Q4 2020 Cactus Inc Earnings Call
Okay.
Ladies and gentlemen, thank you for standard.
And welcome to the Cactus Q4, 'twenty 'twenty earnings Conference call.
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He had a conference over to your speaker today, Mr. John Fitzgerald. Please go ahead Sir.
Okay.
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, and Steve Tadlock, Our Chief Financial Officer.
Also joining us today are Joel Bender, Senior Vice President and Chief operating Officer, Stephen 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 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 a 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 Scott Thanks, John and good morning to everyone.
On a year on which the U S rig count was down 55% year over year cactus showcase its ability to outperform a recording adjusted EBITDA margins of nearly 35% and generating free cash flow of a $117 million, we were able to offset a portion of the general activity decline by growing our <unk>.
Market share from 31% at year end 2019 to a record 43% on the fourth quarter a 2020.
We were further pleased to see overall activity begin to improve during the fourth quarter, a trend which continued in early 2021.
We ended the year with no bank debt and $289 million on cash. So in summary fourth quarter revenues were just about $68 million. Adjusted EBITDA was approximately $20 million adjusted EBITDA margins were 29% our cash balance increased to nearly $289 billion and we paid a quarterly dividend of <unk> per share.
Sure.
Now I'll turn the call over to Steve Tadlock, Our CFO, who will review our financial results and following his remarks I'll provide some thoughts on our outlook for the near term before opening the lines for Q&A, Steve. Thanks, Scott in Q4 revenues of $68 million were 14% higher than the prior quarter product revenues of <unk>.
$43 million were up 20% sequentially driven by an increase in market share in rigs followed.
Product gross margins were 31% a revenues down approximately 4500 basis points on a sequential basis due primarily to the Q3 impact a tariff refunds.
Product gross margins were up nearly 100 basis points sequentially when excluding the impact of these refunds, which declined by over a $5 million from Q3 to Q4.
Rental revenues were slightly under $9 million down from nearly $10 million during the third quarter, a 'twenty 'twenty gross margins declined to negative 10% due to lower revenue on a relatively fixed depreciable base, a $600000 decrease in tariff free funds and accelerated mobilization costs.
Field service and other revenues in Q4 were over $16 million up 17% versus the third quarter. This represented just under 32% a combined product and rental related revenue during the quarter ahead of expectations. We expect field service revenue to be approximately 30% a product and rental revenue during the first quarter of 'twenty and 'twenty one.
Gross margins were 30% a revenues down 350 basis points sequentially. The margin decline was less than the usual seasonal drop that occurs during the fourth quarter. Thanks to a careful management of nonproductive time during the holiday season.
SG&A was up $600000 sequentially to $9 million during the quarter inline with expectations. The increase was primarily attributable to higher payroll related expenses associated with an increased bonus accrual and employee additions, we expect SG&A to be slightly less than $10 million in Q1, 2021 inclusive of stock based.
<unk> expense of less than $2 million.
Fourth quarter, adjusted EBITDA was approximately $20 million down from $25 million during the third quarter tariff refunds were down nearly 6 million sequentially accounting for more than 100 per cent of the sequential decline in adjusted EBITDA.
Adjusted EBITDA for the quarter represented 29% a revenues down from 41 per cent of revenues during the third quarter or a 31% a revenues last quarter when excluding the 6 million a tariff refunds.
Adjustments during the fourth quarter, a 2020 included $2 million in stock based compensation.
Depreciation expense was $9 3 million during the period down from $9 8 million during the third quarter due largely to a lack of additions to a rental assets field service equipment and vehicle fleet.
Our public or a class a ownership was relatively stable in Q4 and was 63% at the end of the quarter. This should result in an effective tax rate of approximately 19% from Q1 2021, assuming no changes in a public ownership percentage.
GAAP net income was $6 1 million in Q4, 'twenty 'twenty versus $10 9 million during the third quarter from 2020.
Internally, we prefer to look at adjusted net income and earnings per share, which were $6 3 million and eight cents per share respectively compared to nine and a half million in 13 cents per share in Q3, 2020 again, the third quarter was aided by $6 million in tariff refunds, which contributed approximately 4 million in additional adjusted net income during the quarter or so.
<unk> per share.
We estimate that the tax rate for adjusted EPS will be 26, 5% during the first quarter of 2021.
During the fourth quarter, we paid a quarterly dividend of nine cents per share, resulting in a cash outflow a $5 million as publicly announced in late January. The board has also approved a dividend of <unk> per share to be paid in March of this year.
Our cash cash position increased by nearly $15 million during the quarter to approximately 289 million at yearend highlighting the continued free cash flow generation of the company above and beyond our current dividend for the quarter operating cash flow was 22 million and a net capex was $2 million.
Capital requirements for a business remained modest and we will continue to exercise discipline with regards to growth capex as such our net capex guidance for 'twenty 'twenty, one is for a range of $10 million to $15 million.
That covers the financial review and I'll now turn you back to Scott Thanks, Steve.
We noted on our last call a strong management conviction that further market share gains were forthcoming and this certainly proved accurate as we achieved a record product market share a 43% during the fourth quarter setting the company up well for 2021, given the loyalty of our customer base, our strong track record a exit.
<unk> had a reputation for delivering innovative products and services to meet customer demands and changing markets on this call I'll provide an update on our near term outlook, excluding the impact of the recent winter storms that paralyzed much of a southern U S before providing our current best estimate of the storms effect.
On our first quarter financial results.
As mentioned earlier customer reactivity continued to generate positive momentum and we currently expect cactus as rigs followed to increase by approximately 25% during the first quarter of 2021.
Excluding the impact of the aforementioned winter storms, we expect product revenues to increase 20% or more on a sequential basis continued strength in product tree shipments may have indicated slight a slight upside to this outlook, but the aforementioned weather related delays provide reason for caution.
Product EBITDA margins are expected to remain at a low 30 percentage low thirty's percentage during the first quarter, despite pressure from rising steel prices and ocean freight costs.
On a rental side of the business, we've been reluctant to chase low margin work and accordingly, we maintained our position that customers compensate us for the value our equipment and services provide a such revenues declined during the quarter as customers chose to award work to lower cost suppliers. However, we noted on a our last call that we were optimistic regarding inquiry.
Demand for higher end providers in 2021.
Certainly been the case to start a new year.
For the first quarter again, excluding any weather related impacts, we expect rental revenue to be up more than 50% on a sequential basis.
As we've seen historically the redeployment of assets temporarily wise on EBITDA margins, which we expect to be approximately 60% for the first quarter.
Okay.
Revenue from our innovations in January was nearly equal to the total amount generated from that source during the fourth quarter.
Offering encouragement that customers are re validating several of these technologies now that their budgets have been reset.
Regarding field service revenues on this segment continued to be driven by both our product and rental activity, we expect to see EBITDA margins from a low to mid 30% range. During the first quarter down sequentially as we adjust wages to be more to more appropriately reflect market activity, but still higher than we've typically achieved over the last.
A few years.
Utilization, however remains a concern for the reasons mentioned previously.
Like to close by highlighting a few items before opening the line to questions to be clear the guidance figures provided exclude the impact of weather related.
Slow down witnessed in February at present, our best estimate of the total revenue related impact from the storms is in a range of $3 million to $5 million during the first quarter and proportional to our revenue generated by source.
Uncertainty remains regarding the speed with which our customers fully re mobilize but we've been encouraged by the recovery witnessed over the last several days.
The potential EBITDA impact associated with this loss revenue is likely to be in a range of $2 million to $3 million as we supported our associates through this challenging period and maintain some element of fixed cost during the slowdown.
Internationally, but we've been working to establish relationships with several players in the mid east and made our first shipment of rental equipment into the region. In early 2021. We believe this initial shipment will be able to generate revenue once travel restrictions ease and we can provide the required supervisors. We further believe that Vista initially.
<unk> will provide a platform for further growth in product sales as well, which would be more of a 'twenty 'twenty two a bit.
On a new net on new technology front, we're now capable of converting it enabling cactus equipment to run on internally or externally sourced electric power at the well site, thereby reducing the need for diesel power generation during completion and promoting a more environmentally friendly operation.
Given our close relationships with many of the largest E&P operators and our ability to drive efficiency gains customers have traditionally viewed us as key figures in the quest for a more environmentally friendly wall side as a result, some of our largest customers view cactus is an important ESG partner tasked with adding our clients and conducting their op.
Operations on a safer faster and cleaner manner. We believe this development and the offering of our new technologies is a differentiator that will enable us to gain share from several other lower price providers against whom we most often compete.
I'll remind investors, we're developing these new technologies and beginning our international expansion carefully as evidenced by a full year 2021, net capital budget, a $10 million to $15 million. Our team will continue to evaluate capital deployment with returns and free cash flow as our main priorities, we frankly hope that conditions will improve beyond.
Current expectations justifying a modest upward revision in spending.
Regarding M&A, we continue to believe the consolidation within our industry makes the most sense for their scope for a significant tangible synergies.
In summary, we remain optimistic about the opportunities at the upcoming activity recovery presents in a ready to take advantage of our favorable positioning I'd.
I'd be remiss in not acknowledging the outstanding performance from our associates in this last year their commitment to safety and attention to execution excellence has been directly responsible for a success, particularly in light of their financial sacrifices our partial rollback of a 2020 rate wage reductions was.
In recognition of the same and reflects our increasing optimism regarding the macro environment.
With that I'll turn it back over to the operator, and we can begin Q&A operator.
Thank you.
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Your question price per pound key.
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Your first question comes from a line of George on Leary with Tpa Channel Company.
Okay.
Morning, George.
Super Super quick one I just wanted to make sure I heard the rental guidance number right did you say up 15, or a 50% quarter over quarter.
500.
Okay want to make sure I heard that right and not get over my skis in the model.
Great number to you and thanks for that clarification, and then a little bit more of a thoughtful question.
When you spoke about the new technology offerings, you guys are working on reducing emissions, reducing methane emissions in particular is a clear focus you guys always collaborate are often collaborate with your customers.
Throughout your process and working with them I wonder how much of that was cash.
Jack just identifying an opportunity and how much of that was E&P customers coming to you and saying Hey, we need we need a lower emissions to court ESG type investors, which is what that process was like and what was the impetus for for a going that way on the technology front, yes, George so unlike most of our innovations this was really a.
Cactus concept.
We looked at how.
How many generators are on location.
And not only the number of generators, but the resulting maintenance issues with generators.
Sort of a scratch our heads trying to determine if there was not a better way and we came up with what we think is a significantly better way.
Providing power.
Okay, great. Thanks for answering my questions I'll turn it back over.
Your next question comes from the line.
Paul.
With Stephens.
Good morning, and thanks for taking my questions.
Tommy how are you doing great. Thanks, Congrats on the market share record Scott in the past you've given us some insight into some other different customer dynamics that drive that just with trends that sometimes vary among majors independents privates et cetera.
Any context, you can give us there on the fourth quarter record or what the trends might look like in the first part of this year.
Yes, Tommy I think debt.
We saw the percentage of our revenue that was derived from private increase.
Around 25% from 20%.
As you know the private added.
Quite a few rigs in the last quarter and they continue to add rigs.
At the beginning of 2021, so what we've really seen has been a.
A pretty substantial increase from private but now we're beginning to see a.
A substantial maybe not a substantial on a percentage basis, but some positive.
I think data points from some of our large publicly traded e&ps so between those two.
A pretty high level of confidence that the number of rigs followed will continue to increase.
Yeah.
Shifting gears.
Gears to a cost inflation you called out.
Steel is one item.
On freight as well.
I wanted to ask what measures you've taken already to try to mitigate the impacts there and then as we look forward into this year. If those pressures don't abate is there some point at which they might be more difficult to mitigate in the marketplace or how should we think about that over the next couple of quarters.
Yes, So let me, let me I'm going to tie that in with market share gains because I think it's important that you understand that.
As we increase our market share, we we look to customers who exhibit loyalty and.
Obviously willing to pay you.
We think it's a reasonable price and so.
We also have a relationship with those customers that leaves us with some confidence that we'll be able to.
Get some.
Cheap cost recovery, so I think debt the steel price increases that were seeing particularly on the far east the ocean freight increases that we're seeing but we will be able to offset with a live.
Other negotiations with those customers.
<unk>.
When I think about pricing in this market and clearly this has been the worst market I've ever seen.
We don't chase market share with customers who don't.
Price some value on the products and at our execution ability.
As a side note I think in the last.
Yes over the last six months every time, we've had to compete on price with a.
A major contract we've lost we're just not going to lower our price.
We're gonna be discriminating in terms of market share in terms of the customers that we chase that's not to say we are.
There is no limit on how much market share we want a limitation really is on a sort of customers that we chase.
All very helpful. Scott, Thank you and I will turn it back.
Our next question comes from a line of Scott Gruber with Citigroup.
Yeah.
Yes, good morning.
Scott how are you.
Doing well.
A question here on the on the rental side I'm, just comparing your revenues and the outlook to the public tempers that we saw low and obviously you guys were very disciplined on pricing.
Late last year and didn't see the the balance a lot of the public pumper. So.
Which created something of a GAAP.
The revenue trajectories, obviously that now starts to close and one Q.
But if I compare it kind of a <unk> outlook versus pre pandemic.
Our revenue they are still running further below versus the pump or so just curious now that customers are willing to pay for a quality willing to pay for efficiency and unique technology introductions.
Yeah, how many quarters in a row do you think youre going to be able to sustain an above market growth rates in rental.
Well and as much as we started Scott from such a low base based upon our.
Our.
Reluctance to chase work.
I'm pretty optimistic that completions offers a.
Maybe the highest growth trajectory of all of our business segments.
I don't really want a.
Pardon me speculate beyond Q1.
Excuse me, but I think the dynamics in the business is.
As I predicted have changed to our benefit I think that.
That's some of the lower tier providers are struggling.
In terms of delivery and equipment quality and.
That sort of was a was a signal that we were we were looking for them and a lot of that decline in our rental revenue was self inflicted.
Knew it was going to be very very price competitive and when we made a very very draconian cuts.
After the first quarter, we cut our frac support team more than we cut anybody else just because.
History tells us that Frac is going to suffer more we began I guess on the fourth quarter.
Add people back at resources back as we saw that there was some opportunity we're continuing to add resources in that area. Both in terms of a plant and in terms of field locations. So.
Yes, I feel good about the second quarter, but I don't know that I would necessarily say another 50%.
Got you.
It does seem like there is an opportunity here for the rest of the year.
And then just following up on on the installation commentary.
Some color on your ability to pass it through to customers.
On the weather that we had a partial pass through a full pass through it seems like a there'll be a lot easier at 60 <unk>.
45, a 50, but some color there would be great too.
Okay.
So I think youre right no customer ever likes to pay a higher price no matter what happens.
To oil prices, but they are very eager to pay a lower price I think that debt.
Two things are going to work on our benefits first is.
The loyalty of our customer base, I think our customer base value. So I know they do they value our ability to execute.
<unk>.
And theyre going to work with us to protect to protect the company from these rising cost I think the second thing and it really is an important factor is I believe at least that we're going to see a tightening up in the market.
And with a tightening in the market and opportunity.
Improved pricing.
So I think those are the two factors that give me confidence that we'll be able to.
More than offset the increased costs.
Got it appreciate the color Scott Thank you.
Your next question comes from a line of Blake channel.
<unk> with Wolfe research.
Yeah, Hey, Thanks, Good morning wanted to follow up on the market share commentary is there any way you can maybe quantify for us or even qualitatively the number of.
New customers that have contributed to the growth in market share off bottom.
March April of 2020.
Versus the existing customer kind of that split.
Well thinking.
Yeah.
I think it's.
No John you have more debt on that than I do I think I mean, I haven't got feeling.
And I would just characterize it broadly speaking as a.
A big chunk.
The increases that we saw right off the bottom.
Early in the recovery, where we're smaller.
Private tour operating one or two rigs and then what you saw a kind of back part of the fourth quarter and are seeing some early this year is kind of existing customers, adding new rig adding additional rigs.
Got it okay that makes sense and then presumably if oil prices stabilize you get the existing customers to add a few more rigs as you mentioned.
Moving to profitability.
Tariff refund impact is now behind you it sounds like some cost inflation as mentioned in some of the other questions.
You've given incremental margins in some of your materials in the past I'm. Just wondering if we can just roll all of this together and maybe frame a rough idea of incremental margins across product and rental.
And service if you don't mind, just so we can understand how all these puts and takes kind of roll up.
Yeah.
Obviously I'll give you a number is kind of excluding weather impacts Scott kind of talked about about that overall impacts, but excluding weather impact in general we tend to see incrementals kind of close to what our adjusted margins or the EBITDA margins are by the business lines.
I think on rental obviously, given some of the increased mobilization costs to the same extent a field service a those are the two areas where we've.
Provided some caution for Q1.
So.
Youll see incrementals on on rental and field service less than sort of a typical EBITDA margin, but as we kind of.
For field service for example, when you add somebody that was not with a company previously a training cost then you have to add vehicles and tools and things like that.
You kind of grow into.
The new rig count that Youre at that tends to work itself out and then you get back to that sort of.
Reasonable incrementals on the rental side again, it's about getting that equipment ready and getting it to the field.
Repaired and so thats.
What youre seeing there on product, we really expect it to be kind of the same as the EBITDA margin really because theres not a whole lot that that changes on that front.
So.
You know I don't want to give specific numbers, but product you would see about the same as EBITDA margin rental a.
A little bit less field service more more substantially less partly because of the wage reinstatement we talked about.
Extremely helpful I'll get back in queue. Thanks.
Again to ask on audio questions. Please press star one.
Telephone keypad. Your next question comes from a line of Steven <unk> with Stifel.
Thanks, Good morning, gentlemen.
Good morning.
So two quick things. So one is just following up on sort of a market share discussion on.
On the product side.
Pricing.
Developed has there been any material changes.
On the pricing front over the last or do you expect that going forward.
Steven I think we've hit bottom in terms of pricing but.
As you I'm sure a soon.
Product pricing did suffer.
In 2020, not nearly to the extent a frac pricing.
But it did suffer.
As I said I think that's behind Us now and.
And our view is that there's going to be scope for for pricing increases going forward.
Don't know how large that scope will be but certainly enough to cover our additional.
The cost inflation impact.
Okay. Thank you and then.
As you think about the you've talked a bit about international growth opportunities in your Capex seems fairly low in 2021.
How are you thinking about returning more cash to shareholders and I'm just thinking in terms of maybe you could frame it on a kind of.
What's the cash balance debt youre comfortable with to run a business and be able to drive growth, but still.
Still returned maybe more cash to shareholders because youre in such a strong cash position.
Well, let me first tell you that.
You're talking to the largest shareholders from a business.
A dividend.
And not only or with a larger shareholders, but we have the lowest salaries. So.
We're certainly not a post increasing dividends and.
And so the question that we ask ourselves is what is the best use of this cash do we do we increase the dividend.
Or do we redeploy the cash do we deploy the cash in other areas I think that.
This year at least we.
We feel like there are still enough potential opportunities out there.
Debt, we still would like to try to deploy the cash to grow the business.
And.
But failing that of course, we would increase the dividend I'm not ready to say that we're out of opportunities because we're clearly not out of opportunities in terms of how much cash do we need to run this business.
This business has always been free cash flow positive, we will be free cash flow positive this year.
Despite.
We expect a b it increased working capital.
Yes.
I can tell you a $100 million because it's a round number.
But it is certainly it would be no more than a $100 million.
Okay, great. Thanks, and then if you throw on my one other quick one when you think about the competitive landscape on the product side I mean, there's obviously, where some some changes in ownership over the last year.
Are you seeing any changes.
On net and.
As far as the competition is concerned.
You had nothing Thats really noteworthy okay great.
That's what I figured I just wanted to check but thank you.
Thank you have a follow up question on lineup like Jan fraud with a free.
Sir.
Hey, Thanks for letting me back in here didn't want to piggyback off that last question in terms of M&A I think you've mentioned in the past artificial lift is just one potential Avenue.
Have you revisited that and where could we might expect a in the oilfield isn't necessarily U S. Shale is it international just trying to get a sense for what you think the best opportunities are out there from from an M&A perspective.
So I've changed my attitude since I made a comment about artificial lift.
That's not to foreclose that that possibility but.
In terms of priorities.
Yes.
Or at least ranking my first choice would be a direct competitor who competes with us globally. So on the U S internationally.
Behind that would be on international player. So while we wouldn't be able to extract synergies in the U S.
We feel like we could take advantage.
And I'm sure you would agree.
On international footprint, particularly when you consider I think the strength of our supply chain, which.
Arguably the lowest cost highest quality in the business, so we need that opportunity.
Try to apply that internationally and so that would be my that.
That would be number two on my list.
Three would be something where we step out from our core.
A competency, but it's a distant third.
That makes a lot of sense on I appreciate the detail there and then one more follow up if I could I think you've mentioned in the past that international margins are currently running.
Not just a little bit lower but appreciably lower than those in U S shale.
Can you update us on that notwithstanding some of the middle east logistical and free challenges in a normalized world.
Is it still true that your product margins will be lower internationally versus U S.
Okay, So blake just to be clear.
In the case of Cactus. The answer is yes international margins would be less than U S and.
In the case of our competitors I don't believe that's the case.
Okay. Thank you so much guys I appreciate it.
And there are no further audio questions I will now turn the call back to our speakers for closing remarks.
I'd like to thank everyone for joining the call today and look forward to speaking with you after the next quarter.
Thanks, everybody.
Ladies and gentlemen that concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
And his team.
Yes.
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Yes.
Yes.
And on.
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