Cactus - Q3 2024
October 31, 2024
Transcript
Operator (participant)
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 Q&A session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising 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, John Fitzgerald. Please go ahead.
John Fitzgerald (Head of Investor Relations)
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 Tadlock, CEO of FlexSteel, 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.
Scott Bender (Chairman and CEO)
Thanks, John, and good morning to everyone. I'm pleased to report our Q3 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 Q3. Our Spoolable Technologies 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 Q3. 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 Q3 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.
I now turn the call over to Jay 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.
Jay Nutt (CFO)
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 Q2 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 Q2.
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 remeasurement of the earn-out liability associated with the FlexSteel 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, Q3 adjusted EBITDA was $100 million. Adjusted EBITDA margin for the Q3 was 34.2% compared to 35.7% for the Q2.
Adjustments to total company adjusted EBITDA during the Q3 include non-cash charges of $5.6 million in stock-based compensation, $100,000 charge related to the final remeasurement of the FlexSteel 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 Q3 was $15 million, which includes $4 million of amortization expense related to intangible assets resulting from the FlexSteel 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 Q3 versus $63 million during the Q2. The slight decline was primarily driven by the professional fees incurred at corporate, mostly offset by small quarterly changes in the remeasurement of the FlexSteel earn-out liability.
Book income tax expense during the Q3 was $16 million, reflecting an effective tax rate of 21%. Adjusted net income and earnings per share were $63 million and $0.79 per share, respectively, compared to $65 million and $0.81 per share in the Q2. Adjusted net income for the Q3 was net of a 26% tax rate applied to our adjusted pre-tax income. During the quarter, we paid a dividend of $0.13 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 FlexSteel earn-out liability. The final payment associated with the 2023 TRA liability was deferred to the Q4. 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 equivalents 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 Q3. In a moment, Scott will give you our Q4 operational outlook. Some additional financial considerations when looking ahead to the Q4, including effective tax rate similar to the Q3 rate of 22% and an estimated tax rate for adjusted EPS of approximately 26%. Total depreciation and amortization expense during the Q4 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 million to 37 million due to the timing of equipment receipts and our international expansion efforts. Finally, the board has approved a quarterly dividend of $0.13 per share, which we paid in December. That covers the financial review and outlook, and I'll now turn the call back over to Scott.
Scott Bender (Chairman and CEO)
Thanks, Jay. I'll now touch on our operational expectations for the Q4 by reporting segment. Based upon preliminary revenue for October, we expect pressure control revenue to reflect a mid-single-digit dip versus the Q3 due to the combination of lower average U.S. 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 Q4, 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 segment.
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 Q4 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 Q4 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 Q3 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 FlexSteel products in 2025. This initiative, in combination with supply chain improvements, could improve margins by over 100 basis points in the 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 Middle East 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 U.S. 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 wellhead system to our customers to enable them to achieve reduced 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 wellhead 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?
Operator (participant)
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 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 a Q&A roster. Our first question comes from the line of Arun Jayaram of JPMorgan Securities, LLC. Your line is now open.
Arun Jayaram (Research Analyst)
Hey, good morning, team. I was wondering. I'm doing great. How are you?
Scott Bender (Chairman and CEO)
I'm doing fine.
Arun Jayaram (Research Analyst)
Great, well, great to get through the room. Is that my first question? I'm going to ask for maybe a little grace this morning. Quickly, I'd love to hear your thoughts on, obviously, you pursued an inorganic kind of growth opportunity. I'd love to hear about just thoughts on your overall portfolio and if strategically, at a high level, how are you thinking about kind of augmenting the portfolio? Obviously, you've had a really, really interesting acquisition with Spoolables, which has been really, really successful. But I wanted to get your thoughts on just the portfolio.
Scott Bender (Chairman and CEO)
Okay. That's your only question?
Arun Jayaram (Research Analyst)
I have a follow-up.
Scott Bender (Chairman and CEO)
How do you know you have a follow-up when I haven't answered this question? Okay. So I've changed my medication, I guess. 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 FlexSteel-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 I think about FlexSteel that even after the earn-out payment, we paid six. What job? 6,364. Six, fifty.
$66.50. They've already given us back $190 million. 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.
Arun Jayaram (Research Analyst)
Understood. And just maybe a separate question. We're just days away from the election, and I'm not going to ask you to comment on who you think is going to win. But 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.
Scott Bender (Chairman and CEO)
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? Will they be, well, I mean, we've heard President Trump say he's going to apply tariffs everywhere. I mean, 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. And 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, coupled with Bossier City, gives us a significant competitive advantage. And keep in mind that FlexSteel is 100% U.S.
Arun Jayaram (Research Analyst)
Yeah. You make that in Baytown, right? That product?
Scott Bender (Chairman and CEO)
Yes. Yes.
Arun Jayaram (Research Analyst)
Okay. Great.
Scott Bender (Chairman and CEO)
Thanks a lot.
Arun Jayaram (Research Analyst)
But anyway, short answer is I think we're in the best position of anybody I know in this business. Great. Thanks a lot.
Operator (participant)
One moment, Scott. Question. Thank you. Our next question comes from the line of Scott of Citigroup. Your line is now open.
Scott Gruber (Managing Director and Senior Analyst)
Hey, Scott.
Scott Bender (Chairman and CEO)
Good morning.
Scott Gruber (Managing Director and Senior Analyst)
Good morning. Doing well. Doing well. I wanted to kind of ask a follow-up to Arun's question. You mentioned continued interest in pursuing acquisitions, but I 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 at which you'd consider returning some of it to shareholders? Just your latest thoughts on cash balance and deployment.
Scott Bender (Chairman and CEO)
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, 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 be 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.
Scott Gruber (Managing Director and Senior Analyst)
That's the end of 2025.
Scott Bender (Chairman and CEO)
But you also know, Scott, I have this tremendous aversion to debt.
Scott Gruber (Managing Director and Senior Analyst)
Right. Right. And that's by the end of 2025, just to be clear. You can let it build for a few more quarters.
Scott Bender (Chairman and CEO)
Yes. Yes.
Scott Gruber (Managing Director and Senior Analyst)
Okay. And then just a follow-up on 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? Seems to be pushed to the right a bit, but some color there would be great as well.
Scott Bender (Chairman and CEO)
Okay. I think that 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 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. 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 I've never lied to you. I'm not going to lie to you now.
Scott Gruber (Managing Director and Senior Analyst)
Got it. Well, I appreciate the time. Thanks, Scott. I'll turn it back.
Operator (participant)
Thank you. Our next question comes from the line of Stephen Gengaro with Stifel. Your line is now open.
Scott Bender (Chairman and CEO)
Hey, Stephen. How are you?
Stephen Gengaro (Managing Director)
Hi. I'm good. Good morning, everybody. Thanks for taking the questions. I think the first one, when we think about what we see in the U.S. from a consolidation perspective, and it feels like the dynamics of the business have changed, have you seen much change 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?
Scott Bender (Chairman and CEO)
Yes, because I've spoken about this before. We're going to see. 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?
Stephen Gengaro (Managing Director)
Yes.
Scott Bender (Chairman and CEO)
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'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 in terms of market share, this would bode well for us.
Stephen Gengaro (Managing Director)
Great. Thanks. No, that's good color, and my follow-up, I'm not sure you want to go here quite yet, but when we think about 2025 and you sort of think about what you laid out for this Q4 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 rig count's kind of flattish from current levels, that Cactus can deliver modest growth in EBITDA next year?
Scott Bender (Chairman and CEO)
Yes.
Stephen Gengaro (Managing Director)
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.
Scott Bender (Chairman and CEO)
Okay.
Operator (participant)
Thank you. Our next question comes from the line of David Anderson with Barclays. Your line is now open.
Scott Bender (Chairman and CEO)
Hey, David. How are you?
David Anderson (Managing Director and Senior Equity Research Analyst)
I'm doing very well. How are you?
Scott Bender (Chairman and CEO)
Great.
David Anderson (Managing Director and Senior Equity Research Analyst)
So, question on kind of the level of sales per rig in Q2 and pressure control. You kind of highlight how they were much higher and they were going to revise a bit lower in Q4. 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 equipment on your site? I mean, and does the shift in forecast, is that just a function of just, as you said, customers just a little bit more overly cautious on the rest of your business?
Scott Bender (Chairman and CEO)
Yeah. David, it really is. It's primarily impacted by the production tree call-offs. And they are so difficult to predict. So 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.
David Anderson (Managing Director and Senior Equity Research Analyst)
Gotcha. So I was.
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 2018. So in 2019 and 2020, your revenue per rig went up substantially. And I'm just kind of thinking back, and I don't remember, maybe you can refresh my 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 in, you're making this in the U.S. versus out, so you can provide a lower cost to your customer, therefore share increases and the like. Do you think the same thing can happen again this time? Would you do anything different? Do you ramp up manufacturing capacity faster?
Scott Bender (Chairman and CEO)
Are you asking me if we would ramp it up faster in the U.S.?
David Anderson (Managing Director and Senior Equity Research Analyst)
Yeah. Right. I mean, is that, and would you have done anything different the last time? Or is it just sort of a natural function of how this transition? Because I'm just looking at the numbers back in 2019 and 2020, they went up substantially on a revenue per rig basis. I'm just wondering how much of that contributed to it, the tariffs and people kind of going to your product versus others.
Scott Bender (Chairman and CEO)
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 of two, three months?
Jay Nutt (CFO)
A little bit longer than that.
Scott Bender (Chairman and CEO)
How long was it, do you remember?
Jay Nutt (CFO)
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.
Scott Bender (Chairman and CEO)
I didn't think it was that long.
Jay Nutt (CFO)
Yes, sir.
Scott Bender (Chairman and CEO)
So the tariff exclusion had a big impact there.
Jay Nutt (CFO)
Okay.
Scott Bender (Chairman and CEO)
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 has got to be addressed. And I think we are very far along in getting that addressed.
David Anderson (Managing Director and Senior Equity Research Analyst)
Great. Okay. Thank you.
Operator (participant)
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.
Scott Bender (Chairman and CEO)
Hey, Jeff.
Jeff LeBlanc (Director in the Equity Research Division)
Hi. Good morning, Scott.
Scott Bender (Chairman and CEO)
Hey.
Jeff LeBlanc (Director in the Equity Research Division)
How are you?
Scott Bender (Chairman and CEO)
How are you?
Jeff LeBlanc (Director in the Equity Research Division)
Good.
Scott Bender (Chairman and CEO)
Good.
Jeff LeBlanc (Director in the Equity Research Division)
I guess the question I wanted to ask is, if you could quantify the magnitude of the international Spoolable Technologies' revenue, and then also, should we think about this as a baseload moving forward on which future growth would be goes? So just steady revenue and international moving forward?
Scott Bender (Chairman and CEO)
Steve?
Stephen Tadlock (Executive VP and CEO of Spoolable Technologies Segment)
Yeah. We're in the kind of high single digits percent of spoolable 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.
Scott Bender (Chairman and CEO)
I think.
Jeff LeBlanc (Director in the Equity Research Division)
Thank you.
Scott Bender (Chairman and CEO)
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 FlexSteel in the next couple of years could be 40% of our business. That's a lot.
Jeff LeBlanc (Director in the Equity Research Division)
Is that 40% of spoolables or 40% of overall?
Scott Bender (Chairman and CEO)
I'm talking about spoolables.
Jeff LeBlanc (Director in the Equity Research Division)
Okay. Thank you very much. I'll hand the call back to the operator.
Scott Bender (Chairman and CEO)
Thanks, Jeff.
Operator (participant)
Thank you. This concludes the question and answer session. I would now like to turn it back to John Fitzgerald for closing remarks.
John Fitzgerald (Head of Investor Relations)
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.
Operator (participant)
Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.