Cactus Inc (WHD) 2024 Q4 法說會逐字稿

Good day and thank you for standing by, and welcome to the Cactus Q4 2024 earnings call.

(Operator Instructions)

And 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.

Please go ahead.

Thank you, and good morning.

We appreciate you joining us on today's call.

Our speakers will be Scott Bender, our Chairman and Chief Executive Officer; and Jay Nutt, our Chief Financial Officer.

Also joining us today are Joel Bender, President; Steven 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.

Forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control.

These risks and uncertainties could 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.

With that, I will turn the call over to Scott.

Thanks, Alan, and good morning to everyone.

As we concluded 2024, our business continued to outperform, with revenue and earnings performance for the full year outpacing the industry activity levels that have been softening for the past two.

Our organization's performance continues to demonstrate the inherent characteristics that make Cactus one of the most resilient and high-return oilfield service businesses, including a low fixed cost base and a flexible supply chain; our relentless focus on safety, cost control and execution for our customers; and offering differentiated, efficiency-enhancing and highly engineered products and services.

We finished the year with solid margin performance in both segments despite fourth quarter revenue declines due primarily to seasonality.

Fourth quarter total company highlights include: revenue of $272 million, adjusted EBITDA of $93 million, adjusted EBITDA margins of 34.1%, we paid a quarterly dividend of $0.13 per share and we increased our cash balance to $343 million.

I'll now turn the call over to Jay Nutt, our CFO, who will review our financial results.

And following his remarks, I'll provide some thoughts on our outlook for the near term, before opening the lines for Q&A.

So Jay?

Good morning.

As Scott mentioned, total Q4 revenues were $272 million, which were down 7.2% sequentially.

The revenue decline was a bit more than we anticipated in our Spoolable Technologies segment guidance as the stronger performance experienced in October was not sustained through the end of the year.

Total adjusted EBITDA of $93 million was down 7.6% sequentially.

For our Pressure Control segment, revenues of $177 million were down 4.5% sequentially, driven primarily by decreased customer activity and reduced shipments of production equipment as anticipated.

Operating income decreased $1.7 million or 3.3% sequentially, with operating margins increasing 40 basis points due to the nonrecurrence of miscellaneous charges incurred during the third quarter, offset by lower operating leverage in the quarter.

Adjusted segment EBITDA decreased $0.5 million or 0.8% sequentially, with margins increased by 130 basis points due to the reasons previously noted.

For our Spoolable Technologies segment, revenues of $96 million were down 11.2% sequentially due to lower customer activity levels in the back half of the seasonally slow quarter.

Operating income decreased $7.4 million or 22.4% sequentially, with operating margins decreasing 380 basis points due to some ongoing higher input costs and reduced operating leverage.

Operating income is inclusive of $4 million of intangible amortization expense.

Adjusted segment EBITDA decreased by $7.3 million or 17.1% sequentially, while margins decreased by 260 basis points.

Corporate and Other Expenses were $5.9 million, down $2.8 million sequentially, due to the nonrecurrence of professional fees incurred during the third quarter related to growth initiatives.

Adjusted Corporate EBITDA was flat in Q4 at $4.1 million of expense.

On a total company basis, fourth quarter adjusted EBITDA was $93 million, down 7.6% from $100 million during the third quarter.

Adjusted EBITDA margin for the quarter was essentially flat at 34.1%.

Adjustments to total company EBITDA during the quarter include a noncash charge of $6.9 million in stock-based compensation and $3.2 million gain related to a revaluation of the tax receivable agreement.

Depreciation and amortization expense for the quarter was $15 million, including the $4 million of amortization expense related to tangible -- intangible assets resulting from the FlexSteel acquisition.

During the fourth quarter, the public or Class A ownership of the company averaged 85% and ended the quarter at 86%.

GAAP net income was $57 million in the quarter versus $62 million during the third quarter.

The decrease was largely driven by lower revenues in both segments, which offset the gain related to the revaluation of the TRA.

Book income tax expense during the fourth quarter was $19 million, resulting in an effective tax rate of 24%.

Adjusted net income and earnings per share were $57 million and $0.71 per share, respectively, versus $63 million and $0.79 per share in the third quarter.

Adjusted net income for the fourth quarter and full year 2024 was net of a 26% tax rate applied to our adjusted pretax income.

During the fourth quarter, we paid a quarterly dividend of $0.13 per share, resulting in a cash outflow of approximately $10 million, including related distribution to members.

We also made the final cash TRA payment of $6.3 million associated with the 2023 taxes during the quarter.

We ended the year with a cash balance of $343 million, a quarterly increase of approximately $39 million.

The cash build was a little bit lower than our usual cadence, in part due to lower quarterly income, a build of raw material inventory in our Spoolable Technologies business following several missed opportunities in the second half of 2024, and in anticipation of robust sales levels in 2025.

Additionally, Pressure Control inventory balances remained elevated as inventory was increased through the third and fourth quarters due to uncertainty regarding potential port strike activities and the possible implementation of new tariffs.

CapEx was approximately $11 million during the quarter, and net CapEx for the full year was approximately $35 million, near the midpoint of our guidance provided in October.

In a moment, Scott will give you our first quarter operational outlook.

Some additional financial considerations when looking at the first quarter, include, an effective tax rate of 22% and an estimated tax rate for adjusted EPS of approximately 26%.

Additionally, we made a cash tax payment and associated distributions of approximately $25 million in January that was related to deferred estimated 2024 federal taxes.

This deferral was allowed under IRS disaster relief provisions after Hurricane Beryl affected the Houston area in June of last year.

This deferral benefited our third and fourth quarter 2024 cash balances.

Total depreciation and amortization expense for the first quarter is expected to be $15.5 million, with $7 million associated with our Pressure Control segment and $8.5 million in Spoolable Technologies.

Our full-year 2025 CapEx expectations are in the range of $45 million to $55 million.

The increase from 2024 is due to increased spending on equipment upgrades, inefficiency improvements at FlexSteel's Baytown manufacturing facility, together with international supply chain diversification efforts, including a $6 million supply chain investment made in January that was originally planned for 2024 to mitigate tariff costs.

Finally, the Board has approved a quarterly dividend of $0.13 per share, which will be paid in March.

This covers the financial review, and I'll now turn the call back over to Scott for his comments about the first quarter outlook.

Thanks, Jay.

I'll now touch on our expectations for the first quarter by reporting segment.

During the first quarter, we expect Pressure Control revenue to be flat to up versus the $177 million reported in the fourth quarter.

This view is based on strong January results in combination with modestly increasing customer activity levels expected through the end of the first quarter.

Adjusted EBITDA margins in our Pressure Control segment are expected to be 33% to 35% for the first quarter.

This adjusted EBITDA guidance excludes approximately $3 million of stock-based comp expense within the segment.

As you would expect, we are closely monitoring the supply chain impact of recently announced tariff adjustments, particularly as they relate to our Chinese production facility.

The details remain fluid, making the impact difficult to quantify.

But at this time, we believe that our cost profile will be impacted by additional tariffs on goods imported from the US -- into the US -- I'm sorry, from our Chinese facility, which will be incremental to the existing Section 301 tariffs.

These additional tariff expenses, when implemented, will impact the entire US industry as tariffs will be applied to all steel and derivatives regardless of the countries of origin.

As a reminder, our Bossier City manufacturing facility is the industry's largest US manufacturer of API 6A equipment, and we currently build approximately half of our equipment at that facility.

I'm pleased to share that the location of our new low-cost production facility is in Vietnam.

We placed our first orders from this facility and expect modest shipments to begin in the second quarter before ramping up in the back half of the year once we obtain our API 6A accreditation.

From our current understanding, this facility will also be impacted by the new tariffs but at a significantly lower rate than our Chinese production facility, demonstrating the benefits of supply chain diversification.

We believe our unique combination of production facilities will ensure that we remain a flexible and low-cost producer committed to delivering for our customers.

Regarding our Spoolable Technologies segment, we expect first quarter revenue to be down mid to high single digits relative to the fourth quarter due to extended seasonality as our customers were slow to increase activity through January.

Historically, the first quarter has been the lowest revenue quarter of the year.

In 2024, international orders were the primary driver of a sequential increase in the first quarter.

We are, however, experiencing a meaningful rebound in order activity in February, and early indications suggest that customer activity is building and that the second and third quarters of 2025 will be strong.

This year, we will be introducing a product qualified for H2S service, which will increase our addressable market particularly in the most active international regions.

In addition, we shipped product to a mining customer and a shallow water offshore customer in the fourth quarter, and we expect continued opportunities in these areas.

Additionally, increased shipments to a major midstream customer contributed to our record sales in 2024, and such shipments are expected to continue to grow in 2025.

Finally, our international opportunity list continues to expand and supports our confidence towards achieving our long-term goal of 40% international revenue contribution.

We expect EBITDA margins to be approximately 35% to 37% in Q1, which excludes $1 million of stock-based comp in the segment.

Lower operating leverage is the primary driver for the anticipated margin decline.

As a reminder, 100% of FlexSteel pipe is manufactured in Baytown, Texas, using domestically sourced coil, so we do not expect the same direct tariff cost impacts in this segment, although upstream supply chain impacts are still being determined.

Adjusted Corporate EBITDA is expected to be a charge of approximately $4.5 million in Q1, which excludes $2 million of stock-based comp.

We've made real progress on our international expansion plans and remain focused on establishing an international business in a disciplined manner.

We continue to dedicate significant resources in both segments to international revenue diversification.

In conclusion, I remain very pleased with both of our business segments performance. 2024 was a record revenue year for Cactus as the first year with the full contribution from FlexSteel in both segments outperformed lower average industry activity levels year-over-year.

Trade policy uncertainty and customer consolidations still present risk to the US oil and gas industry, but we have successfully addressed such challenges before.

Importantly, our customers have historically supported our responses to such matters.

In 2025, we remain focused on ramping up our Vietnam production facility, introducing new value-enhancing products in both segments, continuing to win new customers, expanding internationally and managing our manufacturing cost profile.

(Operator Instructions) Stephen Gengaro, Stifel.

So I guess 2 things.

I guess I'd start with when we think about the activity outlook in the US, how are you guys thinking about the activity over the next few quarters in the US market?

And maybe as part of that, do you think you can outgrow underlying activity?

I would -- all right, let me answer your last question first, and that answer is yes.

We're continuing to add new customers and I feel comfortable that we'll continue to do so.

I think that this, of course -- my estimate of the US rig count sort of predates what's going right now with trade policy.

And I don't think this trade policy is -- I'm sure you'd agree, it's not clearly constructive.

We were anticipating overall US onshore rig count in the 550 to 560 range.

I was probably -- well, I wasn't probably, I was encouraged that there was upside based upon some renewed activity in the natural gas regions, which we've begun to see.

And then, believe it or not, in the Bakken and in the Mid-Continent areas, now we're all concerned about the uncertainty that's going to follow from these ever-changing trade policies.

So I guess the short answer is, yes, I'm confident that whatever it is, whatever happens to the US activity levels, that we will outperform those.

Great.

No, that's good color.

And then I guess the other question, it might be harder to kind of crystallize.

But at a high level, when you think about the Bossier City facility versus China, just -- I know you've had some comments around this in the past.

And I'm trying to remember sort of the margin headwind that, that created a couple of years back.

I want to say it was like a 100 to 200 basis point margins on the legacy Cactus business when you sort of switched over to Bossier versus China.

Is that in the ballpark?

Steve was the CFO at that time.

I can just tell you on a comparative basis in terms of cost, Bossier was at least 35% higher than our Far East supply chain.

So keep in mind that as the tariffs increase for imported steel, be it China or, wherever, Vietnam or Europe, that US steel prices are also going to increase.

And that means Bossier costs are going to increase as well.

To what extent, I don't know.

But you can anticipate they're going to be pretty close to whatever sort of the weighted average of steel prices is that are being imported internationally.

But let's face it, that's why the US steel producers have pushed so hard on steel and aluminum.

Makes sense.

And just

--

Think about 35%.

Okay.

And just a quick follow-up to that, and then I'll turn it back.

Do you think, given what you're seeing in the end market and given how public the tariff situation is, that you can offset that with, let's call it, cost recovery versus price?

I would be very disappointed if our customers didn't support us in this, okay?

But time will tell.

Exactly.

But that's great

--

I just need to add something.

Our customers have always been very loyal to us because we've been very loyal to them.

We've never taken advantage of them.

We're very transparent in what we do and why we do it.

And I've been gratified by the way they've supported us in the past.

Arun Jayaram, JPMorgan Securities.

I did have maybe a follow-up on the tariff discussion.

Jay mentioned that you're going to do a $6 million supply chain investment in 1Q maybe to mitigate the impact from the tariffs.

But maybe you could talk about what the game plan will be on a go-forward basis, just given the fact that you do have flexibility now between Vietnam and Bossier City to kind of mitigate that impact as you move forward?

My answer would probably have to go beyond just simply responding to your question.

I think that -- not just Cactus, but given that we have the largest domestic supply chain capabilities in the industry, there is not a whole lot of spare capacity here.

There are not enough people.

There is not -- the domestic forging capacity has gone from this country, and much of it that remains has pivoted towards, it won't surprise you to hear, military applications.

So if you were to go into some of the larger historically oilfield service forgers, you're going to see things that perhaps that are destined for Ukraine or places like that, or could be the Mid East, you're not going to see a whole lot of oilfield service material, for obvious reasons.

So there is just a limit to how much more we can ramp up Bossier.

And interestingly enough, although you didn't ask the question, we are busier today in Bossier than we were in 2024.

So now let me pivot over to Vietnam.

What we expect to see is -- this is a vertical manufacturing facility that we're putting in, so we would expect to see Vietnam would begin to take over supplying our needs in the U.S., and our Chinese facility will take over responsibility for international demand.

So I think I may have mentioned before that when we first designed the facility in Vietnam -- I didn't mention Vietnam, we did design a facility that was capable of handling the entirety of our US demand.

Interesting.

Interesting.

And then maybe

--

Did that answer your question?

Yes, maybe.

Actually that $6 million investment -- I was -- no, it was clear.

That $6 million supply chain investment, could you just highlight that?

Yes.

So first of all, we already made initial investments in 2024.

But the $6 million -- this additional $6 million was slated for 2024, so it got postponed to 2025.

And it's made right now.

This will provide us with vertical manufacturing capabilities.

So think about Suzhou, the way we develop Suzhou with a modest amount of capital investment, plus the fact that we're going to be far more vertical in our supply.

Understood.

Did I confuse you again?

No, no, no.

That's helpful.

And maybe just my follow-up, I want to get more details.

You talked about FlexSteel, the ability now to address H2S solutions.

And I was wondering maybe if you could comment, is that product commercialized?

And maybe discuss maybe some of the growth opportunities from that product?

Yes.

I'll let Steve go into the details, but it is commercialized.

We're shipping -- well, Steve, when are going to make our first shipment?

Yes, our first shipment will be March or April, and that will be to a US customer, and we have some other US customers interested.

Really, I mean, the bigger addressable market for us is in the Middle East, where most oil production, at least for our pressures and diameters, is sour.

So our prior Middle East sales have been more in the water injection area and some other corrosive applications, but not H2S and oil production.

So we're excited about that.

As we mentioned on the call, we think it supports the eventual 40% international contribution that we're shooting for from FlexSteel in the grand scheme of things.

(Operator Instructions) Scott Gruber, Citigroup.

(inaudible)

Scott, can you speak up a little bit?

Can you hear me?

Yes, I hear you better now.

That's because Alan just turned the volume up.

Thanks.

Great.

Great.

So staying on Spoolables, can you just provide a bit of color on how the Spoolables' share is evolving in the US?

When you bought the business a couple of years ago, you had talked about upside to share and product lines and gathering lines, so I wanted to see how that's evolving.

And if completion activity is kind of flattish this year, how should we think about Spoolables' growth in '25 in the US?

And then touch on the international growth potential as well.

Yes.

Well, 2024 as a whole was a record revenue.

In 2023, at least from a Cactus reported standpoint, we didn't have January and February in there, but we were up -- when we look back at the prior owners, we were up about 4%, I think, total revenues.

And some of that was due to international growth that we talked about on the last call and we just -- we're talking about now.

But that's -- we're pretty pleased with that.

That indicates that we were growing share in the US despite -- what was the rig count reduction, 13%?

13%.

13% or so year over year.

So we feel very good about our positioning.

We continue to expand, particularly on the larger diameters.

I think some of the deeper longer laterals, it pushes people probably to higher diameters and pressures where we tend to have less competition and start running into steel more.

So if you're looking for a spoolable alternative, it benefits us there as well as with some of the bigger field developments that we see.

So overall, we're very pleased with it.

We -- like we said, we had a rec fourth quarter.

I think, obviously, we wish our guide had been a little bit different.

We just were projecting off of an extremely strong October and activity fell off further than we anticipated.

I guess Q1 is typically our weakest quarter as steel construction gets off to a slow start, but we're seeing the ramp up from January to February, like we'd expect.

So we don't have any true activity concerns.

Customers are telling us that, in many cases, 2025 activity, at least over the last couple of months, they've been telegraphing that it should be up.

And as far as international awards, they're just lumpier and harder to project.

They tend to be, at a minimum, $1 million, typically on the higher side for us.

Recently, more in the $5 million to $6 million.

So last year, in 2024, in Q1, we benefited from an almost $5 million international order.

We don't have that this year.

So that kind of puts us where we are.

But overall, I'm feeling very bullish about our prospects.

But we have to contend with the market now.

So we just take what the market gives us, but we're trying to expand our portfolio as we talked about and then target other areas of growth.

And the H2S product is interesting.

How long would it take for a product like that to get qualified for sale in the Middle East?

And has that process begun?

Yes.

So it is qualified to API for certain pressure and diameter ranges currently.

We're working on further qualification.

As far as Middle East qualifications, you always have some country-specific qualifications, and we're working through those now.

But it's not

--

Or in the middle of.

Yes, we're in the middle of it.

It's not a multiyear process, so this should be working towards this year.

Stephen Gengaro, Stifel.

Just when we think about the Pressure Control side, how should we think about the international growth as far as where you stand right now and the opportunities?

I imagine in -- probably in Argentina and also in the Middle East, and just kind of where you stand on that progress?

Our general counsel is looking at me right now, throwing darts.

Don't ask me that question.

And I said in the narrative that we made real progress and we have made real progress.

So I really need to leave it at that.

Okay.

Okay.

I think everybody on this call knows that we've never lied to anybody and we're not going to start now.

Got you.

That makes sense.

I'm still modeling it as a US business until we -- but I was just curious if you could give more color.

But I appreciate that you can't right now.

Okay.

Thank you.

And there are no further questions at this time.

I would now like to turn the conference back to Scott Bender, Chairman and CEO, for closing remarks.

Okay.

I just want to thank everybody for your support.

Thanks for joining us.

This team worked really, really hard this year.

We're working even harder this year.

This -- my hope is that 2025 will be a transformative year for the company as a whole.

And we're doing everything in our power to ensure that, that happens.

So everybody, have a good day.

Thanks for joining us.

Thank you, presenters.

And thank you, ladies and gentlemen.

This concludes the conference call.

Thank you for participating, and you may now disconnect.

Have a good day.