Q4 2022 Cactus Inc Earnings Call
Yeah.
Okay.
Good day and thank you for standing by welcome to the Cactus Q4, 2022 earnings conference call.
Time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
A question. During this session you will need to press star one one on your telephone and you'll then here an automated message advising your hand is race to withdraw your question Press Star. One again, please be advised that today's conference is being recorded.
I'll now like to hand, the conference over to your Speaker today, John Fitzgerald Director of corporate development and I are please go ahead.
Okay.
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, Steve.
Steven Bender, 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 risk factors discussed in our filings with the SEC.
Any forward looking statements. We make today are only as of today's date and we undertake no obligation to publicly update or review any forward looking statements.
In addition during today's call.
We will reference certain non-GAAP financial measures.
Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in our earnings release.
With that I will turn the call over to Scott, Thanks, John and good morning to everyone. During the fourth quarter. The company set records for both quarterly revenue and adjusted EBITDA. This was also our eighth consecutive quarter with adjusted EBITDA growth I was particularly pleased with the margin performance in each of our revenue categories. The fourth quarter is usually our.
Our weakest due to seasonal factors, but results were strong across the board and highlighted the company's best in class margin and return profile.
Some fourth quarter highlights include revenue increased 2% sequentially to a company record $188 million adjusted EBITDA improved by 4% sequentially to accompany a record $66 million adjusted EBITDA margins were 35% up 90 basis points versus the third quarter, we paid a quarterly dividend of <unk> <unk>.
<unk> per share and we increased our cash balance to 345.
I'll 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.
For opening the lines for Q&A. So Steve. Thank you Scott note that all the historical and forward looking data referenced today will be for cactus on a standalone basis, only and not inclusive of any potential impacts from the pending flex deal transaction, which is expected to close in the coming weeks.
As Scott mentioned Q4 revenues of $188 million were 2% higher than the prior quarter product revenues of $125 million were up 2% sequentially driven primarily by an increase in rigs followed product gross margins of 41% rose 120 basis points sequentially due largely to operating leverage and lower.
Branch costs rental revenues were $27 million for the quarter up 1% versus the third quarter gross margins were up 420 basis points due to better asset management and lower repair costs as well as declining depreciation expense.
Field service and other revenues in Q4 were approximately $36 million up 1% sequentially. This represented approximately 24% of combined product and rental related revenues during the quarter in line with expectations gross margins were 24% up 20 basis points sequentially driven by lower supplies.
Cost and branch related expenses.
SG&A expenses were $23 million during the quarter up $6 9 million sequentially. The increase was attributable to higher professional fees and expenses $7 4 million of which were related to the pending acquisition of flex deal. Excluding these transaction related expenses SG&A was $15 5 million and 8% of revenue.
We expect SG&A exclusive of transaction related fees to be relatively flat in Q1, 2023 with stock based compensation expense of approximately $3 million.
Fourth quarter, adjusted EBITDA was approximately $66 million up four.
Went from $64 million during the third quarter.
Adjusted EBITDA for the quarter represented 35, 4% of revenues compared to 34, 5% in the third quarter.
Adjustments to EBITDA during the fourth quarter of 2022 included approximately $3 million in stock based compensation $7 million in flex deal acquisition related fees and expenses and then add back of $2 million in other expense related to the revaluation of the company's tax receivable agreement.
Consistent with the fourth quarter's presentation, we've now revised the adjusted EBITDA for the third quarter of 2022 to exclude 1 million influx deal acquisition related expenses that were not previously added back to our adjusted results.
Depreciation expense for the fourth quarter was $8 $1 million approximately $8 million is expected in the first quarter of 2023 income tax expense during the fourth quarter was $7 9 million.
During the fourth quarter, the public or class a ownership of the company averaged 80% and ended the quarter at 80%. Following the equity offering we completed in January of this year or class a ownership is expected to average 81% of the total share shares outstanding during the first quarter.
Barring further changes in our public ownership percentage, we expect an effective tax rate of approximately 21% for Q1 2023.
GAAP net income was $41 million in Q4, 22 versus <unk> $42 million during the third quarter. The decrease was driven by higher transaction related expenses, which more than offset increased gross profit across our various revenue categories.
We prefer to look at adjusted net income and earnings per share, which were $44 million 57 per share respectively. During the fourth quarter versus $40 million 52 per share in Q3 2022.
Adjusted net income for the fourth quarter applied it to 25% tax rate two our adjusted pre tax income generated during the quarter, we estimate that the tax rate for adjusted EPS will be 25% during the first quarter of 2023.
As previously stated we have revised the adjustments through the third quarter of 2022 to include the $1 million in acquisition related expenses that were not previously added back.
During the fourth quarter, we paid a quarterly dividend of <unk> 11 per share, resulting in a cash outflow of approximately $8 4 million, including related distributions to members in January the board approved a dividend of <unk> 11 per share to be paid in March.
We ended the quarter with a cash balance of $345 million up $24 million sequentially operating cash flow was approximately $39 million during the quarter with net working capital representing a cash outflow of approximately $21 million.
This was driven in part by a decrease in accounts payable due to the timing of seasonal payments. In addition, payables declined in in advance of anticipated first quarter inventory declines.
Excluding non routine items associated with the flex deal transaction, we expect networking capital to be relatively flat during the first quarter of 2023 and down as a percentage of revenue following a strong January .
Net capex was approximately $6 million during the fourth quarter of 2022 capital requirements for our business remain modest and we will continue to exercise discipline with regards to capital expenditures for 2023, we expect net capital expenditures to be in the range of 35% to $45 million. This is inclusive of the potential purchase of a current.
Lease domestic property for approximately $7 million to build out of a new R&D facility in Houston, and it assumes $5 million to $10 million in growth capital dedicated to international expansion towards the end of the year that covers the financial review and I'll now turn the call over to Scott. Thanks, Steve as stated earlier the company generated record revenue and EBITDA during the quarter.
U S product market share increased to 42% during the period as rigs followed rose by approximately 7%.
From <unk> 2022 through December of 2022, we added 26 rigs in line with projections provided during our last earnings call product EBITDA margins improved by 110 basis points during the quarter to 41% during the fourth quarter. The majority of our rig additions came from public companies, but we also.
<unk> increased our rig count with private operators, thus far during 2023, we've witnessed a mid single digit percentage increase in public rigs, followed which has been partially offset by a slight decrease in private rigs followed particularly in gas basins for the first quarter of 2023, we still expect cactus is average rigs followed.
To be up 3% to 5% sequentially. Despite the overall decline in the U S land rig count as you know our core customers tend to be larger well established oil producers, who are less reactive to short term swings in commodity prices. Nonetheless, we're prepared to deal with the impact that lower natural gas prices will likely have on the industry.
Early in the Haynesville and area weighted towards privates.
We are also excited to be introducing several technical wellhead enhancements, which are in the final stages of testing.
First quarter 2023 product revenue is expected to be up approximately 5% versus <unk> <unk>.
EBITDA margins are forecasted to be in the 41% to 42% range for the first quarter, we feel good about the prospects of market share gains as evidenced by our ability to achieve market share of over 42% in February .
From an international perspective, there are really no changes regarding our plans for product commercialization and the mid east by 2024. In addition, we continue to benefit.
Benefit from opportunities outside of Saudi.
On the rental side of the business revenues increased 1% during the fourth quarter and were up over 40% year over year International increases drove the sequential top line improvement for the first quarter of 2023, we expect rental revenue to remain relatively flat EBITDA margins should be in the low 60% range with potential with potential for <unk>.
Spansion late this year as we introduced cost saving enhancements.
Field service EBITDA margins improved by 20 basis points during the fourth quarter overcoming what is typically the weakest seasonal quarter of the year revenue was 23, 6% of combined product and rental revenue during the period fuel service.
Revenue for the first quarter of 2023 is expected to remain between 23, and 24% of product and rental revenue field service EBITDA margins are expected to be approximately 28% regarding the <unk> acquisition and management is excited and optimistic about this unique combination as noted earlier this.
But we received no comments from the FTC or Doj during the HSR waiting period from a financing perspective, we successfully raised $166 million of net proceeds from an equity offering in January at a very substantial progress regarding our permanent debt financing at this time, we expect to close on a new one.
$125 million term a facility with a new $225 million upsized revolving credit facility upon transaction closing, which should occur during the first quarter of this year flex.
<unk> fourth quarter financial performance was in line with our expectations. Following the closing of the transaction Cactus will provide additional details on the expected financial impact of the first quarter. We look forward to sharing the same once we close.
Despite recent weakness in natural gas prices, we are optimistic regarding our customer base, which is larger than primarily oil focused cactus remains well positioned to deliver for shareholders amid an overall healthy market backdrop and with that I'll turn it back over to the operator, and we can begin Q&A operator.
Yes. Thank you at this time, we will conduct a question and answer session. As a reminder, asked a question you will need to press star one on your telephone and wait for your name to be announced to withdraw your question Press Star one again.
Also as a reminder, please limit yourself to one question and one follow up standby. Please while we compile our roster.
Our first question comes from the line of David Anderson of Barclays. Your line is open.
Hey, good morning, Scott how are you.
David how are you.
Im doing great.
Was hoping if you could just kind of step back a little bit.
And talk about the U S kind of the overall U S onshore market overall, it really kind of how you see duration of this cycle compared to say other cycle, let's say kind of the OE to 12 or 13 timeframe.
You touched on my end.
Everyone sort of waiting for its natural gas storage to have this ripple effect. Some people, who we think is going to collapse of the U S services market.
Would you make the cases, the more resilient market I mean, there is fewer players more discipline in terms of capacity and pricing I think youre seeing in your business as well shouldn't this all kind of result in a cycle with more duration.
Can you maybe expand on that a little bit.
David.
Yes.
Alright.
I think that what we've seen let me first talk about natural gas what we've seen.
As weakness in the Haynesville I'm sure you know that we've not seen the same weakness in the northeast.
The Haynesville is a very high cost area to operate and it's dominated by private players. So one would expect that with lower gas prices the haynesville would suffer.
For those of our customers that have multiple basin exposure and we're seeing a.
Our redeployment of rigs.
The haynesville and into those quality basis. So let me maybe I'll turn my attention to the areas that we see.
Expect to see continued activity strength.
I can only tell you what our customers tell us and you know that.
Okay.
We visit personally with all of our large customers on a regular basis.
Indicated.
No reduction.
The reduction in activity.
<unk>.
None of them planned on $100 oil so that if I think about our major customers.
Actually seeing evidence of increases and they're all based on activity and those increases will likely off.
Losses in the Haynesville with David.
That said I don't know how low.
So I just feel like there's enough.
Im not indications of demand.
<unk>.
And the Permian is actually in the Bakken as well.
I think that in terms of fundamentals I'm, probably more bullish on oil fundamentals that may be a lot of people I think.
U S production rates are disappointing right now well.
Commissions fees are disappointing I think that we're going to see China opened up which is.
Also has implications in terms of cost, but China opening up I think the Russian sanctions are going to start buying.
Pretty good about.
<unk> of this current oil base cycle.
I don't even want to to offer an opinion on gasoline.
I think the $2 gas makes no sense.
Yes.
Okay.
So youre not really concerned that natural gas can sort of kept the applecart here that it doesn't seem like that could be big enough to really.
Be more than an air pocket is that fair way to look at it well David I'm always concerned about our customers' cash flow and so to the extent that natural gas prices are low.
Their cash flow is going to be reduced.
But I don't think that is kind of I am not I don't have this this overreaching concerned about the impact of natural gas on the rest of our customers and.
With many of them over the last two weeks. So it's been very very recent.
Mhm.
That's good to hear.
I know everybody always love to ask you about M&A and you are just dying to tell us about other deals you're working on right now.
But I'll tell you just get us flex deal with small idea it's around kind of.
The well site different things that youre already doing but I guess when I look at this market. The reality is most of the bad actors are gone.
Theres really no private equity money on the side until we can tell is it fair to say that the M&A route is going to be pretty hard over the next two or three years and that may be that the organic opportunities you've talked about the middle East Latin America is another area you'd sort of expanded does that make that more a more likely growth route organically than M&A.
Because of just look theres just it seems like there's fewer opportunities in a more consolidated market now I would say that there are there are certainly no fewer opportunities statement. There are fewer buyers, but there are no fewer opportunities. There are an awful lot of people who are interested in monetizing.
And during this period of time, but my.
I'm going to reiterate what I've said before my preference has always been and will continue to be to consolidate this market.
So when I think about M&A opportunities I need to think about I think about consolidation.
Flex deal was an incredibly unique opportunity for this company and you know all the reasons.
I can't think of another another.
Companies that we've looked at.
That checked all the boxes is there another flex deal out there.
Haven't seen another flex deal that's not to say there is not another flex deal, but I would probably tell you look for organic growth or an opportunity internationally.
Okay.
Thanks, a lot Scott and good luck. Thank you David.
Thank you one moment for our next question.
Next question comes from the line of Steve <unk> of Stifel. Go ahead. Your line is open.
Thanks, Good morning, everybody.
Morning, Steve.
Sure.
Two things from me if you could start and I know you gave some good color on the first quarter outlook when you.
Youre very strong margins in the in the fourth quarter across the board.
Can you just talk a little bit about your conversations with customer on the product side, and what youre seeing from a pricing perspective relative to inflation and how we should be.
Thinking about it.
Margin contracted capacity.
Let me now.
Okay.
Which I would assume.
Yeah.
Okay.
Back half of the year.
Yes, I think that that.
This team feels.
Pretty good about sustaining margins.
In terms of.
Cost impact I think we have done.
Joe has done a remarkable job of managing our costs.
A lot of our input costs are just now beginning to flow through we still have to get rid of some of this higher cost inventory, but but.
We're seeing the replacement costs.
Decline, so I think that from a cost perspective and thats the.
And the impact that that has on margins I'm feeling pretty positive.
And just along those lines I know you talked a little bit about.
Maybe using more capacity out of Louisiana because of some of the supply chain issues, where do the supply chain issue stand now.
Transit times.
Our much improved.
The FERC Joel on this but I may supply chain is actually sort of return to.
Some normalcy there are pockets of it.
Still problematic elastomers.
Some breath in material things like that it's available you just have to plan ahead for it which we've done in terms of vessels and things you can ship out of China, now and pickup on weekly shipment.
Drop it off at the Port and pick it up in about a week. So that's returned to normal I think the only challenge there is many blank sailings, but if you prepare yourself and you have contracts like we do it should be no disruption in terms of getting product.
Okay, great. Thank you gentlemen.
Thank you Steve.
Thank you one moment please.
Our next question comes from the line of David Smith.
Pickering Energy partners. Your line is open.
Hey, good morning, Thank you for taking my question.
Congratulations on the quarter and really looking forward to.
The post close our Q&A.
Right.
Thank you.
My questions were asked so I'll ask a couple of minor ones.
Going back to the.
The natural gasoline.
Sorry, if I missed this but wanted to ask if you're having any conversations with clients who indicate they might accelerate oil programs.
Additional frac spreads became available to them.
The short answer is no.
Because because we're our customer basis, so dominated by larger players, they're not nearly as reaction and so.
Most of our major customers have indicated.
Slight increases in activity and they have not mentioned any change in their plan as a result of the availability of additional frac.
Pressure brokers.
Makes perfect sense, but I had to ask.
And just circling back to the <unk>.
Or innovation.
In the product segment.
Just wanted to ask it.
Really looking forward to.
We're hearing about those.
I'm all ears, if you want to share any color on that.
Thinking about those as potentially beneficial to market share.
<unk>.
Maybe just more accretive to margins.
Because your market share and margins are already so strong.
Yes.
David We've always believed that if we don't continue to innovate innovation is one of our.
Greatest defenses in terms of our market share and so yes, I think that these enhancements will be attractive to people who perhaps.
We're not cactus customers, but the real reason for this is to continue and expand the gap between what we offer and what our competitors offer it provides us not only with the ability to retain market share, but it provides us importantly, with the ability to protect.
Our margins.
Hi.
Great answers I appreciate the color.
If I can slip in one minor one.
Field service margins has held up remarkably well in the fourth quarter wanted to ask if that was just exceptional execution. If you are able to get maybe better better margin protection basically trying to think through.
This year and going forward, whether you figured out how to mitigate that historical seasonality hit to those margins.
Yeah, I'll, let Steven answer that that's his department piece.
We're all very very pleasantly surprised with our fourth quarter <unk> field service results, Yes, I think just to reiterate we were very proud of what we achieved in the fourth quarter.
I think we're optimistic that things will continue and that trajectory, there's still quite a bit of pressure on wage inflation. The field service levels. So we're keeping an eye on that but concentrating more on utilization at this point.
And David we probably do.
I haven't worked for a lot of competitors obviously.
We do have an extraordinarily good job of monitoring utilization so.
We're particularly sensitive to that during the fourth quarter.
Usually drops because of the holidays.
We plan better this year, we executed better this year.
That will continue.
To take those lessons forward.
Thank you for all that color.
Between the acquisition and the international expansion.
Lot of good stuff, we're looking forward to.
Thank you all for your time.
Thank you.
Thank you.
We have another question from.
Stephen <unk> Stifel.
Steven Your line is now open.
Thanks, Thanks for taking my question gentlemen.
Two quick ones one was.
On the market share.
Improvement we saw sequentially in what you highlighted.
February .
Is this <unk>.
More rigs from existing customers or is it new customers or is it a combination.
It's a combination.
Okay, great. Thanks.
The other one and I know I ask you. This on the call on the flex still call, but maybe just to refer.
Fresh and we're getting this question.
From investors.
The differentiation that flex steel brings can you just give us.
A minute.
Sort of the key differentiating factors and obviously, that's a big big part of the character story. So I think it's.
It would be useful for me just to kind of get.
Get another summary on the big differentiation of flex deal versus their competition.
Steve you want to take that sure.
Yes, I think it comes down to a lot of what makes cactus in the wellhead side, So special which is really in our mind. They just have a superior product and they do a better job of executing on the service and customer interactions and everybody else. When you look at the sort of the formulation of their product.
They are the only spool composite that utilizes steel.
So it has a robustness that the others lack and in.
In my experience customers really value that.
<unk>.
Just because.
Its problems less things to worry about they've got enough to worry about out there in the field.
Okay.
The ultimate benefit to the customer one of sort of cost savings efficiency.
Less maintenance, how should we think about sort of the value prop to the customer.
Yes, it's really a multifold.
You get a cost benefit.
In terms of more rapid installation getting wells online faster.
What are some of the other aspects.
This product handles higher pressures so it has a.
Much larger addressable addressable market larger diameter.
Under which means that it can be used.
Further downstream of the choke.
So it has greater exposure to the market you do have less maintenance as well versus steel corrosion.
<unk> had zero field failures since they introduced the product and I think thats a function of.
The fact that it's not fiberglass or aramid fiber it's steel.
So you still have to join it you have to put couplings.
Ultimately on this product and it's you can imagine it's a lot better a couple.
Steel steals because companies are steel and steel to plastic.
Great.
If I can ask one more around flex deal.
The equity raise.
When you did the deal.
We announced the deal.
Our math suggested you could deleverage listing.
Quickly you didn't necessarily need to do equity.
And I was just curious on the thought behind that and does that maybe sure.
Tell us that there is potentially more.
Looking at and you wanted to financial flexibility.
I think yes, I think that's right Stephen.
<unk> certainly been rewarded by.
By having the strengthen our balance sheet to date and we let the cash balance to grow over time with no debt.
And that gave us an opportunity like the one we saw with flex deal and so it doesn't necessarily mean that is because theres. Some other M&A trade that would be M&A, that's out there right now, but having the flexibility to.
Provide those options is something that we certainly had in mind when we did the equity raise.
Summarize it it's definitely on our minds.
Great. Okay. Thank you all for the color I appreciate it.
Yes.
Thank you.
I'd like to now turn the call back to John Fitzgerald for closing remarks.
We appreciate everyone's interest in cactus and look forward to speaking with you on next quarter's earnings call.
Thanks, everybody have a great day.
Thank you for your participation in today's conference. This does conclude the program and you may now disconnect.
Yeah.
The conference will begin shortly to raise and lower Johan during Q&A you can dial one one.
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