Q3 2021 Cactus Inc Earnings Call
Yeah.
Ladies and gentlemen, thank you for standing by and welcome to the Khakis quarters, three 2021 earnings call. At this time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if requiring further with distance. Please press star zero.
Now like to turn the call over to our speaker today, Mr. John Fitzgerald Director of corporate development and I are you may begin.
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, our 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 now available on our website.
Please note that any comments, we make on today's call regarding projections or expectations for future events are forward looking statements covered by the private Securities Litigation Reform Act.
Forward looking statements are subject to a number of risks and uncertainties many of which are beyond our control.
These risks and uncertainties can cause actual results to differ materially from our current expectations.
We advise listeners to review our earnings release and the risk factors discussed in our filings with the SEC.
Any forward looking statements. We make today are only as of today's date and we undertake no obligation to publicly update or review any forward looking statements.
In addition, during today's call, we will reference certain non-GAAP financial measures.
A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures are included in our earnings release and with that I will turn the call over to Scott. Thanks, John and good morning to everyone. During the third quarter drilling activity continued to move higher against the backdrop of strengthening commodity prices.
I was particularly proud of our incremental margin performance in both product and rental business lines cactus remains extremely well positioned to participate and what we believe will be a multiyear up cycle for the industry in the third quarter provided evidence of that we are preparing now with people and inventory for what is increasingly looking like a <unk>.
Very busy 2022 and.
In summary, third quarter revenues increased 6% sequentially with growth in each of our revenue categories. Adjusted EBITDA was up 11% sequentially. Adjusted EBITDA margins were 28% up 120 basis points sequentially, we paid a quarterly dividend of <unk> 10 per share and ended the quarter with 302.
Cash and no debt and I will 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 up for Q&A. So Steve.
Thanks, Scott Q3 revenues of $115 million were 6% higher than the prior quarter product revenues of $75 million were also up 6% sequentially driven primarily by an increase in rigs followed product gross margins at 34% rose approximately 200 basis points sequentially as cost recovery efforts offset.
Inflationary pressures across the supply chain rental revenues were $15 million for the quarter up approximately 4% from the second quarter of 2021, while gross margins increased 12 percentage points sequentially due primarily to lower repair and equipment activation costs as well as lower depreciation as a percentage of revenue.
Field service and other revenues in Q3 were $25 million up 6% versus the second quarter of 2021. This represented 28% of combined product and rental related revenues during the quarter, which was slightly above expectations.
We expect field service revenue to be 27% to 28% of product and rental revenue during the fourth quarter of 2021.
Gross margins were 23% down 320 basis points sequentially with the reduction largely attributed attributable to lower utilization associated with time spent on new hire training higher fuel and re mobilization costs and overtime required to meet increased activity levels.
SG&A expenses were $12 $1 million during the quarter up 800000 versus the second quarter. The sequential increase was primarily attributable to higher salaries and wages increased professional fees and it system upgrade costs SG&A expenses were 10, 5% of revenue compared to the same percentage during the second quarter.
We expect SG&A to be approximately $12 million in Q4, 2021 inclusive of stock based compensation expense of approximately $2 million.
Third quarter, adjusted EBITDA was approximately $32 million up 11% from $29 million during the second quarter of the year adjusted EBITDA for the quarter represented nearly 28% of revenues compared to 26, 5% for the second quarter adjusted.
Adjustments to EBITDA during the third quarter of 2021 included approximately $2 million in stock based compensation.
Depreciation expense for the quarter was $9 1 million a similar amount as expected for the fourth quarter.
We reported income tax expense of $3 $3 million during the third quarter, which is inclusive of $1 7 million income tax benefit associated with a partial release of the valuation allowance during the period and a $5 million tax benefit related to the Finalization of our 2020 tax returns.
During the quarter, the public or class a ownership of the company averaged 77% and ended the quarter slightly higher at 78% barring.
Barring further changes in our public ownership percentage, we expect an effective tax rate of approximately 22% for Q4.
GAAP net income was $17 2 million in Q3, 2021 versus $14 8 million during the second quarter we.
We prefer to look at adjusted net income and earnings per share, which were $14 7 million and <unk> 19 per share respectively. During the third quarter versus $12 3 million and <unk> 16 per share in Q2 to Q3 adjustments included the application of a 28% tax rate two our adjusted pre tax income generated during the quarter, we estimate there.
The tax rate for adjusted EPS will remain at 28% during the fourth quarter of 2021.
During the third quarter, we paid a quarterly dividend of <unk> 10 per share, resulting in a cash outflow of nearly $8 million, including related distributions to members. The board has approved a dividend of <unk> 10 per share to be paid in December of this year.
We ended the third quarter with a cash balance of $302 million for the quarter operating cash flow was approximately $9 million and our net capex was $4 million given issues with the global supply chain and extended transit times, we have strategically increased inventory levels over the last two quarters. Our goal is to secure equipment on a timely basis and anticipate.
<unk> of greater customer activity.
During the third quarter, we made our annual TRA payment and associated distribution of $12 5 million.
As a reminder, this payment is reflective of cash tax savings that occurred in 2020 as a result of our corporate structure. The next such payment isn't expected to occur until mid 2022.
Capital requirements for our business remain modest and we will continue to exercise discipline with regards to growth capex as such our net capex guidance for 2021 remains in the range of $10 million to $15 million that covers the financial review and I'll now turn you back to Scott. Thanks, Steve.
As previously mentioned, we reported sequential growth across all our revenue categories. During the third quarter, while improving overall margins to their highest level. This year. Despite extraordinary supply chain challenges. Following recent conversations with customers I'm more bullish on U S activity levels that I've been in some time.
Assuming commodity prices remain supportive and key supply such as Oc TG are available we would not be surprised to see the U S land rig count grow by an additional 10% by the end of the first quarter of next year.
Despite nearly all of the U S market rig additions coming from private operators, who have historically represented a smaller portion of our business, we reported market share at 42% during the period.
What was a testament to our sales operations and supply chain teams, we improved product margins by 200 basis points during the quarter. Despite the historic levels of material and fleet and freight inflation and the increased use of our of our higher cost Bossier City facility.
Looking to the fourth quarter. We currently anticipate our rigs followed to increase by approximately 10%. We remain of the opinion that are publicly traded customers, who will respond to the improved commodity environment as we head into 2022, and we would expect to see another double digit increase in the beginning of 2022 fourth quarter product revenue is expected.
<unk> to be up at least 5% sequentially based on current expectations regarding the timing of our latest cost recovery efforts, we expect relatively flat EBITDA margins in Q4, despite continued inflation headwinds.
Note that revenue generated per rig typically declines marginally during the fourth quarter as completion activity lags drilling around the holidays. Additionally, and a rising rig environment product revenue per rig can lag as rigs are fully on boarded lastly, and importantly, we have noted a modest decline in wells drilled per rig.
A trend that could continue into next year, if overall third party service execution wanes.
Margin performance will continue to be a function of our ability to adjust prices to compensate for the intense inflationary pressures being experienced in labor steel and freight.
If successful on this front to date further steps are underway to achieve incremental margins consistent with historical norms.
In recent weeks conversations with customers have increasingly focused on the ability to secure equipment to meet drilling plans.
We've always excelled in our ability to timely and safely deliver this competitive strength, resulting from our unique supply chain model becomes even more important during times in which the industry struggles with overall shortages, although cost inflation has been well telegraphed throughout our industry and beyond naturally not all customers welcome cost recover.
<unk> efforts as we've stated previously this organization is focused on returns and not market share regardless. It is our belief that 2022 will be a year of heightened pressure on delivery and execution, which will reward those of us with significant domestic infrastructure best in class products and differentiated service and <unk>.
<unk> on the rental side of the business revenues increased by less than we had originally anticipated for the quarter, but were still up 4% sequentially. During a period of relatively flat domestic completion activity customers have been relying on their inventories of drilled but uncompleted wells for the last several quarters.
The ducks at their lowest level since early 2017 that trend appears to have ended however, one positive of the more moderated growth as it is generally generally leads to slightly more favorable EBITDA margins, resulting from reduced reactivation costs, our rental business is witnessing some positive dynamics.
Which should lead to above market growth during the fourth quarter.
The tail end of the fourth quarter is normally subject to some year end budget exhaustion. We currently anticipate rental revenue to be up at least 10%. During Q4, the rental EBITDA margins are expected to be in the low to mid 50% range during that period.
This rental market remains highly competitive but showed activity move forward in 2022, along with the rig count there may be a line of sight to some improved pricing dynamics something we haven't seen since early 2020.
Our reputation for providing equipment safely and reliably and reliably should become an important point of differentiation in the coming year as some service providers struggled to execute regarding our expansion into the mid east. We were extremely pleased to have generated first revenue during the third quarter as previously disclosed this has been in <unk>.
<unk> with any MSR.
Who has been active in the development of unconventional fields in Saudi Arabia, our agreement within ESR was important for cactus to quickly gain access to a Ram co and has allowed us to prove our technology and reliability with a key customer. This represents an important first step for our entrance into the area and we're excited about our overall potential in the region.
We continue to evaluate the shipment of additional assets into the region given the increase in unconventional activity, while we pursue product sales and field service revenues continued to be driven by both product and rental activity revenue as a percentage of product and rental revenue is expected to decrease marginally on a sequential basis.
This segment typically witnesses lower margins during the final quarter due to the seasonal elements and accordingly, we expect to see EBITDA margins in the low to mid 20% range. During the fourth quarter, we would expect margins to approach more normalized levels in the first quarter of next year as labor utilization returns to traditional levels.
I'd like to close our prepared remarks by highlighting a few key points.
The supply chain issues that have plagued most manufacturing businesses have not abated increased costs will continue to represent a headwind for the next few quarters at least the size of that impact will depend on the degree of further cost increases and our ability to continue working with our customers to compensate us for the <unk>.
<unk>, we face and ensuring on time deliveries.
That said, we remain advantaged due to our Bossier city manufacturing capabilities unparalleled experience and the relationships of our operations team. We simply don't tolerate missed committed deliveries and no. One is better prepared to handle these issues in the face of increased pressures arising from changes in the amount and timing of <unk>.
Deliveries on the labor front the market continues to tighten. However, we believe that cactus offers unique opportunities for our associates and we've always been successful in recruiting key talent.
There has been no change in our opinions regarding M&A, we continue to believe that consolidation within our industry makes sense and this team will carefully monitor and evaluate opportunities to the extent they become available as I remind you regularly management are long term investors in this business.
And are highly aligned with our shareholders as activity rebounds, our team will continue to evaluate capital deployment with returns and free cash flow as our main priorities.
In summary, we were extremely pleased with the cost recovery support from our customers in both our product and rental revenue categories. Additionally, our optimism regarding industry activity levels continues to improve we remain ready to take advantage of our favorable positioning as the ongoing activity recovery continues and so with that.
I'll turn it back over to the operator, and we may begin Q&A operator.
As a reminder to ask a question you will need to press star one on your telephone Julian J. Your question Christy pound key. Please have one question and one follow up question only please stand Oliver compile the Q&A roster.
Our first question comes from the line of Chase Mulvehill from Bank of America.
Hey, good morning.
Chase how are you.
Great. Thanks.
I guess first question, obviously, you talked about the supply chain challenges.
And.
In other kind of frictional cost around <unk>.
<unk> and things like that.
So I guess, maybe first question is.
I asked you this last quarter I'm going to ask you again.
Today, better or worse than yesterday.
From a supply chain.
Friction.
What are you doing to continue to manage the supply chain and how easy is it for you to continue to push alone.
Price increases to offset kind of inflationary costs I think you snuck three questions in there chase.
They are all related.
Okay.
The first one is easy.
It's worse.
And it was when you last asked the question.
I think this quarter was probably significantly worse than what we've seen in previous quarters. So that's why I'm, particularly proud of the job the team did.
And increasing our incremental margins.
What are we doing.
To address supply chain.
As much as our competitors have access to this call, you're probably not going to get much of an answer.
To that but.
You know the secret sauce, we've talked about it before.
We have Bossier city.
Forecast.
Do we just do a number of things, but it's sort of the.
It's one of the things I prefer not to discuss openly and then.
Hum.
Your last question.
Could you also just forget.
Well.
You know im not going to discuss pricing, but having told you know that cost is.
Kris bought more than we expected in the third quarter, but our margins went up that should give you some indication that we have been successful.
Okay Alright.
Smartass answer okay.
Yeah.
Alright, and then when you think about activity and I think you said up 10% rig activity between now and kind of the end of the first quarter call.
Call it roughly 50 rigs horizontal rigs.
Could you maybe kind of characterize what you're seeing of those 50 rigs.
As more publics privates.
I'm just trying to understand the mix there in between pilots and pilots.
Third quarter was mostly privates.
Fourth quarter, we expect to see an increasing.
An increasing participation by Publix.
Okay Alright.
Alright.
I used that was four so I will jump back in the queue.
Hey, Scott.
Thanks Chase.
Our next question comes from the line of Scott Gruber from Citigroup.
Hey, Scott good morning.
Good morning.
Good good.
Just to check the.
Forecast has reached solid up 10% in revenues of at least 5% did I hear that correctly.
Good.
Gotcha.
And just some additional color on the revenue per rig.
<unk>, obviously taken down a little bit is that a mix issue with more prizes and the mix and they just tend to drill a little bit slower is it supply chain issues is starting to impact everybody in here is any fluctuation with.
Wellhead sales.
Driving that number as well.
Yes. So this is <unk>.
That's a very very good question.
Really it's a straightforward answer but it has many components. So let me start by saying.
That in general, we see fewer wells drilled per.
Per rig per month by private simply do by Publix. So that's not helpful.
Number two.
We monitor the well efficiency of our overall customers and for the first time.
I don't know how many quarters.
I'm looking at my team, we actually saw rig efficiencies drop in Q3 and by that I mean fewer wellheads ship out per month per rig than we've seen.
<unk>.
The entire year and maybe in the last two years as far as I know it was it was a surprising drop and then of course as the duck as the Ducks began to book.
Deplete the need for production trees also fell off so it's that combination I think of really broadly rig efficiencies.
Which could also result from maybe the incremental rigs being added being less efficient crews being less efficient or it could be that I think it's really a function of privates.
And the overall mix, but that.
That really has more to do that and the fact that that we've seen that the reduction in docs have had the most to do with with the fact that our revenue per rigs have dropped.
Now, what I expect and what the team expects and what our inventory levels reflect our belief based upon the conversations we've had with our core customer base, who are the publics that we're going to see the public's reemerge going into 2022.
Got you so.
Just in terms of our trends.
Got it.
Got it.
Thanks, Scott I thought was going to ask about the 2022 trend.
With public coming back in.
<unk>.
A stabilization in.
Production tree sales such that that revenue per rig trend should start to stabilize or do you expect it centrally.
Centric degrade a little bit more on <unk>.
I think that fourth quarter will be challenging just because of seasonality and the best of times people just tend to put on fewer production trees in the fourth quarter.
They've had a couple of days off as well, which is not helpful.
I don't expect to see great results in the fourth quarter.
I'm much more optimistic as we get into the first and second quarters of next year.
Seeing us return to our historic levels.
Gotcha.
Youre going to have the benefit of some cost recovery.
Mhm.
Got you.
And then just one additional one.
You and peers have been building extra inventory.
Just given the issues on the supply chain side.
Is that coming due and then some more build to go in and how you think about managing inventory levels aster.
We get past <unk> supply chain blows you do bring them down if you can just kind of keep them as an insurance policy, how you're thinking about it longer term.
I can tell you that the that the industry is stressed with shortages right now.
So we've always been sort of opportunistic and because we have so much cash.
Great place for us to put our cash.
I think the second point is we have historically high levels of in transit inventory and by that I mean inventory on the water that we can't get our hands on.
And I'm looking at Steve Tadlock, I think we're at three times.
Three times, that's a huge amount of inventory that we have.
It's been on a cruise now for an extended period of time. So that has not been helpful and we have to we have to accommodate that.
The broader.
Your broader question is do I see inventory levels coming back down yes, once Joel gets more confident in the supply chain once the transit times and they will become clear.
Closer to historic Transit times, Youll see inventory levels dropped back down to our normalized run rate.
Yes.
I would just add obviously inventory based on prospective sales not historical sales.
Given our view for 2022.
Like Scott said, taking advantage of that with what we expect to come I think working capital as a percent of annualized revenues was pretty good this quarter. It was more in line with our normal which is 25% to 27%. We were at 26% in Q3 I think in Q4, you would expect we expect that to be more 27 five.
<unk> maybe of annualized revenues.
You guys have largely been made all the color.
Thank you.
Thank you.
Our next question comes from the line of Stephen <unk> from Stifel.
Thanks, Good morning, gentlemen.
Good morning, Stephen how are you good thank you.
Two things for me.
Year to date, obviously, we've talked about this public private mix.
And I know historically you are.
Sure.
Your relationships tend to be very sticky are you seeing that same stickiness with the private operators as you have historically with the public's.
Yes, Sir.
Okay. Good.
And then as we think about next year in aggregate I know you gave some good color on the beginning of the year.
Are you seeing the same type of expectations as we had been hearing from many of the Frac companies like looking at kind of a 20% plus rise in spending and probably a bit lower.
<unk>, Inc.
The increase in activity or are you.
Your insight different than that.
So.
I have to have to be honest I don't really listen to the pressure pumper Cogs.
Kind of looking at my Man, John Fitzgerald here does that 20% and I assume that includes what they consider to be.
Inflation, yes.
What's the real activity increase their projected.
Heavily.
Probably close to half of that 10%.
Would be very surprised if our frac activity was only up 10% next year.
It's going to be better than that.
Okay, and I'm talking about excluding inflation.
I think it would be better than that.
Great. Thank you and then just if I could slip in one final.
The competitive landscape in the U S market right obviously.
Has changed a little bit over the last couple of years are you seeing any material changes in the competitive landscape in the <unk>.
Folks that are that are <unk>.
Fighting against you.
I would say there are there are.
There are a lot of smaller players out there fighting amongst each other.
But I wouldn't say that.
We're not really seeing the impact there clearly.
There is clearly taking a disproportionate share of the privates that are drilling.
What you would expect but in the I think in a market, where we participate and that we really haven't seen much of a change.
Okay, great. Thanks for the color Jim.
Our next question comes from the line of Ian Macpherson from Piper Sandler.
And how are you.
Good morning, Scott Great. Thanks, how are you.
Sure.
It has fallen Stephen's question does an emerging disconnect I think between expected rates of activity increase in E&P spending.
There's not enough money and 20% of R&D spend growth to accommodate.
Service and product cost inflation, that's happening plus twenties activity it just doesn't fit.
I'd be curious to see how.
That unfolds, but my question is different really your market shares.
Has sustained in the low <unk> for.
About a year now you sided OCG OCC G is.
Specific threat or bottleneck that could govern growth over the near term with casing et cetera, but I was going to ask it.
Shortages in Europe.
Nice as well could emerge and if you could actually out compete.
The other 60% or so of the market on deliverability.
In this tight supply chain market and actually take your take more market share not just on the basis of.
Premium differentiation in efficiency, but also.
Sure availability and deliverability.
Wellheads.
That's the plan.
Okay.
See evidence of competitors stumbling on deliverability out there today is that.
An abstract were a real opportunity.
Yes, we are seeing some of that.
Okay.
And then I was going to ask also you don't have at hand, and don't ask me too many more questions than by competitors.
This went to only for cactus Sally.
We're up and running.
How are you thinking about the scalability of that opportunity going into 2022.
I see.
Bank debt.
You're talking about just within the kingdom or beyond the kingdom.
Yes, sure total international.
Yes, I think that as I've.
I've said before our hope and our plans are to continue the expansion of the mid east with any MSR, we were using Saudi kind of as our test case.
The performance has been very good very pleased with it I think that.
We'll continue.
To deploy more assets in Saudi I can't tell you exactly when and I think youll see us deploy assets and other areas of the mid east.
In conjunction with any yes.
I also feel increasingly optimistic that we will turn some of this.
<unk> into product sales later next year.
Very good and look forward to next steps on that thanks, a lot. Thanks Ian.
Our next question comes from the line of Taylor Zurcher from Tudor Pickering Holt.
Hey, good morning, Thanks for taking my question My first one is on M&A.
You talked about the continued need for M&A and likely continuing to evaluate deals and I guess my question is in this commodity price environment. It feels like seller expectations have probably gone up significantly. So just curious if you could frame.
Just generally speaking where bid ask spreads today and.
If the commodity price environment.
Hindering the likelihood of M&A over the near term horizon and maybe the next 12 months at all.
Well, we haven't had too many bid ask.
It really speak to you from experience I mean, it would be logical that.
That sellers would want more but it also would be logical that we can afford to pay more with our currency.
So.
Honestly.
I don't think that we're disadvantaged.
The improving dynamics in the <unk>.
In the macro.
In fact, I feel probably the opposite because.
As long as this company continues to perform.
Our investors will continue to reward us and as long as they continue to reward us I think will be.
Excellent position.
To move forward on M&A.
I mean that leads me.
To answer a question that you Havent asked yet.
And that is why don't you give up some of this 300 plus million dollars youre going to have positive free cash flow in the fourth quarter.
Why don't you released that to the shareholders.
I'm going to answer the way I normally do on it that is that we are the largest shareholders in <unk>.
Personally love dividends.
But I still see some opportunities to deploy that cash.
And in M&A.
Manner. So.
I know I have asked all of you to be patient with US. We are just very careful about how we spend money, but don't misinterpret that to mean, we don't we're not willing to spend money. We are willing and we are we're pretty actively looking.
Well you answered my questions. There so thanks for that and maybe I'll sneak one in on market share.
40% to 50 rigs being added through Q1 based on that in the 10% metric that you provided.
I suspect as the public start to come back a little bit more in the coming months that that market share probably has room to move higher but just curious how you frame that for cactus over the next couple of quarters I.
Thank your conclusion was correct.
Awesome, Thanks for the answers.
Okay. Thank.
Thank you.
There are no further questions at this time, please continue Mr. Scott Sanjay.
Alright again, thank you everybody for your continued.
The attention to cactus and interest in cactus and.
We do look forward to seeing you hopefully in person.
Over the next 12 months everybody have a good day.
Ladies and gentlemen, this concludes today's conference call. Thank you everyone for participating you may now disconnect.
Okay.
Sure.
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Okay.
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Ladies and gentlemen, thank you for standing by and welcome to the catch is quarter three 2021 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone please.
Be advised that today's conference is being recorded if required and further with distance. Please press star Zero I would now like to turn the call over to our speaker today, Mr. John Fitzgerald Director of corporate development and I are you may begin.
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, our 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 now available on our website.
Please note that any comments, we make on today's call regarding projections or expectations for future events are forward looking statements covered by the private Securities Litigation Reform Act.
Forward looking statements are subject to a number of risks and uncertainties many of which are beyond our control.
These risks and uncertainties can cause actual results to differ materially from our current expectations.
We advise listeners to review our earnings release and the risk factors discussed in our filings with the SEC.
Any forward looking statements. We make today are only as of today's date and we undertake no obligation to publicly update or review any forward looking statements.
In addition during today's call.
We will reference certain non-GAAP financial measures.
Reconciliation of these non-GAAP measures to the most directly comparable GAAP measures are included in our earnings release and with that I will turn the call over to Scott. Thanks, John and good morning to everyone. During the third quarter drilling activity continued to move higher against the backdrop of strengthening commodity prices I was particularly proud of our incremental margin.
Performance in both product and rental business lives cactus remains extremely well positioned to participate and what we believe will be a multiyear up cycle for the industry in the third quarter provided evidence of that.
We are preparing now with people and inventory for what is increasingly looking like a very busy 2000.
'twenty two.
In summary, third quarter revenues increased 6% sequentially with growth in each of our revenue categories. Adjusted EBITDA was up 11% sequentially. Adjusted EBITDA margins were 28% up 120 basis points sequentially, we paid a quarterly dividend of <unk> per share and ended the quarter with 302.
Made in cash and no debt I'll now 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 up for Q&A. So Steve. Thanks, Scott Q3 revenues of $115 million were six <unk>.
Sent higher than the prior quarter product revenues of $75 million were also up 6% sequentially driven primarily by an increase in rigs followed product gross margins at 34% rose approximately 200 basis points sequentially as cost recovery efforts offset inflationary pressures across the supply chain rental revenues were <unk>.
$15 million for the quarter up approximately 4% from the second quarter of 2021, while gross margins increased 12 percentage points sequentially due primarily to lower repair and equipment activation costs as well as lower depreciation as a percentage of revenue.
Service and other revenues in Q3 were $25 million up 6% versus the second quarter of 2021.
This represented 28% of combined product and rental related revenues during the quarter, which was slightly above expectations.
We expect field service revenue to be 27% to 28% of product and rental revenue during the fourth quarter of 2021.
Gross margins were 23% down 320 basis points sequentially with the reduction largely attributed attributable to lower utilization associated with time spent on new hire training higher fuel and re mobilization costs and overtime required to meet increased activity levels.
SG&A expenses were $12 $1 million during the quarter up 800000 versus the second quarter. The sequential increase was primarily attributable to higher salaries and wages increased professional fees and it system upgrade costs SG&A expenses were 10, 5% of revenue compared to the same percentage during the second quarter.
We expect SG&A to be approximately $12 million in Q4, 2021 inclusive of stock based compensation expense of approximately $2 million.
Third quarter, adjusted EBITDA was approximately $32 million up 11% from $29 million during the second quarter of the year adjusted EBITDA for the quarter represented nearly 28% of revenues compared to 26, 5% for the second quarter adjusted.
Adjustments to EBITDA during the third quarter of 2021 included approximately $2 million in stock based compensation.
Depreciation expense for the quarter was $9 1 million a similar amount as expected for the fourth quarter.
We reported income tax expense of $3 3 million during the third quarter, which is inclusive of a <unk> 7 million income tax benefit associated with a partial release of the.
Uhm allowance during the period and a half million tax benefit related to the Finalization of our 2020 tax returns.
During the quarter, the public or class a ownership of the company averaged 77% and it ended the quarter slightly higher at 78% borrowing.
Barring further changes in our public ownership percentage, we expect an effective tax rate of approximately 22% for Q4.
GAAP net income was $17 2 million in Q3 of 2021 versus $14 8 million during the second quarter.
We prefer to look at adjusted net income and earnings per share, which were $14 7 million and <unk> 19 per share respectively. During the third quarter versus $12 3 million and <unk> 16 per share in Q2 to Q3 adjustments included the application of a 28% tax rate two our adjusted pre tax income generated during the quarter we estimate.
The tax rate for adjusted EPS will remain at 28% during the fourth quarter of 2021.
During the third quarter, we paid a quarterly dividend of <unk> 10 per share, resulting in a cash outflow of nearly $8 million, including related distributions to members. The board has approved a dividend of <unk> 10 per share to be paid in December of this year.
We ended the third quarter with a cash balance of $302 million for the quarter operating cash flow was approximately $9 million and our net capex was $4 million given issues with the global supply chain and extended transit times, we have strategically increased inventory levels over the last two quarters. Our goal is to secure equipment on a timely basis and anticipate.
<unk> of greater customer activity.
During the third quarter, we made our annual TRA payment and associated distribution of $12 5 million.
As a reminder, this payment is reflective of cash tax savings that occurred in 2020 as a result of our corporate structure. The next such payment isn't expected to occur until mid 2022.
Capital requirements for our business remain modest and we will continue to exercise discipline with regards to growth capex as such our net capex guidance for 2021 remains in the range of $10 million to $15 million that covers the financial review and I'll now turn you back to Scott. Thanks, Steve.
As previously mentioned, we reported sequential growth across all our revenue categories. During the third quarter, while improving overall margins to their highest level. This year, despite extraordinary supply chain challenges.
Following recent conversations with customers.
We're bullish on U S activity levels that I've been in some time, assuming commodity prices remain supportive and key suppliers such as OTT G are available we would not be surprised to see the U S land rig count grow by an additional 10% by the end of the first quarter of next year.
Despite nearly all of the U S market rig additions coming from private operators, who have historically represented a smaller portion of our business, we reported market share at 42% during the period.
And what was a testament to our sales operations and supply chain teams, we improved product margins by 200 basis points during the quarter, Despite historic levels of material and fleet and freight inflation and the increased use of our of our higher cost Bossier City facility.
Looking to the fourth quarter. We currently anticipate our rigs followed to increase by approximately 10%. We remain of the opinion that are publicly traded customers will respond to the improved commodity environment as we head into 2022 and would expect to see another double digit increase in the beginning of 2022 fourth quarter product revenue is expected.
<unk> to be up at least 5% sequentially based on current expectations regarding the timing of our latest cost recovery efforts, we expect relatively flat EBITDA margins in Q4, despite continued inflation headwinds.
Note that revenue generated per rig typically declines marginally during the fourth quarter as completion activity lags drilling around the holidays. Additionally, and a rising rig environment product revenue per rig can lag as rigs are fully on boarded lastly, and importantly, we have noted a modest decline in wells drilled per rig.
A trend that could continue into next year, if overall third party service execution wanes.
Margin performance will continue to be a function of our ability to adjust prices to compensate for the intense inflationary pressures being experienced in labor steel and freight.
While successful on this front to date further steps are underway to achieve incremental margins consistent with historical norms.
In recent weeks conversations with customers have increasingly focused on the ability to secure equipment to meet drilling plants, we've always excelled in our ability to timely and safely deliver this competitive strength, resulting from our unique supply chain model becomes even more important during times in which the industry struggles with overall.
<unk>, although cost inflation has been well telegraphed throughout our industry and beyond naturally not all customers welcomed cost recovery efforts. As we've stated previously this organization is focused on returns and not market share regardless. It is our belief that 2022 will be a year of heightened pressure on delivery and execution.
<unk>, which will reward those of us with significant domestic infrastructure best in class products and differentiated service and execution on the rental side of the business revenues increased by less than we had originally anticipated for the quarter, but were still up 4% sequentially during a period of relatively flat domestic complete.
<unk> activity customers had been relying on their inventories of drilled but uncompleted wells for the last several quarters, but with Dr. <unk> at their lowest level. Since early 2017 that trend appears to have ended however, one positive of the more moderated growth as it is generally generally leads to a slightly more favorable EBITDA.
Margins, resulting from reduced reactivation costs, our rental business is seeing some positive dynamics, which should lead to above market growth during the fourth quarter.
While the tail end of the fourth quarter is normally subject to some year end budget exhaustion. We currently anticipate rental revenue to be up at least 10%. During Q4, the rental EBITDA margins are expected to be in the low to mid 50% range during that period.
This rental market remains highly competitive but showed activity move forward in 2022, along with the rig count there may be a line of sight to some improved pricing dynamics something we haven't seen since early 2020, our reputation for providing equipment safely and reliably and reliably should become an important point of differentiation.
<unk> in the coming year as some service providers struggled to execute regarding our expansion into the mid east. We were extremely pleased to have generated first revenue during the third quarter.
As previously disclosed this has been in concert with any MSR.
Who has been active in the development of unconventional fields in Saudi Arabia, our agreement within ESR was important for cactus to quickly gain access to a Ram co and has allowed us to prove our technology and reliability with a key customer. This represents an important first step for our entrance into the area and we're excited about our overall potential in the <unk>.
We continue to evaluate the shipment of additional assets into the region given the increase in unconventional activity, while we pursue product sales and field service revenues continued to be driven by both product and rental activity revenue as a percentage of product and rental revenue is expected to decrease marginally on a sequential basis.
This segment typically witnesses lower margins during the final quarter due to the seasonal elements and accordingly, we expect to see EBITDA margins in the low to mid 20% range. During the fourth quarter, we would expect margins to approach more normalized levels in the first quarter of next year as labor utilization returns to traditional levels.
I'd like to close our prepared remarks by highlighting a few key points.
The supply chain issues that have plagued most manufacturing businesses have not abated increased costs will continue to represent a headwind for the next few quarters at least the size of that impact will depend on the degree of further cost increases and our ability to continue working with our customers to compensate us for the challenge.
As we face and ensuring on time deliveries.
That said, we remain advantaged due to our Bossier city manufacturing capabilities unparalleled experience in their relationships of our operations team. We simply don't tolerate missed committed deliveries and no. One is better prepared to handle these issues in the face of increased pressures arising from changes in the amount and timing.
Of deliveries on the labor front the market continues to tighten. However, we believe that cactus offers unique opportunities for our associates and we've always been successful in recruiting key talent.
No change in our opinions regarding M&A, we continue to believe that consolidation within our industry makes sense and this team will carefully monitor and evaluate opportunities to the extent they become available as I remind you regularly management are long term investors in this business and are highly aligned with our shareholders as activity re.
<unk> our team will continue to evaluate capital deployment with returns and free cash flow as our main priorities.
In summary, we were extremely pleased with the cost recovery support from our customers in both our product and rental revenue categories. Additionally, our optimism regarding industry activity levels continues to improve we remain ready to take advantage of our favorable positioning as the ongoing activity recovery continues and so with that.
I'll turn it back over to the operator, and we may begin Q&A operator.
As a reminder to ask a question you will need to press star one on your telephone Julian J. Your question Greg Pound key. Please have one question and one follow up question only please Stefan will compile the Q&A roster.
Our first question comes from the line of Chase Mulvehill from Bank of America.
Hey, good morning.
Morning Chase how are you.
Good how are you Scott.
Great. Thanks.
I guess first question, obviously, you talked about the supply chain challenges.
And.
In other kind of frictional cost around inflation and things like that.
So I guess, maybe first question is.
Asked you this last quarter I'm going to ask you again.
Today, better or worse than yesterday.
From a supply chain.
Friction and then what are you doing to continue to manage the supply chain and how easy is it for you to continue to push alone.
Price increases to offset kind of inflationary costs I think you snuck three questions in there chase.
They're all related.
So the first one is easy.
It's worse.
And it was when you last asked the question.
I think this quarter was probably significantly worse than what we've seen in previous quarters. So that's why I'm, particularly proud of the job the team did.
And increasing our incremental margins.
What are we doing.
Address supply chain and as much as our competitors have access to this call you're probably not going to get much of an answer.
To that but.
You know the secret sauce, we've talked about it before.
We have Bossier city.
We forecast.
We do we just do a number of things, but it's sort of the.
It's one of the things I prefer not to discuss openly and then.
What was your last question.
The ability to do all of our strict yet.
Well.
You know I'm not going to discuss pricing, but having told you know that cost increase.
<unk> increased by more than we expected in the third quarter, but our margins went up that should give you some indication that we have been successful.
Okay, Alright, Adam Smartass answer okay.
Yeah.
Alright, and then when you think about activity and I think you said up 10% on.
Rig activity between now and candidate into the first quarter.
I would call it roughly 50 rigs horizontal rigs.
Could you could you maybe kind of characterize what you're seeing of those 50 rigs like are those more publics privates.
I'm just trying to understand the mix there in between pilots and pilots.
Third quarter was mostly privates.
Fourth quarter, we expect to see an increasing.
An increasing participation by Publix.
Okay Alright.
Alright.
You said that was for so I will jump back in the queue.
Thanks Chase.
Our next question comes from the line of Scott Gruber from Citigroup.
Hey, Scott.
Good morning.
Good good.
Just to check the product forecast has reached solid up 10% in revenues of at least 5% did I hear that correctly.
Did.
Gotcha.
And just some additional color on the the revenue per rig.
<unk>, obviously taken down a little bit is that a mix issue with more privates in the mix and they just tend to drill a little bit slower is it supply chain issues is starting to impact everybody in any fluctuation with wellhead sales.
Driving that number as well so this is.
That's a very very good question.
Really it's a straightforward answer but it has many components. So let me start by saying.
That in general, we see fewer wells drilled.
Per rig per month by private simply do by Publix. So that's not helpful.
Number two.
We monitor the well efficiency of our overall customers and for the first time.
I don't know how many quarters.
I'm looking at my team, we actually saw rig efficiencies drop in Q3 and by that I mean fewer wellheads ship out per month per rig than we've seen.
Sure.
The entire year and maybe in the last two years as far as I know it was it was a surprising drop and then of course as the deck as the Ducks began to deplete the need for production trees also fell off so it's that combination I think of really broadly rig.
Patient sees.
Which could also result from maybe the incremental rigs being added being less efficient crews being less efficient or it could be that I think it's really a function of privates.
And the overall mix, but that.
That really has more to do that and the fact that that we've seen that the reduction in docs have had the most to do with with the fact that our revenue per rigs have dropped.
Now, what I expect and what the team expects and what our inventory levels reflect is our belief based upon the conversations we've had with our core customer base, who are the publics that we're going to see the public's reemerge going into 2022.
Got you so.
Yes, just in terms of our trends.
Good.
Got it.
Thanks, Scott I thought was going to ask about the 2022 trend.
With public coming back in.
Has.
A stabilization in production.
Production tree sales such that that revenue per rig trend should start to stabilize or do you expect it to essentially integrate a little bit more on <unk>.
I think that fourth quarter will be challenging just because of seasonality and the best of times people just tend to put on fewer production trees in the fourth quarter.
They take a couple of days off as well, which is not helpful.
I don't expect to see great results in the fourth quarter I'm much more optimistic as we get into the first and second quarters of next year.
Seeing us return to our historic levels.
Gotcha.
Youre going to have the benefit of some cost recovery.
Hum.
Got you.
And then just one additional one.
You and peers have been building extra inventory.
Just given the issues on the supply chain side.
Is that coming due and then he has some more build to go in and how you think about managing inventory levels. After we get past all these supply chain blows you do bring them down if you can just kind of keep them as an insurance policy, how you're thinking about it longer term.
Right now I can tell you that the COVID-19.
The industry is stressed with shortages right now so we've always been sort of opportunistic and because we have so much cash it's a great place for us to put our cash I think the second point is we have historically high levels of in transit inventory and <unk>.
That I mean inventory on the water that we can't get our hands on.
And I'm looking at Steve Tadlock, I think we're at three times or three times, that's a huge amount of inventory that we have.
It's been on a cruise now for an extended period of time. So that has not been helpful and we have to we have to accommodate that.
The broader.
Your broader question is do I see inventory levels coming back down yes, once Joel gets more confident in the supply chain once the transit times and they will become <unk>.
Closer to historic Transit times, Youll see inventory levels dropped back down to our normalized run rate.
Yeah, I would just add obviously inventory based on prospective sales not historical sales.
Given our view for 2022.
We are.
Like Scott said, taking advantage of that with what we expect to come I think working capital as a percent of annualized revenues was pretty good. This quarter was more in line with our normal which is 25% to 27%. We were at 26% in Q3 I think in Q4, you would expect we expect that to be more 27, 5% maybe of any.
And as revenues.
You guys have largely got it in all the color.
Thank you.
Thank you.
Our next question comes from the line of Stephen <unk> from Stifel.
Thanks, Good morning, gentlemen.
Good morning, Stephen how are you good thank you.
Two things for me.
Year to date, obviously, we've talked about this public private mix.
I know historically your your.
Your relationships tend to be very sticky are you seeing that same stickiness with the private operators as you have historically with the public's.
Yes, Sir.
Okay. Good.
And then as we think about next year in aggregate I know you gave some good color on the beginning of the year.
Are you seeing the same type of expectations as we had been hearing from many of the Frac companies like looking at kind of a 20% plus rise in spending and probably a bit lower.
Sure.
Increase in activity or are you.
As your insight.
And that.
So.
I have to have to be honest I don't really listen to the pressure poppers Cogs.
Looking at my Man, John Fitzgerald here that 20% and I assume that includes what they consider to be.
Inflation.
What's the real activity increase their projected.
As Lisa probably close to half of that sort of 10%.
It would be very surprised if our frac activity was only up 10% next year.
It's going to be better than that.
Okay, and I'm talking about excluding inflation.
I think it would be better than that.
Great. Thank you and then just if I could slip in one final.
The competitive landscape in the U S market right obviously.
<unk> has changed a little bit over the last couple of years are you seeing any material changes in the competitive landscape.
Folks that are that are.
Fighting against you.
I would say there.
There are.
There are a lot of smaller players out there fighting amongst each other.
But I wouldn't say that.
We're not really seeing the impact there clearly.
There is clearly taking a disproportionate share of the privates that are drilling.
What you would expect but in the I think in a market, where we participate and that we really haven't seen much of a change.
Okay, great. Thanks for the color Jim.
Our next question comes from the line of Ian Macpherson from Piper Sandler.
And how are you.
Good morning, Scott Great. Thanks, how are you.
Sure.
It has fallen Stephen's question does an emerging disconnect I think between expected rates of activity increase in A&P spending that.
There's not enough money and 20% of R&D spend growth to accommodate that.
Service and product cost inflation, thats happening plus 'twenty activity it just doesn't fit.
I'd be curious to see how.
That unfolds, but my question is different really your market shares.
Has sustained in the low <unk> for.
About a year now you sided OCG OCC G is.
Specific threat or bottleneck that could govern growth over the near term with casing et cetera, but I was going to ask if.
The shortages in Europe.
Nice as well could emerge and if you could actually out compete.
The other 60% or so of the market on deliverability.
In this tight supply chain market and actually take your take more market share not just on the basis of.
Premium differentiation in efficiency, but also.
Sure availability to deliverability of.
Wellheads.
That's the plan.
Okay.
See evidence of competitors stumbling on deliverability out there today is that.
An abstract or a real opportunity.
Yes, we are seeing some of that.
Okay.
And then I was going to ask also you don't have any running.
And don't ask me to have any more questions at my competitors.
This one is only for cactus salary.
You're up and running how are you thinking about the scalability of that opportunity going into 2022.
I think that.
You're talking about just within the kingdom or beyond the kingdom.
Yes, sure total international.
Yes, I think that as I've.
<unk> said before our hope and our plans are to continue the expansion and the mid east with any MSR, we were using Saudi kind of as our test case.
The performance has been very good very pleased with it I think that.
We'll continue.
To deploy more assets in Saudi I can't tell you exactly when and I think youll see us deploy assets and other areas of the mid east.
In conjunction with NHS.
I also feel increasingly optimistic that we will turn some of this.
<unk> into product sales later next year.
Very good look forward to next steps on that thanks, a lot. Thanks Ian.
Our next question comes from the line of Taylor Zurcher from Tudor Pickering Holt.
Hey, good morning, Thanks for taking my question My first one is on M&A.
You talked about the continued need for M&A and likely continuing to evaluate deals and I guess my question isn't in this commodity price environment. It feels like seller expectations have probably gone up significantly. So just curious if you could frame.
Generally speaking were bid ask spreads that today.
If the commodity price environment.
Hindering the likelihood is of M&A over the near term horizon, maybe the next 12 months at all.
Well, we haven't had too many bid ask.
It really speak to you from experience I mean, it would be logical that.
That sellers would want more but it also would be logical that we can afford to pay more with our currency.
So.
Honestly.
I don't think that we're disadvantaged given the improving dynamics in the <unk>.
In the macro.
In fact, I feel probably the opposite because.
As long as this company continues to perform.
Our investors will continue to reward us and as long as they continue to reward us I think will be.
Excellent position.
To move forward on M&A.
I mean that leads me.
To answer a question that you Havent asked yet.
And that is why don't you give up some of this 300 plus million dollars youre going to have positive free cash flow in the fourth quarter.
Why don't you released that to the shareholders.
I'm going to answer the way I normally do and that is that we are the largest shareholders in <unk>.
Personally love dividends.
But I still see some opportunities to deploy that cash.
And in M&A.
Manner. So.
I know I've asked all of you to be patient with US. We are just very careful about how we spend money, but don't misinterpret that to mean, we don't we're not willing to spend money. We are willing and we are we're pretty actively looking at.
Well you answered most of my questions. There. So thanks for that Jeff maybe I'll sneak one in on market share.
40% to 50 rigs being added through Q1 based on the 10% metric that you provided.
I suspect as the public start to come back a little bit more in the coming months that that market share probably has room to move higher but just curious how you frame that for cactus over the next couple of quarters. Thank.
Thank your conclusion was correct.
Awesome, Thanks for the answers.
Okay. Thank.
Thank you.
There are no further questions at this time please continue Mr. Scott.
Alright again, thank you everybody for your continued.
The attention to cactus and interest in cactus and.
We do look forward to seeing you hopefully in person.
Over the next 12 months everybody have a good day.
Ladies and gentlemen, this concludes today's conference call. Thank you everyone for participating you may now disconnect.