Q2 2022 Cactus Inc Earnings Call
Okay.
Good morning, and thank you for standing by welcome to the chapter second quarter 2022 earnings call.
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I would now like to hand, the conference over to your Speaker today, John Fitzgerald John .
Thank you and good morning.
We appreciate you joining us on today's call.
Our speakers 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.
Steven vendor Vice President of operations and will Marsh, our general counsel and Vice President of administration.
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 risks 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.
Included in our earnings release, and with that I will turn the call over to Scott. Thanks, John and good morning to everyone. I am pleased to report that cactus posted its sixth consecutive quarter of adjusted EBITDA growth over 10% results were strong across the board and highlighted the company's best in class margin.
And return profile from.
Some second quarter highlights include revenue increased 17% sequentially to a company record of $170 million adjusted EBITDA improved by 31% sequentially. Adjusted EBITDA margins were 33% up 360 basis points versus the first quarter, we paid a quarterly dividend.
<unk> 11 per share and increased our cash balance to 312 million ill now 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 for Q&A. So Steve. Thank you Scott.
<unk> Q2 revenues of $170 million were 17% higher than the prior quarter product revenues of $112 million were up 19% sequentially driven primarily by an increase in rig followed and successful cost recovery effort.
Product gross margins at 38% Rose 320 basis points sequentially due to leverage of our fixed cost base and cost recovery effort.
Rental revenues were $24 million for the quarter up 6% versus the first quarter driving an increase in gross margins of 280 basis points sequentially due to reduced equipment repair costs and lower depreciation as a percentage of revenue.
Field service and other revenues in Q2 were approximately $34 million up 16% sequentially.
This represented 25% of combined product and rental related revenues during the quarter gross margins were.
Up 600 basis points sequentially, driven largely by the company's measures implemented to address inflationary fuel and labor costs.
SG&A expenses were $14 $7 million during the quarter up <unk> 6 million sequentially. The increase was primarily attributable to higher bonus accruals due to stronger than expected financial performance SG&A declined to eight 7% of revenue down from nine 7% during the first quarter, we expect SG&A to be slightly above 15.
In Q3, 2022, excluding any nonrecurring expenses stock based compensation expense and <unk> is expected to be approximately $2 6 million.
Second quarter, adjusted EBITDA was approximately $56 million up 31% from $42 million during the first quarter.
Adjusted EBITDA for the quarter represented 33% of revenues compared to 29% in the first quarter.
Adjustments to EBITDA during the second quarter of 2022 included approximately $2 4 million in stock based compensation.
Depreciation expense for the second quarter was $8 9 million and a similar amount as expected in the third quarter.
We reported income tax expense of $8 8 million during the second quarter.
During the quarter, the public or class a ownership of the company averaged 80% and ended the quarter at 80% barring further changes in our public ownership percentage, we expect an effective tax rate of approximately 21% for Q3 2022.
GAAP net income was $36 million in Q2 2022 versus $27 million during the first quarter. The increase was driven by higher operating income during the period.
We prefer to look at adjusted net income and earnings per share, which were $33 4 million and <unk> 44 per share respectively. During the second quarter versus $22 9 million and <unk> 30 per share in Q1.
Adjusted net income for the second quarter apply the 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 third quarter.
During the second quarter, we paid a quarterly dividend of <unk> 11 per share, resulting in a cash outflow of approximately $8 million, including related distributions to members of the <unk>.
<unk> has approved a dividend of <unk> 11 per share to be paid in September .
We ended the quarter with a cash balance of $312 million up $14 million sequentially operating cash flow was approximately $31 million and our net capex was $6 million.
Inventory rose by approximately $13 million sequentially, primarily due to activity increases longer lead times and our decision to increase product safety stocks to ensure timely delivery.
Capital requirements for our business remain modest and we will continue to exercise discipline with regards to growth expenditures, our net capex guidance for 2022 remains unchanged with the remaining expenditures expected to be weighted towards the third quarter.
Covers the financial review and I'll now turn the call over to Scott. Thanks, Steve.
The company generated record revenue during the second quarter and reported its highest quarterly EBITDA since mid 2019 U S product market share remained strong at 39, 5% during the period as rigs followed increased by over 8% product revenue for U S land rigs followed increased by <unk>.
10% highlighting the success of our cost recovery efforts during the period product EBITDA margins improved by 300 basis points during the quarter to 39%.
Looking to the third quarter of 2022, we anticipate cactus as rigs followed to rise more than 5% product revenue is expected to increase in the mid to high single digits percentage wise.
Product EBITDA margins are forecasted to remain strong during the third quarter, we're confident that our public and large private customers will be adding rigs through the end of the year, which bodes well for our market share.
As addressed in our earnings release, we're increasingly focused on maintaining and improving the quality of our customer base last quarter. We mentioned the trial with a major independent operator, our team has executed well for this customer and although not reflected in the second quarter. We are now servicing additional rigs with more expected through the end.
<unk> of the year.
During the quarter, we progressed our efforts in the mid east with direct discussions with a major NOC. We now expect to complete equipment testing. This year trial order deliveries in 2023 and commercialization by 2024.
In the immediate term, we expect to book, our first product revenues in the mid East and South America. During the third quarter, we will continue to selectively target international markets as we progress plans for more meaningful growth abroad.
Regarding our supply chain tightness in overseas freight and transit times from the far East have started to moderate in addition, raw material and component costs are starting to show signs of improvement. Accordingly, we are cautiously optimistic that this will lead to continued margin improvement by early 2023 following the.
<unk> of our existing inventory.
On the rental side of the business revenues increased by over 6% during the quarter and were up over 60% year over year incremental EBITDA margins were nearly 90% during the second quarter for the third quarter rental revenues are expected to increase by an additional 10% and EBITDA margins are expected to be relatively flat during the period in <unk>.
Full service the company implemented a number of measures to offset wage and transportation inflation early in the second quarter. This resulted in a 570 basis point improvement to field service EBITDA margins and highlights the ability of the company to quickly address headwinds field service revenue for <unk> is expected to be.
<unk>, 24% of product and rental revenue, we expect fuel service EBITDA margins to be in the mid 27% range for the third quarter up slightly on a sequential basis. Overall, we're excited about the momentum of the business going into Q3, which is typically the strongest quarter of the calendar year.
Guarding our outlook on M&A management continues to believe that it can be a useful tool to enhance shareholder returns. However, this team will continue to exercise discipline in patients in the evaluation of any such opportunities and keep a narrow focus on high quality businesses with characteristics similar to our own the ability to rich.
Cash to our shareholders remains an attractive avenue to deploy capital.
So in summary, cactus remains well positioned to deliver continued growth and returns as well as the suasion customers concerns regarding the timely supply and quality of service so with that I'll turn it back over to the operator, and we can begin Q&A operator.
Thank you very much.
At this time, we'll conduct conduct a question and answer session.
Reminder, to ask a question.
One one on your phone.
And then wait for your need to be in there.
Let me to one question and then one follow up there pretty standby and we will get ready to start.
Okay.
Our first question is coming from Scott Gruber Citigroup Scott go ahead and ask your question.
Yes, good morning.
Hey, Scott how are you.
Doing well doing well thanks.
So I wanted to ask about rental sounds like you'll get a nice 10%.
It moves higher and three Q, but just thinking about the running room in that segment.
Given that you guys kind of voluntarily.
Let you share slip and pricing really class are you seen pricing recover sufficiently in that market and that market gets sufficiently tight that we have several.
Orders of share recapture and endless and rental.
Yes, Scott, we're finally seeing some some relief not across the board, but we are.
We're absolutely seeing some some indication of some tightness in the market and.
And the resulting opportunities for increases in price.
Yes, you do.
Look back at 2019 that you guys were doing about $40 million in quarterly revenue and rental is there.
Any possibility of getting back to that Mark and call. It 12, 18 months or so.
I think that that.
Despite the fact that rental prices are firming they are still significantly below.
2019 pricing so.
Sure.
I can't envision them getting back to that level, but.
Certainly improving I think to the point, where it would be a meaningful improvement there still.
They are still too many players in this space is too fragmented market.
And frankly a cut.
Customers don't really.
I think respect the moat around our products the way around our rental products or antibodies retinal products for that matter the way they respect the moat around our products our <unk> products.
Got you and then if I could just ask one additional one on the macro side.
A lot of moving pieces.
Today with some recessionary fears.
On oil price, but at the same time, we're hearing those indications that.
We're going to get a few rigs added here by the public operators late in the year and maybe a few more to start the year Wides, which budgets.
Can you talk about that intersection between maybe some risk to <unk>.
<unk>.
Activity.
If oil prices continue to drawdown versus.
What's likely to be some ads.
On the public side as well.
Well I guess, one can you frame up yes, if the forward curve is accurate where the U S rig count could land, let's say six months time so.
After some of the budget refresh Meg additions.
But also what oil prices could in parallel that growth.
You could get some.
Declines more privates that would offset the growth just because of supply.
Wow.
Alright.
Let me try to break this down.
Forgive me if I, if I fail to address some of those many questions included in your one follow up.
Go ahead.
Let me, let me start with with my view on private versus public.
So.
Not going to surprise, you and I would tell you that I believe that the privates will not display the same sort of disproportionate games at $90 $90 oil as they did during the second quarter and the first quarter. So our view.
And we have pretty good visibility for Q3, and Q4 is that we expect to gain market.
Our market share with privates in the third quarter, and then we expect that to flip towards our large publicly traded customers in the fourth quarter and into the first quarter of next year.
So.
That's why I made the comment that I feel good about market share by the end of the year.
Our strength is in the is in the large publicly traded e&ps.
I think that.
Whether or not the large publicly traded e&ps can offset weakness in the privates.
Gut feeling is it will.
But it probably will mean that the rig count in the first quarter will be.
Hang in there in the low eight hundreds.
I wouldn't look for a large increase in Q1 budget.
Budgets are going to be reset for sure, but our customers are exercising pretty extraordinary capital discipline, but as of right now.
I have much we have much better visibility into the public's than we do in the private and so that's just my best guess don't look for a tremendous amount of growth in Q1, but the growth that does come will come from.
Our core customer base.
Got it understood I appreciate it.
Thanks Scott.
Thanks, so much Scott.
Our next question is coming from Connor Lynagh with Morgan Stanley .
Hey.
Hi, yes. Thank you.
Good morning.
Good morning. Good morning, I was wondering if you could help us think through what the raw material deflation and potential easing in freight means for your margins of your cost structure is there any way of sort of identifying how much those items have run up.
What your margins might be on a normalized deck any sort of framework you can provide would be helpful.
Alright, I will let Steve respond to that.
Yes.
We kind of said in the script that.
We expect margins on the product side to remain strong through the end of the year as we run off this inventory and we just aren't in the habit of providing guidance beyond the next quarter just given all the.
And as announced in puts and takes of customer activity and material costs, but like we said, we expect them to be beneficial and you can kind of look through our history.
Our product margins in the past.
<unk> tariffs.
And I'd use that as a guide for the future, but like we said that that's a 2023 thing.
Yeah understood understood maybe.
The other side of the question that is.
Would suggest that you have.
And what you are saying that you expect to hold pricing despite raw.
While material deflation can you just discuss how you've approached customers with price increases thus far.
Is there any degree of sort of surcharge or things like that that will roll off where is most of us just pricing in the absolute that you expect to stay.
Yes, we never talk about pricing ever.
Okay.
Alright, one more try here guys. So.
Within within the.
Rental sorry within the products business is there is there anything beyond the tariffs that you would point to that is structurally different from 18 19.
You would.
<unk> influence your margin in a more normal.
Commodity input environment.
Okay.
Certainly currency as is.
Very constructive tailwind for us because you know that we bring about half of our products and maybe slightly more than half of our product set from the far east.
The strengthening dollar.
It's going to prove I think to be a tailwind.
You can you can quantify.
<unk>.
The change in the U S dollar to the to the Chinese.
You on easily.
And then.
Figure half of our product comes from the far east in terms of.
<unk>.
Of other fundamental changes other than the.
Constant sort of.
Our valuation of lower cost designs, I really can't point to anything substantial.
I guess, maybe the exception let me just let me just follow that up the exception will be as transit times.
Improved from the far East Youll see less contribution from our higher cost Bossier City operation and more contribution from our <unk> supply chain.
Got it makes sense. Thank you.
Thank you so much.
And now we are going to hear from Peter Nielsen.
Stephen <unk> with Stifel.
Steven Yes.
Yes, thanks, good morning, everybody.
<unk>.
Two things from me.
If we could start.
Just thinking about your guidance and you had a you had a nice step up in sort of revenue per rig followed in the quarter and I was just curious without maybe giving too much detail on sort of cost recovery efforts, but is there a rig efficiency.
Element to that and will that likely come off a little bit next quarter.
Rig efficiencies have actually been.
Fairly.
Constant I would say cost it to down but I attribute the decrease in rig efficiencies to be more related to an increase in laterals and lateral lengths. So.
Obviously, the longer laterals the longer a rig is over a whole a logger or where it goes over the hold fewer wells. It can drill per month I think that we saw.
Earlier in the year.
<unk>.
<unk>.
Rig inefficiencies due to labor issues among the other service contractors I think thats still exists to some extent, but honestly I think it's pretty much stabilized.
I'm not really I mean.
I heard horror stories during the first half of the year with rigs waiting on cement waiting on pipe.
Sure.
They seem to have abated.
Great. Thanks.
Thank you that's helpful and then second I mean, you obviously.
<unk> talked about the balance sheet and the cash generation.
Can you give us an update on kind of what your what you see.
On the M&A side is there is there anything out there that's interesting and or just kind of how the market has evolved.
As far as those opportunities is it better worse the same as maybe three months ago.
In terms of opportunities exactly yes.
I would say definitely better.
I would say that.
Sure.
That's a very interesting question I know that a lot of our investors.
Sure.
Interested in.
Answering I'd say the opportunities are greater I'd say the disparity between the bid and ask is pretty significant I'd say in this population.
<unk>.
Qualified buyers.
<unk> has probably reduced.
So.
Hum.
Sort of guardedly optimistic that there is.
Something to be done.
Over the medium term.
I feel better today than I did a year ago or even six months ago.
Okay, Great. That's helpful color. Thank you.
Thank you so much David.
Steven.
David Anderson from Barclays there'll be asking.
Question.
David.
Scott, leaving us hanging on to that last answer there.
Further on that one.
I was wondering if you could go back to the visibility question answer you gave on the publics versus privates, just sort of just in general on the wellhead side.
Just curious if that visit how thats kind of look from the beginning of the year are your customers already starting to talk about 2023, I'm just curious with all the equipment and supply chain concerns that there have you seen a change of behavior you needed the privates or publics in terms of ordering your wellheads in terms of the up in front of their jobs.
David we are seeing.
Far better forecasting now.
Than we've ever seen before pardon me from them.
From the large.
Large e&ps.
And the public E&ps, so thats been a great benefit interestingly because of the <unk> pressures we know.
And because they have to forecast if they want to get pipe.
They are now including us in their pipe forecasts, which is a pretty good gauge. It. This is really something that just began to occur this year and.
And that's why I'm confident that that we have a pretty good view towards the third and fourth quarters.
In terms of the privates far less visibility.
Okay. So I guess that kind of goes back to what you are saying about the fourth quarter and how would you think about those programs evolving.
So we know all about these equipment shortages out there we're hearing so on your business both here in the capital discipline across the industry theres not many rigs or pressure pumping fleets. You can go back to work. So would your business is tied to both of those markets is there a concern that while pricing and margins can continue to move higher and products at a lack of capacity I guess price and <unk>.
<unk> <unk>.
Lack of capacity could ultimately moderate growth in activity in the next few years is it just not enough rigs or pressure on equipment to go out there.
Thinking about that that dynamic, yes, let me.
First let me talk about Frac, our market share is so low.
If there was not another pressure pumping crew added we have room to grow.
Okay.
Drilling rigs another story.
I'm going to take a little contrary view here just based upon the decades I've been in this business, yes rigs are in tight supply and I know there are a lot of folks who believe that we're going to be constrained by the availability of rigs, but I'm going to bet that some of the rigs that are stacked.
Now.
The less efficient rigs are going to go back to work.
Does the day rates are going to be high so I think youre going to see some people spend some money to upgrade rigs that perhaps they would not have upgraded six months ago.
I think we'll be constrained, but we won't be nearly as constrained as many people feel money moves into this business so quickly.
We've certainly seen that if I could just squeeze one more in there.
Pressure control business, you had talked about your market share and very fragmented curious what the capital discipline in that market. Overall is it just too much capacity and too. Many players or has had people have been building out or maybe just also on the side of that is there much attrition in pressure pumping.
Pressure control or is that sort of the reason why.
We still have too much capacity in there.
I think the barriers to entry.
Or just are just too low I think that.
The availability of Chinese valves, although they've been.
Clearly.
The supply has been intermittent over the first six months because of the issues in the far east.
There appear to be plenty of frac valves available in the market and this would be.
I think that our larger competitors aren't adding to their fleets, but I think the.
The smaller players are having no trouble getting valves right now.
Got it.
Thank you very much Scott.
Yes.
Thank you David.
And our next question is coming from Cameron Lochridge.
<unk> incorporated.
Welcome.
Hey, good morning, Thanks for taking my questions. Good morning, Cameron how are you doing.
I'm doing well why are you doing Scott great. Thanks.
Great.
So I wanted to first start you mentioned in the release.
We're working towards increasing the quality of your customer base.
I thought that was an interesting snippet there and just wanted to ask if you could offer some more color on.
What youre doing on that front and what maybe the implications or I know you don't like talking about price, but on cost recovery.
February efforts what are some of the implications there.
As we as we fine tune that customer base.
Yeah.
Yeah.
Okay.
Cameron I think you probably know the answer to this.
When you have.
In a market like this fit that that's tight.
Particularly the labor side of the market.
We are blessed with adequate inventories.
Labor remains tight.
When you go out to market you have to go out to market to those customers who are going to value that.
The.
Execution excellence, the service excellence as well as the products and so.
Sure.
By and large.
The larger players place greater value.
On that on our offerings than some of the privates. So as we approach the market, we're just having to be a little bit more discriminating and we are being a little bit more discriminating about who we approach. The second thing is as we applied our cost recovery.
Plans, we promised and we took it seriously we promised our large customers that if they supported US we would support them and that meant that we would have adequate people and inventory to take care of their needs and.
I can tell you the name of this business is repeat business I'm proud to say I can't remember the last time, we lost a customer and I don't want tend to lose any customers certainly don't intend to lose any because we can't deliver on time and so.
That plays a large part in.
The way, we view the opportunities the opportunities out there.
That makes sense. That's helpful. Thank you Scott and then.
Moving back to the topic of M&A.
We've gotten a few questions from folks just asking base.
Basically.
As you've been looking at this pipeline deals over the past several quarters.
Pretty healthy balance sheet obviously.
Just wondering if you could comment on maybe the.
Difficult it may be a strong word, but the difficulty of sourcing we're looking for the right.
Target the right candidate.
That complements <unk>.
Your profile, having a differentiated product.
<unk> service model.
What are some of the puts and takes there and how how.
Plentiful or.
Not plentiful.
Candidates like that in the market today.
I would never characterized.
Them as being plentiful camry.
Stretch of the imagination, but I would say that there are more suitable candidates, we're seeing more suitable candidates today than we have.
Say six months ago, or 12 months ago and.
It could very well be that debt.
Owners see this as an opportunity to monetize finally after a very tough couple of years.
I suspect that's the reason.
<unk> made mentioned to the fact that the bid ask disparity is pretty significant but.
That's why you have to practice, a little bit of patients, but I do believe the opportunities are better.
With those candidates who meet most of our criteria. So that's why I feel pretty good about this.
Got it thank you Scott I'll turn it back thanks Cameron.
Thank you so much Cameron and if anyone does have a question just to reminder, yes star one on your phone.
Now David Smith, Pickering Energy partners has a question.
Hey, good morning, and thank you for taking my question Hey, David how are you.
Well thanks.
Just circling back to.
Comment you made on the call.
Regarding discussions with MSC and the Middle East you mentioned.
Product testing next year commercialization expected by by 'twenty four.
It's something that envisioned distribution from your existing facilities or something that could be building a regional manufacturing presence.
The latter.
Yeah.
Great.
Could you remind us kind of a rough expected lead times.
To establish a new manufacturing facility.
In the Middle East.
But in the neighborhood of.
12 months to 18 months.
Great. Thank you for that.
Yes, most of my questions had been asked but just a quick one.
Yes.
Given the improving visibility you have for drilling activity on the public e&ps.
Wondering if this might translate at all into a little.
Maybe maybe more forward visibility on the types of customers, who place more value on your rental offerings.
Yes.
If youre seeing anything positive in that mix.
I mean, the short answer is yes, David.
The more activity.
The higher the percentage of activity that.
It's being conducted by the by the larger.
Publicly traded companies the better for our pressure control business for our Frac business. There's no question about that we don't do very well at all with privates in terms of Frac valve rentals. So here right.
Great.
Thank you for your time.
Thank you David.
Thank you so much data.
Thank you for the question.
I'd like to turn it back to the gentlemen for closing remarks.
Thanks, everyone for joining the call we look forward to connecting with you next quarter, Okay, everybody have a great into the summer.
The conference will begin.
<unk> to raise your hand during Q&A you can dial one one.
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