Nine Energy Service Inc (NINE) Q3 2018 Earnings Conference Call Transcript

All of these trends benefit Nine as we solidify partnerships with our customers. We always try to provide a value proposition that is built and sustained on performance. For example, our Scorpion Composite Plugs is reducing cycle times and saving operators more than two days per well. Recently an operator in the Northeast drilled out 144 of our Scorpion plugs with a single drill bit, eliminating the costly process of tripping in and out of the well and replacing the bit.

We also provided the wireline work on this well and completed all 144 stages as numerous runs. At Nine, we thrive on working with the most forward-leaning operators and completing the most complex wells across North America. Moving forward, we will remain focused on providing technology and service to push the limits on completion to help our customers reduce cost and increase production. As we have previously discussed, labor has been a bottleneck in the industry, and we saw significant wage inflation in the first half of this year.

This quarter, wage inflation was relatively flat contributing to margin expansion quarter over quarter. We anticipate the majority of wage inflation for the company in 2018 was taken during the first half of the year, and I will speak more to 2019 later in the call. During Q3, we increased our headcount by approximately 3% versus 7% in Q2. And since the end of 2017, we have added over 300 incremental employees and increased our headcount by approximately 18%.

Our average stages per employee per month in Q3 was approximately 14.5 stages, an increase of approximately 164% over 2014. We anticipate this trend continuing as more operators transition to manufacturing mode on their multi-well pads. I am extremely excited to welcome Magnum to Nine. Later in the call, we will also be discussing another team, who we are thrilled to have join us through an acquisition we completed in October.

As a reminder, we successfully closed the acquisition of Magnum Oil Tools on October 25, positioning Nine as one of the premier providers of completion-focused technology combined with excellence in both service execution and conveyance capability. We now have a strong first-mover advantage in dissolvable technology and a proven internal R&D team to ensure we are staying ahead of trends. With this transaction, we put a new capital structure in place with long-dated maturities and enhanced financial flexibility, including a private offering of $400 million in aggregate principal amount of 8.75% senior unsecured notes due in 2023, and we closed its new $200 million, five-year ABL credit facility. I want to reiterate our conservative approach to debt and believe that one-time net debt to EBITDA is the optimal leverage profile.

With the company becoming so much more cash generative, we still anticipate a reasonable cap rate to reach our target leverage within the next 12 to 24 months. We were extremely pleased with the continued growth and execution this quarter. I remain confident in the team we have in place and our ability to differentiate. With that, I would like to turn the call over to Clinton to walk through segment and other detailed financial information for the quarter.

Clinton Roeder -- Chief Financial Officer

Thank you, Ann. As a reminder, all financial information and operational metrics are for the legacy Nine business only and do not include any Magnum numbers or metrics. In our completion solutions segment, third-quarter 2018 revenue totaled $196.6 million, an increase of approximately 6% compared to second-quarter revenue of $185.1 million. Third-quarter 2018 adjusted gross profit was $49.4 million, an increase of approximately 26% over Q2 and an incremental adjusted gross profit margin of approximately 90%.

During the third quarter of 2018, we completed 1,072 cementing jobs, an increase of approximately 3% over the second quarter. The average blended revenue per job increased by approximately 2%. Cementing revenue for the quarter increased by approximately 5%. Towards the back half of Q3, we received one double and one single pump unit and expect to receive delivery of one single-pump and one double-pump spread in Q4.

During the third quarter of 2018, we completed 10,698 wireline stages, an increase of approximately 6% versus second quarter. The average blended revenue per stage increased approximately 4%. Wireline revenue for the quarter increased by approximately 10%. We received two incremental growth capital wireline units toward the back half of Q3, and we'll not receive any additional units this year.

For completion tools, we completed 18,620 stages, an increase of approximately 11% versus the second quarter. Completion tool revenue increased by approximately 8%. During the third quarter, our coiled tubing days were decreased by approximately 6% due to a unit being down for maintenance for 30-plus days this quarter. We continue to see strong demand for our large diameter coil units with the average blended day rate for Q3 increasing by approximately 8%.

Coiled tubing utilization during the third quarter was 79%. Coiled tubing revenue increased by approximately 2%. We completed the conversion of our 2 3/8th unit at the end of September, which provided no revenue contribution this quarter. We will not be adding any additional new units this year.

In our production solutions segment, third-quarter 2018 revenue totaled $21.8 million, an increase of approximately 7% compared to second quarter 2018 revenue of $20.4 million. Adjusted gross profit for the second quarter was $3.1 million, compared to second quarter adjusted gross profit of $2.8 million, an increase of approximately 12%. During the third quarter, well services had utilization of 65%, an increase of 5%. Total rig hours for the quarter was 49,665, an increase of approximately 3%.

Average revenue per rig hour during the second quarter was $439, an increase of approximately 4%. During the third quarter, the company reported net income of $13.7 million, or $0.56 per diluted share, compared to net income of $9 million, or $0.37 per diluted share, in the second quarter of 2018. Company reported selling, general, and administrative expenses of $21.8 million, compared to $16.1 million for the second quarter. This increase was largely due to transaction expenses and professional and legal costs.

Depreciation and amortization expense in the third quarter was $15.5 million, compared to $15.1 million in the second quarter. During the third quarter of 2018, the company's effective tax rate was 7.6%. The effective tax rate for the quarter was primarily attributable to changes in pre-tax book income and valuation allowance positions as well as tax liabilities in states where income is expected to exceed available net operating losses. During the third quarter, the company reported net cash provided by operating activities of $25.6 million, compared to $7.9 million in Q2, an increase of approximately 224%.

The average DSO for the third quarter was 62 days, compared to 59 days in Q2 and is averaged approximately 59 days for the full year. We estimate DSO increase approximately two days due to a major customer implementing a system change, which has been resolved. Total capital expenditures were $11.5 million, of which approximately 22% was maintenance capex. This compares to total capital expenditures of $11.6 million in Q2.