Q3 2023 Cactus Inc Earnings Call
Good day, and thank you for standing by welcome to the Cactus, Inc quarter three earnings call.
At this time all participants are in a listen only mode.
The speaker's presentation, there will be a question and answer session.
Ask a question during the session you will need to press star one one on your telephone.
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To withdraw your question. Please press star one again.
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I would now like to hand, the conference over to your first speaker today.
Boyd, who is director of corporate development and Investor Relations.
Please standby thank you I had.
Thank you and good morning.
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, and CEO of Flex deal.
Also joining us today are Joel Bender, President, Steven Bender, Chief operating officer, and will Mark our General counsel.
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.
Conciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in our earnings release.
That I will turn the call over to Scott.
Thanks, Alan and good morning to everyone. We were pleased with the company's execution in the third quarter and encouraged by October's preliminary results. Despite the declines in the U S land rig count during the period as expected pressure control revenues decreased quarter over quarter, while split-level technologies revenues remained raw.
<unk> flat.
Bulk segment sales outperformed the reduced activity levels once again, reflecting our value proposition.
Third quarter total company highlights include revenue of $288 million adjusted EBITDA of $103 million adjusted EBITDA margins at 35, 8%, we paid a quarterly dividend of <unk> 12 per share and as previously announced we are pleased to have no bank debt after repaying the last of the.
$155 million of debt raised to finance the flex deal acquisition earlier in the quarter I'll.
I'll now turn the call over to Steve Tadlock, our CFO and CEO of Flex deal overview of 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.
As Scott mentioned total Q3 revenues were $288 million.
Pressure control revenues of $182 million were down eight 4% sequentially driven primarily by decreased customer activity.
Operating income decreased $6 7 million or 12, 3% sequentially with operating margins declining 120 basis points, primarily due to lower operating leverage adjust.
Adjusted segment, EBITDA decreased $10 5 million or 15% sequentially with margins falling by 250 basis points due to the reduction in activity and the aforementioned operating leverage.
Global technologies revenues of $105 million were down one 2% sequentially due to product mix operating income increased $45 $8 million, primarily due to the quarter over quarter change in the re measurement of the earn out liability associated with the <unk> acquisition, where we recorded a $5 1 million gain in the quarter compared to $18.
$1 million loss in Q2, as well as by a reduction in inventory step up expense, which was zero in the third quarter versus $19 3 million in the second quarter.
Operating income was also inclusive of $4 million of intangible amortization expense adjusted.
Segment, EBITDA, which excludes all of the above noncash charges decreased to $1 8 million.
Or three 9% sequentially with margins decreasing by 110 basis points due to a transient increase in product input costs that impacted the cost of sales this quarter.
On a total company basis third quarter, adjusted EBITDA was $103 million down.
<unk> down 11% from $115 million during the second quarter adjusted EBITDA margin for the quarter was 35, 8% of revenues down 190 basis points from the second quarter due to lower operating leverage adjust.
Adjustments to total company EBITDA during the third quarter of 2023 included approximately $1 1 million and transaction related fees and expenses noncash charges of $4 4 million in stock based compensation of $5 $1 million gain related to the flex still earn out liability and a <unk> $3 million gain due to the reevaluation.
<unk> of the TRA liability.
Depreciation and amortization expense for the third quarter was $15 million total.
Total depreciation and amortization expense during the fourth 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 technologies.
$4 million of the $8 million total scalable technologies DNA is related to the intangibles acquired from <unk>. We expect this expense to remain stable for the next several quarters.
Net interest expense during the third quarter was approximately $1 4 million.
Decreasing sequentially due to the reduced debt level.
Income tax expense during the third quarter was $18 million up from $10 million in the second quarter tax expense increased due to increased income from operations.
During the third quarter, the public or class a ownership of the company averaged 82% and ended the quarter at 82%.
Barring further changes in our public ownership percentage, we expect an effective tax rate of approximately 21% for Q4 2023.
GAAP net income was $68 million in the third quarter versus $32 million during the second quarter. The increase was driven by lower inventory step up expense decreased amortization of purchase price intangibles, the change and re measurement of the earn out liability and decreased interest expense.
We prefer to look at adjusted net income and earnings per share, which were <unk> $64 million and <unk> per share respectively. During the third quarter versus $67 million 84 per share in the second quarter. Adjusted net income for the third quarter applied at 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 fourth quarter of 2023.
During the third quarter, we paid a quarterly dividend of <unk> 12 per share, resulting in a cash outflow of approximately $10 million, including related distributions to members. The board has approved a quarterly dividend of <unk> 12 per share to be paid in December. Additionally, we made cash TRA payments and associated distributions of approximately $32 <unk>.
$7 million related to 2022 tax savings provided by the TRA.
As previously announced we also paid down the remaining $55 million of bank debt in the third quarter.
We ended the quarter with a cash balance of $64 million.
Net capex was approximately $8 million during the third quarter of 2023, our full year 2023, Capex outlook is now in the range of $35 million to $40 million at the low end of our prior guidance.
That covers the financial review and I'll now turn the call over to Scott.
Thanks, Steve.
Pardon me I doubt.
And our expectations for the fourth quarter by reporting segment during the fourth quarter, we expect pressure control revenue to be down low single digits sequentially due to the anticipated decline in the average industry rig count quarter over quarter. Despite projected gains in cactus rigs followed from today through the end of it.
The year, we also expect U S land drilling activity will be up approximately 5% from today's levels in Q1 of 2024 for reference our October total revenues were up over 10% from September.
Though our Q4 guide incorporates holiday seasonality. In addition, we expect our rental revenues to remain stable in Q4 from Q3 levels. Despite forecasted declines in industry completion activity adjusted EBITDA margins on our pressure control segment are expected to be 30% to 32% for the quarter include.
Ziv of pressure control SG&A in general corporate expenses. This adjusted EBITDA guidance excludes approximately 4 million of stock based compensation expense within the segment as well as transaction related expenses.
Margins are expected to be approximately flat to down sequentially on modestly lower operating leverage as mentioned last quarter, we have implemented supply chain initiatives in response to reduce year.
Year to date activity levels, which should positively impact inventory costs early next year and the first half of next year. We also plan to introduce several new product enhancements.
It should serve to generate additional benefits for our customers as well as support our operating results our testing for a potential <unk> customer continues to progress on schedule. We're also actively continuing our work on ownership structures in the region and still expect customer acceptance and first orders in late 2024.
Sure Mor.
You on these efforts in the first half of next year.
Switching over to our global Technology segment, we expect revenue of $90 to $95 million during the fourth quarter, a decrease of approximately 10% to 15% versus the third quarter due to the year to date U S land activity decline and seasonal impacts on the business as shipments depend to a meaningful degree on our customers.
<unk> installation contractors and on completion activity, we expect adjusted EBITDA margins in this segment to be approximately 38% to 40% for Q4 moderating slightly from Q3 levels on lower operating leverage note that this margin guidance excludes approximately $1 million of stock based comp.
In the segment.
As previously announced we're very pleased to report that our ownership of flex deal has progressed to the point, where we're ready to transition to a new leader of this business Steve Tadlock currently our executive Vice President and Chief Financial Officer has taken over as CEO of Flex deal Steve brings over 10 years of experience with our company.
Several years of experience as a director and chairman of poly flow.
Louisville pipe business sold the Baker Hughes in 2018.
Im confidence Steve is the right person to lead flex deal in the next phase of our ownership and we'd like to thank him for his outstanding contributions to cactus as our CFO, while we mature as a public company next week, Steve will begin to transition his CFO duties to our keefer, while we undertake a search for a permanent CFO our.
Retired in 2016 from Baker Hughes, as Vice President Controller, and Chief Accounting Officer, and have supported cactus in an advisory capacity since our IPO in 2018.
This remains a very exciting time at cactus, we're very pleased with the initial financial and operational results of the flex deal business and are excited to have introduced an additional highly differentiated product to our portfolio that diversifies, our revenue streams, both from industry and cycle timing perspectives our work on.
Adding capacity in the med <unk> is progressing on schedule. In addition, we've undertaken significant efforts to diversify our low cost supply chain in recent months, which will reduce potential geopolitical risks to our business and further solidify our position as a low cost manufacturer. Despite these various growth grow.
<unk> and supply chain initiatives, we expect to generate meaningful cash flow in the coming quarters to return to shareholders and to allow us to pursue attractive inorganic growth opportunities.
Our fourth quarter activity levels for cactus and flex deal are expected to be down. We're encouraged by indications received from customers regarding planned 2024 activity. Additionally, I am pleased to see the recent wave of consolidation occurring among our E&P customers' larger well capitalized disciplined A&P.
<unk> benefit our industry by reducing breakeven costs with their larger manufacturing type development programs, while providing consistency and returns that attract investor capital under the energy sectors. These customers also tend to gravitate to premium equipment and service providers such as cactus, So I'm confident.
We will be the beneficiary of further consolidation over time with that I'll turn it back over to the operator, and we may begin Q&A operator.
Yes.
Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced withdraw your question. Please press star one again.
Please standby.
We compile the Q&A roster.
First question comes from Scott Gruber with Citigroup go ahead. Your line is open.
Yes, good morning.
Hey, Scott how are you.
Doing well.
So a couple of moving pieces here and pressure control margin extended to dip into <unk>.
The service activity slows.
That tends to reverse.
In the new year, but then you'll also see the benefit of the inventory initiatives and now it sounds like some product enhancements.
With a backdrop of modest rig count recovery.
Trying to think about the.
Base expectations for for where pressure control margins can go buy <unk> next year is mid thirties type number a reasonable given the inventory initiatives.
The answers.
Yes.
Scott This is Steve.
We obviously.
Like giving guidance ahead of time I think that is probably not an unreasonable assumption yes.
Some recovery in activity and what we're doing on the other side of things or the cost side of things with Joe's efforts.
That's reasonable.
Got you.
And then I know the.
The earn out liability for select steel moves around some with the activity outlook.
Where does that stand today and.
And that's paid.
One year post close Brexit, that's a <unk> payment is that alright.
That's paid in <unk> of 'twenty four.
It's going to keep moving around unfortunately, that's just accounting we had to reevaluate every quarter right now it's at $18 9 million.
Okay.
Got it.
Turn it over thank you.
Thanks Scott.
Thank you standby for the next question please.
Thank you Sir.
The next question comes from David Anderson with Barclays. Go ahead. Your line is now open.
Hey, David Good morning, I'm doing well how are you.
I'm fine thanks.
So just kind of a near term question and a little bit of a longer term question just on the near term question. It feels like we've seen a bit of a change in behavior over the last couple of months from customer leases kind of extent iPad.
Was just wondering kind of what youre seeing there kind of on the margin.
Hi, David Yes, David Chang.
Change in behavior from what.
Well just from your customers from your customers from the E&P just in general we've seen like the fourth quarter slowdown, we're seeing a little bit the seasonality is a little bit more pronounced I'm. Just curious if you've seen anything kind of on the margin is that the private sector that are kind of pulling back a little bit is it your bigger customers youre talking about budgeting.
<unk> I'm, just kind of curious what's happening on the margin if there's been any changes you've seen there I would say the privates are pulling back.
Okay.
Does that just kind of a near term thing there, yes, I think we're all we're all pretty encourage by our are larger.
Our larger customers in terms of what they tell us now in terms of their plans.
Okay.
So if we look into kind of 'twenty four and beyond one of the things we hear quite a bit from the e&ps as the push for more efficiencies, whether or not that's through longer laterals and more subsurface analysis, so shale kind of move into manufacturing mode.
And I was wondering how this changes on your business mix effectively your business is driven by the well count spread across wellhead pressure control and on the production side.
Just wondering how your revenue opportunity.
Evolves in a mature shale like the mix is going to shift a little bit.
Wondering how that changes the revenue opportunity at all and I also note that those two businesses is probably where you have the most market share opportunity can you just kind of talk about how you see that mix potentially shifting them in a more mature kind of manufacturing mode shale.
Okay. So.
Not surprisingly I may not answer your question directly but this shift towards longer laterals.
Is being addressed by <unk>.
This comment we made about some new products that we're introducing next year. So we believe that in response to this tendency for longer laterals, we have a product that we're going to introduce.
We ended the first quarter second quarter that will enhance customer's productivity and longer laterals and so the hope is that it will make our product even more attractive not much I can do about the rig efficiencies.
<unk> fourth to support them.
<unk>.
And further develop the moat around our products.
In other words, you've got a playbook of cards you're dealt.
So when you have a great.
But it also does fit into kind of those two markets, where you have more market share opportunities. So right I mean, I would think particularly on the <unk> side as you kind of already showing that as just kind of mature that should be.
An area, where you can gain share I.
I believe youre right.
Okay.
Thank you.
One moment for our next question.
Thank you for holding.
Our next question comes from Kurt Hollywood with Benchmark go ahead. Your line is open.
Thank you. Thank you hey, good morning.
How are you hey, Scott doing well thanks.
Yes, so Scott yes, it's the risk is you are not directly answering this question as well I'll take the chance.
So look in the in the context of.
<unk>.
Either on.
Product enhancements going into next year, you provided some color around.
And enhancement around the longer laterals. So I was wondering if you might provide maybe a couple of additional teasers on what.
What what we could be looking for in and just in a broader context on what these enhancements are going to are going to address.
Yes so.
Okay.
Kirk I hate to answer this question, but I'm going to answer it anyway.
So the product enhancements.
Not surprisingly.
Both our rental business and our wellhead business and our rental business, we expect the product enhancements to have a.
Meaningful impact on our maintenance costs and our repair costs.
So we've finished prototyping we've been spending I guess the last nine months almost a year prototype prototyping of new Frac valve design and.
We will be introducing that next year, and so I'm very hopeful that youre going to see some margin impact from that.
In terms of wellhead.
As we we actually started from a relatively clean sheet of paper, we've got a new wellhead thats going to be highly even more highly value engineered catch my drift as well as adding features that are as I mentioned earlier responsive to this tendency towards law.
<unk> laterals.
So I forgot.
Okay. That's good color I really really appreciate that now is too much.
A follow up here for Steve and congrats on your new role Steve.
<unk>.
Just kind of curious in the context of.
No.
<unk>.
As you've entered into this new role right is there a.
Significant shifts in strategy direction.
What do you see in terms of opportunities now that you are sitting in that seat.
No I wouldn't say there is a shift I think that the company was.
And a good.
Direction and.
And I think really my job is just to keep it going in that direction and help shepherd the growth.
I'm really excited about it I think the quality of the people.
Obviously I spend a lot of time with people over there and the last.
I guess nine months, now, but but spending even more time in the last months Ive, just really impressed with the people and the product and the processes that they have in place. So it's really just confusing a little bit more of the cactus sculpsure.
And taking it from there.
Okay, great. Thanks, a lot guys I appreciate it.
Please standby for your next question.
Sure.
Okay.
Your next question comes from Stephen <unk> with Stifel.
Go ahead your line is open.
Thanks, I'm trying to think of something you won't answer.
Good.
Yeah.
Yes.
I think I think first and this might be in that category actually but given what you mentioned about the privates, maybe pulling back a little bit.
I think last quarter, you referenced that on the wellhead side that your share was probably at an all time high or are you continuing to see.
Similar numbers on the shares.
Gosh, Steve I thought that was going to be the very first question.
Okay.
And you know we've had this discussion collectively before the call thinking we're trying to divorce ourself from discussing market share, but let me pass you on the back.
Do not worry about market share.
Okay, I'll be telling you what the market share is well that satisfy.
Telling you that we battle.
That works for now.
In other words don't factor of market share loss into your numbers got you got you and I understand that makes sense.
Well, let me just let me let me say more of that can we just tell you even more I think that this.
Yes.
This tendency towards consolidation.
I've always said, it's going to be constructive I still believe that it's going to be constructive.
Okay. That's.
That's helpful.
One other follow ups I was going to ask about so that is that's helpful. So.
Now.
Well, we won't count that.
Inc.
Yeah.
<unk>.
Yeah.
Repairs to all work, but the movement of the balance sheet back to being positive cash honestly very rapidly post post a large transaction reflects steel.
Youre going to probably start building cash over over the next year.
Can you talk about either your approach.
Basically what's the approach to capital allocation from here as as capital built.
My first choice first of all.
We consider the dividend.
Pretty sacred to us that's why we kind of started at a low level and it moved up slowly.
We announced a share buyback.
Which is still in place my first choice is inorganic growth.
Want to grow this business and I want to grow it primarily internationally.
<unk>.
To do that we need cash.
Fortunately since I've been in this business for four plus decades. This has always been a highly positive cash flow generating business and it still is.
So I think we will have plenty of currency to do what we want to do including taking care of our shareholders on a quarterly basis.
Great. Thanks, Thanks for the detail.
Sure.
Thank you as a reminder to ask a question you need to press star one on your telephone.
One moment, while we.
Wait for any additional questions.
At this time I'm showing no further questions.
Ill now turn it back over to Scott vendor for closing remarks.
Thank you all for joining us this quarter I'll look forward to speaking to you next quarter and.
Trust me when I tell you we are working hard to provide for.
Industry best shareholder returns.
Have a good day.
Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
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Thank you.
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Yes.
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<unk>.
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Yes.
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Good day, and thank you for standing by welcome to the Cactus, Inc quarter three earnings call.
At this time all participants are in a listen only mode.
The speaker's presentation, there will be a question and answer session.
To ask a question during the session you will need to press star one on your telephone you will then hear an automated message advising that your hand is rich.
Draw. Your question. Please press Star one one again please.
Please be advised that today's conference is being recorded.
I would now like to hand, the conference over to your first speaker today, Alan Boyd, who is director of corporate development and Investor Relations.
Please Sam Thank you I had.
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, and CEO of Flex deal.
Also joining us today are Joel Bender, President, Steven Bender, Chief operating officer, and will Mark our General counsel.
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 from 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.
Conciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in our earnings release.
That I will turn the call over to Scott.
Thanks, Alan and good morning to everyone. We were pleased with the company's execution in the third quarter and encouraged by October's preliminary results. Despite the declines in the U S land rig count during the period as expected pressure control revenues decreased quarter over quarter, while split-level technologies revenues remained raw.
<unk> flat.
<unk> segment sales outperformed the reduced activity levels once again, reflecting our value proposition.
Third quarter total company highlights include revenue of $288 million adjusted EBITDA of $103 million adjusted EBITDA margins of 35, 8%, we paid a quarterly dividend of <unk> 12 per share and as previously announced we are pleased to have no bank debt after repaying the last of the.
$155 million of debt raised to finance the flex deal acquisition earlier in the quarter I'll now turn the call over to Steve Tadlock, our CFO and CEO of Flex deal Who'll 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.
Hey, Steve.
Thank you and Scott mentioned total Q3 revenues were $288 million pressure control revenues of $182 million were down eight 4% sequentially driven primarily by decreased customer activity.
Operating income decreased $6 7 million or 12, 3% sequentially with operating margins declining 120 basis points, primarily due to lower operating leverage adjusted.
Adjusted segment, EBITDA decreased $10 5 million or 15% sequentially with margins falling by 250 basis points due to the reduction in activity and the aforementioned operating leverage.
<unk> technologies revenues of $105 million were down one 2% sequentially due to product mix operating income increased $45 8 million, primarily due to the quarter over quarter change in the re measurement of the earn out liability associated with the <unk> acquisition, where we recorded a $5 1 million gain in the quarter compared to $18.
$1 million loss in Q2, as well as by a reduction in inventory step up expense, which was zero in the third quarter versus $19 3 million in the second quarter.
Operating income was also inclusive of $4 million of intangible amortization expense adjusted.
Segment, EBITDA, which excludes all of the above noncash charges decreased to $1 8 million.
Or three 9% sequentially with margins decreasing by 110 basis points due to a transient increase in product input costs that impacted the cost of sales this quarter.
On a total company basis third quarter, adjusted EBITDA was $103 million down 11% from $115 million during the second quarter adjusted EBITDA margin for the quarter was 35, 8% of revenues down 190 basis points from the second quarter due to lower operating leverage.
Adjustments to total company EBITDA during the third quarter of 2023 included approximately $1 1 million and transaction related fees and expenses noncash charges of $4 4 million in stock based compensation of $5 $1 million gain related to the flex still earn out liability and a <unk> $3 million gain due to the revaluation.
Of the TRA liability.
Depreciation and amortization expense for the third quarter was $15 million.
Total depreciation and amortization expense during the fourth 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 technologies.
$4 million of the $8 million total scalable technologies DNA is related to the intangibles acquired from <unk>. We expect this expense to remain stable for the next several quarters.
Net interest expense during the third quarter was approximately $1 4 million.
Decreasing sequentially due to the reduced debt level.
Income tax expense during the third quarter was $18 million up from $10 million in the second quarter tax expense increased due to increased income from operations.
During the third quarter, the public or class a ownership of the company averaged 82% and ended the quarter at 82%.
Any further changes in our public ownership percentage, we expect an effective tax rate of approximately 21% for Q4 2023.
GAAP net income was $68 million in the third quarter versus $32 million during the second quarter. The increase was driven by lower inventory step up expense decreased amortization of purchase price intangibles, the change and re measurement of the earn out liability and decreased interest expense.
We prefer to look at adjusted net income and earnings per share, which were <unk> $64 million and <unk> <unk> per share respectively. During the third quarter versus $67 million 84 per share in the second quarter. Adjusted net income for the third quarter applied at 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 fourth quarter of 2023.
During the third quarter, we paid a quarterly dividend of <unk> 12 per share, resulting in a cash outflow of approximately $10 million, including related distributions to members. The board has approved a quarterly dividend of <unk> 12 per share to be paid in December. Additionally, we made cash TRA payments and associated distributions of approximately 32.
$7 million related to 2022 tax savings provided by the TRA.
As previously announced we also paid down the remaining $55 million of bank debt in the third quarter.
We ended the quarter with a cash balance of $64 million.
Net capex was approximately $8 million during the third quarter of 2023, our full year 2023, Capex outlook is now in the range of $35 million to $40 million at the low end of our prior guidance.
That covers the financial review and I'll now turn the call over to Scott.
Steve.
Pardon me I doubt.
And our expectations for the fourth quarter by reporting segment during the fourth quarter, we expect pressure control revenue to be down low single digits sequentially due to the anticipated decline in the average industry rig count quarter over quarter. Despite projected gains in cactus rigs followed from today through the end of.
The year, we also expect U S land drilling activity will be up approximately 5% from today's levels in Q1 of 2024 for reference our October total revenues were up over 10% from September.
Though our Q4 guide incorporates holiday seasonality. In addition, we expect our rental revenues to remain stable in Q4 from Q3 levels. Despite forecasted declines in industry completion activity adjusted EBITDA margins on our pressure control segment are expected to be 30% to 32% for the quarter include.
Ziv of pressure control SG&A in general corporate expenses. This adjusted EBITDA guidance excludes approximately 4 million of stock based compensation expense within the segment as well as transaction related expenses.
Margins are expected to be approximately flat to down sequentially on modestly lower operating leverage as mentioned last quarter, we've implemented supply chain initiatives in response to reduce year.
Year to date activity levels, which should positively impact inventory costs early next year and the first half next year. We also plan to introduce several new product enhancements, which should serve to generate additional benefits for our customers as well as support our operating results our testing for a potential <unk> customer continues to.
Progress on schedule. We're also actively continuing our work on ownership structures and the region and still expect customer acceptance and first orders in late 2024, who will share more with you on these efforts in the first half of next year.
<unk> over to our global Technology segment, we expect revenue of $90 to $95 million during the fourth quarter, a decrease of approximately 10% to 15% versus the third quarter due to the year to date U S land activity decline and seasonal impacts on the business as shipments depend to a meaningful degree on our customers.
Installation contractors and on completion activity, we expect adjusted EBITDA margins in this segment to be approximately 38% to 40% for Q4 moderating slightly from Q3 levels on lower operating leverage note that this margin guidance excludes approximately $1 million of stock based comp.
In the segment.
As previously announced we're very pleased to report that our ownership of flex deal has progressed to the point, where we're ready to transition to a new leader of this business.
<unk> tablets currently our executive Vice President and Chief Financial Officer has taken over as CEO of Flex deal Steve brings over 10 years of experience with our company several years of experience as a director and chairman of poly flow.
Global pipe business sold the Baker Hughes in 2018.
I'm confident Steve is the right person to lead flex deal over the next phase of our ownership and we'd like to thank him for his outstanding contributions to cactus as our CFO, while we mature as a public company next week, Steve will begin to transition his CFO duties to our key for while we undertake a search for a permanent CFO our.
Tired in 2016 from Baker Hughes, as Vice President Controller, and Chief Accounting Officer, and have supported cactus in an advisory capacity since our IPO in 2018.
This remains a very exciting time at cactus, we're very pleased with the initial financial and operational results of the flight steel business and are excited to have introduced an additional highly differentiated product to our portfolio that diversifies, our revenue streams, both from industry and cycle timing perspectives, our work on <unk>.
Adding capacity in the med <unk> is progressing on schedule. In addition, we've undertaken significant efforts to diversify our low cost supply chain in recent months, which will reduce potential geopolitical risks to our business and further solidify our position as a low cost manufacturer.
Spite these various gross growth and supply chain initiatives, we expect to generate meaningful cash flow in the coming quarters to return to shareholders and to allow us to pursue attractive inorganic growth opportunities.
Our fourth quarter activity levels for cactus and flex deal are expected to be down. We're encouraged by indications received from customers regarding planned 2024 activity. Additionally, I am pleased to see the recent wave of consolidation occurring among our E&P customers' larger well capitalized disciplined A&P Cup.
<unk> benefit our industry.
Reducing breakeven costs with their larger manufacturing type development programs, while providing consistency and returns that attract investor capital under the energy sectors. These customers also tend to gravitate to premium equipment and service providers such as cactus. So I'm confident we'll be the beneficiary of further.
<unk> over time with that I'll turn it back over to the operator, and we may begin Q&A operator.
Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Please standby.
While we compile the Q&A roster.
First question comes from Scott Gruber with Citigroup go ahead. Your line is open.
Yes, good morning.
Hey, Scott how are you.
Doing well.
So a couple of moving pieces here in pressure control.
Extended the dip in <unk>.
The service activity slows.
But that tends to reverse.
In the new year, but then you'll also see the benefit of the inventory initiatives and now it sounds like some product enhancements.
With a backdrop of modest rig count recovery.
Trying to think about the.
Base expectations for.
We're pressure control margins can go say about <unk> of next year is mid <unk> type number a reasonable given the inventory initiatives.
And product enhancements.
Yes.
Got it Steve.
We obviously.
<unk> given guidance ahead of time, I think that is probably not an unreasonable assumption yes.
Recovery in activity and what we're doing on the other side of things or the cost side of things with Joe's efforts.
That's reasonable.
Got you.
And then I know the.
The earn out liability for select steel moved around some with the activity outlook, I guess, where does that stand today.
That's paid.
One year post close correct, that's a <unk> payment is that alright.
That's paid in <unk> of 'twenty four.
Keep moving around and unfortunately, that's just accounting we had to reevaluate every quarter right now it's at $18 9 million.
Okay.
Got it.
Turn it over thank you.
Thanks Scott.
Thank you standby for the next question.
Thank you Sir.
The next question comes from David Anderson with Barclays. Go ahead. Your line is now open.
David Good morning.
I'm doing well how are you.
I'm fine thanks.
So just kind of a near term question and a little bit of a longer term question just on the near term question. It feels like we've seen a bit of a change in behavior over the last couple of months from customers. These are kind of extent iPad I was just wondering kind of what youre seeing there kind of on the margin.
Hi, David Yes, David.
Change in behavior from what.
Well just from your customers from your customers from the E&P just in general we've seen like the fourth quarter slowdown we've seen a little bit in the seasonality is a little bit more pronounced I'm. Just curious if you've seen anything kind of on the margin is that the private sector that are kind of pulling back a little bit is it your bigger customers youre talking about budgeting.
I'm just kind of curious what's happening on the margin if there's been any changes you've seen.
The privates are pulling back.
Okay.
Does that just kind of a near term thing there.
I think we're all we're all pretty encourage by our are larger.
Our larger customers in terms of what they tell us now in terms of their plans.
Okay.
So if we look into kind of 'twenty four and beyond one of the things we hear quite a bit from the e&ps as the push for more efficiencies, whether or not thats through longer laterals and more subsurface analysis, so shale kind of move into manufacturing mode.
And I was wondering how this changes on your business mix effectively your business is driven by the well count spread across wellhead pressure control and on the production side.
Just wondering how your revenue opportunity.
Evolves in a mature shale like the mix is going to shift a little bit. So I'm just wondering how that changes the revenue opportunity at all and I also note that those two businesses is probably where you have the most market share opportunity can you just kind of talk about how you see that mix potentially shifting in them.
In a more mature kind of manufacturing mode shale.
Okay. So.
Not surprisingly I may not answer your question directly but slight mix shift towards longer laterals is being addressed by <unk>.
This comment we made about some new products that we're introducing next year. So we believe that in response to this tendency for longer laterals, we have a product that we're going to introduce.
We ended the first quarter second quarter that will enhance customer's productivity and longer laterals and so the hope is that it will make our product even more attractive not much I can do about the rig efficiencies except for to support them and and.
And further develop the moat around our products.
In other words, you've got a playbook of cards you're dealt.
So we had a great.
But it also does fit into kind of those two markets, where you have more market share opportunities. So right I mean, I would think particularly on the <unk> side as you kind of already showing that as this kind of matures that should be an area, where you can gain share.
I believe you are right.
Okay.
Thank you.
One moment for our next question.
Thank you. Our next question comes from Kurt Hollywood with Benchmark go ahead. Your line is open.
Thank you Hey, good morning.
And Kurt how are you.
Hey, Scott doing well thanks.
Yes, so Scott yes.
The risk is you are not directly answering this question as well.
Okay. Thank you guys.
So look in the in the context of providing.
It either on product enhancements going into next year, you provided some color around.
And enhancement around the longer laterals. So I was wondering if you might provide maybe a couple of additional teasers on.
What what we could be looking for and just in a broader context on what these enhancements are going to are going to address.
Yes so.
Kirk I hate to answer this question, but I'm going to answer it anyway.
So the product enhancements.
Not surprisingly.
Both our rental business and our wellhead business in our rental business, we expect the product enhancements.
Have a meaningful impact on our maintenance costs and our repair costs.
So we finished prototyping we've been spending I guess the last nine months almost a year prototype prototyping of new Frac valve design and.
We will be introducing that next year and so on.
I'm very hopeful that youre going to see some margin impact from that.
In terms of wellhead.
As we we actually started from a relatively clean sheet of paper, we've got a new wellhead thats going to be highly even more highly value engineered catch my drift as well as adding features that are as I mentioned earlier responsive to this tendency towards <unk>.
<unk> laterals.
So that's all I can say.
Okay. That's good color I really really appreciate that now it's too much.
Follow up here for Steve and congrats on your new role Steve.
Yes.
Just kind of curious in the context.
No.
As you've entered into this new role right is there a.
Significant shifts in strategy direction.
What do you see in terms of opportunities now that you are sitting in that seat.
No I wouldn't say there is a shift I think that the company was.
And a good <unk>.
Direction and.
And I think really my job is just to keep it going in that direction and help shepherd the growth.
I'm really excited about it I think the quality of the people.
Obviously I've spent a lot of time with people over there in the last.
I guess nine months, now, but but spending even more time in the last months, just really impressed with the people.
The product and the processes that they have in place. So it's really just confusing a little bit more of the CAC to sculpsure.
And taking it from there.
Okay, great. Thanks, a lot guys I appreciate it.
Please standby for our next question.
Yes.
Your next question comes from Stephen <unk>.
<unk> with stifle.
Go ahead your line is open.
Hi, Thanks, I'm trying to think of something you won't answer.
Oh good.
Yeah.
I think I think first and this might be in that category actually but given what you mentioned about the privates, maybe pulling back a little bit I think last quarter you referenced that on the wellhead side that your share was probably at an all time high or are you continuing to see.
Kind of similar numbers on the shares.
Gosh, Steve and I thought that was going to be the very first question.
Okay.
No.
We have this discussion collectively before the call thinking we're trying to divorce ourself.
From discussing market share, but let me pass you on the back.
Do not worry about market share.
Okay, I'll be telling you what the market share is well that satisfy.
Im telling you that we bought it.
That works for now.
In other words don't factor of market share loss into your numbers got you got you know I understand that makes sense.
Well, let me just let me, let me say more of that and we just tell you even more I think that this.
<unk>.
This tendency towards consolidation.
I've always said, it's going to be constructive I still believe that it's going to be constructed.
Okay. That's helpful.
One of the follow ups I was going to ask about so that is that's helpful. So.
Now.
Well, we won't count that.
<unk>.
Yes.
<unk>.
The repairs to all work, but the movement of the balance sheet back to being positive cash honestly very rapidly post post the large transaction reflects deal.
Youre going to probably start building cash over over the next year.
Can you talk about either your approach well just basically what's the approach to capital allocation from here as capital built.
Oh.
My first choice first of all.
Consider the dividend.
Pretty sacred to us that's why we kind of started at a low level and it moves slowly.
We announced a share buyback.
Which is still in place my first choice.
And organic growth.
I want to grow this business and I want to grow it primarily internationally.
<unk>.
To do that we need cash.
Fortunately since I've been in this business for four plus decades. This has always been a highly positive free cash flow generating business and it's still is.
So I think we will have plenty of currency to do what we want to do including taking care of our shareholders on a quarterly basis.
Great. Thanks, Thanks for the detail.
Yes.
Thank you as a reminder.
Ask a question you need to press star one on your telephone.
One moment, while we.
Wait for any additional questions.
At this time I'm showing no further questions.
Like to now turn it back over to Scott vendor for closing remarks.
Thank you all for joining us this quarter I'll look forward to speaking to you next quarter and.
Trust me when I tell you we are working hard to add.
Provides for it.
Industry best shareholder returns.
Have a good day.
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