Q1 2021 Cactus Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Cactus and Q1 2021 earnings call at this time, all FNB side nearly sitting on the mountain.
After the speaker's presentation, there will be a question and answer session.
And I ask a question during the session you will need to press star one on your telephone if you're a requiring a further assistance. Please press star zero.
Now I would like to welcome.
John Fitzgerald director of corporate development and IR, Sir Please go ahead.
Thank you and good morning, everyone.
We appreciate your participation in today's call.
The speakers on today's call will be Scott vendor, 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, Steven Bender, Vice President of operations.
And David Isaac Our General Counsel, and Vice President of administration.
Yesterday, we issued our earnings release, which is available on our website.
Please note that any comments, we make on today's call regarding projections or our expectations for future events are forward looking statements covered by the private Securities Litigation Reform Act.
Forward looking statements.
Are subject to a number of risks and uncertainties.
Many of which are beyond our control.
These risks and uncertainties can cause actual results to differ materially from our current expectations.
We advise listeners to review our earnings release and the risk factors discussed in our filings with the SEC.
Any forward looking statements. We make today are only as of today's date and we undertake no obligation to publicly update or review any forward looking statements.
In addition, during today's call, we will reference certain non-GAAP financial measures reckon.
Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in our release.
With that I will turn the call over to Scott, Thanks, John and good morning to everyone I apologize in advance a fighting a cold and apparently losing.
Cactus demonstrated its ability to achieve meaningful sequential growth during the first quarter. Despite the weather related challenges that impacted us in February.
Our product market share remained robust at nearly 43% during a quarter we.
We believe we are well positioned to capitalize on the U S market recovery that is now underway and summary, first quarter revenues increased 24% sequentially, which would you share with each revenue category reporting growth of more than 20% adjusted EBITDA was up 15% sequentially adjusted EBITDA margins for.
27%, our cash balance rose to nearly $292 million and we paid a quarterly dividend of nine <unk> per share.
And now I'll turn the call over to Steve Tadlock, Our CFO, who will review.
Our financial results. Following his remarks I'll provide some thoughts on our outlook for the near term before opening the lines up for Q&A. So Steve. Thanks, Scott in Q1, total revenues of $84 million or 24% higher than the prior quarter and product revenues, a $52 million were up 21%.
Actually driven by an increase and rigs followed product gross margins were 30% a revenues down approximately a 110 basis points on a sequential basis due primarily to increased costs associated with tariffs materials freight and wages.
Rental revenues were about $12 million for the quarter up approximately 45% from the fourth quarter, a 2020 rental gross margins increased more than 200 basis points sequentially due to higher revenue on a relatively fixed depreciable base.
Field service and other revenues in Q1 were nearly $20 million up 21% versus the fourth quarter of 2020. This represented 31% a combined product and rental related revenues during the quarter slightly ahead of expectations, We expect field service revenue to be 28% to 29% and product and rental revenue during the second quarter a 2021.
On.
Gross margins were just under 28% a revenues down 250 basis points sequentially.
Margin decline was attributable to partial wagering and statements instituted for our associates during the quarter and operational inefficiencies related to February as inclement weather.
SG&A expenses were $9 $6 million during the quarter <unk> 7 million sequentially.
<unk> increase was primarily attributable to higher payroll related expenses associated with and increased bonus accruals wage reinstatement and complete edition.
As a percentage of revenue and G&A expenses decreased from 13% during the fourth quarter, a 2022, 11% and the first quarter, we expect SG&A to be slightly more than $10 million from Q2, 2021 inclusive of stock based comp of approximately $2 million.
First quarter adjusted EBITDA was approximately $23 million up from just under $20 million during the fourth quarter, a 2020 and.
Adjusted EBITDA for the quarter represented 27% a revenues down from 29% a revenues during the fourth quarter in part attributable to February adverse weather conditions together with increases in payroll and other expenses.
Adjustments during the first quarter, a 2021 and include $2 million and stock based compensation and point $4 million, a secondary stock offering related expenses.
Depreciation expense was $9 2 million during the period down slightly from $9 3 million during the third and fourth quarter. A 2020, we expect a similar amount during the second quarter.
We reported a total tax benefit a $4 million during the first quarter, which is representative for $2 million and tax expense offset by $6 million and discrete tax benefits 5 million. A these benefits related to a deferred tax assets valuation allowance released due to ownership changes from a march offerings.
During the quarter on a public ownership average 65% as a result of the March secondary offering our public ownership with 72% at the end of the quarter. This should result in an effective tax rate of approximately 19% for Q2 2021, barring further changes and our public ownership percentage and.
GAAP net income was $15 1 million and Q1, and 2021 versus $6 1 million during the fourth quarter a 2020.
And this included the previously mentioned costs associated with a March follow on offering as well as the income tax benefit related to the offering.
Internally, we prefer to look and adjusted net income and earnings per share, which were $8 6 million and 11 cents per share respectively, compared to $6 3 million and <unk> <unk> per share and Q4 and 2020.
Adjustments included <unk> $4 million, a non routine charges associated with a secondary offering of common stock that was completed during the first quarter and the application of a 25% tax rate to our adjusted pre tax income generated during the quarter, we estimate that the tax rate for adjusted EPS will be 25% during the second quarter a 2021.
During the first quarter, we paid a quarterly dividend of <unk> <unk> per share, resulting in a cash outflow a $6 million, including.
Including related distributions to members and the board has also approved a dividend of nine cents per share paid in June of this year.
Our cash position increased by over $3 million during the quarter to approximately 292 million highlighting the continued free cash flow generation of the company above and beyond our current dividend related to payments and increases in working capital associated with higher activity levels for the quarter operating cash flow was nearly $16 million and a net capex was $2 million.
And capital requirements for our business remain modest and we will continue to exercise discipline with regards to growth Capex and as such our net capex guidance for 2021 remains in a range of $10 million to $15 million that covers a financial review and I'll now turn you back to Scott. Thanks, Steve.
We noted on our last call a strong management a conviction that revenue improvements were forthcoming. This proved accurate as we achieved over 20% growth during the first quarter and all revenue categories. We continue to generate positive momentum both from existing customer activity increases and by adding new customers and recent quarters.
<unk> been highly successful and winning product business with private operators.
While a large publicly traded e&ps continue to represent the majority of our customers private operators now represent over a third of our rigs followed up from sub 20% during the middle of last year.
Over the same period, our market share with a private has increased from approximately 15% to nearly 25% today.
We currently expect cactus as rigs followed to increase by over 10% during the second quarter of 2021.
Given the improving market dynamics continued customer efficiency gains and normal lag times from Q1's rate gains, we expect Q2 product revenues to increase by over 25% on a sequential basis.
EBITDA margins are expected to improve by approximately 200 basis points during the second quarter, highlighting confidence and our ability to offset some of the headwinds related to rising steel prices and ocean freight costs.
On a rental side of the business revenues increased considerably during the quarter as customers returned to supplier scared to generating efficiency gains with more reliable equipment.
Revenue from our innovation was up nearly five times on a on a sequential basis during the quarter revenue from these technologies represented nearly 20% of our domestic rental revenue up from a mid single digit percentage during the fourth quarter a 2020.
For the second quarter, we expect rental activity to be up and the high single digits percentage wise sequentially as DUC reduction tailwind moderate we currently expect EBITDA margins to be at a low 50% range for Q2.
This market remains highly competitive and we don't expect a market materially tightened until late this year or early next year and.
Field service revenues continued to be driven by both our product and a rental activity revenue as a percentage of product and rental revenue is expected to decrease to decrease and marginally on a sequential basis as pricing and our products business line likely has greater upside potential from first quarter levels, we expect to see field service EBITDA margin.
And the mid 30% range during the second quarter.
In summary, the company's run rate revenue for April indicates more than a 20% increase versus the first quarter average. This gives us confidence as a company revenue can grow by at least that amount for the whole of a second quarter.
I'd like to close by highlighting a few items before opening the line for questions and.
And recognition of our associates' continued focus on execution and commitment to safety and April we reinstated wages. Following rollbacks that occurred during the depths of last year's downturn.
And energy point research as most recently published a customer satisfaction survey report cactus achieved the industry's highest marks and surface wellheads and trees surface production equipment and multiple other categories across all oilfield product cactus had the highest post sales support ranking and it was.
One of the top rated companies and engineering a solid.
On the technology, all the technologies for US we piloted self sourced electric power generated equipment for the first time in April.
For the equipment has been well received by our customers and represents a more environmentally friendly way to generate power at the well site.
We believe this type of innovation will continue to differentiate cactus from its less technologically focused peers.
Regarding our expansion into the mid east, we finalized initial arrangements and Saudi Arabia, and have rental equipment and country, a wedding deployment cactus and made preparations to send a required personnel abroad, but the current gating item remains travel restrictions related to COVID-19, the assets, we've shipped a date of revenue potential of Approx.
And like a $1 billion per quarter, we anticipate revenue generation beginning during the second half of this year, though uncertainty remains as to timing we.
We've recently taken the opportunity to enhance our sales team and the mid east and further demand and further demand our rental and further demand for a rental equipment exist today. The company is currently evaluating where the day ship additional assets into the region and we remain enthusiastic about the potential for this market.
Regarding M&A, we continue to believe that consolidation within our industry makes sense and we will continue to carefully monitor and evaluate.
Such opportunities.
In summary, we remain optimistic about the opportunities at the upcoming activity recovery presents and a ready to take advantage of our favorable positioning and so with that I'll turn it back over to the operator, and we can begin Q&A operator.
Okay.
Thank you Sir and as a reminder, if you wish to ask a question simple.
The press Star then the number one on your telephone keypad once again and that a star one on your telephone keypad.
First a question is from the line of Chase moving.
We will be healed of bank of America. Your line is now open.
Hey, good morning, everybody.
And I guess how are you.
Good how are you I guess, you've got a little cold so hopefully I'll get over that fairly quickly a little warm to have a cold and it's pretty hot and Houston.
And I ask you to restrict your questions to answers that only require 10 words or less.
[laughter] Ultra ultra.
So if we could talk about pricing obviously commentary.
And pricing has been pretty positive at least at least on the product side I mean, obviously, a rental is not so much.
But we think about pricing and how much you've been able to push price I know you're not going to give me that number on how much for being able to push price, but if we can think about.
So far the pricing that you've been able to get on the product side. How much of that is will you see and <unk> and the guide that I think you said margins would be up 200 bps. So how much of that is flowing through and <unk> versus kind of continue flowing through and the back half and and the pricing that youre seeing is it is it more wellheads or is it all.
So trees.
Yes, the pricing is wellheads and trees.
<unk>.
I'm going to just guess.
Debt.
About half.
And the second quarter.
About half of the impact and the full impact and the third quarter.
Okay, Alright, that's helpful. And then I would assume that it's a market continues to improve then you'd be able to continue to push price.
Right.
And your expectation, yes, right, yes, okay.
One more and if we think about you know the.
The market share gains that you've had.
I guess, maybe could you talk about pad sizes and.
And if you see pad sizes growing have you seen that kind of happened over the past few quarters.
And then maybe if you talk about a.
A kind of isolate a conversation around profit because obviously you know what kind of what we always heard is it the products do smaller pads are you starting to see them do bigger pads.
And you did which actually increases the value of your wellhead business and so just kind of speak to that a little bit.
Yes, I think in general it's fair to say that we're seeing pad sizes decrease.
Yes.
I don't know that I can really address whether or not privates and begun to increase pad sizes.
Steve and have you seen any indication of that.
No I don't.
And I think tangible.
And general pad sizes have decreased.
This year okay.
So what would you attribute the market share gains on the profit side is there just a bigger focus for.
Cactus about on the profits.
Chase, it's it's just really a.
The impact of lots of our customers lots of our larger customers, reducing personnel and those personnel who are used to use and cactus finding their way over and a management positions at the privates.
So, it's just and expansion of really the relationships that we fostered over the last.
10 years and these people now.
<unk> management positions with privates.
Alright, perfect sorry on made you talked too much Scott I'll.
And I'll turn it back over.
Okay.
Your next question is from the lineup so Scott Gruber from Citigroup. Your line is now open.
Good morning, Marc Good morning, Scott how are you.
And while doing well.
And so there's a bit a debate this earning season.
And the vigor with which private to add rigs from here. Some suggest that trimble will lose steam others are saying and will continue and whats.
Is your view on.
The appetite for private and to continue to add rigs and any color on on the other two cohorts.
And the majors and.
And publix and their appetite.
To add rigs, that's probably more of a a second half question, but what do you see and across the cohorts today.
I think that a bit our view is that.
For the rest of the year.
And the large e&ps publicly traded E&ps will.
Increase.
Disproportionately and comparison to the private so kind of a reverse of what we saw earlier this year and I don't see the majors picking up a significantly.
And until 2022, so I think.
The benefit from from that segment well begin to crystallize may.
Maybe starting at the end of the year, but certainly next year. So I think the second half of this year will be a tale of a.
Publicly traded large publicly traded e&ps at least for cactus.
Got you and.
And then a separate question.
Electric.
<unk> rental equipment.
What's the outlook for additional deployments and.
Does deployment require.
And basically a joint deployment with and electric Frac fleet to <unk>.
<unk> powered the source power independently.
Can you can you deploy it on a conventional fleet just some color there.
Yes, absolutely it was designed to be deployed with conventional fleets. So it's self contained and it produces and sells power. It can be deployed with electric fleets. We can use power off of off of off of that source, but that was not why and how it was designed.
We expect this is really a retrofit of our existing assets. That's why the capex requirements are fairly modest so we intend to roll that through the fleet between.
A really starting we started that and the second quarter, we will try to complete debt to the extent the market.
Cooperates through the end of the year.
Got it I appreciate the color. Thank you.
Thank you.
Your next question is from the lineup.
Tommy Moll from Stephens. Your line is now open items.
Hi, Tommy how are you.
Good morning, Scott Thanks for taking my questions.
I wanted to start on on cost inflation, which is something that was a.
Just discussed at least as early as a quarter ago. It sounds like particularly on the product side that market is improving and youre able to take at least enough price to continue to improve margins there, but what what anecdotes can you share with us on the cost inflation side and any measures.
You've taken to to address those.
And let Joel address the leak.
Anecdotes because.
And of course and out keep in mind, Joe is going to tell you the very worst of the stories.
He is not going a pattern itself on the back and tell you about.
And on what he has done to mitigate the impact but go ahead Joel.
It's been a pretty challenging period to be honest with you and it's coming from sort of all sides between raw material.
And freight issues and wage inflation, it's been tough all the way a round we were proactive and started early on and in order and the additional products to try and keep pricing down but we're pretty.
For <unk> and we're pretty.
Tough when it comes to a negotiating product. So we spent a lot of time much more time.
And we normally do working with our suppliers trying to forecast.
Quite a by the lower price goods as much as we could early on and we've been successful in doing that successful and negotiating pricing down and I've not been able to avoid increases, but I've avoided some double digit increases.
Look like they were prevalent in the marketplace. In addition in terms of freight and started booking early on so that we wouldn't get hit with a lot of these higher container rates because im sure Youre aware, if you've read the.
The news that containers have gone from 2500.
And that's a 10000, if youre trying to buy on spot market. So we book and advance.
We lay our product and at the ports three and four weeks in advance a shipping now so we're trying to do anything we can to mitigate these additional cost but.
The honest.
Reality is that we do have these increases and it's a continual battle what would you say steel has gone up for example, and the last.
It's Ben.
Double digit numbers I've seen it as much as 20%, 25%, depending upon one water to the net debt by order something at the end of last year and a mortar and this year I've seen and go up that much.
So it's a it's a constant battle right now.
That's all very helpful.
Thank you.
If I could shift back to M&A, Scott you referenced it and your comments.
And we've heard it from you before at the same time I'm curious if.
If it appears more or less likely than say 90 days ago, just given that.
The commodity or WTO is still on the mid Sixty's and the industry generally is moving up into the right are seller expectations.
At a level where a.
Transactions are more or less likely would you say versus last time, we spoke.
Oh, I'd say that.
The best time to have done this would have been towards the end of last year. When I first began to harp on it I guess I first mentioned that in the second quarter.
Earnings call and.
That's what it takes to sometimes give people over the edge so.
The opportunity still exists and the prices will be higher but.
Yes, Tobey I think there are people that just.
Are struggling to make money and North America, even with the <unk> and the.
Low sixties I think there's some working capital challenges for people that aren't terribly well financed.
Capital markets and felt support this industry. So the opportunities are still there but.
You know the answer to this sellers' expectations have increased Fortunately, our currency has as well so.
I don't really see that as being.
<unk>.
And Instore Mountable roadblocks to transacting.
Thank you Scott I'll turn it back.
Your next question is from the line of Georgia Lee Lee.
Tudor Pickering Holt Company. Your line is now open.
Morning, George.
And as Scott and hope you feel better soon.
Thanks.
Just a question on incremental margins moving forward you outlined everything rollout for the second quarter, but just kind of a crystal ball question and that's not too far out it seems like theres a potential for a higher incremental margins given the fact pattern you laid out prices, increasing and you have some cost headwinds at the moment, assuming those cost headwinds abate and we.
Higher incrementals and the and the third quarter and a purposely asking a question that you can answer quickly.
I'll answer to say a and words.
But on.
Yes.
Q2.
Obviously, they are not quite as great as we'd like in terms of our projections, just because a wagering and statements and rental margins and the pressure on that market, but like you said that we would expect them to kind of a return to a better level Q3 forward.
And in General we look at adjusted EBITDA margins and nuclear Incrementals are slightly better each category.
On that front and so yes I think.
The outlook is more positive for Q3 for us.
Great helpful. Thanks, very much and then <unk>.
Scott I think you said products growth should outpace rental growth is that more of like and underlying market activity standpoint in terms of more rigs and frac spreads being added I realized there's also a pricing component or is a more sluggish for rental growth.
And from just the pricing dynamics there still.
Not in great position, so youre not going to play where the pricing is not attractive.
George that you got it.
Great I told you that area either.
A question for responses that were good.
Debt up thanks, guys.
Thank you.
Your next question is from the lineup gone on line, though of Morgan Stanley. Your line is now open.
Thanks.
Maybe we can stay on.
Good morning, good morning.
Maybe you can say on that on a rental side of things here.
You talked about and you guys, a reclaiming price and in product.
What do you think it takes and rental I mean, my general understanding is this equipment gets pretty beat up and I think you're one of the few well capitalized companies out. There is there is there and attrition angle to this or do you think we need materially higher frac activity to really truly drive the pricing on that.
And I think theres definitely and attrition factor.
And just now coming into play.
Particularly.
Kelly because so many of our competitors are not charging for repairs and the repairs.
And increasingly expensive.
Youll see absolutely some attrition in that regard, but there also needs to be some tightening and the market and.
That coupled with attrition I think is why I made a comment that I think we're going to see some price improvement by the end of the year beginning of next year. So it's a combination of those but to be clear we need we really do need both.
Yes, understood and I apologize if I missed but have you guys provided an update on the innovations on on.
And in recent quarters here and just any any thoughts around potential uptake as a market improves here.
We haven't provided a whole lot of detail except for this.
Except maybe mentioned the fact that of course, we're going to be generating our power.
Outside of diesel generation, so we'll be rolling that through the fleet as I mentioned earlier.
We're far more digitized today than we were this time last year. So we can manage all of the Frac operations for which we're responsible remotely outside of the exclusion zone.
<unk>.
I think that.
We've really begun to focus.
As we did and the last market downturn.
And on our valve designed I think debt.
Reducing repair cost is going to be critical going forward. So we're spending a lot of time on a less sexy parts of the frac business and that is.
Reducing the need for.
For a really robust valve repairs.
Every time, a outcomes and we're one of a few companies that completely terry's a valve down to its bones and rebuilds that and.
It's a very very costly process, but it allows us to sleep at night. So we're addressing a lot of R&D efforts for that direction.
Got it I appreciate it.
Your next question is from the line of Ian Macpherson from Siemens. Your line is now open.
Good morning, and Ian.
Good morning, Scott.
Right.
And you've capitalized really well on the customer mix shifts this year and.
And a part of that look semi structural.
Structural with higher oil prices and you've also spoken to the <unk>.
And that those and the more commoditized part of.
Your your your business.
Still struggling.
And it seems like we're at a point a capitulation for some of those so just given those two dynamics.
I wanted to just ask you to amuse medium longer term on the ceiling for market share it seems like.
Getting up to 43% has been a good story, but might not be the end of the story.
So I just wanted to get a thoughts on that and you can keep it simple words you lost your line.
Hey.
I'll provide a try first and I'm going to reiterate what I've mentioned last quarter and that is that there is market share to be gained but it's a matter of whether or not we.
We can attract customers that are going to pay us for our value proposition. So not everybody is going to pay us for our value proposition.
But there is.
Everybody a cactus believes we can add market share the second part is that.
We just we just witnessed a competitor going out a business and.
On the wellhead.
Segment, I think that Thats. The first of several now to be sure. They are not tier one players, but they have rigs and.
And they've been they.
And they haven't been very constructive in terms of getting prices back up to a reasonable level. So I think this could be a year, particularly as working capital requirements.
Increase that we'll see some attrition and.
Wellhead providers.
Weatherford and announced they were going out of a wellhead business.
Yes, yes.
I think there is.
They're all a awful lot of wellhead companies out there right now and.
Good well I will stay tuned and I would ask you another one on M&A, but I think you've addressed it for now so thank you.
Thanks and.
Your next question is from the lineup steeped and getting out of Stifel. Your line is now open.
And gentlemen, hi.
Hi, Steven.
Two things if you're on my one.
And you obviously have a lot of cash.
I'm curious about and as you look as you look at M&A opportunities.
To the extent and nothing materializes.
And any sense for timeframe endure a willingness to change and dividend policy I mean, obviously, there's a lot of people there who care, but just curious your perspective on that as a as of today.
Yes.
I'm going to have to give you the same answer I've, given before and that is debt.
Phil a largest shareholders. So all this cash on our balance sheet is not.
It's not helpful for the family since we don't work for a salary.
So it's not it's not our best interest to keep this cash on our balance sheet having.
Having said that.
The only reason we're keeping it on our balance sheet is that we have a.
A fairly.
And.
Guess optimistic view of opportunities this year, if those opportunities turn out not.
To come to fruition, then clearly Oregon ex.
Spanned our dividend this is I'm not going to I'm not going to hang around forever waiting for a M&A opportunity because I think frankly as the market is.
We talked about earlier is the market heals itself the opportunities probably well.
Over days at least at a decent price.
Got it thank you and then.
<unk> talked a little bit about international.
As we think about.
And the impact that has I mean would you think we'd start to see a meaningful impact in 'twenty, two where do you think it's going to take a little longer to kind of a gain momentum and see.
And it kind of a more significant profit impact.
Later than that how should we how should we sort of think about the timing I think second half a 2022.
Okay, great. Thank you.
Once again, if you wish to ask a question simply press Star then the number one class Dent and number one and your telephone keypad and your next question is from the line of David Smith.
Hey, Inc. And then energy advisors. Your line is now open.
Hey, good morning, guys. Thank you.
Okay.
On.
I wanted to make sure that I heard correctly on the Q2, a rental guidance did.
Did you say revenue up high single digits margins and low 50 per cent range.
Yes.
And I expect that Q1 rental margins may have reflected some impacts from the storm disruptions.
I was just hoping you might help with some color behind that a segment margin stepping down a little and Q2 is this a flattish pricing and rising costs.
There is something else, maybe a staging for international deployment way and more.
So it is it is in fact, a pricing environment.
That's not very helpful.
We do have we don't have great visibility and our Frac business as we've mentioned before but we've got we are preparing ourselves for a couple a very large.
Deployments and June and July so that's impacting our margins, but I would say really most of it has to do with just this.
And this pricing environment more than anything else.
Great and helpful. Thats. It from me thank you.
There are no further questions presenters. Please continue.
Yes.
Okay. Thanks, everybody I appreciate your time.
And your interest and cactus stay safe.
And.
And with that this concludes today's conference call. Thank you for it and being you may now disconnect.
And.
Okay.
And.
And later on.
And our clients.
And then.
And those communications.
Yes.
And.
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And thank you.
For example.
And <unk>.
And.