Greetings, and welcome to Nine Energy Service Fourth Quarter and Full Year 2023 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Heather Schmidt, Vice President of Strategic Development and Investor Relations. Thank you. You may begin.

Thank you. Good morning, everyone, and welcome to the Nine Energy Service earnings conference call to discuss our results for the fourth quarter and full year 2023. 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 a reconciliation to the most directly comparable GAAP financial measures are also included in our fourth 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 fourth quarter and full year results for 2023. The oil and gas market continued to be volatile in 2023. At the end of 2022, there were 779 rigs in the U.S. and by the end of 2023, the rig count was down to 622, a decline of approximately 20%. Most of these rig declines came out of the natural gas regions in conjunction with the average natural gas price declining by over 60% year-over-year and was compounded by a lower average WTI price, which declined by approximately 18% year-over-year from approximately $95 in 2022 to approximately $78 in 2023. Despite the market, we continue to differentiate with forward-leaning technology coupled with excellent service. I want to highlight some of the team's achievements during 2023. In January, we announced the redemption of our senior notes due 2023. In conjunction with the unit's offering, we amended and extended our existing asset-based revolving credit facility to January of 2027. This new capital structure gives us additional flexibility and delevering continues to be a high priority for Nine. Operationally, we performed well and continued to be at the forefront of technology. I am extremely proud of our completion tool offering and what we have been able to accomplish this year with both our existing tools and the introduction of new tools in the domestic and international markets. Our Scorpion composite plug has surpassed over 370,000 plugs run since we acquired the technology in 2015. Our dissolvable plugs continue to perform well, and we increased our total number of dissolvable Stinger units sold by approximately 18% in 2023 over 2022. We have maintained a leading market share in the U.S. dissolvable market while simultaneously selling dissolvable plugs into the international markets. In 2023, we increased our total international revenue by approximately 16% year-over-year. During 2023, our multi-cycle barrier valve performed very well in the Middle East, and we anticipate demand will continue to increase our market share and customer base in that region. We also announced the commercialization of our new Pincer hybrid frac plug; the Pincer comprises 47% less material than our predecessor, the Scorpion fully composite frac plug, and offers industry-leading drill-out times. We look forward to gaining market share with this tool in 2024. Our service lines did a good job of defending and justifying price in 2023. Despite a declining rig environment, our total cementing revenue was down by only 2% year-over-year, and we were able to increase our average revenue per job by approximately 10% year-over-year. Despite significant exposure in the Haynesville Basin, our coil team increased total revenue by approximately 3% year-over-year, and our wireline team also increased revenue by approximately 9%. We made significant progress this year with ESG. We quantified the company's greenhouse gas emissions for 2021 and 2022, and we will have 2023 data this year. Through this process, we are identifying gaps and procedures to make the collection of this data more accurate and efficient, as well as developing a strategy on how to potentially reduce our emissions moving forward. We are in the process of formalizing our sustainability efforts for the market and continuing to provide the time and resources internally to improve. Company revenue for the year was $609.5 million. Net loss was $32.2 million or a negative $0.97 per diluted share and a negative $0.97 per basic share. Adjusted EBITDA for the year was $73 million. Now turning to Q4. Revenue for the quarter was $144.1 million, which was in the upper end of our original guidance of $137 million to $147 million. Adjusted EBITDA was $14.6 million, an increase of 26% over Q3 and reflected an adjusted EBITDA margin of 10%. Net loss was $10.3 million or a negative $0.30 per diluted share and a negative $0.30 per basic share. Adjusted ROIC for the fourth quarter was approximately 3.9%. Activity levels and pricing were mostly stable quarter-over-quarter, but as anticipated, we did not have a recurrence of the operational inefficiencies in elevated white space that occurred in August. Additionally, we saw a significant increase in our international tool sales, almost doubling international revenue in Q4 versus Q3. I would now like to turn the call over to Guy to walk through detailed financial information.

Thank you, Ann. As of December 31, 2023, Nine's cash and cash equivalents were $30.8 million, with $20.8 million of availability under the revolving credit facility, resulting in a total liquidity position of $58.9 million, as of December 31. On December 31, 2023, the company had $57 million of borrowings under the revolving credit facility. Subsequent to December 31, we paid down an additional $5 million of the revolving credit facility. Since our refinancing in January of 2023, we have reduced our borrowings under the revolving credit facility by approximately $20 million. Our liquidity position will continue to be impacted by our semi-annual interest payments of approximately $19.5 million, with our most recent payment taking place in January of 2024. During the fourth quarter, revenue totaled $144.1 million with adjusted gross profit of $25.6 million. During the fourth quarter, we completed 974 cementing jobs, an increase of approximately 12% versus the third quarter. The average blended revenue per job decreased by approximately 10%. Cementing revenue for the quarter was $52.3 million, an increase of approximately 1%. During the fourth quarter, we completed 5,675 wireline stages, an increase of approximately 1%. The average blended revenue per stage decreased by approximately 2%. Wireline revenue for the quarter was $28 million, a decrease of approximately 1%. For completion tools, we completed 26,926 stages, an increase of approximately 4%. Completion tool revenue was $36.1 million, an increase of approximately 11%. During the fourth quarter, our coiled tubing days worked decreased by approximately 5%, with the average blended day rate increasing by approximately 5%. Coiled tubing utilization during the quarter was 44%. Coiled tubing revenue for the quarter was $27.7 million, a decrease of approximately 1%. During the fourth quarter, the company reported general and administrative expense of $12.8 million with full year G&A of $59.8 million. Depreciation and amortization expense in the fourth quarter was $9.8 million, with full year D&A of $40.7 million. Our tax provision was approximately $0.6 million for 2023. The provision for 2023 is the result of our tax position and state and non-U.S. tax jurisdictions. For the year end 2023, the company reported net cash provided by operating activities of $45.5 million. The average DSO for 2023 was 53 days. Our total CapEx spend for 2023 was approximately $22.3 million, which came in below management's original guidance of $25 million to $35 million. For 2024, we anticipate total CapEx of $15 million to $25 million, the vast majority of which is maintenance CapEx. At the end of last year, we put a $30 million ATM in place to provide flexibility for the company. During Q4, we did not sell any shares under the ATM program. I will now turn it back to Ann.

Thank you, Guy. For 2024, most public operators are by and large, keeping activity and CapEx levels relatively flat year-over-year. As our customers continue to consolidate, this leads to larger, more reliable D&C programs, which should help stabilize the market. Our long-term outlook remains positive for North America and the potential upside for activity levels. The decline curves in North American shale are significant, and many operators have worked through their Tier 1 acreage. In addition, planned LNG projects should spur future activity in some of the natural gas basins, specifically the Haynesville. For Q1, we have not seen any significant changes in the market conditions with the rig count relatively flat versus year-end, and we anticipate overall pricing and activity levels to remain mostly flat. Because of this, we expect Q1 to be relatively flat compared with Q4 with projected revenue between $135 million and $145 million. We will continue to focus on our strategy of being an asset and labor-light business that couples excellent service and forward-leaning technology to help our customers lower their cost to complete. Our team has been together for a long time, and given our experience through cycles, we are confident we can navigate market changes and quickly capitalize on improving markets. Our service and geographic diversity provide us a good balance, and we remain focused on diversifying more of our top-line revenue streams to cementing and completion tools, especially within the international markets. We will now open up the call for Q&A.

Thank you. At this time, we will be conducting a question-and-answer session. Our first question comes from Waqar Syed with ATB Capital Markets. Please proceed with your question.

Thank you and good morning.

Good morning.

Good morning.

Ann, certainly, very impressive international growth, 16% year-over-year. Could you maybe quantify what percentage of total revenues are now being generated from the non-North America market?

Yes. We think about it as roughly moving up about 1 point. So before it was around 4% in 2022, and for 2023, we're closer to 5% now. And obviously, Waqar, a big piece of our strategy here is to go at this deliberately, carefully and increase our exposure to those international markets, both through our unconventional tools as well as through conventional tools. So we're pretty excited about that. As you know, the international market has been a pretty healthy place. We expect that will continue this year, and our tools are really performing fabulously there.

And right now, the majority of the international market is still Middle East, or is it also in Latin America? How are you thinking about it geographically?

So we sell through to about 22 countries. The primary region is the Middle East and Argentina. But we are definitely selling into countries like China, etc. So very excited about that. Argentina, that Vaca Muerta is a very, very hot play, and it loves some of our tools. And again, the Middle East has been a very exciting region for us.

So this mid-teens type growth rate, is that kind of sustainable in 2024 and beyond?

We're cautious about forecasting that for the market because, again, as you know, we're a small cap company and entering into these big plays can be significant for us, but it can also be lumpy and very unpredictable. So we're extremely excited about that 16% year-over-year growth. We're intending to move it, but I'm not going to quantify that for the market this year.

Okay. Now the incremental margins, EBITDA margins in Q4 were very, very strong. How should we be thinking moving forward? But first off for Q4, was there anything special, or was it just like August was terrible, and you had the cost fixed costs kind of unchanged, or was it mostly driven by international? Maybe just provide some color on the strong incremental margins. And then how should we be thinking about future quarters?

Yeah. Thanks, Waqar. So as you say, August was very difficult for us, and we had a lot of operational inefficiencies there due to all the white space. So just quite a lot of cost absorption. That wasn't present in Q4, although we did have a bit of budget exhaustion and seasonality in December as happens every year. So those were the key driver. As you say, international also was much bigger in Q4 that has higher margins. Q1, we forecast $135 million to $145 million for you, so flat to slightly down versus Q4.

Okay. And then in terms of thinking about free cash flow or what the EBITDA level is required for breakeven free cash flow. How should we think about that as we consider your CapEx, annual interest expense, and then working capital build or draw or any other cash taxes?

Yeah, Waqar. So we provided the CapEx guidance. The cash interest expense is going to be about $45 million or thereabouts. It's going to be less—just as a note, the cash interest is less than the book interest because of the amortization of the deferred financing costs. So I think that's important to note. Cash taxes will be fairly negligible for 2024. So again, working capital is going to depend on which way revenue goes. If revenue builds, you'll see a working capital outflow or revenue shrinks, it will be a working capital inflow, and you can see that quarter by quarter. Otherwise, those are really the big cash flow items. You have a few million miscellaneous expenses. But those are really the key items.

So if we take the midpoint of the CapEx guidance of about $20 million, roughly around $65 million of EBITDA is needed for free cash flow breakeven. Is that fair?

I think that's fair, plus or minus, yeah.

Okay. Sounds good.

Again, excluding the impact of working capital, that's the key variable. Excluding impact, yes.

Okay. Well, hopefully, if EBITDA goes up, then maybe that gets offset a little bit from working capital. But that’s all for me. Thank you very much. Appreciate it.

Thank you, Waqar.

Our next question is from Tim Moore with EF Hutton. Please proceed with your question.

Good morning and nice dissolvable Stinger plugs growth and international sales growth for the year. Those were definitely standouts and really important drivers. So your December quarter EBITDA loss and EPS loss, and that's my exact estimates published just the sales mix was a bit more weighted towards product revenues than expected. So maybe just starting off with I have about four questions. With the rig count flat the past 10 weeks, what can you share on the general sentiment of private operators and their budget planning? I know they don't plan out as far as everyone else. But at the same time, if there is an inflection and in turn this spring, they could come back quicker on spending. So what are you hearing there?

Yeah. It's a great question. I think the private operators certainly are behaving differently in those black crude markets than you would see some of the smaller guys that are more levered to gas. So I think right now, a lot of those players are well situated within those crude markets. You're not—clearly, you're not seeing something that's a catalyst for a frenzy among private at the moment. However, as you say, these things are very volatile, and we've seen shifts—six-month shifts pretty readily and handy in these markets over the past few years. So they're definitely out there, and they're ready. I would say that many operators are experiencing a ton of operational efficiencies right now, which is really helping them inside these commodity price environments. So the gas operators certainly have pulled back, and most of those have been publicly announced. You could imagine the same behavior for the private, and that's going to take a lot of gas off the market. So let us see what happens in that October time frame and where those prices are posted. But very encouraging to see our customers respond to the market in a very moderated way and clearly very focused on returning cash to those investors. So I think we're no longer in an industry that doesn't have discipline and isn't responsive. So as you well know, when those gas operators slow down, a lot of gas is going to come off the market. I mean multiple Bcf already should be coming off the market just based on these announcements. So that's pretty exciting for us, and it seems that, that rounds out the year-end could be pretty strong.

That's helpful color. And I noticed that the gross margin for a product was very impressive, I think 25% in the quarter, if I calculate it correctly. I know some of that was mix. What do you think is a realistic gross margin for products for this year? I mean, can you hold up in the low 20s?

Yeah. It's a good question, Tim. We haven't guided that. So hard for us to provide that here to the market. I would say, the mix was very favorable in Q4 due to international. And so it will be variable by quarter, just depending on mix and whether they're domestic or international sales and mix of composites and dissolvables and so forth.

Yeah. That's helpful. Because I mean, the more you push international, and you clearly pulled it off this last year, I mean the more margin mix should be accretive. So that's great. Actually, can Ann maybe elaborate a little bit more on that next-gen frac plug that uses 40% less material and just what you're seeing on initial talks with customers and if you have the capacity to produce a lot of those if you're in place then?

So I'll take the second part of that first. The way that we've designed these tools, and I don't want to relegate them just to as simple as assembling Legos, but the intent was to be able to assemble and drive the supply chain so that we could flex up and down very, very easily. So to answer the second part, yes, we are positioned to produce quite a few of these and we hope to gain market share this year. So it's about 47% less material. You've got really what I consider a hybrid plug. The key here is, as you know, the market needs us to hold pressure for the frac, not have any fluid bypass, so you're actually isolating those stages. And then really, they're looking for minimal to no drill-out. So the tensor is an answer from kind of some of your legacy composite plugs, trying to get those operators something that's even faster to drill out if they're not ready to make the change yet to a fully dissolvable plug. So it's an effective bridge for them. Yes, we've had—we're trialing with some very large customers at the moment. We're extremely excited about this product. As you know, Tim, we're evolving and innovating constantly on existing products. One of the special things about the R&D team here at Nine is they're ultra-responsive. They have a high sense of urgency, but they're really not designing for themselves. They're designing for the customers specific to these wellbores. So we're able to turn out innovations pretty constantly. We're also really excited about the pump-down rings on our plugs, especially considering water concerns out in the Delaware, every barrel that you can save is huge. So little tweaks like that are very, very important. We're pretty thrilled about this product and really excited to see what it's going to do this year.

Great. Thanks for elaborating on that. I think that's a terrific innovation that will catch fire, that's great. I know you mentioned—the guidance was $15 million to $25 million for CapEx this year being mostly maintenance CapEx. But for the growth CapEx component of that, is it fair to assume that all that's going towards cementing and the light labor completion tool, not tubing?

That's correct. So your growth CapEx is almost exclusive to completion tools and some cementing, and the vast majority of this is a maintenance capital budget.

Got it. That makes sense. And it makes perfect sense of ROIC for the return on the growth CapEx for cementing and completion. I know you can't give guidance yet for the year in sales growth, and I don't know if 10% growth for the year, it will be entirely second-half loaded if that's what I go with. But when—how quickly can you flex up and down? Let's say that there is—what I'm reading at least from what I'm seeing is could be a good recovery and growth in the rig count, hopefully this spring, early summer. So how could you do that in a few weeks or months to really—if there is that private operator budget switch on the crude side, even on the gas side, can you respond to that pretty quickly or does it take 10 to 12 weeks?

Yes. No. I mean, I think 2022 is a perfect example of that, right, where you can go from a measly level of EBITDA in Q1 to a $30 million a quarter in Q3. One of the great pieces about this business is we've got a lot of variable costs. We have a team that's been really—my COO and I have been together since 2014. This is a team that's tried and true, and we know exactly what to do on the way down and exactly what to do on the way up, which doesn't mean that's a fun experience, by the way. But it's just a salty team, and we seem to get better at it each time, and we're responding, I would say, within a quarter to answer your question specifically. We do not seem to miss capitalizing on an up market. That is something that we've proven, and we've proven at several different times over these cycles. So we're ready and excited for anything like that that may happen. In the meantime, we're always working on innovating technology. Our history has demonstrated that exact capability. And so, I would encourage people to go back and look at those quarters and how fast we are able to snap up.

Good. I mean, that's really what I was getting at. I mean, a year ago, I have been asking like the downturn to flex on the contingency stuff. But it just seems like with your high variable cost structure, your incremental margins to be pretty huge if there's a good turn one quarter. So thanks a lot, Ann. Thanks, Guy. Appreciate it. That’s it for my questions.

Okay. Many thanks. I want to end by thanking you for your continued support and also thanking our team for their incredible work in 2023. Thank you, all.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.