Ladies and gentlemen, thank you for standing by, and welcome to the Cactus Quarter Three 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to turn the call over to our speaker today, Mr. John Fitzgerald, Director of Corporate Development and IR. You may begin.

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 Steve Tadlock, our Chief Financial Officer. Also joining us today are Joel Bender, our 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 now available on our website. Please note that any comments we make on today's call regarding projections or expectations for future events are forward-looking statements covered by the Private Securities Litigation Reform Act. Forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to review our earnings release and the risk factors discussed in our filings with the SEC. 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. Reconciliation of these non-GAAP measures to the most directly comparable GAAP measures are included in our earnings release. And with that, I will turn the call over to Scott.

Thanks, John, and good morning to everyone. During the third quarter, drilling activity continued to move higher against the backdrop of strengthening commodity prices. I was particularly proud of our incremental margin performance in both product and rental business lines. Cactus remains extremely well positioned to participate in what we believe will be a multiyear up cycle for the industry, and the third quarter provided evidence of that. We are preparing now with people and inventory for what is increasingly looking like a very busy 2022. In summary, third quarter revenues increased 6% sequentially with growth in each of our revenue categories. Adjusted EBITDA was up 11% sequentially. Adjusted EBITDA margins were 28%, up 120 basis points, sequentially. We've had a quarterly dividend of $0.10 per share and ended the quarter with $302 million in cash and no debt. I'll now turn the call over to Steve Tadlock, 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 up for Q&A. So Steve?

Thanks, Scott. Q3 revenues of $115 million were 6% higher than the prior quarter. Product revenues of $75 million were also up 6% sequentially, driven primarily by an increase in rigs followed. Product gross margins at 34% rose approximately 200 basis points sequentially as cost recovery efforts offset inflationary pressures across the supply chain. Rental revenues were $15 million for the quarter, up approximately 4% from the second quarter of 2021, while gross margins increased 12 percentage points sequentially due primarily to lower repair and equipment activation costs, as well as lower depreciation as a percentage of revenue. Field service and other revenues in Q3 were $25 million, up 6% versus the second quarter of 2021. This represented 28% of combined product and rental-related revenues during the quarter, which was slightly above expectations. We expect field service revenue to be 27% to 28% of product and rental revenue during the fourth quarter of 2021. Gross margins were 23%, down 320 basis points sequentially with the reduction largely attributable to lower utilization associated with time spent on new higher training, higher fuel and remobilization costs, and overtime required to meet increased activity levels. SG&A expenses were $12.1 million during the quarter, up $800,000 versus the second quarter. The sequential increase was primarily attributable to higher salaries and wages, increased professional fees, and IT system upgrade costs. SG&A expenses were 10.5% of revenue compared to the same percentage during the second quarter. We expect SG&A to be approximately $12 million in Q4 2021, inclusive of stock-based compensation expense of approximately $2 million. Third quarter adjusted EBITDA was approximately $32 million, up 11% from $29 million during the second quarter of the year. Adjusted EBITDA for the quarter represented nearly 28% of revenues compared to 26.5% for the second quarter. Adjustments to EBITDA during the third quarter of 2021 included approximately $2 million in stock-based compensation. Depreciation expense for the quarter was $9.1 million, a similar amount is expected for the fourth quarter. We reported income tax expense of $3.3 million during the third quarter, which is inclusive of a $0.7 million income tax benefit associated with a partial release of the valuation allowance during the period and a $0.5 million tax benefit related to the finalization of our 2020 tax returns. During the quarter, the public or Class A ownership of the Company averaged 77% and ended the quarter slightly higher at 78%. Barring further changes in our public ownership percentage, we expect an effective tax rate of approximately 22% for Q4. GAAP net income was $17.2 million in Q3 2021 versus $14.8 million during the second quarter. We prefer to look at adjusted net income and earnings per share, which were $14.7 million and $0.19 per share, respectively, during the third quarter versus $12.3 million and $0.16 per share in Q2. The Q3 adjustments included the application of a 28% tax rate to our adjusted pretax income generated during the quarter. We estimate that the tax rate for adjusted EPS will remain at 28% during the fourth quarter of 2021. During the third quarter, we paid a quarterly dividend of $0.10 per share, resulting in a cash outflow of nearly $8 million, including related distributions to members. The Board has approved a dividend of $0.10 per share to be paid in December of this year. We ended the third quarter with a cash balance of $302 million. For the quarter, operating cash flow was approximately $9 million, and our net CapEx was $4 million. Given issues with the global supply chain and extended transit times, we have strategically increased our levels over the last two quarters. Our goal is to secure equipment on a timely basis in anticipation of greater customer activity. During the third quarter, we made our annual TRA payment and associated distribution of $12.5 million. As a reminder, the payment is reflective of cash tax savings that occurred in 2020 as a result of our corporate structure. The next such payment isn't expected to occur until mid-2022. Capital requirements for our business remain modest, and we will continue to exercise discipline with regards to growth CapEx. As such, our net CapEx guidance for 2021 remains in the range of $10 million to $15 million. That covers the financial review. And I'll now turn you back to Scott.

Thanks, Steve. As previously mentioned, we reported sequential growth across all our revenue categories during the third quarter, while improving overall margins to their highest level this year despite extraordinary supply chain challenges. Following recent conversations with customers, I'm more bullish on U.S. activity levels than I've been in some time. Assuming commodity prices remain supportive and key supplies such as OCTG are available, we would not be surprised to see the U.S. land rig count grow by an additional 10% by the end of the first quarter of next year. Despite nearly all of the U.S. market rig additions coming from private operators who have historically represented a smaller portion of our business, we reported market share at 42% during the period. And what was a testament to our sales, operations, and supply chain teams, we improved product margins by 200 basis points during the quarter despite historic levels of material and freight inflation and the increased use of our higher cost Bossier City facility. Looking to the fourth quarter, we currently anticipate our rigs followed to increase by approximately 10%. We remain of the opinion that our publicly traded customers will respond to the improved commodity environment as we head into 2022 and would expect to see another double-digit increase in the beginning of 2022. Fourth quarter product revenue is expected to be up at least 5% sequentially based on current expectations. Regarding the timing of our latest cost recovery efforts, we expect relatively flat EBITDA margins in Q4 despite continued inflation headwinds. Note that revenue generated per rig typically declines marginally during the fourth quarter as completion activity lags drilling around the holidays. Additionally, in a rising rig environment, product revenue per rig can lag as rigs are fully onboarded. Lastly and importantly, we have noted a modest decline in wells drilled per rig, a trend that could continue into next year if overall third-party service execution wanes. Margin performance will continue to be a function of our ability to adjust prices to compensate for the intense inflationary pressures being experienced in labor, steel, and freight. While successful on this front to date, further steps are underway to achieve incremental margins consistent with historical norms. In recent weeks, conversations with customers have increasingly focused on the ability to secure equipment to meet drilling plans. We've always excelled in our ability to timely and safely deliver. This competitive strength resulting from our unique supply chain model becomes even more important during times in which the industry struggles with overall shortages. Although cost inflation has been well telegraphed throughout our industry and beyond, naturally not all customers welcome cost recovery efforts. As we've stated previously, this organization is focused on returns and not market share. Regardless, it is our belief that 2022 will be a year of heightened pressure on delivery and execution, which will reward those of us with significant domestic infrastructure, best-in-class products, and differentiated service and execution. On the rental side of the business, revenues increased by less than we had originally anticipated for the quarter, but were still up 4% sequentially during a period of relatively flat domestic completion activity. Customers have been relying on their inventories of drilled but uncompleted wells for the last several quarters, but with the DUCs at their lowest level since early 2017, that trend appears to have ended. However, one positive of the more moderated growth is that it generally leads to slightly more favorable EBITDA margins, resulting from reduced reactivation costs. Our rental business is witnessing some positive dynamics, which should lead to above-market growth during the fourth quarter. While the tail end of the fourth quarter is normally subject to some year-end budget exhaustion, we currently anticipate rental revenue to be up at least 10% during Q4. Rental EBITDA margins are expected to be in the low to mid-50% range during the period. This rental market remains highly competitive, but should activity move forward in 2022 along with the rig count, there may be line of sight to improve pricing dynamics, something we haven't seen since early 2020. Our reputation for providing equipment safely and reliably should become an important point of differentiation in the coming year as some service providers struggle to execute. Regarding our expansion into the Mid East, we were extremely pleased to have generated first revenue during the third quarter. As previously disclosed, this has been in concert with NESR, who has been active in the development of unconventional fields in Saudi Arabia. Our agreement with NESR was important for Cactus to quickly gain access to Aramco and has allowed us to prove our technology and reliability with a key customer. This represents an important first step for our entrance into the area, and we're excited about our overall potential in the region. We continue to evaluate the shipment of additional assets into the region given the increase in unconventional activity while we pursue product sales. In field service, revenues continue to be driven by both product and rental activity. Revenue as a percentage of product and rental revenue is expected to decrease marginally on a sequential basis. This segment typically witnesses lower margins during the final quarter due to seasonal elements. And accordingly, we expect to see EBITDA margins in the low to mid-20% range during the fourth quarter. We would expect margins to approach more normalized levels in the first quarter of next year as labor utilization returns to traditional levels. I'd like to close our prepared remarks by highlighting a few key points. The supply chain issues that have plagued most manufacturing businesses have not abated. Increased costs will continue to represent a headwind for the next few quarters at least. The size of that impact will depend on the degree of further cost increases and our ability to continue working with our customers to compensate us for the challenges we face in ensuring on-time deliveries. That said, we remain advantaged due to our Bossier City manufacturing capabilities, unparalleled experience in the relationships of our operations team. We simply don't tolerate miscommitted deliveries, and no one is better prepared to handle these issues in the face of increased pressures arising from changes in the amount and timing of deliveries. On the labor front, the market continues to tighten. However, we believe that Cactus offers unique opportunities for our associates, and we've always been successful in recruiting key talent. There's been no change in our opinions regarding M&A. We continue to believe that consolidation within our industry makes sense, and this team will carefully monitor and evaluate opportunities to the extent they become available. As I remind you regularly, management are long-term investors in this business and are highly aligned with our shareholders. As activity rebounds, our team will continue to evaluate capital deployment with returns and free cash flow as our main priorities. In summary, we were extremely pleased with the cost recovery support from our customers in both our product and rental revenue categories. Additionally, our optimism regarding industry activity levels continues to improve. We remain ready to take advantage of our favorable positioning as the ongoing activity recovery continues.

Our first question comes from the line of Chase Mulvehill from Bank of America.

I guess first question, obviously, you talked about the supply chain challenges and other kind of frictional costs around inflation and things like that. So I guess maybe first question is, I asked you this last quarter, I'm going to ask you again, is today better or worse than yesterday from a supply chain friction? And then what are you doing to continue to manage the supply chain? And how easy is it for you to continue to push along price increases to offset kind of inflationary costs?

I think you snuck three questions in there, Chase.

They're all related.

The first question is straightforward. The situation is worse than it was when you last inquired. I believe this quarter has been significantly worse compared to previous quarters, which makes me particularly proud of the team's efforts to improve our incremental margins. Regarding how we're addressing the supply chain, given that our competitors are on this call, I won't provide extensive details. However, we have Bossier City and we implement various strategies, but I prefer not to discuss them in detail. What was your last question?

Ability to continue pushing along prices?

Did you forget? Well, I'm not going to discuss pricing, but having told you now that cost increased by more than we expected in the third quarter, but our margins went up. That should give you some indication that we've been successful. That's a smart answer, Chase.

Okay. All right. And then when you think about activity, and I think you said up 10% on rig activity between now and kind of the end of the first quarter, let's call it, roughly 50 rigs, horizontal rigs. So could you maybe kind of characterize what you're seeing of those 50 rigs? Like, are those more public, private? Just trying to understand the mix there between publics and privates.

The third quarter was primarily private. In the fourth quarter, we anticipate an increase in participation from public companies.

Our next question comes from the line of Scott Gruber from Citigroup.

So just to check, the product forecast as rigs followed up 10% and revenues of at least 5%. Did I hear that correctly?

You did.

Got you. And just some additional color on the revenue per rig trend, obviously taken down a little bit. Is that a mix issue with more privates in the mix and they just tend to drill a little bit slower? Is it supply chain issues starting to impact everybody? And is any fluctuation with wellhead sales driving that number as well?

Yes, that’s a very good question with a straightforward answer that has many components. In general, we observe that private companies drill fewer wells per rig each month compared to public companies, which isn't particularly helpful. Additionally, we keep an eye on the well efficiency of our customers, and for the first time in several quarters, we noticed a decline in rig efficiencies in Q3. By this, I mean there were fewer wellheads being shipped out per month per rig than we’ve seen throughout the year and possibly over the last two years, which was a surprising decline. As the drilled uncompleted wells started to decrease, the demand for production trees also diminished. This combination of overall rig efficiencies likely stems from the fact that newly added rigs might be less efficient, crews may be performing less effectively, or it could be related to the presence of more private companies in the overall mix. Ultimately, we've noticed that the reduction in drilled uncompleted wells has significantly impacted our revenue per rig. Looking ahead, both my team and I believe, based on discussions with our core public customers, that we will see the public companies reemerging as we approach 2022.

Got you. So yes, just in terms of trends.

There's hope.

Go ahead. It's okay. And I was going to ask about the 2022 trend with publics coming back and do you have a stabilization in the production presales such that, that revenue per rig trend should start to stabilize? Or do you expect it to potentially degrade a little bit more in Q1 and Q2?

Yes, I think that fourth quarter will be challenging just because of seasonality. I mean in the best of times, people just tend to put on fewer production trees in the fourth quarter. They take a couple of days off as well, which is not helpful. So I don't expect to see great results in the fourth quarter. I'm much more optimistic as we get into the first and second quarters of next year, seeing us return to our historic levels. You're going to have the benefit of some cost recovery.

Got you. And then just one additional one. You and peers have been building extra inventory just given the issues on the supply chain side. Is that coming to an end? Do you have some more build to go? And how are you thinking about managing inventory levels after we get past all these supply chain loads, do you bring them down, you kind of keep them as an insurance policy? How are you thinking about it longer term?

Currently, the industry is experiencing significant stress due to shortages. We've always been opportunistic, and with our substantial cash reserves, it’s an advantageous time for us to invest that cash. Additionally, we are facing historically high levels of in-transit inventory, which refers to inventory at sea that we are unable to access. I'm looking at Steve Tadlock and believe we have about three times the normal inventory that is in transit for an extended period, which is not helping our situation. We need to address this challenge. Regarding your broader question about the future of inventory levels, I do see them returning to normal. Once Joel gains more confidence in the supply chain and transit times align more closely with historical averages, we can expect inventory levels to decrease back to our typical run rate.

Yes. I would just add that inventory is determined by expected sales rather than past sales. Based on our outlook for 2022, we are taking advantage of that with our expectations moving forward. Working capital as a percentage of annualized revenues was quite solid this quarter, aligning with our average of 25% to 27%. We reported 26% in Q3, and in Q4, we anticipate it will be closer to about 27.5% of annualized revenues.

Our next question comes from the line of Stephen Gengaro from Stifel.

Two things for me. Year-to-date, obviously, we've talked about this public-private mix. And I know historically, your relationships tend to be very sticky. Are you seeing that same stickiness with the private operators as you have historically with the public?

Yes, sir.

Okay. Good. And then as we think about next year in aggregate, I know you gave some good color on the beginning of the year. Are you seeing the same type of expectations as we have been hearing from many of the frac companies like looking at kind of a 20% plus rise in spending and probably a bit lower increase in activity? Or is your insight different than that?

So I have to be honest, I don't really listen to the pressure pumpers cause. I'm looking at my man, John Fitzgerald here. Is that 20%, and I assume that includes what they considered to be inflation? So what's the real activity increase they're projecting, having said?

Probably close to half of that.

So 10%. I would be very surprised if our frac activity was only up 10% next year. It's going to be better than that. And I'm talking about excluding inflation, I think it would be better than that.

Our next question comes from the line of Ian MacPherson from Piper Sandler.

To follow on Stephen's question, it is an emerging disconnect, I think, between expected rates of activity increase in E&P spending that there's not enough money and 20% E&P spend growth to accommodate the service and product cost inflation that's happening plus 20s activity, it just doesn't fit. So I'd be curious to see how that unfolds. But my question is different. Really, your market share has sustained in the low 40s for about a year now. You cited OCTG as a specific threat or bottleneck that could grab and growth over the near term, but I was going to ask if shortages in your niche as well could emerge. And if you could actually outcompete the other 60% or so of the market on deliverability in this tight supply chain market and actually take more market share, not just on the basis of premium differentiation and efficiency, but also just sheer availability and deliverability of wellheads.

That's the plan.

Okay. Do you see evidence of competitors stumbling on deliverability out there today? Is that an abstract or a real opportunity?

Yes, we are seeing some of that, Ian.

And then I was going to ask also you...

Ian, don't ask me too many more questions about my competitors.

Okay. This one is only for Cactus. You're up and running. How are you thinking about scalability of that opportunity going into 2022?

I think that you're talking about just within the kingdom or beyond the kingdom?

Yes, sure. Total international.

Yes. I think as I've said before, our hope and our plans are to continue the expansion in the Mid East with an ASR. We're using Saudi kind of as our test case. And the performance has been very good, very pleased with it. I think that we'll continue to deploy more assets in Saudi. I can't see exactly when. And I think you'll see us deploy assets in other areas of the Mid East in conjunction with NES. I also feel increasingly optimistic that we'll turn some of this exposure into product sales later next year.

Our next question comes from the line of an unidentified analyst from Tudor, Pickering, Holt.

My first one is on M&A, and you talked about the continued need for M&A and likely continuing to evaluate deals. And I guess my question is, in this commodity price environment, it feels like stellar expectations have probably gone up significantly. So just curious if you could frame just generally speaking, where bid-ask spreads sit today and if the commodity price environment is hindering the likelihood of M&A over a near-term horizon maybe the next 12 months at all?

We haven't had many bid-ask scenarios, so I can't speak from experience. It seems logical that sellers might expect higher offers, but we could also pay more with our currency. I don't think we're at a disadvantage given the improving macro environment. In fact, I feel the opposite because if our company continues to perform well, I believe our investors will keep rewarding us. As long as they do, we'll be in a great position for M&A. This brings me to a question you haven't asked: why not distribute some of the over $300 million, especially since we're expecting positive free cash flow in the fourth quarter? My usual response is that we are the largest shareholders and I personally appreciate dividends. However, I still see opportunities to invest that cash in M&A. I've asked for your patience as we are careful with our spending, but that doesn't mean we're unwilling to invest. We are actively looking for opportunities.

Well, you answered both my questions there. Maybe I'll sneak one in on market share, 40 to 50 rigs being added through Q1 based on the 10% metric that you provided. I suspect as the public start to come back a little bit more in the coming months that the market share probably has room to move higher. But just curious how you frame that for Cactus over the next couple of quarters?

I think your conclusion was correct.

There are no further questions at this time. Please continue, Mr. Scott Bender.

Again, thank you, everybody, for your continued attention to Cactus and interest in Cactus, and we do look forward to seeing you, hopefully, in person over the next 12 months. Everybody, have a good day.

Ladies and gentlemen, this concludes today's conference call. Thank you, everyone, for participating. You may all disconnect.