Q4 2023 Nine Energy Service Inc Earnings Call
Greetings and welcome to nine energy service fourth quarter and full year 2023 conference call.
Operator: Greetings and welcome to the Nine Energy Service fourth quarter and full year 2023 conference. At this time, all participants are on a listen-only conference call.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
Operator: The question-and-answer session will follow the formal... If anyone should require operator assistance during the conference, please let me know; please press star zero on your telephone. And 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.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
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 circuits, Chief Financial Officer, We appreciate your participation.
Heather Schmidt: 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.
Heather Schmidt: Some of our comments today may include forward-looking statements reflecting nine 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.
Some of our comments today may include forward looking statements are fucking 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 at a <unk>.
Heather Schmidt: 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.
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.
Ann G. Fox: 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.
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 region.
And in conjunction with the average natural gas price declining by over 60% year over year and was compounded by a lower average W. T I price, which declined by approximately 18% year over year from approximately $95 in 2022 to approximately $78 in 2002.
'twenty three.
Ann G. Fox: 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 units offering, we amended and extended our existing asset-based revolving credit facility to January of 2027.
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 units 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 on the forefront of technology I am extremely proud of our completion tool offering and what we have been able to accomplish this.
Ann G. Fox: This new capital structure gives us additional flexibility, and delevering continues to be a high priority for Nine. Operationally, we performed well and continue to be on 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 exceeded over 370,000 plugs run since we acquired the technology in 2015.
Here with both our existing tools and the introduction of new tools in the domestic and international markets. Our Scorpion composite plug has surpassed over 370000 plugs run since we acquired the technology in 2015, our Dissolvable plugs continued to perform well and we incur.
Ann G. Fox: 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 plug market while simultaneously selling dissolvable plugs into international markets. In 2023, we increased our total international revenue by approximately 16% year-over-year. In 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 is comprised of 47% less material than our predecessor Scorpion fully composite frac plug and offers industry-leading drill-out times.
<unk>, 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 pincers comprised of 47% less material than our predecessor.
Scorpion fully composite frac plugs and offers industry, leading drill out times, we look forward to gaining market share with this tool in 2024.
Ann G. Fox: We look forward to gaining market share with this tool in 2024. Our service lines did a good job of defending and justifying prices 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. Additionally, 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.
Our service lines did a good job of defending and justifying price in 2023. Despite a declining rate environment are told US 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 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.
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 to the market and continuing to provide the time and resources internally to improve.
Ann G. Fox: 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. The net loss was $32.2 million, or negative 97 cents per diluted share and negative 97 cents per basic share.
Company revenue for the year was $609 5 million net loss was $32 2 million or negative 97 cents per diluted share and negative 97 cents per basic share adjusted EBITDA for the year was 73 million now turning to Q4.
Ann G. Fox: 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 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 negative 30 cents per diluted share and negative 30 cents per basic
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 EBITA margin of 10%.
Net loss was $10 3 million or negative <unk> 30 cents per diluted share and negative 30 cents per basic share adjusted ROE I see for the fourth quarter was approximately three 9%.
Activity levels and pricing pricing were mostly stable quarter over quarter, but as anticipated. We did not have a recurrence of the operational inefficiencies and 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.
Guy Sirkes: 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 the detailed financial information. Thank you, Ann.
Walkers detailed financial information. Thank you Ann as of December 31, 2023, Nine's cash and cash equivalents were $30 8 million with $28 million of availability under the revolving credit facility, resulting in a total liquidity position of $58 9 million as of December 31st.
On December 31, 2023, the company had $57 million of borrowings under the revolving credit facility. Subsequent to December 31st 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.
Guy Sirkes: As of December 31st, 2023, NINES 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 31st. On December 31st, 2023, the company had 57 million in borrowings under the revolving credit facility. Subsequent to December 31st, we paid down an additional $5 million of the revolving credit facility, and since our refinancing in January of 2023, we have reduced our borrowings under the revolving credit facility by approximately $20 million. However, 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. In 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%.
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%.
[noise] cementing revenue for the quarter was $52 3 million an increase of approximately 1%.
During the fourth quarter, we completed 5675 wireline stages, an increase of approximately 1%.
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 26926 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.
Guy Sirkes: 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, an increase of approximately 1%.
Depreciation and amortization expense in the fourth quarter was $9 8 million with full year DNA of $40 7 million.
Our tax provision was approximately zero point $6 million for 2023.
The provision for 2023 as a 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.
Guy Sirkes: 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 coil tubing days worked decreased by approximately 5%, with the average blended day rate increasing by approximately 5%. Coil tubing utilization during the quarter was 44%. Coil tubing revenue for the quarter was $27.7 million, a decrease of approximately 1%. During the fourth quarter, the company reported general and administrative expenses 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 DNA of $40.7 million.
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.
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.
Thank you guys for 2020 for 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 and C programs, which should help stabilize the market. Our long term outlook remains positive for North America, and the potential upside for <unk>.
<unk> levels the decline curves in North American shale are significant and many operators have worked through their tier one acreage. In addition planned LNG projects should spur future activity in some of the natural gas space and specifically the Haynesville for Q1, we have not seen any significant changes in the market conditions, but the rig count relatively flat first.
Guy Sirkes: Our tax provision was approximately $0.6 million for 2023. The provision for 2023 is the result of our tax position in 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.
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 and $145 million. We will continue to focus on our strategy of being an asset and labor light business a couple.
Guy Sirkes: Our total CapEx spend for 2023 was approximately $22.3 million, which came in below management's original guidance of $25 to $35 million. For 2024, we anticipate total CapEx of $15 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. However, during Q4, we did not sell any shares under the ATM program.
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 market our service and geographic diversity provides us a good balance and we remain folk.
Just on diversifying more of our topline revenue streams to cementing and completion tools, especially within the international markets. We will now open up the call for Q&A.
Okay.
Thank you.
Ann G. Fox: 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 for activity levels. However, the decline curves for North American shale are significant, and many operators have worked through their Tier 1 a-bridge.
At this time, we'll be conducting a question and answer session.
If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd 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 Olga Sayiid with a T V capital markets. Please proceed with your question.
Thank you and good morning.
Good morning, Good morning, Dan.
And certainly a very impressive international growth, 16% year over year.
Operator: 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 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 and $145 million. We will continue to focus on our strategy of being an asset and labor-light business that couples excellent service with forward-leaning technology to help our customers lower their costs 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.
Maybe quantify like what percentage of total revenues are now being generated from the no North America market.
Oh, yes, we have it think about it as roughly moving up about a point so before it was around 4% in 2022 and for 2023 were closer to 5% now and obviously what car you know a big piece of our strategy here is to go at this deliberately and carefully.
And increase our exposure to those international markets, both through our unconventional tools as well as through conventional until it. So we're pretty excited about that as you know the international market. It's been a pretty healthy place. We expect that will continue this year and our tools are really performing fabulously.
Fabulously there.
Okay.
And right now the majority of the international market is a state of them at least are as adults in Latin America.
Operator: Our service and geographic diversity provides us with 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 to questions and answers. Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone. Any confirmation, Tom, will indicate your line is in question. You may press star 2 if you'd like to remove your question from. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the button.
Thinking about it geographically.
So are we sell through to about 22 countries. The primary region is the middle East and Argentina them, but we are definitely you know we're selling into countries like China et cetera. So very excited about that Argentina that Buck on March is a very very hot play and it it love some of our tools and again.
Middle East has been a very exciting region for us.
So this a mid teens type growth rate is that kind of sustainable or they come in for 24 and beyond.
You know, where 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.
Waqar Mustafa Syed: One moment, please, while we pull. Our first question comes from Waqar Syed with ATB Capital Markets. Please proceed with your question. Thank you and good morning.
Ann G. Fox: And certainly very impressive international growth, 16% year-over-year. Could you maybe quantify like what percentage of total revenues are now being generated from the non-North American markets? Yes, we've, think about it as roughly moving up about a point.
But I'm not going to quantify that for the market this year.
Okay.
The incremental margins EBITDA margins in Q4 was very very strong and.
Ann G. Fox: So before, it was around 4% in 2022, and for 2023, we're closer to 5% now. And obviously, Waqar, you know, 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 to continue this year, and our tools are really performing fabulously there. And right now, the majority of the international market is still the Middle East. Or is it also Latin America, or how are you thinking about it geographically? We sell through to about 22 countries. The primary region is the Middle East and Argentina.
How should we be doing going forward, but close to fall in Q4 was there anything special or is it was it just like August was terrible and so you know you had the cost are fixed.
Fixed plus kind of changed or is it was it mostly driven by international maybe just provide some color on the strong incremental margins and then you know how should we be thinking about a future quarters.
Yeah, Thanks for the car so.
As you 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. So that wasn't present in Q4, although we did have a bit of budget exhaustion and seasonality in December as you know as happens every year.
<unk>.
So those were that was the key driver as you say international also was much bigger in Q4 that has higher margins.
Ann G. Fox: But we are definitely, you know, selling into countries like China, etc. So, very excited about that. Argentina, that Baco March is a very, very hot game, and it loves some of our tools.
Q1, we've we've forecast of $135 million to $145 million for you so far.
Flat to slightly down versus.
Versus Q4.
Yeah.
Okay.
And then and in terms of like thinking about free cash flow or what.
Ann G. Fox: 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? You know, 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, you know, 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.
EBITDA level is required.
The basis for breakeven free cash flow.
How should we think about that as we think about your.
Capex the annual interest expense and then you know working capital build or draw Oh.
Or any other cash taxes.
Yeah, well car. So we provided the capex guidance the cash interest expense is going to be about $45 million or thereabouts.
Is gonna be less the just as a note the cash interest is less than the the book interest because of the amortization.
Amortization of the deferred financing costs.
So I think that's important to note cash taxes will be fairly negligible.
Guy Sirkes: Now, the incremental margins, EBITDA margins in 2.4 were very, very strong, and... You know, how should we be thinking going forward, but first of all, in Q4, was anything special, or was it just that August was terrible, and so, you know, you had the cost, fixed cost kind of unchanged, or was it mostly driven by international, maybe just provide some color on the strong incremental margins and then, you know, how should we Yeah, thanks, Waqar. So, you know, as you say, August was very difficult for us.
For 2024, so again working capital is going to depend on which way revenue goes off revenue builds youll see a working capital outflow or revenue shrinks it'll be a working capital inflow and you can see that quarter by quarter.
Otherwise there those are really the big the.
The big cash flow items, you'll 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 $40 million of roughly around $65 million of EBITDA is needed for a free cash flow breakeven is that is that fair.
Guy Sirkes: And we had a lot of operational inefficiencies there due to all the white space, so just quite a lot of cost absorption. So that wasn't present in Q4. Although, you know, we did have a bit of budget exhaustion and seasonality in December, as you know, which happens, you know, every year. So that was the key driver, as you say, international also was much bigger in Q4 and had higher margins. You know, for Q1, we've forecast $135 million to $145 million for you. So, you know, flat to slightly down versus Q4. And then, in terms of thinking about free cash flow or what the EBITDA level is required maybe on an annual basis for breakeven free cash flow, how should we think about that as we think about your company? I am always looking forward to working with you!
I think that's fair.
Plus or minus yeah.
Okay. So it sounds good again, excluding excluding impacts of working capital that's the key variables exclude impacts yeah.
Okay, well off leaves EBITDA goes up then maybe that gets offset a little bit for them for working capital but.
That's all for me. Thank you very much I appreciate it.
Thank you Waqar.
Our next question is from Tim Moore with <unk> Partners. Please proceed with your question.
Good morning, and nice Dissolvable Stinger plugs growth in international sales growth for the year that was those were definitely standouts.
Really important drivers yeah. So your December quarter EBITDA loss in the EPS loss match. My exact estimates published you know just the sales mix was a bit more weighted towards product revenue than expected.
So maybe just starting off with <unk>, we have about four questions.
With the rig count flat for the past 10 weeks.
Guy Sirkes: Yeah, Waqar. So, you know, 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.
What can you kind of share on the general sentiment of private operators in their budget planning I know.
No, they're not playing out as far as everyone else around the same time, if there is an inflection in in time.
This spring you know they could come back quicker maybe on spending so what do you what are you hearing there.
Yeah, It's a great question I think the private operators.
Guy Sirkes: So I think that it's important to note that cash taxes will be fairly negligible in 2024. So again, working capital is going to depend on which way revenue goes. So if revenue builds, you'll see a working capital outflow; or revenue shrinks, it'll be a working capital inflow. And you can see that quarter by quarter. But otherwise, those are really the big cash flow items. You'll have a few million miscellaneous expenses, but those are really the key items.
Certainly are behaving differently.
Differently in those black crude markets. Then 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 youre not clearly you're not seeing something that's a catalyst for a frenzy amongst privates at the moment. However, as you say you know these things are very volatile and we've seen a shift six months shifts are pretty readily and handily in these markets over the past few.
Waqar Mustafa Syed: So, if we take the midpoint of the CapEx guidance of about $20 million, so roughly around $65 million of EBITDA is needed for free cash flow break-even, is that fair? I think that's fair. Plus or minus, yeah. Again, excluding the impact of working capital. That's the key variable. Excluding impacts, yeah. Well, hopefully, if that goes up, then maybe that gets offset a little bit from working out. That's all for me. Thank you very much.
Yes, so they're definitely out there and theyre ready I would say that many operators are experiencing a ton of operational efficiencies right now, which is really helping them inside of these commodity price environments. So the gas operators certainly has pulled back and those of most.
Of those have been publicly announced and you could imagine the same behavior for the privates and that's going to take a lot of gas off the market. So let us see what happens and that October timeframe, and and where those prices are posted but I'm very encouraging to see our customers respond to the markets in a very I would say.
Timothy M. Moore: Thank you, Waqar. Our next question is from Tim Moore with EF Hutton. Please proceed with your question. Good morning, and nice dissolvable stinger plug growth and international sales growth for the year. Those were definitely standouts.
Moderated way and clearly very focused on returning cash to those investors. So I think we're no longer in a 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 off the market I mean, multiple BCS already should be coming off the market.
Ann G. Fox: Really important drivers. Yeah, so your December quarter EBITDA loss and EPS loss are my exact estimates published. You know, just the sales mix was a bit more weighted towards product revenues than expected. So maybe just starting off with, you know, I have about four questions.
Just based on these announcements so that's that's pretty exciting for us and it seems that that rounds out the year and could be pretty strong.
Timothy M. Moore: With the rig count flat for the past 10 weeks, what can you kind of share on the general sentiment of private operators and their budgets? You 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?
That's helpful color and you know I know.
Notice that the gross margin for our product was very impressive I think 25%.
If I calculated correctly I know some of that was mix you know well what do you think is a realistic gross margin for product you know.
Ann G. Fox: 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 amongst privates at the moment.
For this year I mean can you hold up in the low twenties.
Yeah.
Yeah. It's a good question, Tim we haven't guided a that so you know hard for us to provide that here to the market I would say the the mix was very favorable in Q4.
Due to international and so it'll be it'll be variable by quarter, just depending on mix and whether they're domestic or international sales and mix of composites and dissolvable and so forth.
Ann G. Fox: However, as you say, these things are very volatile, and we've seen shifts, six months' shifts, pretty readily and easily 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 of 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 privates, and that's going to take a lot of gas off the market.
No that's no that's helpful because I mean.
Are you pushing internationally its really pulled it off this last year I mean, the board, but margin mix it should be accretive.
That's great.
Actually you can and maybe elaborate a little bit more of that next gen frac plug them onto a 40% less material and just what you're seeing them.
Initial talks with customers and you know if you have the capacity to produce a lot of those this year and place them.
Ann G. Fox: So let us see what happens in that October timeframe and where those prices are posted. But I'm very encouraging to see our customers respond to the markets in a very, I would say 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 BCFs should already 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, Collar. Ann
So I'll take the second part of that first is the way that we've designed these tools in and I don't Wanna relegate them, just as simple as assembling legos, but the intent there was to be able to assemble and drive the supply chain. So that we can flex up and down very very easily so to answer the second part.
Yes, we are positioned to produce them quite a few of these and we hope to gain market share. This year. So it's about 47% less material.
You've got a really what I consider a hybrid plug and it's 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 outs. So the pincer has that answer.
Guy Sirkes: You know, I noticed that the growth margin for a product... very impressive, I think, 25% in the quarter, if I calculated correctly. I know some of that was mixed. What do you think is a realistic gross margin for a product? You know, for this year, I mean, can you hold up in the low 20s?
From kind of some of your sturdy old legacy composite plugs I'm 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 answer. So it's an effective bridge for them and yes. We've had we're trialing with some very large customer.
Guy Sirkes: Yeah, it's a good question, Tim. We haven't discussed that. So, you know, hard for us to provide that here in the market. I would say the mix was very favorable in Q4 due to international, and so it'll be variable by quarter just depending on the mix and whether they're domestic or international sales and the 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. That's great. You know, you actually, can Ann maybe elaborate a little bit more on that next-gen FRAC plug, the one with 40% less material? you know, what you're seeing on.
At the moment and we're extremely excited about this product and as you know Tien, where we're evolving and innovating constantly on existing products and one of the very special things about the R&D team here at nine is their ultra responsive they have a high sense of urgency, but they're really not designing for themselves.
Sellers are designing for the customer specific to these well bores and so we're able to turn out innovations pretty constantly. We're also really excited about are.
The pumped 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 where we're pretty thrilled about this product and really excited to see what it's going to do this year.
Ann G. Fox: You know, initial talks with customers and, you know, if you have the capacity to produce a lot of those this year in place. 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 being as simple as assembling Legos. But the intent there 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 percent less material. You really have what I consider a hybrid plug.
Oh, great. Thanks for elaborating on X I think that's a terrific innovation that Oh catch fire that that's great.
I know you mentioned I think the guidance was 15 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 is going towards cementing in the toy labor completion tools not tubing.
That's crap. So your growth Capex is almost exclusive to completion tools and some cementing and it's the vast majority of this is in maintenance capital budget.
Got it that makes sense and it makes.
Perfect sense for the Rois seen for the return on the growth Capex for our cementing and completion.
Ann G. Fox: And the key here is, as you know, the market needs us to hold pressure for the frack, not have any fluid bypass. So you're actually isolating those stages. And then really, they're looking for minimal to no drill outs. So the pincer is that answer from kind of some of your sturdy old 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 answer.
I know you can't.
Give guidance yet for the year and sales growth.
Yeah, I don't know if 10% growth for the year it would be entirely second half loaded if that's where I go with but.
How quickly can you flex up and down and let's say that there is what I'm reading you know at least from what I'm seeing is.
Could be a good.
Your recovery and growth in the rig count you know hopefully the spring early summer.
Ann G. Fox: So it's, in effect, a bridge for them. And yes, we're trialing with some very large customers at the moment. We're extremely excited about this product, and as you know, Tim, we're evolving and innovating constantly on existing products. And one of the very special things about the R&D team here at Nine is that they're ultra responsive. They have a high sense of urgency, but they're really not designing for themselves. They're designing for customers specific to these wellbores.
I mean, you know if you do that in a few weeks or months to really if there is a private operator budget yeah.
Switch on the crude side, even the gas side.
Wanted out 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.
You can go from a muesli level of EBITDA in Q1 to $30 million a quarter in Q3, and so one of the great pieces about this business is we've got a lot of our variable costs. We have a team that's been really my CFO and I have been together since 2014. This is it.
Ann G. Fox: And 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 Delaware. Every barrel that you can save is huge, so little tweaks like that are very, very important.
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 but it's a it's just the salt the team and we seem to get better at it each time and we're responding I would say within a quarter.
Ann G. Fox: We're pretty thrilled about this product and really excited to see what it does this year. Thanks for elaborating on that because I think that's a terrific innovation that will catch on. That's great. You know, I think the guidance was $15 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 tools, not tubing? That's correct. So your growth capex is almost exclusively for completion tools and some cementing, and the vast majority of this is a maintenance capital budget. That makes sense to me.
To answer your question specifically, we are we do not seem to Miss capitalizing on an up market that is something that we've proven and we've proven it several different times over these cycles, so where where we're ready and excited for anything like that that may happen and in the meantime.
You know, we're always working on innovating technology, but our history has demonstrated that exact capability and so I would encourage people to go back and look at those corridors and how fast we are able to snap up.
Ann G. Fox: Perfect sense for the ROIC for the return on the growth gap. Thank you.
Good I mean, that's really what I was getting at I mean.
Anybody asking like you know the downturn.
Timothy M. Moore: You know, I, you know, I know you can't give guidance yet for the year and sales growth. I don't know if 10% growth for the year will be entirely second half loaded if that's what I go with. Where, you know, 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 that there could be a good recovery and growth in the rig count, you know, hopefully this spring or early summer. So, how many, you know, can you do that in a few weeks or months to really, if there is that private operator budget, switch on the crude side, even the gas side?
On the contingency stuff, but it just seems like with your high variable cost structure here and come out the margins would be pretty huge if theres a good turn one quarter. So thanks, Thanks, a lot and 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.
Ann G. Fox: 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 quarter in Q3. So one of the great pieces about this business is we've got a lot of variable costs. We have a team that's 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 it's a fun experience, by the way. But it's just a salty team, and we seem to get better at it each time.
Today's conference has ended please disconnect your lines at this time. Thank you.
Ann G. Fox: 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 it several different times over these cycles. So we're ready and excited for anything like that that may happen. And in the meantime, you know, we're always working on innovating technology. But our history has demonstrated that exact capability.
Timothy M. Moore: And so I would encourage people to go back and look at those quarters and how fast we are able to snap them up. Good. I mean, that's really what I was getting at.
Timothy M. Moore: I mean, a year ago, I'd have been asking you about the downturn to flex on the contingency stuff, but it just seems like with your high variable cost structure, you're going to come back to margin, a good turn one quarter. So thanks a lot, Ann. Thanks, Guy. I appreciate it. Okay, many thanks.
Ann G. Fox: 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...