Q1 2023 Cactus Inc Earnings Call
Yeah.
Good day, and thank you for standing by and welcome to the Cactus Q1, 2023 earnings Conference call.
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I would now like to hand, the conference over to your Speaker today, Alan Boyd director of corporate development and Investor Relations. Please go ahead Alan.
Thank you and good morning, we.
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 Bender, Vice President of operations T. S CEO of flex deal and.
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'll turn the call over to Scott.
Thanks, Alan and good morning to everyone before we commence our comments regarding regarding the quarter I want to take this opportunity to acknowledge some changes to our management team Alan Boyd who provided the introduction. This morning has joined US from Halliburton as director of corporate development and Investor Relations Alan has an extensive.
Of background, ranging from investment banking to working as a drilling engineer at Exxonmobil. He.
He will be taking up for John is moving over to serve as CFO of flex deal on behalf of our entire team I would like to thank John for his efforts, leading our investor relations function as we matured as a public company and look forward to his continued success in her new role.
The past few months have been incredibly active here at Cactus, we announced and closed the flex deal acquisition during the quarter and our result in our reported results for the quarter include one month of contribution from flex deals business on a standalone basis Cactus would have once again set records for both quarterly revenue and adjusted.
EBITDA.
<unk> wellhead market share hit an all time high consistent with the past who will walk through cactus is the results in detail discussing product rental and field service on a go forward basis. We will report legacy Cactus is the pressure control segment and flex deal as a spillover technologies segment.
And our guidance will reflect how we intend to report results in the future note that we will continue to evaluate the reporting structure, particularly around corporate SG&A. Some highlights for the first quarter include.
Revenue of $228 million adjusted EBITDA of $79 million adjusted EBITDA margins were nearly 35% while had market share was a record 43% and we paid a quarterly dividend of <unk> 11 per share 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 before opening the lines for Q&A, Steve. Thank you as Scott mentioned total Q1 revenues were $228 million, which includes one month's of flex steel results.
Sure control product revenues of $130 million were up 4% sequentially driven primarily by an increase in rigs followed gross margins inclusive of depreciation expense were 40%. This was down 40 basis points sequentially due in part to product mix.
In our pressure control product business. The U S wellhead market share increased to 43, 3% during the period. Despite the overall decline in the U S land rig count our rigs followed rose by approximately 6%.
This increase was driven by our larger publicly traded customers.
Our rigs followed with private operators remained relatively flat versus the fourth quarter.
Pressure control rental revenues were $27 million in Q1 down 2% versus the fourth quarter. The slight decline was driven by lower revenue from our Australian operations, which had a particularly strong fourth quarter.
Gross margins were down 200 basis points to 42% due to higher redeployment related costs.
Pressure control field service and other revenues in Q1 were approximately $38 million up 6% sequentially. This represented approximately 24% of combined pressure control product and rental related revenues during the quarter slightly above expectations.
Gross margins inclusive of depreciation expense for 23% down 80 basis points sequentially due to increased labor costs as retention remains a key focus.
Pressure control of SG&A expenses were $22 $7 million during the quarter relatively flat sequentially, despite higher transaction related fees and expenses, which totaled $8 6 million in Q1. Excluding these transaction related expenses pressure control SG&A was approximately $14 million, representing approximately 7% of pressure.
Controle revenue.
Pressure control adjusted EBITDA was $69 million, an increase of $2 7 million sequentially.
As a reminder, we closed the flex deal acquisition on February 28. So the first quarter results include approximately one month ownership of the business given flex deals completion orientation activity is often seasonally lower in Q1 and to a lesser extent in Q4 March had a strong finish to Q1 with $34 million of revenue.
Operating income in our scalable technology segment. During the period was <unk> 2 million inclusive of SG&A related expenses that flex steel operating income is also burdened by noncash charges of $4 $2 million associated with purchase price adjustments to acquired inventory. Additionally, operating income included $3 7 million of <unk>.
Tangible asset amortization costs during the period smooth those technologies, adjusted EBITDA, which backed out these noncash charges as well as stock based compensation expense was $10 3 million during the month, which equates to an adjusted segment EBITDA margin of 35%.
On a total company basis first quarter, adjusted EBITDA was $79 million up 20% from $66 million during the fourth quarter adjusted EBITDA for the quarter at nearly 35% of revenues with similar to the fourth quarter.
Adjustments to total company EBITDA during the first quarter of 2023 included approximately for that product.
Based compensation.
$9 million in transaction related fees and expenses and $4 million related to the aforementioned noncash purchase accounting related step up in inventory that increase available technology as cost of goods sold during the period. We also back down to $3 4 million gain from the revaluation of the TRA liability.
Depreciation and amortization expense for the first quarter with $13 million, which again includes $4 million of amortization expense related to intangible assets booked as part of purchase accounting.
Total depreciation and amortization <unk> expense during the second quarter is expected to be approximately $22 million 9 million of which is associated with our pressure control segment and $13 million associated with scalable technology.
This figure is inclusive of an expected $9 million of intangible amortization expense within <unk> technologies during the quarter.
Intangible amortization expense is expected to decline thereafter with a total amount estimated for the second half of 2023 at approximately $8 million or $4 million per quarter.
Net interest income during the first quarter was approximately $1 million, we expect interest expense of less than $3 million during the second quarter.
Income tax expense during the first quarter was $2 million tax expense was reduced due to a benefit related to release of our valuation allowance.
During the first quarter, the public or class a ownership of the company averaged 81% and ended the quarter at 81% barring further changes in our public ownership percentage, we expect an effective tax rate of approximately 20% for Q2 2023.
GAAP net income was $52 million in Q1, 2023 versus <unk> $41 million during the fourth quarter of 2022. The increase was driven by lower income tax expense and higher other income related to the noncash revaluation of our TRA liability.
We prefer to look at adjusted net income and earnings per share, which were $51 million or <unk> 64 per share respectively. During the first quarter versus $44 million and <unk> 57 per share in Q4 2022.
Adjusted net income for the first quarter apply to 24, 5% tax rate to our adjusted pre tax income generated during the quarter, we estimate that the tax rate for adjusted EPS will be 24, 5% during the second quarter of 2023.
During the first quarter, we paid a quarterly dividend of <unk> 11 per share, resulting in a cash outflow of approximately $9 million, including related distributions to members. The board has also approved a dividend of <unk> 11 per share to be paid in June .
We ended the quarter with a cash balance of $75 million and gross bank debt of $155 million since the end of the quarter, we paid off $60 million of the term loan balance and the business continues to generate strong free cash flow.
Net capex was approximately $14 million during the first quarter of 2023. This included the purchase of previously leased domestic property for approximately $7 million during the period.
The capex outlook for the pressure control business remains unchanged for 2023.
With the addition of the flex fuel business, we have revised our full year capital expenditure budget to $45 to $55 million.
It covers the financial review and I'll now turn the call over to Scott. Thanks, Steve I'll now touch on our expectations for the second quarter based on our new reporting segments. During the second quarter, we expect pressure control revenue to be down in the low single digits percentage wise versus the $195 million reported in the first quarter.
As softness in rig activity may well extend to regions beyond the gas weighted basins. We expect however, more resiliency and production pre sales during the period relative to wellhead equipment. Additionally, we expect to gain some market share and our frac rental business, which should partially offset overall industry activity.
Clients customer indications point to cactus is onshore rig activity down 3% to 5% sequentially on average in the second quarter, depending on the timing of rig releases from Q1 exit Q2 exit we're expecting an 8% to 10% drop in our rig count.
Note that we are not planning to officially public published market share.
On a go forward basis, given that our new reporting structure will combine the legacy <unk> business lines into one segment during the second quarter, we expect to make additional product shipments into Europe . Following an award in the region. This highlights the traction we continue to gain and various international locations regarding our planned expansion efforts in the <unk>.
We continue to work and evaluate ownership structures and the region testing and trials remain the goal for 2023 with approvals to follow <unk>.
Adjusted EBITDA margins in our pressure control segment are expected to be 33% to 35% for the second quarter inclusive of pressure control SG&A and general corporate expenses. This adjusted EBITDA guidance excludes $3 5 million of stock based comp expense within the segment as well as transaction related fees.
Expenses total depreciation expense for our pressure control segment during the second quarter is expected to be approximately $9 million.
Switching over to our scalable technology segment, we expect revenue of $100 million to $105 million during the second quarter, an increase of approximately 15% to 20% versus the first full quarter total, including the two months prior to the acquisition closed this highlights the benefits of the product diversification.
<unk> achieved with the acquisition with the acquisition customer demand for flex deals unique technologies remains robust as flex deal continues to replace stick steel pipe and competing products as previously disclosed our scalable technology segment was working through some higher cost inventory during the first quarter with the majority.
Alrighty of this headwind behind US we expect adjusted EBITDA margins on the segment to increase to between 32 and 33% for Q2 note that this margin guidance excludes the noncash impact from the step up in the value of inventory on hand associated with purchase accounting, which is anticipated to be approximately <unk> <unk>.
$13 million in Q2 and $2 million for the second half of 2023, we expect stock based comp and our scalable technology segment to be approximately $1 3 million.
During the last month, we've had the opportunity to introduce flex deals with mobile technology to select legacy cactus customers and we've already had success I'm confident that this trend will continue as we further showcases superior technology to additional clients as of cactus there is potential to add more larger.
That can move the needle on a go forward basis looking forward. We're excited about the opportunity set for the combined business. The capital light structure strong margin profile should enable the company to generate continued free cash flow this year and rapidly pay down debt, we hope to return to a net cash position.
<unk> this year, which will enable the management team to further evaluate return of capital strategies.
With the recent pullback in commodity prices, while the recent pullback in commodity prices is expected to pressure domestic land activity, we expect our business to outperform general domestic industry activity customer balance sheets remain in much better shape today than they have in years' past cactus remains well positioned to deliver for our shareholders.
Amid the current market environment finally, I want to personally thank our management team and advisors for their herculean efforts and transitioning flex deal to our calculus company and with that I'll turn it back over to the operator, So we may begin Q&A operator.
Thank you at this time, we will conduct the question and answer session. As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced.
To withdraw your question. Please press star one again.
Please limit yourself to one question and one follow up.
At this time standby and we will begin to compile our Q&A roster.
Our first question will come from Dave Anderson with Barclays Go ahead, Dave.
Thank you very much good morning, Scott are you Hey, David how are you.
Great I'm doing great.
Just says the rig count weakness you think is extending beyond the gas basins. I was wondering if you could expand on that a little bit more.
Is that really a reflection of the lower oil prices on the private.
What are you seeing we haven't really heard from.
Larger e&ps majors pulling back at all I'm, just wondering if you could kind of talk about kind of how you see those customer bases shifting in second quarter and also maybe kind of what's your sense on the back half of the year do you think second quarter will kind of plateau or I don't know, obviously gassy sort of its own thing, but maybe just kind of your broader thoughts on the market for the rest of the year, if you wouldn't mind.
Or do you always assets easy questions.
Todd.
Let me say that.
It just stands to reason that with lower gas prices.
That translates into lower cash flow for our customers and because our customers are so focused on returns for their shareholders I can't help but think although I don't have any objective evidence that.
The pullback will extend beyond private so to be sure I think the privates will be affected as you all know more than the public but I don't think the publics are going to be totally immune from the pullback I think in addition to that we have to recognize that all of it 70 Bucks 72 box I didn't actually look this morning.
But the low seventies.
And that has got to have probably an outsized impact on private but to some extent on publics as well I also.
Beth.
When OPEC has another opportunity.
<unk> their production cuts youll see production cuts that are going to be supportive.
Of tightening supply.
Looking I think that the rig count could possibly bottom out.
Towards the end of the second quarter and I do think that the bottom could be in the range of $6 15 to 675, although David I'll look I don't have any objective evidence other than I haven't been in this business for so long.
I think you know.
Okay.
Sentiment is not exactly right now very supportive.
But I don't think its going to fall below that and that's.
Not a terrible.
A terrible area, we can certainly.
Enjoyed very good returns at that level, but.
But I think that everybody is sort of getting themselves. If they think that we're only going to see another 30 rigs pullback.
Okay.
Some wisdom I think for the markets.
Very well needed here.
If I could shift over your flex steel acquisition here.
Can you just talk a little bit about the overlap today with your wellhead business inflect steel.
In other words can you give me maybe a sense I'm not asking for a number but just a lot of wellheads.
They currently kind of done go into flex steel or is that obviously, that's going to be one of the opportunities I will take the selling quality and reducing installation time for customers, but is there much of an overlap today and can you just talk about kind of how you see that moving forward in terms of getting is that the same youre talking to the same person with the customer obviously.
As an E&P, but are you talking the same people how does that kind of work its not really a business. We've had a lot of exposure to historically.
So Dave.
The first point I want to make is that everybody who buys at cactus production tree ultimately has to buy a flex deal product or.
Nick Pi or a product competitive with flex deal like from <unk> or from Shar core or from Baker, So everybody's got to run some sort of.
Transmission line from the end of our chub.
In terms of cactus customers.
If we look at flex deals major.
Customers in the U S. They're also cactus customers so.
Having said that cactus has about five times the number of customers as flex deal. So we're taking this opportunity to introduce the flex steel product line to those customers.
Knowing that they've got to buy something and so it's logical we think to extend.
To expand our wallet size from those customers.
Does that help you at all.
Tom if I could just squeeze in one more question like I don't know a ton about how the inner workings of flex fuel, but how does pricing typically work here.
Steel prices kind of a driver like <unk>, just kind of loosely.
How does that how does the conversations come about.
The drivers of pricing.
So I'm going to tease us with us I'm going to let TFS offer his comments.
So in terms of pricing.
Pricing is that with the.
With the intention of providing the best value to the customer.
We sell our products, but perplexity as products, primarily on safety and quality.
And in that regard were very similar to cactus and the legacy cactus business.
And.
That's why we have also a similar sort of overlap in customer base.
Amongst large customers as well as in privates.
Although like Scott said, we have lots of opportunities to get introduced to legacy cactus customers to grow our topline.
So David let me just expand upon that to be to be fair.
<unk> is by nature sort of a modest person but.
Steel prices clearly steel is up is a large component of his input but.
The way they market their product has been without an eye towards steel prices. So that means that when steel prices went crazy beginning.
Of course, the war in Ukraine.
Flex still did not respond with commensurate increases in their product prices. So.
Don't base their selling price on the their cost of steel.
Okay.
Great. Thank you very much I appreciate it.
Thank you David.
Thank you and as a reminder, if you'd like to ask a question. Please press star one one from your telephone.
Our next question comes from Kurt Elli with benchmark. Please go ahead Sir.
Hey, good morning, everybody.
Good morning.
Doing well doing well thank you so much.
Great I appreciate all the outlook commentary in providing perspective around how you think things are going to evolve. Thank.
Everybody's kind of kind of grapple around elements of the business right now so it's all incrementally helpful.
I guess my question is it sounds like you've got a lot of momentum and a lot of runway here to kind of hold tech flex deal into what you've been doing obviously with five X. The customer base. I know you also looked at the opportunity to leverage flex deal.
On the international front.
And understanding that still probably maybe a year away to seeing some real significant uptick, but just kind of curious.
Scott as you see that unfolding.
What are what are the some of the hurdles you may have to overcome to kind of see that international business grow to the extent, we think again.
Youre talking about hurdles in both product lines.
Well, yes, just maybe overall again I know this is not your first foray in building an international business right.
Just what I'm trying to get a sense as to what you what you see happening in the pipeline what kind of feedback you might be getting from customers right now and the kind of reception and how does that make you feel and do you think theres going to be any roadblocks to expanding your business internationally.
I think the major roadblock remains those countries that require indigenous manufacturing and.
I think by now you know which countries those are.
The rest of the world.
It doesn't have such requirements and.
Frankly, I think that that will flex deal has historically done a much better job internationally, then cactus has.
Flex deals attention turned towards the domestic market as they try to just that.
Had a similar commitment as we had during the supply chain challenges and that is their commitment to take care of their domestic U S customers and when you do that it's just logical that may not be appropriate but.
It's logical that you back off in terms of your focus on international markets for flex tail on particular projects.
International projects can be more disruptive to their manufacturing process, then for cactus and so as a result.
They really Couldnt chase the big International projects at the same extent.
Capital for Us Fortunately is not an issue.
So.
We are.
Combining our marketing efforts flex fuel and cactus together to take.
That's sort of approach the international market, So we will be calling on customers.
Single individual in many of the markets in hopes of getting some interest.
To be fair.
Purchasers on the flex deal side are mostly facility engineers.
Whereas on our side, they're mostly drilling and completion engineers, so even though same companies.
A different set of decision makers. So the major roadblocks right now have just been.
Our lack of exposure and so ask me. This question in a year as we begin to ramp up our efforts internationally.
Sure.
There is no reason.
Historically TFS International <unk>.
<unk> had years, where international was 30% of your business that's right.
There is no structural reason why we can't return to that.
Yeah, and I would say just to add to that.
Any kind of growth that we're going to expect in international markets, especially in the offshore segment.
A really big benefit for flex deal because flex deals got those.
Asymmetric upside nodes.
ROE in the shallow water upstream.
Offshore segments.
Okay. Thank you I appreciate it that's it for me.
Thank you.
As a reminder, if you'd like to ask a question. Please press star one one on your telephone to ask the question.
Thank you and please standby, while we compile our Q&A roster.
Okay.
Okay.
Yes.
Okay.
Thank you everybody.
I would now like to turn it back over to Alan for closing remarks.
We appreciate everyone's interest in cactus and look forward to speaking with you in the next quarter quarter's earnings call.
Thank you for your participation in today's conference call. This concludes the program you may now disconnect.
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