Q2 2023 Cactus Inc Earnings Call
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Thank you.
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Good day and thank you for standing by welcome to the Cactus second quarter 2023 earnings Conference 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 this session you will need to press star one on your telephone you will then hear an automated message about your hand is right to withdraw your question. Please press star. One again, please be advised that today's conference is being recorded I would now like to hand the conference over to.
To your speaker today, Alan Boyd director of corporate development and Investor Relations.
Yeah.
Thank you and good morning.
We appreciate you joining us on today's call our speakers will be Scott Bender, our chairman and Chief Executive Officer, and Steve Tadlock, Our Chief Financial Officer.
So joining us today are Joel Bender, President Steven Bender, Chief operating Officer T. S. CEO of flex deal and will Marsh, our general counsel and executive Vice President.
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.
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.
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, Alan and good morning to everyone.
We are understandably pleased with the Companys performance in the second quarter, Despite a weakening U S land market where.
Particularly proud to be in a net cash position today well ahead of our internal plan as you know free cash flow generation has always been a strength of our company and has been enhanced further by the <unk> acquisition on a standalone basis, each of cactus and flex deals set records for both quarterly revenue and adjusted EBITDA.
This strength reflects the highly differentiated offerings in each of our segments today will walk through our results and our recently introduced segment reporting format, consisting of pressure control, which is legacy cactus <unk> technologies, which represents a flex steel business from second.
<unk> <unk>.
Total company highlights include revenue of $306 million adjusted EBITDA of $115 million adjusted EBITDA margins of 37 point.
7%, we paid a quarterly dividend of <unk> 11 per share record cash flow from operations of $108 million yesterday, we announced that our board approved a 9% increase in our quarterly dividend to <unk> 12, a share and as of July 31.
We have repaid the full $155 million of debt raised to finance the flex deal acquisition.
Giving us once again free of bank debt.
I'll turn the call over to Steve Tadlock, Our CFO , who will review our financial results. Following his remarks I'll provide some thoughts on our outlook for the near term before opening the lines up for Q&A Steve.
Thanks, Scott as Scott mentioned total Q2 revenues were $306 million pressure control revenues of $199 million were up two 3% sequentially driven primarily by increased customer activity. Despite the decline in U S land activity as the quarter progressed.
Operating income increased $5 1 million or 10, 3% sequentially with operating margin, increasing 200 basis points, primarily due to lower transaction expenses, partially offset by an increase in the allowance for doubtful accounts, which was primarily attributable to a single customer.
Adjusted segment EBITDA was $69 9 million, an increase of <unk> 8 million or one 2% sequentially with margins decreasing slightly by 40 basis points driven substantially by the aforementioned allowance.
As a reminder, we closed the flex deal acquisition on February 28 through the second quarter results represent our first full quarter of ownership of the business. While the first quarter included only March results.
Global technology revenues were 106.
$6 7 million, an operating loss of $6 million.
Operating loss was inclusive of $19 3 million of inventory costs associated with the step up in value of inventory on hand at acquisition $8 7 million of intangible amortization expense and $18 1 million of expense associated with the re measurement of the earn out with the <unk> acquisition.
The Remeasurement expense this quarter reflects the revenue outperformance versus our prior forecast.
This liability will be re measured in adjusted if necessary on a quarterly basis through the final earn out evaluation data for June 32024.
Adjusted segment, EBITDA, which excludes all of the above noncash charges was $45 5 million with margins of 42, 6% and approximately 200 basis point increase from March levels due to the depletion of higher cost material in the prior quarter and improved operating leverage note that no corporate costs have been allocated the flex deal in the period.
On a total company basis second quarter, adjusted EBITDA was $115 million up 45% from $79 million during the first quarter adjusted EBITDA margin for the quarter was 37, 7% of revenues an increase from the first quarter due to operating leverage and higher contribution from the school technologies segment.
Adjustments to total company EBITDA during second quarter of 2023 included approximately $2 2 million and transaction related fees and expenses and noncash charges of $5 3 million in stock based compensation $18 $1 million related to the flex fuel earn out liability and $19 $3 million of purchase accounting related step up in inventory, which is.
Packaged scalable technology is cost of sales.
Depreciation and amortization expense for the second quarter was $22 million, which again includes 9 million of amortization expense related to intangible assets booked as part of purchase accounting.
Total D&A expense during the third quarter is expected to be approximately $15 million 7 million of which is associated with our pressure control segment and $8 million of which is associated with global technology. This figure is inclusive of an insect expected $4 million of intangible amortization expense within <unk> technologies during the third.
<unk>.
Intangible amortization expense is expected to remain relatively stable at $4 million per quarter for the next several quarters as the longer lives acquisition intangibles amortized at a steady rate.
Net interest expense during the second quarter was approximately $5 $9 million interest.
Interest expense increased sequentially due to the debt level and accelerated amortization of deferred financing fees, which contributed approximately $3 3 million to interest expense as we paid down debt faster than our forecast and recognize these expenses in the second quarter, we expect interest expense of approximately $1 million during the third.
Income tax expense during the second quarter was $10 million.
<unk> expense increased due to higher expected earnings in the elimination of the benefit related to release of our valuation allowance to be utilized in the first quarter.
During the second 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.
We expect an effective tax rate of approximately 21% for Q3 2023.
GAAP net income was $32 million in the second quarter versus $52 million. During the first quarter. The decrease was driven by higher income tax expense higher interest expense increased inventory step up expense increased purchase price intangibles amortization and the expense related to the remeasurement of the earn out liability associated with the outstanding.
<unk> flex deal.
We prefer to look at adjusted net income and earnings per share, which were $67 million 84 per share respectively. During the second quarter versus $51 million and <unk> 64 per share in the first quarter.
Adjusted net income for the second quarter applied to 26% tax rate to our adjusted pre tax income generated during the quarter.
We estimate that the tax rate for adjusted EPS will be 26% during the third quarter of 2023.
Sure.
During the second 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.
Our board has also approved a 9% increase to the quarterly dividend to <unk> 12 per share which will be paid in September .
Additionally, we repurchased approximately 4000 shares of class a common stock in the final days in the second quarter under our new authorization for approximately 159000.
We ended the quarter with a cash balance of $64 million and growth bank debt of $55 million.
Since the end of the quarter, we repaid the entirety of our bank debt outstanding and are once again in a net cash position.
Looking ahead to the third quarter, we expect to make our 2022 related TRA payment and distribution, which will be approximately $34 million along with an estimated 2023 cash tax payment of $9 million and a quarterly dividend of $10 million.
Net capex was approximately $6 million during the second quarter of 2023.
We're reducing our full year 2023, capex outlook to 35% to $45 million on lower expectations for near term growth spending our pressure control given moderating activity levels.
This range is inclusive of planned investments and low cost supply chain diversification, but excludes investments in the middle East, which we now believe will occur in early 2020 for.
That covers the financial review and I'll now turn the call over to Scott. Thanks, Steve.
Touch on our expectations for the third quarter based on our reporting segments. During the third quarter, we expect pressure control revenue to be down approximately 10% versus the $199 million reported in the second quarter as the decline in drilling activity impacts our business, which remained resilient through the declining.
Rig count in the first half of the year.
As of last Friday, Baker Hughes U S land rig count is down 17% from year end 2022 levels and down 14% from Q1 2023 average levels are differentiated pressure control business continues to outperform this activity decline, we expect the rig count may continue to be pressure.
In the third quarter, although customer indications suggest activity will be flat to up in the fourth quarter, if commodity prices remain constructive or larger well capitalized customers remain committed to investing in their business through commodity cycles and our revenue outperformance.
Outperformance of the declining rig count year to date is reflective of this commitment.
Adjusted EBITDA margins at our pressure control segment are expected to be 32.5% to 34% for the third quarter inclusive of pressure control SG&A in general corporate expenses. This adjusted EBITDA guidance excludes approximately 4 million of stock based compensation expense.
Within this segment as well as transaction related expenses margins are expected to be down sequentially on lower operating leverage although we've begun to see deflation in our supply chain costs. After many months of inflationary pressures. We expect the benefits of this to begin to materialize in the third quarter and more more.
<unk> in the fourth quarter and the mid East will continue to work through testing and trials, which are progressing on schedule or also continue our work on evaluating ownership structures in the region.
Pardon me and upon the completion of our evaluation expect customer acceptance and first orders in late 2024 as mentioned earlier, we now expect to finalize our investment structure in the region in early 2020 for switching over to <unk> technologies segment.
<unk> revenue to be relatively flat versus the second quarter, driven by continued penetration and share of wallet and share of market. This outperformance of the market highlights the benefits of the product diversification achieved with the acquisition.
As discussed last quarter, our squibb oral technology segment was also working through some higher cost inventory during the first quarter and that headwind is now behind us.
We expect adjusted EBITDA margins in this segment to be in the approximately 40% range for Q3 moderating slightly from record Q2 levels with volatility in our supply chain.
Note that this margin guidance excludes approximately $1 million of stock based compensation and the segment also given the high inventory turnover. We have now completed the amortization of the noncash step up in value of inventory associated with purchase price accounting ahead of plan.
And we will not have that cost or add back going forward as mentioned in our form 8-K that was filed last night with our earnings release, we announced a few changes our chairman Bruce Ross <unk>, who has served in that role since the company's founding in August of 2011 has stepped down from the chairman role. After his many years of valuable service.
He will remain a director and continue to contribute to the board for which I am very thankful I've assumed the role of Chairman. In addition to continuing in my current responsibilities as CEO given my additional responsibilities as chairman and my role supporting the integration of Flex deal Joel has assumed the role of President as President Joe.
We continue to oversee our supply chain, including our manufacturing and production facilities. Steven vendor has assumed joles role of Chief operating officer, where he will continue to oversee our branch and field operations managing the majority of our associates and introducing significant technology enhancements.
To our service delivery and invoicing.
Process, Gary Rosenthal as independent Board member since 2018 has assumed the lead director role you should not infer in a retirement plans from these changes.
We are still in the early innings of introducing the flex steel product line, a cactus is much larger customer base through joint meetings.
And are highly encouraged by early efforts to integrate our sales organizations both in the U S and internationally.
Just like Cactus a flex this team is highly technical delivers a superior product and service and strives to exceed customer expectations.
And that is what the cactus legacy business more customer customers will learn to appreciate that many benefits associated with the flex deals global product.
Including speed of installation total cost of ownership production increased safety and reduced emissions for more efficient field operations, we anticipate introducing new products and services in 2020 for the details of which will be discussed when appropriate as.
As stated previously our substantial free cash flow in the five months since the acquisition closed and enabled us to repay all of our $155 million of bank debt well ahead of plan.
Debt free balance sheet.
And increased confidence in the strong through cycle cash flow profile of the combined business has led us to revalue reevaluate our cash return priority as evidenced by our June announcement of the inaugural share repurchase program and the increase to the base dividend announced yesterday going forward, we expect to remain.
Main discerning buyers of our own stock as we believe we will continue to be rewarded for having the flexibility to invest in attractive organic and inorganic growth opportunities with our excess cash while maintaining a strong balance sheet, while third quarter activities for pressure control are expected to be down.
Given the year to date decline in U S land activity spool technologies is expected to remain stable. We are confident that our consolidated business will continue to outperform the market and we remain encouraged by the investment discipline, we see from both our customers and service industry peers.
Moreover, we expect that our end process supply chain diversification will further strides strengthening our low cost high quality competitive advantage in future periods and with that I'll turn it back over to the operator, so that we may begin Q&A operator.
Thank you we will now conduct the question and answer session. As a reminder to ask a question. Please press star one on your telephone and pay for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster.
Yes.
Our first question comes from Stephen <unk> of Stifel.
Thanks, Good morning, everybody.
Good morning, how are you.
Good thanks, Greg so.
My first question.
When I think about the legacy business, and we had modeled and expected market share to grow a little bit I know you are not going to speak directly to market share, but can you talk about.
What youre seeing in that business, both from a pricing perspective.
And just sort of what the if the competitive landscape there.
Changed at all.
If you wanted to tell me. If you think we are right you gained about 200 basis points of market share, we'd love to hear that.
While we're not going to talk about market share directly but I.
I will share with you that we set a record for market share during the quarter.
I'm, absolutely not going to talk about pricing I would never have.
It certainly never will.
So sorry about that but at least you got your market share question answered.
Okay.
What about just sort of the competitive landscape has there been any change in the competition.
Made progress.
At all do you think or do you think your your.
Your position just remains as strong as it's been for the last several years.
Hello.
All right.
I guess the best evidence of that is the statement that I made about record market share for the quarter.
Okay. Okay. Thanks, and then just the other one I wanted to ask you about because you guys are out there on the frontline constantly as well.
You mentioned it earlier about rig counts in the third quarter and maybe stabilization are you seeing that are you, saying that based on conversations based on early orders like what gives you the confidence that we do see a stabilization and hopefully.
<unk> in 2024.
Yes.
Let me, let me be clear, even though you haven't asked this question explicitly.
I believe in transparency as you know.
From conversations with our customers.
My feeling now you may recall I call. It a trough of 650 earlier.
Or biotech that $6 50 down to closer to 600 for the U S land count I think that.
That's going to probably occur.
Mid to latter part of the third quarter, after which time, we will see some stabilization in and I feel like we'll begin to see some increases particularly.
Coming from the privates, who have suffered the most in terms of.
Of activity decline and they always respond first.
Great.
You mentioned that I'll slip one in on the plywood side, you've made progress driving some it seems like the last couple of quarters, That's fair right.
We have historically made progress with private.
The fact of the matter is private.
Used to account for about 35, or so percent of our business they are down to about 30%.
Its not terribly surprising when you consider how much the privates have dropped.
Yes, great great color. Thank you.
Thank you.
One moment for our next question.
Okay.
Our next question comes from David Anderson of Barclays.
Hey, David Hey, Good morning, Scott Good morning, Scott how are you.
Are you done.
Just let me follow up on Stephen's question, or just a little bit because if you think about kind of your larger customers. There is it fair to say they've been kind of hold it staying the course I'm just kind of wondering what theyre, saying if anything about 24 yet.
Are you expecting kind of them just to stay steady here throughout and really kind of the incremental anything incremental comes from pilots or maybe natural gas just bigger picture. How are you thinking about the next two or three quarters.
Yes, so to be clear without mentioning customer names.
It really big one.
You're probably thinking about right now has.
Maintained very robust activity in the Permian and Delaware areas, but they have.
Released rigs and their gas here areas that'll be fair that didn't represent a large portion, but it wasn't meaningful percentage, so think about where they had gas rigs drilling in those cap rates have either stop or a balance of stock so not really fair to say that the majors.
Have maintained their recovery in terms of visibility.
We have visibility pretty good visibility through the end of the year, but I don't think.
I see customers all the time, none of our customers are talking about 2024.
I do believe that budgets.
Let's all hope it.
Hello remains in that.
Safety <unk> 78 to $82 range I think we will seek budget resets and.
That will include I think increased activity from private as well as from the larger players.
You heard me say last time despite.
All the patents, who believe that we can make up for the drop in gas count by.
By picking up oil.
I've mentioned that cash flow is cash flow.
As cash flows decrease shareholder returns remain constant.
Something's got to give and something has yet so.
If we look at.
At our.
I Shouldnt answer questions that you haven't asked.
Yes.
Yes.
So please please do.
If I think about the decline that we've seen and our rig count believe it or not.
At 50% gas, 50% oil related which kind of supports.
By position that cash is cash.
So some are talking about natural gasoline is coming back later in the I know you didn't get too specific there.
This is kind of LNG buildout happening at some point in 'twenty. Four are you in that cancer or you think you can give me more kind of private so on the oil side will be more sort of the uptick.
<unk> and <unk>.
Yes, the latter.
Okay.
You made a comment just now about 24 that nobody's talking about 'twenty. Two I was just curious is that is this a little bit late.
Are you surprised youre not talking about 24 are your customers kind of holding off because they don't understand the cost structure. So I'm. Just curious would you would you would normally be having talks about 24 at this time of year.
Yeah.
Now I would say that that.
When you are in the January timeframe, you normally get visibility over six months, but as you approach a budget reset period, I think that period of visibility.
Tracks a bit so ask me again in September and I think I'll have a much better idea of what we can et cetera.
And that makes a lot of sense, if I could just shift on the <unk> side, so margins on the.
EBITDA margins were impressive this quarter sounds like kind of going forward.
Yes.
We're talking kind of in the 40% next quarter. It sounds like your kind of normalized number is a bit higher than your original thinking just curious whats changed you've now had the business operation four months so.
Are you seeing something different or is it more on the cost opportunity side or are you just managing better just curious what's changed.
Terms of that outlook.
Margins longer term.
While I'm not managing at Ts.
He is with US this morning.
Clear about that this is this is not a reflection of of Scott vendor.
<unk> would you like to maybe offer a comment there yes, David this is TFS.
The flexible business, a very robust business and I think.
You should not read too much into the first quarter two.
Two second quarter change in margins because of the first quarter.
Cactus had one flex Steve just for a month.
David.
And it also had a lot of I think <unk>.
Hold it and went through in the last call that a lot of the.
Accounting related adjustments to inventory et cetera, so on a go forward basis.
The 40 plus percent margin that Scott guided towards.
Is near term expectations.
Business has got a phenomenal competitive advantage the business has got really meaningful customer value proposition, it's very differentiated and we are firing on all cylinders. So.
I hope that provides you a little bit of an overview, Scott Tassos polite way of saying he is confident that he can maintain those margins.
Okay.
40, plus alright.
So.
Let me ask <unk> question, a little bit here I know you don't want to have our pricing.
Details on contract.
David.
Im not going to ask you about it.
<unk>.
General question here I'm curious about how your customers order you spool products does this typically come on your framework agreement is a job to job and this is the cloud.
I'm just not sure if you want to answer this question, but is there a route loose rule of thumb as to how much volume we.
Priced every quarter I'm, asking because obviously steel prices have come down quite a bit since March you. Just said that part of it is getting more expensive inventory I'm. Just curious just generally speaking how does that business work from that perspective.
So David let me just help us a little bit you have two questions here right. The first is how the customers place orders.
Is that right.
Correct are you asking how far in advance.
This order.
It's more is it kind of relates to the timing of pricing is there.
Like a loose frame agreement, which you just kind of walking it down and it gets like every once a year you kind of look at it I'm just trying to understand.
With steel prices correcting as much as they have like how much does that.
<unk> kind of loosely trying to understand.
Okay.
Yes, please yes David.
Just a big picture just stepping back.
One of the things.
E&P operators focus on is clearly managing costs and they manage it pretty tight to their supply chain departments. The benefit we have in the flex deal side as that business has got a really differentiated value proposition and the value proposition is based on safety and quality.
And the safety and quality Flex deal has got a tremendous track record we've never we've not had one operating field failure in the history of the business.
And as a result, we are able to differentiate ourselves versus competition.
Other part just before I answer your question that you should just keep in mind.
Is.
<unk>.
Products and services make up less than 2%.
Right about 2% of share of wallet.
Operator spend.
So the so that's the background all to say.
Operators really placed callouts, it's sort of like a milk run David.
Just a <unk> order purchased and now we do both.
<unk> as well as services, we deliver it all through delivered a length.
<unk> and services that we offer our customers. So all to say that sometimes we get products and services that are required to be in customer site within three days most of the time within five to seven days.
And.
That's how we manage the business.
Okay. Thank you very much I appreciate it.
Thank you.
One moment for our next call.
Okay.
Our next question comes from Kurt Hallie a benchmark.
Hey, good morning.
How are you.
Yes, Scott.
How are you doing.
Great. Thanks.
Awesome.
Hey, Scott.
In the press release, you got a reference that cobalt technologies.
<unk>.
The pressure control business in terms of the revenue impact of a slowdown in activity.
Just kind of curious in that dynamic as it kind of like a quarter lag question number one and question number two.
Do you expect that the sport business were kind of seeing the same sort of magnitude of decline that you indicated.
That pressure control is going to see in the third quarter.
Okay and maybe.
Probably again.
We characterize that correctly and tease you can jump in with what I say is incorrect and you can still you'll still heavier job even if hugh.
On the shelf and Mike.
In the case of spool bowls.
TFS TSS team is.
Increasing their penetration.
In terms of the market.
And in terms of share of wallet, So I don't think that.
That we're in a position right now to tell you what percent of their.
Revenue change is due to.
Market penetration wallet penetration.
Versus a lag.
But look they need for people to drill wells and complete wells and put wells online and to that extent.
Their business is going to be impacted the question is and I think <unk> answered. It is our feeling is that is increase in share of wallet and end market.
It's going to compensate for that.
Is that fair.
I don't disagree with you Scott, but I would just add.
No I would just add to that comment.
Kurt the share of wallet is an unique sort of <unk>.
Market lever that we have our company level that we have to continue increasing penetration into our customers.
Wanted to just provide you just a quick background to that.
Unlike some of the products that are offered just in one part of the customers value chain.
<unk> products are offered at multiple parts of the value chain. So what I mean by that is it's used under pipe on the pad when they're constructing the pad.
And in that regard.
The business was pretty much the revenue and the bookings, particularly will pretty much mirrored that.
Rig count movements, but then it also is installed further down the value chain. So for instance, when.
When you connect the well pad to the central tank battery. That's another segment and then when you connect the central tank battery to the water disposal line. That's another segment and then when you connect the central tank battery to the midstream takeaway lines. So there are multiple segments and when we say that is share of wallet penetration.
We mean by that is.
Can we get a customer on the is usually on one one of these customers. One of these segments and then they see how well and flex still performs how well the team is performing in terms of service and the value proposition is realized and then they begin to sort of start using us in other segments of their operation.
And that is going to continue hopefully growing and it's continued to grow in the last 10 years that I've been here and hopefully it'll continue to grow in the years to come.
That's great Fantastic I appreciate that.
Scott follow up in.
Comment you made about the middle east kind of rollout and what you see for pressure control. Thank you kind of referenced sometime late 2024.
Again don't want to mince any words that you mentioned, but is it late 'twenty for when you think youll start to generate incremental revenue or is the real incremental revenue opportunity in 2025 and beyond.
Tell me what incremental needs okay.
Yes.
How about just growing the revenue base in the Middle East is that is that really.
Our expectation is you'll see that at the end of 2024, and then it'll accelerate into 'twenty five and thereafter.
Okay got you alright, I appreciate that all for me.
Thank you one moment for our next question.
Okay.
Our next question comes from Saga part of Bank of America.
Hi, Good morning, good morning, Scott.
Good morning, how are you.
Good good good thanks for asking Scott.
Maybe sticking to this <unk>.
Side of things that just wanted to clarify on your answer to <unk> question, because I think I kind of heard not in those words, but I think I kind of heard that yes, there is a lag.
When it's fully built and embarked in but do you think that share of wallet penetration can help you offset that.
Should we think that there's a scenario and a realistic scenario that the pool of business revenues might not fall over the next couple of quarters.
Well, we never provide guidance beyond a quarter as you note.
Yes.
So I really would only like to.
Carver you I think guidance on the next quarter. So I think that our guidance is.
Stands and that is that despite this falling rig count and activity level that they are going to maintain their Q2.
Levels.
I'm, sorry, I can't be more precise.
Yes, Scott I totally understand that but yes.
Maybe we should think about the lag.
Obviously completions lagged the rig count and production and then how you are guiding that our production to the central tank batteries and onward that lags completion retail just what kind of a loud should we think about it six months is it nine months or is it different than that Ray just conceptually how should we think about that lag.
Yes, Sara this is Scott if I may.
Yes, I think.
Look it's incredibly hard Sarah before I answer the question just to give you a disclaimer, it's incredibly hard to predict the future, especially to build accurately right.
So predicting the customers.
Sort of.
<unk> spend on different segments is a little bit of an impossible task, but I'll take I'll answer the question on the split it was it was it was a it was raised.
I think wed like historically, we've seen a three to four month lag.
And but.
With the increased cross penetration capabilities that we're having with cactus, where we sell.
Products.
Having multiple meetings.
With the.
With cactus customers as well, we're beginning to see penetration in the pipe on the bag segment.
And we're beginning to see more line pipe in different types of customers.
And so.
Historically, it's been about three to four months it may be a little shorter this time.
It may be a little longer this time, but that's where it's historically buffers.
Okay. Okay. Okay. No. That's really helpful. And then a quick follow up on the cost side of things.
<unk> is a big cost, but you don't price a product like XD.
So value.
Based on pricing.
But can you help at all in terms of how should we think about operating leverage fixed cost looking later, because anything you can give us along those lines.
Yes.
Steve we're not.
Riding any kind of guidance into the material costs as a percent or anything like that we'd like to keep that source.
So the covenants competitive reason.
Okay.
Okay, guys. Thanks for the answers I'd turn it back.
Okay.
Thank you.
As a reminder to ask a question. Please press Star then one on the telephone and wait for your name to be announced.
I am showing no further questions at this time I would now like to turn the conference back to Alan <unk> for closing remarks.
We appreciate everyone joining today and look forward to speaking with you next quarter.
Yeah.
Have a good day everybody. Thanks.
This concludes today's conference. Thank you for participating you may now disconnect.
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