Cactus, Inc. Q2 FY2020 Earnings Call

Good morning and welcome to the Cactus Second Quarter 2020 Earnings Call. My name is Joanna and I will be facilitating the audio portion of today's interactive broadcast. All lines have been placed on mute to prevent any background noise. For those of you on the stream, please take note of the options available in your event console. As a reminder, please limit your question to one and then one follow-up question. Thank you. At this time, I would like to turn the show over to Mr. John Fitzgerald, Director of Corporate Development and IR. Sir, 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; Steve Tadlock, our Chief Financial Officer. Also joining us today are Joel Bender, Senior Vice President and Chief Operating Officer; Steven Bender, Vice President of Operations; and David Isaac, our General Counsel and Vice President of Administration. Yesterday we issued our earnings release, which is available on our website. 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. With that, I will turn the call to Scott.

Thanks, John. Good morning, everyone. Last quarter we were among the first to set realistic expectations for our industry. Since then oil prices have rapidly recovered to approximately $40 a barrel, completion activity looks to have troughed and we appear to be approaching a bottom in the U.S. rig count that is marginally higher than previously forecasted. Nonetheless, we remain committed to further streamlining our existing operations as we expect activity to remain below the levels needed to support the current industry capacity. The second quarter was better than expected for Cactus. Although drilling and completion activity in the U.S. fell by more than half, we demonstrated the variable cost nature of this business through industry EBITDA margins and significant free cash flow generation. In summary, second quarter revenues were $67 million. Adjusted EBITDA was over $22 million. Adjusted EBITDA margins were approximately 34%. Our cash balance increased by $40 million to $271 million and we paid a quarterly dividend of $0.09 per share. I'll now turn the call over to Steve Tadlock, 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&A.

Thanks, Scott. In Q2, revenues of $67 million were 57% lower than the prior quarter. Product revenues at $41 million were 53% lower sequentially, as the U.S. onshore rig count fell by more than 50% quarter-over-quarter. Product gross margins increased to 36% of revenues, up 100 basis points on a sequential basis in part due to $3.1 million in tariff-related benefits received during the quarter. Rental revenues were $12 million, down 68% from the first quarter. The decrease was attributable to significantly lower industry completion activity. Although gross margins declined on a sequential basis, we were able to maintain positive margins through the achievement of cost reductions in both direct and branch expenditures. Field service and other revenues in Q2 were $14 million, down 54% from the first quarter. This represented just under 27% of combined product and rental-related revenues during the quarter, slightly ahead of expectations. We expect this to represent approximately 26% of product and rental revenue during the third quarter. Gross margins decreased 440 basis points sequentially, largely due to lower revenues, which were offset by lower payroll expenses, better labor utilization, and rationalization of our field service vehicle fleet. SG&A was down $5 million sequentially to $8.7 million during the quarter. The decrease was primarily attributable to lower payroll-related expenses, despite the sequential increase in non-cash stock-based compensation expense. We expect SG&A to be between $8 million and $9 million in Q3 2020 with stock-based compensation expense flat at slightly over $2 million. We recorded just under $1 million of severance expense in Q2 2020. Second quarter adjusted EBITDA was $22 million, down from $54 million during the first quarter. Adjusted EBITDA for the quarter represented 34% of revenues. Adjustments during the second quarter of 2020 included $900,000 in severance expenses and $2 million in stock-based compensation. Depreciation expense was $10.5 million during the period, down from $11 million during the first quarter. Our public or Class A ownership was relatively stable in Q2 and was 63% at the end of the quarter. This should result in an effective tax rate of approximately 19% in Q3 2020, assuming no changes in our public ownership percentage. GAAP net income was $9.1 million in Q2 2020. Internally we prefer to look at adjusted net income and earnings per share, which were $7.4 million and $0.10 respectively compared to $31 million and $0.41 per share in Q1 2020. We estimate that the tax rate for adjusted EPS will remain at 26%. During the second quarter we paid out $6.8 million resulting from our quarterly dividend of $0.09 per share. The Board has also approved a dividend of $0.09 per share to be paid in September of this year net of the dividend and associated distribution payments. Our cash position increased by an impressive $40 million during the quarter to almost $271 million at June 30, highlighting the strong free cash flow generation of the company. For the quarter, operating cash flow was $57.4 million and our net CapEx spend was $8.2 million. As disclosed in our release, Cactus recognized $7.5 million in refunds during the quarter associated with tariff exclusions granted in March of this year. The refunds reduced inventory values by $4 million and cost of revenues by $3.5 million during the second quarter. There remains over $6 million in additional potential refunds not yet recorded as of June 30. These will be recognized as a reduction to cost of goods sold if and when received with the amount substantially allocated to product costs. Early in the third quarter, we made our annual TRA payment and associated tax distribution of approximately $23 million. We expect this payment and associated distribution to be substantially lower in 2021 as such disbursements vary directly with imputed tax liability. The recent payment reflects our strong 2019 results and the associated tax savings arising from our corporate structure. The capital requirements for the business remain modest as evidenced by us reducing our net CapEx guidance for 2020 to be between $20 million and $25 million. That covers the financial review and I'll now turn it back to Scott.

Thank you, Steve. We've emphasized that the two primary elements contributing to Cactus' success are our variable cost structure and low capital needs. This was evident in the second quarter when we cut payroll-related expenses by about $85 million annually and lowered our 2020 CapEx forecast to 60% below our 2019 figures. The $85 million in savings came from reductions implemented by the end of May, incurring less than $2 million in total severance costs during the first half of 2020. In our products sector, we received positive news when the USTR granted exclusions for certain goods we manufacture internationally, which positively affected our product gross profit in the second quarter. Additionally, we are hopeful about receiving over $6 million in further refunds in the upcoming quarters, although the timing and final amount are still uncertain. These exclusions are scheduled to last until August this year, but we have applied for extensions and are awaiting a response. If these extensions are granted, they could positively impact our future margins. Despite everything mentioned, our solid financial position is enabling us to benefit from lower costs throughout our supply chain, which should support incremental growth in the future. Regarding market share, we believe the quarter aligned with our earlier expectations of volatility due to significant declines in April and May, given our unique customer profile. With the rig count showing signs of stabilization, we are confident that we will end up with higher market share in the latter half of 2020 compared to both our June levels and pre-downturn levels, supported by our mid-July market share hitting an all-time high and encouraging signs from both long-term and new customers. As we’ve seen in past downturns, clients cannot overlook efficiency gains as price concessions become limited and impractical. If the U.S. onshore rig count remains flat in the near term, the average rig count for Q3 will drop approximately one-third sequentially. We currently anticipate that the rigs tracked by Cactus will decline in the range of 20% sequentially, which is better than the overall market. From a financial view, we expect product revenue in Q3 to decrease slightly less than the percentage reduction in our tracked rigs, benefiting from modest increases in production-related activity and maintaining EBITDA margins around 30%. On the rental side, revenues fell similarly to the drop in onshore completion activity during the second quarter, as operators halted activities due to challenges in marketing their barrels. Furthermore, pricing was comparable to levels seen in early 2016. We continue to exercise discipline in pursuing business opportunities, recognizing the value our equipment and services provide to clients. This disciplined approach has been crucial in maintaining our EBITDA margins just shy of 70% in the second quarter. Looking ahead to Q3, we expect revenue to decline in the low double-digit percentage range quarter-over-quarter, with margins around 60%. In terms of field service revenues, these are influenced by both our product and rental activities, and we foresee EBITDA margins in the mid-20% range for the upcoming quarter. We were pleased to achieve total adjusted EBITDA margins of nearly 34% during this quarter. As a reminder, we maintained adjusted EBITDA margins above 20% during the previous downturn while being private, and we believe we can reach similar results even with the costs associated with being a public company. As previously noted, we have reduced our CapEx guidance to between $20 million and $25 million for 2020 based on expected activity levels. We anticipate continuing to spend below $10 million annually at least through the latter half of 2020 and into 2021. In closing, I want to highlight a few points before we open up for questions. Internationally, we still believe our strategy to expand into target markets will pay off in 2021 as we pursue viable business opportunities outside the U.S., although travel restrictions have hindered our progress. Regarding mergers and acquisitions, we believe that consolidation within our industry where we can see tangible synergies is the most sensible path forward. On the topic of capital allocation, we set our dividend level with the industry's cyclicality and our capacity to adjust costs in mind. We are confident that we will be among the few oil field service companies capable of maintaining our dividend level throughout this downturn. As I often remind you, management are long-term investors in this business and are closely aligned with our shareholders. With the nearly 75% drop in activity levels since last year, our ongoing success in generating cash returns has never been more crucial. In summary, Cactus is well-equipped to navigate this challenging market environment. Now, I will hand it back to the operator to begin the Q&A.

Thank you. Your first question comes from the line of Sean Meakim from JPMorgan.

Thank you. Hey, good morning.

How are you?

Scott, I'm doing great. Thank you. Well done on managing the quarter and you're right. Just really highlights the variable nature of your costs and it's highly differentiated in the sector the tariff revelation is quite constructive for margins going forward. If as you said in the past maybe half of your cost of goods sold from China and the tariff just maybe 25% of those costs, is the blended impact on COGS something like 10% to 15%. I'm assuming you are going to give me some caveats to attempt that down, but would love to hear some elaboration on that.

Okay. Steve, you on it now.

Yes, I think everything you said is correct as of kind of the last part. First of all, these exclusions weren't on all of our products. But they were on a significant number of our products. So as we kind of look at what the margin impact would have been for the quarter because it did happen in March, so you've got a full quarter's impact you probably looking at something like 3% on the product margins on an absolute basis impact once you factor in that 50% is coming from China and all the other caveats you mentioned. I think something Scott mentioned on the phone call is important I think, Joel is in working suppliers very hard and obviously in this environment everybody suffers and things tend to roll downhill. So we've been able to take concessions there and so regardless of the tariff extension outcome, we feel pretty confident that as we get some of these cost benefits in our inventory and they roll through the system we will be able to maintain something in the low '30s range on that product margins.

Got it. Yes. The clarification is really helpful. And then on market share, it sounds like there is some volatility. Just given the unprecedented speed at which rigs are getting dropped but you sound pretty encouraged by how you came out of the quarter and then where you stand today in terms of market share. So you're executing a similar playbook to the last downturn. Can you just talk about some of those puts and takes and what the implication is looking forward in terms of market share?

Yes, Sean, I wish I could answer your question directly. I feel very confident, and the team feels the same way. This market is quite volatile, but I'm confident that by the end of the year, we'll see record market share for the company. I want to keep it at that. One issue we've encountered is that some of our high-profile customers entered this downturn with large rig counts and subsequently dropped rigs very quickly, which increased the volatility in our month-to-month market share. However, that volatility has decreased significantly, and we're starting to see the advantages of bringing in new customers as well as some existing ones returning to work. I believe we have the most financially responsible customers in the industry, and our adoption rate is increasing. So yes, I feel very confident. I wish I could provide more details, but I can't.

Understood. Thanks a lot.

Your next question comes from the line of Ian MacPherson of Simmons. Your line is open.

Good morning, and congratulations on the quarter. Scott, you briefly mentioned the M&A opportunities available to you. I gathered from last quarter's call that M&A wasn't a pressing issue, but it seems there has been some stabilization in the U.S. market. Can you provide more insight into its current dimensions? I'm also curious about what types of extensions or acquisitions for Cactus could be conceptually viable, considering the changes in the U.S. market this year.

So right. Let me be clear right now. We have nothing on the horizon in terms of M&A. There clearly are a lot more opportunities that are surfacing. But I think that because of the cautious nature of this team, we now believe that the best M&A opportunities will appear within our own industry. It's the business we know; in fact I think we know it better than anybody else I like to sound like somebody else who makes public announcements, but I think it's true we have more experience in this business. We understand that there're surprises and we want M&A opportunities, whereas I mentioned, there are we see tangible synergy benefits. And the best place to look is within our own industry for that reason.

Does that entail U.S. onshore focus or anything broader than that potentially?

I would say both. We just see now quite frankly want it to be related to stockholders and wellheads.

Understood. Thanks very much. I will pass it over. Appreciate it.

Next question comes from the line of George O'Leary from TPH & Company. Your line is open.

Hey George. How are you doing?

Good morning guys. I am doing well. How are you?

I am doing great. Thanks.

Could you provide the percentage of your rental revenues that come from the new technology you implemented last year compared to the older technologies? Has there been any change in this mix as we've moved through this soft period and started to recover?

That it's about 15% George. Right now the headwinds that we face are that the customers who appreciated our technologies the most really cut back on their completion activity. And as a result, we've been unable to move that number up. Having said that, I think that collectively this group feels extremely good that that's the same group that will ultimately have the money to start completing wells in the latter part of this year and certainly in 2021 and for that reason I'm optimistic that that adoption rate as a percentage of our total revenue is going to increase.

Thank you, Scott. I have one more question. You mentioned that the July market share is already at a record. Could you provide the specific market share of rigs followed in July? Also, is that level in July what you are aiming for by the end of the year, or do you believe it is a realistic target for the end of the year?

I have a nice try George. I sort of purposely didn't tell you what that percentage was, but you can look at the chart you know what it means broadly speaking. I guess what I'd tell you is that we had a record. I think that we can move up from that record additionally by the end of the year. I feel good about that.

Thank you. Figure that was case but I dig a shot.

All right, sorry George.

Okay. Your next question comes from the line of Tommy Moll from Stephens. Your line is open.

Hey Tommy.

Good morning Scott. And thanks for taking my questions.

How are you doing?

Good. Thank you. We haven't discussed your Asia supply chain much today, but could you provide an update on any potential interruptions for products coming out of China? Additionally, what is the priority level for alternative sources of supply in the future? You've mentioned this before, and any updates you could share would be appreciated.

Yes I'll let Joel talk about China, but I can tell you that as we discussed in the last call, we're moving with increased focus on diversifying our supply chain out of that area, but Joel you want to talk about China.

China has really returned to base capacity and production. I'm not really seeing any kind of distribution issues with the suppliers there that there is lots of capacity right now. I think the only issue that we see right now is just relates to vessel availability. So it might take us two weeks longer to get product in than it did before because you typically deliver to the port and it used to be they would load you same week now it may take you two weeks to get it in, but again, in terms of production there's just been no disruption in production from there. And going to the other point in terms of alternate use for product, we are actively as Scott said, working on that, and I think you'll see some that produce some sort of fruit in 2021. Lots of good options right now. A couple of different locations for that, but that is our focus right now between now and the end of the year.

Thank you for the context. Moving on to your cost-saving initiatives, you successfully reduced expenses by $85 million annually, which highlights the variable nature of your cost structure. As we consider a possible recovery, should we view the entire $85 million reduction as variable, or have you identified opportunities to also reduce fixed costs during this process? Would that positively affect your incrementals as you recover?

I'm going to answer that question in two parts. First, if we remove the $85 million in costs and return to pre-COVID levels, we wouldn't need to add that amount back. Even though it was related to payroll, the $85 million does not account for the non-payroll costs that we've aggressively addressed. For the second part, regarding fixed costs, we have minimal fixed costs in our business. Our organization is quite flat, lacking multiple management layers. Our average lease duration for facilities is around three years, giving us considerable flexibility in managing long-term facility costs. We never invested heavily in a fixed cost structure, so there aren’t many areas for reduction. We've targeted some opportunities for cost savings, but those aren't substantial write-downs. We’ve avoided situations where we would need to take write-downs to reduce fixed costs, so I think it's important to view our approach differently.

Very helpful Scott and maybe we will schedule a podcast for a more fulsome discussion on write-downs in fixed cost.

You are beyond that podcast?

I'd love to lead it. Thank you. I'll turn it back.

Your next question comes from the line of Jacob Lundberg from Credit Suisse. Your line is open.

Hey, good morning guys.

Good morning.

Just wanted to go back to the discussion on some of your new innovations within the rental segment. I'm curious if during the downturn you've seen any change in the way your customers are thinking about some of those products, so I understand some negative customer mix kind of took down the numbers temporarily in 2Q. But in terms of your conversations with customers, any changes in the way those operators are thinking about, I'm thinking broadly just the application of innovative technologies in their business, but obviously specifically as it relates to your business and you think coming out of this there could be greater appetite for stuff like that as kind of focus goes from immediate cash preservation towards thinking about driving better efficiencies.

We saw very little interest in additional costs related to fracking during the quarter. However, over the past few weeks, as some of our larger clients have started discussing resuming work, we are noticing renewed interest in the innovative aspects of our rental fleet. Another important point is that stage costs have significantly decreased, which means the value of reducing non-productive time is not as high. Consequently, the return on investment for innovation, which we have always considered to be very high, is now somewhat less compelling in today's market environment. What benefits us is that the pressure pumping pricing stabilizes, begins to increase, and the customer mix emphasizes safety and innovation. Overall, I feel more optimistic about the future this quarter, even though there was no interest in spending money.

Okay. That makes sense. And then just a question, I guess, again on the rental segments. I was kind of curious on the top line guidance of 3Q. I would have expected with perhaps a little bit of rebound in completion activity in 3Q maybe revenues would have been flat to modestly up, I just kind of curious if you could help me understand what seems like it disconnect, but maybe you guys have a different view on 3Q completions.

I think the first part of the quarter was pretty good. And then it deteriorated in the last couple of months. Probably the most honest answer is we're conservative. Okay. Fair enough. I think there is some upside.

Makes sense. Thanks a lot. Appreciate it guys.

Okay.

Your next question comes from the line of Connor Lynagh from Morgan Stanley. Your line is now open.

Yes. Thanks.

Connor, how are you doing?

Good. How are you doing?

Great.

I was wondering if I could follow up on Jack's question there more on the rig side of things, I think you guys gave one of the more realistic assessments last quarter where things were heading. I think you've addressed to completions there, but on the drilling side of things I think you guys have highlighted you get a little bit more visibility than some of the other contractors. So what's your thinking on people's appetite to put some rigs back to work later this year or early 2021 where do you think the customers are at these days?

I'd see appetite in believe it or not the Eagle Ford, I see an appetite in the Delaware, I see sort of no indication of any increased appetite in the Mid-Con; I see sort of a waning appetite in the Northeast. We had really hoped that gas prices in the Northeast would be constructive on that seeing that so much may be a little bit of optimism on the Bakken, but I would say primarily South Texas and the Delaware.

Got it. That makes sense. Any order of magnitude you sort of have us think about for as we move later this year. I mean we're talking low double-digits, we're talking single-digits what sort of your thinking there?

I would say probably low double-digits by the end of the year.

Got it. I wanted to switch topics, go ahead.

Let me just caveat that by saying that that really is off the top of my head. I'm trying to think about customer-by-customer and I think I said earlier we're blessed with some customers that are capable of adding rigs financially, some of them are some of them aren't but I think it's fair to say low double-digits. What I really think will happen. You didn't ask this question, but I'm going to answer it anyway. Our production tree business, which is historically in the 26% or so range, 27% range of products really fell off the face of the map because of completion activity. You're going to see much better results from our production tree segment. We're already seeing some light there and as frac activity in general picks up I think you'll see production act. Our production tree pick up disproportionately faster than our wellhead product segment.

Got it. That's kind of question where I stock about something I didn't even ask. The one higher level question I had here is you've had some of your large competitors. I mean probably for the better part of the past 12 to 18 months here, but there is a serious mandate to generate returns. And I think it's clear to many that you've taken a lot of share and the returns that some of those larger players are a lot lower than they used to be, have you seen any shift in behavior there as we've kind of gone into the downturn. These organizations have done another round of cost cutting do you have a lot more opportunities or is it too early to tell.

You know how much I love all my competitors I don't want to take a disparaging remarks about them. This business doesn't really probably move the needle as much with our competitors. I think they have a lot of other problems besides their surface wellhead business. The short answer is I haven't really seen any indication of any change in their behavior.

That's fair. Thanks.

Speakers, your next question comes from the line of Kurt Hallead of RBC. Your line is open.

Hey good morning everybody.

Good morning.

Hey Scott. Just wanted to clarify see if I can clarify one thing when you talked about the prospect of increased activity in South Texas and the Delaware with that specific to completion activity or drilling activity or some combination of both.

Yes, I was really talking, but I have responded that I was only thinking about drilling.

Okay, great. I appreciate that. In the context of completion-related activity, can you give us your perspective on how you may see things evolving it seems like there's going to be a pickup of activity here in the third quarter and then I'm kind of getting a little bit of a mixed read on the prospects for sustainability of that dynamic into the fourth quarter. So, maybe pushing a little bit beyond your comfort zone about quarter-to-quarter dynamics but I know you're really tied in close to your customer base so would really appreciate perspective.

Yes, I think that in our view is that the improvement in completion activity will be in West Texas to a far greater degree than any other basin and I don't really have a good visibility beyond the next 90 days in that regard. So, we know that a couple of our customers are going to be adding some crews. But they are not talking about the continued adding of crews. Having said that our customers have built a lot of DUCs sooner or later they're going to have to address those. I think that the industry is probably going to maintain a higher level of DUCs than they have in the past but I feel pretty good about 2021 in that regard. Maybe I'm probably not as optimistic that you're going to see a large increase from Q3 to Q4 though.

Okay, that's great color. And then I think at least from my perspective, be curious to get a read from you as to or refresh for if you will as to what is driving the market share gains on the wellhead side of the business. There have been any recent developments or new developments or improved elements of technology efficiency wonder if you can give us a little more color on what you think is ultimately driving that share dynamic.

I believe it's a mix of customers and the right customers increasing their rigs. It can be challenging for those outside the industry to fully understand, but our execution has been exceptional, especially as others scale back. It's not surprising that service levels tend to decline during such times, but we chose to maintain our key field service and branch operations staff because we were in a strong financial position. In my view, our execution has never been better than it is now. While our competitors may start to overlook this aspect of their business, we are reaping the rewards of our focus.

Okay, I appreciate that. And if I may slip one in for Steven. Just wanted to also clarify on this in terms of the margins for the products business that low 30% margin would be exclusive of any tariff refunds in the back half of the year.

Yes.

Yes.

Okay. Thank you for clarifying. Thanks.

Your next question comes from the line of Blake Gendron from Wolfe Research. Your line is open.

Hey thanks. Good morning. Thanks for taking my questions here. The first on products, so it sounds like trees fell off a cliff, so products revenue underperformed the rig count quarter-over-quarter on average. I wouldn't assume the pricing improved in the quarter, but still revenue and products per rig followed increased slightly. So is it just an efficiency thing where the rigs that were left were drilling far more wells? And is this a trend you see continuing that may not be fully appreciated in the way we think about this business for a lower growth rig count moving forward?

There is a delay between the addition of rigs and the realization of revenue. We entered the downturn with a very high rig count, which I believe had a positive impact during the quarter, despite the lag. Additionally, our product mix has improved, as the areas with the lowest cost wellheads experienced the most decline, while regions like the Delaware performed the best. The average wellhead cost in the Delaware is significantly higher compared to regions like the Bakken or South Texas. Therefore, it’s a combination of the product mix and the lag time between adding rigs and generating revenue.

Totally fair. Shifting gears to international. I know we have some time obviously to nail this down as we move forward here right now with logistical constraints it's tough to get traction here. But how do you think about the international expansion and I guess specifically the Middle East is one that investors anticipate you eventually getting back to just because you're very familiar in your prior businesses in that part of the world. What would be the ideal commercial structure look like would you basically stand up your own operation in that part of the world, when you try to go through a commercial partner appreciate some of your comments about overhead and keeping fixed cost low. I'm just trying to understand I guess what sort of the optimal strategy is? And then how you think about roughly margin accretion versus the U.S. business as it stands today if we were to see a little bit more expansion internationally?

Well I think I might have some competitors on the line which always gives me a little bit of concern, so I'm not going to, I'm going to have to be a little bit vague in my response. I would say you're going to see a combination of the two, but one thing we will never do and that is subject to our technology to the whims of others to distribute outside of our control. So no matter what structure we adopt be it a standout facility, be it a JV or a partnership. We're going to maintain control so we can control the technology. In terms of margins, it's just a fact that margins internationally. I know that some of our larger competitors take a different view. My experience as I've said many times before is margins are lower internationally. I think that maybe the industry doesn't appreciate the fact that while international is held up extremely well this year simply because it's project-oriented and the orders were booked last year. Margins internationally are going to take a beating in 2021 as particularly, the NOCs negotiate their 2021 purchases, so margins are going to be even worse than what we had anticipated, but nonetheless we are staying the course. We're going to continue to pursue this and I still feel like 2021 you're going to see some results of that. So general margins worse than I had anticipated worse than maybe some people have disclosed to you and we're not the only company obviously that's turning its attention internationally which is just going to increase competition long all service lines. That's just still it.

Is it lower margin than the U.S. business or just lower than international has been in recent history?

Lower in the U.S. lower than it has been.

Got you. And just one quick follow-up, any opportunity you think on the unconventional gas side as it relates to your rental products or is it just not have scale yet in the Middle East?

Yes, there is opportunity there.

Your next question comes from the line of Mr. Gengaro of Stifel. Your line is open.

Thanks. Good morning, gentlemen. Just a quick follow-up for me. When you talk about market share gains going forward is it a function of more work by existing customers, new customers or a combination of those two?

Combination.

Okay. Thanks. And then just one other follow-up on the working capital front as we look at the second half of the year, any guidance the benefit you might get from working capital either based on the dynamics of DSOs and payables or in aggregate?

Sure. Yes, I would say on the AR side we had a great quarter in terms of collections obviously days left some, but we think we'll continue to see some harvesting in AR and certainly in inventory we would expect some. I think looking at the overall picture, we think we will remain free cash flow positive through the remainder of the year with the cash balance roughly flat after paying on dividends and taking into account the recent TRA payment.

Yes. Let me just add to that even though you didn't ask the question. This team has done a really remarkable job on AR, and I mean I'm very optimistic that we're going to emerge from this thing with very little impact from customer payment problems.

Okay. Thank you.

Your next question comes from the line of Chase Mulvehill from Bank of America. Your line is open.

Hey. Good morning, gentlemen.

How are you, Chase?

I’m doing well. It’s finally sunny here in Houston, so it’s nice to look off the window and see some sun rising ring. But…

I'm optimistic that we're going to emerge from this thing with very little impact from customer payment problems. Thank you. Your next question comes from the line of Chase Mulvehill from Bank of America. Your line is open. Hey. Good morning, gentlemen. How are you, Chase? I’m doing well. It’s finally sunny here in Houston, so it’s nice to look out the window and see some sun rising. But…

No. It’s Houston, right.

Yeah, exactly.

I guess, I wanted to come back to the market share question and doing the calculation what the rig count expectations probably are for 3Q for the industry, and your comment about rigs followed down around 20%. If I'm doing the math right that kind of implies that you'd have about 35% share in the third quarter. Can you confirm that number, and then also on the share gains. This has been asked a lot, but I guess maybe I didn't hear if you've actually had success penetrating the majors yet.

I think that's a fair question I've got about market share. Certainly you're pretty good mathematician buddy, so let me just say that. Okay. The next question really you asked about the majors. I'm not going to comment on that except to say that think about the people who are going to be drilling wells to the second half of the year and in the next year. And I feel good about the customers with whom we do business and their ability to drill wells financially.

Okay, all right. I'll take that as a yes.

No, Chase I didn't say yes.

You didn't say no. All right. I guess a lot of other things have been covered here, but just wanted to talk about CapEx and longer-term CapEx. Obviously the back half is kind of mostly maintenance. Maintenance, I think you've said is kind of below $10 million on an annual basis. As we look over the next couple of years and you think about building out internationally. How should we think about the moving pieces for CapEx? How much growth do you think that you need to spend over the next couple of years as you push internationally?

God, I wish I could tell you we’ve got immense of money, it's not going to be. I think I've said this in the last call or the call before, do not concern yourself with international CapEx. We're going to do it in a manner that's going to be very conservative, because that's just the way we operate. You're not going to see us announce a $10 million facility in Kazakhstan or someplace like that or anywhere. Okay? We're just not going to do that.

Okay. Is there anything to consider regarding the rental side? I imagine you probably won't need to focus on it in the near term, but do you anticipate any significant growth in rental over the next couple of years?

Not for legacy equipment. Obviously, we've got plenty of that. I've got a couple of very interesting products that I'm not going to discuss on the completion side that we have not introduced, but we intend to introduce. But, it's still not going to be a significant amount of money.

Okay. Understood.

But it will be incremental CapEx to be sure. I would stand by I think our earlier statement that 2021 looks like a $10 million CapEx year.

Got it. Okay. I’ll turn it back. Appreciate the color.

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Thanks everyone for joining the call.

Thanks everybody. Stay safe. Kind of looking forward to seeing everybody again when we can all get together. Stay well.

Thank you, speakers. Once again, ladies and gentlemen this concludes today's conference call. Thank you all for joining. You may now disconnect.