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spk01: Good morning, and thank you for standing by. Welcome to the CHAPTIS second quarter 2022 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 1 on your telephone, and you will then hear an automated message advising that your hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, John Fitzgerald. John?
spk04: Thank you and good morning. We appreciate you joining us on today's call. Our speakers 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, Stephen Bender, Vice President of Operations, and Will Marsh, our General Counsel and Vice President of Administration. Please note that any comments we make on today's call regarding projections or 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 of these non-GAAP measures to the most directly comparable GAAP measures are included in our earnings release. And with that, I will turn the call over to Scott.
spk03: Thanks, John, and good morning to everyone. I'm pleased to report that CACTUS posted its sixth consecutive quarter of adjusted EBITDA growth over 10%. Results were strong across the board, and highlighted the company's best-in-class margin and return profile. Some second quarter highlights include revenue increased 17% sequentially to a company record of $170 million. Adjusted EBITDA improved by 31% sequentially. Adjusted EBITDA margins were 33%, up 360 basis points versus the first quarter. We paid a quarterly dividend of 11 cents per share and increased our cash balance to $312 million. I'll now 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 for Q&A. So, Steve.
spk00: Thank you. As Scott mentioned, Q2 revenues of $170 million were 17% higher than the prior quarter. Product revenues of $112 million were up 19% sequentially. driven primarily by an increase in rigs followed and successful cost recovery efforts. Product gross margins at 38% rose 320 basis points sequentially due to leverage of our fixed cost base and cost recovery efforts. Rental revenues were $24 million for the quarter, up 6% versus the first quarter, driving an increase in gross margins of 280 basis points sequentially due to reduced equipment repair costs and lower depreciation as a percentage of revenue. Field service and other revenues in Q2 were approximately $34 million, up 16% sequentially. This represented 25% of combined product and rental-related revenues during the quarter. Gross margins were up 600 basis points sequentially, driven largely by the company's measures implemented to address inflationary fuel and labor costs. SG&A expenses were $14.7 million during the quarter, up $0.6 million sequentially. The increase is primarily attributable to higher bonus accruals due to stronger than expected financial performance. SG&A declined to 8.7% of revenue, down from 9.7% during the first quarter. We expect SG&A to be slightly above $15 million in Q3 2022, excluding any non-recurring expenses. Stock-based compensation expense in 3Q is expected to be approximately $2.6 million. Second quarter adjusted EBITDA was approximately $56 million, up 31% from $42 million during the first quarter. Adjusted EBITDA for the quarter represented 33% of revenues compared to 29% in the first quarter. Adjustments to EBITDA during the second quarter of 2022 included approximately $2.4 million in stock-based compensation. Depreciation expense for the second quarter was $8.9 million, and a similar amount is expected in the third quarter. We reported income tax expense of $8.8 million during the second quarter. During the quarter, the public or Class A ownership of the company averaged 80% and ended the quarter at 80%. Barring further changes in our public ownership percentage, we expect an effective tax rate of approximately 21% for Q3 2022. GAAP net income was $36 million in Q2 2022 versus $27 million during the first quarter. The increase was driven by higher operating income during the period. We prefer to look at adjusted net income and earnings per share, which were 33.4 million and 44 cents per share, respectively, during the second quarter, versus 22.9 million and 30 cents per share in Q1. Adjusted net income for the second quarter applied a 25% tax rate to our adjusted pre-tax income generated during the quarter. We estimate that the tax rate for adjusted EPS will be 25% during the third quarter. During the second quarter, we paid a quarterly dividend of 11 cents per share, resulting in a cash outflow of approximately $8 million, including related distributions to members. The Board has approved a dividend of 11 cents per share to be paid in September. We ended the quarter with a cash balance of $312 million, up 14 million sequentially. Operating cash flow was approximately 31 million, and our net capex was 6 million. Inventory rose by approximately 13 million sequentially, primarily due to activity increases, longer lead times, and our decision to increase product safety stocks to ensure timely delivery. Capital requirements for our business remain modest, and we will continue to exercise discipline with regards to growth expenditures. Our net CapEx guidance for 2022 remains unchanged, with the remaining expenditures expected to be weighted towards the third quarter. That covers the financial review, and I'll turn the call over to Scott.
spk03: Thanks, Steve. The company generated record revenue during the second quarter and reported its highest quarterly EBITDA since mid-2019. U.S. product market share remained strong at 39.5% during the period, as rigs followed increased by over 8%. Product revenue per U.S. land rig followed increased by over 10%, highlighting the success of our cost recovery efforts during the period. EBITDA margins improved by 300 basis points during the quarter to 39%. Looking to the third quarter of 2022, we anticipate Cactus' rigs followed to rise more than 5%. Product revenue is expected to increase in the mid to high single digits percentage-wise. Product EBITDA margins are forecasted to remain strong during the third quarter. We're confident that our public and large private customers will be adding rigs through the end of the year, which bodes well for our market share. As addressed in our earnings release, we're increasingly focused on maintaining and improving the quality of our customer base. Last quarter, we mentioned a trial with a major independent operator. Our team has executed well for this customer, and although not reflected in the second quarter, we are now servicing additional rigs with more expected through the end of the year. During the quarter, we progressed our efforts in the Mideast with direct discussions with a major NOC. We now expect to complete equipment testing this year, trial order deliveries in 2023, and commercialization by 2024. In the immediate term, we expect to book our first product revenues in the Mideast and South America during the third quarter. We'll continue to selectively target international markets as we progress plans for more meaningful growth abroad. Regarding our supply chain, Tightness in overseas freight and transit times from the Far East have started to moderate. In addition, raw material and component costs are starting to show signs of improvement. Accordingly, we are cautiously optimistic that this will lead to continued margin improvement by early 2023 following the utilization of our existing inventory. On the rental side of the business, revenues increased by over 6% during the quarter and were up over 60% year over year. Incremental EBITDA margins were nearly 90% during the second quarter. For the third quarter, rental revenues are expected to increase by an additional 10%, and EBITDA margins are expected to be relatively flat during the period. In field service, the company implemented a number of measures to offset wage and transportation inflation early in the second quarter. This resulted in a 570 basis point improvement to field service EBITDA margins and highlights the ability of the company to quickly address headwinds. Field service revenue for 3Q is expected to be approximately 24% of product and rental revenue. We expect field service EBITDA margins to be in the mid-27% range for the third quarter, up slightly on a sequential basis. Overall, we're excited about the momentum of the business going into Q3, which is typically the strongest quarter of the calendar year. Regarding our outlook on M&A, management continues to believe that it can be a useful tool to enhance shareholder returns. However, this team will continue to exercise discipline and patience in the evaluation of any such opportunities and keep a narrow focus on high quality businesses with characteristics similar to our own. The ability to return cash to our shareholders remains an attractive avenue to deploy capital. So in summary, Cactus remains well positioned to deliver continued growth and returns, as well as assuaging customers' concerns regarding the timely supply and quality of service. So with that, I'll turn it back over to the operator, and we can begin Q&A. Operator?
spk01: Thank you very much. At this time, we'll conduct the question and answer session. As a reminder, to ask a question, you need to press star 1-1 on your phone and then wait for your name to be announced. We ask that you limit to one question and then one follow-up. So please stand by and we'll get ready to start. Our first question is coming from Scott Gruber from Citigroup. Scott, go ahead and answer your question.
spk03: Yes, good morning. Good morning, Scott. How are you?
spk06: Doing well. Doing well, thanks. So I wanted to ask about rental. Sounds like you'll get a nice 10% move higher in 3Q. But just thinking about the running room, in that segment, given that you guys kind of voluntarily, you know, let your share slip when pricing really collapsed. Are you seeing pricing recover sufficiently in that market and that market gets sufficiently tight that we have, you know, several quarters of share recapture ahead of us in rental?
spk03: Yeah, Scott, we're finally seeing some some relief, not across the board, but we're absolutely seeing some indication of some tightness in the market and resulting opportunities for increases in price.
spk06: Yes, if you look back at 2019 and you guys were doing about $40 million in quarterly revenue and rental, is there any possibility of getting back to that mark and call it 12, 18 months or so?
spk03: I think that despite the fact that rental prices are firming, they're still significantly below 2019 pricing. So I can't envision them getting back to that level, but certainly improving, I think, to the point where it would be a meaningful improvement. There's still too many players in this business, too fragmented a market. and um and frankly customers don't really i think respect the mode around our products the way around our rental products or anybody's rental products for that matter the way they respect the mode around our products our wild products gotcha and if i could just ask one additional one on the macro side just a lot of moving pieces uh today with some recessionary fears laying on
spk06: an oil price, but at the same time, we're hearing those indications that we're going to get a few rigs added here by the public operators late in the year and maybe a few more to start the year once budgets reset. Can you talk about that intersection between maybe some risk to private activity if oil prices continue to draw down versus you know, what's likely to be some ads on the public side is then, well, I guess one, you know, can you frame up if the forward curve is accurate, you know, where the U.S. rig count could land at, say, six months time. So, you know, after some of the budget refresh rig additions, but also, you know, what oil price could imperil that growth where you could get some declines from the privates that would offset the growth and it kind of just goes flat.
spk03: Wow. All right. Let me try to break this down. And forgive me if I fail to address some of those many questions included in your one follow-up question. Let me start with my view on privates versus publics. So not going to surprise you when I tell you that I believe that the privates will not display the same sort of disproportionate gains at $90 oil as they did during the second quarter and the first quarter. So our view, and we have pretty good visibility for Q3 and Q4, is that we expect to gain market share with privates in the third quarter, and then we expect that to flip towards our large publicly traded customers in the fourth quarter. and into the first quarter of next year. So that's why I made the comment that I feel good about market share by the end of the year. You know that our strength is in the large publicly traded E&Ps. I think that whether or not the large publicly traded E&Ps can offset weakness in the privates, my gut feeling is it will. But it probably will mean that the recount in the first quarter will hang in there in the low 800s. I wouldn't look for a large increase in Q1. Budgets are going to be reset for sure. But our customers are exercising pretty extraordinary capital discipline. But as of right now, we have much better visibility into the public than we do in the privates. And so that's just my best guess. Don't look for a tremendous amount of growth in Q1, but the growth that does come will come from our core customer base.
spk06: Got it. Understood. Appreciate it. Thanks, Scott.
spk01: Thanks so much, Scott. And our next question is coming from Connor from Morgan Stanley. Connor?
spk02: Yeah, thank you. Morning, Connor. Morning, morning. I was wondering if you could help us think through what the raw material deflation and potential easing in freight means for your margins or your cost structure. Is there any way of sort of identifying how much those items have run up or what your margins might be on a normalized deck? Any sort of framework you can provide would be helpful.
spk03: All right, I'm going to let Steve respond to that.
spk00: Yeah, I mean, Connor, we kind of said in the script that we expect margins on the product side to remain strong through the end of the year as we run off this inventory. And we just aren't in the habit of providing guidance beyond the next quarter, just given all the ins and outs and puts and takes of customer activity and material costs. But like we said, we expect them to be beneficial and you can kind of look into our history at what our product margins in the past have been considering tariffs. And I'd use that as a guide for the future. But like we said, that's a 2023 thing.
spk02: Yeah, understood, understood. Maybe the other side of the question then is it would suggest that you, in what you're saying, that you expect to hold pricing despite raw material deflation. Can you just discuss how you've approached customers with price increases thus far? Is there any degree of sort of surcharge or a thing like that that will roll off? Or is most of this just pricing in the absolute that you expect to stay?
spk03: Yeah, Connor, we never talk about pricing ever.
spk02: All right. One more try here, guys. So within the product business, is there anything beyond the tariffs that you would point to that is structurally different from 18-19 that you would expect to influence your margin in a more normal commodity input environment?
spk03: You know, certainly currency is is a very, very constructive tailwind for us because you know that we bring about half of our products in, maybe slightly more than half of our products in from the Far East. So this strengthening dollar is going to prove, I think, to be a tailwind. I mean, you can quantify the change in the U.S. dollar to the Chinese yuan easily. And then figure half of our product comes from the Far East. In terms of other fundamental changes, other than the constant sort of evaluation of lower cost designs, I really can't point to anything substantial. I guess maybe the exception, let me just follow that up. The exception will be As transit times improve from the Far East, you'll see less contribution from our higher-cost Bossier City operation and more contribution from our Far East supply chain.
spk02: Got it. Makes sense. Thank you.
spk01: Thank you so much, Connor. And now we are going to hear from Stephen Gingaro. Stephen is with Staple. David?
spk07: Yes, thanks. Good morning, everybody. Good morning. Two things for me. If we could start, just thinking about your guidance, you had a nice step up in sort of revenue per rig followed in the quarter. And I was just curious, without maybe giving too much detail on sort of cost recovery efforts, but is there a rig efficiency issue? element to that, and will that likely come off a little bit next quarter?
spk03: Rig efficiencies have actually been fairly constant. I would say constant to down, but I attribute the decrease in rig efficiencies to be more related to an increase in laterals, in lateral lengths. Obviously, the longer the laterals, the longer a rig is over a hole, the longer a rig is over the hole, the fewer wells it can drill per month. I think that we saw earlier in the year some significant rig inefficiencies due to labor issues among the other service contractors. I think that still exists to some extent, but honestly, I think it's pretty much stabilized. I'm not really I mean, I heard horror stories during the first half of the year with rigs waiting on cement, waiting on pipe. They seem to have abated.
spk07: Great. Thank you. That's helpful. And then second, I mean, you obviously talked about the balance sheet and the cash generation. Can you give us an update on kind of what you see on the M&A side? Is there anything... out there that's interesting and or just kind of how the market has evolved as far as those opportunities? Is it better, worse, the same as maybe three months ago? In terms of opportunities?
spk03: Exactly, yes. I would say definitely better. I'd say, you know, that's a very interesting question. I know that a lot of our investors are interested in in me answering. I'd say the opportunities are greater. I'd say the disparity between the bid and ask is pretty significant. I'd say the population of qualified buyers is probably reduced. So I'm sort of guardedly optimistic that there is something to be done over the medium term. I feel better today than I did a year ago or even six months ago.
spk07: Okay, great. That's helpful, caller. Thank you.
spk01: Thank you so much, David. Excuse me, Steven. My goodness. David Anderson from Barclays will be asking our next question.
spk08: David, welcome. I think I'm leaving us hanging with that last answer there. I'm not going to question you harder on that one. I was wondering if you could go back to the visibility question. The answer you gave on the public versus private is just sort of just in general on the wellhead side. I'm just curious how that's kind of looked from the beginning of the year. Are your customers already starting to talk about 2023? I'm just curious with all the equipment and supply chain concerns out there, have you seen a change of behavior in either the privates or the publics in terms of ordering their wellheads up in front of their jobs?
spk03: Yeah, David, we're seeing – far better forecasting now than we've ever seen before, pardon me, from the large E&Ps and the public E&Ps. So that's been a great benefit. Interestingly, because of the OCTG pressures, we now, and because they have to forecast if they want to get pipe, they're now including us in their pipe forecasts. which is a pretty good gauge. This is really something that just began to occur this year, and that's why I'm confident that we have a pretty good view towards the third and fourth quarters. In terms of the privates, far less visibility.
spk08: Okay, so I guess that kind of goes back to what you were saying about the fourth quarter and how you think about those programs evolving. We know all about these equipment shortages out there here, and I know not necessarily in your business, but here in the capital discipline across the industry, there's not many rigs or pressure-bumping fleets that can go back to work. So with your businesses tied to both of those markets, is there a concern that while pricing and margins can continue to move higher in products, that a lack of capacity, I guess price and rentals, that a lack of capacity could ultimately moderate growth and activity over the next few years if there just aren't enough rigs or pressure-bumping equipment to go out there?
spk03: How are you thinking about that, that dynamic? First, let me talk about frac. Our market share is so low that if there was not another pressure pumping crew added, we have room to grow. Drilling rigs, another story. I'm going to take a little contrary view here just based upon the decades I've been in this business. Yes, rigs are in tight supply, and I know there are a lot of folks who believe that we're going to be constrained by the availability of rigs. But I'm going to bet that some of the rigs that are stacked now, the less efficient rigs, are going to go back to work because the day rates are going to be high. So I think you're going to see some people spend some money to upgrade rigs that perhaps they would not have upgraded six months ago. I think we'll be constrained, but we won't be nearly as constrained as many people feel. Money moves into this business so quickly.
spk08: We've certainly seen that. If I could just squeeze one more in there on your pressure control business. You talked about your market share and very fragmented. Curious about the capital discipline in that market overall. Is it just too much capacity and too many players, or have people been building out? And maybe just also on the side of that, Is there much attrition in the pressure control, or is that sort of the reason why we still have too much capacity in there?
spk03: I think the barriers to entry are just too low. I think that the availability of Chinese valves, although clearly the supply has been intermittent over the first six months because of the issues in the Far East, there appear to be plenty of frac valves available in the market. And this would be, I think that our larger competitors aren't adding to their fleets, but I think the smaller players are having no trouble getting valves right now.
spk08: Got it. Thank you very much, Scott.
spk01: Thank you, David. And our next question is coming from Cameron Lockridge from Stevens, Inc. Cameron, welcome.
spk05: Hey, good morning. Thanks for taking my questions. Morning, Cameron. How are you doing? I'm doing well. How are you doing, Scott? I'm great, thanks. Great. So I wanted to first start, you mentioned the release. you're working towards increasing the quality of your customer base. I thought that was an interesting snippet there. And I just wanted to ask if you could offer some more color on what you're doing on that front and what maybe the implications are. I know you don't like talking about price, but on, you know, cost recovery efforts, what are some of the implications there as we, as we fine tune that customer base?
spk03: You know, I, Cameron, I think you probably know the answer to this. When you have in a market like this that's tight, particularly the labor side of the market, we're blessed with adequate inventories, but labor remains tight. When you go out to market, you have to go out to market to those customers who are going to value the the execution excellence, the service excellence, as well as the product. And so, by and large, the larger players place greater value on our offerings than some of the privates. So, as we approach the market, we're just having to be a little bit more discriminating, and we are being a little bit more discriminating about who we approach. The second thing is, as we apply to our cost recovery plans, we promised and we took it seriously. We promised our large customers that if they supported us, we would support them. And that meant that we would have adequate people and inventory to take care of their needs. And I can tell you the name of this business is Repeat Business. I'm proud to say I can't remember the last time we lost a customer and I don't intend to lose any customers. Certainly don't intend to lose any because we can't deliver on time. And so that plays a large part in the way we view the opportunities out there.
spk05: That makes sense. That's helpful. Thank you, Scott. And then moving back to the topic of M&A, we've gotten a few questions from folks just asking, basically, as you've been looking at this pipeline of deals over the past several quarters, pretty healthy balance sheet, obviously. Just wondering if you can comment on maybe the difficulty, maybe a strong word, but the difficulty of sourcing or looking for the right target, the right candidate that complements your profile of having to differentiate a product, a differentiated service model. What are some of the puts and takes there and how, you know, plentiful or not plentiful or candidates like that in, in the market today?
spk03: You know, I would never characterize, um, them as being plentiful Cameron, any stretch of the imagination, but I would say that there are more, uh, suitable candidates. We're seeing more suitable candidates today than we have, um, say six months ago or 12 months ago. And it could very well be that owners see this as an opportunity to monetize finally after a very tough couple of years. I suspect that's the reason. I also made mention of the fact that the bid-ask disparity is pretty significant, but that's why you have to practice a little bit of patience. But I do believe the opportunities are better with those candidates who meet most of our criteria. So, that's why I feel pretty good about this.
spk05: Got it. Thank you, Scott. Not going to bet. Thanks, Cameron.
spk01: Thank you so much, Cameron. And if anyone does have a question, just a reminder that you press SCAR11 on your phone. And now, David Smith from Pickering Energy Partners has a question.
spk05: Hey, good morning. Thank you for taking my question. Hey, David. How are you? Doing well, thanks. I'm hoping to circle back to a comment you made on the call regarding discussions with an NOC in the Middle East. You mentioned product testing next year, commercialization expected by 24. Is this something that envisions distribution from your existing facilities or something that could entail building a regional manufacturing presence?
spk03: The latter.
spk05: Great, and could you remind us on kind of the rough expected lead times, you know, to establish a new manufacturing facility in the Middle East?
spk03: Yeah, it's about, you know, it's in the neighborhood of 12 to 18 months.
spk05: Great, thank you for that. Yeah, most of my questions have been asked, but just a quick one. given the improving visibility you have for drilling activity on the public EMPs, wondering if this might translate at all into a little, you know, maybe more forward visibility on the types of customers who place more value on your rental offerings. And if, you know, if you're seeing anything positive in that mix.
spk03: Yeah. I mean, the short answer is yes, David. The more activity, the higher the percentage of activity that is being conducted by the larger publicly traded companies, the better for our pressure control business, for our frack business. There's no question about that. We don't do very well at all with privates in terms of frack valve rentals. So you're right. Great. Thank you for your time. Thank you, David.
spk01: Thank you so much, David, and thank you for the questions. And now I would like to turn it back to the gentleman for closing remarks.
spk04: Thanks, everyone, for joining the call. We look forward to connecting with you next quarter.
spk03: Okay, everybody, have a great end of the summer. Thanks.
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