Cactus, Inc.

To ask a question during your session, you will need to press star 11 on your telephone. You will then be advised that your hand is raised. To withdraw your question, please press star 11 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, Alan Boyd, Director of Corporate Development and Investor Relations. 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, Stephen Bender, Chief Operating Officer, Steve Padlock, CEO of FlexDeal, 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'll turn the call over to Scott.

Thanks, Alan, and good morning. I'm extremely pleased with our third quarter performance. Pressure control margins improved sequentially due to our tariff mitigation and cost reduction efforts, while swillable technology sales and margins exceeded expectations on higher international shipments. These outcomes are the result of extensive efforts and focus from our team, and I'm very grateful. Some third quarter total company financial highlights include revenue of 264 million, adjusted EBITDA of 87 million, adjusted EBITDA margin of 32.9%. We paid a quarterly dividend of 14 cents per share, and we increased our cash balance to 446 million. Now I'll turn the call over to Jay Nutt, 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 line for Q&A. Jay?

Thank you, Scott. As Scott just mentioned, total Q3 revenues were $264 million, a sequential 3.5% decline, and total adjusted EBITDA was $87 million, approximately flat from the second quarter. For our pressure control segment, revenues of $169 million were down 6.2% sequentially, driven primarily by lower FRAC rental revenues as we continue to focus on our consumable business. Operating income increased 2.2 million or 5.2% sequentially, with operating margins increasing 290 basis points. An adjusted segment EBITDA was 2.1 million or 3.9% higher sequentially, with margins increasing by 320 basis points. The margin increase was primarily due to the implementation of cost reduction initiatives, tariff mitigation efforts, and reduced legal expenses. For our spoolable technology segment, revenues of $95 million were down 1% sequentially on lower domestic customer activity levels, mostly offset by increased international sales. Operating income decreased 2.2 million or 8% sequentially with operating margins decreasing 210 basis points due to higher input cost. Adjusted segment EBITDA decreased $2 million or 5.2% sequentially while margins declined by 160 basis points. Corporate and other expenses declined to half a million dollars to 9.1 million in Q3, which included 3.2 million of professional fees associated with the announced plan to acquire a majority interest in the surface pressure control business of Baker Hughes. Adjusted corporate EBITDA was down slightly to 4.2 million of expense. On a total company basis, third quarter adjusted EBITDA was 87 million, flat from the second quarter. Adjusted EBITDA margin for the third quarter was 32.9% compared to 31.7% for the second quarter. Adjustments to total company EBITDA during the third quarter of 2025 include non-cash charges of $6.1 million in stock-based compensation and $3.2 million for transaction-related professional fees and $247,000 for continued severance actions to right-size the organization for lower activity levels. Depreciation and amortization expense for the third quarter was $16 million, which includes an ongoing $4 million of amortization expense related to the intangible assets resulting from the FlexDeal acquisition. During the third quarter, the public or Class A ownership of the company averaged and ended the period at 86%. Gap net income was $50 million in the third quarter versus $49 million during the second quarter. Book tax expense during the third quarter was $14 million, resulting in an effective tax rate of 22%. Adjusted net income and earnings per share were $54 million and 67 cents per share, respectively, during the third quarter, compared to $53 million and 66 cents per share in the second quarter. Adjusted net income for the third quarter was net of a 25% tax rate applied to our adjusted pre-tax income consistent with the prior quarter. During the quarter, we paid a quarterly dividend of 14 cents per share, resulting in a cash outflow of approximately $11 million, including related distributions to members. We ended the quarter with a cash balance of $446 million, a sequential increase of approximately $40 million. Inventory build has represented a working capital headwind year to date, which has decreased our usual pace of cash flow, with most of the increase in the carrying value being due to tariffs rather than increased quantities of inventory on hand. Net capex was approximately $8.2 million during the third quarter of 2025. In a moment, Scott will give you our fourth quarter operational outlook, some additional financial considerations when looking ahead to the fourth quarter, include an effective tax rate of 22% and an estimated tax rate for adjusted EPS continuing at 25%. Total depreciation and amortization expense during the fourth quarter is expected to be approximately $16 million, with $7 million associated with our pressure control segment and the remaining $9 million in spoolable technologies. Our full year 2025 net capex outlook remains in the range of $40 to $45 million, including the $6 million equity investment made into Vietnam. Additionally, the annual TRA payment and related member distribution was delayed to October of 2025 from our previous plan to settle in the third quarter. The payment and related distributions were made earlier this month and totaled approximately $23 million. Finally, the board has approved a quarterly dividend of 14 cents per share, which will be paid in December. That covers the financial review, and I'll now turn the call back over to Scott.

Thanks, Jay. I'll begin by touching on our current understanding of the highly fluid tariff situation. Through the third quarter, there were no substantial changes in the tariff rates applied to our goods, which were detailed on last quarter's call. We continued to pay an incremental 70% tariff on most goods imported from China for a 95% total tariff rate and a 50% tariff on most goods imported from Vietnam. We're seeking further clarity on recent announcements of tariff reductions in the Far East, but based upon the latest information, we expect some reduction in the fentanyl-related tariff rate from China. That said, the Section 232 tariff, which remains at 50%, is far more impactful to our operations. At this point, we are several months into our efforts to mitigate the tariff impact to our business. I'm proud of the work our team has done to flex the organization and supply chain to improve profitability, and I'm appreciative of the support of our customers and vendors throughout this process. Our Vietnam plant is increasing its pace of shipments, and we still expect substantial displacement of Chinese shipments into the US by mid next year. as we await the finalization of our API certification. I'll now move on to our expectations for the fourth quarter of 2025 by operating segment. During the fourth quarter, we expect pressure control revenue to be relatively flat versus the $169 million, excuse me, reported in the third quarter. Aided by modestly increased activity in our frac rental business, which offsets normal holiday slowdowns. We believe that most industry activity declines for 2025 are behind us and expect the fourth quarter U.S. land rig count to drift modestly lower through the year end. Adjusted EBITDA margins in our pressure control segment are expected to be in the 31% to 33% for the fourth quarter, staying relatively stable from the third quarter and inclusive of typical seasonal declines in field service utilization. This suggested EBITDA guidance excludes approximately 3 million of stock-based comp expense within the segment. Shifting to our spoolable technology segment, we are particularly pleased with the progress we're making on the international side of the business. We achieved our highest international revenue since the acquisition during the third quarter, which served to further our geographic diversification. We expect this momentum to continue. We were recently awarded our first gas service order from a major Middle East NOC and shipped a large order for a new customer in Africa. Additionally, we recently booked our first commercial order in another major Middle East market for shipment in the first half of 2026, which is our first sour service order in the region. We're further encouraged by customer interest in newly developed products. For the fourth quarter, we expect total splittable technologies revenue to be down low double digits sequentially, which is consistent with the typical seasonal pattern in this business. We expect adjusted EBITDA margins to be approximately 34 to 36 for Q4, which excludes a million dollars of stock-based competence segment, moderating third quarter levels on lower volumes. Adjusted corporate EBITDA is expected to be a charge of approximately $4 million in Q4, which excludes $2 million of stock-based comp. Regarding our planned acquisition of a majority interest in the surface pressure control business that Baker used, integration planning and administrative legal filings are proceeding smoothly, and we expect that transaction will close in early 2026. In conclusion, The third quarter demonstrated real progress from our actions to enhance our operating results. The improvement in pressure control margins reflects the agility of our organization in responding to highly dynamic market conditions as we've demonstrated through past cycles. The stronger Spoolable Technologies international revenues are the result of a long-term, concerted effort to increase our sales focus in key global markets which should be enhanced by the increased footprint offered by our announced acquisition of a majority interest in the Baker Hughes surface pressure control business. Domestic activity levels remain subdued, but I'm confident in our ability to continue to outperform and deliver industry-leading returns for our shareholders. I'd like to close by thanking our associates for their focused commitment on executing for our customers throughout a turbulent market. With that, I'll turn it back over to the operator and we can begin Q&A. Operator?

Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from David Anderson of Barclays. Your line is open.

Hey, good morning, Scott. How are you?

Good morning, David. How are you?

Good. I have a rather broad question to start. You probably hate the question, but I'll ask it anyways. I was wondering if you could kind of give us a sense as to where kind of your U.S. customers are thinking, kind of what they're thinking and what they're asking about in the current environment. 4Q is a little bit softer. There's no sense of urgency out there. You characterized it just now as subdued. I think you've also said customers when acting on the oils in the 50s. I was just wondering, are your customers concerned that oil prices are going to take another leg down? Are you seeing more than the usual pricing pressure out there, or is this more of a situation where customers are actually kind of fairly bullish but are just sort of staying flat at these levels waiting for kind of an oil price signal for next year? I'm just trying to get a handle as to how we should think about upstream spending in 26 from these four Q levels that we're going to see coming out here, just some of the puts and takes.

Yeah, I mean, David, that's obviously a question that weighs heavily on us. I'm going to give you my personal opinion, and I think that the downside risk of oil prices is far greater than upside potential. If I was a betting man, I'd suggest it was going to be between 55 and 60, but I also think our customers have taken that into consideration with their plans. I can tell you that they are currently far less transparent than they have been in the past because, you know, we're very much in a wait-and-see environment. And a major part of that, David, is you know this, is not only the surplus availability coming out of OPEC+, but it also has to do with questions about the administration's implementation and enforcement of Russian oil sanctions. The Russians have proved to be very adept at circumventing sanctions, as have the Iranians. So I think that all of our customers are concerned about that. But none of them, I think, are basing their budgets on $65 oil or even $60 oil. The other, I think, important aspect is that we believe that our larger customers who maintain relatively large inventories in core drilling basins and core basins will be far less susceptible to lower oil prices than some of the privates or independents.

It's very helpful. Thanks a lot, Scott. Okay, please. I was going to ask about the spoolable side. I was wondering if you could expand a little bit on the international opportunities and kind of talk about kind of what was unusual in this quarter that the swivels were higher. And also if you could talk about some of the more attractive markets for this part. I think you said Africa, a couple in the Middle East. You've also talked previously about cross-selling opportunities at SPC in the Middle East, but you're already getting awards ahead of that. Could you sort of just talk about a couple of those different markets that you're seeing for spoolable and kind of 26 and 27 opportunities?

Sure, I'm going to defer to Steve Tadlock.

Hey, David. I think in Q3, I mean, really, in terms of markets, we're seeing it worldwide, which is... We're obviously very pleased by that. When I kind of stepped into the role two years ago, we probably had our best concentration in Latin America, and that's just some of the individuals we had down there representing us on the team. And since then, we've expanded... personnel and put them – we've utilized the Cactus Wellhead Australia team. They've done a great job. We got our first delivery in Q3 to Australia. We added another individual in Southeast Asia who's seeing some traction. We've added somebody in the Middle East who's – as Scott mentioned, we had our first hour service order for next year. For a Middle East region, we've never done a country we've never done business in. So it's really across the board. We're just seeing a lot of interest in the product. I think the introduction of the sour service product in the past year has really opened up the worldwide market, just given the larger sour needs overseas versus the U.S. So I think that's kind of fundamentally what's happening. It's Increased focus, more personnel, and the orders kind of build on themselves. So, you know, more traction. Somebody moves to another company or they hear about another company using our product, and it's spreading.

Appreciate it for the commentary. Thanks. Thanks, guys. Thank you. Thank you, Dave.

Thank you. Our next question comes from Scott Gruber of Citigroup. Your line is now open. Hey, Scott. Yes, good morning.

Good morning. Good morning. Really excellent margin performance here in pressure control during the quarter. Can you just unpack that a bit more for us? You know, was that greater acceptance of tariff surcharges than anticipated, or did you pull the cost level lever harder? during the course, unpack that pressure control margin beat a bit for us.

Mr. Gruber, you know I'm not going to comment on price changes, don't you? Yes, you do.

I try. You always try.

Let me just say it's a combination, but I'm not going to focus on the relative contributions. So think about this. We really are blessed to have the best supply chain guy in the industry. He happens to be my brother, but I'm still objective about that. He's done a great job of receiving cooperation from our suppliers. That's the first point. I think the second point is that we do have some very understanding customers because we've supported them and They continue to support us. And then we're very aggressive in terms of flexing the organization in terms of activity. Keep in mind, and I've said this before, that because we're primarily in a variable cost business, it's much easier for us to flex down than it is for oilfield service companies that have relatively high fixed costs. So it really is a combination of all those things. The team has just done a great job. We've also redirected our supply chain to minimize the impact of tariffs because we have purchasing power, which, by the way, will only be enhanced, we expect, by the addition of Baker used SBC business. So Scott, that's not the answer you wanted. But it's all I can give you right now.

No, I appreciate all the color. And I wanted to ask about that new wellhead system that you guys were about to introduce kind of six, 12 months ago, and then the market started softening. Where do you stand with that now? It seems like we're finding some potential stability in the market. We'll see where oil prices go. But you got your pressure control margins back up. You've kind of worked through the tariffs issue. Just give us your latest thoughts on introducing that new system in 26 or whether that's going to be delayed further.

Yeah, so I can answer that question, Scott. Q1.

Oh, great. Easy answer. Very quick. Appreciate it, Scott. I'll turn it back.

Thank you, Scott. Thank you. Our next question comes from Steven Gingaro of Stiefel. Your line is now open.

Hey, Steven. How are you?

Good. Thanks. Good morning. Thanks for taking the question. I think two for me, and one follows up a little bit on Scott's question. I think, and you can correct me if I'm wrong, but I think last quarter you alluded to it being harder to support margins with the tariffs. And it sounded like part of that was because of lower customer activity. But it seems like that tone has changed a bit, and the results were clearly very good. Can you comment on that at all?

Yeah, because, you know, Stephen, just to remind you, what happened to us in the previous quarter is that the tariff rates changed very unexpectedly. in I think it was May or early June when the Section 232 moved from 25 to 50. So we frankly had not anticipated that and received no indication that that was the case. As a result, it made it very difficult for us to make a case to suppliers, customers, not knowing where we were going to land. We have greater clarity on that, which helps us to address our suppliers and our customers. So I would think it's more about the increased tariff environment than it is about activity levels. That said, we've been very pleasantly surprised with how our particular customer base has held up. But again, I want to emphasize, Stephen, that our expectations are that those customers with holdings in the core areas of our basins, because our customers are the larger publicly held E&Ps, that we expect that to hold up relative to the rest of the market.

Great. Thanks. And the follow-up to that was, without without asking you about market share, but when you think about pressure control and you think about activity levels, you've been outperforming that, right? And I would imagine as we go forward here, notwithstanding how the recount evolves, you'll continue to outperform that, driven just primarily by the stability of your customers. Is that fair as we think about it? And I'm thinking it's like a North America comment.

Yeah. Yeah, as I mentioned, we're not getting a whole lot of clarity in terms of next year. But I think it's also fair to say that our market share is going to be a function of new names. And we're seeing some increased interest from some significant players. I believe that's going to continue. I'm guardedly optimistic that we'll be able to defend and potentially expand it. The question is, how big is that pie going to be? I can't estimate that for you. I just think that our pie is going to be significantly larger than some of our competitors. I would also say that we've seen some very large competitors try to increase market share during this period of anemic growth, frankly, at the expense of, I think, their margins. So I can't control that.

Great. Good. Now that's good color. I appreciate it.

Thank you. Our next question comes from Arun Jayaram from JP Morgan Securities. Your line is open.

Good morning, gentlemen. I wondered if you could provide any updated perspective on the Cactus SPC transaction, which you indicated you expect to close in early 2026. How is the integration planning going? updated views would be much appreciated because that is an important swing factor as we think about your earnings power next year.

So specifically, what are you asking me?

Yeah, just your thoughts on kind of the earnings power of that segment next year. Obviously, there's been some cross-currents in Saudi, although We were on the neighbor's call yesterday and Tony mentioned how there could be an improvement in activity as you got into the second half of 2026. I was wondering if you've been to the Middle East recently and just could offer any kind of data points or fresh perspective. Like I said, there's just been some cross-currents as we think about potential spending trends next year.

Yeah, I was there about two weeks ago. So I think the Saudis are probably projecting the possibility of increased activity in the second half of 26, but that hasn't translated into orders. And those are just facts. You know, the international market typically, when we have a slowdown in the U.S., you normally see about a 12-month lag in the international market. So I expect the international market, even the Mideast, to have a relatively weaker 2026 than in 2025. There is no concrete objective evidence, which would only be manifested by order placements. I can't be terribly optimistic about the mid-East. Rent is going to be in the low 60s, and that's got to somehow translate into reduced activity. Now, what we are seeing is some U.S. companies becoming more active in the Mideast. And I think that's, which is really good for us because they happen to be our customers. And there is an absolute undeniable focus on unconventional drilling. And they really are welcoming Western companies. And as a result, the Western companies bring in the suppliers with whom they're most comfortable. So I feel good about that. Will that offset the overall decline? Not likely, but it'll mitigate the impact.

Great. That's helpful. Really appreciate that perspective. Maybe just my follow-up. Maybe give us an update on your sourcing plans internationally. How is the ramp going in Vietnam? And maybe just some thoughts on that.

Yeah, so I can defer to Joel on that. He's in the room with us. Vietnam is progressing. Well, Joel, I'll let you handle this.

Yeah, it's progressing well. We're starting to move some of the wellhead into the U.S. that we need to be able to assemble and monogram. We're currently in line with API to get our audit to be monogrammed we filled the paperwork out and submitted all the required additional documentation so we're expecting to have that audit in the next hopefully in the next 90 or so days so we'll have that done after the first the year one of our requirements is to be able to provide api monogrammed equipment from that facility but on the interim we have started to move wellhead housings and tubing head bodies into the us that will be we'll do the assembly at our bozer city facility So it's progressing well, expanding, adding headcount, adding fixtures for testing. So pretty pleased with the progress.

In any sense, once you do get API certification, what kind of mix Vietnam can have perhaps next year?

We're going to focus primarily on the wellhead out of there towards the end of the year. We'll start bringing some of our gate valves But the primary focus for the beginning of the year and the year will be getting as many of the wellheads and the tubing head assemblies. You know, I would say somewhere in the magnitude of at least half.

Oh, wow. Okay. Got it. Thanks, gentlemen.

Thank you. Our next question comes from Don Christ of Johnson Rice. Your line is open.

Good morning. Good morning, guys. Good morning. Thanks for letting me in. Scott, I just wanted to ask one question on kind of the macro front. I mean, we're hearing a lot more chatter about unconventional drilling in many different countries around the world. And obviously, there's a lot more activity kind of moving that direction. But I just wanted to know from your standpoint, what do you think the timeframe would be to kind of see a material pickup and unconventional around the world whether it be in Turkey or Libya or any other places that aren't big today and unconventional it's just kind of time frame perspective because nobody seems to give that number out well I can tell you this with absolute certainty that we've seen an exponential increase in unconventional requests

throughout the Middle East. I'm less optimistic about Argentina, frankly, because there's just not that many rigs running in comparison to the Mideast. A lot of interest in Saudi, a lot of interest in Abu Dhabi. I would probably tell you that by the end of 2026, we're going to see, in fact, I think we have our first unconventional shipment, Joel, scheduled for when?

It's probably going to go January to February.

Yeah, so, you know, it's basically a U.S. product, so I don't anticipate, obviously, any issues with that. So I think we'll see a steady ramp-up. Their real interest right now is to compare the results of using an unconventionally, a design specifically addressing unconventional with what they're using in terms of flanged equipment. So this will be pending the results of the time savings. So if the time savings are anything at all approaching the US, I think that, you know, once word spreads and it spreads quickly, I think you're going to see a serious ramp up. So let's call it fourth quarter because they need time to drill these wells and analyze the efficiency. So I can tell you my gut feeling is 27 will be a significant contributor. And I think that by the fourth quarter of 26, we're going to see some meaningful shipments.

I appreciate the color. You're always good at the macro stuff. Thank you. Thank you.

Thank you. I am showing no further questions at this time. I would now like to turn it back over to the Chairman and CEO, Scott Bender, for closing remarks.

All right. I want to thank everybody for their continued interest in the company, and I'm really pleased with this team's efforts in terms of dealing with, you know, sort of an anemic market in a very uncertain tariff landscape. And this really is a reflection of not only how flexible our team is, but also the fact that we are and will always be heavily invested in consumables and variable cost businesses. So thanks again for your interest. Have a good day.

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