Cactus Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 9, 2023

There are 7 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Cactus Q1 2023 Earnings Conference Call. At this time, all participants are in listen only mode. After the presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Alan Boyd, Director of Corporate Development and Investor Relations.

Operator

Please go ahead, Alan.

Speaker 1

Thank you, and good morning. We appreciate you joining us on today's call. Our speakers will be Scott Bender, our Chief Executive Officer and Steve Tadlock, our Chief Financial Officer. Also joining us today are Joel Bender, Senior Vice President and Chief Operating Officer Stephen Bender, Vice President of Operations TS, CEO of Flexsteel and Will Marsh, our General Counsel and Vice President of Administration. Please note that any comments we make on today's call regarding projections or expectations for future events are forward looking statements covered by the Private Securities Litigation Reform Act.

Speaker 1

Forward looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to review our earnings release and the risk factors discussed in our filings with the SEC. Any forward looking statements we make today are only as of today's date, and we undertake no obligation to publicly update or review any forward looking statements. In addition, during today's call, we will reference certain non GAAP financial measures.

Speaker 1

Reconciliations of these non GAAP measures

Speaker 2

Thanks, Alan, and good morning to everyone. Before we commence our comments regarding the quarter, I want to take this opportunity to acknowledge some changes To our management team, Alan Boyd, who provided the introductions this morning has joined us from Halliburton as Director of Corporate Development and Investor Relations. Alan has an extensive background ranging from investment banking to working as a drilling engineer at ExxonMobil. He will be taking over for John, who is moving over to serve as CFO of Flexsteel. On behalf of our entire team, I'd like to thank John for its efforts leading our Investor Relations function as we matured as a public company and look forward to its continued success in the new role.

Speaker 2

The past few months have been incredibly active here at Cactus. We announced and closed the Flexsteel acquisition during the quarter And our reported results for the quarter include 1 month of contribution from Flexsteel's business. On a standalone basis, Cactus would have once again Set record for both quarterly revenue and adjusted EBITDA as U. S. Wellhead market share hit an all time high.

Speaker 2

Consistent with the past, We'll walk through Cactus' results in detail, discussing product, rental and field service. On a go forward basis, we will report legacy Cactus as the Pressure Control segment and Flexsteel as a spoolable technology segment and our guidance will reflect How we intend to report results in the future. Note that we will continue to evaluate the reporting structure, particularly around corporate SG and A. Some highlights for the Q1 include revenue of $228,000,000 adjusted EBITDA of 79,000,000 Adjusted EBITDA margins were nearly 35%, wellhead market share was a record 43%, and we paid a quarterly dividend of $0.11 per share. I'll now turn the call over to Steve Tadlock, our CFO, who will review our financial results.

Speaker 2

Following his remarks, I'll provide some thoughts on our outlook for the near term before opening the lines for Q and A. Steve?

Speaker 3

Thank you. As Scott mentioned, total Q1 revenues were $228,000,000 which includes 1 month of Flexsteel results. Pressure Control product revenues of $130,000,000 were up 4% sequentially, driven primarily by an increase in rigs followed. Gross margins inclusive of depreciation expense were 40%. This was down 40 basis points sequentially due in part to product mix.

Speaker 3

In our Pressure Control product business, the U. S. Wellhead market share increased 43.3% during the period. Despite the overall decline in the U. S.

Speaker 3

Land rig count, our rigs followed rose by approximately 6%. This increase was driven by our larger publicly traded customers. Our rigs followed with private operators remained relatively flat versus the 4th quarter. Pressure control rental revenues were $27,000,000 in Q1, down 2% versus the 4th quarter. The slight decline was driven by lower revenue from our Australian operations, which had a particularly strong Q4.

Speaker 3

Gross margins were down 200 basis points to 42% due to higher redeployment related costs. Pressure control field service and other revenues in Q1 were approximately $38,000,000 up 6% sequentially. This represented approximately 24% of combined pressure control product and rental related revenues during the quarter, slightly above expectations. Gross margins inclusive of depreciation expense were 23%, down 80 basis points sequentially due to increased labor costs as retention remains a key focus. Pressure control SG and A expenses were $22,700,000 during the quarter, relatively flat sequentially despite higher transaction related fees and expenses, which totaled $8,600,000 in Q1.

Speaker 3

Excluding these transaction related expenses, Pressure Control SG and A was approximately 14,000,000 representing approximately 7% of Pressure Control revenue. Pressure Control adjusted EBITDA was $69,000,000 an increase of $2,700,000 sequentially. As a reminder, we closed the Flexsteel acquisition on February 28, so the Q1 results include approximately 1 month ownership of the business. Given Flexsteel's completion orientation, activity is often seasonally lower in Q1 and to a lesser extent in Q4. Marsh had a strong finish to Q1 with $34,000,000 of revenue.

Speaker 3

Operating income in our spoolable technologies segment during the period was $200,000 inclusive of SG and A related expenses at Flexsteel. Operating income is also burdened by non cash charges of $4,200,000 associated with purchase price adjustments to acquired inventory. Additionally, operating income included $3,700,000 of intangible asset amortization costs during the period. Spoolable Technologies adjusted EBITDA, which backs out these non cash charges as well as stock based compensation expense was $10,300,000 during the month, which equates to an adjusted segment EBITDA margin of 30.5%. On a total company basis, 1st quarter adjusted EBITDA was $79,000,000 up 20% from $66,000,000 during the Q4.

Speaker 3

Adjusted EBITDA for the quarter at nearly 35% of revenues was similar to the 4th quarter. Adjustments to total company EBITDA during the Q1 of 2023 included approximately 4th nonrec based compensation, $9,000,000 in transaction related fees and expenses and $4,000,000 related to the aforementioned non cash purchase accounting related step up in inventory that increased Fullable Technologies cost of goods sold during the period. We also backed out a $3,400,000 gain from the revaluation of the TRA liability. Depreciation and amortization expense for the Q1 was $13,000,000 which again includes $4,000,000 of amortization expense related to intangible assets booked as part of purchase accounting. Total depreciation and amortization expense during the Q2 is expected to be approximately $22,000,000 dollars 9,000,000 of which is associated with our Pressure Control segment and $13,000,000 associated with spoolable technologies.

Speaker 3

This figure is inclusive of an expected $9,000,000 of intangible amortization expense within Insulinable Technologies during the quarter. Intangible amortization expense is expected to decline thereafter with the total amount estimated for the second half of twenty twenty three at approximately $8,000,000 or $4,000,000 per quarter. Net interest income during the Q1 was approximately $1,000,000 We expect interest expense of less than $3,000,000 during the Q2. Income tax expense during the Q1 was $2,000,000 Tax expense was reduced due to a benefit related to a release of our valuation allowance. During the Q1, the public or Class A ownership of the company averaged 81% and ended the quarter at 81%.

Speaker 3

Barring further changes in our public ownership percentage, we expect an effective tax rate of approximately 20% for Q2 2023. GAAP net income was $52,000,000 in Q1 2023 versus $41,000,000 during the Q4 of 2022. The increase was driven by lower income tax expense and higher other income related to the non cash revaluation of our TRA liability. We prefer to look at adjusted net income and earnings per share, which were $51,000,000 $0.64 per share respectively during the Q1 versus $44,000,000.57 per share in Q4 2022. Adjusted net income for the Q1 applied a 24 5 percent tax rate to our adjusted pre tax income generated during the quarter.

Speaker 3

We estimate that the tax rate for adjusted EPS will be 24.5% during the Q2 of 2023. During the Q1, we paid a quarterly dividend of $0.11 per share, resulting in a cash outflow of $9,000,000 including related distributions to members. The Board has also approved a dividend of $0.11 per share to be paid in June. We ended the quarter with a cash balance of $75,000,000 and gross bank debt of 155,000,000 Since the end of the quarter, we have paid off $60,000,000 of the term loan balance and the business continues to generate strong free cash flow. Net CapEx was approximately $14,000,000 during the Q1 of 2023.

Speaker 3

This included the purchase of a previously leased Domestic property for approximately $7,000,000 during the period. The CapEx outlook for the Pressure Control business remains unchanged for 2023.

Speaker 2

With the addition of the Flexsteel business, we have revised our full year capital expenditure budget to $45,000,000 to $55,000,000 That covers the financial review and I'll now turn the call over to Scott. Thanks, Steve. I'll now touch on our expectations for the Q2 based on our new reporting segments. During the Q2, we expect pressure control revenue to be down in the low single digits percentagewise versus the $195,000,000 reported in the Q1 as softness in rig activity may well extend to regions beyond the gas weighted basins. We expect, however, more resiliency and production tree sales during the period relative to wellhead equipment.

Speaker 2

Additionally, we expect to gain some market share and our frac rental business, which should partially offset overall industry activity declines. Customer indications point to Cactus' onshore rig activity down 3% to 5% sequentially on average in the 2nd quarter depending on the timing of rig releases. From Q1 exit to Q2 exit, We're expecting an 8% to 10% drop in our rig count. Note that we are not planning to officially publish market share On a go forward basis, given that our new reporting structure will combine the legacy Cactus business lines into one segment. During the Q2, We expect to make additional product shipments into Europe following an award in the region.

Speaker 2

This highlights the traction we continue to gain in various international locations. Regarding our planned expansion efforts in the Mideast, we continue to work and evaluate ownership structures in the region, testing and trials remain The goal for 2023 with approvals to follow. Adjusted EBITDA margins in our Pressure Control segment are expected to be 33% to 35% for the 2nd quarter, inclusive of Pressure Control's SG and A and general corporate expenses. This adjusted EBITDA guidance excludes $3,500,000 of stock based comp expense within the segment as well as transaction related fees and expenses. Total depreciation expense for our Pressure Control segment during the Q2 is expected to be approximately $9,000,000 Switching over to our spoolable technology segment, we expect revenue of $100,000,000 to $105,000,000 during the second quarter, an increase of approximately 15% to 20% versus the 1st full quarter total, including the 2 months prior to the acquisition close.

Speaker 2

This highlights the benefits of the product diversification achieved with the acquisition. Customer demand for Flexsteel's unique technologies Remains robust as Flexsteel continues to replace stick steel pipe and competing products. As Previously disclosed, our spoolable technologies segment was working through some higher cost inventory during the Q1. With the majority of this headwind behind us, We expect adjusted EBITDA margins on the segment to increase to between 32% 33% for Q2. Note that this margin guidance excludes the non cash impact from the step up in the value of inventory on hand associated with purchase accounting, which is anticipated to be approximately $13,000,000 in Q2 $2,000,000 for the second half of twenty twenty three.

Speaker 2

We expect stock based comp in our spoolable technology segment to be approximately 1,300,000 During the last month, we have had the opportunity to introduce Flexsteel's spoolable technology to select legacy Cactus customers And we've already had success. I'm confident that this trend will continue as we further showcase the superior technology to additional clients. As of Cactus, there is potential to add more large accounts that can move the needle on a go forward basis. Looking forward, we're excited about the opportunity set for the combined business. The capital light structure, strong margin profile should enable the company to generate continued free cash flow this year and rapidly pay down debt.

Speaker 2

We hope to return to a net cash position this year, which will enable the management team to further evaluate return of capital strategies. With the recent pullback in commodity prices, While the recent pullback in commodity prices is expected to pressure domestic land activity, we expect our business to outperform General domestic industry activity. Customer balance sheets remain in much better shape today than they have in years past. Cactus remains well positioned to deliver for our shareholders amid the current market environment. Finally, I want to personally thank our management team and advisors for their Herculean efforts in transitioning Flexsteel to a cactus company.

Speaker 2

And with that, I'll turn it back over to the operator, so we may begin Q and A. Operator?

Operator

Thank you. At this time, we will conduct the question and answer session. Please limit yourself to one question and one follow-up. At this time, stand by and we'll Our first question will come from Dave Anderson with Barclays. Go ahead, Dave.

Speaker 4

Thank you very much. Good morning, Scott. How are you?

Speaker 5

Hey, David. How are you?

Speaker 4

I'm doing great. I'm doing great. You just said the rig count weakness you think is Extending beyond the gas basin. I was wondering if you could expand on that a little bit more. Is that really a reflection of the lower oil prices On the privates, is that where you're seeing?

Speaker 4

We haven't really heard the larger E and Ps or majors pulling back at all. Just wondering if you could kind of talk about kind of how you see Customer bases shifting in 2nd quarter. And also maybe kind of what's your sense on the back half of the year? Do you think its second quarter will kind of plateau or I don't know, obviously gas is sort of its own thing, but maybe just kind of your broader thoughts on the market for the rest of the year, if you wouldn't mind.

Speaker 2

David, you always ask such easy questions. So let me say that It just stands to reason that with lower gas prices, that translates into lower cash flow for our customers And because our customers are so focused on returns to their shareholders, I can't help but think, although I don't have any objective evidence that The pullback will extend beyond private. So to be sure, I think the privates will be affected as you all know more than the publics. But I don't think the publics are going to be totally immune from the pullback. I think in addition to that, we have to recognize that all is at $70 $72 I didn't actually look this morning, but the low 70s.

Speaker 2

And that has got to have Probably an outsized impact on privates, but to some extent on Publix as well. I also think though that When OPEC has another opportunity to evaluate their production cuts, you'll see production cuts that are going to be supportive of Of tightening supply. Looking, I think that the rig count could possibly bottom out Towards the end of the second quarter and I think that the bottom could be in the range of $650,000,000 to $675,000,000 Although David, I don't have any objective evidence other than I haven't been in this business for so long.

Speaker 1

I think you know

Speaker 2

that Cinnamon is not exactly right now very supportive,

Speaker 4

But I don't

Speaker 2

think it's going to fall below that. And that's not a terrible area. We could certainly Enjoy very good returns at that level. But I think that you're everybody is sort of kidding themselves If they think that we're only going to see other 30 rigs pull back.

Speaker 4

Some wisdom, I think, for the markets Very well heated here. If I could shift over your Flexsteel acquisition here. Can you just talk a little bit about the overlap Today with your wellhead business in Flexsteel, in other words, could you give me maybe a sense, I'm not asking for a number, but just a lot of wellheads Today, currently kind of then go into Flexsteel or is that obviously that's got to be one of the opportunities. I would think the selling point would be on reducing installation time for customers. But is there much of an overlap today?

Speaker 4

And can you just talk about kind of how you see that Moving forward in terms of getting that is that the same are you talking to the same person with the customer? Obviously, it's an E and P, but are you talking to the same people? I mean, how does that kind of work? Not really a business we've had a lot of exposure to historically.

Speaker 2

Okay. So Dave, the first point I want to make is that Everybody who buys a cactus production tree ultimately has to buy a Flexsteel product Or big pipe or a product competitive with Flexsteel like from NOV or from CharCor Or from Baker. So everybody's got to run some sort of transmission line from the end of our show. In terms of Cactus customers, if we look at Flexsteel's major Customers in the U. S, they're also Cactus customers.

Speaker 2

So having said that, Cactus has about Five times the number of customers as Flexsteel. So we're taking this opportunity to introduce the Flexsteel product line To those customers, knowing that they've got to buy something. And so it's logical, we think, To expand our wallet size for those customers. Does that help you at all?

Speaker 4

That helps a ton. If I can Squeeze in one more question. I guess I don't know a ton about how the inner workings of Flexsteel, but how does pricing typically work here? Are steel prices kind of a driver like it is in OCTG? Just kind of loosely like just how does the conversations come about?

Speaker 4

What are sort of the drivers of Pricing.

Speaker 2

TS is with us. I'm going to let TS offer his comments.

Speaker 6

So In terms of pricing, pricing is set with the intention of providing the best value to the customer. We sell our products to Flexsteel's products primarily on safety and quality. And in that regard, we are very similar to Cactus and the legacy Cactus business. And that's why we have also similar sort of overlap in customer base amongst large customers as well as in privates. Although like Scott said, we have lots of opportunities to get introduced to legacy Cactus customers to grow our top line.

Speaker 2

So David, let me just expand upon that. To be fair, TS is by nature sort of a modest person, but Steel prices clearly steel is a large component of this input. But the way they've marketed their product Has been without an eye towards steel prices. So that means that when steel prices went crazy beginning of Of course, with the war in Ukraine, Flexsteel did not respond with commensurate increases in their product prices. So, they don't base their selling price on their cost of steel.

Speaker 4

Okay, Great. Thank you very much. Appreciate

Speaker 2

it. Thank you, David.

Operator

Thank you. Our next question comes from Kurt Halle with Benchmark. Please go ahead, Kurt.

Speaker 5

Hey, good morning, everybody.

Speaker 2

Good morning, Kirk. How are you?

Speaker 5

Good. Doing well. Doing well. Thank you so much. Great.

Speaker 5

Appreciate all the outlook and the commentary and providing perspective Around how you think things are going to evolve. I think everybody's kind of grapple around elements of the business right now. So it's all incrementally helpful. So I guess my question is, it sounds like you got a lot of momentum and a lot of runway here to kind of pull Flexsteel into what you've been doing, Obviously, with 5x the customer base, I know you also looked at the opportunity to leverage Flexsteel on the international front And understanding that's still probably maybe a year away to seeing some real significant uptick, but just kind of curious, Scott, as you see that unfolding, what are some of the hurdles you may have to overcome to Kind of see that international business grow to the extent we think it can.

Speaker 2

You're talking about hurdles in both product lines or

Speaker 5

Well, yes, yes, just maybe overall, again, I know this is not your first foray in building an international business, right? But And how does that make you feel? And do you think there's going to be any roadblocks to expanding your business internationally?

Speaker 2

I think the major roadblock Remains those countries that require indigenous manufacturing. And I think by now you know which countries those are. The rest of the world Doesn't have such requirements. And frankly, I think that while Flexsteel Has historically done a much better job internationally than Cactus has. Flexsteel's attention turned towards the domestic market as they tried to just they had a similar commitment as we had during the supply chain challenges And that is their commitment to take care of their domestic U.

Speaker 2

S. Customers. And when you do that, it's just Logical, it may not be appropriate, but it's logical that you back off in terms of your focus On international markets, for Flexsteel in particular projects, international projects can be more disruptive To their manufacturing process than for Cactus. And so as a result, they really couldn't chase The big international projects to the same extent. Capital for us fortunately is not an issue.

Speaker 2

And so We are combining our marketing efforts, Flexsteel and Cactus together to take That sort of approach to the international market. So we'll be calling on customers with a single individual in many of the markets In hopes of getting some interest.

Speaker 1

To be

Speaker 2

fair, purchasers on the Flexsteel side are mostly facility engineers, Whereas on our side, they're mostly drilling and completion engineers. So even though same companies, Different set of decision makers. So the major roadblocks right now have just been A lack of exposure. And so ask me this question in a year as we begin to ramp up our efforts internationally. There's no reason.

Speaker 2

Historically, TS International, you've had years where international was 30 plus percent of your business?

Speaker 6

That's right.

Speaker 2

There is no Structural reason why we can't return to that.

Speaker 6

Yes. And I'd say just back to that in a way, any kind of growth that we're going to expect international markets, especially in the offshore segment, will be a really big benefit for Flexsteel because Flexsteel has got those Asymmetric upside notes to grow in the shallow water offshore segments.

Operator

Thank you everybody for your participation. I would now like to I'll turn it back over to Alan Boyd for closing remarks.

Speaker 1

We appreciate everyone's interest in Cactus and look forward to speaking with you on the

Operator

Thank you for your participation in today's conference call. This concludes the program. You may now disconnect.

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Cactus Q1 2023
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