Cactus Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 8, 2023

There are 10 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Cactus Second Quarter 2023 Earnings Conference Call. 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.

Speaker 1

Thank you, and good morning. We appreciate you joining us on today's call. Participants will be Scott Bender, our Chairman and Chief Executive Officer and Steve Tadlock, our Chief Financial Officer. Also joining us today are Joel Bender, President participants are in the line with our Chief Operating Officer TS, CEO of Flexsteel and Will Marsh, our General Counsel and Executive Vice President.

Speaker 2

Participants are in

Speaker 1

the line with our expectations. 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.

Speaker 1

Any forward looking statements we make today are only as of today's date,

Speaker 3

participants are

Speaker 1

in the same period, 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'll turn the call over to Scott.

Speaker 4

Thanks, Alan, and good morning to everyone. We are understandably pleased with the company's performance in the Q2 despite a weakening U. S. Landmark. We're particularly proud to be in a net cash position today, well ahead of our internal plan.

Speaker 4

As you know, free cash flow generation has always been a strength of our company and has been enhanced further by the Flexsteel acquisition. On the strength reflects the highly differentiated offerings in each of our segments. Today, we'll walk through results in our recently introduced segment reporting format, participants are participating in the call, which is legacy Cactus and Spoolable Technologies, which represents the Flexsteel business. From second quarter, of our total company highlights include revenue of $306,000,000 adjusted EBITDA of 115,000,000 our adjusted EBITDA margins of 37.7 percent. We paid a quarterly dividend of $0.11 per share, record cash flow from operations of $108,000,000 Yesterday, we announced that our Board approved a 9% increase in a quarterly dividend of $0.12 a share and at July 31, we have repaid the full $155,000,000 of debt participants are ready to finance the Flexsteel acquisition, leaving us once again free of bank debt.

Speaker 4

I'll now turn the call over to Steve Tadlock, our CFO, will review our financial results. Following his remarks, I'll provide some thoughts on our outlook for the near term before opening the lines up are

Speaker 5

ready for Q and A. Steve? Thanks, Scott. As Scott mentioned, total Q2 revenues were 306,000,000 pressure control revenues of $199,000,000 were up 2.3% sequentially, driven primarily by increased customer activity despite the decline in U. S.

Speaker 5

Land activity as the quarter progressed. Operating income increased $5,100,000 or 10.3 percent sequentially, with operating margins increasing 200 basis points, primarily due to lower transaction expenses, partially offset by an increase in the allowance for doubtful accounts, which was primarily attributable to a single customer. Adjusted segment EBITDA was $69,900,000 an increase of $800,000 as a reminder, we closed the Flexsteel acquisition on February 28, so the Q2 results represent our 1st full quarter of ownership of the business, all the Q1 included only March results. Schoolable Technologies revenues were $106,700,000 and operating loss was 6 operating loss was inclusive of $19,300,000 of inventory costs associated with the step up in value of inventory on Handed acquisition, of our earnings call will be recorded in the quarter. We expect to be approximately $8,700,000 of intangible amortization expense and $18,100,000 of expense associated with the remeasurement of the earn out participating in the Flexsteel acquisition.

Speaker 5

The remeasurement expense this quarter reflects the revenue outperformance versus our prior forecast. This liability will be remeasured and adjusted if necessary on a quarterly basis through the final earn out evaluation date of June 30, 2024. Adjusted segment EBITDA, which excludes all the above non cash charges, was $45,500,000 with margins of 42.6%, an approximately 1200 basis point increase from March levels due to the depletion of higher cost material in the prior quarter and improved operating leverage. Note that no corporate costs have been allocated to Flexsteel in the period. On a total company basis, 2nd quarter adjusted EBITDA was 115,000,000 participants are up 45% from $79,000,000 during the Q1.

Speaker 5

Adjusted EBITDA margin for the quarter was 37.7 percent of revenues, an increase from the Q1 due to operating leverage and higher contribution from the spoolable technologies segment. Adjustments to total company EBITDA during for the Q3 included approximately $2,200,000 in transaction related fees and expenses and non cash charges of $5,300,000 in stock based compensation, are $18,100,000 related to the Flexsteel earn out liability and $19,300,000 of purchase accounting related step up in inventory, participants are in the Q3 of 2019. Total D and A expense during the Q3 is expected to be approximately $15,000,000 $7,000,000 of which is associated with our Pressure Control segment of which is associated with spoolable Technologies. This figure is inclusive of an expected $4,000,000 of intangible amortization expense as the longer lived acquisition intangibles amortized at a steady rate. Net interest expense during the Q2 was approximately $5,900,000 interest expense increased sequentially due to the debt level and accelerated amortization of deferred financing fees, which contributed approximately $3,300,000 to interest expense as we paid down debt faster than our forecast and recognize these expenses in the Q2, we expect interest expense of approximately $1,000,000 during the Q3.

Speaker 5

Income tax expense during the Q2 was $10,000,000 tax expense increased due to higher expected earnings and the elimination of the benefit related to a release have a discussion of our valuation allowance utilized in the Q1. During the Q2, the public or Class A ownership of the company averaged 81% and ended the quarter at 81%. Barring further changes in our public ownership percentage, we expect an effective tax rate of our operating expenses were approximately 21% for Q3 2023. GAAP net income was $32,000,000 in the 2nd quarter versus $52,000,000 during the Q1. The decrease was driven by higher income tax expense, higher interest expense, increased inventory step up expense, increased purchase price intangibles amortization and the expense related to the measurement of the earn out liability associated with the outstanding performance of Flexsteel.

Speaker 5

We prefer to look at adjusted net income and earnings per share, which were $67,000,000 $0.84 per share, respectively, during the 2nd quarter participants are in the Q1. Adjusted net income for the 2nd quarter applied to 26% tax our adjusted pretax income generated during the quarter. We estimate that the tax rate for adjusted EPS will be 26% during the Q3 of 2023. During the Q2, we paid a quarterly dividend of $0.11 per share, resulting in a cash outflow of approximately $9,000,000 including related distributions to members. The Board has also approved a 9% increase to the quarterly dividend to $0.12 per share, which will be paid in September.

Speaker 5

Additionally, we repurchased approximately 4,000 shares of Class A common stock in the final days of the Q2 under our new authorization for approximately 159,000 we ended the quarter with a cash balance of $64,000,000 and gross bank debt of $55,000,000 Since the end of the quarter, operating cash tax payment will be approximately $34,000,000 along with an estimated 2023 cash tax payment of $9,000,000 all participants

Speaker 3

are in the range of $10,000,000

Speaker 5

Net CapEx was approximately $6,000,000 during the Q2 of 2023 we're reducing our full year 2023 CapEx outlook to $35,000,000 to $45,000,000 on lower expectations for near term growth spending at Pressure Control given moderating activity levels. This range is inclusive of planned investments in low cost supply chain diversification, but excludes investments in the Middle East, ready to discuss our financial review, and I'll now turn the call over

Speaker 4

to Scott. Thanks, Steve. I'll now touch on our expectations for the Q3 based on our reporting segments. During the Q3, we expect pressure control revenue should be down approximately 10% versus the $199,000,000 reported in the 2nd quarter participants are in the range of $1,000,000 as the decline

Speaker 3

in drilling activity impacts

Speaker 4

our business, which remained resilient through the declining rig count in the first half of the year. Participants are in the range of $1,000,000,000. As of last Friday, Baker Hughes U. S. Land rig count was down 17% from year end 2022 levels and down 14% participants are in the range of 2nd quarters from Q1 2023 average levels.

Speaker 4

Our differentiated pressure control business continues to outperform this activity decline. We expect the rig count may continue to be pressured in the Q3, although customer indications suggest activity will be flat to up in the 4th quarter if commodity prices remain constructive, our larger well capitalized customers remain committed to investing in their business through commodity cycles and our revenue outperformance of the declining rig count year to date is reflective of this commitment. Adjusted EBITDA margins in our Pressure Control segment are expected to be 32.5% to 34% for the 3rd quarter, in line with the financial statements are included in pressure control, SG and A and general corporate expenses. This adjusted EBITDA guidance excludes approximately $4,000,000 in the range of stock based compensation expense within the segment as well as transaction related expenses. Margins are expected to be down sequentially operating leverage, although we've begun to see deflation in our supply chain costs after many months of inflationary pressures.

Speaker 4

We expect the benefits of this to begin to materialize in the Q3 and more significantly in the Q4. Participants are in the Middle East, we continue to work through testing and trials, which are progressing on schedule. We're also continuing our work our efforts are focused on evaluating ownership

Speaker 3

structures in the

Speaker 4

region and upon the completion of our evaluation, expect customer acceptance in late 2024. As mentioned earlier, we now expect to finalize our investment structure in the region in early 2024. Switching over to the spoolable technology segment, we expect revenue to be relatively flat versus the 2nd quarter, participants are in the range of $1,000,000 driven by continued penetration in share of wallet and share of market. This outperformance of the market highlights the benefits of the product diversification performed well achieved with the acquisition. As discussed last quarter, our School of Technology segment was also working through some higher cost inventory in the Q1 and that headwind is now behind us.

Speaker 4

We expect adjusted EBITDA margins in this segment are expected to be in the approximately 40% range for Q3, moderating slightly from record Q2 levels with volatility in our supply chain. Note that this margin guidance excludes approximately $1,000,000 of stock based compensation in the segment. Also given the high inventory turnover, we have now completed the amortization of the non cash step up in value of inventory associated with purchase price accounting ahead of plan and we will not have that cost or add back going forward. As mentioned in the Form 8 ks that was filed last night with our earnings release, we announced a few changes. Our Chairman, Bruce Rothstein, who has served in that role since the company's founding in August for which I'm very thankful.

Speaker 4

I've assumed the role of Chairman in addition to continuing my current responsibilities as CEO. Given my additional responsibilities as Chairman and my role supporting the integration of Flexsteel, Joel has assumed the role of President. As President, Joel will continue to oversee our supply chain, including our manufacturing and production facilities. Stephen Bender has assumed Joel's role of Chief Operating Officer, where he will continue to oversee our branch and field operations, Managing the majority of our associates and introducing significant technology enhancements to our service delivery all participants are in the process. Gary Rosenthal, an independent Board member since 2018 has assumed the Lead Director role.

Speaker 4

You should not infer any retirement plans from these changes. We are still in the early innings of introducing the Flexsteel product line our expectations are to Cactus' much larger customer base through joint meetings and are highly encouraged by early efforts to integrate our sales organizations, participating in the U. S. And internationally. Just like Cactus, the Flexus team is highly technical, delivers a superior product and service our customers will learn are ready to take questions to the operator.

Speaker 4

We are

Speaker 3

ready to take questions to the operator. We are ready to take questions to our operator. We are ready to take questions to our operator. We are ready

Speaker 4

to take questions

Speaker 3

to our operator. We are ready

Speaker 4

to take questions to our operator. We are ready to take questions

Speaker 3

to our operator. We are ready to take questions to our operator.

Speaker 4

We are ready to take questions to our operator. We are ready to take questions to our operator. Thank you, operator. In the range of $1,000,000,000 of total cost of ownership production, increased safety and reduced emissions for more efficient field operations. We anticipate introducing new products and services in 2024, the details of which will be discussed when appropriate.

Speaker 4

Participants are in the range of $1,000,000 as stated previously, our substantial free cash flow in the 5 months since the acquisition closed enabled us to repay all of our of bank debt, well ahead of plan. The debt free balance sheet and increased confidence in the strong through cycle cash flow profile of the combined business has led us to reevaluate our cash return priorities as evidenced by our June announcement are in the

Speaker 3

range of $1,000,000 of

Speaker 4

the overall share repurchase program and the increase of the base dividend announced yesterday. Going forward, we expect to remain discerning buyers participating in the our earnings call will be recorded in the quarter and inorganic growth opportunities with our excess cash, while maintaining a strong balance sheet. While Q3 activities for pressure control are expected to be down given the year to date decline in U. S. Land activity, Spool Technologies is expected to remain stable.

Speaker 4

We're confident that our consolidated business will continue to outperform the market we remain encouraged by the investment discipline we see from both our customers and service industry peers. We expect that our in process supply chain diversification will further strengthen our low cost, will provide a high quality competitive advantage in future periods. And with that, I'll turn it back over to the operator so that we may begin Q and A. Operator?

Operator

Thank you. We will now conduct a question and answer session. Our first question comes from Stephen Gengaro of Stifel.

Speaker 6

Thanks. Good morning, everybody.

Speaker 4

Good morning. How are you?

Speaker 6

I'm good. Thanks. I'm good. So my first question, when I think about the legacy business I mean, we had modeled and expected market share to grow a little bit. I know you're not going to speak directly to market share, but can you talk about what you're seeing in that business, both from a pricing perspective and just sort of what the if the competitive landscape there

Speaker 4

Well, as you know, we're not going to talk about market share directly, but I will share with you that we set a record for market share during the quarter. Absolutely not going to talk about pricing. I never have and I certainly never will. So sorry about that, Steve. But at least you got your market share question answered.

Speaker 6

But what about just the sort of the competitive landscape? Your position just remains as strong as it's been

Speaker 4

for the last several years. I guess the greatest best evidence of that is the statement that I made about record market share for the quarter.

Speaker 6

Participants are in the line with us. Okay. Okay. Thanks. And then just the other one I wanted to ask you about because you guys are out there on the front line constantly is, you mentioned earlier about rig counts in the Q3 and maybe stabilization.

Speaker 6

Are you seeing that based on conversations based on early orders. Like what gives you the confidence that we do see a stabilization And hopefully a recovery in 2024.

Speaker 4

Yes. So let me be clear, even though you haven't asked this question From conversations with our customers, my feeling now, you may recall, I called a trough of 650 Earlier, I'm revising that 650 down to closer to 600 ready for the U. S. Land count. I think that that's going to probably occur in the mid to latter part of the third quarter, after which time we'll see some stabilization and I feel like we'll begin to see some increases, particularly are coming from the privates who have suffered the most in terms of activity decline and they always respond first.

Speaker 6

Great. And since you mentioned that, I'll slip one in. On the private side, you've made progress with the private side, it seems like the last couple of quarters. That's fair, right?

Speaker 4

We have historically made progress with private. The fact of the matter is private But that's not terribly surprising when you consider how much the privates have dropped.

Speaker 6

Yes, great. Great colors. Thank you.

Operator

Thank you. One moment for our next question. Our next question comes from David Anderson of Barclays.

Speaker 7

I'll follow-up on Steven's question just a little bit. If you think about kind of your larger customers there, is it fair to say they've been kind of whole staying the course? I'm just kind of wondering what they're operator, maybe natural gas, just bigger picture how you're thinking about the next 2 or 3 quarters?

Speaker 4

Yes. So to be clear without mentioning customer names, The really big one that you're probably thinking about right now has maintained very robust activity participants are in the Permian and Delaware areas, but they have released rigs in their gassier areas. Now to be fair, that didn't represent a large portion, but it was a meaningful percentage. So think about where they had gas rigs drilling and those gas rigs have either stopped or are about to stop. So it's not really fair to say that the majors have maintained In terms of visibility, we have visibility, pretty good visibility through the end of the year, but I don't think and I see customers all the time.

Speaker 4

None of our customers are talking about 2024. I do believe The budgets, let's all hope that oil remains in that, That will include, I think, increased activity from private as well as from the larger players. You heard me say last time, all the pundits who believe that we make up for the drop in gas count by picking up oil, I think I mentioned that cash flow is cash flow. And as cash flows decrease, shareholder returns remain constant. Something's got to give and something has given.

Speaker 4

So if we look If I think about the decline that we've seen in our rig count, believe it or not, it's about 50% gas, 50% oil related, which kind of supports my position that cash is cash.

Speaker 7

So some are talking about natural gas roads coming back later in the year. I know you didn't get too specific there. And I know there's this kind of LNG build out happening at some point in 2024. Are you in that can't there or you think this is going to be more kind of private on the oil side Will be more sort of that uptick 4Q into 1Q?

Speaker 4

Yes, the latter.

Speaker 7

Okay. You made a comment just now about 2024 that nobody's talking about 2024. I was just curious, is that is this a little bit late? Are you surprised they're not talking about 2024? Are your customers kind of holding off because they want to understand the cost structure?

Speaker 7

So I'm just I'm curious, would you normally be having talks about 2024 at this time of year?

Speaker 4

No. I would say that when you're in the January timeframe, you normally get visibility over 6 months. But as you approach a budget reset period, I think that period of visibility, contracts a bit.

Speaker 7

Makes a lot of sense. If I could just shift over on the spoolable side. So margins were and the EBITDA margins were impressive this quarter. It sounds like kind of going forward. I guess you're talking kind of in the 40s next quarter.

Speaker 7

It sounds like you're going to normalize numbers a little bit harder than Just curious what's changed? You've now had the business obviously for 4 months. So are you seeing something different? Is it more on the cost opportunities are you just managing it better? Just curious what's changed in terms of that outlook on the margins longer term.

Speaker 4

Well, I'm not managing it. TS is with us this morning.

Speaker 8

So I want to be

Speaker 4

clear about that. This is not a reflection of Scott Bender. TS, would you like maybe offer a comment there.

Speaker 2

Yes, David, this is TS. The Flexsteel business is a very robust business, and I think You should not read too much into the Q1 to second quarter change in margins because the Q1, Cactus had owned Flexsteel just for a month, David. And it also had a lot of I think as we reported and went through in the last call, We've got a lot of accounting related adjustments to inventory, etcetera. So on a go forward basis, the 40 plus percent margin that Scott guided towards is near term the expectations. Our business has got a phenomenal competitive advantage.

Speaker 2

The business has got really meaningful customer value proposition. It's very differentiated, participants are firing on all cylinders. So I hope that provides you a little bit of an overview. Scott, anything else?

Speaker 3

Yes, it does.

Speaker 2

Scott, anything else?

Speaker 4

TS's polite way of saying he's confidence that he can maintain those margins.

Speaker 7

45%, all right. So Let me dance on this question a little bit here. I know you don't want to talk about pricing. I know you want to talk about details on contracts. I'm well aware of it.

Speaker 7

I'm not going to ask you about it. I'll ask you to include a very general question here. I'm curious about how your customers order your spoolable products. Does this typically come under frame agreement? Is it job to job?

Speaker 7

And this is the and I'm just not sure if you want to answer this question, is there a loose rule of thumb as to how much volume gets repriced every quarter? I'm asking because obviously steel prices have come down quite a bit since March, you just said that part of it is getting that expensive inventory out. I'm just curious, generally speaking, how does this business work from that perspective?

Speaker 4

David, let me just help PS a little bit. You have two questions here, right? The first is how the customers place orders? Is that right?

Speaker 7

That's correct.

Speaker 4

Are you asking how far in advance they place orders?

Speaker 7

It's more as it kind of relates to the timing of pricing. Like, is there like a loose frame agreement, which you just kind of plucking it down and it gets like every once a year you kind of look at it. I'm just sort of trying to understand like with steel prices correcting as much as they have, like how much does that Roll through, I guess, kind of loosely trying to understand.

Speaker 4

Okay. Jeff, please.

Speaker 2

Yes. David, operator Just a big picture, just stepping back, one of the things E and P operators focus on is clearly managing costs. They manage it pretty tight through their supply chain departments. The benefit we have in the Flexsteel side is that business has got a really differentiated value proposition and the value proposition is based on safety and quality. And the safety and quality, Flexsteel has got a tremendous track record.

Speaker 2

We've never we've not had one operating field failure in the history of the business. And as a result, we're able to differentiate ourselves versus competition. The other part, just before I answer your question that you should just keep in mind, is Spoolable products and services make up less than 2% or right about 2% of share of wallet of a operator spend. Operator So that's a background, all to say, operators really operator plays callouts. It's sort of like a milk run, David.

Speaker 2

And it's just a milk run order purchased and now we do both products as well as services, we deliver it all through deliver to length, products and services that we offer our customers. It's all to say that sometimes we get products and services that are required to be in customer site within 3 days, most of the time within 5 to 7 days.

Operator

Our next question comes from Kurt Hallead of Benchmark.

Speaker 8

Hey, good morning.

Speaker 4

Good morning, Kurt. How are you?

Speaker 3

Participants are ready

Speaker 8

to take questions. Good, Scott. Thanks. How are you doing?

Speaker 4

I'm great. Thanks.

Speaker 8

Awesome. So, Scott, in in the press release, you kind of referenced that Spool Bowl Technologies would lag the Pressure Control business in terms of the revenue impact, there's a slowdown in activity. So I'm just kind of curious in that dynamic. Is it kind of like a quarter lag? Ready for questions.

Speaker 8

Question number 1. And question number 2, do you expect that the spoolable business would kind of see the same sort of of the magnitude of decline that you indicated that Pressure Control is going to see in the Q3.

Speaker 4

Okay. Maybe I probably Didn't characterize that correctly. And TS, you can jump in if what I say is incorrect. And you can still you'll still have your job even if you can't, I'll just open mic. In the case of spoolables, TS' team is increasing their penetration in terms of the market and all participants are in the same position in terms of share of wallet.

Speaker 4

So I don't think that we're in a position right now to tell you what percent participants are going to be impacted. The question is, and I think TS has answered it, is our feeling is that his increase in share wallet

Speaker 2

I won't disagree with you, Scott, but I'd just add to the comment. Kurt, the share of wallet is a unique sort of market lever that we have or company lever that we have to continue increasing penetration into our customers. I wanted to just provide you just a quick background to that. Unlike some of the products that are offered just in one part of the customer's value chain, spoolable products are offered at multiple parts of the value chain. So What I mean by that is, it's used under pipe under pad when they're constructing the pad.

Speaker 2

And in that regard, the business will pretty much the revenue and the bookings particularly will pretty much mirror that

Speaker 3

all participants are in the range

Speaker 2

of 2,000,000,000. When you connect the well pad to the central tank battery, that's another segment. And then when you connect the Central Tank Battery to the midstream takeaway lines, so there are multiple segments. And when we say all participants are in the same store. One of these segments and then they see how well Flexsteel performs, how well the team is performing in terms of service And the value proposition is realized and then they begin to start of start using us in other segments of their operation.

Speaker 2

Participants are in the same store. And that is going to continue hopefully growing and it's continued to grow in the last 10 years that I've been here and hopefully it will continue to grow in the years to come.

Speaker 8

That's great. That's fantastic. Appreciate that. Scott, follow-up in the comment you made about of the Middle East kind of rollout and what you see for pressure control, I think you kind of referenced sometime late 2024. Again, I don't want to mince any words that you mentioned, but is it late 'twenty four when you think you'll start to generate incremental revenue or is the real incremental revenue opportunity 2025 and beyond?

Speaker 4

Tell me what incremental means.

Speaker 8

How about just growing the revenue base In the Middle East, is that really starting to

Speaker 4

Our expectation is you'll see that at the end of 2024 And then it will accelerate into 2025 and thereafter.

Speaker 8

Okay, got you. All right, appreciate that. That's all for me.

Operator

Our next question comes from Saurabh Pant of Bank of America.

Speaker 9

Hi. Good morning. Good morning, Scott.

Speaker 4

Good morning. How are you?

Speaker 9

Good, good, good. Thanks for asking. Scott, maybe sticking to the spoonables side of things, I just wanted to clarify on your answer to Kurt's question Because I think I kind of heard, not in those words, but I think I kind of heard that, yes, there is a lag when spoolables is impacted, but you think that share of wallet penetration can help you offset that. So should we think that there's a scenario and a realistic scenario that poolable's revenues might not All it on over the next couple of quarters.

Speaker 4

Well, we never provide guidance beyond a quarter, As you know, maybe you don't know. So I really would only like to offer you, I think, guidance on the next quarter. So I think that our guidance stands and that is that despite this falling rig count and activity level That they're going to maintain their Q2 levels. I'm sorry, I can't be more precise, but

Speaker 9

Yes, no, Scott, I totally understand that. But just the way we should think about the lag, obviously, completions lag, the rig count and production and how you carry that production to the central tank batteries and onwards that lags completion rate. So What kind of a lag should we think about? Is it 6 months? Is it 9 months?

Speaker 9

Is it different than that? Or just how should we think about that lag?

Speaker 2

Yes, Saurabh, this is TS, Scott, if I may. Sure. Yes, I think, look, it's incredibly hard, Saurabh, before participants Before I answer the question, just to give you a disclaimer, it's incredibly hard to predict the future, especially if you do it accurately, right? So predicting the customers' Sort of budget spend on different segments is a little bit of an impossible task, but I'll take I'll answer the in the spirit it was raised. I think we'd like historically, we've seen a 3 to 4 month lag.

Speaker 2

And but with the increased cross penetration capabilities that we're having with Cactus, where we sell our products, we're having multiple meetings with Cactus customers as well. We're beginning to see penetration in the pipe under pad segment, and we're beginning to see more line pipe in different types of customers. And so, historically, it's been about 3 to 4 months. It may be a little shorter this time. It may be a little longer this time, but that's where it's historically been.

Speaker 9

Participants Okay, okay, okay. Now that's very helpful. And then a quick follow-up on the cost side of things in spoonables. I know steel is a big cost, but you don't operator price your product like it's steel, right? It's a value based pricing.

Speaker 9

But can you help at all in terms of how should we think about operating leverage, fixed cost, working variable cost, anything you can give along those lines?

Speaker 5

Yes. We're so this is Steve. We're not providing any kind of guidance Into the material costs as a percent or anything like that. We'd like to keep

Speaker 6

that to

Speaker 5

ourselves for competitive reasons.

Speaker 9

Okay. Okay, guys. Thanks for the answers. I'll turn it back.

Operator

Thank you. I am showing no further questions at this time. I would now like to turn the conference back to Alan Boyd for closing remarks.

Speaker 3

Participants are in the line with us.

Speaker 1

We appreciate everyone joining today and look forward to speaking with you next quarter.

Speaker 4

Participants are in

Speaker 3

the line with us.

Operator

This concludes today's conference. Thank you for participating. You may now disconnect.

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