors are acting irrationally from a pricing perspective to gain market share.

This behavior, coupled with activity declines throughout every region has led to increased pricing pressure, from which no service line is immune.

The hardest hit region remains the Northeast where we estimate frac activity is already down over 25% versus the end of Q1, which has caused increased pricing pressure and our total revenue in this region to decrease by approximately 26% from Q2 to Q3, slightly more than the 20% decline we anticipated.

As a reminder, we said on our last call that we estimated frac crews could drop from as high as approximately 55 to 60 crews at the end of Q1 to as low as 35 to 40 and potentially more following Thanksgiving. We believe these declines are still accurate.

Our operations and sales teams has done an incredible job winning new market share and managing cost to keep that region viable and we believe the staff we have in place is right sized to address the current operational needs of the business for the remainder of the year and into 2020.

The Northeast accounts for approximately 20% of NINE’s total revenue and includes both wireline and completion tool. As we anticipated and discussed during our last call, composite plugs continue to receive pricing pressure across all regions. Activity declines have caused revenue and total stages completed to decrease quarter-over-quarter.

Since the second quarter, we have lost approximately 20 to 25 frac crews followed across our composite plug business, the majority out of the Northeast. For some context, you can think about every frac crew completing approximately 2.5 wells per month with each well having approximately 75 plugs.

Assuming 22 crews, this equates to approximately 4,100 plugs per month or approximately 12,300 plugs per quarter. The bulk of these losses came from dropped frac crews by operators’ curtailing activity while a few others were lost due to our unwillingness to chase price to the bottom.

While we have reduced price on our composite plugs to maintain existing market share to aid and excel the introduction of our new tools in 2020, we have made the strategic decision to not meet unreasonable pricing by some of our competitors.

Cementing remains steady with both activity and price relatively flat quarter-over-quarter despite rig count dropping by approximately 11% over that same time period.

Cementing remains one of our most defensible businesses and we continue to innovate with new flurry designs and execute with unparalleled on time rates of over 95% on the service execution side. In the Permian, we were able to increase market share for the third quarter in a row.

Coiled tubing saw activity declines and pricing pressures during the third quarter. Increased pricing pressure comes from a combination of overall activity decline, new units coming to market and competitors looking to buy market share.

While all these competitors do not often win the works, it does allow operators to place additional pressure on us to reduce price. Additionally, we estimate that this overall activity has declined throughout 2019, approximately 30 to 35 new large diameter units have come on or are coming to market bringing a rough total of U.S.

large diameter units at year end to 240 to 250 units. We are not there yet. But because coil is a more highly capital-intensive business, we are watching pricing closely and we’ll stack units before we destroy capital and generate negative full cycle returns. U.S. Wireline has been hit the hardest today on pricing.

However, our team has done a great job maintaining overall market share in a declining activity environment. We are working with our best and most efficient customers to increase stage volume, enabling us to better work with them on pricing.

Because of the increased efficiencies in this business and the low capital nature, there is very minimum maintenance CapEx. We do have more flexibility on pricing and are still generating positive EBITDA margins for every active region in the service line.

While the back half of the year has been challenging, we have been focused on executing our 2019 strategic initiatives including the evaluation of existing service lines and geographies that are not accretive to ROIC, adjusted EBITDA margins and cash generation, as well as the development of our new dissolvable and composite plug technologies.

I will start by addressing service lines and geographies and then provide an update on our tool progression. As part of this evaluation process, we identified two areas within the portfolio we wanted to address, well services and Canada.

On August 30th, we completed the sale of our Well Services division to Brigade Energy Services for approximately $17.4 million in cash subject to working capital and other post-closing adjustments.

This transaction made NINE a pure play completions company, that is more asset light, while also reducing our employee base by approximately 24%, with 107 work over rigs, some of which were over 30 plus years old, we identified a material capital commitment coming in 2020 and beyond and we were not willing to destroy capital moving forward.

The divestiture also allows us to focus solely on our core service offerings and the successful development and commercialization of our new technology. Simultaneously, during the third quarter, we began the process of shutting down our Wireline operations in Canada.

We will maintain a completion tool footprint in this region including a small number of employees and an office. Over the last several years, the Canadian market has been extremely difficult with depressed activity, challenged infrastructure, and an oversupply of service companies and equipment.

Despite having a great team in place at NINE, this geography was not contributing to the overall earnings and return of the business. Additionally, like Well Services, the Wireline equipment was aging and required a significant infusion of capital to maintain current operations.

In the beginning of September, we’ve halted all Wireline operations in Canada and received minimal revenue and EBITDA contribution for the month.

We reduced the headcount from approximately 90 people to ten and there were approximately 1.4 million of severance costs associated with the lay-offs, which comprises part of the restructuring charges in Q3. None of the 14 Wireline trucks in the region will be generating revenue for the company moving forward.

One to two trucks could potentially be utilized for back-up units or remedial work in U.S., but the vast majority will be sold. Today, we are working on selling these units along with the remaining and flurry equipment and inventory.

Year-to-date, Canada has generated approximately $18 million in revenue and generated $30.5 million in revenue in 2018, the majority of which has been from the Wireline business.

Total net PP need for Canada as of September 30, 2019 was approximately $3.8 million and there is approximately $1.7 million of inventory we are in the process of selling or sending to U.S.

By restructuring the Canadian operations to be solely focused on completion tools, we have lowered the fixed costs significantly eliminated future capital expenditures and will be more resilient in the phase of continued challenging market conditions.

We believe our new dissolvable and composite plugs will be marketable in Canada and can take market share, driving profitability in 2020 and beyond. Before I turn the call over to Clinton, I will provide an update on our technology trials which remains one of NINE’s highest priorities.

The first technology we will be bringing to market is the low temperature dissolvable plugs, which will address the Permian, Northeast and portions of other basins like the DJ Niobrara with lower bottom hole temperatures.

Originally, we anticipated field trials will be completed by mid-Q4, because of current market conditions and significant activity drops during Q3, especially in September, we are extending trials to ensure we have met our internal threshold of successful trials.

We are however, still very confident that our Q1 2020 timeline for our commercialization remains on track. Throughout the quarter, we have won many trials across several basins from multiple customers with unique wellbores.

The success rate of the tool has been above 90% today with any of the trials we did not seen having 100% success, we were able to very quickly identify the issue with the operator, remediate the problem and apply the changes to the next trial.

Through the trials, we have seen the foundational elements of the dual impacts including the integrity of the IP design and its ability to hold pressure without slipping, as well as the performance of our new materials that have dissolved within the timeframe required in temperatures as low as 137 degrees.

We continue to receive very positive feedback from the customers we are partnering with and there is a strong appetite from other operators to trial the tool as we continue to produce and share positive results from our completed trials. The second technology we will be introducing is a high-temperature dissolvable plug to address the U.S.

markets like the Eagle Ford, Haynesville and the Bakken, as well as international markets including Argentina and Saudi Arabia. This plug will utilize some of our existing high-temperature yields that are proven and have consistently performed flawlessly.

Trials for this plug will begin during the fourth quarter of this year and we still anticipate field trials will be completed in Q1 with commercialization in Q2 of 2020.

We remain very confident in the continued performance of the materials that we’ve been successfully for over years in high temperature environments and have many strong relationships with customers willing to trial the new tool.

These operators beliefs in dissolvable is already very resolute due to historic runrates and our new shorter and lower cost plugs should only proliferate adoption across these regions. Lastly, we will be introducing a new, shorter, all composite plug that will address the entire composite plug market.

There is still a large addressable market for composite 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.

Field trials for the composite plug will begin in early 2020 with commercialization before the end of Q2 2020. As we have progressed with the trials, we have grown more confidence not only in the dissolvable thesis, but in the tool design and materials.

Despite reducing the size of the tool by over 70%, our team has been able to hold the highest down hole pressures across the United States and provide a consistent and predictable dissolution results in some of the coldest temperatures.

As a reminder, all three tools will be utilizing the same IP design, which is approximately 70% shorter than our current plugs with fewer component parts which will streamline assembly and supply chain. Most importantly, it will reduce our manufacturing cost ultimately allowing us – overall cost to complete for our customers.

Our customers are still finalizing budgets for 2020,but today, we do anticipate overall North American E&P CapEx spend to be flat to down up to 15%. We will not be providing any formal guidance for 2020 numbers at this time, but have tried to be as specific as we can for commercialization timelines.

As we think about technology adoption and what we have seen from introducing new products in the past, we believe strongly the largest rigs to the tools is not in the future adoption of dissolvables or there is successful performance of our tools, rather the timing for market penetration and revenue ramp.

It is extremely difficult to pinpoint the exact timeframe of large volume adoption, but we believe this will happen in 2020. We will start to commercialize the low temp dissolvable plug in Q1, but do not anticipate a significant revenue increase to occur in Q1, but more likely in late Q2 or Q3.

That said, I want to reiterate our strong confidence in our tool design and materials, as well as the overall dissolvable thesis and the growth potential this brings to NINE.

We felt confident we’ve reduced manufacturing costs to a point that enables us to lower the upfront AFE for our customers to be less or net neutral to current plug and drill out prices, while increasing returns for the operator by significantly reducing cycle times.

Ultimately, these new products will provide a significant sub-change in the way our operators complete their wells, increasing their IRR through significant time savings, reducing their overall AFE and cost to complete with our lower priced offering and the elimination of drill out deals, lowering their carbon footprint with less diesel-powered equipment at surface for the drill out and reducing overall risk at the well site.

I would now like to turn the call over to Clinton to walk through segment and other detailed financial information for the quarter. .

Thank you, Ann. In our Completion Solutions segment, third quarter revenue totaled $186.3 million with adjusted gross profit of $33.6 million. During the third quarter, we completed 1,116 cementing jobs, a decrease of approximately 3% versus the second quarter. The average blended revenue per job increased by approximately 2%.

Cementing revenue for the quarter was $55.8 million, a decrease of approximately 2% quarter-over-quarter. During the quarter we received one incremental cementing unit related to our 2018 CapEx.

At this time, we anticipate receiving five of the eight cementing units related to 2019 CapEx before the end of the year, which will likely begin generating revenue in 2020. We hope to receive the remaining three units during H1 of 2020.

During the third quarter, we completed 11,781 Wireline stages, an increase of approximately 2% versus the second quarter. U.S. Wireline stages were down quarter-over-quarter but were slightly offset by an uptick in Canadian Wireline coming out of spring breakout despite a little contribution given the month of September.

The average blended revenue per stage decreased by approximately 10%. Wireline revenue for the quarter was $59.2 million, a decrease of approximately 8%. In completion tools, we completed 20,414 stages, a decrease of approximately 38% versus the second quarter. The majority of this decline came from our composite plug business.

Completion tool revenue was $40.2 million, a decrease of approximately 28%. During the third quarter, our coiled tubing days were decreased by approximately 16%. The average blended day rate for Q3 decreased by approximately 5%.

Coiled tubing utilization during the third quarter was 49%, which does include two small diameter units we had parked for the entire quarter. Coiled tubing revenue was $31.1 million, a decrease of approximately 20%.

In our Production Solutions segment, second quarter revenue totaled $16.1 million with adjusted gross profit for the third quarter of $1.9 million. During the third quarter, Well Services had utilization of 66%, which increased approximately 9% quarter-over-quarter.

Total rig hours for the quarter was 34,325 and the average revenue per rig hour was $470. As a reminder, financial and operational metrics for the Production Solutions segment are for the time period of July 1st through August 30th and do not include any contribution from September.

The company reported selling, general and administrative expense of $19.2 million, compared to $21.8 million for the second quarter. This decrease was largely due to a reduction in stock-based comp and a reduction in the retention bonus related to the Magnum acquisition.

Depreciation and amortization expense in the third quarter were $16.5 million, compared to $18.5 million in the second quarter. The company recognized income tax expense of approximately $700,000 in the third quarter of 2019 and overall income tax benefit year-to-date of approximately $1.5 million.

The discrete impact from the Production Solutions divestiture and the current year impact or valuation allowance positions along with the state and non-U.S. income taxes are the permanent - primary components of our 2019 tax position.

During the third quarter, the company reported net cash provided by operating activities of $69.4 million, an increase of approximately six times quarter-over-quarter. The average DSO for the third quarter was approximately 57.8 days, compared to 64 days in Q2.

Total capital expenditures were $10 million, of which approximately 47% was maintenance CapEx. Our full year CapEx guidance of $60 million to $70 million remains unchanged with approximately 73% spent year-to-date using the midpoint of the provided range.

As of September 30, 2019, NINE's cash and cash equivalents were $93.3 million with $118 million of availability under the revolving ABL credit facility resulting in a total liquidity position of $211.3 million as of September 30, 2019.

Our ABL was undrawn, but availability decreased quarter-over-quarter due to the sale of our Production Solutions business and a reduction in accounts receivable.

During Q4, we will have scheduled cash payments of approximately $39 million, which includes an interest payment of approximately $17 million, CapEx between $16 million and $17 million and payout of Magnum’s retention bonus of approximately $5 million. We do anticipate working capital will be a source of cash during Q4.

I will now turn it back to Ann to discuss our Q4 outlook. Thank you, Clinton. During Q3, we began to see activity softness across all regions with the largest declines in the northeast.

We do anticipate that’s continuing for the remainder of 2019 and that budget exhaustion will be exacerbated this year versus prior years due to E&P capital discipline, coupled with typical slowdowns related to weather and holidays.

With further activity declines, we will also see realizations of sole quarter impacts of additional pricing concessions made in Q3 across all service lines. With what we know today through discussions with our customers, we do not anticipate further pricing declines in Q4 and into Q1 of 2020 from the September decline.

At these current prices across service lines, we are still able to generate positive EBITDA margins, but we will watch pricing closely to ensure we are not impeding ROIC and will park units when warranted.

With the current market, we are managing cost very tightly, and working closely with our operational teams to ensure we are shielding margin wherever possible without fundamentally impeding our earnings potential moving forward.

This includes headcount reductions where applicable and since Q2, including the sale of production Solutions and closure in Canada, our headcount is down approximately 32%. Additionally, we are working with our vendors to reduce pricing our materials such as coiled reels, gun bodies and other large volume items.

As we gain more visibility into 2020 from our customers, we will adjust accordingly, but today, feel very confident we have right-sized the business from a headcount perspective to meet our current activity levels, while maintaining highest quality service execution.

For Q4, we expect total revenue of between $150 million and $160 million, and consolidated adjusted EBITDA between $11 million and $15 million.

The revenue associated with the Production Solutions segment and the closure of our Canadian Wireline business for the full quarter, would have ranged from $20 million to $25 million and the remainder of the decline comes from the full quarter impact of September pricing pressure and our exacerbated activity decline due to customer budget.

On our Q1 call, we talk about Q1 of 2019, as a quarterly runrate forecasting 2019 and expected a flat year overall from activity and earnings perspectives. We used this assumption as a basis for our annual guidance numbers as well as the foundation for our outlook on leverage metrics into Q4 2020.

At that time, we miscalculated the impulsion of the gas market and the effect that will have on our back half numbers, as well as the added activity softness and pricing pressure that has taken place across North American land in the back half of this year. .

With the acquisition of Magnum, we restructured our capital structure to have more flexibility and issued a $400 bond and with a new ABL in place which is currently undrawn. Our target leverage is one-times net debt to EBITDA.

Originally, we thought we will reach with the Q4 of 2020 using a flat H1 2019 runrate as our baseline with the addition of our new technology and the lower CapEx in 2020. Since that time, we have seen the market shift in H2 of 2019 and do anticipate North American activity will be down year-over-year in 2020.

While we still expect growth in our Tools business and a significantly lower CapEx number in 2020, with the market conditions we have had to push the one-time net debt EBITDA timeframe into 2021. Delevring the company will remain one of our top priorities, but I do want to be very clear that we feel very good about the liquidity of the company.

We have shown even in a down market that we are capable of generate significant cash flow and this will only become stronger as we shift more of our top-line to Completion Tools. We are already in discussions with our customers regarding our plans into 2020.

We do anticipate North American activity will be down year-over-year with the largest declines coming in the Northeast, but are gaining good visibility into H1 2020. Budgets will reset in Q1 and we do not thank you for the good runrate for 2020.

Our team has proven their ability to gain market share in an anemic environment are our discussions with customers today show activity picking up at the beginning of the year. Regardless of the marketplaces, NINE has a unique opportunity to generate EBITDA margin expansion and strong cash flow with the introduction of the new tools.

Whether the inflection point of volume for tools comes in Q2 or Q3 of 2020, we are excited about the commercialization of our new tools and the potential upside it brings to the company, as well as the value it brings to our customers. Our capital light strategic plan is playing.

We feel very good about our liquidity position which we expect to improve as we shift more of our EBITDA mix to Completion Tools, while simultaneously reducing CapEx. The biggest strategic challenge for the 2019 continues to be the creation of a strong ROIC business with the ability to generate good profitability through the cycle.

We will now open the call to Q&A. .

[Operator Instructions] Our first question today is coming from the line of Sean Meakim with JPMorgan. Please proceed with your question. .

Thank you. Hey, good morning. .

Good morning. .

So, Ann, I understood that giving 2020 guidance is difficult at this time, but can you talk about how you would flex the numbers with respect to generating cash and I think selling well services will be helpful in terms of shedding some G&A burden given the heavy labor content? It sounds like you may be closed the maintenance spending on CapEx.

But how confident are you in terms of free cash generation next year? And just how you think about the levers across the mix shift towards tools, capital spending, working capital management, - can you be able to walk through that a little bit for us. .

Sure. Absolutely, so, if you think about our strategic acquisition of Magnum, that was all done with a push towards making the business more capital light.

Typically, if you thought about reducing that CapEx spend by 60% or potentially more than that, you would say, hey, you know you are spending under your annual depreciation expense and you are really impeding the sustainability of the business going forward. And what we would tell you is, we are actually shifting the generation of those earnings.

So you should continue to see that capital spend being light in the next – in the near term. So that’s kind of just one aspect to realize is that not that we are temporarily pulling back CapEx, but they were actually just fundamentally shifting the nature of the driver behind the earnings which is a lot more capital-light.

So that’s one thing I would say. When you think about 2020, obviously, as we said, we expect it to be a flat-to-down year. Certain E&P customers have come out with their budgets, others have not. So, we are saying right now, flat-to-down 15%, that could change significantly as we come into Q1 meaning it could be a little bit better than the down 15%.

So you should expect that as you think about qualifying the overall numbers. And again, you should expect to see revenue and EBITDA contribution from the tools continue to make a push over time.

If you think about the margin trajectory, Sean, think about us as starting to see over the 17% adjusted EBITDA margin and if you look at the midpoint of Q4, that’s an 8% margin. So, when you walk that nine points down, it’s my intent to get this company to walk that nine points stock up in 2020 by the end of the year.

So you will see us continue to expand that EBITDA margin which also obviously helps to generate good solid free cash flow. So, I would expect margin expansion and free cash flow is a story for 2020. And then, beyond that, we can start to layer in that really nice top-line growth.

But again, as we said, we wouldn’t anticipate the trajectory of tools to really start to impact this company until H2 2020. But that’s something that we are very excited about when we think of the unique opportunity for this company outside of market forces.

And if didn’t answer your question, I am happy to provide additional color, obviously, we’ll also be providing cash flow per share metrics for 2020 when we get to that Q4 call, so that you guys can build that cash flow statement. But I am happy to take incremental questions. .

Well. Thank you Ann. I think you answered that quite well. So that’s a good segue to talk about dissolvable commercialization. So 1Q 2020 still on track.

But I am just trying to think through when do you think you will be to provide a firmer runway for the adoption rate and I think your point is well taken in terms of getting to the exact point of high adoption – or high volume adoption.

But maybe could you just walk through the fundamental building blocks beyond early commercialization in 2020?.

Yes. I mean, I think - excuse me. Right now, in this market, it’s a tensed market. The tone is tough. It’s a [indiscernible] mentality across any service line. And so, what really matters probably more in this market I might say it was $75 WTI market is customers really want to see what’s working for other customers.

And so, I think there will be – that market penetration will be a little more conservative at least what we’ve priced in as far as the Q2 or the Q3 ramp, just because of the tone in the market and customers wanting to say, hey, let me see how this guy does with a full wellbore, partial wellbore before they commit to it.

So I think that’s what we’ve priced in as far as thinking about when that inflection point happens.

And that’s a bit of a nuance given just the market right now and I would say, again, it’s the commodity price environment and the activity and the budgets that we are seeing come out, those are certainly headwinds for any service line and even tools that makes it a little bit slower.

So, it’s again, very difficult for us to project exactly when this ramp will occur and that’s why we are asking folks on the phone to risk that somewhere between Q2 and the back half of 2020, because it’s just – it’s very difficult for us to pinpoint exactly, but our experience with tools is it’s a little bit more like runners taking their mark and that can be a slow process.

But the minute that gun fires, it just goes. And that’s really based on dependability and performance of those tools and that’s what we have a whole lot of confidence about after seeing these field trials. .

Got it. Very good. Thanks, Ann. .

Thank you, Sean. .

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

Good morning, Ann. Good morning, guys. .

Good morning..

Piggy back on Sean’s initial question which I agree you answered well. But just kind of peeling back the onion on the cost side of the equation and you talked about 900 BPS of EBITDA margin that you’d like to get back next year.

I am just curious as you think about the primary drivers there, whether that be costs or revenues, one, could you kind of frame that for us, whether it’s cost or revenues that really get you back and then two, taken a lot of cost out of the system already with the closure of Canada, removal of 24% of your workforce with the Production business, what buckets are left for you guys to whittle away it on the cost side and where is the management team kind of focused at this point on the cost side of the equation?.

Yes, I mean, certainly, big lever is obviously headcount, right. So, prior to the Production Solutions sale, if you looked at our labor as a percentage of the top-line, on any given quarter, you could see that fluctuate between 30% or 35%, right? So on a runrate basis, we probably dropped ten points off of that and that was obviously by design.

It’s not just shedding capital-intensive businesses, but shedding labor-intensive businesses. So that’s also a part of the strategy. But to your point, 2020, the margin expansion is not driven by cutting costs inside of those financial statements.

The primary driver for margin expansion and regaining those points of margin throughout the year is the introduction of tools with a very high margin profile. So, again, obviously, you are always tweaking cost here and there.

But the primary driver is going to be from the introduction of those tools and also, remember, George, we have purposely slammed that margin on those tools right now to hold those wellbores.

So, that was part of our initiatives that we talked about in Q2 of [closing] [ph] wellbores and holding market share, so that we can fill those wellbores with cost that are lower, with products that are lower cost to our customers with much nicer margin profiles for the company. So, again, primary driver is from tools on the margin expansion side. .

Okay, great. That’s helpful. And then, just, I know you are not giving guidance for 2020, but I want to make sure I don’t get out over my skis.

If I think of – to the CapEx budget for 2020 assuming the 60s percent year-over-year, I mean, that $35-ish million ballpark, $30 million, $35 million, am I thinking about that correctly?.

You are too high. It could be lower than that. .

That’s good to hear. And glad I checked on that. Thank you all for the color. I’ll hand it back over. .

Thanks, George. .

Our next question comes from the line of J.B. Lowe with Citi. Please proceed with your questions. .

Hey, thanks. Good morning. That’s quite the CapEx cut. That’s good to hear. I had a question on the field trials for the new low temp plugs. I know, you guys said, 90% plus success rate.

I guess, is that – I mean, is that good? I mean, what kind of success rate is needed for these tools? I mean, this is kind of – I know you are working with customers that have already used these things before.

But, I mean, do they need to see success rates above 95% getting to the high 90s and I guess, as you did some tweaks after the first run, what do you get that success rate up to on the kind of second go round?.

Yes, it’s a very good question and I am glad you asked it. So, when you think about some of the failures we had, it’s really important to think about what type of failures those are.

So, as those have been – for instance, plug slipping or showing us that the design was flawed, then, even though the percentage of the failures maybe low, we would be concerned. In some cases, these were frankly operational issues at surface.

And there were issues that literally indicated to us that it had nothing to do with the design or the materials, it was more just a collection of human errors frankly, sometimes on our part. So, I think, if you’d stripped out and normalize, you would find that we are – we have not so far been concerned with any of those failures.

But we did want to be clear that we have had them and they’ve just been literally due to human error or for instance, sometimes not choosing the right charges, simple and frankly stupid things that we should have been more conscious of before running those down hole.

But what you are really looking for in these dissolvable plugs, when you make tool that short, it’s very, very hard to hold the differential pressures that we see in the U.S. and so, these tools are rated to 10,000 PSI and for a very short tool to be able to hold high differential pressures really challenging.

And so, we’ve been very pleased with seeing that and the tool’s ability to hold pressure. And then, secondly, when you think about materials, we don’t want the customer – excuse me – finding anything on the drill out.

And that can be any piece or part of that plug and so we’ve been enormously pleased with the fact that our customers are not finding anything when they go back into that well. So, those are kind of the two categories of issues that we are really looking at and these other failures are just frankly just not a concern for us.

So, I am not sure that answers your question. But of course, customers want to see a 100% success all the time and right now, in U.S. land market, they are very focused on that and you have a bunch of really nervous completions engineers out there and pleased to be very, very conscious of their context and we certainly are. .

Great. Yes, I can imagine. Follow-up question just on the two other new technology additions.

I guess, the difference between the kind of old generation to new generation, is it mostly just on delaying for the tool, it’s not so much the materials that’s going into the composition?.

That’s right. That’s exactly the right way to think about both the high temp and the composite. So that, it allows us to come back into that wellbore, offer a lower price to our customer and offer a much amelioration on our margins. .

Okay. So the materials have been proven as – it’s just the different price point. Gotcha. Okay.

Then on the pricing concessions that you gave in 3Q, can you kind of bucket those in either in absolute number of percent of decrease or which product lines got hit more? Because, I mean, your cementing revenue held in for the quarter was there pricing concessions for the cementing side as well or did that kind of avoided on that?.

It was – yes, but it was pretty flat. So, when you think about or at least when I think about Q4 as it relates to Q3, 50% of that revenue guide, give or take is due to divestitures or closing down Wireline, right? And then the remaining 50% is really due to price and activity.

And we actually split that out and ran those numbers and it’s almost half and half. But where actually declines are most pronounced will be in the Tools business and the Coil business. And where the pricing has been really hit hardest as of late is in the coil business. And so, that’s kind of how you should think about.

I mean, I think, we are really at a bottom now for Wireline pricing. The other thing I think is important for folks on the phone to remember is, we are always also looking back at 2015 and 2016 and 2014 with pricing and looking at this current date pricing and thinking about how it relates to those years.

So if you look at current date pricing relative to 2016 in Cementing, Wireline and coil, you are still well over 50% in all of the service lines and where you were in 2016.

So, that’s just important to remember 2014, you are still down, most of them and the only reason our cement business looks like it’s up in price in 2014 is because, we fundamentally shifted the percentage of production string jobs that we were doing. So we are always watching this.

So, as difficult and challenging is this market itself, I have never once felt it is remotely close to where we were in 2016. It’s just anemic.

But there is actually rebound that we already know about in Q1 and we still think this business has a great ability by the end of the year to generate a very nice margin given the context of the environment, as well as excellent free cash flow and fundamentally reduced percentage of CapEx as it relates to the top-line.

So, not a great market, but again, we think we are well positioned to navigate it. .

All right. Great. Thanks so much. .

Thank you. Our next question is from the line of Chase Mulvehill with Bank of America. Please proceed with your questions. .

Hey, good morning. Ann, I guess, I wanted to come back to the 900 BPS of margin expansion that you expect in 2020 and you kind of highlighted the Completion Tool business as the main driver there.

So, maybe could you talk about kind of where margins are today for this business? And kind of where they were 12, 18 months ago? And just kind of help us frame..

Sure. Yes. So, I mean, I think, we are not giving specifics, but I’ll just tell you generally, when you think about Completion Tools, you are generally thinking about a business that’s a 30% margin business. And we’ve taken significant points off that margin, significant points.

And so, we are going to put those points back on and that’s without getting too specific Chase. That’s where we are going to see the driver of the expansion. And again, I’ll just remind you, we have planned those margins because it’s composite plugs, but then incremental to that.

We are also holding high-temp wellbores with dissolvables at much lower margins than we typically would have had until we can get these new products out to market. So, we are getting hit on both sides on the completion tools front and then obviously, you know on the activity.

So you have reduced ability to cover that fixed cost absorption that you need in our product line business like this. So, it’s very significant degradation in the margin there that we’ve assumed for these tools. It’s significant. .

Okay.

And if we think about the composite exposure that you have out of the tool, some of the wider holes, what kind of revenues further do you think you have out there from – or the cannibalized by dissolvable plugs?.

It’s a great question. I think the cannibalization, it will begin a bit in the back half, but where you will see it more pronounced is in kind of that next two to three year period as the adoption rate for dissolvables increases.

So next year, as we think about 2020, the primary story for us won’t be the cannibalization, because remember, we will be introducing a new composite plug which we actually think will gain incremental share above where we are now. And so, that will complete the picture, we believe if we do our job right.

So what we are hoping to do is, it’s claw into incremental market share in the composite plug market, while we continue to claw share from other composite plug providers with dissolvables.

But, again, we don’t split out the revenue between composites and dissolvables, but we have and we said many times the primary driver of the revenue right now for Completion Tools is certainly composite plugs. .

Okay. And let me squeeze in one more real quick. You have an unique perspective on lateral lengths.

I’d be curious to kind of get your view on how much further do you think the industry can push lateral lengths?.

That’s a very good question and I think, we are seeing some wellbores that are extending beyond even the longest ones that we’ve done. But I think the industry is kind of finding its footing in lateral lengths and that’s probably somewhere around the 10,000 foot mark. And again, you will see Northeast operators pushing beyond that.

I think sometimes we see in West Texas, operators are constrained by acreage. And so, if they don’t have the contagious acreage, they are unable to push beyond those points. But I would say, it’s really for us.

We can get above it as kind of a 10,000 to 12,000, 13,000 foot lateral lengths, and what I always remind myself is, when we started building this company in 2010, a 5,000 foot lateral was like, so long in the Bakken. And not one of us at the table ever thought we would get to the lateral lengths we are at now.

So, I just remind myself that we make these assumptions and we try to kind of cap things. But anything can change and as you all know the drilling efficiencies are just unbelievable and seem to keep growing.

So, I think, a lot of operators are seeing a real plus to their IRRs when they go out that couple of thousand extra feet and if the completion services industry can actually make the completion of those extra 10,000 feet easy and decrease the risk popping their IRR, then you may see them go longer.

But right now, it becomes very risky depending what the total measure depth is to get out really beyond that. And I think that is constrained a bit of the increasing in lateral lengths. .

Okay. It makes sense. Thanks, Ann. I will turn it over. .

Thank you. The next question is from the line of Praveen Narra with Raymond James. Please proceed with your questions. .

Hi, good morning guys. .

Good morning. .

I guess, I wanted to ask one follow-up on the trials, just quick one.

What percentage of your customer base has trialed the low temp at this point? I think it makes into or about the cadence, but I was just curious on how many have seen it?.

We are not giving out that percentage, but what I’ll say is that, we’ve been really pleased with the number of different customer groups that holds very different perspectives, that have them willing to try – trial this tool. But we are not giving out the actual number. And just as a reminder, our top 10 customers make up about 24% of our revenue..

Right. I guess, I was curious on the comment that we don’t expect any further pricing declines in Q4 or 2020 assuming I heard that correctly.

I guess, is that – is it fair to assume then that we’ve seen the competitive behavior become more rational or I guess, is it E&P customers that are willing to – at these prices take on the premium service provider?.

It’s a good question. What I meant specifically by that is we saw a lot of pricing degradation coming into the back half of Q3, specifically into September. So we will see that impact on a full quarter basis in Q4. But we do not anticipate further declines from that level.

And I think you even saw in EOG’s call they came out and talked about the fact that their field service pricing is not going to move anymore in order to keep sustainable or affect businesses. And I think we are certainly seeing if that decline is stopped then people are no longer willing to go lower.

So, we just don’t anticipate further degradation here from price. What we are – you do see that in our margin, like I said, is you see the full quarter impact of the pricing declines that we did take. But our teams even in the Northeast feel confident that we have reached the bottom here on pricing.

And that’s a feeling you get when your competitors stop moving it down and fortunately, not for the industry, I think we’ve found that floor is up.

Is that’s helpful?.

Yes, that’s very helpful. If I could just ask one more. .

Go ahead. .

I guess, you mentioned that basically, Q4 you guys expect this to be the bottom and Q1 we see a bit of recovery.

I assume that means you guys are willing to hold on to a little bit of excess and this is why Q4 is not a good base, right? Can you kind of help us quantify how much excess capacity, whether it’s in personnel or it’s just unabsorbed cost in Q4 that we should recover just when activity comes back?.

I think it’s – I think, again, we will be a lot more – we will be a lot more specific about this in 2020 numbers. But if you looked at the midpoint of our margin, the 8%, when I think about costs and what I think about we are hanging on to, it’s probably a couple 100 basis points. .

Perfect. Thank you very much. .

Thank you. [Operator Instructions] And our next question is from the line of Waqar Sayeed with AltaCorp. Please proceed with your question. .

Well, thanks for taking the call. My question Ann, is on the competitive landscape for the low temp plugs.

Are you aware of any of your competitors coming out with a similar product? Do they have anything on field trials? Or anything already being marketed or sold?.

That’s a very good question. And no, we are not aware of anything, Waqar, but we have often said to our investor community and the folks on the phone that we would expect the large caps to play in the space and continue to innovate. And they are competitors we are used to having and we plan to have.

But no, there is nothing that we see in trial right now that’s addressing the market the way in which we are addressing it. .

Good, good.

And then, I may have missed this, do you have any DD&A guidance for the fourth quarter?.

We’ve not laid that out specifically for the fourth quarter. .

We haven’t, but I think the way you can think about it is excluding, obviously the production changes about $16 million for the full quarter. .

Right. Okay. And then, in terms of the number of cementing units, I know, you added one.

What’s the total number of units as of today?.

32. .

32.

And so, by the end of the year, you will be at 37 and then sometimes next year on 40, is that – am I thinking it correctly?.

That’s correct. .

Okay. Great.

Is it possible for you to provide us with the magnitude of pricing changes that you’ve seen with the last three or four months in the different service lines?.

We are not going service line-by-service line, Waqar for Q4. But, we can walk through some of the magnitude of the pricing that we saw from Q2 to Q3, if that will be helpful. That’s already looking more flat, it settles at 2%, but that was really the mix of jobs for Wireline. You saw the average revenue per stage go down about 10%.

And for coiled tubing, we talked about the day rate down about 5%. .

Great. .

And again, that’s – all that kind of pricing pressure during the quarter. So you will see the full impact of that in Q4. .

That’s very helpful. Thank you very much. I appreciate it. .

Thank you. At this time, I will turn the floor back to Ann Fox for closing remarks. .

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

Thank you. This will conclude today’s conference. You may disconnect your lines at this time. Thank you for your participation..