Cactus, Inc.

Good day and thank you for standing by. Welcome to the CACTUS Q3 2024 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 will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, John Fitzgerald. Please go ahead.

Thank you and good morning. We appreciate you joining us on today's call. Our speakers will be Scott Bender, our Chairman and Chief Executive Officer, and Jay Nutt, our Chief Financial Officer. Also joining us today are Joel Bender, President Steven Bender, Chief Operating Officer, Steve Tadlock, CEO of Flex Steel, and Will Marsh, our General Counsel. 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. With that, I will turn the call over to Scott.

Thanks, John, and good morning to everyone. I'm pleased to report our third quarter results, which highlighted the unique resilience of both of our business segments. Despite the continued decline in U.S. land rig activity, total company revenue improved sequentially during the third quarter. Our spoolable technology segment reported record quarterly revenue. As I noted on last quarter's call, we expected that most of the domestic activity decline was behind us. While that has largely played out as anticipated, softer activity continued throughout the third quarter. Given the subdued market conditions, I continue to be very proud of our associates ongoing commitment to customer execution that's led to this consistent record of outperformance. Some third quarter total company highlights include revenue of $293 million, adjusted EBITDA of $100 million, adjusted EBITDA margin of 34.2%, and we increased our cash balance to $303 million. Now I'll turn the call over to Jane Nutt, our CFO, who will review our financial results in more detail. Following his remarks, I'll provide some thoughts on our outlook for the balance of the year before opening the lines for Q&A.

Good morning. As Scott mentioned, we had another solid quarter, resulting in total Q3 revenues of $293 million, which were up 1% sequentially. Total adjusted EBITDA of $100 million was down 3% sequentially. For our pressure control segment, revenues of $185 million were down 1.1% sequentially, as unforecasted shipments of production equipment that benefited the second quarter didn't repeat to the same extent during this period. Operating income decreased $3.1 million, or 5.6% sequentially, with operating margins decreasing 130 basis points. The decline in operating margin was driven by miscellaneous charges incurred in the quarter including reserves taken in connection with customer bankruptcies and other litigation claims. Adjusted segment EBITDA decreased 3.3 million, or 5.1% sequentially, with margins decreasing by 140 basis points for the reasons just noted. Excluding the aforementioned charges, segment adjusted EBITDA margins were essentially flat versus the second quarter. In our spoolable technology segment, Revenues were up 4.3% sequentially due largely to resilient domestic customer activity. Operating income increased $2.9 million sequentially, primarily due to lower expense booked as a result of the re-measurement of the earn-out liability associated with the Flex Steel acquisition, offset by some higher input cost. Note that the earn-out liability was paid in full and closed out during the quarter. Adjusted segment EBITDA at 42.5 million was flat sequentially, while margins decreased by 160 basis points, resulting from the increased input cost. Corporate and other expenses were 8.7 million in Q3, up $2.8 million sequentially, resulting from professional fees associated with pursuit of an inorganic growth opportunity that we're no longer pursuing. Adjusted EBITDA was flat sequentially. On a total company basis, third quarter adjusted EBITDA was $100 million. Adjusted EBITDA margin for the third quarter was 34.2% compared to 35.7% for the second quarter. Adjustments to total company adjusted EBITDA during the third quarter include non-cash charges of $5.6 million in stock-based compensation, $100,000 charge related to the final remeasurement of the flex deal earn out liability upon settlement and the $2.8 million for professional fees associated with the evaluation of an inorganic growth opportunity. Depreciation and amortization expense for the third quarter was $15 million, which includes $4 million of amortization expense related to intangible assets resulting from the flex deal acquisition. During the quarter, the public or Class A ownership of the company averaged and ended the period at 84%. GAAP net income was $62 million in the third quarter versus $63 million during the second quarter. The slight decline was primarily driven by the professional fees incurred at corporate, mostly offset by small quarterly changes in the remeasurement of the Flex Steel earn-out liability. Book income tax expense during the third quarter was $16 million, reflecting an effective tax rate of 21%. Adjusted net income and earnings per share were $63 million and 79 cents per share, respectively, compared to $65 million and 81 cents per share in the second quarter. Adjusted net income for the third quarter was net of a 26% tax rate applied to our adjusted pre-tax income. During the quarter, we paid a dividend of 13 cents per share, resulting in a cash outflow of approximately $11 million, including related distributions to members. Additionally, we paid $37.1 million to close the flex still earn out liability. The final payment associated with the 2023 TRA liability was deferred to the fourth quarter. This residual payment is approximately $5.5 million. excluding accrued interest and associated distributions. Due to our continued strong operating earnings and disciplined working capital management, we increased our cash and cash equivalence balance by $57 million, notwithstanding the aforementioned payments, and we closed the quarter with a cash balance of $303 million. Capital spending was $10 million during the third quarter. In a moment Scott will give you our fourth quarter operational outlook. Some additional financial considerations when looking ahead to the fourth quarter, including effective tax rate similar to the third quarter rate of 22% and an estimated tax rate for adjusted EPS of approximately 26%. Total depreciation and amortization expense during the fourth quarter is expected to be $15 million. with $6.5 million associated with our pressure control segment and $8.5 million in spoolable technologies. Our full year 2024 CAPEX outlook has been reduced to be in the range of $32 to $37 million due to the timing of equipment receipts and our international expansion efforts. Finally, the Board has approved a quarterly dividend of 13 cents per share, which will be paid in December. That covers the financial review and outlook. And I'll now turn the call back over to Scott.

Thanks, Jay. I'll now touch on our operational expectations for the fourth quarter by reporting segment. Based upon preliminary revenue for October, we expect pressure control revenue to reflect the mid single digit dip versus the third quarter due to the combination of lower average US land drilling activity and seasonal factors, including potential customer budget exhaustion. These factors are resulting in less visibility into production equipment shipments around year end. Although we are closely monitoring the potential impacts of operator consolidations, preliminary discussions with our current customers indicate activity increases in the early part of next year. Adjusted EBITDA margins in our pressure control segment are expected to be 33% to 35% for the fourth quarter as cost management and ongoing cost efficiencies are expected to offset the impact of the anticipated revenue decline. The adjusted EBITDA guidance excludes approximately $3 million of stock-based comp expense within the second. We believe product costs will trend lower during the second half of 2025 due to ongoing efficiency improvements as well as our supply chain diversification efforts. Regarding our spoolable technology segment, we expect fourth quarter revenue to be down in the mid to high single digits quarter over quarter. As a reminder, seasonal declines approaching 10% in this business during the fourth quarter are not uncommon. We expect adjusted EBITDA margins in this segment to be approximately 36% to 38% in Q4, which excludes $1 million of stock-based comp in the segment. Lower operating leverage in Q4 combined with some ongoing higher material costs are the primary drivers of the expected Q4 margin progression. The higher material costs and impacted results during the third quarter are expected to persist through year end before easing. These higher material cost increases have been partially the result of spot purchases to address increased demand relative to prior expectations. Additionally, we look forward to expanding the benefits of using the pressure control supply chain to source certain components of our flex steel products in 2025. This initiative, in combination with supply chain improvements, could improve margins by over 100 basis points in this segment by the end of next year. Adjusted corporate EBITDA is expected to be a charge of approximately $4 million in Q4 which excludes approximately 1.7 million of stock-based comp. Regarding our international expansion plans, we remain focused on establishing a Mideast business and will continue to take a disciplined approach to evaluating strategic opportunities. We continue to dedicate significant resources in both segments. As an example of our success to date, international revenue in spoolable technologies for 2024 has already doubled 2023's full year performance. While the US market continues to be challenging, I remain optimistic and very pleased with the market positioning of Cactus, our portfolio of high margin, high return products and services, and the commitment of our organization to exceed customer expectations. I'm eager to responsibly roll out our latest generation wall head system to our customers to enable them to achieve reduce drilling times while enhancing safety and reliability. In addition, we will complete prototype testing of our new frac valve design, which will significantly reduce maintenance costs. In summary, our primary objectives for the next year remain unchanged and include meaningful contributions from our new non-section 301 manufacturing facility to enhance the cost and risk profile of our supply chain. increased availability of our next generation wall head system, continued customer additions, and increases within our customer base for both segments, supported by the introduction of new products and services, and international expansion in both segments. And with that, I'll turn it back over to the operator so we may begin Q&A. Operator?

Thank you. At this time, we will conduct a question and answer session We ask that you limit yourself to one question and one follow-up question. As a reminder, to ask a question, you will need to press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by while we compile a Q&A roster. Our first question comes from the line of Aaron Jayaram of JPMorgan Securities LLC. Your line is now open. Good morning, Tim.

I was wondering – I'm doing great. How are you? I'm doing fine. Great. Well, it's great to get through the – Is that my first question? I'm going to ask for maybe a little grace this morning. Yeah, quickly – I'd love to hear your thoughts on, you know, obviously you pursued an inorganic kind of growth opportunity. I'd love to hear about just thoughts on, you know, your overall portfolio and if, you know, strategically at a high level, how are you thinking about kind of augmenting, you know, the portfolio? Obviously you've had a really, really interesting acquisition with Spoolables, which is, you know, has been really, really successful. But I wanted to get your thoughts on just the portfolio.

Okay. That's your only question? I have a follow-up. How do you know you have a follow-up if I haven't answered this question? Okay. I've changed my medication. I guess I'm a little snarkier than normal. Okay, so... I think that consistent with what I've always said before, our primary objective would be international. However, should another flex steel-looking opportunity present itself, we would take advantage of that. We have the balance sheet. You know that. We have the capacity. in terms of our line of credit. And, you know, I think about FlexDeal, that even after the earn-out payment, we paid six, what, John? They've already given us back $190 million. So I'd be kind of foolish in terms of value for our shareholders in not looking at that. But primarily, it would be an international opportunity that I would focus on.

Understood, understood. It just may be a separate question. You know, we're just days away from the election. And I'm not going to ask you to comment who you think is going to win. But, you know, one of the candidates has talked a lot about tariffs. And I just wanted to get your general thoughts on that. It does appear that you're mitigating that risk through your expansion to a third manufacturing base. But just talk about that general risk and how you think about that for Cactus, just given your current production base between the U.S. and China.

Yeah, I would say that of all of our competitors, we're in the best position because we have Bossier City. that takes care of about half of what we produce. That's the first point. The second point is every one of our competitors imports goods, and most of them obviously import goods from China where Section 301 applies. The big question is, will tariffs be applied or tariff increases be applied disproportionately to China. We've heard President Trump say he's going to apply tariffs everywhere. I've heard numbers as high as 200%. I've heard 60%. I really don't know. I think that he's going to get tremendous pushback. We've even heard Kamala say that she wanted to increase tariffs. Of all of our competitors, I think that this move that we're making right now and will be complete by the end of next year puts us in a, that coupled with Bossier City gives us a significant competitive advantage. And keep in mind that Flex Steel is 100% U.S.

Yeah, you make that in Baytown, right? That product? Yes. Okay. Great.

But anyway, short answer is I think we're in the best position of anybody I know in this business.

Great. Thanks a lot.

One moment for our next question. Thank you. Our next question comes from the line of Scott of Citigroup. Your line is now open.

Hey, Scott. How are you? I wanted to kind of ask a follow up to Arun's question. You mentioned continued interest in pursuing acquisitions, but can't help but notice that your cash balance keeps rising after another strong free cash quarter. So should the expectation be that you'll continue to grow the cash balance as you pursue acquisitions, or is there a level of cash? I wish you'd consider returning some of it to shareholders. Just your latest thoughts on cash balance and deployment.

That's a good question, Scott. We have too much cash. So if we weren't... interested in actively pursuing some expansion, I would have returned this cash already. So there is a, you know, like I told you before, when you became, when you were all very patient about our growing cash balance, I asked you to be patient because we were looking at some things. There'll be a point in time if nothing actually occurs And I would suggest that by the end of the year, by the end of the coming year, when we would increase the amount of cash that we return to our shareholders. We do not have, frankly, an optimal capital structure right now.

And that's the end of 25.

But you also know, Scott, I have this tremendous aversion to debt. Right, right.

And that's by the end of 25, just to be clear. You can let it go a few more quarters. Yes, yes. And then just a follow-up on the, you know, getting your wellhead system qualified in the Middle East. Can you just provide an update on that process and timing of building a facility there? It seems to be, you know, pushing the right a bit, but probably there would be great as well.

Okay. I think that, you know, we're continuing our testing, and I don't think, frankly, that testing is the limiting factor. It's the decision about the direction that we're going to go. And so I wouldn't worry about the former. We have several alternatives, and this has taken us way longer than I had expected. But, you know, we are by nature very cautious people. But, Scott, it's full speed ahead. We're going to get this done. It's just we're going to get it done in a very responsible way. You know, I'm incredibly proud that we have survived all of this without ever having to take an impairment charge and i don't intend to ever take an impairment charge so just bear with us scott i'm going to tell you trust me because you know i've never lied to you i'm not going to lie to you now you got it i appreciate you guys thanks scott i'll turn it back thank you

Our next question comes from the line of Steven Gingaro with steeple. Your line is now open.

I'm good. Good morning, everybody. Thanks for taking the questions. Um, I think the first one, uh, w when we think about what we see in the U S from a consolidation perspective, and you know, it feels like the dynamics of the business have changed. Have you seen much change from, from your perspective and your conversation with customers? versus sort of prior cycles and how they either utilize or view your high-performance products versus peers and pricing. I know you don't love to talk about pricing, but just in general, has the world changed much versus prior sort of soft periods?

Yes, because I've spoken about this before. We're going to see, you know, I used to laugh I don't remember. Do you remember when Scott Sheffield made this comment about he expected there to be only five or so operators left in the Permian? Yes. And I thought, gee whiz, is that possible? Well, I still don't believe it's possible. But I do believe now that we might see a large percentage of the market controlled by just a handful of majors. This is the first time I've ever seen that. And I think that with that comes a serious high grading of their supply chain. And high grading of their supply chain is a net positive for us. I think that some of our smaller competitors are going to have a very difficult time because we're moving much more this time from relationship buying to technical buying. And that means that the host of small independent wellhead providers are going to struggle. So I think that while, you know, you've heard me say before, when company A with 20 rigs buys company B with 20, it doesn't end up at 40. I think that's still true. But I do think that the that in terms of market share, this would bode well for us.

Great. Thanks. Now, that's good color. And my follow-up, and I'm not sure you want to go here quite yet, but when we think about 25 and you sort of think about what you laid out for this fourth quarter softness, and I think you said some customers maybe have some indication of maybe small increases early next year, but do you think in a flattish, if the recount's kind of flattish from current levels, that cactus can deliver modest growth in EBITDA next year?

Yes.

Okay. Good. That's how we've been modeled, so I'm glad you said that. No, thank you for the color. This is very helpful. Okay.

Thank you. Our next question comes from the line of David Anderson with Barclays. Your line is now open.

Hey, David. How are you? I'm doing very well. How are you? Great. So question on kind of the level of sales per rig in second quarter and pressure control. You kind of highlight how they were much higher and they were going to revise a bit lower in fourth quarter. Can you just expand a little bit more about how that moves up and down? I would think kind of the wellhead demand relative to rigs would stay pretty consistent. So is it really just a function of utilization of the rest of the kit on your site? I mean, and does the shift in 4Q, is that just a function of just like, as you said, do customers just a little bit more overly cautious on the rest of your business?

Yeah. David, it really is most, it's primarily impacted by the production tree call-offs. And they are so, so difficult to predict. So, you know, we see customers take, a large number of production trees, then they kind of go quiet, then they take a large quantity of production trees, and that's really the primary driver for the change in revenue per rig. Gotcha.

So I was looking at the model kind of going back over time and kind of getting back to this hypothetical tariff question. That happened in 18, so in 19 and 20, your revenue per rig went up substantially. And I'm just kind of thinking back, and I don't remember, maybe you can refresh your memory a little bit here. I don't remember you necessarily expanding your manufacturing in the U.S., or did you? And I guess sort of my question is, is this just sort of a natural function? Hey, you have kit, you're making this in the U.S. so you can provide a lower cost to your customer, therefore, Share increases in the life. Do you think the same thing can happen again this time? Would you do anything different? Do you ramp up manufacturing capacity faster?

Are you asking me if we would ramp it up faster in the U.S.?

Well, yeah, right. I mean, would you have done anything different the last time? Or is it just sort of a natural function of how this transitions? Just look at the numbers back then. 19 and 20, they went up substantially on a revenue per week basis. I'm just wondering how much of that contributed to it with the tariffs and people kind of going to your product versus others.

Yeah, I don't think really that tariffs had much impact because even with the tariffs, our costs are lower importing than they are producing domestically. So I really don't think that's an issue. I think that what really was an issue was that we did have a period of a tariff exclusion, which helped. I don't know if you remember that. There was a brief period. What was it, Joel? A couple, two, three months?

A little bit longer than that.

How long was it?

I think it was I want to say I think it might have been 12 to 18 months. We had a decent run for a while on it. I didn't think it was that long.

So the turf exclusion had a big impact there. But what would I have done differently? I can't think. I still believe strongly in a low-cost manufacturing source. I just believe right now very strongly that the geopolitical risk coming out of China have got to be addressed. And I think we are very far along in getting that addressed.

Great. OK. Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Jeff LeBlanc with TPH. Your line is now open.

Hey, Jeff. Good morning, Scott. Hey, how are you? How are you? Good. Good. I guess the question I wanted to ask is if you could quantify the magnitude of the international swivel technology's revenue, and then also should we think about this as a base load moving forward on which future growth would be good, so just steady revenue and international moving forward?

Steve? Yeah, we're in the kind of high single digits as a percent of swivel that's coming from international And like Scott mentioned, that's double over where it was last year. And yes, we view this as an active growth area for us, dedicating resources, both additional hires, repurposing some people in the organization to focus on international, as well as expanding service capacity to support that.

I think further to that, if I could just interject, We're even doing very preliminary work on some capacity expansion because we think that this international business for flex steel in the next couple of years could be 40% of our business. That's a lot.

Is that 40% of spoolables or 40% of overall?

I'm talking about spoolables.

Okay. Thank you very much. I'll hand the call back to the operator.

Thanks, Jeff.

Thank you. This concludes the question and answer session. I would now like to turn it back to John Fitzgerald for closing remarks.

We appreciate your interest in CACTUS. Thank you for joining us, and we'll look forward to speaking with you on next quarter's call.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.