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spk00: Ladies and gentlemen, thank you for standing by and welcome to the CACTIF Q2 2021 earnings call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to John Fitzgerald, Director of Corporate Development and IR. Thank you. Please go ahead.
spk03: Thank you and good morning, everyone. We appreciate your participation in today's call. The speakers on today's call will be Scott Bender, our Chief Executive Officer, and Steve Tadlock, our Chief Financial Officer. Also joining us today are Joel Bender, Senior Vice President and Chief Operating Officer, Steven Bender, Vice President of Operations, and David Isaac. our General Counsel and Vice President of Administration. Yesterday, we issued our earnings release, which is available on our website. Please note that any comments we make on today's call regarding projections or our expectations for future events are forward-looking statements covered by the Private Securities Litigation Reform Act. 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. Any forward-looking statements we make today are only as of today's date, and we undertake no obligation to publicly update or review any forward-looking statements. In addition, during today's call, we will reference certain non-GAAP financial measures Reconciliations to these non-GAAP measures to the most directly comparable GAAP measures are included in our earnings release. With that, I will turn the call over to Scott. Thanks, John.
spk09: Good morning to everyone. CACTUS demonstrated its ability to achieve meaningful sequential growth during the second quarter. Revenue and adjusted EBITDA were each up over 25% versus Q1, significantly outpacing the 16% increase in the U.S. land rig count. Product market share remained robust. at just under 42% during the period. We believe we're well positioned to capitalize on the U.S. market recovery, given expectations for activity gains beyond the private operators as we head into next year. In summary, first quarter revenues increased 29% sequentially, with each revenue category reporting growth of more than 15%. Adjusted EBITDA was up 27% sequentially. Adjusted EBITDA margins were 27%, Pre-cash flow was above $25 million for the quarter. Our cash balance rose to $309 million. And our Board of Directors approved an 11% increase in our quarterly dividend to $0.10 per share. And I'll turn the call over to Steve Tadlock, our CFO, who will review our financial results. Following his remarks, I'll provide some thoughts on our outlook for the near term before opening the lines at UNA. Steve?
spk05: Thanks, Scott. In Q2, total revenues of $109 million were 29% higher than the prior quarter. Product revenues of $70 million were up 35% sequentially, driven by an increase in rigs followed, improved drilling efficiencies, production-related equipment demand, and cost recovery initiatives. Product gross margins were 32% of revenues, up approximately 190 basis points on a sequential basis, as we began to address the impact of the significant cost inflation which commenced in late 2020. Rental revenues were nearly $15 million for the quarter, up approximately 17 percent from the first quarter of 2021. Rental gross margins decreased 90 basis points sequentially due primarily to higher repair costs as we deployed more equipment in the field. Field service and other revenues in Q2 were nearly $24 million, up 20 percent versus the first quarter of 2021. This represented 28 percent of combined product and rental-related revenues during the quarter and was in line with expectations. We expect field service revenue to be approximately 27% of product and rental revenue during the third quarter of 2021. Gross margins were 26% of revenues down 160 basis points sequentially, with the reduction largely attributable to wage reinstatements completed for our associates during the quarter. The adverse impact on utilization of time spent on new hire training and overtime required to meet the aforementioned increase in activity levels. SG&A expenses were $11.4 million during the quarter, up $1.8 million versus the first quarter. The sequential increase was primarily attributable to higher payroll-related expenses associated with higher bonus accruals, wage reinstatements, and employee additions. Additionally, the quarter included an increase in stock-based compensation expense related to previously granted PSUs. As a percentage of revenue, SG&A expenses decreased from 11 percent during the first quarter to 10 percent in the second quarter. We expect SG&A to be 11 to 12 million in Q3 2021, inclusive of a slightly reduced stock-based compensation expense of approximately $2 million. Second quarter adjusted EBITDA was approximately 29 million, up 27% from just under 23 million during the first quarter of the year. Adjusted EBITDA for the quarter represented nearly 27% of revenues in line with the first quarter. Adjustments during the second quarter of 2021 included slightly over $2 million in stock-based compensation, and $1 million in other expense related to the revaluation of our TRA liability. Depreciation expense for the quarter was flat versus Q1 at $9.2 million, with a similar amount expected for the third quarter. During the period, we recorded a $1 million non-cash adjustment and other expense related to the revaluation of our tax receivable agreement liability. We reported income tax expense of $1.4 million during the second quarter, which is inclusive of a $3 million income tax benefit associated with a partial release of a valuation allowance during the period and was partially offset by $600,000 of expense related to changes in our foreign tax credit position. During the quarter, the public or Class A ownership of the company averaged 73%. Following cadence distribution of all but $900,000 of its shares to its limited partners, our public ownership was 77% at the end of the quarter. This distribution removes what was considered an overhang on our stock. Barring further changes in our public ownership percentage, we expect an effective tax rate of approximately 21% for Q3. GAAP net income was $14.8 million in Q2 2021 versus $15.1 million during the first quarter, which had a tax benefit for the period. Internally, we prefer to look at adjusted net income and earnings per share, which were $12.3 million and $0.16 per share, respectively, during the second quarter, versus $8.6 million and $0.11 per share in Q1. The Q2 adjustments included backing out $1 million in other expense related to the revaluation of the tax receivable agreement liability and the application of a 28% tax rate to our adjusted pre-tax income generated during the quarter. We estimate that the tax rate for adjusted EPS will be 28% during the third quarter of 2021. During the second quarter, we paid a quarterly dividend of $0.09 per share, resulting in a cash outflow of nearly $7 million, including related distributions to members. The Board has approved a dividend of $0.10 per share to be paid in September of this year. Our cash position increased by $17 million during the quarter to approximately $309 million, highlighting the continued free cash flow generation of the company above and beyond dividend-related payments. For the quarter, operating cash flow was approximately $27 million, and our net CapEx was $2 million. Capital requirements for our business remain modest, and we will continue to exercise discipline with regards to growth CapEx. As such, our net CapEx guidance for 2021 remains in the range of $10 to $15 million. During the third quarter, we expect to make a TRA payment of approximately $9 million and an associated distribution to members of $3 million. That covers the financial review, and I'll now turn it back to Scott.
spk09: Thanks, Steve. The second quarter again highlighted our ability to outperform domestic drilling and completion activity. While the U.S. land rig count gained 16% during the quarter, our total revenue grew 29 percent, with product revenue up 35 percent over the period. Despite the majority of rig count additions in the quarter being driven by private operators who have historically represented a smaller portion of our business, we reported market share at nearly 42 percent during the period. Additionally, our product revenue generated per rig followed increased by approximately 20 percent due to a combination of rig efficiency gains greater production tree revenue, and cost recovery efforts. Looking to the third quarter, we currently anticipate our rigs followed and product revenues to increase by high single-digit percentage. We remain of the opinion that our publicly traded customers will respond to the improved commodity environment as we head into 2022, thereby contributing to tightness in this competitive market. Product EBITDA margins are by slightly higher for the third quarter, as increased direct costs are offset by cost recovery initiatives that should more fully materialize over the coming months. The supply chain headwinds that we referenced on last quarter's call continue to persist. As you may know, steel prices make up the largest portion of our material costs. While our input cost increases have not been as drastic as the hot rolled Coil Steel Index prices you see on your Bloomberg screens, we've seen a double digit increase. since last year in some cases. The cost of freight, specifically ocean freight, continues to experience even higher inflation. Moreover, delivery disruptions have emerged as increasingly problematic, highlighting the important role that our Bossier City facility plays in our ability to execute effectively and retain and enhance customer loyalty. Cactus has diligently worked with our customers in managing the impact of materially higher costs. As economies continue to open worldwide, the global supply chain is likely to remain under pressure and the market for our equipment should remain tight, whether that be from materials freight or people. Thus, we expect further negotiations with customers in order to address this dynamic during the second half of the year. At the same time, we're optimistic that some of these inflationary pressures will begin to ease by next year, representing a potential tailwind for returns in 2022. On the rental side of the business, revenues increased by more than we anticipated during the second quarter. With this came increased equipment repair costs as more of our fleet moved to the field, which weighed on our margins during the period. Revenue from our innovations was up 33% on a sequential basis in Q2 and represented over 20% of our domestic rental revenue, the highest level witnessed since the COVID-related downturn. For the third quarter, while general market commentary is pointing to limited completion activity growth following the second quarter duck drawdowns, we expect rental revenue to be up in the 10% to 15% range sequentially as we continue to gain traction from larger customers who value efficiency and reliability. We currently anticipate rental EBITDA margins to be in the high 40% range for Q3 as we expect this market to remain competitive. Regarding our expansion into the Middle East, we've been encouraged by recent progress made in deploying personnel into the region, which is an important step in our model. We now expect to generate first revenue in the region toward the end of the third quarter. As previously disclosed, the assets we've shipped to date have revenue potential of approximately $1 million per quarter. We continue to evaluate the shipment of additional assets into the region, giving the additional demand for our equipment. In field service, revenues continue to be driven by both product and rental activity. Revenue as a percentage of product and rental revenue is expected to decrease marginally on a sequential basis as cost recovery likely has a higher upside potential versus second quarter levels. We expect to see field service EBITDA margins in the low 30% range during the third quarter down sequentially to reflect a full quarter of wage reinstatements and continued new higher activity but still strong versus historical levels. I'd like to close our prepared remarks by highlighting a few key points, starting with returns. Despite being only one year removed from the worst oil price collapse of my career, we achieved an annualized return on capital employed of over 30 percent for the second quarter. This speaks to the disciplined approach taken by our management team and our ability to quickly capitalize on the industry recovery currently underway. Since the beginning of 2020, we've generated free cash flow above and beyond our quarterly dividend every single quarter. During that time, our cash balance has increased by over $100 million, despite more than $35 million in dividend-related payments to our shareholders. I'm especially proud of our team's management of working capital levels over this period, particularly in light of the accelerated revenue growth this year. Our confidence in this business to continue to generate free cash flow and the strength of our balance sheet have enabled us to raise the regularly quarterly dividend to 10 cents per share, an 11% increase. As we stated previously, we set the original dividend at a level we had hoped to grow over time. While we had the capacity to increase our dividend rate sooner, we were sensitive to the sacrifices that our associates had made. Now that compensation has been reinstated, we feel more comfortable reassessing the dividend level on a more regular basis. Additionally, we do not view regular dividend increases as mutually exclusive from potential special dividends, buybacks, or M&A. We'll continue to carefully monitor and evaluate all capital deployment opportunities. In summary, we were extremely pleased with the ability to show significant top-line growth during the second quarter and generate meaningful free cash flows. Despite the speed and severity of the industry's cost inflation being greater than anticipated, we proactively address these pressures during the second quarter. Our ability to dampen the impact of increased costs is a reflection of the differentiated nature of our product and services and the value our customer base places on us. This provides optimism for margin improvement next year as volumes expand and costs potentially return to more normalized levels. We remain ready to take advantage of our favorable positioning as the ongoing activity recovery continues. So with that, I'll turn it back over to the operator, and we may begin Q&A. Operator?
spk00: As a reminder, to ask a question, you will need to press star 1 on your telephone keypad. We do ask that you limit yourself to one question and one follow-up. Your first question is from George O'Leary of TPH & Company.
spk06: morning scott morning guys hey george how are you i'm hanging in there man y'all doing all right you're doing great thanks good um first questions on the the middle east now that you should have some revenues there by the end of the third quarter but more of a longer term question just given you built multiple businesses during your career how long do you believe it will take to ramp up in the middle east such that it becomes a a meaningful piece of the business, call it 10 plus percent of revenue somewhere in that market. Is it a three-year time horizon, a five-year time horizon? Just bracket what's reasonable and what's unreasonable to think about.
spk09: All right, George. It's going to take about, to meaningfully ramp up our Mideast revenue in the range of 20%, 15%, 20%, we're going to have to build a facility and building a facility is about an 18-month proposition. So as our comfort level increases, which we expect to happen with the introduction of these rental assets, you can figure 18 to 24 months from the end of the year.
spk06: Okay, that's very helpful, Scott. And then Just the super strong revenue growth in products in Q2 caught my eye. And you mentioned rig efficiencies. There's just also production trees, goat heads. Was increased revenue driven more by those drilling efficiencies and selling more wellheads? Or did the production tree sales really kick in and juice the revenues? What was the larger contributor there?
spk05: Yeah, it was a mixture of a variety of things, really. So we can't point to any one factor, but it was production tree and completion-related increases on the product side. It was obviously the cost recovery efforts and just the kind of catch-up. We'd seen a rapid recovery in rigs, and we still even had pretty healthy rig count growth over that period. But as that increase sort of settles in, you tend to see more revenue per rig. There's always a lag there
spk06: Great, thanks for the cover, guys. Y'all have a good one. Thanks, George.
spk00: Your next question is from Tommy Mull of Stevens.
spk04: Morning, Tommy. Morning, Tommy. Scott, I wanted to start on supply chain. Just any anecdotes you can share with us on measures that you've taken to try to address some of the issues that have arisen, and then secondarily, anything you can do to quantify issues what the impact has been or might be going forward and what you've attempted to do on what I think you're referencing as cost recovery there.
spk09: Well, Tommy, that's a pretty easy, easily answered question there. First, and I have Joel's in here, and he can add some color to the supply chain issues. First, I'm not going to disclose the impact of the cost increases nor I will talk about cost recovery, though. So we started that fairly early, as you would expect, and it accelerated during the second quarter. Towards the end of the second quarter, these things don't happen overnight. A lot of pushback, but by the end of the second quarter, we were successful in reaching agreements with virtually all of our customers. That's not to say that the price increases were fully implemented by the end of June because they were not. So you'll see a much greater impact from those negotiations in the third quarter. In terms of supply chain, I can tell you that I think the area that's been the most impacted has been ocean freight. But I'll let Joel answer that.
spk08: I mean, that has. I mean, we saw that coming around the first quarter or so, so we actually ordered up inventory for two reasons. One, to protect the supply chain and have availability for our customers, and secondly, to try to, you know, as best we could, protect our margins by ordering up, and we had the cash to do it, so it allowed us to put some inventory on the ground and maintain those costs as best we can, as I mentioned. That's really been the issue, which is trying to keep product on the ground and trying to really protect our margins. So we have stocked up on most of our common products in anticipation of what we've seen. And honestly, the disruption we've seen with the vessels and the containers has probably been greater than we anticipated. But fortunately, end of June, beginning of July, a lot of this product started showing up. So that's allowed us to make our deliveries and increase our product revenue.
spk09: You know, Tommy, I think we've seen ocean freight double. Would you say that's fair?
spk08: It's more than doubled.
spk09: More than doubled. And ocean freight is a pretty high percentage of our total cost. It's a meaningful percentage of our total cost.
spk04: Related to all these issues, I wonder if you've had or anticipate having some share gain opportunities, just given the flexibility you have with Bossier and the balance sheet you've got and have deployed to order in advance of a lot of these big bottlenecks, maybe where some companies have not been as nimble.
spk09: Yeah, Tommy, I'd be very disappointed as the year progresses. particularly into the fourth quarter and first quarter of next year if that doesn't result in some meaningful gains. We've already had to bail out a customer or two who don't use this exclusively. Most of our customers do use this exclusively, but yes, our larger competitors are not as flexible and nimble in terms of supply chain response. So this, as I mentioned, you know, in the script, we do view this as a positive, having Bossier City.
spk04: Great. We'll look forward to watching the progress. Thanks for the time, and I'll turn it back.
spk00: Our next question is from Chase Mulvihill of Bank of America.
spk02: Good, good. How are you, Scott? Thanks for squeezing me in here. You know, I guess a few questions. I guess let's first just kind of go back and touch on kind of supply chain friction and raw material inflation and hate to beat a dead horse here, but just kind of thinking about supply chain pressures. If you were to look at them today, are they accelerating or decelerating? And the same question really on the raw material cost. You know, we can look at HRC, hot rolled coal, a coil on our bloomberg stream but you know we don't know the exact you know still awesome stuff that they're flowing through your p l so just help us understand if if that pressure is starting to kind of decelerate yet not really okay we don't really we don't really think we're going to see an easing i mean joel can add some again some color but we don't anticipate an easing
spk09: freight, or steel until the end of the year?
spk08: I'm going to say maybe into the first quarter of next year, honestly.
spk09: That's why it's incredibly important that we stay close with our customers. I can't overemphasize the job that this organization has done in ensuring that this incredibly rapid and severe increase in costs has not been reflected in severe margin degradation. So we've done an exceptionally good job, in my opinion, of protecting this company in that regard.
spk05: And I think, you know, as Joel mentioned, he's been proactively ordering to protect that going forward as well and lock in prices so that, you know, as he sees rates go up, it's not necessarily, yeah, that could be the next order, but he's heavily ordered starting in Q1.
spk02: That makes sense. And I guess kind of two quick follow-ups or a quick follow-up on that one. Are you able to kind of push surcharges through related to kind of incremental shipping costs? And then what about how much can you save by shifting more to Bossier City from a production standpoint to avoid some of the higher, the elevated cost of shipping?
spk09: Yeah. Our Far East supply chain is still more competitive, even including the higher freight costs. So it doesn't really make sense to do that.
spk08: No, because you have to remember, too, that if steel's going up in China, it's going up everywhere at this point. So any product you buy today that's steel or has a component of steel in it, you're going to see an increase, whether it's coming from China, the U.S., Italy, India, any of these locations, you're seeing the same kind of increases on the steel.
spk09: So in answer to your question about freight recovery, so we're now implementing freight surcharges with our clients.
spk05: And I think historically, and this hasn't changed, if we get a drop-in order that was not forecasted, you know, Joel's not shy about requesting
spk08: No, that's going to go at a market price. It's not going to go at necessarily a contract price.
spk02: Okay, perfect. I guess coming back to the questions around kind of market penetration on the international side, and obviously you're starting with rentals, but maybe could you speak to kind of the well-head market? You know, us investors are really not – you know, too well educated on the well-head market structure, you know, internationally. So maybe just talk about that market structure and, you know, how fragmented it is or is not.
spk09: Yeah, so it's clearly not as fragmented as the U.S. market. You know, you've got three major players internationally, and it used to be four, so... It's a much tighter market. The better markets internationally are the markets that require indigenous manufacturing. So if you think about the world, think about the areas that have the most attractive margin potential, those are the markets that require that you have a facility. And that's why I responded earlier to see a meaningful contribution from the Mideast in particular is going to require that we build a factory. Fortunately, a factory will cost about $15 million. Fortunately, we're in a position to do that. The US, though, is so fragmented that the competitive pressures are just much more acute here.
spk02: OK, perfect. Appreciate all the answers. I'll turn it back over. Thanks, Scott.
spk00: As a reminder, if you would like to ask a question, please press star one. Your next question is from Connor Leno of Morgan Stanley.
spk07: Yeah, thanks. Morning, guys. Good morning. I was wondering what we should read into from the magnitude of your dividend increase. Certainly good to see you guys returning extra capital, but if we think about the sustainability or the durability even in, to your point, the worst downturn we've had in this industry in decades, you guys would have very easily covered even the new dividend run rate. So I'm just curious, what's your sort of thinking? Are you continuing to think that there's incremental M&A opportunities? Would you just prefer to see this grow more long-term as opposed to a big step change? Just curious the calculus around that.
spk09: So you really asked two questions. The first is, as I mentioned, We set it low to make sure it was sustainable. We would have raised it earlier had it not been for, I think, the morale at the company. You know, we asked our associates to take some very painful hits to their wages and benefits, and we didn't feel like it was appropriate to increase the dividend, although we had the capacity to do so until we had addressed those. Those are behind us. and fully reflected, or will be fully reflected this quarter. And so our plan is to much more frequently address incremental increases in the dividend. So I think that, barring the unexpected, that's still on the horizon. We do not absolutely view that as mutually exclusive with M&A opportunities, so we are absolutely focused on accretive M&A opportunities that don't impair our balance sheet and our ability to continue to pay a dividend or increase the dividend.
spk07: Yeah, I understand. I definitely understand the portion around the people. Maybe just sticking with that theme, what are you seeing in terms of the labor market? How's your sort of capacity at labor? at your facilities and then in terms of your field service?
spk09: You know, we added, I think, this quarter about 125 or so associates since the beginning of the year. We've added over 200. We have about 90 open positions right now. Is that right, Tim? That's correct. Something like that. It's a struggle, to be sure. We're no different from anyone else. Fortunately, when we go out into the field, unlike a pressure pumper, we typically only go out with one associate, sometimes two. So the burden in terms of service tech is not quite as high. We've been able to hire, and we've been able to control our labor costs surprisingly well, but it's a full-time job. to try to bring these folks on. So it's impacting us. It's just not probably as impactful to us as it is to pressure pumpers and perhaps drilling contractors.
spk07: That's fair. Are you anticipating significant wage increases for the duration of the year here?
spk09: So I think that we are going to see some increases towards the end of the year, but I don't think there'll be a cause for concern.
spk07: All right. That's helpful. Thank you.
spk00: Your final question is from Stephen Gingaro of Stiefel.
spk01: Thanks. Good morning, gentlemen. Good morning. Two things for me. One is I just wanted to get back to the revenue per rig followed number that you guys talked a little bit about earlier. And I think you said, and I might've missed this, that you expected, I don't know if you said a seven to 9% or high single digit increase in the third quarter. I think you said in rigs followed, if that was correct. How does that revenue per rig number evolve? I mean, I know there's some puts and takes with the, with the tree sales, et cetera, but given the pricing and given what you're seeing, does that, is that stabilized? Does that, trend back towards a more normalized level in the next quarter? How do we think about that?
spk05: Yeah, this quarter, we're expecting it to more stabilize as production activity maintains. And as Scott said, the cost recovery initiatives came throughout the quarter. And we're growing it, you know, more, well, high single digits. So I think we would expect that to be relatively flat quarter over quarter.
spk01: Okay, great. That's helpful. Thank you. And then, Just on the market share question, I mean, I understand the dynamics of the privates versus the publics and your share being so strong with the publics. How has the share with the privates evolved? Because my sense was it has improved just based on what you guys did in the first quarter. But how has that evolved over the last couple quarters, and how do you see that playing out as it fits into the puzzle?
spk09: Yeah, so it's – There's absolutely no question our market share gains with the privates have been meaningful and substantial. I think that, you know, John, help me out here. I think we've gone from at the end of last year from about 20 to now 27 or so percent, something like that.
spk03: Yeah, middle of 2020, we were probably down in the mid, maybe even lower mid-teens. Through this year, we kind of got into the 20s in the first and second quarter, and we Despite the fact that the overall market share number ticked down in the second quarter, our share with the privates actually ticked up a little bit. But as you know, Stephen, if the privates went from 45% of the rigs to 55% of the rigs, we can gain share there a little bit. But just given the mix issue, it's going against us from that perspective from an overall market share standpoint.
spk01: Exactly. That makes sense, and as publics pick up activity, we should see that benefit, I would expect. That's what we expect. The other quick one, and I think Chase asked about the international landscape on the wellhead side, but on the U.S. front, have you seen any changes? I know one of the businesses changed hands a couple of quarters back, and I'm just curious if you've seen any change in the U.S. competitive landscape or anything you're watching closely.
spk09: Yeah, so we had a couple of competitors, small competitors that retreated since the beginning of the year. And we've seen an equal number of new competitors enter the market. I think people think that, frankly, replicating the cactus story is easy. And so it seems that everybody wants to try it. And apparently they don't view the barriers to entry as being very significant. So I think on a net basis, we probably have the same number, maybe one more competitor today than we did at the beginning of the year.
spk01: Okay, great. Thank you for the call, gentlemen.
spk09: Thank you, Stephen.
spk00: There are no other questions in queue. Do you have any closing remarks?
spk09: No, we just want to thank everybody for For your support, I think the rest of this year is going to be incredibly challenging. People don't realize that managing in a downturn in some respects is pretty easy. You have to cut your expenses. Managing in an upturn is much more challenging. And I think that we're blessed with the very best management team in the industry in taking advantage of this opportunity. really unexpected growth that we've had in our top line. So anyway, stay tuned. Thanks for your support. Everybody have a great day and stay safe.
spk00: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
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