Q2 2020 Cactus Inc Earnings Call
Good morning, welcome to catch the second quarter 2020 earnings call. My name is you why not and I will be put anything audio portion of the D. Interacting broadcast all intimately on mute to prevent any background noise right. Those of you on this team mistake noticed the options available in your event consult during the.
Yes, you didn't ask your view you answer your questions Mckinney feel up your is uncomfortable except me.
A question via the phone please press star one and if he would like to meet your your question you meet Ratchet down <unk> as a reminder, leaks could be make your question into one and then one follow up question in queue. At this time I would like to train the show over to Mr., John Fitzgerald director of corporate <unk> <unk>.
Sorry. Please go ahead.
Thank you and good morning, everyone. We appreciate your participation in today's call.
Speakers on today's call will be Scott vendor, our Chief Executive Officer, Steve Tadlock, Our Chief Financial Officer.
Also joining us today are drilled vendor senior Vice President and Chief operating Officer, Steven vendor, 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 the any comments, we make on todays 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 FCC.
Any forward looking statements. We make today are only as of today's date, we undertake no obligation to publicly update or view 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 or include in our earnings release.
With that I will turn the call discussed.
Thanks, John Good morning, everyone.
Last quarter, we were among the first to set realistic expectations for our industry.
It's that oil prices of rapidly recovered to approximately $40 barrel completion activity looks to have trough and we appear to be approaching a bottom in the U.S. rig count that as marginally higher than previously forecasted. Nonetheless, we remain committed to further streamlining our existing operations as we expect act.
Liberty to remain below the levels needed to support the current industry capacity.
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 costs nature of this business through industry, leading margins and significant free cash flow generation in summary.
Second quarter revenues were 67 million adjusted EBITDA was over 22 million adjusted EBITDA margins were approximately 34% our cash balance increased by $40 million to 271 million and we paid a quarterly dividend of license for sure I will try.
On the call over to Steve tab like 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 Q1 day So Steve.
Thanks, Scott in Q2 revenues of 67 million were 50%, 57% lower than the prior quarter product revenues at 41 million 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 its 3.1 million in tariff related benefits received during the quarter.
Rental revenues were $12 million 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 million 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 in rental revenue during the third quarter.
Gross margins decreased 440 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.
SDMA was down $5 million sequentially to 8.7 million during the quarter. The decrease was primarily attributable to lower payroll related expenses. Despite the sequential increase noncash stock based compensation expense.
We expect SGN eight to be between eight and $9 million in Q3, 2020 with stock based compensation expense flat at slightly over $2 million.
We recorded just under $1 million of severance expense in Q2 2020.
Second quarter, adjusted EBITDA was $22 million down from 54 million during the first quarter adjusted EBITDA for the quarter represented 34% of revenues adjustments. During the second quarter 2020 included 900000 severance expenses and $2 million in stock based compensation.
Depreciation expense was 10, a half million during the period down from 11 million during first quarter.
Our public or class eight ownership was relatively stable in Q2 and was 63% at the ended the quarter. This should result in an effective tax rate of approximately 19% in Q3 2020, assuming no changes in our public ownership percentage.
GAAP net income was 9.1 million in Q2 2020 internally, we prefer to look at adjusted net income and earnings per share, which were 7.4 million and 10 cents, respectively compared to 31 million and 41 cents per share in Q1 2020.
We estimate that the tax rate for adjusted EPS will remain at 26%.
During the second quarter, we paid out $6.8 million, resulting from our quarterly dividend of nine cents per share. The board has also approved a dividend of nine cents per share to be paid in September of this year.
Net of the dividend and associated distribution payments, our cash position increased by an impressive $40 million during the quarter to almost $271 million at June thirtyth, highlighting the strong free cash flow generation of the company.
For the quarter operating cash flow was $57.4 million and our net capex spend was 8.2 million.
As disclosed in our release Cactus recognized 7.5 million and refunds during the quarter associated with tariff exclusions granted in March of this year, the refunds reduced inventory values by $4 million and cost of revenue by three and a half million during the second quarter. There remains over $6 million in additional potential refunds not yet recorded as of June.
Yes. These will be recognized as a reduction the cost of goods sold if and when received with the amount substantially allocated to product costs.
The capital requirements for the business remain modest as evidenced by us reducing our net capex guidance for 2020 to be between 20 and $25 million that covers the financial review and I'll now turn you back to Scott Okay. Thanks, Steve.
We've often highlighted that the two key factors and cactuses successive been its variable costs nature and its modest capital requirement. This was validated during the second quarter as we reduced payroll related expenses by approximately 85 million on an annualized basis and reduce the midpoint of our 2020 capex.
This guidance to 60% below 2019 levels, the 85 million at an annualized payroll cost savings was achieved through reductions made by the end of may requiring less than 2 million in total associated cash severance charges. During the first half of 2020.
Looking to our products business. We received favorable news is the you STR 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 will receive a little over 6 million additional refunds in the coming quarters. So the timing and final amount remains uncertain. These exclusions are currently set to run through August of this year, though we've applied for extensions and are currently awaiting.
Our response, such extensions if granted portend well for future margins.
Notwithstanding the foregoing, our strong financial position as 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 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 will emerge with higher market share. During the second half of 2020, then 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 us 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 Cactuses rigs follow to be down in the 20% range sequentially outperforming the broader market.
From a financial person.
Production in our Q3 product revenues to be slightly less than the percentage reduction in our rigs follow 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 2016.
We continue to maintain discipline and evaluating business opportunities recognizing the value of our equipment and serve the value our equipment and services bring to customers. This disciplined mosquito our ability to maintain EBITDA margins just below 70% during the second quarter looking to Q3, we expect low double digit rate.
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 20% 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 maintains adjusted EBITDA margins above 20% during the prior downturn, while private and we believe we'll we'll achieve similar results despite our public company costs.
As noted earlier, we've reduced our capex guidance to 20 25 million for 2020, given expected levels of activity. We foresee continued annualize levels of spending below 10 million 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 use not surprisingly however, travel restrictions have impeded our momentum.
Regarding M&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 in our ability to flex costs in line. We remain confident we will we will emerge as one of the fuel oil field service companies, who maintained their dividend level through this downturn.
As I remind you regularly management, our long term investors in this business and highly aligned with our shareholders given the almost 75% reduction and activity levels. Since last year. Our continued success in generating cash 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 cuda operator.
Thank you once again, ladies and gentlemen, I would like to ask a question you made fresh start then the number one on your telephone.
I would like to do all your question you May proceed with alky. Once again. Please can you do your question into line and then one follow up question. Your first question comes from the liking of shrinking from Jpmorgan. Your line is indeed.
Thank you good morning.
Are you.
So Scott Im doing great. Thank you.
Well done on managing the quarter and you're right, it's really highlights.
The variable nature of your costs and its highly differentiated in the sector.
The tariff regulation is quite constructive for margins going forward.
As you said in the past maybe half of your cost of goods Sonep in China and.
The tariff maybe 25% of those costs is the blended impact on Cogs, something like 10% to 15% I'm, assuming you're to give me some caveats attempt that down but would love to hear.
Some elaboration on that.
Okay, Steve you on it now.
I think.
Everything you said, it's correct is that we're kind of the last part first of all these these exclusions weren't on all of our products launched 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've got a full quarter's impact you're probably looking at something like 3%.
On the product margins on absolute basis impact.
Once you factor in that 50% is coming from China, and and all the other caveats you mentioned.
I think something Scott mentioned on the phone calls important job and working supplier is very hard and obviously in this environment, everybody suffers and things tend to roll downhill. So we've been able to.
Concessions, there and so regardless of the.
Perfect attention outcome, we feel pretty confident that.
As we get some of these cost benefits in our inventory and they roll through the system will be.
Able to maintain something in a low thirtys range on that product margins.
John It yes. Thank you for that as that clarification is really helpful.
Then on market share.
It sounds like there is some volatility just given the unprecedented speed at which rigs running drops 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 playbooks and last downturn.
Can you just talked about in those puts and takes and what the implication is looking forward in terms of market share.
Yeah.
Wow Sean.
Yes, I wish I could answer your question directly I can I can tell yet I feel very confident that team feels very confident.
[music].
If if this is such a volatile market though.
[music].
And I think youre going to see.
And I'm confident you're going to see record market share at this company by the end of the year.
I really want to leave it at that part of the problem, but 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 and 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.
Yes, I feel very confident I wish I could give you more detail, but you know I can't.
Understood. Thanks, Scott.
Your next question comes from the line of Ian Macpherson of Simmons. Your line is open.
Thanks, Good morning, and congrats on.
The quarter.
Got you mentioned just briefly but with regard to the M&A opportunity landscape.
In front of view.
Anything, but that is logical and accretive.
[music].
I.
Third from last quarter's call that M&A was not a hot played issue, but obviously the we've seen some stabilization in the U.S., Mark and have a better sense, what the dimensions of it are.
Looking forward and just curious what what types of extensions or bolt ons for cactus.
Good makes sense conceptually given the redefinition of the U.S. market over the course of this year.
So let me be clear right now we have nothing on the horizon in terms of M&A.
There's there clearly are a lot more opportunities that are that are.
That are surfacing, but I think that because of the cautious nature of this team.
We now believe that that the best M&A opportunities.
We will appear within our own industry. It's the business. We know fact, I think we know it better than anybody else eight to sound like somebody else.
It makes public announcements, but.
I think it's true we have more experience in this business will we understand it there are surprises and we what we want M&A opportunities, whereas I mentioned, there are we see tangible synergy benefits and.
The best place to look is within our own industry for that reason.
Does that entail.
So onshore focus or or anything broader than that essentially.
I would say both I.
We just what we do see quite frankly wanted to be related to track rentals and wellheads.
Understood.
Thanks, very much I'll pass it over appreciate it.
Your next question comes from the line of George O'leary from TPH and company. Your line is open.
Hey, George.
Morning, guys.
All right how doing well how are you.
I'm doing great. Thanks.
Just curious if you can frame what percentage of your rental revenues are kind of the newer generation and technology that you rolled out last year and and what percentage are older technologies and just curious if theres any.
If you can't bring the exact numbers has that mix shifted as we progress through this soft period and start to bounce off the bottom.
It's about 15% George right now.
Headwinds that we face or that the customers who.
I appreciate it our technology is 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 at that same group that will ultimately have the Monday to start completing wells in the latter part of this year in certainly in 2021 and for that reason.
I'm optimistic that that adoption rate as a percentage of our total rental revenue is going to increase.
Very interesting in 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 taken a stab at it previously asked question could you frame what the July market share of rigs followed wise and then does that.
Is that level in July kind of what you're targeting by the ended the year unless you think is feasible by the end of the year.
That's a nice try George.
Okay.
I sort of purposely didn't tell you what that percentage wise, but you can look at the chart you know what it means.
Broadly speaking I guess, what I'd tell you that we had a record.
I think that we can move up from that record.
Additionally, by the end of the year.
I feel good about that.
I figured out as the case bad take a shot arch sorry George.
Your next question comes from the line of Tony milestones Stephens. Your line is open.
Hey, Tommy.
Morning, Scott and thanks for taking my questions are.
Are you don't.
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 they are maybe 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 Youve commented on that before and any update be willing to share would be helpful.
Yes, I'll, let you all talked about China, but I can tell you that as we discussed in the last call.
We're.
We're moving with with increased I think focus on.
Our diversifying our supply chain out of that area.
Hi, Joe you want to talk about China, China tonnage really returned to base.
Capacity and production I am not releasing any kind of distribution any kind of distribution issues with the suppliers. There fat there's lots of capacity right now I think the only issue that we see.
Right now, it's just we're lights to vessel availability so.
Might take us two weeks longer to get product in that it did before because you typically deliver to the port and it used to be they'd love to same week not may take you two weeks to get a dead, but again in terms of reduction Theres just been no disruption and 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 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 ended the year.
Great. Thank thank you both that context is all helpful.
And shifting to.
Different topic now on your cost save initiative.
If you took 85 million annualized out pretty quickly, which as you indicated earlier Scott again underscores the.
Variable.
So 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 million as variable on the way back up or have having gone through this process.
Have you seen opportunities or have you already have moved on opportunities to take fixed cost out as well, which would then have positive implications for your incrementals in a recovery.
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 co bid we would not have to.
At 85 going up that's the first.
Part of the answer okay, even though that was.
Payroll related so that 85 million does not include the non payroll related costs that we've attacked with vengeance.
So I hope that answers the first part 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 Fibest 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.
Point as we never invested in a large fixed cost platform.
And as a result.
Theres, just not that many opportunities for us to reduce.
[music].
We'll be certainly there are some and weve attack, those but it's not going to be.
They're not going to be write downs I'll.
I'm going to go off.
Im off script already which is not unusual.
Taking write downs for example to reduce your fixed costs like guest that reduce your fixed costs.
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.
Very helpful, Scott and maybe we'll schedule of podcasts for.
More fulsome discussion on write downs and fixed costs.
[laughter] you want beyond that I guess.
I love to lead it [laughter].
Thank you I'll turn it back.
Your next question comes from the line of Jacob and then a break from credit Suisse. Your line is open.
Hey, good morning, guys.
Good morning.
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 any change in the way or customers or thinking about some of those products. So I understand some negative customer mix kind of took down the numbers temporarily in twoq, but in terms of your conversations with customers and each.
Changes in the way does does that does 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, yes. So we saw no we saw very little appetite for any additional.
Cost of Frac site.
During during the quarter.
Interestingly enough over the last I'd say couple two three weeks as 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.
The other item of course that sub significance is.
Stage costs have gone down a lot, which means that the value of reducing NPP.
It's not quite as great and so the payback on an innovation, which we've always thought.
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 frac.
As 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 and spending money.
Okay that makes.
That makes sense and then.
Just a question I guess again on the on the rental segment.
Hi, curious on the topline guidance of three Q I would've expected with perhaps a little bit of rebound completion activity in threeq and maybe revenues.
Ben flats modestly up.
Just.
Curious if you could help me understand what seems like a disconnect that maybe you guys into different view on three key regions.
No I think the first part of the quarter was was pretty good and then it deteriorated in the last couple of months.
I would probably be that.
Most honest answer is we're conservative.
Okay Fair enough I think theres some upside.
Makes sense.
Thanks, a lot appreciate it guys.
Yes.
Your next question comes from the line of Conor liner from Morgan Stanley.
Thanks.
Yes. Thanks Cotter how are you just wondering is good.
Great.
I was wondering if I could follow up on objects question, there more more on the rig side of things. So I think you guys.
Gave one of the more realistic assessments last quarter, where things were heading.
I think you've addressed to completion there but.
On the drilling side of things I think you guys have highlighted you get a little bit more visibility that somebody other contractors. So what's your thinking on people's appetite to to put some rigs back to work later this year early 21, where do you think customers are out these days.
I see an appetite and believe it or not the Eagle Ford I see an appetite.
In the Delaware.
I see sort of.
No indication of in the increased appetite in the mid con.
I see sort of a loaning appetite in the northeast we had really hopes that.
The gas prices in the northeast would be a 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.
Got it that makes sense any order of magnitude you'd sort of.
Habits think about for as we as we move later this year I mean, we talking low double digits.
Are we talking single digits, what sort of your thinking there.
I would say probably low double digits by the end of the year.
Got it right I wanted to pivot maybe.
Let me just caveat that by saying that.
It really is off the top of my head I'm trying to.
Think about customer by customer and.
As I think I said earlier, we're blessed with some customers that are capable of adding rigs.
And finally some of them are some of them art, but I think it I think I think it's fair to say low double digits.
What I really think will happen unit you didn't ask this question, but I'm going to answer it anyway.
Our production tree business, which has.
You know historically.
[music].
26% or so range, 27% range.
Alex really fell off the face of the map.
As of completion activity.
You are going to see much better results from our production tree segment, we're already seeing some light there and as Frac activity in general picks up I think you'll see production at our production trees pickup disproportionately faster than our wellhead products segment.
Got it but that's kind of question, where it where it gets talking about something it maybe to ask.
[laughter].
The the one high level question I had here is you've had some of your large competitors I mean, probably for the better part of the past.
12, 18 months here, but.
Theres theres that theres, a serious mandate to generate returns and I think it's it's clear that many that you've taken a lot of share.
The returns that some of those larger players there a lot lower than they used to be.
You seen any shift in behavior, there as we've kind of gone into a downturn. These organizations that another round of cost cutting do you have a lot more opportunities or is it too early to tell.
You know how much I love all my competitors.
I don't want to make it.
Disparaging remarks about them.
This business doesn't really probably moved the needle as much with our competitors I think they have a lot of other problems.
Besides there surface wellhead business.
The short answer is I haven't really seen.
Any any indication of any change in their behavior.
That's fair thanks.
See Greens. Your next question comes from the line upgrade Colleen.
Do you see your line is open.
Hey, good morning, everybody.
Good morning.
Hey, Scott just wanted to clarify if I can clarify one thing when you talked about the prospect of increased activity in South, Texas, and the Delaware would that specific to a two completion activity or drilling activity or some combination of both.
Yeah, I was really talk I was going to have responded I was only thinking about drilling.
Okay, Great I appreciate that in the context that completion related activity can you give us now your perspective on how you may see things evolving seems like theres 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 into the fourth quarter. So maybe push.
Being a little bit beyond your comfort zone about quarter to quarter dynamics, but I.
I know you're really tied in close to your customer base. It would really appreciate perspective.
Yeah, I think than that.
In our view is that the the improvement in completion activity will be in West Texas.
To a far greater degree than any other basin.
And I.
I don't really have good visibility.
Beyond the next 90 days in that regard. So we have we know that a couple of our customers are going to be adding some crews, but they're not talking about.
Continued to continue adding crews having said that.
Our our customers have built a lot of ducs sooner or later, they're going to have to address those.
I think that the industry's probably going to.
Maintain a higher level of ducs and they have in the past but.
I feel pretty good about 2021 in that regard.
Maybe.
Probably not as optimistic that you're going to see.
A large increase from Q3 to Q4, though.
Okay.
That's great color and then I think.
From my perspective, I'd be curious to get get a read from you as two or refresh for a few wells as to what is that is driving the market share gains on the wellhead side of the business has there been any recent developments or new developments or proved elements technology efficiencies Wonder if you give us a little more color on.
What you think is is ultimately driving that had shared dynamic.
I think it's it's a combination of.
Customers customer mix.
The right customers.
Adding rigs.
I think it's.
But it's it's it's so hard for anybody outside the business to appreciate it but its outstanding execution.
As as everybody cuts back.
It's not going to 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 a feel service and branch operating people. So.
And I think our level of execution has.
As 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.
Okay appreciate that and if I may slip on Internet Steven.
Just wanted also clarify on this in terms of the margins for the.
Products business that low 30% margin would be exclusive of Danny.
Chris refunds in the back half near.
Yes, yes.
Okay. Thank you for clarifying thanks.
Your next question comes from the line of lead Gen Gone from Wolfe Research. Your line is open.
Hey, Thanks, Good morning, Thanks for taking my questions here the first some products so.
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.
Proved 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 we're 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 lower growth rig count moving from.
Sure.
Well I'd like you and others that Theres, a delay between rigs added and revenue realized okay.
So 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 wellheads fell off the most.
In areas like the Delaware held up the best and the average wellhead is is a good deal more expensive in the Delaware than this for example in the Bakken or in South Texas. So.
It's a combination of product mix.
It's a comp as well as as I said, the lag time between rigs being added.
Revenue being generated.
Totally fair shifting gears to international I know, we have some time, obviously to to nail this down as we move forward here right now with logistical constraints, it's tough to to get traction here, but.
How do you think about the international expansion I guess, specifically the middle East is 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 cost 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 US businesses a stands today, if we were to see a little bit more expansion internationally.
Oh.
Well I think I might have some competitors on the line.
Which always gives me a little bit of concern.
I'm not going to.
And I'm going to have to be a little bit vague in my response, I would say youre going to see a combination of the too.
But one thing we will never do and that is.
Subject our technology to.
To the whims of others to distributed outside of our control. So no matter what structure, we adopt be it a standout facility being to be at a JV or a partnership we're going to maintain control. So we can control the technology.
In terms of of margins, it's just 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 as margins are lower internationally I think that that maybe the industry doesn't appreciate the fact that while international is held up extremely well this year simply because its project oriented in the orders were booked last year.
Margins internationally or going to take a beating and 2021.
As particularly the snow season.
Negotiate their 2021 purchases so margins are going to be even worse than what we had anticipated.
But nonetheless.
We are staying the course, we're going to continue to pursue this and.
And I still feel like 2021, you're going to see some results of that so general margins 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 going to increase competition, along all service lines.
That's just.
Totally 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.
Lower than the U.S. lower than it has been.
Gotcha 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.
Yes, there's opportunity there.
Great. Thank you very much.
Your next question comes from the line of Mr., Jim Darby of Stifel. Your line is open.
Thanks, Good morning gentleman.
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 combination of those two.
Combination.
Okay. Thanks, and then just one other follow up on the on the working capital front as we look at the second half the year any guidance.
The benefit you might get from working capital either you or based on the.
The dynamics of Dsos and payables or inaccurate.
Sure Yeah, I would say on the air side, we had a great quarter in terms of collections, obviously, they slipped some but we think we will continue to see some harvesting and they are and certainly in inventory. We would expect some I think looking at the overall picture we think will.
We 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 here right payment.
Great. Thank you.
Let me just add to that even though you didnt ask the question. This team has done a really remarkable job on A.R.
And.
We are I mean, I'm very optimistic that we're going to emerge from this thing.
With very little impact from.
[noise] customer payment problems.
Okay. Thank you.
Your next question comes from the line of Chase Mulvehill from Bank of America like I said.
Hey, good morning Edelman.
Alright.
I'm doing well, it's finally, Sony here in Houston, So, it's nice to look out the window and see some sunrise entering.
But I.
But you're not going to last year.
No it's used Tonight [laughter].
I guess I wanted to come back to the market share question and you know doing the calculation you know what the rig count expectations, probably are for Threeq you for the industry in 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.
Sure.
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 if you actually had success penetrating the majors yet.
I think that's a fair question I've got [laughter] about market share.
Hi.
So basically.
You are pretty good mathematician Buddy.
Let me just say that okay.
All right.
The next question really.
You asked about the majors in a you know I'm not going to comment on that except to say that.
Yes, I think about people are going to 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.
Okay, all right I'll take that as a yes belt Chase I'd say, yes.
[laughter], you Didnt say no [laughter] alright.
I guess, the let other things have been covered here, but just wanted to talk about capex in longer term capex.
Obviously, the back half is kind of mostly maintenance.
Maintenance I think you've said is kind of below 10 million on annual basis as we look over the next couple of years and you think about building out you know internationally, how should we think about the you know 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 a internationally.
Got it I would I wish I could tell you was an immense amount of money, it's not going to be I think I've said is in the last call or the call before do not concerned yourself with international Capex.
We're going to do it in a manner that's going to be.
Very conservative because that's just the way we operate you're not going to see us and now to 10 billion dollar facility in cosmic stand or someplace like that or anywhere.
Okay, well just like we're just not going to do that.
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.
And growth for for rental.
Not for legacy equipment, obviously, we've got plenty of we've got plenty of that.
Got a couple of very interesting products that I'm not going to discuss on the completion side that we have not.
Introduced but we intend to introduce but it's still I can lead to significant amount of money.
Okay, but it will understood it will be incremental capex to be sure I stand by I think our earlier statement that 2021 looks like a $10 billion capex year.
Got it Okay I'll turn it back over appreciate the color.
Thank you speakers there I know my my questions. At this time you may continue.
Thanks, everyone for joining the call back to everybody stay safe or kind of looking forward to soon everybody long.
When we can all get together.
Okay well.
Thank you see crazy once again, ladies and gentlemen. This concludes today's conference calls. Thank you all for joining you may now disconnect.
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