Cactus - Earnings Call - Q2 2020
July 30, 2020
Transcript
Speaker 0
Good morning, and welcome to Cactus Second Quarter twenty twenty Earnings Call. My name is Joanna, and I will be facilitating the audio portion of today's interactive broadcast. All lines have been placed on mute to prevent any background noise. For those of you on the screen, please take note of the options available in your event console. During the question and answer period, enter your questions in the q and a field of your event console and click submit.
To ask a question via the phone, please press 1. And if you would like to withdraw your question, you may press the pound key. As a reminder, please limit your question into one and then one follow-up question. Thank you. At this time, I would like to turn the show over to mister John Fitzgerald, director of Corporate Department and IR.
Sir, please go ahead.
Speaker 1
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 Steve Tabak, 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 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 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 to Scott.
Speaker 2
Thanks, John, and good morning, everyone. Last quarter, we were among the first to set realistic expectations for our industry. Since then, oil prices have rapidly recovered to approximately $40 a barrel. Completion activity looks to have trough and we appear to be approaching a bottom in The U. S.
Rig count that is marginally higher than previously forecasted. Nonetheless, we remain committed to further streamlining our existing operations as we expect activity to remain below the levels needed to support the current industry capacity. The second quarter was better than expected for Cactus. Although drilling and completion activity in The U. S.
Fell by more than half, we demonstrated the variable cost nature of this business through industry leading margins and significant free cash flow generation. In summary, second quarter revenues were $67,000,000 adjusted EBITDA was over $22,000,000 adjusted EBITDA margins were approximately 34%, Our cash balance increased by $40,000,000 to $271,000,000 and we paid a quarterly dividend of $09 per share. 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 and A. So Steve?
Speaker 3
Thanks, Scott. In Q2, revenues of $67,000,000 were 57% lower than the prior quarter. Product revenues at $41,000,000 were 53% lower sequentially as The U. S. Onshore rig count fell by more than 50% quarter over quarter.
Product gross margins increased to 36% of revenues, up 100 basis points on a sequential basis in part due to $3,100,000 in tariff related benefits received during the quarter. Rental revenues were $12,000,000 down 68% from the first quarter. The decrease was attributable to significantly lower industry completion activity. Although gross margins declined on a sequential basis, we were able to maintain positive margins through the achievement of cost reductions in both direct and branch expenditures. Field service and other revenues in Q2 were $14,000,000 down 54% from the first quarter.
This represented just under 27% of combined product and rental related revenues during the quarter, slightly ahead of expectations. We expect this to represent approximately 26% of product and rental revenue during the third quarter. Gross margins decreased four forty basis points sequentially, largely due to lower revenues, which were offset by lower payroll expenses, better labor utilization and a rationalization of our field service vehicle fleet. SG and A was down $5,000,000 sequentially to $8,700,000 during the quarter. The decrease was primarily attributable to lower payroll related expenses despite a sequential increase in non cash stock based compensation expense.
We expect SG and A to be between 8,000,000 and $9,000,000 in Q3 twenty twenty with stock based compensation expense flat at slightly over $2,000,000 We recorded just under $1,000,000 of severance expense in Q2 twenty twenty. Second quarter adjusted EBITDA was $22,000,000 down from $54,000,000 during the first quarter. Adjusted EBITDA for the quarter represented 34% of revenues. Adjustments during the 2020 included $900,000 in severance expenses and 2,000,000 in stock based compensation. Depreciation expense was $10,500,000 during the period down from $11,000,000 during the first quarter.
Our public or Class A ownership was relatively stable in Q2 and was 63% at the end of the quarter. This should result in an effective tax rate of approximately 19% in Q3 twenty twenty assuming no changes in our public ownership percentage. GAAP net income was $9,100,000 in Q2 twenty twenty. Internally, we prefer to look at adjusted net income and earnings per share, which were $7,400,000 and $0.10 respectively compared to $31,000,000 and $0.41 per share in Q1 twenty twenty. We estimate that the tax rate for adjusted EPS will remain at 26%.
During the second quarter, we paid out $6,800,000 resulting from our quarterly dividend of $09 per share. The Board has also approved a dividend of $09 per share to be paid in September. Net of the dividend and associated distribution payments, our cash position increased by an impressive $40,000,000 during the quarter to almost $271,000,000 at June 30, highlighting the strong free cash flow generation of the company. For the quarter, operating cash flow was $57,400,000 and our net CapEx spend was $8,200,000 As disclosed in our release, Cactus recognized $7,500,000 in refunds during the quarter associated with tariff exclusions granted in March. The refunds reduced inventory values by $4,000,000 and cost of revenue by $3,500,000 during the second quarter.
There remains over $6,000,000 in additional potential refunds not yet recorded as of June 30. These will be recognized as a reduction to cost of goods sold if and when received with the amount substantially allocated to product costs. Early in the third quarter, we made our annual TRA payment and associated tax distribution of approximately $23,000,000 We expect this payment and associated distribution to be substantially lower in 2021 as such disbursements vary directly with imputed tax liability. The recent payment reflects our strong 2019 results and the associated tax savings arising from our corporate structure. The capital requirements for the business remain modest as evidenced by us reducing our net CapEx guidance for 2020 to be between 20,000,000 and $25,000,000 That covers the financial review and I'll now turn you back to Scott.
Speaker 2
Okay. Thanks, Steve. We've often highlighted that the two key factors in Cactus' success have been its variable cost nature and its modest capital requirements. This was validated during the second quarter as we reduced payroll related expenses by approximately $85,000,000 on an annualized basis and reduced the midpoint of our 2020 CapEx guidance to 60% below 2019 levels. The $85,000,000 in annualized payroll cost savings was achieved through reductions made by the May requiring less than $2,000,000 in total associated cash severance charges during the 2020.
Looking to our products business, we received favorable news as the USTR granted exclusions on specific goods that we manufacture internationally. This produced a favorable impact on product gross profit during the second quarter. And as Steve mentioned, we're optimistic that we'll receive a little over $6,000,000 in additional refunds in the coming quarters, though the timing and final amount remains uncertain. These exclusions are currently set to run through August, though we've applied for extensions and are currently awaiting a response. Such extensions have granted portend well for future margins.
Notwithstanding the foregoing, our strong financial position is allowing us to leverage lower costs throughout our supply chain. This should support incrementals looking further out. With regards to market share, we believe the quarter played out largely in line with our previously communicated expectations for volatility given the magnitude of the week to week declines in April and May and our specific customer profile. Now that the rig count is exhibiting signs of stabilization, we're confident that we'll emerge with higher market share during the 2020 than both our June and pre downturn levels, of use supported both by our mid July market share reaching an all time high and positive indications from long term and recently acquired customers. As witnessed during prior downturns, customers cannot afford to ignore efficiency gains as further service pricing concessions become scarce and untenable.
Assuming The U. S. Onshore rig count is relatively flat from current levels in the near term, the average Q3 rig count will be down approximately one third sequentially. We currently expect Cactus' rigs followed to be down in the 20% range sequentially outperforming the broader market. From a financial production in our Q3 product revenues to be slightly less than the percentage reduction in our rigs followed during the third quarter with some modest level of production related activity increases and with EBITDA margins in the range of 30%.
On the rental side of the business, revenues declined to a similar degree as onshore completion activity during the second quarter as operators ceased activity given limited ability to move barrels to market. In addition, desperation pricing mirrored levels witnessed in early twenty sixteen. We continue to maintain discipline in evaluating business opportunities, recognizing the value of our equipment and services bring to customers. This discipline was key to our ability to maintain EBITDA margins just below 70% during the second quarter. Looking to Q3, we expect low double digit revenue declines quarter over quarter given the lower starting point with margins in the 60% range.
Regarding field service revenues in this segment continue to be driven by both our product and rental activity and expect to see EBITDA margins in the mid-twenty percent range for the coming quarter. We were very pleased to record total adjusted EBITDA margins of nearly 34% during the quarter. If you recall, we were able to maintain adjusted EBITDA margins above 20% during the prior downturn while private, and we believe we'll achieve similar results despite our public company costs. As noted earlier, we've reduced our CapEx guidance to 20,000,000 to $25,000,000 for 2020. Given expected levels of activity, we foresee continued annualized levels of spending below $10,000,000 for at least the back half of 2020 and into 2021.
I'd like to close by highlighting a few items before opening the line to questions. Internationally, we continue to believe our strategy to expand into targeted markets will bear fruit in 2021 as we develop viable business opportunities outside of The U. S. Not surprisingly, however, travel restrictions have impeded our momentum. Regarding M and A, we continue to believe that consolidation within our industry where we have visibility to tangible synergies makes the most sense.
Regarding capital allocation, we set our dividend level with our industry's cyclicality and our ability to flex costs in mind. We remain confident we will emerge as one of the few oilfield service companies who maintain their dividend level through this downturn. As I remind you regularly, management are long term investors in this business and highly aligned with our shareholders. Given the almost 75% reduction in activity levels since last year, our continued success in generating cash and returns has never been more important. In summary, Cactus is well positioned to navigate this challenging market environment.
And with that, I'll turn it back over to the operator, so we may begin Q and A. Operator?
Speaker 0
Thank Your first question comes from the line of Sean Meakim from JPMorgan. Your line is open.
Speaker 4
You.
Speaker 5
Scott. Are you?
Speaker 4
I'm doing great. Thank you. Well done on managing the quarter. And you're right, this really highlights the variable nature of your costs, it's highly differentiated in the sector. The tariff revelation is quite constructive for margins going forward.
If, as you said in the past, maybe half of your cost of goods sold are from China and the tariff is maybe 25% of those costs is the blended impact on COGS, something like 10% to 15%. I'm assuming you're going give me some caveats to tamp that down, but would love to hear some elaboration on that.
Speaker 2
Okay. Steve, do want to fix Yeah. That or do you want to
Speaker 3
I think everything you said is correct except for kind of the last part. First of all, these exclusions weren't on all of our products, but they were on a significant number of our products. So as we kind of look at what the margin impact would have been for the quarter because it did happen in March, so you got a full quarter's impact, you're probably looking at something like 3% on the product margins on an absolute basis impact once you factor in that 50% is coming from China and all the other caveats you mentioned. I think something Scott mentioned on the phone call is important. Think Joel has been working with suppliers very hard and obviously in this environment everybody suffers and things tend to roll downhill.
So we've been able to get concessions there. And so regardless of the tariff extension outcome, we feel pretty confident that as we get some of these cost benefits in our inventory and they roll through the system, we'll be able to maintain something in the low 30s range on the product margins.
Speaker 4
Got it. Yes. That clarification is really helpful. And then on market share, it sounds like there was some volatility just given the unprecedented speed at which rigs were getting dropped. But you sound pretty encouraged by how you came out of the quarter and then where you stand today in terms of market share.
So you're executing a similar playbook to the last downturn. Can you just talk about some of those puts and takes and what the implication is looking forward in terms of market share?
Speaker 2
Wow, Sean. Yeah. I I wish I can answer your question directly. I can I can tell you, I feel very confident? The team feels very confident.
If if this is such a volatile market, though. I think you're gonna see I mean, I'm I'm confident you're gonna see record market share at this company by the end of the year. I I really wanna leave it at that. Part of the problem that we've had is that, as you know, we have some very high profile customers that went into this downturn with very large rig counts, And they dropped rigs extremely rapidly, which, increased the volatility in our month to month market share. That volatility has now, subsided to a large degree, and we're beginning to see the benefits of of adding new customers, as well as some of those customers returning to work.
So, we have the best financed customers, I think, in the industry, the most financially responsible customers, and and our adoption rate is going up. So, yeah, I I feel very confident. I wish I could give you more detail, but, you know, I can't.
Speaker 4
Understood. Thanks, Scott.
Speaker 0
Your next question comes from the line of Ian Macpherson of Simmons. Your line is open.
Speaker 6
Thanks. Good morning, and congrats on the quarter. Scott, you mentioned, just briefly that with regards to the M and A opportunity landscape in front of anything that is logical and accretive. I inferred from last quarter's call that M and A was not a hot plate issue. But obviously, we've seen some stabilization in The U.
S. Market and have a better sense of what the dimensions of it are looking forward. And just curious what types of, extensions or bolt ons for Cactus you know, could make sense conceptually given, the redefinition of The US market, over the course of this year?
Speaker 2
So let me be clear right now. We have nothing on the horizon in terms of m and a. There clearly are a lot more opportunities that are surfacing. But I think that because of the cautious nature of this team, we now believe that that the best m and a opportunities will appear within our own industry. It's the business we know.
In fact, I think we know it better than anybody else. I hate to sound like somebody else who makes public announcements. But I think it's true. We have more experience in this business. We understand that there aren't surprises.
And we want want m and a opportunities, whereas I mentioned, there are we we see tangible synergy benefits. And, the best place to look is within our own industry for that reason.
Speaker 6
Does that entail, a US onshore focus or or anything broader than that potentially?
Speaker 2
I would say both. I we just want we just, you know, quite frankly, want it to be related to frac rentals and.
Speaker 6
Understood. Thanks very much. I'll pass it over. Appreciate it.
Speaker 0
Your next question comes from the line of George O'Leary from TPH and Company. Your line is open.
Speaker 2
Hey, George. Morning, guys.
Speaker 5
How are you?
Speaker 4
I'm doing well. How are you?
Speaker 2
I'm doing great. Thanks.
Speaker 7
Just curious if you could frame, you know, what percentage of your rental revenues are kind of the newer generation of technology that you rolled out last year and what percentage are older technologies? And just curious if there's any if you can't frame the exact numbers, has that mix shifted as we've progressed through this soft period and start to bounce off the bottom?
Speaker 2
It's about 15%, George. Right now, you know, the headwinds that we face or that the customers who appreciated our technologies the most really cut back on their completion activity. And and as a result, we've been unable to move that number up. Having said that, I think that collectively this group feels extremely good that that's the same group that will ultimately have the money to start completing wells in the latter part of this year and certainly in 2021. And for that reason, I'm optimistic that that adoption rate as a percentage of our total rental revenue is gonna increase.
Speaker 7
Okay. That's very interesting and very helpful. Thank you, Scott. And then just one more for me. You said July market share is already at a record, so apologies for taking a stab at a previously asked question.
Could you frame what the July market share of rigs followed was? And then does that is that level in July kinda what you're targeting by the end of the year or what you think is feasible by the end of the year?
Speaker 2
That was a nice try, George. You know, I I sort of purposely didn't tell you what that percentage was, but, you know, you you can look at the chart. You know what it means, broadly speaking, I guess, when I tell you that we hit a record. I think that we can move up from that record, additionally by the end of the year. I feel good about that.
Speaker 7
Great. Figured that was the case, but I had take a shot.
Speaker 2
All right. Sorry, George.
Speaker 0
Speakers, your next question comes from the line of Tony Mall from Stephens. Your line is open.
Speaker 5
Hey, Tony.
Speaker 8
Good morning Scott and thanks for taking my questions.
Speaker 2
How are you doing?
Speaker 8
Doing fine. Thank you. So we haven't talked about your Asia supply chain much today. But I wonder if you could give us an update on the extent to which there may be any interruptions for product coming out of China. And then on a related point, the level the priority level for alternative sources of supply in the future?
You've commented on that before, and any update you'd be willing to share would be helpful.
Speaker 2
Yes. I'll let Joel talk about China. But I can tell you that as we discussed in the last call, we're we're moving, you know, with with increased, I think, focus on diversifying our supply chain out of that area. But, Joe, you wanna talk about China?
Speaker 9
China China has really returned to base capacity and production. I'm not really seeing any kind of distribution issues with the suppliers there. In fact, there's lots of capacity right now. I think the only issue that we see right now is just relates to vessel availability. So it might take us two weeks longer to get product in than it did before because you typically deliver to the port and it used to be they'd load you same week now, it may take you two weeks to get it in.
But, you know, again, in terms of production, there's just been no disruption in production from there. And going to the other point in terms of alternate venues for product, we are actively, as Scott said, working on that. And I think you'll see some that, you know, produce some sort of fruit in 2021. Lots of good options right now, couple of different locations for that. But that is our focus right now between now and
Speaker 8
the end of the year. Great. Thank you both. That context is all helpful. And shifting to a different topic now on your cost save initiative.
You took $85,000,000 annualized out pretty quickly, which as you indicated earlier, Scott, again underscores the variable nature of your cost structure. Maybe I'm getting a little bit ahead of things here. But as we think about a potential recovery, should we think about all of that $85,000,000 as variable on the way back up? Or having gone through this process, have you seen opportunities or have you already moved on opportunities to take fixed cost out as well, which would then have positive implications for your incrementals in recovery?
Speaker 2
Okay. I'm going to answer that question in two parts. The first is, if we took 85 out going down and we returned to pre COVID, we would not have to add 85 going up. That's the first part of the answer. Okay.
Even though that was payroll related. So that 85,000,000 does not include the non payroll related costs that we've attacked with vengeance. So I hope that answered the first part. The the second part is has to do with fixed costs. You know, we just don't have a whole lot of fixed costs in this business.
We don't have multiple layers of management. In fact, it's about the flattest organization I think you'll see. In terms of facilities, our our average lease duration is in the neighborhood of three years. So, we have a lot of flexibility in terms of of managing our long term facility costs in that regard should we need to. But I think the the point is we never invested in a large fixed cost platform.
And as a result, there's just not that many opportunities for us to reduce. We don't certainly, there are some, and we've attacked those, but it's not gonna be we don't you know, they're not gonna be write downs. I'll I you know, I'm gonna go off I'm I'm off script already, which is not unusual. Taking write downs, for example, to reduce your fixed cost, well, I guess that reduced your fixed cost. We never put ourselves in a position to have to take the write downs.
So, I think you need to look at us in a little different way.
Speaker 8
Very helpful, Scott. And, maybe we'll schedule a podcast for a more fulsome discussion on, write downs and fixed cost.
Speaker 2
You want to be on that podcast? I'd
Speaker 8
love to lead it. Thank you. I'll turn it back.
Speaker 0
Your next question comes from the line of Jacob Lundberg from Credit Suisse. Your line is open.
Speaker 10
Hey, good morning, guys.
Speaker 2
Good morning.
Speaker 11
Just wanted to go back to the discussion on some of your new innovations within the rental segment. I'm curious if during the downturn, you've seen any change in the way your customers are thinking about some of those products. So I understand some negative customer mix kind of took down the numbers temporarily in 2Q. But in terms of your conversations with customers, any changes in the way those operators are thinking about I'm thinking broadly just the application of innovative technologies in their business, but obviously, specifically as it relates to your business. And do you think coming out of this, there could be greater appetite for stuff like that as kind of the focus goes from, immediate cash preservation towards thinking about driving better efficiencies?
Speaker 2
Yes. So we saw no you know, we saw very little appetite for any additional cost on a frac site during during the quarter. Interestingly enough, over the last, I'd say, couple two, three weeks, is some of our larger accounts are beginning to talk about going back to work. We're seeing renewed interest in the innovation part of our rental fleet. You know, the the other item, of course, that that's of significance is stage costs have gone down a lot, which means that the value of reducing NPT is not quite as great.
And so the payback on an innovation, which we've always thought was was extremely high, just naturally becomes slightly less compelling in an environment like today's environment. So the best thing that happens for us, frankly, and probably the industry, pressure pumping pricing stabilizes, begins to move up, and the customer mix that begins to frack, is a customer mix that supports, safety and and, and innovation. So I feel much better about the future. This quarter, though, there was just no interest in spending money.
Speaker 11
Okay. That makes sense. And then just a question, I guess, again on rental segment. Just kind of curious on the top line guide for 3Q. I would have expected with perhaps a little bit of rebound in completion activity in 3Q, maybe revenues would have been flat to modestly up.
I'm just kinda curious if you could help me understand what seems like a disconnect, but maybe you guys have a different view on 3Q completions.
Speaker 2
I think the first part of the quarter was pretty good, and then it deteriorated in the last couple of months. You know, probably the the the the most honest answer is we're conservative. I think there's some upside. Makes sense.
Speaker 9
Thanks a lot.
Speaker 11
Appreciate it, guys.
Speaker 2
Your
Speaker 0
next question comes from the line Connor Lynagh from Morgan Stanley. Your line is open.
Speaker 5
Thanks.
Speaker 12
Connor, how are you? Good.
Speaker 5
How are doing? Great.
Speaker 6
I was wondering if I
Speaker 5
could follow-up on Jake's question there, more on the rig side of things. So I think you guys gave one of the more realistic assessments last quarter of where things were heading. I think you've addressed completions there. But on the drilling side of things, I think you guys have highlighted you you get a little bit more visibility than than some of the other contractors. So what's your thinking on people's appetite to, to put some rigs back to work later this year or early twenty one?
You know, where where do you think the customers are are at these days?
Speaker 2
I see an appetite in, believe it or not, the Eagle Ford. I see an appetite in the Delaware. I see sort of no indication of any increased appetite in the Mid Con. I see sort of a waning appetite in the Northeast. We have really hopes that that gas prices in the Northeast would be would be constructive.
I'm not seeing that so much. Maybe a little bit of optimism on the Bakken, but I would say primarily South Texas and the Delaware.
Speaker 5
Got it. That makes sense. Any any order of magnitude you'd you'd sort of, you know, have us think about for as we as we move later this year? I mean, are we talking low double digits? Are we talking single digits?
What what sort of your thinking there?
Speaker 2
You know, I would say probably low double digits by the end of the year.
Speaker 5
Got it. Alright. I wanted to pivot maybe go go ahead.
Speaker 2
Sorry. Let let me just caveat that by saying, you know, that really is off the top of my head. I'm trying to think about customer by customer. And as I I think I said earlier, we're blessed with some customers that are capable of adding rigs financially. Some of them are.
Some of them aren't. But, you know, I think I think, I think it's fair to say low double digits. What I really think will happen you didn't you didn't ask this question, but I'm gonna answer it anyway. Our production tree business, which has been,
Speaker 3
you know,
Speaker 2
historically in the 26% or so range, 27% range of products, really fell off the face of the map because of completion activity. You're gonna see much better results from our production tree segment. You know, we're already seeing some light there. And as frac activity in general picks up, I think you'll see production act our production trees pick up disproportionately faster than our wellhead product segment.
Speaker 5
Got it. That's the best kind of question where I get you talking about something I didn't even ask. The one higher level question I had here is you've had some of your large competitors, I mean, probably for the better part of the past twelve to eighteen months here, but there's a serious mandate to generate returns. And I think it's clear to many that you've taken a lot of share and the returns at some of those larger players are a lot lower than they used to be. Have you seen any shift in behavior there as we've kind of gone into the downturn?
These organizations have done another round of cost cutting. Do you have a lot more opportunities, or is it too early to tell?
Speaker 2
You know how much I love all my competitors. I don't wanna make any disparaging remarks about them. This business doesn't really probably move the needle as much with our competitors. I think they have a lot of other problems besides their surface wall head business. The short answer is I haven't really seen any, any indication of any change in their behavior.
Speaker 5
That's fair. Thanks.
Speaker 0
Speakers, your next question comes from the line of Kurt Hallead of RBC. Your line is open.
Speaker 12
Hey, good morning, everybody.
Speaker 2
Good morning. Hey,
Speaker 12
Scott. Just wanted to see if I can clarify one thing. When you talked about the prospect of increased activity in South Texas and the Delaware, was that specific to completion activity or drilling activity or some combination of both?
Speaker 2
Yes. Was really talking I was when I responded, I was only thinking about drilling.
Speaker 12
Okay. Great. I appreciate that. In the context of completion related activity, can you give us your perspective on how you may see things evolving? Seems like there's going to be a pickup of activity here in the third quarter.
And then I'm kind of getting a little bit of a mixed read on the prospects for sustainability of that dynamic into the fourth quarter. So maybe pushing a little bit beyond your comfort zone about quarter to quarter dynamics, but I know you're really tied in close to your customer base, so would really appreciate your perspective.
Speaker 2
Yeah. I think that our view is that the improvement in completion activity will be in West Texas to a far greater degree than any other basin. And I don't really have good visibility beyond the next ninety days in that regard. So, we have we know that a couple of our customers are gonna be adding some crews, but they're not talking about continued the continued adding of crews. Having said that, our our customers have built a lot of ducts.
Sooner or later, they're gonna have to address those. I think that the industry is probably gonna, maintain a higher level of DUCs than they have in the past, but, I feel pretty good about 2021 in that regard. Maybe I'm probably not as optimistic that you're gonna see, a large increase from q three to q four, though.
Speaker 12
Okay. That's, that's great color. And then I think, at least from my perspective, I'd be curious to get a read from you as to or a refresher, if you will, as to what is driving the market share gains on the wellhead side of the business. If there have been any recent developments or new developments or improved elements of technology efficiencies. Wonder if you could give us a little more color on what you think is ultimately driving that share dynamic.
Speaker 2
Yeah. I think it's a combination of customers, customer mix, the right customers, adding rigs. I think it's, you know, it's it's it's it's so hard for anybody outside the business to appreciate it, but it's outstanding execution. As as everybody cuts back, it's not gonna surprise you to learn that that, service levels also suffer. And we made the decision because we were financially capable, of maintaining our core group of, of field service and branch operating people.
So and I I think our level of execution has has, in my opinion, has never been better than it is today. And so as our competitors perhaps begin to to maybe pay less attention to that aspect of the business, I think we're seeing the benefits of that.
Speaker 12
Okay. Appreciate that. And if I may slip one in for Steven. Just wanted also clarify on this. In terms of the margins for the, products business, that low 30% margin would be exclusive of any tariff refunds in the back half of the year?
Speaker 2
Yes. Yes.
Speaker 12
Okay. Thank you for clarifying. Thanks.
Speaker 0
Your next question comes from the line of Blake Gendron from Wolfe Research. Your line is open.
Speaker 13
Hey, thanks. Good morning. Thanks for taking my questions here. The first on Products. So it sounds like Trees fell off a cliff.
So Products revenue underperformed the rig count quarter over quarter on average. I wouldn't assume the pricing improved in the quarter. But still revenue and products per rig followed increased slightly. So is it just an efficiency thing where the rigs that were left were drilling far more wells? And is this a trend you see continuing that may not be fully appreciated in the way we think about this business for a lower growth rig count moving forward?
Speaker 2
Well, I'd like to know there's a delay between rigs added and revenue realized. Okay? So, you know, we we went into the downturn with a very, very high rig count. And and you saw the benefit of that, I think, during the quarter, as I said, because of the lag. That's one point.
I think the next point is our product mix is more has become more favorable in that the areas with the lowest cost wellhead fell off the most. And areas like, the Delaware held up the best, and the average wellhead is is a good deal more expensive in the Delaware than it is, for example, in the Bakken or in South Texas. So, it's a combination of product mix. It's a common as well as, as I said, the lag time between rigs being added and and revenue being generated.
Speaker 13
Totally fair. Shifting gears to international. I know we have some time, obviously, to nail this down. As we move forward here right now with logistical constraints, it's tough to get traction here. But how do you think about the international expansion?
And I guess specifically The Middle East as one that investors anticipate you eventually getting back to just because you're very familiar in your prior businesses in that part of the world. What would the ideal commercial structure look like? Would you basically stand up your own operation in that part of the world? Would you try to go through a commercial partner? Appreciating some of your comments about overhead and keeping fixed costs low.
Just trying to understand, I guess, what sort of the optimal strategy is. And then how you think about roughly margin accretion versus The U. S. Business as it stands today if we were to see a little bit more expansion internationally?
Speaker 8
Well,
Speaker 2
I think I might have some competitors on the line, which always gives me a little bit of concern. So I'm not you know, I'm I'm gonna have to be a little bit vague in my response. I would say you're gonna see a combination of the two. But one thing we will never do, and that is subject our technology to to the whims of others to distribute it outside of our control. So no matter what structure we adopt, be it a stand up facility, be it a be it a JV or a partnership, we're gonna maintain control so we can control the technology.
In terms of of margins, it's just a a fact that margins internationally, I know that some of our larger competitors, take a different view. My experience, as I've said many times before, is margins are lower internationally. I think that maybe the industry doesn't appreciate the fact that while international has held up extremely well this year simply because it's project oriented and the orders were booked last year, margins internationally are going to take a beating in 2021 as particularly the NOCs negotiate their 2021 purchases. So margins are gonna be even worse than what we had anticipated. But nonetheless, you know, we are staying the course.
We're gonna continue to pursue this. And, and I still feel like 2021, you're gonna see some results of that. So general margin's worse than I had anticipated, worse than maybe some people have disclosed to you. And and we're not the only company, obviously, that's turning its attention internationally, which is just gonna increase competition along all service lines. Not
Speaker 13
fair. Is that lower that's lower margin than The U. S. Business, just to be clear, or just lower than international has been in recent history?
Speaker 2
Lower than The U. S, lower than it has been.
Speaker 13
Got you. And just one quick follow-up. Any opportunity, you think, on the unconventional gas side as it relates to your rental products? Or is it just not of scale yet in The Middle East?
Speaker 2
Yes, there's opportunity there. Great. Thank you very much.
Speaker 0
Your next question comes from the line of Mr. Gengari of Stifel. Your line is open.
Speaker 10
Thanks. Good morning, gentlemen. Just a quick follow-up for me. When you talk about market share gains going forward, is it a function of more work by existing customers, new customers or a combination of those two?
Speaker 2
Combination.
Speaker 10
Okay. And then just one other follow-up on the working capital front. As we look at the second half of the year, any guidance, the benefit you might get from working capital either based on the dynamics of DSOs and payables or in aggregate?
Speaker 3
Sure. Yes, I would say on the AR side, we had a great quarter in terms of collections. Obviously, days slipped some, but we think we'll continue to see some harvesting in AR and certainly in inventory we would expect some. I think looking at the overall picture, we think we'll remain free cash flow positive through the remainder of the year with the cash balance roughly flat after paying out dividends and taking into account the recent TRA payment.
Speaker 10
Great. Thank you. Yeah. So I let me
Speaker 2
let me just add to that even though you didn't ask the question. This team has done a really remarkable job on AR. And we're I I mean, I'm very optimistic that we're gonna emerge from this thing, with very little impact from customer payment problems.
Speaker 12
Okay. Thank you.
Speaker 0
Your next question comes from the line of Chase Mulvehill from Bank of America. Your line is open.
Speaker 14
Hey. Good morning, gentlemen.
Speaker 12
Are you doing?
Speaker 14
I'm doing well. It's it's finally sunny here in Houston, so it's nice to look out the window and see some sun rather than rain. But
Speaker 12
It's not it's not gonna
Speaker 2
last. No.
Speaker 14
It's Houston, right? Yes. Guess, I wanted to come back to the market share question and doing a calculation, what the rig count expectations probably are for 3Q for the industry and your comment about rigs followed down around 20%. If I'm doing the math right, that kind of implies that you'd have about 35% share in the third quarter. Can you confirm that number?
And then also on the share gains, this has been asked a lot, but I guess maybe I didn't hear if you've actually had success penetrating the majors yet.
Speaker 2
I think that's the third question I've got about market share. Chase, you're a pretty good mathematician, buddy. Let me just say that. Okay? Alright.
Speaker 12
The the
Speaker 2
next question, really, you asked about the majors, and, you know, I'm not gonna comment on that except to say that, you know, think about the people who are gonna be drilling wells to the second half of the year and into next year. And I feel good about the customers, with whom we do business and their ability to drill wells financially.
Speaker 14
Okay. Alrighty. I'll take that as a, a yes.
Speaker 2
Don't chase.
Speaker 14
I didn't
Speaker 2
say yes. You
Speaker 14
didn't say no. All right. I guess a lot of other things have been covered here, but just wanted to talk about CapEx and longer term CapEx. Obviously, the back half is kind of mostly maintenance. Maintenance, I think you've said, is kind of below $10,000,000 on an annual basis.
As we look over the next couple of years and you think about building out internationally, how should we think about the moving pieces for CapEx? How much growth do you think that you need to spend over the next couple of years as you push internationally?
Speaker 2
God, I wish I could tell you it was an immense amount of money. It's not gonna be.
Speaker 7
I think I've said
Speaker 2
this in the last call or the call before, do not concern yourself with international CapEx. We're we're gonna do it in a in a manner that's gonna be very conservative because that's just the way we operate. You're not gonna see us announce a $10,000,000 facility in Kazakhstan or someplace like that or anywhere. Okay. We're just not we're just not gonna do that.
Speaker 14
Okay. And then on the rental side, is there anything I mean, I imagine you probably don't need to spend on the rental side anytime in the near term. But over the next couple of years, do you foresee kind of any big bumps in growth for rental?
Speaker 2
Not for legacy equipment. Obviously, we've plenty of that. Got a couple of very interesting products that I'm not gonna discuss on the completion side that we have not introduced, but we intend to introduce. But it's still not gonna be a significant amount of money. Okay.
Understood. It will be incremental CapEx to be sure. I I stand by, I think, our earlier statement that 2021 looks like a $10,000,000 CapEx year.
Speaker 14
Got it. Okay. I'll turn it back over. Appreciate the color.
Speaker 0
Thank you. Speakers, there are no more more questions at this time. You may continue.
Speaker 1
Thanks, everyone, for joining the call.
Speaker 2
Thanks, everybody. Stay safe. Kinda looking forward to seeing everybody again when we can all get together. Stay well.
Speaker 0
Thank you, speakers. Once again, ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.