Q2 2025 Cactus Inc Earnings Call
Scott Bender: Good day, and thank you for standing by. Welcome to the Cactus Q2 2025 earnings 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 the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. 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, Director of Corporate Development and Investor Relations. Please go ahead.
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 Jay Nutt, our Chief Financial Officer. Also joining us today are Joel Bender, President; Stephen Bender, Chief Operating Officer; Steve Tadlock, CEO of Flexdeal; and Will Marsh, 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.
Again, 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, director of corporate development and investor relations. Please go ahead.
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 Jay nut. Our Chief Financial Officer. Also joining us today are Joel Bender. President Steven Bender Chief Operating Officer Steve tadlock CEO of flex deal and will Marsh our general counsel
Please note that any comments we make on today's call regarding projections or expectations for future events or forward-looking statements covered by the private Securities litigation Reform Act.
For looking statements or subject to a number of risks and uncertainties, many of which are beyond our control.
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. 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.
These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to review or 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.
Scott Bender: Thanks, Alan, and good morning to everyone. We generated substantial free cash flow during the second quarter, despite the exigencies caused by tariffs and commodity market weakness. We also announced the transformative acquisition of a controlling interest in Baker Hughes' surface pressure control business. Our spoolable technologies business outperformed profit expectations in the quarter, and our pressure control product sales remained strong relative to declining activity levels. I'd like to thank our Cactus associates for another quarter in which we remained focused on safety and execution for our customers, despite the challenging business climate. Some second-quarter total company financial highlights include revenue of $274 million, adjusted EBITDA of $87 million, adjusted EBITDA margins of 31.7%. We increased our cash balance to $405 million, and yesterday we announced that our board approved an 8% increase in our quarterly dividend to $0.14 per share.
In addition, during today's call, we will reference certain non-gaap Financial measures. Reconciliations of these non-gaap measures to the most directly comparable. Gaap measures are included in our earnings release with that. I'll turn the call over to Scott. Thanks, Alan, and good morning to everyone. We generated substantial free, cash flow during the second quarter. Despite the existence of these caused by tariffs and commodity Market weakness. We also announced that transformative acquisition
Have a controlling interest in Baker. Use surface pressure control business. Our spoil Technologies, business outperform, profit expectations in the quarter and our pressure control product sales, remain strong relative to declining activity levels.
Scott Bender: I'll now turn the call over to Jay Nutt, our CFO, who will review our financial results, and following his remarks, I'll provide some thoughts on our outlook for the near term before opening the lines for Q&A. So, Jay.
I'd like to thank our Cactus Associates for another quarter, in which we remain focused on safety and execution for our customers, despite the challenging business climate, some second quarter total company. Financial highlights include revenue of 274 million, adjusted evadav, 87 million, adjusted Eva down margins of 31.7%. We increase our cash balance to 405 million. And yesterday, we announced that our board approved, an 8% increase in our quarterly dividend to 14 cents per share.
Jay Nutt: Thank you, Scott. As Scott just mentioned, total Q2 revenues were $274 million. A sequential 2.4% decline, and total adjusted EBITDA was $87 million, down 7.6% sequentially. For our pressure control segment, revenues of $180 million were down 5.5% sequentially, driven primarily by lower revenue in our rental business, where pricing often weakens disproportionately when overall demand softens. As we've demonstrated in the past, we will continue to selectively deploy rental equipment when returns meet our threshold. A less favorable product mix compared to the first quarter resulted in slightly lower product revenues in the period, though our product sales decreased less than the decline in the average US land rig count, a testament to our strong market position.
I'll now turn the call over to Jay nut. Our CFO who will review our financial results and following his remarks. I'll provide some thoughts on our outlook for the near-term before opening the lines for q&as. So J
Thank you. Scott Scott just mentioned total Q2 revenues were 274 million the sequential 2.4% decline. In total adjusted ebata was 87 million down 7.6% sequentially.
For our pressure control segment. Revenues of $80 million were down 5.5%. Sequentially driven primarily by lower revenue and our rental business or pricing often weakens disproportionately when overall demand softens.
As we've demonstrated in the past, we will continue to selectively deploy rental equipment. When returns meet our threshold,
a less favorable product, mix compared to the first quarter resulted in slightly lower product revenues in the period.
Jay Nutt: Operating income declined $12 million, or 22.1% sequentially, with operating margins compressing 510 basis points, and adjusted segment EBITDA was 11.7 million, or 18% lower sequentially, with margins decreasing by 450 basis points. The operating margin decline was primarily due to the lower operating leverage, higher product costs due to tariffs, which particularly impacted our results in June, and a lower revenue contribution from our higher margin rental business. In addition, we recorded $5.1 million of legal expenses and reserves in connection with litigation claims, which represented an increase of approximately $2 million from the first quarter. For our spoolable technology segment, revenues of $96 million were up 3.9% sequentially on higher domestic customer activity in the seasonally stronger second quarter.
Though, our product sales decreased less than the decline in the average US land rig count a testament, to our strong Market position.
Operating income declined, 12 million or 22.1% sequentially with operating margins compressing 5101010 basis points and adjusted segment. Evita was 11.7 million or 18% lower sequentially with margins, decreasing by 450 basis points.
The operating margin decline was primarily due to lower operating leverage and higher product costs due to tariffs.
Which particularly impacted our results in June.
And the lower Revenue contribution from our higher margin rental business.
In addition, we recorded 5.1 million of legal expenses and reserves in connection with litigation claims, which represented an increase of approximately $2 million from the first quarter.
Jay Nutt: Operating income increased $4.2 million, or 17.5% sequentially, with operating margins expanding 340 basis points due to the improved operating leverage and increased manufacturing efficiencies following our investments in the same. Adjusted segment EBITDA increased $4.4 million, or 13.2% sequentially, while margins expanded by 320 basis points. Corporate and other expenses were flat sequentially at $9.6 million in Q2, which included a $3.5 million of professional fees associated with the announced plan to acquire a majority interest in the surface pressure control business of Baker Hughes. Adjusted corporate EBITDA was flat at 4.4 million of expense compared to Q1. On a total company basis, second quarter adjusted EBITDA was $87 million, down 7.6% from $94 million in the first quarter. Adjusted EBITDA margin for the second quarter was 31.7% compared to 33.5% for the first quarter.
For a spool technology segment. Revenues of 96 million were up 3.9% sequentially on higher domestic customer activity in the seasonally stronger second quarter.
Operating income increased 4.2 million or 17.5% sequentially with operating margins expanding 340 basis points due to the improved operating leverage in increased manufacturing, inefficiency is following our investments in the same.
Adjusted segment. Eva de increased 4.4 million or 13.2% sequentially.
20 basis points.
Corporate and other expenses were flat sequentially at 9.6 million in Q2 which included the 3 and a half million dollars of professional fees associated. With the announced plan to acquire a majority interest in the surface pressure control business of Baker Hughes.
Adjusted corporate EPA was flat at 4.4 million of expense compared to q1.
On a total company basis. Second quarter adjusted Eva de was 87 million down 7.6% from 94 million in the first quarter.
Jay Nutt: Adjustments to total company EBITDA during the second quarter of 2025 include non-cash charges of $6.3 million in stock-based compensation, $3.5 million for transaction-related professional fees, and $177,000 for the initial phase of severance actions taken in June to right-size the organization to reflect lower activity levels. A fuller picture of the actions taken to restructure the business will be evident in our results as we progress through the year. Depreciation and amortization expense for the second quarter was $16 million, which includes an ongoing $4 million of amortization related to the intangible assets resulting from the Flexdeal acquisition. During the second quarter, the public or Class A ownership of the company averaged and ended the period at 86%. GAAP income was $49 million in the second quarter versus $54 million during the first quarter. The decrease was largely driven by lower operating income.
Adjusted EVA margin for the second quarter was 31.7% compared to 33.5% for the first quarter.
Adjustments to Total company. Evita during the second quarter of 2025 include non-cash charges of 6.3 million in stock-based compensation.
3.5 million for a transaction related, professional fees, and 177,000, for the initial phase of severance actions taken in June to right-size the organization to reflect lower activity levels.
A fuller picture of the actions taken to restructure the business will be evident in our results as we progress through the year.
Depreciation and amortization expense for the second quarter was 16 million which includes an ongoing dollars of amortization related to the intangible assets resulting from the flex, still acquisition.
During the second quarter, the public or Class A ownership of the company averaged and ended the period at 86%.
Jay Nutt: Book tax expense during the second quarter was $14 million, resulting in an effective tax rate of 23%. Adjusted net income and earnings per share were $53.66 per share, respectively, during the second quarter compared to $59.73 per share in the first quarter. Adjusted net income for the second quarter was net of a 25% tax rate applied to our adjusted pre-tax income. During the quarter, we paid a quarterly dividend of $0.13 per share, resulting in a cash outflow of approximately $10 million, including related distributions to members. Positive movements in both inventory and accounts payable, combined with lower net CapEx, led to a much stronger quarter of free cash flow. We ended the quarter with a cash balance of $405 million, a sequential increase of approximately $58 million. Net CapEx was approximately $11.1 million during the second quarter of 2025.
Gap income was 49 million in the second quarter versus 54 million during the first quarter. The decrease was largely driven by lower operating income.
Book tax expense during the second quarter was 14 million resulting in an effective tax rate of 23%.
Adjusted net income and earnings per share. Were 53 million, and 666 cents per share respectively.
During the second quarter compared to 59 million and 73 cents per share in the first quarter.
Adjusted net income. For the second quarter was net of a 25% tax rate, applied to our adjusted pre-tax income.
During the quarter. We paid a quarterly dividend of 13 cents per share. Resulting in a cash outflow of approximately, 10, million included Arielle, including related, distributions to members.
Positive movements in both inventory and accounts payable combined with lower net. Capex led to a much stronger quarter of free cash flow.
We entered the quarter with a cash balance of 405 million, a sequential increase of approximately 58 million.
Jay Nutt: In a moment, Scott will give you our third-quarter operational outlook. Some additional financial considerations when looking ahead to the third quarter include an effective tax rate of 22% and an estimated tax rate for adjusted EPS of approximately 25%. Total depreciation and amortization expense during the third quarter is expected to be approximately $16 million, with $7 million associated with our pressure control segment and $9 million in spoolable technologies. We are reducing our full-year 2025 CapEx outlook to be in a range of $40 million to $45 million, including the $6 million equity investment made into Vietnam in the first quarter. We are continuing to evaluate our capital spending program, considering the trend of domestic activity while maintaining investments to support Vietnam production growth and to strengthen manufacturing efficiencies in Baytown.
Net capex was approximately 11.1 million during the second quarter of 2025.
In a moment, Scott will give you our third quarter, operational Outlook some additional Financial considerations. When looking ahead to the third quarter including an effective tax rate of 22% and an estimated tax rate for adjusted EPS of approximately 25%.
Total depreciation and amortization expense. During the third quarter is expected to be approximately 16 million with 7 million dollars associated with our pressure control segment, and 9 million in spool Technologies
We are reducing our full year. 2025 capex Outlook to be in a range of 45, 40 million to 45 million, including the 6 million Equity investment made into Vietnam in the first quarter.
Jay Nutt: Additionally, we expect to pay an annual TRA payment and distributions related to 2024 taxes late in the third quarter, which will be approximately $24 million. Finally, the board has approved an 8% increase in the quarterly dividend of $0.14 per share, which will be paid in September. We're pleased that the durability of cash flows in our structurally capital-light business has allowed us to consistently increase our dividend over the past several years. That covers the financial review, and I'll now turn the call back over to Scott.
We are continuing to evaluate our Capital spending program, considering the trend of domestic activity while maintaining Investments to support, Vietnam production growth and to strengthen manufacturing efficiencies in Baytown.
Additionally, we expect to pay an annual tax payment in distributions related to 2024 taxes.
late in the third quarter, which will be approximately 24 million
Finally, the board is approved and 8% increase in the quarterly dividend of 14 cents per share, which will be paid in September.
We're pleased that the durability of cash flows in our structurally. Capital light business has allowed us to consistently increase our dividend over the past several years.
Scott Bender: Thanks, Jay. I'd like to take a few moments to discuss our latest understanding of the tariff impact on our business and the corresponding weaker-than-anticipated pressure control margin performance in the second quarter. On June 4th, the Section 232 tariff rate on steel and certain steel derivatives was unexpectedly doubled from 25% to 50%. This resulted in an increase in the tariff rate applied to goods imported from our Chinese manufacturing facility from the minimum 44% to 45% incremental rate discussed on last quarter's call and reflected in our guidance affirmed on June 4th to what is now an incremental 70%. As a result of the general tax tariff uncertainty and this change, we broadened our supply chain to other higher-cost jurisdictions, including the US, to ensure certainty of delivery for our customers.
That covers the financial review, and I'll now turn the call back over to Scott.
Scott Bender: These higher-cost materials turned through our inventory faster than we had anticipated, resulting in depressed margins as we exited the quarter. In light of recent announcements, we must now modify the statement we made last quarter regarding our expectations that sourcing from Vietnam going forward would put us back into the same tariff position we have been operating under for the past several years. Considering the recent doubling of the Section 232 tariffs, we now believe that the rate applied to most imports from Vietnam could remain at 50%, despite the recently published rate of 20%, an absolute increase of 25% over the Section 301 rate that applied to our imports from China since 2018. This increased rate has not changed our planning to heavily utilize Vietnam for our US imports, given the challenges of scaling US manufacturing and the cost competitiveness of Vietnam.
An increase and the tax rate, tariff rate applied to Goods imported from our Chinese manufacturing facility from the minimum 44. 45% incremental rate discussed on last quarter's call and reflected. And our guidance affirmed on June 4th to what is now an incremental 70%, as a result of the general tax, tariff uncertainty and this change. We broadened our supply chain to other higher cost jurisdictions including the US to ensure certainty of delivery for our customers. These higher cost materials turned through our inventory, faster than we had anticipated resulting in depressed margins as we exited the quarter.
In light of recent announcements, we must now modify the statement we made last quarter regarding regarding our expectations that sourcing from Vietnam going forward would put us back into the same tariff position. We have been operating under for the past several years, considering the recent doubling of the section 232 tariffs. We now believe that the rate applied to most imports from Vietnam, could Remain the 50%. Despite the recently published rate of 20% on absolute increase of 25% over the section 301, right? That applied to our imports. From China. Since 2018, this increased rate has not changed our planning to heavily utilize Vietnam for our us Imports, given the challenges of scaling
Scott Bender: We continue to work with our vendors and our customers to neutralize the impact of these increased tariff base rates going forward. I'll now touch on our expectations for the third quarter of 2025 by reporting segment. During the third quarter, we expect pressure control revenue to be down mid to high single digits versus the $180 million reported in the second quarter. The decline is primarily due to the anticipated decrease in the average rig count in the third quarter. Further deterioration in our frack rental business is also contributing to the decrease as we elect to sideline equipment rather than irresponsibly deploy into a shrinking market where we believe current frack rate counts are more than 10% below second quarter average levels.
Us manufacturing and the cost competitiveness of Vietnam. We continue to work with our vendors and
Our customers to neutralize the impact of these increased tariff. Base rates going forward. I'll now touch on our expectations. For the third quarter of 2025 by reporting segments, during the third quarter, we expect pressure control Revenue to be down mid to high single digits versus the 180 million reported in the second quarter. The decline is primarily due to the anticipated, decrease in the average recount in the third quarter.
Scott Bender: Last Friday, the Baker Hughes US land rate count was 526, 5% below the second quarter average level, and we anticipate that modest softening will continue into the fourth quarter. Our customers have recently suggested that the majority of the declines for 2025 are behind us, provided commodity prices remain near recent levels. Adjusted EBITDA margins in our pressure control segment are expected to stay relatively stable at 28% to 30% for the third quarter, despite lower operating leverage. This adjusted EBITDA guidance includes the partial benefits arising from our cost reduction and recovery efforts, offsetting increased average tariff costs, and excludes approximately $3 million of stock-based compensation expense within the segment.
Further deterioration in our frac rental business has also contributed to the decrease as we elect to sideline equipment, rather than irresponsibly deploy it into a shrinking market. We believe current frac crew counts are more than 10% below second quarter average levels. Last Friday, the Baker Hughes land rig count was 526, 5% below the second quarter average level. We anticipate that this softening will continue into the fourth quarter. Our customers have recently suggested that the majority of the declines for 2025 are behind us, provided commodity prices remain near recent levels.
Scott Bender: Considering the increasing pace of shipments from our Vietnam facility and the support of our customer base, we believe that the second and third quarters will represent the trough of our pressure control segment profit margin in this cycle, barring further changes in tariff rates or a greater-than-anticipated decline in industry activity levels. Regarding our spoolable technology segment, we expect third-quarter revenue to be down high single digits from the second quarter as the progression of domestic activity levels impacts customer spending. That said, we remain pleased with recent international bookings. We expect adjusted EBITDA margins to be approximately 35% to 37% for Q3, which excludes $1 million of stock-based comp in the segment, moderating from the second quarter levels on lower volume and relatively stable input costs. Adjusted corporate EBITDA is expected to be a charge of approximately $4 million in Q3, which excludes $2 million of stock-based comps.
Adjusted even Dom margins and our pressure control segment are expected to stay relatively stable at 28% to 30% for the third quarter, despite lower operating leverage. This adjusted EBITDA guidance includes the partial benefits arising from our cost reduction and recovery efforts, offsetting increased average tariff costs. It excludes approximately $3 million of stock-based compensation expense within the segment. Considering the increasing pace of shipments from our Vietnam facility and the support of our customer base, we believe that the second and third quarters will represent the trough of our pressure control segment profit margin in this cycle, barring further changes in tariff rates or a greater than anticipated decline in industry activity levels.
Regarding our spillable technology segment. We expect third quarter Revenue to be down high single digits from the second quarter as the progression of domestic activity levels. Impacts customer spending
that said we remain pleased with recent International bookings. We expect adjusted. Avadim margins to be approximately 35 to 37% for Q3 which excludes 1 million of stock-based cop in the segment moderating from the second quarter levels on lower volume and relatively stable input costs, adjusted corporate evaa is expected to be a charge of approximately 4 million in Q3.
Scott Bender: We remain extremely excited about our recently announced plan to acquire a majority interest in the surface pressure control business of Baker Hughes, which we believe is continuing to perform well. The recent activity trends in North American markets, combined with tariff impacts to our base business, further demonstrate the strategic rationale for diversifying our footprint with a business heavily focused on the Mideast. Integration planning work is progressing well, and we expect closing of the transaction in late 2025 or early 2026 as we work through administrative filings and select global jurisdictions. We look forward to welcoming SBC Associates to Cactus in the near future. In conclusion, the second quarter was busy for our team as we announced a transformative acquisition and faced supply chain and tariff uncertainty. Despite these distractions, we maintained execution focus for our customers and generated solid free cash flow in the quarter.
Which excludes 2 million of stock-based comp.
We remain extremely excited about our recently announced plan to acquire a majority interest in the surface pressure control business of Baker use which we believe is continuing to perform. Well the recent activity Trends in North American markets combined with tariff impacts to our base business. Further demonstrate the Strategic, rationale, for diversifying, our footprint,
Scott Bender: Our confidence in the cash flow durability of our structurally variable, cost-driven, and capital-light business is reflected in the board's recent approval to increase our dividend by 8%. We believe the sharpest domestic activity declines for 2025 are behind us and look forward to beginning 2026 with a substantially broader geographic footprint and customer base from our announced acquisition plan. And with that, I'll turn it back over to the operator, and we can begin Q&A. Operator? Thank you. At this time, we will conduct the question-and-answer session. As a reminder, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A question roster. Our first question comes from Stephen Gangaro from Stifel. The floor is yours.
And late 2025 or early 2026. As we work through administrative filings and select Global jurisdictions. We look forward to welcoming SBC Associates to Cactus in the near future. In conclusion, the second quarter was busy for our team as we announced a transformative act, transformative acquisition and face supply chain and tariff uncertainty. Despite these distractions, we remained execution, Focus, we maintained execution Focus for our customers and generated solid free cash flow in the quarter. Our confidence in the cash flow durability of our structurally variable cost driven and capitalized business is reflected in the board's recent approval to increase our dividend by 8%
We believe the sharpest domestic activity declines for 2025 or behind us and look forward to beginning 2026 with a substantially broader Geographic footprint and customer base from our announced acquisition plan. And with that, I'll turn it back over to the operator and we can begin Q&A operator.
Thank you. At this time. We will conduct the question and answer session.
As a reminder, you will need to press star 1, 1 on your telephone, and wait, for your name to be announced.
To withdraw your question. Please press star 1 1. Again please, stand by while we compile the Q&A.
Roster.
Stephen Gengaro: Hi, Stephen. Thanks. Good morning, everybody. I think two things for me. I think first, you mentioned that it sounds like June was kind of felt the brunt of the tariffs, but you still guided pressure control margins pretty flat in the second quarter. Can you just sort of maybe provide a little bit more color around how that's achieved sequentially? Because I'm just thinking June was probably worse than the average in the quarter you just reported.
Our first question comes from Stephen, gengaro from stifle, the floor is yours.
Hi Stephen, uh, thanks, good morning, everybody.
um, I think 2, 2 things for me, I think, first you mentioned
Uh that it sounds like June was kind of felt the brunt of the tariffs but you still guided pressure control margins. Uh pretty flat. In in the second quarter. Can you just sort of
Scott Bender: You would be correct. So I'd tell you there really were a couple of factors. Stephen, the first one was this unexpected doubling of Section 232, for which the administration gave absolutely no notice. So when we prepared our guide for June, we didn't anticipate that 232 was going to ratchet up by 25 absolute points. So that impacted both inbound goods from Vietnam and inbound goods from China. So that was clearly not anticipated. I think, you know, the second point is that we had begun to look for alternate supply chain sources, and that was primarily in the US. And the US supply chain, as you know, is higher cost than our imported supply chain. But we still believed it was below what the fully tariffed amount would have been.
I mean maybe for a little bit more color around around how that's achieved sequentially because I'm I'm just thinking, June was probably worse than the average in the first in the, uh, in the quarter. You just reported
You you would be correct. So I I tell you there, there really were a couple of factors.
Um,
even the first 1 was this unexpected doubling of section 232, uh,
For which the administration gave.
Absolutely, no notice.
So when we prepared our guide for June, we didn't anticipate. The 232 was going to ratchet up by 25 absolute points, so that impacted both inbound goods from Vietnam and inbound goods from China. So that was clearly not anticipated. I think, you know, the second point is that we had um, begun
To.
Look for alternate, supply chain sources and that was primarily in the US. And the US supply chain, as you know, is is higher cost than our imported supply chain. Uh,
Scott Bender: And I think the last was we had anticipated pushing through some cost recovery initiatives only to see oil prices implode in April and May, which actually caused our customers to request price relief rather than entertain cost recovery requests. So we had to put that on pause for a bit. So those are the three contributing factors.
But uh, we still believe that was below what the fully, tariff amount would have been. And I think the last was we had anticipated, uh,
Pushing through some cost recovery. Uh, initiatives only to see uh, all prices.
implode in April and May which actually uh,
Caused our customers to request.
Stephen Gengaro: Okay. Thank you. And then the other question I had, and it's sort of a bigger picture. Like when we look at the world, I mean, oil prices are, you know, relatively high. I mean, I know the strips may be a little lower than the spot price. But when you think about it, you talk to your customers about the next several quarters, what do you think they're looking for to lead to some confidence to ramp activity? Because it feels like the oil price backdrop's not that bad, and the rig count just kind of keeps shrinking.
Price relief rather than entertain uh, cost recovery requests. So we had to put that on pause for a bit. So those are the 3 contributing factors.
Okay, thank you. And then the other question I had is sort of bigger picture, like, when, when we look at the world I mean, oil prices are
You know, relatively High, I mean, I know the strips maybe a little lower than the spot price, but when we, when you think about it, you talk to your customers about the next several quarters. What do you think?
They're looking for.
Scott Bender: Yeah, Stephen, I'm not really sure that our customers are as responsive today as they had as they were five years ago to more robust crude prices because you're entirely right. I think that that range of $65 to $70 is certainly providing very reasonable returns. But they're so focused right now on capital discipline and returning cash to shareholders that nobody wants to be the first to announce CapEx expansion. Having said that, it's undeniable that the gas market is expanding. I think our gas rig count is up 50% since January, which is, of course, diametrically at odds with our oil rig count. So unfortunately for us and maybe the rest of the industry, with some exceptions, gas still makes up a much lower percentage of our total rig count.
To lead to some confidence to ramp activity because I feel like the oil price backed up is not that bad. Although, in the recount, just kind of keeps keeps shrinking.
Yeah. Stephen I I'm not really sure that our customers are as responsive today. As they had, is, they were 5 years ago to to more robust crew prices because you're entirely, right? Uh,
I think that that range is 65 to 70 is certainly providing uh,
Scott Bender: So I guess the short answer is, yes, yes, we're going to see some expansion with gas, but it's starting at a much lower base, and I don't think we're going to see a significant response to oil prices.
Stephen Gengaro: Great. No, thank you for all the details.
Nobody wants to be the first to announce capex expansion. Having said that, um, it's undeniable that the gas market is uh, is expanding. I think our gas recount is up 50% since January, um, which is, of course, uh, diametrically at odds with our oil rate count. So unfortunately for us and maybe the rest of the industry, um, with some exceptions gas, uh, still makes up uh, much lower percentage of our total recount. So, uh, I guess the short answer is. Yes, yes, we're going to see some expansion with gas, but it's it's it's starting at a much lower base. Um, and I don't think we're going to see uh, significant response to oil prices.
Great. No, thank you for all the details.
Scott Bender: Thank you for your question. One moment, please. Our next question comes from David Anderson of Barclays. The floor is yours.
Thank you for your question.
1 moment, please.
Stephen Gengaro: Hey, David. How are you?
David Anderson: Hi, Steve. Morning. I'm doing great, Scott. Thanks.
Stephen Gengaro: Good.
Our next question comes from David Anderson of Barclays. The floor is yours. Hey, David, how are you? Good morning, I'm doing great Scott. Our thanks good.
David Anderson: So your product lines in the US are leveraged across drilling, completions, and production. And it sounds like completions was the weakest for you this quarter as rentals were really kind of taking a hit. I was wondering, could you just kind of walk me through your views on the second half about how those three components are trending? I mean, should we expect production to hold up stronger? Do you think completions might be a little bit stronger than drilling? You're indicating maybe the drilling, maybe the rig count declines are kind of behind us. Can you just kind of walk me through kind of how those three things are kind of driving the second half?
Um, so your product lines in the US are leveraged, across drilling completions and production, and it sounds like completions was the weakest for you. This quarter as rentals were really kind of taken a hit. I was wondering, could you just kind of walk me through your views on the second half about how those 3 components are trending? I mean, should we expect production to hold up stronger? Do you think completions might be a little bit stronger than drilling? You're indicating maybe the drilling, maybe the rig count, declines, are kind of behind us, can you just kind of walk me through kind of how those 3 things?
Scott Bender: Yeah, that's first, first I would I would probably expand on your conclusion that it was completions or frack activity that that mostly impacted our results. But I'd be remiss if I didn't mention that our production business was also beginning to soften, not as significantly as our frack-related business. So then in answer to your question about the rest of the year, I think our team believes that completion activity or frack-related activity is going to decline more significantly than drilling activity. So, as I mentioned, we're already, as of today, 12% below in terms of frack crews. Well, I said at least 10%, but the number is actually 12% today below the frack crew count in the second quarter of this year. And I really don't see that situation improving very much.
Are kind of driving the second half. First first, I would, I would probably expand on your, um, conclusion that it's, it was completions or Frac activity that that mostly impacted our results. But, um, I'd be remiss if I didn't mention that our production business was also beginning to to soften, um,
Not as significantly as our Frac related business. So then in answer to your question about the rest of the year. Uh I think our team believes that completion activity or Frac related activity, is going to decline um
More significantly than drilling activity. So, um, as I mentioned, we're already as of today. 12% Below. In terms of Frack Crews. We, well, I said, at least 10%, but it's the number is actually 12%. Uh, today below the Frac crew count in the second quarter of this year. And, um,
Scott Bender: Unfortunately, as frack activity wanes, so does the subsequent production activity because if we don't frack a well, we can't put a production tree on there. Now, I think we've got quite a few locations that may have been fracked and don't have production trees. So production activity, I don't think, will suffer to the same degree as frack-related activity.
I really don't see that situation improving very much. Unfortunately. It's Frac activity, wanes. So does the subsequent production activity because if we don't Frack a well, we can't put a production Tree on there. Now, I think we've got quite a few locations that may have been fracked and don't have production trees. So production activity, I don't think will suffer to the same degree as Frac related activity.
Stephen Gengaro: All right. Let's shift to much more positive things. Middle East. The Middle East acquisition, and I'd really love to know a little bit about how now you've kind of been in here a little bit, and I'm curious how you're going to approach this. We've watched you grow the pressure control business in US land essentially from scratch to a dominant share position. Clearly, you've done a great job whipping spoolables into shape. But this business in the Middle East is a different story. By all accounts, it's been essentially orphaned under the prior owner. I was wondering if you could kind of walk us through about turning something like this around. Where do you start? What's the process on something like this? How are you sort of thinking about it right now? Really appreciate it. Thank you.
All right. Let's let's let's shift a much more positive things, Middle East, Middle East acquisition. I'm really love to know a little bit about how now you've kind of been in here a little bit and I'm curious how you're going to approach this. We've watched you grow with pressure control but it's in US land essentially from scratch to a dominant share position. Clearly you've done a great job with whipping schools into shape.
Scott Bender: Wow, David. Sorry. It's asking me to maybe offer my opinion about how Baker has run the company. So let me let me first say that Baker has done a significant job in improving the results of their international business over the last two years. So kudos to them. They made some very, very difficult decisions in terms of closing down the less productive manufacturing facilities. I'm looking at my my general counsel here to make sure you're trying to, you're not kicking me, are you? So kudos to them. I think that in general, you know, we operate with a much flatter organization. I mean, that's undeniable. You can imagine we operate with a much flatter organization than any of our large competitors, and Baker's no exception, nor is FMC or Schlumberger Cameron. So, you know, I think that the culture is going to be significantly different.
But this business in the Middle East is a different story. By all accounts, has been essentially orphaned under the prior owner. I was wondering, if you could kind of walk us through about turning something like this around, where do you start? What's the process on something like this? How how are you sort of thinking about it right now? Really appreciate it. Thank you.
Wow, David.
All right, nice to meet you to maybe. Um,
Offer my opinion about how baker has run the company. So, let me, let me first say that Banker has done, uh, a significant job in improving the results of their international business over the last 2 years, so kudos to them, they made some very, very difficult decisions. In terms of closing down, uh the less productive manufacturing facilities. Um, I'm looking at my
My general Council here, to make sure you're trying to, you're not kicking me, are you so kudos to them? I think that um,
Scott Bender: I think, you know, the next area of emphasis will clearly be on our supply chain philosophy, which, again, Baker's done a remarkable job in improving their their cost structure for their products. But, you know, I still believe that we do a much better job, particularly in an environment that's not plagued with tariffs. So I think you could look for supply chain. I think you can look for organization and cultural changes. You know, frankly, I'm excited about the opportunity to enhance that business. I also think you're going to see the same degree of focus that we've brought to the US market on the international market where that has not been the case.
Uh, FMC or, or Slumbers a Cameron. So, you know, I I think that uh, the culture is going to be significantly different, I think, you know, the next
Area of emphasis will clearly be on our supply chain philosophy, which, um, again, Baker's done a, a remarkable job in improving their, their cost structure for the products. Um, but you know, I still believe that.
We do a much better job particularly in Environ in an environment that's not plagued with uh, with tariffs. So I think you could look for supply chain. I think you could look for organization and cultural changes. Um,
Stephen Gengaro: I would expect nothing less. Thank you very much, Scott.
You know, frankly I'm I'm excited about the opportunity to enhance that business. I also think you're going to see the same degree of focus that we've brought to the US market on the international market where that has not been the case.
Scott Bender: Okay. Thank you. Thank you for your question. Our next question comes from Aaron Jawaraman from JP Morgan Securities. The floor is yours.
But expect nothing less. Thank you very much Scott, okay thank you.
Thank you for your question.
Our next question comes from aeon. Jarro Robin from JP Morgan, Securities. The floor is yours.
Scott Gruber: Yeah, yeah. Good morning.
Stephen Gengaro: Good morning.
Scott Gruber: Good morning, team. So is it fair to say when you guys came out with your early June kind of update to the market on pressure control margins in that 33% to 35% range, that it didn't factor in maybe two things. One is the increase in Section 232 tariffs, as well as some of the legal costs that Jay mentioned in his opening remarks. Is that fair?
Yeah. Yeah, good morning. Good morning, good morning. Team so is it fair to say? When you guys came out with your early June, kind of update to the market on pressure control margins, in that 33 35% range, that it didn't factor in. Maybe 2 things, 1 is the increase.
Scott Bender: You know, I mean, it is fair, but I'd say there's more than just that. There's the Section 232, which was significant, but there also is our cost recovery efforts were paused because of the implosion in crude prices.
In section 232 tariffs, as well as some of the legal. Um, um, legal costs that that Jay mentioned in his um, opening remarks. Is that fair?
Scott Gruber: Got it. Got it. That makes sense. That makes sense. And maybe just as a follow-up, and I don't want to spend too much time on this, but maybe you could just talk a little bit about the legal or the legal charge that you took. It looks like something in the queue around an ongoing situation with Cameron. Maybe you could just provide an update on that and thoughts on do you expect any more cost to put in the model as we think about the back half of the year?
You know, I I I mean it is fair, but I I'd say there there's more than just that. Um, there's the section 232 which was significant but um, there also is our cost recovery. Uh, efforts were were paused because of the implosion and crew prices.
Got it, got it. That makes sense. That makes sense.
And maybe just as a follow-up. And I don't want to spend too much time on this, but maybe you could just talk a little bit about
The legal or the legal charge that you took looks like something in the queue around, um, uh, an ongoing, uh, situation with with Cameron, maybe you could just describe provide an update on that and thoughts on. Do you expect any more?
A cost to put in the model as we think about the back half of the year.
Scott Bender: You know, Will, what can I say on that?
Will Marsh: Well, I think we can start by letting them know the trial was delayed. We'll have some further disclosure on that in the 10-Q. So a lot of those expenses were gearing up for trial, which was delayed at the last minute. So there will be some more expenses in the back half of the year, but it's just hard to predict how the litigation may go.
You know, well what can I say on that?
Well, I think we can start by letting them know the trial was delayed. We'll have some further discussion on that and the 10 key. Um, so a lot of those expenses were gearing up for trial, which was delayed at the last minute.
Scott Gruber: Okay. And just what is the nature of the dispute?
So, there will be some more expenses in the back half of the year, but just just hard to predict how the litigation may go.
Okay. And just what is the nature of the dispute?
Will Marsh: It's, as we disclosed in the Q, it's an IP disclosure around the SafeLink or IP dispute around the SafeLink product.
It's uh, as we disclose to the queue, it's, it's an IP disclosure around the safe link or IP dispute around the safe link product.
Scott Gruber: Okay. Got it. Got it. Thanks a lot, gentlemen.
Will Marsh: Thank you.
Okay, got it. Got it. Thanks a lot gentlemen, thank you.
Scott Bender: Thank you for your question. Our next question comes from Scott Gruber of Citigroup. The floor is yours.
Thank you for your question.
Scott Gruber: Hey, Scott.
Our next question comes from Scott grubber of Citigroup. The floor is yours.
Will Marsh: Yes.
Scott Gruber: Good morning, gentlemen.
Will Marsh: Good morning.
Scott Gruber: Doing well. Thanks for letting me in here. It's good to hear, Scott, that PC margins should be troughing. I think that means you expect maybe some improvement into '26, even in a soft drilling market. Is that fair?
Hey Scott, yes, good morning gentlemen doing well. Thanks for, uh, thanks for letting me in here. Um, it's good to hear Scott, that that PC margin should be troughing. Uh, I think that means you, you expect, uh, maybe some, uh, Improvement into 26 even in a soft drilling Market is that fair?
Scott Bender: That's fair.
Um,
Scott Gruber: Okay. And some color on.
that's fair.
Scott Bender: You know, we don't normally give guidance that far out, but all things being equal, that's very fair.
Scott Gruber: No, I know. But you can appreciate there's a lot of moving pieces right now. And obviously, we just see the margins. But if we just assume drilling is kind of, you know, flat, you know, with the normal seasonality, you know, across four Q, one Q. But can you just provide a little more details on what could drive the kind of grind higher in the margins? Is it tariff surcharges being passed along? Is it Vietnam ramping up? And just some more color on what could drive some improvement.
Okay, and some color on, you know, we don't normally give guidance that that far out, but all things being equal, that's very fair.
No, I know. Um, but you can appreciate there's a lot of moving pieces right now. Um,
Scott Bender: You're paying excellent attention. It is more expansive cost recovery benefits. It is the migration to Vietnam. So even though Vietnam currently is 50% incremental, it's still below the absolute 95% coming out of China. So that's, you know, that certainly is a tailwind for us. I think it also has to do with, and we haven't disclosed the impact of that, but if you followed us from the very beginning, you know we're pretty aggressive in terms of right-sizing. And so you'll begin to see the benefits of that right-sizing as they flow through our P&L. So it'll be pretty significant.
You're, you're paying excellent attention. It is um, it's
More expansive cost recovery. Uh benefits it is the the migration to Vietnam. So even though Vietnam currently is
50% incremental; it's still below the absolute.
95% coming out of China. So that's, you know, that that certainly is a Tailwind for us. Um, I think it also has to do with uh, and we haven't disclosed the impact of that, but
Um, if you followed us from the very beginning, you know, we're pretty aggressive in terms of of right sizing. And so you'll begin to see the benefits of that, right sizing as they flow through our p&l. So it's, um,
Scott Gruber: Gotcha. If I could speak one more, and when do you think J&M is in a position to fully take on the former Chinese mode?
It'll be pretty significant.
Scott Bender: Yeah, we believe that that will be the coming summer.
Gotcha. If I could speak one-on-one, when do you think doing them is in a position to fully take on the, uh, the former Chinese load?
Scott Gruber: Okay. Very good. I appreciate it. Thank you.
Yeah, we believe that that will be the uh the coming summer.
Okay.
Very good. I appreciate it. Thank you.
Scott Bender: Thank you for your question. This concludes the question-and-answer session. I would now like to turn it back to Scott Bender, chairman and CEO, for closing remarks.
Thank you for your question.
Scott Bender: I thank you all first for joining us. it's been a pretty active Q2, as you know, both in terms of navigating this macro environment and the tariff environment, as well as, of course, the the announcement of this Baker deal. I think if we've learned anything, and I hope you have as well, it's the importance of this international diversification. So while international won't be immune to some of these oil price swings, they're going to be, it's going to be far more stable and certainly long-term a much more resilient market than than the domestic market. Although, I honestly, I am pretty optimistic about the US. Our market position is strong. Anyway, thank you very much. Everybody have a good day.
This concludes the question and answer session, I would now like to turn it back to Scott Bender, chairman and CEO for closing remarks. Uh I thank you all first for joining us. Um,
it's been pretty active Q2 as you know both in terms of of navigating this uh, the macro environment and the
Tariff environment. Uh,
As well as of course, the, the announcement of the speaker deal. Uh, I think if we've learned anything and I hope you have as well. It's the importance of this International diversification. So while International won't be immune to some of these um, oil price, uh swings. Uh they're going to be it's going to be far more stable and certainly long term, a much more resilient Market than than the domestic Market.
Although I honestly, I am freeze optimistic about the us. All right? Our Market position is is strong. Anyway, thank you very much. Everybody have a good day.
Scott Bender: Thank you for your participation in today's conference. This does conclude the program. You may now
Thank you for your participation. In today's conference, this does conclude the program. You may now disconnect