Cactus Inc (WHD) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by.

Welcome to the Cactus First Quarter 2018 Earnings Call.

Today's call is being recorded.

At this time, I would like to turn the call over to Steve Tadlock, Vice President and Chief Administrative Officer.

Please go ahead.

Thank you, and good morning, everyone.

We appreciate your participation in today's call.

The speakers on today's call will be Scott Bender, our Chief Executive Officer; and Brian Small, our Chief Financial Officer.

Also joining us today are Joel Bender, Senior Vice President and Chief Operating Officer; and Steven Bender, Vice President of Operations.

Yesterday afternoon, we issued our first quarter earnings release, which is available on our website at www.cactuswhd.com.

Please note that any comments we make on today's call regarding projections or our 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.

Any forward-looking statements we make today are only as of today's date, and we undertake no obligation to publicly update or review any forward-looking statements.

In addition, during today's call, we will reference certain non-GAAP financial measures.

Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in our earnings release.

Finally, after our prepared remarks, we will answer any questions you may have.

So with that, I'll turn the call over to Scott.

Okay.

Thanks, Steve, and good morning to everyone.

On our fourth quarter call, we told you we expected our growth to continue in 2018 after a solid financial and operational performance in 2017.

There were several reasons for that optimism.

We took steps to capitalize on growing demand for our frac rental services by increasing and accelerating to the extent practical our investment in large-bore valves.

During the second half of 2017, we added field service techs to a level that was in excess of demand at that time, positioning the company for expansion in 2018.

We further explained that we expected to realize a positive impact from this decision in the coming quarters.

We commenced work on the expansion of our Bossier City facility to accommodate increased product receipts from Suzhou.

We acknowledge that opportunities remained to expand our wellhead market share with smaller, private equity-backed entrants and with majors, albeit at a slower pace for the latter group.

And finally, we intended to increase our focus on innovations related to our completions of frac rental business.

I'm pleased to report that we made progress in all of these areas, some of which contributed directly to our strong first quarter results.

We brought forward rental asset additions to around $15 million during the period, which contributed to a 19% increase in associated revenues compared to the prior quarter.

Field service margin percentages improved over 20% during the period, as we began to convert Q4's non-billable hours to billable hours.

And despite a customer profile heavily weighted in favor of publicly traded E&Ps, we grew our rig count faster than the overall growth in the U.S. onshore count, and we progressed our strategy of expanding our rental business with majors.

Finally, we completed design work on our next wellhead offering.

And importantly, we are soon to deploy prototypes of 4 new completion innovations, all designed in-house, that will reduce human intervention at the well site.

Each technology may be employed independently or in concert to maximize efficiency and safety.

The products are being developed in coordination with a few of our major customers and should be brought to market over the coming 2 quarters.

We believe that the tremendous strain on human capital in our industry and the push toward minimizing nonproductive time between frac stages will highlight the value of these innovations and further enhance Cactus' position as a reliable source of solutions for our customers' high intensity completions operations.

So moving on to our operating results.

While sequential growth exceeded our expectations, our year-over-year growth was truly remarkable, validating our value proposition in the U.S. onshore marketplace.

Here are a few highlights of our year-over-year performance: revenues rose 97%; adjusted EBITDA increased 179%; adjusted EBITDA margin rose from 26.2% to 37.1%; and our market share for U.S. onshore wellheads rose to 26.4%.

Turning to our first quarter results.

Following a decline in the onshore rig count in Q4, our product business, a portion of which lags changes in our rig count, delivered reasonable growth in revenue, while margins benefited from increased sourcing from our Suzhou facility.

Although the number of rigs we service continue to increase, thanks in part to success with private E&Ps, several of our core clients did demonstrate the capital discipline the industry anticipated.

As I mentioned earlier, the biggest story for the quarter was our rental business.

In March, we announced that we were increasing our 2018 capital program by approximately $10 million to respond to missed opportunities.

With paybacks of 10 months, we leveraged the flexibility of our internal supply chain to more quickly address the market share available to us and successfully made ready approximately 40% of our currently projected additions.

Our team did an outstanding job accelerating and deploying these additions during the first quarter and provided we can continue to bring forward our deliveries, we believe that this business line will demonstrate growth in excess of overall activity levels.

As expected, our field service business benefited from a surge in billable hours and higher utilization, most of which related to frac work, which requires greater labor intensity than product installations.

So now I'll turn the call over to Brian Small, our CFO, who'll review our first quarter results in detail.

Following his remarks, I'll provide you with some thoughts on the outlook for the near term, before opening the lines for Q&A.

Brian?

Okay.

Thanks, Scott, and good morning, everyone.

As Scott mentioned, our Q1 revenues at $115 million were almost double the equivalent period last year and almost 10% higher than Q4, 2017.

Product revenues, at just under $59 million, were 78% higher than the equivalent period in 2017 and 3% higher than Q4 '17.

Product gross profit at just over 37% was over 7% higher than Q1 '17 and 3% higher than Q4 '17.

The margin improvement over the last 12 months was due largely to price increases and product mix, while we believe the more recent increase versus Q4 '17 can be partly attributable to an increase in the proportion of products sourced from China and improved absorption in our Bossier City plant.

Rental revenues at just over $29 million were $16 million and $4.7 million higher than Q1 '17 and Q4 '17, respectively.

The increase was primarily attributable to an increase in demand for our products.

As Scott discussed, we accelerated some of the rental CapEx planned for 2018 and are pleased to comment that the additions to the fleet were rapidly put to work and have generated additional revenues and gross profit.

This is reflected in rental gross profits for Q1 at just over 58%, being 22% and 8.6% higher than Q1 '17 and Q4 '17, respectively.

We also commented in our Q4 earnings call that field service revenues had been impacted by some seasonal factors.

As expected, we saw a rebound in Q1 versus Q4 with revenues at just over $27 million, being almost $4 million higher than the previous quarter and $14.5 million higher than the same period last year.

Improved utilization was a primary driver in service gross profits at 20.5%, showing an improvement of over 5% versus Q4 and almost 8% higher than the same period last year.

The increase in SG&A from $6.6 million in Q4 '17 to $9.1 million in the current quarter arose from stock-based compensation and additional headcount costs as we successfully recruited personnel to support our growth and the additional responsibilities associated with being a public company.

Net income came in at $26.4 million.

Given we went public mid-quarter, our income statement reflects the net income attributable to the pre-IPO period as well as that attributable post-IPO to both the noncontrolling interest owners and the public owners of Cactus, Inc.

To provide additional clarity on net income per share, given our Up-C structure and the timing of the IPO mid-quarter, we detail in our earnings release how the reported GAAP diluted EPS of $0.14 per share can be adjusted to reflect what we believe would have been the diluted EPS for the first quarter, if the IPO occurred at the beginning of the quarter.

On this basis, the diluted EPS would have been $0.34 per share as adjusted.

Adjusted EBITDA, which is arrived at by adding to EBITDA the cost of stock-based compensation and the write-off of the remaining balance of original issue discount and deferred costs relating to the term loan taken out in 2014 that was repaid in February '18 following the IPO, was just under $42.7 million.

This was almost 180% higher than Q1 '17 and 22% higher than Q4 '17.

Sequential incremental adjusted EBITDA for Q1 represented 74% of the incremental revenue in the period.

And adjusted EBITDA for the quarter at just under $42.7 million represents 37.1% of revenues, which compares to 33.4% in Q4 '17 and 26.2% for Q1 '17.

Our operating cash flow for the quarter was $38.6 million.

Following the completion of the IPO, we are debt free as we also repaid in full during the quarter the $26 million draw on our revolver in January that was used to fund a tax distribution to our members related to income earned prior to the IPO.

As we become a corporate taxpayer, we expect in Q2 to disperse $6 million of tax-related payments, of which $4 million will be distributed to the legacy owners of the LLC.

Our CapEx for the quarter was $16 million, and we believe that our CapEx for the full year may be closer to $60 million, provided we determine that strategic additions to our rental fleet are warranted to take advantage of business opportunities that arise.

That covers the financial review, and I'll now turn you back to Scott.

Okay.

Thanks, Brian.

As we made clear during our roadshow and in numerous conversations since that time, we are not at this early stage in our public company life comfortable providing detailed guidance.

However, at near the midpoint in Q2, our growth across all business lines has exceeded our internal expectations, including our product sales.

And we still missed opportunities due to a lack of available rental assets.

To that end, we continue to review the size of our fleet mindful of maintaining our attractive ROCE profile.

We believe our top 10 rental customers use us on far less than 50% of their active frac sites.

Had we more equipment, we believe these customers could provide immediate opportunities for asset deployment.

Despite upward revisions in growth CapEx, we believe that our business will continue to generate impressive amounts of free cash flow, as evidenced by our repayment in full of the $26 million we drew down during the quarter.

Finally, as I mentioned, we're making progress in attracting the group of wellhead customers, which has been less well represented in our client list and our early presentation to the completion innovations in process are being met with enthusiasm.

So with that, I'll turn it back over to the operator, and we can begin the Q&A.

Operator?

(Operator Instructions) And we'll go first to Sean Meakim with JPMorgan.

So to start, maybe, I thought it would be helpful just to get a bit more granularity on the innovations that you're ready to bring to market on the wellhead business.

And it might be still a little bit early here, but could you just help us quantify to a degree the economics and your ability to capture some of that value as you deliver these differentiated offerings to your E&P customers?

Sean, the latest innovation, the latest major innovation, I think we mentioned, involves what we refer to as our [4-T] wellhead system that was primarily developed in response to some customer needs in the Delaware Basin.

I really -- I don't believe, at this point, I can quantify the market size or the market demand for that product.

But we don't ever develop something that we don't have a market for.

So this will be a very accretive addition to our product offering.

Sure.

And sorry, I guess I was thinking more on an individual level in terms of a way to quantify, compared to the existing offering, your ability to extract more value for Cactus' [quarter's] offering.

Is it comparable in terms of cost, but you're able to charge a premium because of the incremental value to the E&P?

I guess, how do you think about the economics at that level?

Okay.

Because this system actually handles 4 strings of casing and our [3-T] system handles 3 strings of casing, you're going to completely eliminate one hot-work cycle, one BOP nipple-up -- nipple-down and nipple-up cycle.

I don't really have the hours handy, but I would imagine it's going to be in the neighborhood of 10 hours-or-so of rig time savings.

That seems pretty substantial.

And then just moving over to the frac rental business, given the incremental capital that you're spending, certainly, you're chasing a lot of opportunities out there, more than you can get your hands on at the moment.

Could you maybe just remind us how we should think about maintenance CapEx for the rental fleet?

And then, I guess, just how you approach returns and paybacks for that business relative to the core wellhead business?

Well, the first question is pretty easy.

The amount of maintenance CapEx in our rental business is de minimis.

So this -- to remind you, the repairs on rental equipment are borne -- the cost of repairs are borne by our customers.

So the maintenance that occurs really has to do with replacement of the internal parts.

So it's not the same as the maintenance CapEx, perhaps you're used to thinking about in terms of a pressure pumper.

So the short answer, a de minimis amount.

In terms of how we view the return on our rental business versus the return on our regular business, it is substantially the same.

I would say that probably slightly better in the rental business.

The trade-off, of course, as we've discussed, is the risk and the fact that you spend the money today and although our payback is about 10 months, we believe that our incremental CapEx returns about 10% of its cost per month following deployment.

The fact is a rental business just has inherent risk.

It's not, I think, associated with the product business where our greatest risk is we may have a few months of additional inventory.

We'll go next to Bill Herbert with Simmons.

Scott, a couple questions here with regard to -- on the cost front.

Can you talk a little bit about what you're seeing and what you expect with regard to steel cost inflation to the labor cost inflation?

And I know it's a very fluid environment on this particular topic, but any thoughts with regard to your exposure on the tariff front relating from your China sourced product?

Well, I mean, Joel is in on this call with us as well this morning, but we talk about this all the time, and unless I'm -- unless I haven't been paying attention we don't really believe it's going to be a -- have a material impact on our business, even with the set of revised items that were released, I guess, with the 301.

Correct.

We haven't seen much, and typically, our product comes in as a machined product and that kind of product has not been covered in what we've seen in the tariffs.

In fact, we reviewed all of the harmonized tariff codes that come in, and I review everything that comes in right now from China.

And there was maybe a few items on there, but they were just accessory-type items.

They're not the major components that we sell today.

Okay.

And with regard to steel cost inflation and labor cost inflation, what are you guys seeing?

And is that a source of concern for you?

Or just your thoughts on those fronts, please?

Bill, we -- you may recall, we passed through a fairly substantial increase for our field service techs if the -- in the fourth quarter last year.

And our -- internally, we're thinking that we might, by the end of the year, have another 10% with techs -- our techs.

Keeping in mind that our techs do earn a considerable amount of overtime.

I think that, believe it or not, we're a little bit more concerned about shop employees right now because they earn less over time and their rate of pay is so much less.

So we're thinking that shop employees, particularly in the areas that we're all concerned about, could approach 15%.

We'll go next to George O'Leary with Tudor, Pickering, Holt & Co.

I think a quarter-or-so ago, you guys kind of couched the frac rentals business's pricing there off 40% versus the 2014 levels.

It seems like clearly there is a desire to deploy more cash flow and more CapEx into that business for you guys given the attractive economics there.

I was just wondering if you could update us on where prices sit today and just kind of how that pricing momentum is trending within that business?

I'm really not going to give you any pricing details, other than to say there is still positive momentum in frac rental pricing right now.

Perfect.

That's helpful.

And then from a capital allocation perspective, again, clearly investing into the frac rentals fleet at this point, how do you think about capital deployment beyond that?

Obviously, innovation is one thing that's been a real arrow in your quiver historically.

How do you think about cash returns to shareholders through time?

At this point, it's clearly a very free cash flow generative business.

Just curious for an update there?

Well, if you're concerned that we're going to consume our cash with CapEx, you don't have anything to be concerned about.

We're pretty careful, I think, as you know, even though we have moved up and increased our rental CapEx.

So let me first discuss that.

If we look at the profile of our major frac customers, as I think I mentioned, we believe we do less than half of their frac work.

And by and large, the reason is we can't deliver more than that.

So we -- and I think it's also fair to say that if I look at the profile of our top 10 frac customers, they're all well capitalized and active customers.

So we do very little work with the smaller E&Ps, at least, on our frac side.

So I'm comfortable that their activity levels will be sustained, albeit with the risk that we all know in the West Texas with takeaways.

I'm comfortable that they like our product so I'm comfortable with our levels of CapEx.

I think I may have mentioned before the mistake we made last year, as we didn't anticipate the demand for our frac assets.

Had we done so, I think we would have had even better financial results.

But we are prudent.

So we want to be in a position where we don't have enough assets to go around.

And without great visibility into what our competitors are building, it's -- we are guarded in how much money we spend and deploy in frac valves.

So your -- the last part of your question is, what will we do with this excess cash?

Again, we're in our very, very early stages of being a public company.

We're in early stages of being as liquid as we are, having just recently repaid that term loan, and we are seeing acquisition opportunities, at least ideas that come forward, none of which have been of interest to us.

So we'd like a chance to look at that.

We've got a couple of new, as we mentioned, innovations on the frac side, which as we begin to see crystallize and accepted, that's going to require some capital.

Beyond that, if we're unable to deploy capital I think in a measured fashion that would be consistent with our ROCE profile, then of course, we're going to consider dividends.

We'll go next to J.B. Lowe with Bank of America.

Can you guys hear me?

Yes.

Scott, you'd mentioned that you are seeing some capital discipline amongst your customers.

Have you noticed any change, given how oil prices have acted over the past couple months?

I mean, we're already into May now and people set their budgets at the beginning of the year.

Have you noticed any uptick in orders?

Or are people doing any plans above what they had originally said earlier in this year?

I have seen really no evidence of that.

A lot of conversation, but nothing that is actionable, I think, from our standpoint.

Okay.

Fair enough.

In terms of sourcing from Suzhou, what -- I guess, how much of your product are you currently sourcing from there?

And what potential margin expansion beyond what you've seen so far do you think you can get on the product side, I guess, over the balance of '18?

Well, I think that, Brian, correct me if I'm wrong.

Joel just stepped out.

We're -- our product receipts are running now just under 60% from China as opposed to non-China sources.

So I think that we mentioned that optimal, given the fact that we do get a lot of parachute orders that can only be sourced to Bossier City, we're nearing -- we're probably nearing the point at which they're going to be diminished -- a diminishing impact from China.

Maybe 65% would be optimal and of course that's not insignificant.

It really depends upon our ability to standardize our customers' production plans, which heretofore we've been unsuccessful in doing.

So production really gives rise to this sort of built-in limitation on how much we can bring out of the Far East.

In terms of the margin impact, honestly, these margins are pretty good.

And if I look back historically, on my 40 years in this business, I'm pretty -- I'm very pleased with our product margins right now.

I think we do a really good job, and maybe a couple of more points, but that's probably it.

Okay.

That's helpful.

Lastly on, I know you guys had hired a bunch of service techs last year, but it seems that you've kind of gotten to the place where you want to be in terms of utilizing those guys.

Do you still see increased margins going forward as you kind of spread out that cost basis on better activity?

Or is that kind of -- have we kind of seen all the benefits of that?

What do you think, Brian?

Well, if I look at where our service utilization rates are today, that they have been higher in the past so I think there is scope for upward growth.

We'll go next to Dan Pickering with TPH Asset Management.

A double barrel here from TPH.

Scott, I was wondering if you could just talk a little bit about, you mentioned West Texas takeaway issues.

As we kind of get out into the back part of this year and early next year, do you see any risk that your customers start building DUCs as opposed to continuing their completion cadence?

And what are the implications then for your frac business?

They're clearly building DUCs right now.

Although we're about as busy as we could possibly be in our completions and production side, but it's undeniable that they're building DUCs.

I guess, what I've always wondered about is, how many DUCs are the right number of DUCs.

I think that -- I don't think it's 3,000 and I don't think it's 4,000, it may be 7,000 or 8,000.

I've actually heard some customers that have -- that actually have -- and I'm sure you know more about this than I do, that strategically want to hold an inventory of DUCs.

I'm not sure I understand that, but I hear that all the time.

That -- so to the extent that they desire, as I would, to reduce their DUCs, there would be -- there would seem to be some built-in backlog or at least some -- a built-in safety net should drilling drop off and people rotate into doing more completions since they have the inventory.

Dan, I really -- I don't think about this very much to be honest with you.

Yes, I mean -- the way I'm thinking about it is obviously you're building capacity for, on the frac side, both people and equipment.

And if takeaway is a problem and folks stop completing wells or start building more DUCs, it's just a question of timing around, do you wind up with some excess capacity?

And I think you partially answered it with you're only doing half your -- half of the work for some of your customers and so maybe there's some built-in ability to take share if things were to pause a little bit with DUCs.

And second...

Let me just -- there's another thought I have on that.

If I look at our profile of our clients in West Texas who use our frac services, the vast majority of them are very large.

And they have -- I think, they probably have better in-house infrastructure than some of the smaller players.

Great.

And then second question would just be away from the Permian, which everybody likes to stare at.

Are you seeing any pluses or minuses in your business that surprise you kind of versus plan in other regions, pockets of strength or pockets of weakness?

Yes, we've been pretty busy everywhere.

I think -- I'm surprised that -- it's clear that the Bakken is showing some life, again, I don't know if that's a redeployment of cash out of the Permian.

I don't know if it's just simply $70 oil, but the Bakken has surprised us.

I think that actually our South Texas business has surprised us.

The only area that we really have not done a really -- a great job in has been the Haynesville, and I think we have probably, on a relative basis, the greatest opportunity there.

So honestly, we're busy just about everywhere we operate right now.

Nice job out of the box, guys.

Keep it up.

It appears there are no further questions in queue.

I'd like to turn it back over to today's speakers for any additional or closing remarks.

Thank you for joining the call.

We'll see you at the Citi Conference next week.

Thanks everybody, have a good day.

And this concludes today's conference.

Thank you for your participation.

You may now disconnect.