Welcome to the third quarter 2022 Nine Energy Service earnings call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Heather Schmidt, Vice President of Strategic Development and Investor Relations. Thank you. You may go ahead. Thank you. Good morning, everyone, and welcome to the Nine Energy Service earnings conference call to discuss our results for the third quarter of 2022. With me today are Ann Fox, President and Chief Executive Officer, and Guy Sirkes, Chief Financial Officer. We appreciate your participation. Some of our comments today may include forward-looking statements reflecting Nine's views about future events.
Forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to review our earnings release and the risk factors discussed in our filings with the SEC. We undertake no obligation to revise or update publicly any forward-looking statements for any reason. Our comments today also include non-GAAP financial measures. Additional details and the reconciliation to the most directly comparable GAAP financial measures are also included in our third quarter press release and can be found in the Investor Relations section of our website. I will now turn the call over to Ann. Thank you, Heather. Good morning, everyone. Thank you for joining us today to discuss our third quarter results for 2022.
We had another very strong growth quarter with revenue of $167.4 million, which fell above our original guidance of $145 million-$155 million and reflects an 18% increase quarter-over-quarter. We generated adjusted EBITDA of $32.6 million, reflecting a 72% increase quarter-over-quarter and an adjusted EBITDA margin of 19%. Incremental adjusted EBITDA margins were approximately 54%. Nine generated free cash flow of $26.8 million before changes in net working capital and $9.2 million after changes in net working capital. We used this free cash flow to repurchase bonds. We repurchased $13 million par value of bonds for $10.1 million of cash or 77.7% of par.
This leaves Nine with $307 million of bonds outstanding of the original $400 million issued. I am extremely happy with our team's ability to take over $90 million of debt off the balance sheet, bringing our net debt to adjusted EBITDA to approximately 2.4 x on a run rate basis, while also maintaining strong liquidity throughout one of the most volatile environments we have ever faced. With our strong operating and financial momentum, supportive macroeconomic outlook for 2023 and beyond, and net debt to Q3 2022 adjusted EBITDA of approximately 2.4x , we are actively considering our options for refinancing our capital structure in a constructive way.
On the operations side, we saw minimal rig and Frac Crew increases this quarter, with the majority of Nine's growth coming through price increases, specifically within cementing and coiled tubing, as well as increased volumes in completion tools. We estimate the average Frac Crew count today is between 270 and 275, an increase of approximately 7% versus the end of June. EIA reported completions were flat quarter-over-quarter, and new wells drilled increased by approximately 6%. As I mentioned, our revenue increased by approximately 18% quarter-over-quarter versus the average rig count, which increased by approximately 7%. Service line pricing drove the majority of Nine's growth this quarter, evidenced in our strong incremental margins.
Undersupply of both equipment and labor, coupled with supply chain constraints, has shifted pricing leverage back to service providers as customer participation focused more on availability than just price. Our cementing service line has led Nine on the pricing side, and we had another extremely strong quarter in Q3. The consolidated competitive landscape, coupled with strong technical barriers built through our cutting-edge R&D lab, helped to push pricing. Since Q4 of 2020, cementing pricing has increased by approximately 58%. In the last couple of quarters, this has been exacerbated by a shortage of raw cement, but our ability to innovate and execute is demonstrated in Nine's strong market share position in the basins we operate, where we estimate our total market share is approximately 20%.
We are continuing to work on forward-leaning slurries to help navigate both supply shortages as well as help reduce emissions and provide a greener cementing option for our customers. I remain extremely optimistic and excited about our completion tool division. Today, we believe Nine holds a top market share position in the dissolvable plug market and that over 75% of the total U.S. dissolvable plug market share is held amongst four competitors, including Nine. This is an extremely difficult space for competitors to enter due to the complexity of the material science, which demands predictable and repeatable dissolution in dynamic wellbore. The ability to scale this business and maintain quality control has been a key differentiator for Nine.
We continue to estimate that the total U.S. dissolvable market will continue to grow over 35% by the end of 2023. Our composite plugs remain an important part of our portfolio, and we estimate our U.S. composite plug market share to be over 20% in Q3. There are a larger number of composite plug competitors in U.S. market as this technology has been around for almost 10 years and the materials are more standardized across offerings. Along with the U.S. market, the international market should provide growth opportunities for Nine. Our R&D team in Norway recently completed and received API Q1 certification for a multi-cycle barrier valve targeted for a large Middle Eastern national oil company. We have received approximately $10 million in purchase orders pursuant to an NOC bid process, with opportunities to obtain additional purchase orders moving forward.
It has been publicly stated that this NOC plans to accelerate production and increase activity into 2025. I am extremely proud of Nine's R&D capabilities, which have provided new opportunities in the international market. Our R&D and tools team are also focused on the North American refrac market through both strategic partner partnerships as well as in-house development of new tools. Wireline continues to be our most challenging service line for generating net price increases but remains a very important piece of our portfolio. Our team has increased wireline stages completed by approximately 85% from Q3 2020 to Q3 2022 and has increased revenue per stage by approximately 28% since Q4 2020 to Q3 2022.
This service line plays an important role in both the R&D and sales process for completion tools since Nine runs every type of plug downhole, which results in a quick understanding of any competitive offering. Our coiled tubing division has performed extremely well over the last couple of quarters, driven by recent price increases. Since Q4 2020, the coiled tubing day rate has increased by approximately 61%, while also increasing days worked by over 180% from Q3 2020 to this quarter. Company revenue for the quarter was $167.4 million. Net income was $14.3 million and adjusted EBITDA was $32.6 million. Basic EPS was $0.46. ROIC for the quarter was approximately 29%.
I am extremely proud of our team's performance thus far in 2022, and their ability to capture growth without sacrificing service execution and maintaining a very strong safety record, ending Q3 with a 2022 year to date TRIR of 0.56. I would now like to turn the call over to Guy to walk through detailed financial information.
Thank you, Ann. As of September 30, 2022, Nine's cash and cash equivalents were $21.5 million, with $66.7 millions of availability under the revolving ABL credit facility, resulting in a total liquidity position of $88.2 million as of September 30, 2022. In the fourth quarter of 2022, we borrowed an additional $5 million net from the ABL. This quarter, we generated strong free cash flow of $9.2 million, or $26.8 million before changes in net working capital. As Ann mentioned, we purchased 13 million par value of bonds for $10.1 million of cash, with 77.7% of par during Q3, bringing the total bonds outstanding to $307.3 million.
Using annualized Q3 adjusted EBITDA of $130.2 million brings our net debt to adjusted EBITDA to approximately 2.4x on a run rate basis. During the third quarter, revenue totaled $167.4 million with adjusted gross profit of $44 million, an increase of approximately 49% quarter-over-quarter. During the third quarter, we completed 1,130 cementing jobs, a decrease of approximately 2% versus the second quarter. The average blended revenue per job increased by approximately 18%. Cementing revenue for the quarter was $63.9 million, an increase of approximately 16%. During the third quarter, we completed 5,701 wireline stages, an increase of approximately 5%. The average blended revenue per stage increased by approximately 6%.
Wireline revenue for the quarter was $29.3 million, an increase of approximately 11%. For completion tools, we completed 34,214 stages, an increase of approximately 17%. Completion tool revenue was $40.8 million, an increase of approximately 22%. During the third quarter, our coiled tubing days worked increased by approximately 10%, with the average blended day rate increasing by approximately 10%. Coiled tubing utilization during the quarter was 54%. Coiled tubing revenue for the quarter was $33.4 million, an increase of approximately 21%. During the third quarter, the company reported general and administrative expense of $13.5 million. Depreciation and amortization expense in the third quarter was $9.5 million.
The company's tax provision for the third quarter of 2022 was approximately $0.5 million and less than $100,000 year to date. The provision for 2022 is the result of our tax position in state and non-U.S. tax jurisdictions. The company reported net cash provided by operating activities was $15.1 million. The average DSO for Q3 was 57.1 days. CapEx spent for Q3 2022 was $4.6 million, bringing our total CapEx spent year to date as of September 30, 2022, to $10.8 million. Our full-year CapEx guidance is unchanged at $20 million-$30 million, but we do believe because of supply chain constraints that a portion of 2022 CapEx could fall back into 2023.
We would like to provide some high-level guidance as we think about cash flows going forward. With what we know today, looking into 2023, we anticipate CapEx of $25-$35 million, with approximately 85% of this being allocated toward maintenance capital. The majority of our growth CapEx will go toward the conversion of 4 additional wireline units to electric. Under our existing capital structure, our other large cash outflows will be annual interest payments totaling approximately $32 million in any changes in working capital. Given our substantial Net Operating Loss Carryforward balance of $436.4 million as of December 31, 2021, we do not anticipate any meaningful cash taxes.
We have laid out our thoughts on Nine's illustrative free cash flow based on our Q3 adjusted EBITDA run rate, as well as an illustrative free cash flow walk using different activity and pricing assumptions on pages 21 and 22 of our Q3 investor relations presentation, which can be found on our website. Using Nine's Q3 annualized adjusted EBITDA of $130 million as a benchmark and assuming approximately $32 million of annual interest based on our existing capital structure, approximately $30 million of annual capital expenditures and $4 million of other annual miscellaneous cash outflows, Nine would generate approximately $64 million of annual free cash flow before changes in net working capital. While we believe that we are poised for further growth in 2023, we believe that our business is well positioned to generate free cash flow even at current run rate levels.
With our strong operating and financial momentum, supportive macroeconomic outlook for 2023 and beyond, and net debt to Q3 2022 adjusted EBITDA of approximately 2.4 times, we are actively considering our options for refinancing our capital structure in a constructive way. I will now turn it back to Ann.
As you all know, the overall market has been extremely volatile. However, we remain very optimistic about Nine's outlook into 2023. There are and will continue to be numerous factors that will influence global supply and demand, but we believe North American shale production will be critical for the global supply moving forward. We do think capital discipline for both operators and oilfield service providers will continue into 2023, keeping the market very tight. Obviously, the macro drivers are out of our control. That said, when I look at Nine's business today, operating under the current rig count in Q3, we are sustainable and have generated adjusted EBITDA margins surpassing 2019 levels with strategies on how to grow.
We have what we believe to be one of the top completion tool and cementing offerings in the United States, with top market share positions in our service lines within the basins which we operate. I think the constraints on OFS equipment continue and incremental rig activity moving forward should put upward pressure on pricing and drive net margin. As we have strategically shifted more of our top line exposure to both completion tools and cementing, we are starting to see the impact this will have on our free cash flow generation. Our business has been redesigned to reduce our labor and capital, not only increasing cash flow, but reducing capital allocation risk in a cyclical business.
Despite being a smaller company, our R&D team has designed and commercialized tools used by some of the largest NOCs in the world, as well as tools that compete against our largest peers here in the U.S. We have also developed and commercialized technology to reduce emissions and continue to invest money in electrifying our wireline units. Although we do anticipate activity growth in 2023, we have organic growth strategies in place to continue to expand both our top line and our margin. We are focused on market share gains coupled with strategic price increases, as well as developing our completion tool reach internationally. Visibility into Q4 slowdowns due to weather and budget exhaustion is still a bit blurry, but we do expect some seasonality into Q4.
We also expect pricing to remain steady into Q4, with potential increases beginning again in early 2023 as budgets reset. Because of this, we expect Q4 to be relatively flat to Q3, with projected revenue between $160 million and $170 million. We do anticipate growth returning in Q1 of 2023, and that 2023 activity will increase from where we are today. Nine's geographic and service line diversity positions us well for further growth. We believe we have differentiation in service lines in which we operate, with a strategy towards profitable growth even within a more moderated growth environment in 2023. We will now open up the call for Q&A.
Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from John Daniel of Daniel Energy Partners. Please proceed with your question.
Thank you. Good morning. Good quarter, Ann's team.
Good morning.
First question is just on the valve opportunity with the NOC in the Middle East. I mean, can you frame for us what the opportunity set would be in, over the next couple of years, if at all possible?
Yeah, I can't. I'm not gonna quantify the number for you right here.
Okay.
What I would say is this is for the conventional market.
Okay.
It's the first time that we've stepped off and actually, this was almost a two-year process, John, where we had to get direct certification, do direct field trials with this NOC. Given that it is for the conventional market, which is quite a large market outside of North American shale, we think this could be a very significant opportunity for Nine and really reflects our ability to design from the start, tools that, you know, our largest service providers do not offer, internationally. We're pretty excited about it, and we'll be exploring other niches like this. This is, it's a very big step for us, and really starts to expand that completion tool profile. This is, you know, for the completion phase of the well.
Right. Okay, the next one is just on OFS pricing. Broadly speaking, you know, a lot of the E&P calls this quarter, companies speculate that another 5%-10% type price increase from here next year. Do you kind of agree with those ranges or what's your forecast?
Yeah, no, I think again, if you go back to January of 2022, our customer base underestimated service inflation. I would say that those numbers are, again, another example of underestimating service inflation coming into 2023. You know, just because capital budgets reset for our customers doesn't mean that we have new equipment in place and certainly doesn't mean that the labor situation is any different. I still, and I know I sound like a broken record, I am still seeking 12 highly qualified wireline folks in the Northeast. 12. This is a remarkably challenged labor market. We thought it would ease by now. Clearly it has not. I would be shocked if you saw an inflation number of 5%. I think that's way too low.
Okay. I was referring to from where we are today as opposed to year-over-year.
Yes.
Gotcha.
Yeah, I think that's too low.
Okay. The last one is the additional investments in the four Wireline units, making them electric. How much of that is customer driven versus you all being proactive on an ESG front and seeing the opportunity set, if that makes any sense?
Yeah, I would say it's 100% customer driven.
Okay.
The customers are being proactive on the ESG front, which is filtering down to us. Yes, that's how I would answer that.
How many will you have at the end of the year in 2023 in terms of that are electric based off the current plan of the four? Is it six or seven?
Yes. It's gonna be six that'll be fully electrified and then we have a seventh that has some options on a side-by-side basis to be electric. Yes.
Cool. Okay. Thanks for letting me ask questions.
Thank you.
Our next question comes from Waqar Syed with ATB Capital Markets. Please proceed with your question.
Thank you. First of all, congrats, Ann, on a great quarter.
Thank you.
It looks good. I missed the cementing revenue numbers. Could you kindly repeat that, please?
Yes.
Sure. The cementing revenue number is $63.9 million.
Okay. The stages?
Yeah.
In completion tool stages?
No, cementing. There's one other data point that you gave as well, right? On cementing.
1,130 cementing jobs.
Oh, jobs. Okay.
Per job increase 18%. Yeah.
Ann, the order that you received in October, $7 million, is that all converted to revenues or is that going to convert to the-
No, I'm sorry. No, those are just purchase orders.
When do you expect them to convert to revenues?
That'll convert over the course of next year.
Okay. Is that going to be kind of a typical kind of lead time, like, you know, just 12-month conversion of purchase orders in international markets?
Yeah, I think it's for this tool specifically, Waqar. It's a longer lead time and it's just the contracts are a little bit different. It's gonna be a longer lead time, but it's just product and contract specific.
Okay, great.
It'll be rolling over next year. As Ann mentioned, we hope to get further orders, so it's just gonna be a nice revenue stream for us going forward, we hope.
Okay. Would you start reporting backlogs then, you know, in your disclosures?
No, it's not so significant that it's like that, Waqar.
Ann, in terms of pricing, thank you for your comments. Have you started negotiating with the E&Ps already for next year? Are you getting traction on pricing above that 8%-10% that E&P just stated?
We have started conversations with some of our customers. I would say for some of our service lines, we are moving, yes, in that direction. As you well know, any incremental rig activity is going to put enormous pressure on the OFS market. It's already extremely tight, so that's just quite a bit of incremental activity for us as a sector.
The price increase number that you're giving, are those kind of net pricing or do you think a lot of that gets eaten up in your own inflation?
Well, the example that we gave in the IR deck, that is assuming net pricing. I think, you know, the big challenge always for every CEO out there is trying to predict how inflationary pressures impact the cost line. We've certainly had an enormous amount of inflation that everybody's aware of, and we've obviously been able to get really good net price added to the margin. I think the last time you saw this margin might have been in Q4 of 2018. We're surpassing that. Very nice for us to see. I suspect this team is so good at managing their costs and managing this inflationary environment. It's been proven this year that those price increases I would suspect you'll see net margin impact.
Okay. Then for Q4, you mentioned the revenues could be relatively flat. Do you expect EBITDA margins to be relatively flat as well?
Well, we're not guiding EBITDA margins. I mean, I think it's just a bit lumpy given the, you know, the mix. It's just gonna be mix dependent.
Okay. In which business line do you expect revenues to stay flat? Where do you see growth? Where do you see decline quarter-over-quarter into Q4?
Yeah. I think the biggest change for us will just be our international orders will likely be down in Q4. As you think about margin and as everybody thinks about margin, you can factor that in. Obviously, those are our high margin sales, as you well know. I think, and probably everybody in the sector, you're seeing that our operators are already having to increase budget just to cover down on their inflationary costs. They're extremely conscious of budget exhaustion this year. Again, I think they're waiting until that January 1 mark, and you're not gonna wanna see them run out too far ahead. You're also seeing a lot of our customer base coming in much softer than expected on production. This is something obviously that everybody should be watching.
It came much sooner than our team thought it would come. That's a very good factor for the service sector.
As we look into Q1, you know, incremental margins this quarter were really strong, about 50%. Do you expect the margins to start moderating or incremental margins start moderating in Q1 to a lower number?
I think a 54% incremental margin is definitely not something I would use as a run rate, you know, for 2023 over 2022. I do think that from this company, you're gonna see very strong incremental margins next year coming into 2023. I think it'll be a much better year certainly than 2022, and we're very excited about it. I think it's gonna be a great year for Nine.
Waqar, I think if you wanna see how we think about incremental margins and things like that, you can have a look at the cash walk slides that we posted on in our investor deck. We put some assumptions in there which are, again, purely illustrative. It's just gonna depend on the dynamics in the market, but you get different incremental margins when it's activity-based or price-based. Obviously, you know, it's gonna depend on what actually transpires next year.
Yeah. I think also, Waqar, when you think about it's nice to see a business that we think in 2023 will outperform on an adjusted EBITDA margin basis where we were in 2018. That really reflects on the strategy that we started executing in 2018. Very nice to see that come to fruition. So very much looking forward to the start of this next year.
Great. Well, thank you very much, and congrats again.
Thank you.
Our next question is from Ben Piggott with EF Hutton . Please proceed with your question.
Hi. Thanks. Congrats on a really strong quarter. Just give me a little bit more color on the free cash flow walk. Can you guys just broadly talk about scenarios where maybe you get more aggressive with growth capital? You talked about kind of 80% maintenance CapEx in 2023. Maybe you paint for us a picture where that would be for you to be more aggressive there?
Yeah. Ben, good morning. I'll start with this, and then I'm gonna flip it over to Guy. I would just say generally, when you think about growth now at Nine, versus in the past, remember a big chunk of this revenue derivation is from completion tools, which is incredibly capital light. It's also very labor light. When you think about expanding that top line and then also expanding the margin, just remember, we don't need to put in as many dollars into this machine to generate those types of margins. Lots of growth there in that completion tools business for next year. Just as we think about the cash walk and the CapEx needs for the business, just remember that.
I think, you know, when you look at completion tools over a few year period, just so the market understands, you're talking about over a few year period, about $1 million there in capital. Where your capital spend is pickup trucks and sometimes wireline, but very, very capital light. I'll flip this back to Guy.
Yeah, I mean, not really much to add to that, Ben. I mean, we tried to lay out some guidance for 2023, just to help people think about the cash flow. Again, it's gonna depend on the pace of deliveries and supply chain constraints. We're just seeing, you know, like all firms, it's just difficult to get equipment. The exact pace of deliveries is gonna be a little bit of a moving target, as it has been, this year, candidly.
Yep. Got it. With all that said, is there a way to think about just kind of working capital intensity of growth into 2023 and beyond to the extent that you don't have to pull the CapEx lever as hard? The comments you made on kind of free cash flow framework for 2023 is excluding variability in working capital. Is there a rule of thumb-
Right.
to think about for $X of growth on the top line, the working capital intensity should look like Y?
Yeah. I think the best way to think about working capital intensity is just on a days concept. We reported 57.1 for our DSO. That's gonna be your biggest driver. As revenue increases, if you kinda hold that DSO flat, that's probably pretty reasonable. We've been in the high 50s or 60 for DSO pretty regularly. You can also hold your days payable. You can see how those have trended and kinda trend those going forward. Inventories will rise a bit, but not perfectly linearly with the revenue. If there's growth in revenue, you do expect working capital to be a use of cash, and the magnitude of which is just gonna depend on the revenue growth.
Another point, not necessarily on your question, but just to think about as you think about our financials going forward. When you think about labor light, which is something we don't talk about as much as CapEx light, in 2018, think about this business as roughly, you know, $830 million, $140 million on the adjusted EBITDA line. When you think about going into 2023, if you look at our annualized EBITDA today at about $130 million, in 2018, to generate that, we had roughly 2,300 employees. Today, we have slightly under 1,200. So, lots of efficiency there. So again, these are all reasons that we're excited about this strategy being labor light and CapEx light.
I just wanted to make sure the market understands that as well.
All right. That's good color. I appreciate it. Again, congrats.
Thank you.
Our next question comes from John Daniel with Daniel Energy Partners. Please proceed with your question.
Hey, thanks for letting me back in. Just, I was rereading the press release there, and the plug sales really jumped out at me, I think plus 34% quarter-over-quarter. Congratulations on that. My question is-
Thank you.
Is that driven by, you know, one or two big customers saying, "Holy cow, this works great. We're loading up on it," or are you getting broader penetration across more customers? Just any color there would be appreciated.
Yeah, no, I think this is a very long, broad customer list, and it's actually very diverse as far as the basin that we're running these in and the commodity that it's exposed to. As you know, we also run plugs internationally, and that has really started to pick up. We're super excited about the momentum in the international market. Happy with our dissolvable plug performance recently in a couple of really interesting plays like the Vaca Muerta as well as the Middle East. That's lots of runway there for Nine. That's been pretty awesome to see.
Okay. Well, thank you very much.
Also, John, just one more point on that too. Just if you look in our IR deck, we did wanna let the market know that we've sold 24% more dissolvables today than we have in 2018. Just as you kinda think about generally that growth, and I keep referencing 2018 'cause that was really a pretty strong year for the service sector. We like-
Right.
We like to look at numbers relative to 2018, how are we doing. That's been wonderful for us to see.
Okay. Thank y'all very much.
Thanks. Awesome. Thank you.
There are no further questions at this time. I would now like to turn the floor back over to Ann Fox for closing comments.
Thank you for your participation in the call today. I wanna thank our employees, our E&P partners, and investors. Thank you.
This concludes today's teleconference. You may disconnect your lines at this time. Thanks for your participation.