Greetings, ladies and gentlemen, and welcome to Nine Energy's Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. It is now my pleasure to introduce your host, Ms. Heather Schmidt. Thank you. You may begin.

Thank you. Good morning, everyone, and welcome to the Nine Energy Service Earnings Conference Call to discuss the results for the second quarter of 2021. On the call with me today are Ann Fox, President and Chief Executive Officer; and Guy Sirkes, Chief Financial Officer. We appreciate you're here today. 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 participants 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. 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 filed 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 thank you for joining us today to discuss our second quarter results for 2021. The quarter was in line with what we anticipated, with Q2 revenue of $84.8 million coming towards the top of management's original guidance of $78 million to $86 million, and representing an increase of 27% over Q1 2021. During the quarter, we wrote down $2.4 million of tools inventory as we replace legacy tools and transition our customers to our newest technology, which did negatively impact our operating results, including adjusted EBITDA. Market activity improved throughout the quarter, with June activity slightly stronger than anticipated. While somewhat skewed due to weather-related shutdowns during Q1, the EIA reported completed wells increasing approximately 19% quarter-on-quarter, driven mostly by Permian completions, which increased by approximately 26% quarter-over-quarter. U.S. new wells drilled increased by approximately 24% over that same time period. At quarter end, there were an estimated 205 active frac crews in the U.S., with approximately half of those operating in the Permian. The average active frac crews increased approximately 13% quarter-over-quarter, equating to 23 total new frac crews added. Activity in the gassy regions, specifically the Haynesville and Northeast, remained steady, but the vast majority of activity growth for the industry and for Nine has come out of the Permian. Despite completions increasing 19% quarter-over-quarter, Nine's revenue increased by approximately 27% driven by activity improvements across service lines. Our pricing remains depressed, so we have begun implementing net price increases in our cementing service line in the 10% to 20% range as well as minimal price increases in our coiled tubing service line in the 8% to 12% range. We have been navigating through materials and labor inflation, some of which we are able to pass through to our customers, mostly within cementing and coiled tubing. We remain focused on strategically implementing incremental price increases where applicable without sacrificing crucial market share with key customers. The largest challenge today is labor. It is extremely difficult to find and retain qualified field personnel, causing many of our service lines to miss revenue because of an inability to man equipment. Additionally, OFS is fighting for the same labor pool as other industries, causing wage inflation that is in some cases exceeding price increases. While the labor shortage may potentially be a catalyst for implementing price increases within our service lines moving forward, the magnitude of potential price increases will depend significantly on the timing and pace of further rig and frac crew additions throughout the second half of the year. We do anticipate some wage inflation to continue for the remainder of the year as OFS increases its capacity. Overall, as OFS recovers, our strategy of being an asset and labor-light company is coming to fruition. From Q1 to Q2, Nine's revenue increased by approximately 27% versus our headcount, which only increased by 6%. Our seat completed per employee increased from 16.8% to 19.7%. This will be an advantage for Nine as OFS continues to battle wage inflation and finding qualified labor in order to meet revenue goals. In Cementing, revenue increased by approximately 19%, driven by both activity and price increases. This service line performed very well because of Nine's service quality and technical offerings. We continue to see cement shortages across the industry, which has helped create pricing leverage. Additionally, we continue to gain market share in the Haynesville basin and have already begun work for multiple large operators in this region, estimating our market share at 15% to 20%. Coiled tubing revenue increased by approximately 32% quarter-over-quarter, driven by a mix of price and activity increases in both the Permian and Haynesville. Wireline revenue increased by 46% in Q2. We have not yet implemented net price increases in the service line that has seen market share gains, specifically in the Permian, driving the majority of the quarterly growth. Our dissolvable plug continues to perform very well. This quarter, we increased the net total number of dissolvable stinger sold by over 40%. The efficiency and ESG benefits of dissolvable plugs continue to be better understood by our customers, helping to drive adoption. During 2020, we saw significant pricing declines in the dissolvable plug market. While we continue to bring our manufacturing cost down, the decrease in price is also helping to increase adoption as coiled tubing and other ancillary service costs increase and service quality diminishes. We believe more operators will transition from composite to dissolvable plugs as well as hybrid to full wellbore and dissolvables. We have also seen significant increases in our composite plug sales. From Q1 to Q2, we increased the total number of composite plugs sold by approximately 42%. I am confident we have one of the best-performing downhole completion tools portfolios in the U.S. We continue to battle competitors offering very low prices for products. We do believe quality and performance will prevail, and we are holding price steady. Our R&D team is working to lower our cost of manufacturing. Company revenue for the quarter was $84.8 million. Net loss was negative $24.5 million and adjusted EBITDA was negative $0.4 million. Basic earnings per share was negative $0.81. I would now like to turn the call over to Guy to walk through financial information for the quarter.

Thank you, Ann. As of June 30, 2021, Nine's cash and cash equivalents were $33.1 million with $52.3 million of availability under the revolving ABL credit facility, resulting in a total liquidity position of $85.4 million as of June 30, 2021. Availability under the ABL is based on accounts receivable and inventory balances, so as we build working capital in concert with licensing revenue, the ABL borrowing base should increase. This quarter, we did not repurchase any of our bonds. During the second quarter, revenue totaled $84.8 million with adjusted gross profit of $8.2 million, an increase of approximately 89% quarter-over-quarter. During Q2, we wrote down $2.4 million of tools inventory as we replace legacy tools and transition customers to our newest technology, which did negatively impact adjusted EBITDA. During the second quarter, we completed 641 cementing jobs, an increase of approximately 3% versus the first quarter. The average landed revenue per job increased by approximately 15%. Cementing revenue for the quarter was $27.3 million, an increase of approximately 19% quarter-over-quarter. During the second quarter, we completed 4,639 wireline services, an increase of approximately 35% versus the first quarter. The average blended revenue per stage increased by approximately 9%. Wireline revenue for the quarter was $18.6 million, an increase of approximately 46%. In completion tools, we completed 21,826 stages, an increase of approximately 26% versus the first quarter. Completion tool revenue was $24.4 million, an increase of approximately 22%. During the second quarter, our coiled tubing days worked increased by approximately 25%. The average blended day rate for Q2 increased by approximately 5%. Coiled tubing utilization was 36% with revenue of $14.5 million, an increase of approximately 32%. The company reported general and administrative expense of $12.2 million compared to $10.2 million in the first quarter. This increase was largely due to a legal accrual. Depreciation and amortization expense in the first quarter was $11.5 million compared to $11.9 million in the second quarter. The company's tax provision for the second quarter of 2021 was approximately $0.1 million and $0.1 million year-to-date. The provision for the year is primarily attributable to state and non-U.S. income taxes. During the second quarter, the company reported net cash used in operating activities of negative $19.6 million. The average days sales outstanding for the second quarter was approximately 64.3 days compared to 65 days in Q1. Total capital expenditures for Q2 were $900,000, bringing the total CapEx spend through Q2 2021 to $2.8 million. Our 2021 full year CapEx guidance of $15 million to $20 million remains unchanged, but there is a possibility that a portion of this is deferred into 2022 and 2021 CapEx comes in below or at the bottom end of the range. For Q2, our largest cash outflows were our senior note interest payments of approximately $14 million, CapEx and changes in net working capital. Looking forward, working capital will most likely continue to be a use of cash as revenue increases. I will now turn it back to Ann.

Thank you, Guy. Throughout the quarter, we saw moderate activity increases each month, with June being one of our strongest months from a revenue perspective since Q1 2020. As we mentioned on our last call, we do anticipate Q3 will be better than Q2 from an activity and revenue perspective. Additionally, we will have price increases in place for some customers within our cementing and coiled tubing lines. That said, our public customers remain committed to capital discipline despite very supportive oil prices. Because of this, we anticipate only moderate activity increases for the remainder of 2021. Activity remains very low when compared to historical levels, and we are facing an unprecedented labor shortage, which will be the main catalyst for potential price increases in our labor-heavy service lines, including cementing, coiled tubing, and wireline. Similar to other downturns, as OFS begins to ramp up hiring and unstaffed equipment, we also begin to see a deterioration in service quality and safety, causing many customers to shift their focus from cost to performance, which should provide a very good opportunity for Nine from a market share and pricing perspective. Our pricing in our tools business is steady; as is always the case for tools, we do not anticipate any price increases for this business in the near term but are instead increasing volume while also working internally to lower manufacturing costs and increase the margin. As part of 2021 growth CapEx, we are converting two of our existing wireline units to electric wireline. These units are powered by lithium-ion battery packs and can significantly reduce carbon emissions. We expect to receive these new units mid-Q3. We are very excited to pilot this new technology and provide leaner completions for our customers. Looking into next quarter, we expect Q3 to be better sequentially than Q2, with projected revenue of $95 million to $103 million, driven mostly by activity increases as well as price increases. Today, we remain focused on continuing to gain market share across service lines with quality customers at positive gross margins. It is very important that we are managing growth within the business so as not to sacrifice service and product quality as well as safety. We believe we are well-positioned to capitalize on the recovery with our asset and labor-light business model. We will now open up the call to Q&A.

Our first question comes from J.B. Lowe with Citi.

My question is just on incrementals going into 3Q. It looks like you've been about 35% incrementals on the gross margin front in 2Q. Should we expect something similar for 3Q given the moving pieces between pricing increases and cost inflation?

I think it's not unreasonable. Again, I imagine you're normalizing for the inventory write-down. So we're clearly not guiding it, but I don't think it's an unreasonable thought.

Okay. So I guess the corollary of that is how much of the pricing that you're pushing through, do you think it is going to be net? Is it all gross? Are you not pushing through all the pricing, all the costs of...

This is our conversation multiple times a day, and the data regarding costs, both for labor and materials, is changing significantly. For two days, you might think you have a grasp on what to expect, only to suddenly hear news about inflation affecting a specific component or material you are using or that wages have shifted unexpectedly. My answer is that we just don't know yet. We can make educated guesses based on the company's historical performance and past inflation experiences. However, this market is very dynamic, and I can tell you that the fluctuations and changes we've previously encountered have made this the most challenging situation for forecasting. It's as if something unexpected shifts every few days.

Got you.

The other thing I want to mention is that the entire country is currently dealing with the Delta variant, which will lead to additional costs. We are already facing a shortage of labor in the market, and we were experiencing revenue losses due to labor shortages even before Delta emerged. Generally, the oil sector is not particularly optimistic about the vaccine. It's important to keep this in mind, and it should be a priority for everyone, including customers.

What are you expecting for free cash flow or cash use in the second half, and when do you anticipate becoming free cash flow positive?

Yes. So as we discussed, working capital is going to continue to be a use of cash. So as revenue rises, you'll see accounts receivable and to a lesser degree, potentially inventories build as well. So that's going to be a drain on cash. Our CapEx, you would've seen, we spent very little CapEx in the first half of the year. So our CapEx budget is necessarily going to be back-weighted. And we've also got a coupon payment for the bonds here in the back half of the year as well.

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

Ann, could you provide more details on the ESG benefits of the dissolvables? Have you had the opportunity to compare the emissions from that product to traditional drill outs? Any information you can share would be appreciated.

We conducted an independent environmental study when we adopted the dissolvable plug. This study involved a comprehensive evaluation of the environmental impact from the beginning to the end of the conventional plug's life cycle compared to the dissolvable plug. For instance, using 70 conventional plugs could result in around 75,000 kilograms of carbon emissions, while using our 70-plus dissolvable plugs only leads to about 7,000 kilograms. When considering a six-well pad, this represents a significant reduction, equating to 404 metric tons of carbon emissions, or the equivalent of removing 84 cars from the road. Meeting our customers' sustainability goals is challenging, and they need to evaluate all options. Combustion, associated with traditional services, is a major concern, so we are focused on reducing emissions from combustion wherever possible. With the dissolvable plugs, we eliminate the need for large amounts of diesel during the drilling process, which is significant. We're also exploring other dissolvable components that could further reduce water usage and save considerable diesel. Our company is committed to prioritizing diesel reduction, as it is both measurable and quantifiable, and we aim to provide our customers with cleaner and greener completion options alongside conventional methods. Different segments of our customer base have varying degrees of focus on sustainability, so we need to offer solutions that cater to these different needs. The acquisition of Magnum in October was aligned with this focus, and the timing is now right for customers who are becoming more conscious of these issues. We anticipate a significant uptick in the demand for the dissolvable plugs. Additionally, we expect rising costs in the core service area due to inflationary pressures on labor and capital. This, together with the pricing challenges faced in the dissolvable plug market last year, is likely to drive more interest in our dissolvable options. Furthermore, our operators are experiencing difficulties drilling out plugs in low-pressure settings, particularly in the Permian region, where we only introduced dissolvable technology in the first quarter of 2020, so it has not been long in use. We're enthusiastic about the recent increase in sales of dissolvable plugs.

Okay. I just want to follow up on ESG, if I may. I know it's impossible to measure rate of change in terms of customer sentiment, but the ESG thing is clearly developing and ramping. I mean can you just elaborate on in customer interest in dissolvables willing to taking the meetings versus what might have been tested in Q4, Q1? Just how fast is this uptake in interest?

The uptake has been incredible. Over the past 60 to 90 days, discussions have shifted dramatically; initially, emissions were not even part of the conversation among our sales team in the field, but now it comes up constantly. I was at a site in the Northeast where everyone in the frac van was discussing it. It has suddenly become a relevant topic. The rate of change has been astonishing, though I can't quantify it precisely. Additionally, I believe that, similar to the way our safety statistics evolved in the service sector, there was a time when customers didn't prioritize safety until it became essential to access well pads. We're now seeing a similar trend with ESG metrics, where the service sector will face pressure to demonstrate key performance indicators related to ESG, which will undoubtedly benefit Nine.

Our next question comes from the line of Waqar Syed with ATB Capital Markets.

Ann, could you provide some measure of what the mix is in terms of your sales between composite plugs and dissolvables right now?

Well, no, we actually don't give the exact mix. We certainly had strong growth quarter-over-quarter for dissolvables as well as composites. But the stinger technology is a huge piece of our dissolvable offering we've launched, as you know, a bunch of new technology last year. We're seeing a lot of great adoption. So again, I can't quantify it for you, but I can tell you the percentage increase is very significant, especially relative to the completions that we're seeing in the market. And I would also give you a little color, Waqar, where we're seeing more customers now go to full wellbores. So we haven't seen that previously, and that's been a market change.

Ann, we're hearing about supply chain issues on the cementing side, particularly with the availability of wellsite cement. What is Nine doing to secure and ensure that you have sufficient supplies of cement?

Sorry, I think we had a technical issue there. Can you hear us?

Yes, we can.

Sorry, Waqar, I'm not sure where I left off. I was rambling for a while until we realized the line was cut.

No, we were just talking about the cementing supply chain.

There is no effective way to protect the service sector from cement shortages. Fortunately, our market share is substantial, and we have strong relationships. Currently, the quality of cement is quite poor, with some of our team describing it as the lowest quality available, containing unwanted materials. As a customer, this raises my concerns about selecting a cement company that prioritizes process execution and quality assurance. It's important to remember that even a small rock can disrupt everything during a long execution process. This is a significant issue that I believe will continue and worsen in Q1 as our operators may increase rig numbers. It's a serious concern, and we haven't encountered this level of difficulty before.

Are your suppliers attempting to resolve this issue? Do you believe it will be resolved? Or are they so focused on producing cement that they don't pay much attention to the oil and gas sector?

Yes. I don't think they're trying to rectify it. I think they don't care. Historically, we thought about the service industry as about 5% to 7% of kind of the classes of cement globally. So we've always been a very small piece of the pie for these guys, and now we're just much smaller. Assuming, of course, during the pandemic, construction was great, while the oil and gas industry was not. And so we're now an even smaller piece, far less relevant for them. So I don't think there's really any reason for them to turn their wheels considerably right now. Again, we're watching this very, very closely. And I think we're well positioned relative to competition to handle it. But I think the bigger concern is for the folks that are not locked in with long-term relationships; this could be a very significant problem. And of course, when you have the United States operating on razor-thin maintenance production, very tight guidelines quarterly for their production, this could become very interesting.

So Ann, we're seeing it in pumping and other segments as well, this customer focus on low emissions fleet. Are you seeing any trends towards changing or upgrading cementing fleets towards low emissions as well?

I think customers are very focused on having electrified fleets and utilizing products and materials that support this. However, the challenge is that many customers do not recognize the financial constraints on the service side, which predominantly operates within a diesel-based industry. It's not that it's impossible to make the transition; it's just that there isn't sufficient funding to achieve it. This is where the challenge lies. I believe that 2021 is likely viewed as a time when electric options are essential for maintaining market share, though this could quickly shift to electric vehicles offering additional pricing power due to their scarcity.

Yes. And because of labor shortages, I know last cycle as well that you were refusing jobs because you were worried about service quality. And are you close to that? And if so, what do you think the revenue impact is for growing jobs because of labor or labor not meeting your standards of quality?

Yes, it's a great question, Waqar. We haven't quantified it for the market, but I suspect it gets worse, not better. So again, we're getting labor that, obviously, if we get it, is very new to the market. And so you've also, of course, most service companies have cut back all support functions, to your ability to take that labor and properly train them both from an operational execution perspective as well as the safety perspective is limited. And then you layer the Delta variant on top of that very complex situation here. So I think that it's more challenging, not less challenging. And I think this is going to be very similar to what we saw as the market ramped up in H1 '17, where our customers had been ridiculously focused on price only, and suddenly had such massive service quality issues and safety issues, they started to revert back to quality. So we suspect there will be a similar trend, most especially as we come into 2022 and activity picks up even incrementally. So again, I think this is going to be an interesting time and we'll see. And hopefully, our customers start requiring back cards to get on the well site or it's going to be very challenging for service.

Yes. Just one final question, Guy. Could you confirm that the coupon payments are due in Q4?

Yes. There’s the coupon payment that's due in Q4, yes, $14 million.

Thank you. Ladies and gentlemen, at this time, there are no further questions. I would like to turn the floor back to Ann Fox for closing comments.

Thank you for your participation in the call today. We appreciate your continued support of Nine. Thank you.