Q4 2023 Cactus Inc Earnings Call

February 29, 2024

Unknown Executive: The Ultimate Parody Site-Limited Company, LLC Thank you for standing by, and welcome to Cactus, Inc.'s fourth quarter 2023 earnings conference call. At this time, all participants are in listen only mode.

Okay.

Speaker Change: Thank you for standing by and welcome to Cactus, Inc. Fourth quarter 2023 earnings Conference call. At this time all participants are in listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you'll need to press star one on your telephone. If your question has been answered and you'd like to remove yourself from the queue.

Unknown Executive: After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star one one on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star one one again.

Speaker Change: <unk> simply press Star one again as a reminder, today's program is being recorded and now I'd like to introduce your host for todays program, Alan Boyd director of corporate development and Investor Relations. Please go ahead Sir.

Unknown Executive: As a reminder, today's program is being recorded. And now, I'd like to introduce your host for today's program, Alan Boyd, director of corporate development and investor relations. Please go ahead, sir.

Alan Boyd: 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 Al Keefer, our Interim Chief Financial Officer. Also joining us today are Joel Bender, President, Stephen Bender, Chief Operating Officer, Steve Tadlock, CEO of Bucksteel, and Will Marsh, our General Counsel.

Alan Boyd: 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 I'll keep her our interim Chief Financial Officer.

Speaker Change: Joining us today are Joel Bender, President Steven vendor, Chief operating officer, Steve Tadlock, CEO Flex deal and will Mark our General Counsel. Please.

Alan Boyd: 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.

Speaker Change: 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.

Speaker Change: Forward looking statements are subject to a number of risks and uncertainties many of which are beyond our control.

Speaker Change: These risks and uncertainties can cause actual results to differ materially from our current expectations. We.

Alan Boyd: We advise listeners to review our earnings release and the risk factors discussed in our filings with the SBA. 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. With that, I'll turn the call over to Scott. Thanks, Alan, and good morning to everyone.

Speaker Change: We advise listeners to review our earnings release and the risk factors discussed in our filings with the SEC.

Speaker Change: 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.

Speaker Change: In addition, during today's call, we will reference certain non-GAAP financial measures reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in our earnings release with that I will turn the call over to Scott. Thanks, Alan and good morning to everyone. We closed out the final quarter of 2023 with strong margin performance in both segments.

Scott J. Bender: We closed out the final quarter of 2023 with strong margin performance in both segments. Pre-cash flow was substantial, and with the debt raised to finance the flex-yield acquisition repaid in Q3, we increased our cash balance by over $70 million in Q4. For the full year 2023, both businesses set records for revenue and adjusted EBITDA despite the decline in U.S. land activity over the course of the year. Our company remains well positioned in the market as a provider of highly engineered differentiated products to premium customers, and our strong financial performance reflects that. Some fourth quarter total company highlights include revenue of $275 million, adjusted EBITDA of $100 million, adjusted EBITDA margin of 36.4%, Now I'll turn the call over to Al Keifer, our CFO, who will review our financial results. Following his remarks, I'll provide some thoughts on our outlook for the year, or rather, for the near term, before opening the lines for Q&A. So Al?

Scott J. Bender: Free cash flow was substantial and what's the debt raised to finance the <unk> acquisition repaid in Q3, we increased our cash balance by over $70 million in Q4 for the full year 2023 bulk businesses set records for revenue and adjusted EBITDA. Despite the decline in U S.

Scott J. Bender: Land activity over the course of the year, our company remains well positioned in the market as a provider of highly engineered differentiated products to premium customers and our strong financial performance reflects us some fourth quarter total company highlights include revenue of $275 million adjusted.

Scott J. Bender: EBITDA of $100 million adjusted EBITDA margin of <unk>.

Scott J. Bender: 36, 4%, we paid a quarterly dividend of <unk> 12 per share and we increased our cash balance to 134 million ill now turn the call over to our key for our CFO, who will review our financial results. Following his remarks I'll provide some thoughts on our outlook for the year with a near term lever for <unk>.

CFO: And the lines for Q&A so al.

CFO: Thank you.

CFO: Before I begin I would like to highlight the changes to our reporting structure.

CFO: <unk> in Q4, we are now presenting our corporate and other expenses separately from our two operating segments.

Alan J. Keifer: Before I begin, I would like to highlight the changes to our reporting structure. Beginning in Q4, we are now presenting our corporate and other expenses separately from our two operating segments. The cost within corporate and other consists of personnel whose activities support both operating segments, as well as other public reporting and administrative overhead costs. All of these costs were previously reported within the pressure control segment.

CFO: The cost within corporate another consist of personnel, whose activities support both operating segments as well as other public reporting and administrative overhead cost.

CFO: All of these costs were previously reported within the pressure control segment.

CFO: Prior periods have been recast in the earnings release to conform to this new presentation.

CFO: To assist analysts and investors with understanding this reporting change we have provided a historical reconciliation for 2021 through 2023 on the Investor Relations section of our website.

Speaker Change: I will now begin the results review.

Speaker Change: As Scott mentioned earlier total Q4 revenues were $275 million.

Alan J. Keifer: Prior periods have been recast in the earnings release to conform to this new presentation. To assist analysts and investors with understanding this reporting change, we have provided a historical reconciliation for 2021 through 2023 in the investor relations section of our website. I'll now begin the results review. As Scott mentioned earlier, total Q4 revenues were $275 million. For our pressure control segment, revenues of $180 million were down 1.1% sequentially, driven primarily by decreased customer activity.

Speaker Change: For our pressure control segment revenues of $180 million were down one 1% sequentially driven primarily by decreased customer activity.

Speaker Change: Operating income increased $1 2 million or two 2% sequentially with operating margins, increasing 100 basis points.

Speaker Change: Adjusted segment EBITDA.

Speaker Change: Increased $1 5 million or two 3% sequentially with margins, increasing by 120 basis points.

Speaker Change: The margin improvement was due to lower rental equipment repair costs, partially associated with the recent modification of our Frac about design.

Speaker Change: In efforts to limit our branch expenses in response to reduced activity levels.

Speaker Change: Yes.

Speaker Change: For our <unk> technologies segment revenues of $94 million were down 10, 4% sequentially due to lower customer activity levels.

Alan J. Keifer: Operating income increased 1.2 million or 2.2% sequentially, with operating margins increasing 100 basis points. Adjusted Segment EBITDA increased 1.5 million or 2.3% sequentially, with margins increasing by 120 basis points. The margin improvement was due to lower rental equipment repair costs, partially associated with the recent modification of our frack valve design and efforts to limit our branch expenses in response to reduced activity levels. For our spoolable technology segment, revenues of $94 million were down 10.4% sequentially due to lower customer activity levels. Operating income decreased $11.6 million sequentially due largely to the quarter-over-quarter change in the expense resulting from the re-measurement of the flex-deal earn-out liability.

Speaker Change: Operating income decreased to 11 6 million sequentially.

Speaker Change: Due largely to the quarter over quarter change in the expense, resulting from the remeasurement of the flex still earn out liability.

Speaker Change: Adjusted segment, EBITDA decreased $4 5 million or 10, 2% sequentially.

Speaker Change: While margins increased by 10 basis points.

Speaker Change: As reductions in operating leverage were offset by reduced input costs.

Speaker Change: Corporate and other expenses were $5 7 million in Q4 down $1 3 million sequentially due to lower transaction related expenses and stock based compensation.

Speaker Change: Adjusted corporate EBITDA was approximately flat in Q4 at $3 8 million of expense.

Speaker Change: On a total company basis fourth quarter, adjusted EBITDA was $100 million down two 9% from $103 million during the third quarter.

Speaker Change: Adjusted EBITDA margin for the fourth quarter was 36, 4% compared to $35 eight.

Speaker Change: 8% for the third quarter.

Speaker Change: Adjustments to total company EBITDA during the fourth quarter of 2023 include noncash charges of $4 6 million in stock based compensation.

Alan J. Keifer: Adjusted segment EBITDA decreased $4.5 million, or 10.2% sequentially, while margins increased by 10 basis points, as reductions in operating leverage were offset by reduced input costs. Corporate and other expenses were $5.7 million in Q4, down $1.3 million sequentially due to lower transaction-related expenses and stock-based compensation. Adjusted corporate EBITDA was approximately flat in Q4 at $3.8 million.

Speaker Change: And a $1 9 million expense related to the flex steel earn out liability re measurement.

Speaker Change: Depreciation and amortization expense for the fourth quarter was $15 million, which includes $4 million of amortization expense related to intangible assets booked as part of purchase accounting.

Total depreciation and amortization expense during the first quarter of 2024 is.

Speaker Change: As expected to be approximately 15 million of which $7 million is associated with our pressure control segment and $8 million is associated with <unk> technologies.

Speaker Change: Income tax expense during the fourth quarter was approximately $17 million.

Speaker Change: During the fourth quarter, the public or class a ownership of the company was 82%.

Alan J. Keifer: On a total company basis, fourth-quarter adjusted EBITDA was $100 million, down 2.9% from $103 million during the third quarter. Adjusted EBITDA margin for the fourth quarter was 36.4% compared to 35.8% for the third quarter. Adjustments to total company EBITDA during the fourth quarter of 2023 include non-cash charges of $4.6 million in stock-based compensation and a $1.9 million expense related to the flex deal earn out liability re-measurement. Appreciation and amortization expense for the fourth quarter was $15 million, which includes $4 million of amortization expense related to intangible assets booked as part of purchase accounting. Total depreciation and amortization expense during the first quarter of 2024 is expected to be approximately $15 million, of which $7 million is associated with our pressure control segment and $8 million is associated with spoolable technology. Income tax expense during the fourth quarter was approximately $17 million.

Speaker Change: Barring further changes in our public ownership percentage, we expect an effective tax rate of approximately 22% for Q1 2024.

Speaker Change: GAAP net income was $62 million in the fourth quarter versus $68 million during the third quarter. The decrease was largely driven by the change in re measurement of the earn out liability.

Speaker Change: Adjusted net income and earnings per share were <unk> $65 million 81 per share respectively. During the fourth quarter.

Speaker Change: Compared to $64 million and <unk> 80 per share in the third quarter.

Speaker Change: Adjusted net income for both the fourth quarter and full year 2023 were net of a 23% tax rate.

Speaker Change: <unk> adjusted pre tax income generated during the respective periods.

Speaker Change: This rate was lower than anticipated due to the onetime release in 2023 of valuation allowances associated with the flex steel acquisition.

Speaker Change: We estimate that the tax rate for adjusted net income and EPS will be 26% during the first quarter of 2024.

Speaker Change: During the fourth quarter, we paid a quarterly dividend dividend of 12 <unk>.

Speaker Change: Per share, resulting in a cash outflow of approximately $10 million, including related distributions to members.

Speaker Change: The Board has also approved a quarterly dividend of <unk> 12 per share to be paid in March 2024.

Speaker Change: We ended the quarter with a cash balance of $134 million, a sequential increase of approximately $70 million.

Alan J. Keifer: During the fourth quarter, the public or Class A ownership of the company was 82%. Barring further changes in our public ownership percentage, we expect an effective tax rate of approximately 22% for Q1 2024. Cap net income was $62 million in the fourth quarter versus $68 million during the third quarter. The decrease was largely driven by the change in remeasurement of the earn-out liability.

Speaker Change: Net capex was approximately $9 $5 million during the fourth quarter of 2023, and $38 6 million for the full year 2023.

Speaker Change: Full year 2024, we expect net capex in the range of $45 million to $55 million.

Speaker Change: The increase from 2023 is due to increased spending on.

Speaker Change: On efficiency improvements have flex deals baytown manufacturing facility.

And approximately $20 million budgeted for international growth and supply chain diversification in 2024.

Speaker Change: That covers the financial review and I'll now turn the call back over to Scott. Thank you al well done I'll now touch on our expectations for the first quarter of 2024 by reporting segment.

Alan J. Keifer: Adjusted net income and earnings per share were $65,081,000 per share, respectively, during the fourth quarter, compared to $64,080,000 per share in the third adjusted net income for both the fourth quarter and full year 2023, or net of a 23% tax rate applied to our adjusted pre-tax income generated during their respective periods. This rate was lower than anticipated due to the one-time release in 2023 of valuation allowances associated with the Flex Steel acquisition. We estimate that the tax rate for adjusted net income and EPS will be 26% during the first quarter of 2024. During the fourth quarter, we paid a quarterly dividend of $0.12 per share, resulting in a cash outflow of approximately $10 million, including related distributions to members. The board has also approved a quarterly dividend of $0.12 per share to be paid in March 2024. We ended the quarter with a cash balance of $134 million, a sequential increase of approximately $70 million.

Scott J. Bender: Pardon me during the first quarter, we expect pressure control revenue to be down mid single digits versus the $180 million reported in the fourth quarter of 2023 as strong production equipment sales in Q4 led to stronger revenues and the level of industry activity would imply we expect the U S.

Scott J. Bender: U S land rig count to be approximately flat from today's levels and the remainder of the first quarter. Although a recent weakness in natural gas prices suggest the cautionary outlook beyond this period anecdotally the number of inbound inquiries for Frac rental equipment have increased in the past 45 days.

Scott J. Bender: Suggesting potential for the second quarter of 2024, adjusted EBITDA margins in our pressure control segment are expected to be 33% to 35% for the first quarter exclusive of corporate and other expenses, which are now reported separately. This adjusted EBITDA guidance also excludes approximately.

Scott J. Bender: Proximately 2 million of stock based compensation expense within the segment.

Scott J. Bender: Margins are expected to be down sequentially as reduced product sales impact our operating leverage partially offset by the supply chain initiatives previously announced we expect our low cost manufacturing diversification to enhance product margins by the middle of 2025.

Alan J. Keifer: Net capex was approximately $9.5 million during the fourth quarter of 2023 and $38.6 million for the full year 2023. For the full year 2024, we expect net capex in the range of 45 to 55 million. The increase from 2023 is due to increased spending on efficiency improvements at Flex Steel's Baytown manufacturing facility and approximately $20 million budgeted for international growth and supply chain diversification in 2024. That covers the financial review. And I'll now turn the call back over to Scott. Thank you, Al. Well done!

Scott J. Bender: As mentioned last quarter, new wellhead and valve product improvements are in the process of being introduced and we expect the rollout of these to more significantly impact operating results.

Scott J. Bender: Late this year as we responsibly replace our current inventories are mid east expansion plans are underway testing continues and are still targeting customer acceptance first orders by late 2024, we continue to evaluate opportunities and while we don't have any further news at this time, we're pleased with the outlook.

Scott J. Bender: And look forward to sharing a meaningful update on our efforts within the next 90 days switching over school Rolls Technology Spillovers Technology segment, we expect first quarter revenue to be up low single digits relative to the fourth quarter, which would represent a record setting Q1 for flex deal largely on.

Scott J. Bender: Stronger demand for the majors. We're also seeing increased interest from international and midstream customers, who recognize the value proposition of the flex steel product, we expected adjusted EBITDA margins in this segment to be approximately 37% to 39% for Q1 moderating from Q4 levels on it.

Scott J. Bender: I'll now touch on our expectations for the first quarter of 2024 by reporting, During the first quarter, we expect pressure control revenue to be down mid-single digits versus the $180 million reported in the fourth quarter of 2023, as strong production equipment sales in Q4 led to higher revenues than the level of industry activity would imply. We expect the U.S. land rate count to be approximately flat from today's levels for the remainder of the first quarter, although recent weakness in natural gas prices suggest a cautionary outlook beyond this period. Anecdotally, the number of inbound inquiries for frack rental equipment has increased in the past 45 days, suggesting potential for the second quarter of 2024. Adjusted EBITDA margins in our pressure control segment are expected to be 33 to 35 percent for the first quarter, exclusive of corporate and other expenses, which are now reported separately. This adjusted EGIDA guidance also excludes approximately $2 million of stock-based compensation expense within the segment.

Scott J. Bender: Increased input costs that will begin to work through our inventory late in the first quarter note that this margin guidance excludes approximately 1 million of stock based compensation in the segment.

Scott J. Bender: Adjustments adjusted corporate EBITDA is expected to be approximately $4 million loss in Q1 flat from the fourth quarter, which excludes approximately $1 million of corporate stock based compensation consolidates.

Scott J. Bender: The consolidation of our customers continues in the sector improving our industry's efficiency at this time, we cannot predict the near term impact on our business other than to reiterate that our business model favors larger operators.

Scott J. Bender: We expect a reduction in the U S land rig count by year end following consolidations as a combined entity entities high grade drilling prospects and increased drilling efficiencies further risk to the rig count remains as operators respond to low natural gas prices, our company's focus on safety.

Scott J. Bender: The execution and servicing our customers allowed us to closeout, our milestone 2023 for cactus, Although 2024 U S drilling and completion activity I expect that expectations are modest at this time cactus remains well positioned with two segments that generate high margins and attractive return.

Scott J. Bender: Margins are expected to be down sequentially as reduced product sales impact our operating leverage, partially offset by the supply chain initiatives previously announced. We expect our low-cost manufacturing diversification to enhance product margins by the middle of 2025. As mentioned last quarter, new wellhead and valve product improvements are in the process of being introduced, and we expect the rollout of these to more significantly impact operating results late this year as we responsibly replace our current. Our Mideast expansion plans are underway, testing continues, and we are still targeting customer acceptance first orders by late 2024. We continue to evaluate opportunities, and while we don't have any further news at this time, we're pleased with the outlook and look forward to sharing a meaningful update on our efforts within the next 90 days. Switching over to the spool rules technology segment, we expect first quarter revenue to be up low single digits relative to the fourth quarter, which would represent a record-setting Q1 for FlexSteel, largely on stronger demand for the major

Scott J. Bender: While operating differentiate differentiation differentiated value.

Value to customers, we expect to generate substantial free cash flow in 2024 that will provide us with optionality to increase shareholder returns over time or pursue organic and inorganic growth opportunities in a disciplined manner that our shareholders expect.

Speaker Change: With that I'll turn it back over to the operator, and we can begin Q&A operator.

Certainly one moment for our first question.

Speaker Change: And our first question comes from the line.

Piper Sandler: From Piper Sandler your question please.

Piper Sandler: How are you.

Piper Sandler: Hey, doing well in yourself.

Speaker Change: Okay. Thank you.

Speaker Change: Scott you talked about spools being up some in <unk> due to the majors have you been adding some procurement accounts here.

Speaker Change: Or is this just kind of a general increase in activity from the majors.

Speaker Change: Yes.

Speaker Change: I would like to state catalog can now run.

Speaker Change: We responded.

Speaker Change: Yes, we've just been seeing increased activity from the majors in particular and then.

Speaker Change: We alluded to earlier in the script also international orders from Latin America Middle East.

Speaker Change: <unk>.

Speaker Change: One other positive is on the midstream side.

Speaker Change: A significant interest from a large midstream company with which we hadn't done much business.

Scott J. Bender: We're also seeing increased interest from international and midstream customers who recognize the value proposition of the FlexSteel product. We expected adjusted EBITDA margins in this segment to be approximately 37 to 39 percent for Q1, moderating from Q4 levels on increased input costs that will begin to work through our inventory late in the first quarter. Note this margin of guidance excludes approximately $1 million of stock-based compensation in the segment. Adjusted corporate EBITDA is expected to be an approximately $4 million loss in Q1, flat from the fourth quarter, which excludes approximately $1 million of corporate stock-based compensation.

Speaker Change: And inquiries from other midstream so overall, we're feeling very good about the outlook.

Speaker Change: For the next year.

Speaker Change: Okay got it and then also my second question, Steve just kind of on the product mix I mean, you mentioned the midstream customer.

So it sounds like there's some uptake on kind of the gathering and distribution side. If you could just speak to that maybe a little more kind of what youre seeing this year.

Stephen D. Tadlock: Yes, I think it's.

Stephen D. Tadlock: With midstream you have more regulatory hurdles or a different mindset to get through and the team has been working on that for years and I think they are starting to see the fruits of that effort.

Stephen D. Tadlock: So I think thats really the driver of it.

Speaker Change: Okay perfect. Thanks, so much.

Speaker Change: Thank you.

Speaker Change: Q1 moment for our next question.

Speaker Change: And our next question comes from the line of Arun <unk> from Jpmorgan. Your question. Please.

Arun: Yes. Good morning, I was wondering if you could make.

Arun: Maybe provide more details on some of the new product.

Arun: Introduction it sounds like the new Frac Bell was a tailwind to margins in the quarter.

Scott J. Bender: Consolidation of our customers continues in the sector, improving our industry's efficiency. At this time, we cannot predict the near-term impact on our business, other than to reiterate that our business model favors larger operators. That said, we expect a reduction in the U.S. land rig count by year-end following consolidations as the combined entities have high-grade drilling prospects and increased drilling efficiency. However, further risk to the rig count remains as operators respond to low natural gas prices.

Arun: But give us a sense of.

Arun: The rollout of that new <unk> as well as your new wells had an offering.

Arun: Okay.

Arun: Yes.

Arun: The frac valve as well is being rolled out right now and then.

Arun: I think it's important to recognize that this is a.

Arun: A modification of our existing frac valve, which doesn't lead to any obsolescence. However, this modification.

Arun: Pretty significantly reduces the amount of repairs required.

Arun: As you may know from previous conversations unlike a lot of our peers, we tear down valves completely after every job.

Scott J. Bender: Our company's focus on safety, execution, and servicing our customers allows us to close out a milestone 2023 for Cactus. Although 2024 U.S. drilling and completion activity expectations are modest at this time, Cactus remains well positioned to generate high margins and attractive returns while operating differentiated or in the value-to-customer. We expect to generate substantial free cash flow in 2024 that will provide us with the optionity to increase shareholder returns over time or pursue organic and inorganic growth opportunities in the disciplined manner that our shareholders expect. With that, I'll turn it back over to the operator, and we can begin Q&A. Operator.

Arun: Which gives rise to a large repair cost in terms of replacement parts and we've seen a pretty significant reduction in the damage to our internals.

Arun: Frac valve design, so as soon as we can cycle these valves through their normal repaired.

Arun: Will be replacing the internals with this new design.

Arun: The wellhead design.

Arun: We're looking to roll that out.

Arun: Q3 to Q4, which I think is one of the more exciting iterations I don't know how many iterations turnaround now.

Arun: Ken.

Arun: Thats, what all the different changes had this one.

Arun: <unk> offers the advantage of increased features which for the sake of my competitors on that kind of detail, but also.

Arun: Pretty significant value engineering would enter this particular project.

Unknown Executive: Certainly one moment for our first question, and our first question comes from the line of Luke Lemoine from Piper Sandler. Your question, please. Luke, how are you?

Arun: Think about third and fourth quarter for that great.

Arun: Great.

Arun: Just as my follow up obviously, Saudi Aramco has been in the news over the last several weeks.

Arun: Point for investors. So just wondering if you could give us your perspective on.

Luke Michael Lemoine: Are you doing well on yourself? Thank you. Scott, you talked about schools being up some in 1Q due to the majors. Have you been adding some program accounts here?

Arun: What you see going on from a Capex perspective, and how does this influence your thoughts of potentially committing capital to two new facility there.

Arun: Yes, I don't I don't think it changes my thought.

Stephen D. Tadlock: or it's just this kind of general increase in activity from. I'm going to let Steve Tadlock, who now runs that site, respond. Yeah, we've just been seeing increased activity from the majors, in particular, and then, as we alluded to earlier in the script, also international orders from Latin America, the Middle East, and one other positive is on the midstream side, significant interest from a large midstream company with which we hadn't done much business, and inquiries from other midstream companies. So overall, we're feeling very good about the outlook for the next year. I got it.

Arun: Thoughts on the potential business in Saudi although to be honest, we've talked about this before the fact that our it.

Arun: Saudi as Youre thinking about selling 1% of Aramco.

Arun: <unk>.

It was a little concerning on the one hand, I know that they need the money for 2030 on the other hand.

Arun: It's what could one could interpret this as taking some chips off the table, but in terms of messaging that our Ram co is sending out.

Arun: Now this doesn't change my opinion at all.

Speaker Change: Great. Thanks, a lot.

Speaker Change: Thank you one moment for our next question.

Speaker Change: Okay.

Speaker Change: Our next question comes from the line of Kurt <unk> from benchmark. Your question. Please.

Speaker Change: Okay.

Kurt: Hi, everybody.

Stephen D. Tadlock: And then that was my second question, Steve, just kind of on the product next. I mean, you mentioned the midstream. So it sounds like there's some uptake on kind of the gathering and distribution side. Could you just speak to that maybe a little more of what you're doing? Yeah, I think it is. With midstream, you have more regulatory hurdles or a different mindset to get through, and the team's been working on that for years, and I think they're starting to see the fruits of that effort. So I think that's really the driver of it. Okay, perfect. Thanks a lot.

Kurt: Yes, Thanks Scott.

Kurt: Yes, so Scott you've got some new product coming out now and you said it very exciting stuff, especially on the wellhead front you guys have always done a very good job at.

Growing faster than the market and your product has proven its value by gaining share so kudos on all those fronts.

Speaker Change: I guess, where I'm going with this is.

Speaker Change: Your message seems to be that youre, setting up really really well for some accelerating revenue growth in the second half I know you tend to be conservative and you want to outperform expectation, but just wanted to see if you can give us some additional color.

Speaker Change: On on that ramp and do you agree with that in the second half or do you think it will be much more of a 2025 impact.

Speaker Change: Yes, it's probably more of a I think youll start to see it in the latter part of this year, but.

Arun Jayaram: Thank you. One moment for our next question. And our next question comes from the line of Arun Jayaram from J.P. Morgan. Your question, please. Yeah, good morning.

Speaker Change: I'm, probably less optimistic about the U S rig count in 2024, because I'm not sure that people fully.

Speaker Change: Understand.

Scott J. Bender: I was wondering if you could maybe provide more details on some of the new product introductions. It sounds like the new frac valve was the tailwind for margins in the quarter. But give us a sense of the rollout of that new frac valve, as well as your new wellhead offering. Okay. The frac valve is being rolled out right now, but I think it's important to recognize that this is a modification of our existing frac valve, which doesn't lead to any obsolescence. However, this modification pretty significantly reduces the amount of repairs required. As you may know from previous conversations, unlike a lot of our peers, we tear down valves completely after every job, which gives rise to a large repair cost in terms of replacement parts.

Speaker Change: The overall reduction in rig count that's going to occur. Once these consolidations are completed as customers high grade their prospects now this may not impact it certainly won't impact well count to.

Speaker Change: To the same degree and we're very well count driven these natural gas prices caused me some concern so our focus you're right. Our focus this year is upgrading our supply chain and by upgrading I only mean, one thing and that is lowering our costs. So what we're doing.

Speaker Change: By this diversification from our existing Suzhou facility is.

Speaker Change: <unk> de risking us.

Speaker Change: Political.

Speaker Change: And also meaningfully.

Speaker Change: Decreasing our cost.

Speaker Change: I'm not going to tell you, where we are locating a facility, but it's not going to be in a section 301 country.

Speaker Change: Don't ask me anything else.

Speaker Change: That's great that's fair that's fair so.

Speaker Change: Just one more follow up then on on the International front, Greg This is Ben.

Ben: A strategic play and are making for for some time now and you are now at the cost it looks like of making some meaningful market penetration.

Ben: I don't know can you give us some general sense with disposable business right now just give us an update on what percentage of revenue was coming from outside North America right now.

Scott J. Bender: And we've seen a pretty significant reduction in the damage to our internals with this new frac valve design. So as soon as we can cycle these valves through their normal repair, we'll be replacing the internals with this new design. The wellhead design, we're looking to roll that out in Q3 to Q4, which I think is one of the more exciting iterations. I don't know how many iterations we're on now. Ten? Nine?

Ben: What kind of.

Ben: Where do you think that might go over the next couple of years.

Ben: Yes.

Speaker Change: Yes, I would say.

Speaker Change: <unk> sort of four 5% to 10%, but theres no reason it shouldn't be materially higher than that over time.

Speaker Change: There's a lot of interest.

Speaker Change: Like I said on that both in Latin America, and the Middle East for our products to be fair forgive me for interrupting the previous management.

Scott J. Bender: Yeah, there are a lot of different changes. Yeah, and this one offers the advantage of increased features, which, for the sake of my competitors, I'm not going to detail. But also...

Speaker Change: Flex deals sort of.

Speaker Change: <unk>.

Speaker Change: Retracted from their push internationally because they were so busy domestically not unlike the way we work.

Speaker Change: But we've noticed with a refocused and by the way we've combined our sales efforts between pressure control and disposables.

Scott J. Bender: Pretty significant value engineering went into this particular project. So, think about third and fourth. Great. And just my follow-up, obviously, Saudi Aramco has been in the news over the last several weeks as a focal point for investors. So I was wondering if you could give us your perspective on what you see going on from a CapEx perspective, and how does this influence your thoughts of potentially committing capital to a new facility there? I don't think it changes my thoughts on the potential business in Saudi. Although, to be honest, we talked about this before, the fact that Saudis are thinking about selling 1% of Aramco is, you know, it's a little concerning. On the one hand, I know that they need the money for 2030. On the other hand, What could One could interpret this as taking some chips off the table?

Speaker Change: There is an incredible amount of interest internationally for these flex steel products.

Speaker Change: That's great I appreciate that color. Thank you.

Speaker Change: Thank you one moment for our next question.

Speaker Change: Okay.

Speaker Change: And.

Speaker Change: Our next question.

Speaker Change: Comes from the line of Stephen <unk> from Stifel. Your question. Please.

Stephen: Thanks, Good morning, everybody good morning to you.

Stephen: Thanks.

Stephen: The first and obviously theres a lot of moving pieces with activity in consolidation, but when.

Stephen: We think about B.

Stephen: The legacy <unk> business and the wellhead side.

Stephen: Do you think in the environment you see right now in the U S that that business can grow in 'twenty four.

Stephen: Okay.

Speaker Change: Youre talking about from a market share standpoint or from an absolute standpoint.

Scott J. Bender: But in terms of the messaging that Aramco is sending out, no, this doesn't change my opinion. Thanks a lot. Thank you. One moment for our next question. Our next question comes from the line of Kurt Hallead from Benchmark.

Speaker Change: Well you won't tell me Mark sure anymore, but I imagine, it's pretty high but I think maybe.

Speaker Change: Maybe address both but I assume yes on the market share side, but on the on the on the.

Speaker Change: Absolute side.

Kurt Kevin Hallead: Your question, please. Hey, good morning, everybody. Are you? Thanks, Scott. Yeah, so Scott, you got some new products coming out now. And, as you said, very exciting stuff, especially on the wellhead front. You guys have always done a very good job at growing faster than the market, and the product has proven its value by gaining share. So kudos on all those fronts.

Speaker Change: Where do you think it's how should we think about that in the back half of the year is going to have an impact.

Speaker Change: Yes.

Speaker Change: As I mentioned earlier im not im probably.

Speaker Change: More pessimistic about the overall rig count.

Speaker Change: <unk>.

Some of them. Some of you are and maybe some of my peers, having been through this so many times gas prices at this level consolidations.

Kurt Kevin Hallead: I guess where I'm going with this is, you know, your message seems to be that you're setting up really, really well for some accelerating revenue growth in the second half. I know you tend to be conservative and you want to outperform expectations, but just wanted to see if you could give us some additional color on that ramp. And do you agree with that in the second half?

Speaker Change: Customer has 22 rigs one has 20.

Speaker Change: We never ended up with 42 rigs and we won't end up with 42 rigs or so.

Speaker Change: I'm optimistic market share and by the way. The fact that we have stopped disclosing market share should give you any concern.

Speaker Change: And our market shares.

Speaker Change: It's very very healthy very pleased.

Speaker Change: I'm not quite sure that it can overcome.

Scott J. Bender: Or do you think it'd be much more of a 2025 impact? Yeah, it's probably more of a I think you'll start to see it in the latter part of this year. But, you know, I'm probably less optimistic about the U.S. RID count in 2024 because I'm not sure that people fully understand the overall reduction in RID counts that's going to occur once these consolidations are completed, as customers improve their prospects. Now, this may not impact, it certainly won't impact well count to the same degree, and we're very well count driven. These natural gas prices cause me some concern.

Speaker Change: Our rig count that drops down into that $5 50 to $5 70 range $5 75 range.

Speaker Change: Okay.

Speaker Change: I'm actually.

Speaker Change: I would actually think that on the market is just not a macro chunk at all electric.

Speaker Change: So.

Speaker Change:

Speaker Change: That's good color and then.

Speaker Change: When we.

Speaker Change: And you mentioned this a little bit, but when we think about the international markets for the wellhead, particularly for the wealth I know there are some areas that you've been you've been looking into <unk> had <unk> had some early success what are they.

Speaker Change: Two or three key markets and kind of where do you think that how do you get a malls in 'twenty four 'twenty five.

Speaker Change: Believe it or not.

Speaker Change: Parts of Europe.

Speaker Change: Where I think that we're going to penetrate.

Scott J. Bender: So our focus, you're right, our focus this year is upgrading our supply chain, and by upgrading, I only mean one thing, and that is lowering our cost. So what we're doing with this diversification from our existing Suzhou facility is both de-risking us politically and also meaningfully, I'm not going to tell you where we're locating the facility, but it's not going to be in a Section 301 country. Don't ask me anything else.

Speaker Change: The mid east and.

Speaker Change: Possibly some Latin American business.

Speaker Change: Okay great.

Speaker Change: For the color.

Speaker Change: Thank you one moment for our next question.

Speaker Change: Okay.

Speaker Change: And our next question comes from the line of Scott Gruber from Citigroup. Your question. Please.

Scott Gruber: Hey, Scott Good morning morning.

Scott Gruber: Previously you had discussed getting pressure control margins back into the mid Thirty's.

Scott Gruber: Looking at the cost reallocation.

Scott J. Bender: Fair, that's fair. So just one more follow up then on the international front, right? This has been, you know, a Strategic Play in the Making for some time now, and you're now at the cusp, it looks like, of making some, you know, meaningful, you know, market penetration. I don't know, can you give us some general sense of what the spoolable business right now is all about? Just give us an update on what percentage of revenue is coming from outside North America right now? You know, what kind of Where do you think that might go over the next couple of years? Yeah, I would say it's ranged sort of from 5% to 10%, but there's no reason it shouldn't be materially higher than that over time.

Scott Gruber: That looks to boost margins by couple of hundred basis points right around 200, so just to calibrate the upside potential now.

Scott Gruber: On the order of 37% 38.

Scott Gruber: Alan that we projected that far.

<unk>.

Scott Gruber: We're still working on 2024.

Scott Gruber: Right.

Scott Gruber: Sure.

Scott Gruber: I think that.

Scott Gruber: I just would hate to be expected.

Although I can tell you that our investments this year will be to bolster our low cost manufacturing.

Scott Gruber: So.

Scott Gruber: We are in a cost reduction mode, right now and I think that.

Scott Gruber: Both in terms of product redesign and in terms of manufacturing, but yes, we are quantifying that internally, but I am not prepared to talk about that right now.

Scott J. Bender: There's a lot of interest, like I said earlier, both in Latin America and the Middle East for our products. Now, to be fair, forgive me for interrupting you, the previous management retracted from their push internationally because they were so busy domestically, not unlike the way we were. But we've noticed with a refocus, and by the way, we've combined our sales efforts between pressure control and spoolable, um, there's an incredible amount of interest internationally for these flex steels. That's great. I appreciate that color.

Scott Gruber: Okay.

Scott Gruber: And just let.

Let me just say that instead of that.

Scott Gruber: Okay.

Scott Gruber: And the drivers were again right you have some low cost inventory come through now which should help in the near term and then you are worthy of engineers.

Scott Gruber: Okay, yes, because we have to.

Scott Gruber: One of the things that we pride ourselves on our Joel does is that as we introduce innovations to our product we do it in a very very responsible measured fashion, so as not to obsolete anything we havent stock.

Scott Gruber: So.

Scott Gruber: As we replace our current inventories this step is already on order and being manufactured what it reflects when it becomes real.

Stephen Gengaro: Thank you. Thank you. One moment for our next question. Our next question comes from the line of Stephen Gengaro from Stiefel. Your question, please. Thanks. Good morning, everybody. Good morning to you.

Scott Gruber: <unk> in our results ended the year, but certainly next year and.

Scott Gruber: The new low cost manufacturing facility.

Stephen Gengaro: Thanks. So two for me, the first, and obviously, there's a lot of moving pieces with activity and consolidation. But when we think about the legacy cactus business and the wellhead side, do you think, in the environment you see right now in the US, that business can grow in 24 months? Are you talking about from a market share standpoint, or from an absolute one?

Scott Gruber: Well be partially operational by the end of this year fully operational in 2025.

Scott Gruber: Okay.

Speaker Change: Okay. Yeah, I was looking for that color. Thank you appreciate it thanks Scott.

Speaker Change: Thank you as a reminder, ladies and gentlemen, if you do have a question at this time. Please press star one on your telephone.

Speaker Change: Okay.

Speaker Change: And this does conclude the question and answer session of today's program I'd like to hand, the program back to Scott Bender for any further remarks.

Scott J. Bender: Well, you won't tell me the market share anymore, but I imagine it's pretty high. But I think maybe we should address both, but I assume yes, on the market share side, but on the absolute side, is that enough? Or do you think it's, how should we think about that?

Scott J. Bender: Alright friends I just want to thank you all for attending the call.

Hanging in there we will have some information for you on the international front.

Scott J. Bender: I hope within the next 90 days.

Scott J. Bender: Thank you.

Scott J. Bender: Yes.

Speaker Change: Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.

Scott J. Bender: I know the back half of the year is going to have an impact. You know, as I mentioned earlier, I'm not, I'm probably, more pessimistic about the overall rate, then some of you are, and maybe some of my peers, having been through this so many times, you know, gas prices at this level, and consolidation. One customer has 22 rigs, and one has 20. We never end up with 42 rigs, and we won't end up with 42 rigs.

Speaker Change: Okay.

Speaker Change: Yes.

[music].

Scott J. Bender: So I'm optimistic about market share. And by the way, the fact that we have stopped disclosing market share shouldn't give you any concern, and our market shares are very, very healthy, great place. But I'm not quite sure that it can overcome the Rick count that drops down into 550 to 570.

Scott J. Bender: 570. Okay. No, I'm actually, I'm actually, I would, I would, I would actually pick that on the marketer side. I would, I'm not concerned at all. I would actually pick the opposite.

Speaker Change: Yeah.

Speaker Change: [music].

Scott J. Bender: So, that we know that that's a good color. And then when, when we think about the international markets for the wellhead, particularly for the wellhead, I know there are some areas that you've been looking into. You've had you've had, I think, some early success. What are the two or three key markets and kind of where do you think that how do you get evolves in 2425? Believe it or not, there are parts of Europe where I think that we're going to penetrate the Mideast and possibly some Latin America.

Scott J. Bender: Okay, great. Now, thank you for the color. Thank you. One moment for our next question, and our next question comes from the line of Scott Gruber from Citigroup. Your question, please. Hey, Scott.

Scott Gruber: Yes, good morning. Scott, previously you discussed getting pressure control margins back into the mid-30s, you know, looking at the cost reallocation, you know, that looks to boost margins by a couple hundred basis points, right around 200. So just to calibrate, is the upside potential now something on the order of 37%, maybe 38? Oh my gosh, I don't know how the freaks we projected that far. You know, we're still working on 2024.

Speaker Change: Okay.

Speaker Change: [music].

Speaker Change: Hum.

Speaker Change: Okay.

Scott J. Bender: But you know, I think that, I just would hate to say it, although I can tell you that our investments this year will be to bolster our low-cost manufacturing. So... We are in a cost-reduction mode right now. And I think that...

Scott J. Bender: Both in terms of product redesign and in terms of manufacturing. But yes, we are quantifying that internally, but I'm not prepared to talk about that. Okay.

Scott J. Bender: Okay, and the drivers were again, right? You have some low-cost inventory coming through now, which should help in the near term. And then you're waiting.

Scott J. Bender: One of the things that we pride ourselves on, or Joel does, is that as we introduce innovations to our product, we do it in a very, very responsible, measured fashion so as not to obsolete anything we have in stock. As we replace our current inventories, this stuff is already on order and being manufactured when it reflects, when it becomes reflective in our results this year, but certainly next year. The new low-cost manufacturing facility will be partially operational by the end of this year, and fully operational in 2020. Okay. Great. Yeah, I was looking for that color too.

Scott J. Bender: Thank you. I appreciate it. Thank you. As a reminder, ladies and gentlemen, if you do have a question at this time, please press star 11 on your telephone. And this does conclude the question and answer session for today's program. I'd like to hand the program back to Scott Bender for any further remarks. All right, friends. I just want to thank you all for attending the call. Hang in there. We'll have some information for you on the international front in the next 90 days, I hope. Have a good week.

Speaker Change: [music].

Speaker Change: Alright.

Unknown Executive: Thank you. Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day. ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? Class A Class A Class A Class A Class A Class A Class A Class A Class A Class A Class A Class A Class A, ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? Don't forget to like, share and comment! Thank you for standing by and welcome to Cactus, Inc. fourth quarter 2023 earnings conference call. At this time, all participants are in listen only mode.

Speaker Change: Okay.

Speaker Change: Yes.

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Speaker Change: Sure.

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Speaker Change: [music].

Alan Boyd: As a reminder, today's program is being recorded. And now, I'd like to introduce your host for today's program, Alan Boyd, director of Corporate Development and Investor Relations. Please go ahead, sir.

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Scott J. Bender: We closed out the final quarter of 2023 with strong margin performance in both segments. Free cash flow was substantial, and with the debt raised to finance the FlexJill acquisition repaid in Q3, we increased our cash balance by over $70 million in Q4. For the full year 2023, both businesses set records for revenue and adjusted EBITDA despite the decline in U.S. land activity over the course of the year. Our company remains well positioned in the market as a provider of highly engineered differentiated products to premium customers, and our strong financial performance reflects that. Some fourth quarter total company highlights include revenue of $275 million, adjusted EBITDA of $100 million, adjusted EBITDA margin of 36.4%, I now turn the call over to Al Keifer, our CFO, who will review our financial results. Following his remarks, I'll provide some thoughts on our outlook for the year, or rather, for the near term, before opening the lines for Q&A. So Al.

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Speaker Change: Thank you for standing by and welcome to Cactus, Inc. Fourth 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. If your question has been answered Ed you'd like to remove yourself from the queue.

Alan J. Keifer: Thank you. Before I begin, I would like to highlight the changes to our reporting structure. Beginning in Q4, we are now presenting our corporate and other expenses separately from our two operating segments. The cost within corporate and other consists of personnel whose activities support both operating segments, as well as other public reporting and administrative overhead costs.

Speaker Change: Simply press Star one again as a reminder, today's program is being recorded and now I would like to introduce your host for todays program, Alan Blake Director of corporate development and Investor Relations. Please go ahead Sir.

Alan Boyd: Thank you and good morning, we appreciate you joining us on today's call.

Alan Boyd: Speakers will be Scott Bender, our chairman and Chief Executive Officer, and I'll keep our interim Chief Financial Officer also joining us today are Joel Bender, President Steven vendor, Chief operating officer, Steve Tadlock, CEO of Flex deal and will Mark our general counsel.

Alan J. Keifer: All of these costs were previously reported within the pressure control segment. Prior periods have been recast and earnings released to conform to this new presentation. To assist analysts and investors with understanding this reporting change, we have provided a historical reconciliation for 2021 through 2023 on the investor relations section of our website. I'll now begin the results review.

Alan Boyd: 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.

Alan Boyd: Forward looking statements are subject to a number of risks and uncertainties many of which are beyond our control.

Alan Boyd: These risks and uncertainties can cause actual results to differ materially from our current expectations.

Alan Boyd: We advise listeners to review our earnings release and the risk factors discussed in our filings with the SEC.

Alan Boyd: 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.

Alan J. Keifer: As Scott mentioned earlier, total Q4 revenues were $275 million. For our pressure control segment, revenues of $180 million were down 1.1% sequentially, driven primarily by decreased customer activity. Operating income increased $1.2 million or 2.2% sequentially, with operating margins increasing 100 basis points. Adjusted Segment EBITDA increased 1.5 million or 2.3% sequentially, with margins increasing by 120 basis points. The margin improvement was due to lower rental equipment repair costs, partially associated with the recent modification of our frack valve design and efforts to limit our branch expenses in response to reduced activity levels. For our spoolable technology segment, revenues of $94 million were down 10.4% sequentially due to lower customer activity levels.

Alan Boyd: In addition, during today's call, we will reference certain non-GAAP financial measures reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in our earnings release with that I will turn the call over to Scott. Thanks, Alan and good morning to everyone. We closed out the final quarter of 2023 with strong margin performance in both segments.

Scott: Free cash flow was substantial.

Scott: The debt raised to finance the <unk> acquisition repaid in Q3, we increased our cash balance by over $70 million in Q4 for the full year 2023, both businesses set records for revenue and adjusted EBITDA. Despite the decline in U S land activity over the course of the year our compass.

Scott: <unk> remains well positioned in the market as a provider of highly engineered differentiated products to premium customers and our strong financial performance reflects this some fourth quarter total company highlights include revenue of $275 million adjusted EBITDA of $100 million adjusted EBITDA margin.

Scott: <unk> of 36, 4%, we paid a quarterly dividend of <unk> 12 per share and we increased our cash balance to 134 million ill now turn the call over to al key for our CFO, who will review our financial results. Following his remarks I'll provide some thoughts on our outlook for the year for the near term.

al: Before opening the lines for Q&A so al.

Alan J. Keifer: Operating income decreased $11.6 million sequentially, due largely to the quarter-over-quarter change in the expense resulting from the re-measurement of the flex steel earn-out liability. Adjusted segment EBITDA decreased 4.5 million, or 10.2%, sequentially, while margins increased by 10 basis points, as reductions in operating leverage were offset by reduced input costs. Corporate and other expenses were $5.7 million in Q4, down $1.3 million sequentially due to lower transaction-related expenses and stock-based compensation. Adjusted corporate EBITDA was approximately flat in Q4 at $3.8 million.

al: Thank you.

Al Key: I begin I would like to highlight the changes to our reporting structure.

Al Key: Beginning in Q4, we are now presenting our corporate and other expenses separately from our two operating segments.

Al Key: The cost within corporate another consist of personnel, whose activities support both operating segments as well as other public reporting and administrative overhead costs.

Al Key: All of these costs were previously reported within the pressure control segment.

Al Key: Prior periods have been recast in the earnings release to conform to this new presentation.

Al Key: To assist analysts and investors with understanding this reporting change we have provided a historical reconciliation for 2021 through 2023 on the Investor Relations section of our website.

Speaker Change: I will now begin the results review.

Speaker Change: As Scott mentioned earlier total Q4 revenues were $275 million.

Alan J. Keifer: On a total company basis, fourth-quarter adjusted EBITDA was $100 million, down 2.9% from $103 million during the third quarter. Adjusted EBITDA margin for the fourth quarter was 36.4% compared to 35.8% for the third quarter. Adjustments to total company EBITDA during the fourth quarter of 2023 include non-cash charges of $4.6 million in stock-based compensation and a $1.9 million expense related to the Flex Steel earn out liability re-measurement. Appreciation and amortization expense for the fourth quarter was $15 million, which includes $4 million of amortization expense related to intangible assets booked as part of purchase accounting. Total depreciation and amortization expense during the first quarter of 2024 is expected to be approximately $15 million, of which $7 million is associated with our pressure control segment and $8 million is associated with spoolable technology. Income tax expense during the fourth quarter was approximately $17 million.

Speaker Change: For our pressure control segment revenues of $180 million were down one 1% sequentially driven primarily by decreased customer activity.

Speaker Change: Operating income increased $1 2 million or two 2% sequentially with operating margins, increasing 100 basis points.

Speaker Change: Adjusted segment EBITDA.

Speaker Change: Increased $1 5 million or two 3% sequentially with margins, increasing by 120 basis points.

Speaker Change: The margin improvement was due to lower rental equipment repair costs, partially associated with the recent modification of our Frac about design.

Speaker Change: And efforts to limit our branch expenses in response to reduced activity levels.

Speaker Change: Yes.

Speaker Change: For our <unk> technologies segment revenues of $94 million were down 10, 4% sequentially due to lower customer activity levels.

Speaker Change: Operating income decreased 11 6 million sequentially.

Speaker Change: Due largely to the quarter over quarter change in the expense, resulting from the remeasurement of the flex still earn out liability.

Speaker Change: Adjusted segment, EBITDA decreased $4 5 million or 210, 2% sequentially.

Speaker Change: Margins increased by 10 basis points.

Speaker Change: As reductions in operating leverage were offset by reduced input costs.

Speaker Change: Corporate and other expenses were $5 7 million in Q4 down $1 3 million sequentially due to lower transaction related expenses and stock based compensation.

Speaker Change: Adjusted corporate EBITDA was approximately flat in Q4 at $3 8 million of expense.

Speaker Change: On a total company basis fourth quarter, adjusted EBITDA was $100 million down two 9% from $103 million during the third quarter.

Speaker Change: Adjusted EBITDA margin for the fourth quarter was 36, 4% compared to $35 eight.

Speaker Change: 8% for the third quarter.

Speaker Change: Adjustments to total company EBITDA during the fourth quarter of 2023 include noncash charges of $4 6 million and <unk>.

Speaker Change: Stock based compensation.

Speaker Change: And a $1 9 million expense related to the flex deal earn out liability remeasurement.

Speaker Change: Total depreciation and amortization expense during the first quarter of 2024 is expected to be approximately $15 million of which $7 million is associated with our pressure control segment and $8 million is associated with global technologies.

Speaker Change: Income tax expense during the fourth quarter was approximately $17 million.

Speaker Change: During the fourth quarter, the public or class a ownership of the company was 82%.

Speaker Change: Barring further changes in our public ownership percentage, we expect an effective tax rate of approximately 22% for Q1 2024.

Alan J. Keifer: During the fourth quarter, we paid a quarterly dividend of $0.12 per share, resulting in a cash outflow of approximately $10 million, including related distributions to members. The board has also approved a quarterly dividend of $0.12 per share to be paid in March 2024. We ended the quarter with a cash balance of $134 million, a sequential increase of approximately $70 million.

Speaker Change: Adjusted net income and earnings per share were <unk> $65 million 81 per share respectively. During the fourth quarter.

Speaker Change: Compared to $64 million and <unk> 80 per share in the third quarter.

Speaker Change: Adjusted net income for both the fourth quarter and full year 2023 were net of a 23% tax rate applied to our adjusted pre tax income generated during the respective periods.

Alan J. Keifer: Net Cap X was approximately $9.5 million during the fourth quarter of 2023 and $38.6 million for the full year 2023. For the full year 2024, we expect net capex in the range of 45 to 55 million. The increase from 2023 is due to increased spending on efficiency improvements at Flex Steel's Baytown manufacturing facility and approximately $20 million budgeted for international growth and supply chain diversification in 2024. That covers the financial review. And I'll now turn the call back over to Scott. Thank you, Al.

Speaker Change: This rate was lower than anticipated due to the onetime release in 2023 of valuation allowances associated with the flex deal acquisition.

Speaker Change: We estimate that the tax rate for adjusted net income and EPS will be 26% during the first quarter of 2024.

Speaker Change: During the fourth quarter, we paid a quarterly dividend dividend of 12 <unk> per share, resulting in a cash outflow of approximately $10 million, including related distributions to members.

Speaker Change: The Board has also approved a quarterly dividend of <unk> 12 per share to be paid in March 2024.

Speaker Change: We ended the quarter with a cash balance of $134 million, a sequential increase of approximately $70 million.

Scott J. Bender: Well, I'll now touch on our expectations for the first quarter of 2024 by reporting, During the first quarter, we expect pressure control revenue to be down mid-single digits versus the $180 million reported in the fourth quarter of 2023, as strong production equipment sales in Q4 led to higher revenues than the level of industry activity would imply. We expect the U.S. land rig count to be approximately flat from today's levels in the remainder of the first quarter, although recent weakness in natural gas prices suggests a cautionary outlook beyond this period. Anecdotally, the number of inbound inquiries for frack rental equipment has increased in the past 45 days, suggesting potential for the second quarter of 2024. Adjusted EBITDA margins in our pressure control segment are expected to be 33 to 35 percent for the first quarter, exclusive of corporate and other expenses, which are now reported separately. This adjusted EGA guidance also excludes approximately $2 million of stock-based compensation expense within the segment.

Speaker Change: Net capex was approximately $9 $5 million during the fourth quarter of 2023, and $38 6 million for the full year 2023.

For the full year of 2024, we expect net capex in the range of $45 million to $55 million.

Speaker Change: The increase from 2023 is due to increased spending on.

Speaker Change: On efficiency improvements at flex deals Baytown manufacturing facility.

Speaker Change: And approximately $20 million budgeted for international growth and supply chain diversification in 2024.

Speaker Change: Okay.

Scott: During the first quarter, we expect pressure control revenue to be down mid single digits versus the $180 million reported in the fourth quarter of 2023 as strong production equipment sales in Q4 led to stronger revenues and the level of industry activity would imply we expect the U S lag.

Scott: U S land rig count to be approximately flat from today's levels and the remainder of the first quarter. Although recent weakness in natural gas prices suggest the cautionary outlook beyond this period anecdotally the number of inbound inquiries for Frac rental equipment have increased in the past 45 days.

Scott: Suggesting potential for the second quarter of 2024, adjusted EBITDA margins in our pressure control segment are expected to be 33% to 35% for the first quarter exclusive of corporate and other expenses, which are now reported separately. This adjusted EBITDA guidance also excludes approximately.

Scott: <unk> 2 million of stock based compensation expense within the segment.

Scott J. Bender: Margins are expected to be down sequentially as reduced product sales impact our operating leverage, partially offset by the supply chain initiatives previously announced. We expect our low-cost manufacturing diversification to enhance product margins by the middle of 2025. As mentioned last quarter, new wellhead and valve product improvements are in the process of being introduced, and we expect the rollout of these to more significantly impact operating results late this year as we responsibly replace our current M&A. Our mini expansion plans are underway. Testing continues, and we are still targeting customer acceptance and first orders by late 2024. We continue to evaluate opportunities, and while we don't have any further news at this time, we're pleased with the outlook and look forward to sharing a meaningful update on our efforts within the next 90 days.

Scott: Margins are expected to be down sequentially as reduced product sales impact to our operating leverage partially offset by the supply chain initiatives previously announced we expect our low cost manufacturing diversification to enhance product margins by the middle of 2025.

Scott: As mentioned last quarter, new wellhead and valve product improvements are in the process of being introduced and we expect the rollout of these to more significantly impact operating results.

Scott: Late this year as we responsibly replace our current inventories are Medicaid expansion plans are underway testing continues and are still targeting customer acceptance first orders by late 2024, we continue to evaluate opportunities and while we don't have any further news at this time, we're pleased with the outlook.

Scott: And look forward to sharing a meaningful update on our efforts within the next 90 days switching over schoolgirls technology Spillovers technology segment, we expect first quarter revenue to be up low single digits relative to the fourth quarter, which would represent a record setting Q1 for flex deal largely.

Scott J. Bender: Switching over to the spool rules technology segment, we expect first quarter revenue to be up low single digits relative to the fourth quarter, which would represent a record-setting Q1 for FlexSteel, largely due to stronger demand for the majors. We're also seeing increased interest from international and midstream customers who recognize the value proposition of the FlexSteel product. We expected adjusted EBITDA margins in this segment to be approximately 37 to 39% for Q1, moderating from Q4 levels on increased input costs that will begin to work through our inventory late in the first quarter. Note this margin of guidance excludes approximately 1 million of stock-based compensation in the segment. Adjusted corporate EBITDA is expected to be an approximately $4 million loss in Q1, flat from the fourth quarter, which excludes approximately $1 million of corporate stock-based compensation.

Scott: Stronger demand from the majors. We're also seeing increased interest from international and midstream customers, who recognize the value proposition of the flex deal product, we expected adjusted EBITDA margins in this segment to be approximately 37% to 39% for Q1 moderating from Q4 levels on it.

Scott: Increased input costs that will begin to work through our inventory late in the first quarter. This margin guidance excludes approximately 1 million of stock based compensation in the segment.

Scott: The adjustment adjusted corporate EBITDA is expected to be approximately $4 million loss in Q1 flat from the fourth quarter, which excludes approximately $1 million of corporate stock based compensation.

Scott J. Bender: Consolidation of our customers continues in the sector, improving our industry's efficiency. At this time, we cannot predict the near-term impact on our business, other than to reiterate that our business model favors larger operators. That said, we expect a reduction in the U.S. land recount by year-end following consolidations as the combined entities have high-grade drilling prospects and increased drilling efficiency. However, further risk to the rig count remains as operators respond to low natural gas prices.

Scott: <unk> of our customers continues in the sector improving our industry's efficiency at this time, we cannot predict the near term impact on our business other than to reiterate that our business model favors larger operators that said, we expect a reduction in the U S land rig count a year ago following consolidation.

Scott: As a combined entity entities high grade drilling prospects and increased drilling efficiencies further risk to the rig count remains as operators respond to low natural gas prices, our company's focus on safety execution and servicing our customers allowed us to close out a milestone.

Scott J. Bender: Our company's focus on safety execution and servicing our customers allowed us to close a milestone 2023 for Cactus. Although 2024 U.S. drilling and completion activity expectations are modest at this time, Cactus remains well positioned. We expect to generate substantial free cash flow in 2024 that will provide us with optionality to increase shareholder returns over time or pursue organic and inorganic growth opportunities in the disciplined manner that our shareholders expect. With that, I'll turn it back over to the operator, and we can begin the Q&A. Operator. Certainly, one moment for our first question, and our first question comes from the line about Luke Lemoine from Piper Sandler. Your question, please. Luke, how are you?

Scott: 2023 for Cactus, although 2024 U S drilling and completion activity I expect that expectations are modest at this time cactus remains well positioned with two segments that generate high margins and attractive returns, while operating differentiate differentiation differentiated army valued it.

Scott: We expect to generate substantial free cash flow in 2024 that will provide us with optionality to increase shareholder returns overtime or pursue organic and inorganic growth opportunities in a disciplined manner that our shareholders expect.

Speaker Change: With that I'll turn it back over to the operator, and we can begin Q&A operator.

Speaker Change: Certainly one moment for our first question.

Speaker Change: And our first question comes from the line of Luke Luann from Piper Sandler Your question. Please.

How are you.

Luke Michael Lemoine: Are you doing well on yourself? Thank you. Scott, you talked about schools being up some in 1Q due to the majors. Have you been adding some program accounts here?

Luke Michael Lemoine: Are you doing well in yourself.

Luke Michael Lemoine: Okay. Thank you.

Luke Michael Lemoine: Scott you talked about spools being up some in <unk> due to the majors have you been adding some program accounts here.

Stephen D. Tadlock: or it's just this kind of general increase in activity from, I'm going to let Steve Tadlock, who now runs that, respond. Yeah, we've just been seeing increased activity from the majors, in particular. And then, as we alluded to earlier in the script, also international orders from Latin America and the Middle East. And one other positive is on the midstream side, significant interest from a large midstream company with which we hadn't done much business, and inquiries from other midstream companies. So overall, we're feeling very good about the outlook for the next year.

Luke Michael Lemoine: Or is this just kind of a general increase in activity from the majors.

Luke Michael Lemoine: Okay.

Luke Michael Lemoine: I would like to state catalog can now run.

Speaker Change: Cyber responded.

Speaker Change: Yes, we've just been seeing increased activity from the majors in particular and then.

Speaker Change: We alluded to earlier in the script also international orders from Latin America Middle East.

Speaker Change: <unk>.

Cyber: One other positive is on the midstream side signals with significant interest from a large midstream company with which we hadn't done much business.

Cyber: And inquiries from other midstream. So overall, we're feeling very good about the outlook for.

Cyber: For the next year.

Speaker Change: Okay got it and then also my second question, Steve just kind of on the product mix I mean, you mentioned the midstream customer.

Stephen D. Tadlock: And then that was my second question, Steve, just kind of on the next product. I mean, you mentioned the midstream. So it sounds like there's some uptake on kind of the gathering and distribution side; you could just speak to that maybe a little more of what you're Yeah, I think it's with midstream, you have more regulatory hurdles or a different mindset to get through, and the team's been working on that for years, and I think they're starting to see the fruits of that effort. So I think that's really the driver of it. Okay, perfect. Thanks a lot.

Stephen D. Tadlock: It sounds like there's some uptake on kind of the gathering and distribution side. If you could just speak to that maybe a little more kind of what youre seeing this year.

Stephen D. Tadlock: Yes, I think it's.

With midstream you have more regulatory hurdles or a different mindset to get through and the team has been working on that for years and I think they are starting to see the fruits of that effort.

Stephen D. Tadlock: So I think thats really the driver of it.

Speaker Change: Okay perfect. Thanks, so much.

Speaker Change: Thank you Steve.

Arun Jayaram: Thank you. One moment for our next question. And our next question comes from the line of Arun Jayaram from J.P. Morgan. Your question, please. Yeah, good morning.

Speaker Change: Q1 moment for our next question.

Speaker Change: Okay.

Speaker Change: And our next question comes from the line of Arun <unk> from Jpmorgan. Your question. Please.

Arun: Yes. Good morning, I was wondering if you could make.

Scott J. Bender: I was wondering if you could maybe provide more details on some of the new product introductions. Sounds like the new frac valve was a tailwind to margins in the quarter. But give us a sense of the rollout of that new frac valve, as well as your new wellhead offering.

Arun: Maybe provide more details on some of the new product.

Introduction it sounds like the new Frac valve was a tailwind to margins in the quarter.

Arun: But give us a sense of.

Arun: The rollout of that new <unk> as well as your new wells at the offering.

Scott J. Bender: The frac valve is being rolled out right now, but I think it's important to recognize that this is a modification of our existing frac valve, which doesn't lead to any obsolescence. However, this modification pretty significantly reduces the amount of repairs required. As you may know from previous conversations, unlike a lot of our peers, we tear down valves completely after every job, which gives rise to a large repair cost in terms of replacement parts. And we've seen a pretty significant reduction in the damage to our internals with this new frac valve design. So as soon as we can cycle these valves through their normal repair, we'll be replacing the internals with this new design. The wellhead design, we're looking to roll that out in Q3 to Q4, which I think is one of the more exciting iterations. I don't know how many iterations we're on now. Ten? Nine?

Arun: Okay.

Arun: Yes.

Arun: The frac valve as well is being rolled out right now and then.

Arun: It's important to recognize that this is a.

Arun: Modification of our existing Frac valve, which doesn't lead to any obsolescence. However, this modification.

Arun: Pretty significantly reduces the amount of repairs required.

Arun: You may know from previous conversations unlike a lot of our peers, we tear down valves completely after every job.

Arun: Which gives rise to a large repair cost in terms of replacement parts and we've seen a pretty significant reduction in the damage to our internals within <unk>.

Arun: Frac valve design, so as soon as we can cycle these valves through their normal repaired.

Arun: Replacing the internals with this new design.

Arun: Walnut design.

Arun: We're looking to roll that out.

Arun: Q3 to Q4, which I think is one of the more exciting iterations on how many iterations to overall.

Arun: Now.

Arun: Ken.

Ken: So a lot of different changes had this one.

Scott J. Bender: Yes, with all the different changes. Yeah, and this one offers the advantage of increased features, which, for the sake of my competitors, I'm not going to detail. But also... Pretty significant value engineering went into this particular project. So, think about third and fourth. Great. And just my follow-up, obviously Saudi Aramco has been in the news over the last several weeks.

Ken: <unk> offers the advantage of increased features which for the sake of my competitors I'm not going to detail, but also.

Ken: Pretty significant value engineering would enter this particular project.

Ken: So think about third and fourth quarter for that.

Ken: Great.

Speaker Change: And just my follow up obviously, Saudi Aramco has been in the news over the last several weeks.

Q4 2023 Cactus Inc Earnings Call

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