Cactus Q1 2025 Earnings Report

Cactus EPS Results

• Actual EPS: $0.73
• Consensus EPS: $0.70
• Beat/Miss: Beat by +$0.03
• One Year Ago EPS: $0.75

Cactus Revenue Results

• Actual Revenue: $280.32 million
• Expected Revenue: $272.22 million
• Beat/Miss: Beat by +$8.10 million
• YoY Revenue Growth: +2.30%

Cactus Announcement Details

• Quarter: Q1 2025
• Date: 4/30/2025
• Time: After Market Closes
• Conference Call Date: Thursday, May 1, 2025
• Conference Call Time: 10:00AM ET

Cactus (NYSE:WHD), together with its subsidiaries, designs, manufactures, sells, and leases pressure control and spoolable pipes in the United States, Australia, Canada, the Middle East, and internationally. It operates through two segments, Pressure Control and Spoolable Technologies. The Pressure Control segment designs, manufactures, sells, and rents a range of wellhead and pressure control equipment under the Cactus Wellhead brand name through service centers. Its products are sold and rented primarily for onshore unconventional oil and gas wells for drilling, completion, and production phases of the wells. This segment also provides field services to install, maintain, and handle the equipment. The Spoolable Technologies segment designs, manufactures, and sells spoolable pipes and associated end fittings under the FlexSteel brand name. Its products are primarily used to transport oil, gas, and other liquids. This segment also provides field services and rental items through service centers and pipe yards, as well as offers equipment and services internationally. In addition, the company offers repair and refurbishment services. Cactus, Inc. was founded in 2011 and is headquartered in Houston, Texas.

Cactus Q1 2025 Earnings Call Transcript

Key Takeaways

• In Q1 2025, Cactus posted revenue of $280 million, adjusted EBITDA of $94 million (33.5% margin), paid a $0.13 per share dividend and ended the period with $348 million of cash.
• To neutralize new 45% tariffs on China and 25% Section 232 tariffs on Vietnam, the company is ramping up Vietnam production and rolling out a new wellhead design, expecting full tariff mitigation by mid-2026.
• Pressure Control revenues rose to a record $190 million in Q1 and are guided to decline low-to-mid single digits in Q2, with stable adjusted EBITDA margins of 33–35%.
• The Spoolable Technologies segment booked a Q1 record in orders, saw Q2 revenue growth of mid-to-high single digits and margin guidance of 35–37%, highlighted by its first commercial sour-service pipe shipments.
• Cactus reduced its full-year 2025 net CapEx outlook to $40–50 million while preserving investments in manufacturing diversification and Baytown plant efficiencies, and remains confident in cash flow resilience despite a projected ~30-rig decline in U.S. land activity.

Presentation

[Operator]

Good day, everyone, and thank you for standing by. My name is RJ, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cactus Q1 twenty twenty five Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

[Operator]

Thank you. I would now like to turn the call over to Alan Boyd, Director of Corporate Development and Investor Relations. Please go ahead.

[Alan Boyd, Director of Corporate Development & Investor Relations at Cactus]

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 Flexsteel 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.

[Alan Boyd, Director of Corporate Development & Investor Relations at Cactus]

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.

[Alan Boyd, Director of Corporate Development & Investor Relations at Cactus]

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.

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

Thanks, Alan, and good morning to everyone. I'm pleased with our strong start to 2025, which saw record levels of pressure control product revenues per rig combined with record first quarter bookings in our spoolable technologies business. The market outlook has changed considerably since we last spoke, but these first quarter records and our business fundamentals continue to demonstrate why we outperform market activity trends and support our expectations about our ability to continue to do so. We cannot control the change in the general outlook for our industry, but we can control our rapid response. I continue to be very proud of our associates' commitment to delivering for our customers despite market and supply chain uncertainty.

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

Some first quarter total company highlights include revenue of $280,000,000 adjusted EBITDA of $94,000,000 adjusted EBITDA margin of 33.5%. We paid a quarterly dividend of $0.13 per share and we increased our cash balance to $348,000,000 I'll now turn the call over to Jay Nutt, our CFO, who will review our financial results. Following his remarks, I'll provide some thoughts on our outlook for the near term before opening the lines for Q and A. So Jay?

[Jay Nutt, CFO, Executive VP & Treasurer at Cactus]

Thank you, Scott, and good morning, everyone. As Scott mentioned, total Q1 revenues were $280,000,000 which were up 3% sequentially, and total adjusted EBITDA was $94,000,000 up 1.2% sequentially. For our Pressure Control segment, revenues of $190,000,000 were up 7.7% sequentially, driven primarily by customer drilling efficiencies, leading to record levels of products sold per rigs followed. Operating income increased $3,500,000 or 6.9% sequentially, with operating margins decreasing 20 basis points and adjusted segment EBITDA increased $3,300,000 or 5.3% sequentially with margins decreasing by 80 basis points. The margin decline was primarily due to reserves taken in connection with litigation claims.

[Jay Nutt, CFO, Executive VP & Treasurer at Cactus]

For our Spoolable Technologies segment, revenues of $93,000,000 were down 3.6% sequentially on the expected lower domestic customer activity in the seasonally slow quarter, partially offset by increased international shipments. Operating income decreased $1,600,000 or 6.5% sequentially, with operating margins decreasing 80 basis points due to lower operating leverage. Adjusted segment EBITDA decreased $1,800,000 or 5% sequentially, while margins decreased by 50 basis points. Corporate and other expenses were $9,600,000 in Q1, up $3,700,000 sequentially, resulting from professional fees associated with the evaluation of growth initiatives with a focus on international expansion. Adjusted corporate EBITDA was $4,400,000 of expense.

[Jay Nutt, CFO, Executive VP & Treasurer at Cactus]

On a total company basis, first quarter adjusted EBITDA was $94,000,000 up 1.2% from $93,000,000 during the fourth quarter. Adjusted EBITDA margin for the first quarter was 33.5% compared to 34.1% for the fourth quarter. Adjustments to total company EBIT during the first quarter of twenty twenty five include non cash charges of $6,100,000 in stock based compensation and 3,500,000 for professional fees associated with growth initiatives. Depreciation and amortization expense for the first quarter was $16,000,000 which includes an ongoing $4,000,000 of amortization expense related to the intangible assets resulting from the Flexsteel acquisition. During the first quarter, the public or Class A ownership of the company averaged and ended the period at 86%.

[Jay Nutt, CFO, Executive VP & Treasurer at Cactus]

GAAP net income was $54,000,000 for the first quarter versus $57,000,000 during the fourth quarter. The decrease was largely driven by professional fees incurred at corporate. Book tax expense during the first quarter was $17,000,000 resulting in an effective tax rate of just under 24%. Adjusted net income and earnings per share were $59,000,000 and $0.73 per share respectively, compared to $57,000,000 and $0.71 per share in the fourth quarter. Adjusted net income for the first quarter was net of a 25% tax rate applied to our adjusted pretax income.

[Jay Nutt, CFO, Executive VP & Treasurer at Cactus]

During the quarter, we paid a quarterly dividend of $0.13 per share, resulting in a cash outflow of approximately $11,000,000 including related distributions to members. Additionally, we made a cash tax payment and associated distributions of approximately $25,000,000 in January related to deferred estimated twenty twenty four taxes as discussed during the fourth quarter call. We ended the quarter with a cash balance of $348,000,000 a sequential increase of approximately $5,000,000 This increase was lower than our usual cadence due to the 2024 tax payment, the build of inventory in our spoolable business in anticipation of seasonally stronger second and third quarters and some continued elevated inventory balances in our pressure control business to mitigate tariff impacts. Additionally, strong March revenues led to increased accounts receivable balances at quarter end. Net CapEx, excluding the equity investment in Vietnam, was approximately $9,000,000 during the first quarter of twenty twenty five.

[Jay Nutt, CFO, Executive VP & Treasurer at Cactus]

In a moment, Scott will give you our second quarter operational outlook, Some additional financial considerations when looking ahead to the second quarter include an effective tax rate of 21% and an estimated tax rate for adjusted EPS of approximately 25%. Total depreciation and amortization expense during the second quarter is expected to be approximately $16,000,000 with $7,000,000 associated with our Pressure Control segment and $9,000,000 in Spoolable Technologies. We are reducing our full year 2025 net CapEx outlook, including the $6,000,000 equity investment to a range of 40,000,000 to $50,000,000 given the latest market uncertainty, while maintaining critical investments to support our manufacturing diversification strategy and enhance efficiencies in our Baytown manufacturing plant. We will continue to evaluate further reductions to this planned spend as the year progresses. Finally, the Board has approved a quarterly dividend of $0.13 per share, which will be paid in June.

[Jay Nutt, CFO, Executive VP & Treasurer at Cactus]

This covers the financial review, and I'll now turn the call back over to Scott.

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

Thanks, Jay. I'd like to begin by clarifying our current understanding of the tariff rates that will impact our pressure control business and better quantify the import exposures that we are mitigating. By mid next year, we expect the tariff impact to our business to be neutralized and we are taking several near and medium term actions to achieve this. We are increasing alternative sourcing of product where possible, rolling out our new wellhead design, but most importantly, we are ramping up production from our Vietnam facility and working with our customers to support these cost increases while ensuring on time product delivery. For the past several years, we've paid a Section three zero one tariff of 25% on goods imported from our Chinese manufacturing plant.

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

Currently, we are paying an additional 45% or more on tariffs I'm sorry, additional 45% or more tariffs on our imports from China. Our products imported from Vietnam currently incur the new Section two thirty two, 20 five percent tariff applied to nearly all countries, the same rate that was applied to imports from our Chinese facility before the recent tariff increases. While we had expected no additional tariffs from Vietnam, the 25% tariff will replace the Section three zero one tariff we had already been paying since 2018. So to be clear, we expect that sourcing from Vietnam will put us back into the same tariff position we've been operating under for the past several years. Moreover, we believe Vietnam will provide us with an advantage over the vast majority of our competitors who rely primarily on Chinese imports and do not have material U.

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

S. Manufacturing. The dollar value of goods that we currently import from China exposed to tariffs is highly variable and changing rapidly given these revised rates, but I can share a framework for how to approximate our total imports. In 2022, the last year we reported specific product cost of sales before the acquisition of Flexsteel, our pressure control product revenue represented approximately two thirds of our total revenues. Our product gross margin can be found in historical filings from the same period.

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

Both this product proportion of sales and the gross profit margin are close enough to recent results to utilize to approximate our total pressure control product cost of goods sold. As we have shared previously, about half of our product cost of goods sold relates to imports from China and approximately 80% of our product costs are direct, which relates primarily to material costs and freight. These factors can be taken together to calculate the dollar value of our imports that the tariff expense applies to, which I think you'll agree is relatively small compared with the total size of our business today, particularly including the contribution of Spoolool Technologies. So to reiterate, we expect to neutralize the increased tariff expenses by mid next year. And although our margins may face modest compression between now and then, our inventory on hand and mitigating efforts will allow us to largely preserve our profitability on an absolute basis.

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

I'll now move into our expectations for the second quarter of twenty twenty five by reporting segment. Notwithstanding strong momentum in April in both segments, for the second quarter we expect pressure control revenue to be down low to mid single digits versus the $190,000,000 reported in the first quarter. The anticipated decline is largely due to moderating levels of products sold per rig followed after a record first quarter and a decline in average activity levels. From speaking with our customers, we believe that second quarter average U. S.

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

Land drilling activity will be down slightly from first quarter average levels and the industry will exit second quarter with approximately 30 fewer land rigs operating than today. The activity decline is likely to continue as the year progresses and our customers reset their budgets given weaker commodity prices and tariff impacts. Adjusted EBITDA margins in our Pressure Control segment are expected to remain stable at 33% to 35% for the second quarter. This adjusted EBITDA guidance excludes approximately $3,000,000 of stock based comp expense within the segment. Regarding our Spoolable Technologies segment, we expect second quarter revenue to be up mid to high single digits from the first quarter.

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

We believe normal second quarter seasonal expansion will more than offset the expectation of lower average U. S. Land activity levels. We booked record Q1 orders providing us increased confidence in this outlook. Sales to international locations were up 30% quarter over quarter driven by robust demand in Canada where we had our strongest quarter since acquiring this business.

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

In April, we also produced and shipped our first commercial order of sour service pipe for high H2S applications. We are excited about the opportunities of this product, particularly in the Mideast market. We remain optimistic in our business performance despite uncertainty in the general macro environment. As a reminder, we have a high quality customer base in our spoolable technology segment with approximately 70% of our revenue coming from majors, large E and Ps and NOCs. These customers seem to be more resilient in their purchasing practices than the private and small E and Ps in a lower commodity price environment.

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

We expect adjusted EBITDA margins to be approximately 35 to 37% for Q2, which excludes $1,000,000 of stock based comp in the segment. Given our U. S. Manufacturing footprint, our spoolable technology business is much less directly impacted by tariffs than our pressure control business. However, we have experienced an increase in steel input costs year to date.

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

Although most of our steel inputs are sourced domestically, markets have adjusted pricing to reflect tariffs regardless of where the steel is sourced. Adjusted corporate EBITDA is expected to be a charge of approximately $4,500,000 in Q2, which excludes $2,000,000 of stock based comp. Regarding our international expansion plans, we remain committed to establishing an international business but have no further updates that we can share at this time. I can assure you our leadership is very focused on this initiative. In conclusion, we had a strong start to the year in both segments.

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

Although the industry outlook has clouded considerably in the last ninety days, I remain confident that we will deliver strong returns in cash cash flows through this cycle given our supportive customer base and our industry leading diverse supply chain cost profile. My management and I are unfortunately not strangers to making the difficult decisions necessary to preserve returns during market cycles such as this, and as we've shown in prior downturns, one positive implication is that operators tend to high grade suppliers such as Cactus in times of supply uncertainty. We have received several recent inquiries about expanding business with customers in areas we have not historically serviced, which supports this thesis. And with that, I'll turn it back over to the operator, and we can begin Q and A. Operator?

[Operator]

Your first question comes from the line of David Anderson from Barclays. Please go ahead.

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

Hey, David. How are you?

[J. David Anderson, Managing Director at Barclays]

Vietnam, sound sounds like you're gonna be a hundred percent shifting over from China in about a year. I'm curious on the Bossier City side, though, which appears to be an even greater structural advantage. However, you have talked about some higher costs from importing the steel. I'm curious if you could talk about how you've mitigated that so far. Have you been able to source in other areas?

[J. David Anderson, Managing Director at Barclays]

And even with that, I'm just kind of curious, net net, how much of an advantage is it today in terms of costs for a customer in Bossier City versus China? I'm just curious what that looks like to what he's looking at.

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

David, we've never described Bossier City as a low cost operation. It's a fast turnaround, sort of a robust manufacturing environment, which is frankly anything but low cost. What it frankly does is protect our market share by ensuring that we make deliveries. So I can just tell you that the steps that we're taking, and you're right, migrating to Vietnam for sourcing for The US in addition to several other initiatives will mean that, our supply chain will still be heavily skewed towards non Bossier City manufacturing, despite the fact that they account for 50%. I really don't think that we'll be able to get Bossier much over 50%.

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

And the reason for that is there's not that much US manufactured steel. So although Bossier buys its steel in The US, that doesn't mean the steel has been sourced in The U. S.

[J. David Anderson, Managing Director at Barclays]

Understood on that. We often talk about passing through higher input cost to customers. And I don't mean to diminish your performance in the first quarter, but I'm wondering is have you seen any pull forward in the first quarter of customers trying to get ahead of some of these tariffs? I heard Jay mentioned some of pulling in some more supply chain to get ahead of them. I'm curious how your customers are looking at that today.

[J. David Anderson, Managing Director at Barclays]

And in the past, we often talk about confidence in passing all this through to the customer. Are you still convinced that the customer can absorb all this? I realize you're a small part of this AFE, but I'm just curious how you think your customers are going to behave in this environment. Thank you.

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

Yeah. So maybe we didn't make this clear. Once Vietnam replaces China, we're gonna be largely neutral in terms of tariffs. So you understand that. I think that during this interim period, in addition to the various sourcing initiatives that we're taking, I am very confident that our customers will bridge the gap.

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

So while our profit margin percentages will decline, our absolute profitability will be maintained. And so yes, I am confident of that.

[J. David Anderson, Managing Director at Barclays]

Great. Thank you, Scott.

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

David, you had another what was your first question?

[Operator]

Your next question comes from the line of Stephen Gengaro of Stifel. Please go ahead.

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

Hey, Stephen.

[Stephen Gengaro, Managing Director at Stifel Financial Corp]

Thanks. Good morning, everybody. Well, thanks for all details. I think my first question, and I just second tags on to what Dave asked. But when you look back at kind of prior downturns and cycles and your conversations with customers, you to my knowledge, you've never kind of lost the customer permanently, right?

[Stephen Gengaro, Managing Director at Stifel Financial Corp]

They've tended to stick with you because of the quality of the product, etcetera. What do you expect to see in this downturn? Is there any difference in sort of the way customers are acting or you expect them to act as they sort of navigate this uncertain period?

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

Well, forgive me, Steve, I'm gonna answer David's question, the first question he asked. Are we seeing customers trying to pull forward purchases? Yes, we have had many, many requests from customers to pull forward purchases, 100% of which we have denied. So yes, they're doing the same thing that we're trying to do, but we've not allowed them to do that because it's not fair to our other customers to deplete our pre tariff inventory. So I apologize, David, for not responding.

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

And then, Steven, you want to know

[Stephen Gengaro, Managing Director at Stifel Financial Corp]

Well, it seems like you've obviously we don't talk market share anymore, but it's high. And you're a key cog in the wheel for your customers. So I would imagine that they are sticking by you and not kind of shopping lower price because of the sloppy environment similar they've done in prior cycles? But I just want make sure that's an accurate conclusion.

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

Yeah, I would say that it is an accurate conclusion. Our major customers are sticking by us. I'm not going to tell you that there are not competitors out there who are not going to try to take advantage of our request for support, but I don't see it as any different than it has been in the past. So our best defense has been transparency with our customers, and we've always been transparent with them. We don't take advantage of them.

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

And the fact that we're, to my knowledge, we're really the only supplier who can guarantee delivery and sustainability. So while there might be a few competitors out there who might be able to say, I'm not going to pass the tariff impact, you know that as soon as they deplete their inventory, they're going to have to replace it with higher cost or not replace it at all. The customers with whom we do business, the most important thing to them is sustainability of supply chain. And we truly are the only ones that offer that.

[Stephen Gengaro, Managing Director at Stifel Financial Corp]

Great. Thank you. And the second question I had was around sort of M and A opportunities in this environment. I mean, obviously, the cash balance is very good. You guys are always, I think always, but you're seeking transactions that are proprietary, accretive, cash generating, etcetera.

[Stephen Gengaro, Managing Director at Stifel Financial Corp]

What do you think you'll see in this macro environment? Like do think this creates opportunities for you given how strong the balance sheet is? And anything you can shed light on, on that topic would be helpful.

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

Yes. Steve, it's no surprise to you that private equity can't give anything away right now. So I don't think there's a single investment in the oil field service that's owned by private equity that's not available at an attractive price. Flexsteel was a rather unique opportunity. I think maybe we have seen one or two that are similar to that, but right now my focus is on the business that we're in, the industry that we're in.

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

I wouldn't dismiss another flex deal, and I think there are going to be more and more flex deal looking opportunities, as I say, primarily from private equity, but our focus right now is on our industry.

[Stephen Gengaro, Managing Director at Stifel Financial Corp]

Great. Thanks for the color.

[Operator]

Your next question comes from the line of Scott Gruber of Citigroup. Please go ahead.

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

Hey, Scott. Good Doing

[Scott Gruber, Director - Oilfield Services & Equipment Research at Citi]

well. I missed the revenue guide for Pressure Control 2Q. Can you repeat that? And then on EBITDA dollar preservation, which is super impressive, Dave asked about pushing pricing. I was also curious about startup costs in Vietnam.

[Scott Gruber, Director - Oilfield Services & Equipment Research at Citi]

Are those material? Will those be a weight on near term profits? Are those really de minimis?

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

They're de minimis. I hate to use the word de minimis since it was in the Wall Street Journal today. Did you read that article?

[Scott Gruber, Director - Oilfield Services & Equipment Research at Citi]

That's right.

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

No, minimis tariffs. Anyway, don't want use the word de minimis. So our second quarter guide revenue wise, Alan?

[Alan Boyd, Director of Corporate Development & Investor Relations at Cactus]

It was down low to mid single digits.

[Scott Gruber, Director - Oilfield Services & Equipment Research at Citi]

Okay, appreciate that. And then also on Vietnam, we saw the investment.

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

Let

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

me answer Vietnam for I don't know if we've explained this clearly enough. We have two operations in Vietnam and we have already funded the primary operation, the one that replaces Suzhou. So it's done and dusted except for maybe, I don't know, a couple hundred thousand dollars, there's really not much additional money to be spent. I think most of it Joel is IT related. That's all that's left is the final IT.

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

The final IT which is always the last thing to go in. But it's already producing goods. So you'll have no surprises.

[Scott Gruber, Director - Oilfield Services & Equipment Research at Citi]

Got it. And I was curious about the supply chain in Vietnam or the region, really your ability to kind of move away from the China Chinese supply chain? Are you going to be able to source forgings and castings from either Vietnam or other countries in order to completely move away from China?

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

You are a very clever questioner. As much as I hate to respond to this question, I have to tell you that we will be more fully integrated. Can I leave it at that? In Vietnam than we are in China.

[Scott Gruber, Director - Oilfield Services & Equipment Research at Citi]

Sure. Since you gave me a compliment, you can leave it there. Okay. I appreciate it.

[Operator]

Your next question comes from the line of Arun Jayaram of JPMorgan. Please go ahead.

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

Good morning.

[Arun Jayaram, Vice President at JP Morgan Chase & Co]

How you see the mix of Vietnam manufacturing as a percentage of the total in pressure control kind of evolving as we move through year end and call it mid year of next year?

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

Yes, so the ultimate goal is that Vietnam will provide a 100% or close to 100 of what China provided for The US market. And the Chinese operation will devote its resources to the international markets.

[Arun Jayaram, Vice President at JP Morgan Chase & Co]

Got it. Got it. And you feel like you can get there by middle of twenty twenty six?

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

The only thing really standing between us and that is the fact that we have to wait for API. API has this, I think I mentioned this before, API has a requirement that you have to be up and running that four five, four months Joel?

[Joel Bender, President & Director at Cactus]

Four months. Need to have done an internal

[Joel Bender, President & Director at Cactus]

audit.

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

Okay.

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

So we already started. So once we get API in there and get our monogram, then we can get monogram product. But that's not to say we're not shipping already, because we are. It just means that we can't ship fully assembled and tested. It means we have to finish it in Bossier, and then we can monogram it.

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

But we have to add value in Bossier. Once we see API monogram, it can stand alone and ship, without any additional expense in Bossier City. But yes, Vietnam was designed to fully replace our U. S. Requirements.

[Arun Jayaram, Vice President at JP Morgan Chase & Co]

Great, great. And then my follow-up is you guys use the average cost method of inventory for accounting purposes. So is it fair to say that 2Q will not fully reflect the impact of tariffs on Chinese goods? And so we're trying to maybe understand got quite a few questions on the buy side is maybe to help understand what type of margin or EBITDA impact could we see in the second half when your inventory perhaps reflects the leading edge costs unfortunately because of these tariffs?

[Jay Nutt, CFO, Executive VP & Treasurer at Cactus]

Erin, this is Jay. So we'd say we're on a standard cost basis, but we are rolling our standards given these unusual tariff increases. And we have quite a bit of pre tariff inventory on hand. So as we roll our standards and take up the cost, we also have the benefit of the amortization of the standard cost rule that provides us some relief over the back half of the year. So and we turn our inventory about two times a year.

[Jay Nutt, CFO, Executive VP & Treasurer at Cactus]

So we think that we will see some margin a little bit of margin compression in the back half of the year. But as we diversify the supply chain and sourcing initiatives, that will help mitigate some of the impact on the margins.

[Arun Jayaram, Vice President at JP Morgan Chase & Co]

Great. Thanks a lot.

[Operator]

Your next question comes from the line of Jeff Leblanc of TPH. Please go ahead.

[Jeff LeBlanc, Director - Equity Research at TPH&Co]

Good morning, Scott and team. Thank you for taking my question.

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

Good morning.

[Jeff LeBlanc, Director - Equity Research at TPH&Co]

I just wanted to see if you could share your thoughts on the potential ongoing section two thirty two investigation that the administration has, ordered by the secretary of commerce to conduct.

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

The additional two two thirty two is steel, aluminum, and derivatives. Right?

[Jeff LeBlanc, Director - Equity Research at TPH&Co]

Right.

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

That's what we're

[Jeff LeBlanc, Director - Equity Research at TPH&Co]

talking about. Yes. I thought that they the the secretary of commerce was directed to conduct an ongoing investigation of the impact of the economy.

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

Oh,

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

I'm sorry. To see how Yes, I did read that. I'm not sure I can really opine on that, and I don't wanna get political, but there's only one conclusion. The US does not have adequate steelmaking capacity to avoid imports. And so if we're going to ramp up manufacturing, we're going to rely upon countries who are willing to sell steel.

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

So the answer is it's got be inflationary. I don't see any way to avoid that. As an anecdote, we've always been a large, large consumer of forgings for our industry, way back from our Wood Group days and our Ingram Cactus days. Those forge companies who are capable of producing this unique sort of steel, because we don't just buy steel, we buy shaped forged steel, are either out of business completely and gone, or they've converted their manufacturing to munitions. In fact, a good friend of mine who owns the largest forge company in our area took us on

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

a

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

tour. And he is so full of government work that he just told me, I'm never going back. The selling price is attractive and the sustainability is pretty much assured. And he's just not terribly interested in the volatility of oil field service requirements. So they can send as much money as they want.

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

That's the conclusion. There ain't no steel.

[Jeff LeBlanc, Director - Equity Research at TPH&Co]

Okay. So the idea, though, is that there wouldn't be incremental sanctions or incremental tariffs, related to that investigation.

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

I mean, the existing two thirty sorry for interrupting you. The existing two thirty two it's got to be inflationary. So additional February tariffs could be nothing but more inflationary. There is no substitute for imported steel, and, I don't see anybody building a steel mill right now suitable for our industry.

[Jeff LeBlanc, Director - Equity Research at TPH&Co]

Okay. Thank you very much for the color. I'll hand the call back to the operator.

[Operator]

Your next question comes from the line of Don Christ of Johnson Rice. Please go ahead.

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

Good morning.

[Don Crist, Research Analyst at Johnson Rice & Company L.L.C.]

Good morning, guys. I wanted to ask one question on the sour flexible pipe that you Flexsteel pipe that

[Don Crist, Research Analyst at Johnson Rice & Company L.L.C.]

you

[Don Crist, Research Analyst at Johnson Rice & Company L.L.C.]

shipped. Obviously, that's opening up a new market. And just kind of your thoughts around how big you think or how material that order is and kind of

[Don Crist, Research Analyst at Johnson Rice & Company L.L.C.]

how big that market you think can grow in

[Don Crist, Research Analyst at Johnson Rice & Company L.L.C.]

the next couple of years? I know there's a lot of sour oil out there.

[Stephen Tadlock, Executive VP & CEO of the Spoolable Pipe Segment at Cactus]

Yes, Steve. So in terms of the North American market, I think wells will just continue to get more sour over time, so we think it's a growing opportunity in North America, but given kind of the robustness of our pipe and the makeup, it's not, we're certainly not the cheapest alternative. In general, you know, people choose Flexsteel, they choose it for the reliability, robustness, and they're willing to pay the premium, and that's going to be the case in sour service. So, it's going to be, I think, a small percentage of our sales, but a growing percentage over time. It's more material, more immediately, I think, once we pass some qualification testing, which I think will be sort of something within a twelve month timeframe for The Middle East, because in The Middle East significant,

[Stephen Tadlock, Executive VP & CEO of the Spoolable Pipe Segment at Cactus]

I

[Stephen Tadlock, Executive VP & CEO of the Spoolable Pipe Segment at Cactus]

mean, most production has pretty high H2S content. So we see a lot of opportunity there. Traditionally in The Middle East, we've been more used in water injection applications. But we're really pushing use of our pipe in unconventionals as well as in the sour area. So we're pretty excited about the potential.

[Don Crist, Research Analyst at Johnson Rice & Company L.L.C.]

Right. Yeah. And that's kind of what I was I was pointing towards was The Middle East using a whole lot more pipe because it's our classification. I'll turn it back to the operator. Thanks.

[Operator]

That ends our Q and A session, and we appreciate your participation. I would now like to turn the call back over to Scott Tender, Chairman and CEO, for closing remarks. Please go ahead.

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

Okay. Thanks, everybody, for listening. I know this tariff issue is on everybody's mind. If you were all in here, I'd pat you on the head and tell you that I'm very comfortable that we have this under control. I also would add that historically downturns have been good for our business.

[Scott Bender, CEO & Chairman of the Board of Directors at Cactus]

They've always created opportunities with new customers and we're already seeing those opportunities right now, in fact a little earlier than I had anticipated. So just as we've always come out of these periods stronger, I'm really comfortable that we'll do the same. Anyway, everybody have a good day and thanks for calling in.

[Operator]

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

Participants

Executives

• Alan Boyd, Director of Corporate Development & Investor Relations
• Jay Nutt, CFO, Executive VP & Treasurer
• Stephen Tadlock, Executive VP & CEO of the Spoolable Pipe Segment

Analysts

• Scott Bender, CEO & Chairman of the Board of Directors at Cactus
• J. David Anderson, Managing Director at Barclays
• Stephen Gengaro, Managing Director at Stifel Financial Corp
• Scott Gruber, Director - Oilfield Services & Equipment Research at Citi
• Arun Jayaram, Vice President at JP Morgan Chase & Co
• Joel Bender, President & Director at Cactus
• Jeff LeBlanc, Director - Equity Research at TPH&Co
• Don Crist, Research Analyst at Johnson Rice & Company L.L.C.