Nine Energy Service, Inc. (NINE) Q4 2018 Earnings Conference Call Transcript
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Nine Energy Service, Inc.
(NYSE: NINE)
Q4 2018 Earnings Conference Call
March 07, 2019, 11:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Greetings and welcome to the Nine Energy Service Fourth Quarter and Year End 2018 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) Please note this conference call is being recorded.
I will now turn the conference over to your host Ms. Heather Schmidt. Thank you, you may begin.
Heather Schmidt -- Vice President, Investor Relations and Marketing
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 2018.
With me today are Ann Fox, President and Chief Executive Officer; and Clinton Roeder, Chief Financial Officer. We appreciate your participation. Some of our comments today may include forward-looking statements reflecting Nine's views about future events. Forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to review our earnings release and the risk factors discussed in our filings with the SEC.
We undertake no obligation to revise or update publicly any forward-looking statements for any 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.
As a reminder, all financial and operational results for the full year and fourth quarter are consolidated for Nine, Frac Technology's and Magnum, and includes the legacy Nine business, in only the last six days of October and full month November and December for Magnum, reflecting the close of the transaction on October 25, 2018. All of Magnum's and Frac Technology's financial information from the acquisition date forward are reported under our Completion Solutions segment, as part of our completion tools service line.
I will now turn the call over to Ann Fox.
Ann G. Fox -- President and Chief Executive Officer
Thanks, Heather. Good morning, everyone. Thank you for joining us today to discuss our fourth quarter and full year results for 2018. I want to start by talking about the year and highlight some of the teams many accomplishments. I am extremely proud of our team and the contribution that have come from every part of the organization. This year, we have grown through both profitable organic growth, as well as the strategic M&A.
We have and remain focused on driving value for our shareholders, customers and employees, and our positioning Nine as a completions focused company, that has coupled excellent conveyance service and execution at the well site with forward leaning technology.
Nine has realized tremendous financial growth year-over-year. Growing revenue by approximately 52% to $827.2 million, adjusted EBITDA by over 140% to $141.1 million and adjusted consolidated EBITDA margin by over 600 basis points. Every quarter of this year we saw sequential margin expansion. In Q1 of 2018, Nine's adjusted EBITDA margin was approximately 14%, representing margin expansion of approximately 700 basis points into Q4 margins of approximately 21%.
Our year-over-year incremental adjusted EBITDA margins were approximately 29%. For 2018, we generated return on invested capital for the legacy Nine business of 12% and ROIC for Nine, Magnum and Frac Tech consolidated of 8%. Nine stand-alone ROIC outperform management's original annual target of 8%. We have used this adjusted calculation to provide a better indicator of company performance to exclude the impairment and other one-time related expenses.
Our 2018, cash flow from operations was $89.6 million, an increase of approximately 15 times over 2017. In January, we completed our IPO and provided our shareholders and analysts with the 2018 organic growth plan, including ROIC and adjusted EBITDA target. Both of which we exceeded this year for the legacy Nine business. Additionally, we have met or exceeded quarterly revenue and adjusted EBITDA guidance, since becoming public. Providing accurate and transparent insight around the Company, we will remain a cornerstone of our investor approach moving forward.
We appreciate the support of our shareholders throughout the year, and we will remain focused on driving returns and being good stewards of capital as we continue life as a public company. Organically our service lines performed exceptionally well, winning profitable market share, with the majority of our service lines executing large activity and pricing growth. Including Magnum and Frac Tech for the closing period, year-over-year, we completed approximately 51,000 more stages as a Company, an increase of approximately 86% and increased our market share of US stages completed from approximately a 11% in 2017 to approximately 16% in 2018.
In cementing, we increased our number of jobs completed by approximately 21%, increased pricing by approximately 18%, and increased revenue by approximately 44% year-over-year. Wireline stages completed increased by approximately 51%, pricing increased by approximately 23% and revenue increased by approximately 86% year-over-year. Year-over-year completion tool stages increased by approximately a 115% and revenue increased by approximately 100%.
Coiled tubing utilization increased by approximately 6% while simultaneously increasing pricing by approximately 20% and revenue by approximately 34% year-over-year. While service utilization decreased by approximately 4% with pricing increasing by approximately 8% and revenue by approximately 5% year-over-year. This year, we have also increased our stages per employee by approximately 14%. We took the majority of our wage inflation, during the first half of the year and increased our headcount by approximately 28% year-over-year increases of Magnum and Frac Tech. These accomplishments are a result of our incredible team and their ability to execute at the well site, as well as design and deploy reliable and forward leaning downhole technology.
I had said throughout last year, that I would be disappointed if we did not complete any M&A, and our desire was to leverage more of our top line toward completion tools, which as a reminder requires very little CapEx. During 2018, we successfully executed the strategy with the consummation of the Magnum and Frac Tech acquisitions. These partnerships excel Nine to a more balanced profile of completion tools and conveyance, while creating additional barriers to entry and differentiation. We are less labor intensive, less capital intensive and more free cash flow generative.
With both teams, we expanded our R&D capabilities to help ensure we are creating the tools of the future for our customers and staying ahead of industry trends. We have always said that dissolvables will play a significant role in the completions moving forward, as we reduced intervention downhole. Having a reliable dissolvable offering is imperative, as we begin the early innings of adoption.
Magnum provided us with a strong first-mover advantage with a proven product in a growing market. We believe that dissolvables of 10% to 15% of the total stage count today, and will be 35% to 50% of the total stage count in the next three to five years, because the value proposition is so significant to the operator. With the proliferation of multi-well pad development, the time from spud to first sale has elongated. And the 10,000 foot well of coiled tubing drill out can take approximately three to four days and a well service drill out approximately six to seven days.
The use of dissolvable plugs can eliminate this process, saving operators four days per well, or 24 days for a six well pad. Frac Tech, a Norwegian company provided us a reliable and superior casing flotation tool, that allows operators to flow casing to bottom while additionally bringing long dated expertise and know-how to technology development and commercialization. We have continued to see adoption and market share gains with our Breakthru Tool in both the US and Canada. The integration for both of these transactions is going well, both operationally with cross selling and the sharing of data, as well as procedurally with system and platform implementations including ADP, NetSuite and EHS Insight, our HSE (ph) tracking software.
Now turning to Q4, we had a positive quarter from both the financial and operational perspective, outperforming our expectations with our adjusted EBITDA margins. Revenue at the midpoint of management's original guidance and we beat the midpoint of original adjusted EBITDA guidance by approximately 13%, putting our adjusted EBITDA margin at approximately 21% for the quarter. Company revenue for the quarter was $229.4 million, an approximate 5% increase over Q3. Net loss was $77.3 million, which includes impairments for our well services business and adjusted EBITDA was $48 million, an increase of approximately 25% quarter-over-quarter.
During the fourth quarter of 2018, the Company generated ROIC of 20% for the legacy Nine business and 13% for the Nine consolidated businesses. Overall, we were extremely pleased with the execution this quarter and throughout 2018. I remain confident in the team we have in place and our ability to differentiate.
I would like to now turn the call over to Clinton, to walk through segments and other detailed financial information.
Clinton Roeder -- Senior Vice President and Chief Financial Officer
Thank you, Ann. As a reminder, all financial information and operational metrics include the legacy Nine business and two months and six days of Magnum contribution, which is part of the Completion Solutions segment. In our Completion Solutions segment, fourth quarter 2018 revenue totaled $209 million, an increase of approximately 6% compared to the third quarter revenue. Fourth quarter 2018 adjusted gross profit was $55.1 million, an increase of approximately 11% over Q3. During the fourth quarter of 2018, we completed 1,038 cementing jobs. A decrease of approximately 3% versus the third quarter, due to typical holiday shutdowns and budget exhaustion.
The average blended revenue per job increased by approximately 3% (ph). Cementing revenue for the quarter was $53.2 million, which was flat quarter-over-quarter. At the end of Q4, we received one single pump unit, bringing our year-end unit count to 31. Delivery of the double pump unit is now anticipated for Q1 but is included as part of the Q4 CapEx number.
During the fourth quarter, we completed 10,524 wireline stages, a decrease of approximately 2%. The average blended revenue per stage decreased approximately 2%. Wireline revenue for the quarter was $66.1 million, a decrease of approximately 4%. The decrease in wireline revenue was in line to slightly less than historical results and was most affected by activity declines in the Northeast. We did not had any growth capital wireline units during the quarter, bringing our year-end count to 55. For completion tools, we completed 22,512 stages, an increase of approximately 21%. Completion tool revenue was $45.5 million, an increase by approximately 70%. The large increase was due to the partial addition of Magnum and Frac Tech during the quarter.
During the fourth quarter, our coiled tubing days were decreased by approximately 22% with the average blended day rate increased by approximately 19%. Coiled tubing utilization during the quarter was 62%, coiled tubing revenue for the quarter was $44.6 million, a decrease of approximately 7%. For the entire quarter, we had a small diameter unit down for maintenance, which brought down utilization, while also inflating average day rates. We did not add any additional coil tubing units during the quarter, bringing our year-end count to 16, 12 of which are large diameter units.
In our Production Solutions segment fourth quarter 2018 revenue totaled $20.5 million, a decrease of approximately 6% compared to third quarter 2018. Adjusted gross profit for the quarter was $2.8 million, a decrease of approximately 10%. During the fourth quarter, well services had utilization of 60%, a decrease of approximately 8%. Total rig hours for the quarter was 46,140, a decrease of approximately 7%. Average revenue per rig hour during the fourth quarter was $444, an increase of approximately 1%.
Revenue declines were due in large part activity to declines in the Rockies and Bakken regions with weather and holidays and we're similar to historical Q4 declines. During the quarter, the company reported a net loss of $77.3 million or $2.78 per basic share, which includes $77.7 million related to the impairments associated with the Production Solutions segment. As a reminder, the Production Solutions segment is approximately 10% of our total revenue and includes a 107 workover rigs across the US.