Cactus, Inc. Q1 FY2025 Earnings Call

Good day, everyone, and thank you for standing by. My name is RG, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cactus Q1 2025 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. I would now like to turn the call over to 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; Stephen 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 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 over to Scott.

Thanks, Alan. And good morning to everyone. I'm pleased with our strong start to 2025, which saw record levels of pressure control product revenues per rig, combined with record first quarter bookings and our Spoolable technologies business. The market outlook has changed considerably since we last spoke, but these first quarter records and our business fundamentals continue to demonstrate why we outperform market activity trends and support our expectations about our ability to continue to do so. We cannot control the change in the general outlook for our industry, but we can control our rapid response. I continue to be very proud of our associates' commitment to delivering for our customers, despite market and supply chain uncertainty. Some first quarter total company highlights include revenue of $280 million, adjusted EBITDA of $94 million, adjusted EBITDA margin of 33.5%. We paid a quarterly dividend of $0.13 per share, and we increased our cash balance to $348 million. I'll now turn the call over to Jay Nutt, our CFO, who will review our financial results. Following his remarks, I'll provide some thoughts on our outlook for the near term before opening the lines for Q&A. So Jay.

Thank you, Scott, and good morning, everyone. As Scott mentioned, total Q1 revenues were $280 million, which were up 3% sequentially, and total adjusted EBITDA was $94 million, up 1.2% sequentially. For our Pressure Control segment, revenues of $190 million were up 7.7% sequentially, driven primarily by customer drilling efficiencies, leading to record levels of products sold per rig followed. Operating income increased $3.5 million, or 6.9% sequentially, with operating margins decreasing 20 basis points and adjusted segment EBITDA increased $3.3 million, or 5.3% sequentially, with margins decreasing by 80 basis points. The margin decline was primarily due to reserves taken in connection with litigation claims. For our Spoolable Technologies segment, revenues of $93 million were down 3.6% sequentially on the expected lower domestic customer activity in the seasonally slow quarter, partially offset by increased international shipments. Operating income decreased $1.6 million, or 6.5% sequentially, with operating margins decreasing 80 basis points, due to lower operating leverage. Adjusted segment EBITDA decreased $1.8 million or 5% sequentially, while margins decreased by 50 basis points. Corporate and other expenses were $9.6 million in Q1, up $3.7 million sequentially, resulting from professional fees associated with the evaluation of growth initiatives with a focus on international expansion. Adjusted corporate EBITDA was $4.4 million of expense. On a total company basis, first quarter adjusted EBITDA was $94 million, up 1.2% from $93 million during the fourth quarter. Adjusted EBITDA margin for the first quarter was 33.5%, compared to 34.1% for the fourth quarter. Adjustments to total company EBIT during the first quarter of 2025 include non-cash charges of $6.1 million in stock-based compensation and $3.5 million for professional fees associated with growth initiatives. Depreciation and amortization expense for the first quarter was $16 million, which includes an ongoing $4 million of amortization expense related to the intangible assets resulting from the FlexSteel acquisition. During the first quarter, the public or Class A ownership of the Company averaged and ended the period at 86%. GAAP net income was $54 million for the first quarter versus $57 million during the fourth quarter. The decrease was largely driven by professional fees incurred at corporate. Book tax expense during the first quarter was $17 million, resulting in an effective tax rate of just under 24%. Adjusted net income and earnings per share were $59 million and $0.73 per share, respectively, compared to $57 million and $0.71 per share in the fourth quarter. Adjusted net income for the first quarter was net of a 25% tax rate applied to our adjusted pretax income. During the quarter, we paid a quarterly dividend of $0.13 per share, resulting in a cash outflow of approximately $11 million, including related distributions to members. Additionally, we made a cash tax payment and associated distributions of approximately $25 million in January related to deferred estimated 2024 taxes, as discussed during the fourth quarter call. We ended the quarter with a cash balance of $348 million, a sequential increase of approximately $5 million. This increase was lower than our usual cadence, due to the 2024 tax payment, the build of inventory in our Spoolable business in anticipation of seasonally stronger second and third quarters and some continued elevated inventory balances in our pressure control business to mitigate tariff impacts. Additionally, strong March revenues led to increased accounts receivable balances at quarter end. Net CapEx excluding the equity investment in Vietnam was approximately $9 million during the first quarter of 2025. In a moment, Scott will give you our second quarter operational outlook. Some additional financial considerations when looking ahead to the second quarter include an effective tax rate of 21% and an estimated tax rate for adjusted EPS of approximately 25%. Total depreciation and amortization expense during the second quarter is expected to be approximately $16 million with $7 million associated with our Pressure Control segment and $9 million in Spoolable Technologies. We are reducing our full year 2025 net CapEx outlook, including the $6 million equity investment, to a range of $40 million to $50 million, given the latest market uncertainty, while maintaining critical investments to support our manufacturing diversification strategy and enhance efficiencies in our Baytown manufacturing plant. We will continue to evaluate further reductions to this planned spend as the year progresses. Finally, the Board has approved a quarterly dividend of $0.13 per share, which will be paid in June. This covers the financial review and I'll now turn the call back over to Scott.

Thanks, Jay. I'd like to begin by clarifying our current understanding of the tariff rates that will impact our Pressure Control business and better quantify the import exposures that we are mitigating. By mid-next year, we expect the tariff impact to our business to be neutralized, and we are taking several near and medium-term actions to achieve this. We are increasing alternative sourcing of product where possible, rolling out our new wellhead design, but most importantly, we are ramping up production from our Vietnam facility and working with our customers to support these cost increases while ensuring on-time product delivery. For the past several years, we've paid a Section 301 tariff of 25% on goods imported from our Chinese manufacturing plant. Currently, we are paying an additional 45% or more on tariffs on our imports from China. Our products imported from Vietnam currently incur the new Section 232, 25% tariff applied to nearly all countries, the same rate that was applied to imports from our Chinese facility before the recent tariff increases. While we had expected no additional tariffs from Vietnam, the 25% tariff will replace the Section 301 tariff we had already been paying since 2018. So to be clear, we expect that sourcing from Vietnam will put us back into the same tariff position we've been operating under for the past several years. Moreover, we believe Vietnam will provide us with an advantage over the vast majority of our competitors who rely primarily on Chinese imports and do not have material US manufacturing. The dollar value of goods that we currently import from China exposed to tariffs is highly variable and changing rapidly, given these revised rates. But I can share a framework for how to approximate our total imports. In 2022, the last year we reported specific product cost of sales before the acquisition of FlexSteel, our pressure control product revenue represented approximately two-thirds of our total revenues. Our product gross margin can be found in historical filings from the same period. Both this product proportion of sales and the gross profit margin are close enough to recent results for us to utilize to approximate our total Pressure Control product cost of goods sold. As we've shared previously, about half of our product cost of goods sold relates to imports from China, and approximately 80% of our product costs are direct, which relates primarily to material costs and freight. These factors can be taken together to calculate the dollar value of our imports that the tariff expense applies to, which I think you'll agree is relatively small compared with the total size of our business today, particularly including the contribution of Spoolable Technologies. So, to reiterate, we expect to neutralize the increased tariff expenses by mid-next year. And although our margins may face modest compression between now and then, our inventory on hand and mitigating efforts will allow us to largely preserve our profitability on an absolute basis. I'll now move into our expectations for the second quarter of 2025 by reporting segment. Notwithstanding strong momentum in April in both segments for the second quarter, we expect pressure control revenue to be down low to mid-single digits versus the $190 million reported in the first quarter. The anticipated decline is largely due to moderating levels of product sold per rig, followed after a record first quarter and a decline in average activity levels. From speaking with our customers, we believe that second quarter average US land drilling activity will be down slightly from first quarter average levels and the industry will exit the second quarter with approximately 30 fewer land rigs operating than today. The activity decline is likely to continue as the year progresses and our customers reset their budgets, given weaker commodity prices and tariff impacts. Adjusted EBITDA margins in our Pressure Control segment are expected to remain stable at 33% to 35% for the second quarter. This adjusted EBITDA guidance excludes approximately $3 million of stock-based comp expense within the segment. Regarding our Spoolable Technology segment, we expect second quarter revenue to be up mid to high single digits from the first quarter. We believe normal second quarter seasonal expansion will more than offset the expectation of lower average US land activity levels. We booked record Q1 orders providing us increased confidence in this outlook. Sales to international locations were up 30% quarter-over-quarter driven by robust demand in Canada where we had our strongest quarter since acquiring this business. In April, we also produced and shipped our first commercial order of sour service pipe for high H2S applications. We're excited about the opportunities of this product, particularly in the Mideast market. We remain optimistic about our business performance, despite uncertainty in the general macro environment. As a reminder, we have a high-quality customer base in our Spoolable Technology segment with approximately 70% of our revenue coming from majors, large EMPs and NOCs. These customers tend to be more resilient in their purchasing practices in a private and small EMPs in a lower commodity price environment. We expect adjusted EBITDA margins to be approximately 35% to 37% for Q2, which excludes $1 million of stock-based comp in the segment. Given our US manufacturing footprint, our Spoolable Technology business is much less directly impacted by tariffs than our Pressure Control business. However, we have experienced an increase in steel input costs year to date. Although most of our steel inputs are sourced domestically, markets have adjusted pricing to reflect tariffs regardless of where the steel is sourced. Adjusted corporate EBITDA is expected to be a charge of approximately $4.5 million in Q2 which excludes $2 million of stock-based comp. Regarding our international expansion plans, we remain committed to establishing an international business but have no further updates that we can share at this time. I can assure you our leadership is very focused on this initiative. In conclusion, we had a strong start to the year in both segments. Although the industry outlook has clouded considerably in the last 90 days, I remain confident that we will deliver strong returns in cash and cash flows through this cycle. Given our supportive customer base and our industry-leading diverse supply chain and manufacturing cost profile, my management and I are unfortunately not strangers to making the difficult decisions necessary to preserve returns during market cycles such as this. And as we've shown in prior downturns, one positive implication is that operators tend to high-grade suppliers such as Cactus in times of supply uncertainty. We have received several recent inquiries about expanding business with customers in areas we have not historically serviced, which supports this thesis. And with that I'll turn it back over to the Operator, and we can begin Q&A.

We will take a brief moment to gather the Q&A list. Your first question is from David Anderson at Barclays. Please proceed.

Hey David, how are you?

Vietnam, it seems like you will completely shift from China in about a year. I'm interested in the situation in Bossier City, which seems to offer greater structural advantages. However, you've mentioned some increased costs due to importing steel. Could you explain how you've managed that so far? Have you found alternative sources? Also, I'm curious about the current cost advantage for customers in Bossier City compared to China. What does that comparison look like?

David, we have never referred to Bossier City as a low-cost operation. It is characterized by fast turnaround and a strong manufacturing environment, which actually indicates higher costs. What it does protect is our market share by ensuring timely deliveries. I can share that the steps we are taking, including the shift to Vietnam for sourcing for the US and other initiatives, will mean that our supply chain will still largely rely on non-Bossier City manufacturing, even though they represent 50%. I don't anticipate that we will push Bossier much beyond 50%. The main reason is the limited availability of US manufactured steel. While Bossier does purchase its steel domestically, this doesn't imply that the steel is sourced from the US.

I understand that. We often discuss passing on higher input costs to customers. I don’t mean to downplay your performance in the first quarter, but I’m curious if you noticed any customers trying to get ahead of these tariffs during that time. I heard Jay mention some efforts to adjust supply chains in anticipation. I'm interested in how your customers view this situation currently. In previous discussions, we often mentioned confidence in being able to pass these costs on to customers. Do you still believe that customers can handle all of this? I understand you're a small part of this AFE, but I'm just interested in how you think your customers will act in this environment. Thank you.

Yes, we may not have made this clear before. Once Vietnam takes over from China, we expect to be largely neutral regarding tariffs. I want to emphasize that during this transitional phase, alongside our various sourcing efforts, I am confident that our customers will manage to adapt. Although our profit margin percentages may decrease, our overall profitability will remain steady. So, yes, I am confident in that.

Great. Thank you, Scott.

David, you had another. Yeah, what was your first question?

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

Thanks. Good morning, everyone. I appreciate all the details provided. My first question is regarding what Dave asked. When reflecting on previous downturns and cycles as well as discussions with customers, it seems that you've never lost a customer permanently. They have generally remained loyal due to the quality of the product, among other factors. What do you anticipate in this current downturn? Are there any noticeable changes in customer behavior that you expect as they navigate this uncertain period?

Well, I’m going to address David's initial question. Are we seeing customers trying to expedite their purchases? Yes, we have received numerous requests from customers to do so, all of which we have denied. They are attempting to do what we are trying to do, but we cannot accommodate their requests because it would be unfair to our other customers to exhaust our pre-tariff inventory. I apologize for not responding sooner. And then, Stephen, you would like to know…

It seems that while we don't discuss market share anymore, it's evident that it's strong, and you play a vital role for your customers. Therefore, I would assume they remain loyal to you instead of seeking lower prices due to the challenging environment, as they have done in previous cycles. I just want to confirm if that is a correct understanding.

Yes, I would say that it is an accurate conclusion. Our major customers are sticking with us. There are certainly competitors who may try to take advantage of our request for support, but I don't see this as being different from how things have been in the past. Our best defense has been our transparency with customers, and we've always maintained that approach. We don't exploit them. To my knowledge, we are the only supplier capable of guaranteeing delivery and sustainability. While some competitors might claim they won't pass on tariff impacts, once they run out of their inventory, they will have to procure replacements at a higher cost or not at all. The most critical factor for our customers is the sustainability of the supply chain, and we truly are the only ones able to provide that.

Thank you. My second question is about potential M&A opportunities in the current environment. The cash balance looks strong, and your focus is on proprietary, accretive, cash-generating transactions. What do you anticipate in this macro environment? Do you believe this will create opportunities for you, considering your robust balance sheet? Any insights you can provide on this topic would be appreciated.

Yes, Steve, it's clear that private equity is currently unable to provide favorable deals. Therefore, I believe that any investment in oilfield services owned by private equity is available at a reasonable price. FlexSteel was a unique opportunity, and while there may have been one or two similar instances, my current focus remains on our industry. I wouldn’t rule out the possibility of another FlexSteel-like opportunity, as I anticipate more such opportunities will arise from private equity. However, our primary focus is on our own industry right now.

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

Yes, good morning. I’m doing well. I missed the revenue guidance for pressure control in the second quarter. Could you repeat that? Also, regarding the impressive EBITDA dollar preservation, Dave asked about pushing pricing. I’m also interested in knowing if the startup costs in Vietnam are significant. Will they impact near-term profits, or are they negligible?

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

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

De minimis tariffs. Anyway, I don't want to use the word de minimis. So our second quarter guide, revenue wise, Alan?

Was down low to mid-single digits.

Yes, okay.

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

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

That's all that's left is the final IT then.

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

I was interested in the supply chain in Vietnam or the region and your ability to move away from the Chinese supply chain. Will you be able to source forgings and castings from Vietnam or other countries to completely shift away from China?

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

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

Your next question comes from the line of Arun Jayaram of J.P. Morgan. Please go ahead.

Good morning.

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

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

Got it, got it. And you feel like you can get there by the middle of 2026?

The only thing really standing between us and that is the fact that we have to wait for API. API has a requirement that you have to be up and running for four or five months.

Four months.

Yes, we need to conduct an internal audit, which we've already started. Once we integrate the API and finalize our monogram, we will be able to offer monogram products. However, we are already shipping, albeit not fully assembled and tested. We need to complete the final touches in Bossier before we can apply the monogram. We must add value in Bossier. Once we have the API monogram, it can ship independently without any extra costs in Bossier City. Yes, the operation in Vietnam was designed to fully replace our US requirements.

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

Yes, we're operating on a standard cost basis, but we're adjusting our standards due to the unusual tariff increases, and we have a significant amount of inventory acquired before the tariffs. As we update our standards and account for these costs, we will also benefit from the amortization of the standard cost adjustments, which will offer some relief in the latter half of the year. We typically turn our inventory about twice each year, so we expect to experience some margin compression in the second half. However, as we diversify our supply chain and sourcing strategies, that should help lessen the effect on our margins.

Great, thanks a lot.

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

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

Good morning.

I just wanted to see if you could share your thoughts on the potential ongoing Section 232 investigation that the administration has ordered by the Secretary of Commerce to conduct.

The additional 232 is steel, aluminum and derivatives, right?

I believe the Secretary of Commerce has been tasked with carrying out a continuous investigation into the effects on the US government and the economy.

Oh, I'm sorry to see how I did read that. I'm not sure I can really opine on that, but I don't want to get political, there's only one conclusion. The US does not have enough steel-making capacity to avoid imports. If we're going to ramp up manufacturing, we'll need to rely on countries willing to sell us steel. So the answer is it has to be inflationary. I don't see any way to avoid that. As an anecdote, we've always been a large consumer of forgings for our industry, dating back to our Wood Group and Ingram Cactus days. Those forged companies capable of producing this unique sort of steel are either out of business or have shifted their manufacturing to munitions. A good friend of mine, who owns the largest forge company in our area, took us on a tour, and he is so full of government work that he told me he's never going back. The selling price is attractive and the sustainability is pretty much assured, and he’s just not interested in the volatility of oilfield service requirements. So they can spend as much money as they want. That's the conclusion; there isn't any steel.

Okay, so the idea is that there wouldn't be additional sanctions or tariffs related to that investigation. It just isn't.

I believe the existing 232 tariffs are likely to be inflationary. More tariffs will only contribute to inflation, as there is no substitute for imported steel. Currently, I don't see anyone constructing a steel mill that would meet our industry's needs.

Okay, thank you very much for the color. I'll hand the call back to the Operator.

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

Good morning.

Good morning, everyone. I have a question regarding the sour flexible pipe, specifically the FlexSteel pipe that you shipped. This seems to be opening up a new market, and I would like to hear your thoughts on how significant this order is and how much you believe this market can expand in the next few years, especially considering the abundance of sour oil available.

Yes, Steve. Regarding the North American market, we believe it will continue to expand over time. We see it as a growing opportunity in North America. However, due to the quality of our product, we are not the most affordable option. Generally, customers choose FlexSteel for its reliability and durability, and they are prepared to pay a premium for that. While sour service may account for a small percentage of our sales initially, we expect it to increase over time. More immediately, we anticipate significant developments once we complete some qualification testing, likely within the next twelve months, particularly for the Middle East, where most production has high hydrogen sulfide content. We see considerable opportunities in that region. Traditionally, our products have been utilized mainly in water injection applications, but we are actively promoting the use of our pipe in both unconventional and sour service applications. We are quite enthusiastic about the potential in this area.

Right, yes. And that's kind of what I was pointing towards with the Middle East using a lot more pipe due to its sour classification. I'll turn it back to the Operator. Thank you.

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

Okay, thanks everybody for listening. I know this tariff issue is on everybody's mind. If you were all in here, I'd pat you on the head and tell you that I'm very comfortable that we have this under control. I also would add that historically downturns have been good for our business. They've always created opportunities with new customers, and we're already seeing those opportunities right now, in fact, a little earlier than I had anticipated. So just as we've always come out of these periods stronger, I'm really comfortable that we'll do the same. Anyway, everybody have a good day, and thanks for calling in.

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