Cactus, Inc. Q3 FY2025 Earnings Call

Good day, and thank you for standing by. Welcome to the Cactus Quarter 3 2025 Earnings Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Alan Boyd, Director of Corporate Development and Investor Relations. Please go ahead.

Thank you, and good morning. We appreciate you joining us on today's call. Our speakers will be Scott Bender, our Chairman and Chief Executive Officer; and Jay Nutt, our Chief Financial Officer. Also joining us today are Joel Bender, President; Steven Bender, Chief Operating Officer; Steve Tadlock, CEO of FlexSteel; and Will Marsh, our General Counsel. Please note that any comments we make on today's call regarding projections or expectations for future events are forward-looking statements covered by the Private Securities Litigation Reform Act. Forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. These risks and uncertainties 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. I'm extremely pleased with our third quarter performance. Pressure Control margins improved sequentially due to our tariff mitigation and cost reduction efforts, while Spoolable Technologies sales and margins exceeded expectations on higher international shipments. These outcomes are the result of extensive efforts and focus from our team, and I'm very grateful. Some third quarter total company financial highlights include revenue of $264 million, adjusted EBITDA of $87 million, adjusted EBITDA margin of 32.9%. We paid a quarterly dividend of $0.14 per share, and we increased our cash balance to $446 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 line for Q&A.

Thank you, Scott. As Scott just mentioned, total Q3 revenues were $264 million, a sequential 3.5% decline, and total adjusted EBITDA was $87 million, approximately flat from the second quarter. For our Pressure Control segment, revenues of $169 million were down 6.2% sequentially, driven primarily by lower frac rental revenues as we continue to focus on our consumable business. Operating income increased $2.2 million or 5.2% sequentially, with operating margins increasing 290 basis points and adjusted segment EBITDA was $2.1 million or 3.9% higher sequentially, with margins increasing by 320 basis points. The margin increase was primarily due to the implementation of cost reduction initiatives, tariff mitigation efforts, and reduced legal expenses. For our Spoolable Technologies segment, revenues of $95 million were down 1% sequentially on lower domestic customer activity levels, mostly offset by increased international sales. Operating income decreased $2.2 million or 8% sequentially, with operating margins decreasing 210 basis points due to higher input costs. Adjusted segment EBITDA decreased $2 million or 5.2% sequentially, while margins declined by 160 basis points. Corporate and other expenses declined $0.5 million to $9.1 million in Q3, which included $3.2 million of professional fees associated with the announced plan to acquire a majority interest in the surface Pressure Control business of Baker Hughes. Adjusted corporate EBITDA was down slightly to $4.2 million of expense. On a total company basis, third quarter adjusted EBITDA was $87 million, flat from the second quarter. Adjusted EBITDA margin for the third quarter was 32.9% compared to 31.7% for the second quarter. Adjustments to total company EBITDA during the third quarter of 2025 include noncash charges of $6.1 million in stock-based compensation and $3.2 million for transaction-related professional fees and $247,000 for continued severance actions to right size the organization for lower activity levels. Depreciation and amortization expense for the third 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 third quarter, the public or Class A ownership of the company averaged and ended the period at 86%. GAAP net income was $50 million in the third quarter versus $49 million during the second quarter. Book tax expense during the third quarter was $14 million, resulting in an effective tax rate of 22%. Adjusted net income and earnings per share were $54 million and $0.67 per share, respectively, during the third quarter compared to $53 million and $0.66 per share in the second quarter. Adjusted net income for the third quarter was net of a 25% tax rate applied to our adjusted pretax income, consistent with the prior quarter. During the quarter, we paid a quarterly dividend of $0.14 per share, resulting in a cash outflow of approximately $11 million, including related distributions to members. We ended the quarter with a cash balance of $446 million, a sequential increase of approximately $40 million. Inventory build has represented a working capital headwind year-to-date, which has decreased our usual pace of cash flow with most of the increase in the carrying value being due to tariffs rather than increased quantities of inventory on hand. Net CapEx was approximately $8.2 million during the third quarter of 2025. In a moment, Scott will give you our fourth quarter operational outlook. Some additional financial considerations when looking ahead to the fourth quarter include an effective tax rate of 22% and an estimated tax rate for adjusted EPS continuing at 25%. Total depreciation and amortization expense during the fourth quarter is expected to be approximately $16 million, with $7 million associated with our Pressure Control segment and the remaining $9 million in Spoolable Technologies. Our full year 2025 net CapEx outlook remains in the range of $40 million to $45 million, including the $6 million equity investment made in Vietnam. Additionally, the annual TRA payment and related member distribution was delayed to October of 2025 from our previous plan to settle in the third quarter. The payment and related distributions were made earlier this month and totaled approximately $23 million. Finally, the Board has approved a quarterly dividend of $0.14 per share, which will be paid in December. That covers the financial review, and I'll now turn the call back over to Scott.

Thanks, Jay. I'll begin by touching on our current understanding of the highly fluid tariff situation. Through the third quarter, there were no substantial changes in the tariff rates applied to our goods, which were detailed on last quarter's call. We continue to pay an incremental 70% tariff on most goods imported from China for a 95% total tariff rate and a 50% tariff on most goods imported from Vietnam. We're seeking further clarity on recent announcements of tariff reductions in the Far East. But based upon the latest information, we expect some reduction in the fentanyl-related tariff rate from China. That said, the Section 232 tariff, which remains at 50%, is far more impactful to our operations. At this point, we are several months into our efforts to mitigate the tariff impact to our business. I'm proud of the work our team has done to flex the organization and supply chain to improve profitability, and I'm appreciative of the support of our customers and vendors throughout this process. Our Vietnam plant is increasing its pace of shipments, and we still expect substantial displacement of Chinese shipments into the U.S. by mid-next year as we await the finalization of our API certification. I'll now move on to our expectations for the fourth quarter of 2025 by operating segment. During the fourth quarter, we expect Pressure Control revenue to be relatively flat versus the $169 million, excuse me, reported in the third quarter, aided by modestly increased activity in our frac rental business, which offsets normal holiday slowdowns. We believe that most industry activity declines for 2025 are behind us and expect the fourth quarter U.S. land rig count to drift modestly lower through the year-end. Adjusted EBITDA margins in our Pressure Control segment are expected to be in the 31% to 33% for the fourth quarter, staying relatively stable from the third quarter and inclusive of typical seasonal declines in field service utilization. This adjusted EBITDA guidance excludes approximately $3 million of stock-based compensation expense within the segment. Shifting to our Spoolable Technologies segment, we are particularly pleased with the progress we're making on the international side of the business. We achieved our highest international revenue since the acquisition during the third quarter, which served to further our geographic diversification. We expect this momentum to continue. We were recently awarded our first gas service order from a major Middle East NOC and shipped a large order for a new customer in Africa. Additionally, we recently booked our first commercial order in another major Middle East market for shipment in the first half of 2026, which is our first sour service order in the region. We're further encouraged by customer interest in newly developed products. For the fourth quarter, we expect total Spoolable Technologies revenue to be down low double digits sequentially, which is consistent with the typical seasonal pattern in this business. We expect adjusted EBITDA margins to be approximately 34% to 36% for Q4, which excludes $1 million of stock-based compensation in the segment, moderating third quarter levels on lower volume. Adjusted corporate EBITDA is expected to be a charge of approximately $4 million in Q4, which excludes $2 million of stock-based compensation. Regarding our planned acquisition of a majority interest in the Surface Pressure Control business of Baker Hughes, integration planning and administrative legal filings are proceeding smoothly, and we expect that transaction will close in early 2026. In conclusion, the third quarter demonstrated real progress from our actions to enhance our operating results. The improvement in pressure control margins reflects the agility of our organization in responding to highly dynamic market conditions as we've demonstrated through past cycles. The stronger Spoolable Technologies international revenues are the result of a long-term concerted effort to increase our sales focus in key global markets, which should be enhanced by the increased footprint offered by our announced acquisition of a majority interest in the Baker Hughes Surface Pressure Control business. Domestic activity levels remain subdued, but I'm confident in our ability to continue to outperform and deliver industry-leading returns for our shareholders. I'd like to close by thanking our associates for their focused commitment on executing for our customers throughout a turbulent market. With that, I'll turn it back over to the operator, and we can begin Q&A.

Our first question comes from David Anderson of Barclays.

I have a broad question to start. You might not like it, but I’ll ask it anyway. Could you give us an idea of what your U.S. customers are thinking and what their inquiries are in the current environment? The fourth quarter seems a bit softer, and there doesn’t appear to be any sense of urgency. You described it as subdued. I believe you've mentioned that customers are behaving as if oil prices are in the 50s. Are your customers worried about oil prices dropping further? Are you experiencing more pricing pressure than usual, or do you think customers are generally optimistic or just holding steady, waiting for guidance on oil prices for next year? I'm trying to understand how we should evaluate upstream spending in 2026 based on the fourth quarter levels we're about to see, just some insights on the factors at play.

Yes. I mean, David, that's obviously a question that weighs heavily on us. I'm going to give you my personal opinion. And I think that the downside risk of oil prices is far greater than upside potential. If I were a betting man, I'd suggest it was going to be between $55 and $60, but I also think our customers have taken that into consideration with their plans. I can tell you that they are currently far less transparent than they have been in the past because we're very much in a wait-and-see environment. And a major part of that, David is, you know this is not only the surplus availability coming out of OPEC+ but it also has to do with questions about the administration's implementation and enforcement of Russian oil sanctions. The Russians have proved to be very adept at circumventing sanctions as have the Iranians. So I think that all of our customers are concerned about that. But none of them, I think, are basing their budgets on $65 oil or even $60 oil. The other, I think, important aspect is that we believe that our larger customers who maintain relatively large inventories in the core drilling basins and core basins will be far less susceptible to lower oil prices than some of the privates or independents.

I would like to inquire about the Spoolable segment. Could you provide more details on the international opportunities and explain what contributed to the higher performance of Spoolables this quarter? Additionally, please discuss some of the most promising markets for this product, such as Africa and a few in the Middle East. You have mentioned before the potential for cross-selling with SPC in the Middle East, and it seems you are already receiving awards in advance of that. Could you elaborate on some of the different markets you are targeting for Spoolable and the opportunities you see in 2026 and 2027?

Sure. I'm going to defer to Steve Tadlock.

In the third quarter, we've observed positive developments in markets worldwide, which is encouraging. When I took on this role two years ago, our primary strength was in Latin America, owing to our team members there. Since then, we've increased our personnel and incorporated the Cactus Wellhead Australia team, who have performed excellently. We made our first delivery to Australia in the third quarter. Additionally, we've brought on another person in Southeast Asia who is gaining traction, as well as someone in the Middle East. As Scott highlighted, we secured our first sour service order for next year in a region of the Middle East where we've not previously conducted business. Interest in our product is broadening significantly. The recent launch of our sour service product has effectively opened up the global market, given the greater sour requirements overseas compared to the U.S. This shift is fundamentally driven by heightened focus, increased personnel, and a growing number of orders that build momentum. As traction grows, the news spreads—whether someone moves to another company or they learn about other companies using our product.

Our next question comes from Scott Gruber of Citigroup.

Really excellent margin performance here in Pressure Control during the quarter. Can you just unpack that a bit more for us? Was that greater acceptance of tariff surcharges than anticipated? Or did you pull the cost lever harder during the quarter? Just unpack that Pressure Control margin beat a bit for us.

I'm not going to comment on price changes. However, I want to highlight that we are fortunate to have an exceptional supply chain leader, who is actually my brother. He's done an excellent job of securing cooperation from our suppliers. Additionally, we have very understanding customers who we have supported, and they continue to support us in return. We are also proactive in adjusting our operations as needed. It's important to note that since we primarily operate in a variable cost business, flexing down is much easier for us compared to oilfield service companies that have higher fixed costs. So, it’s really a combination of these factors that has contributed to our success. Our team has performed exceptionally well. We've also adjusted our supply chain to mitigate the effects of tariffs, and our purchasing power, which will only increase with the addition of the Baker Hughes SPC business, plays a significant role. I know this might not be the answer you were looking for, but that's all I can share at the moment.

No, I appreciate all the color. And I wanted to ask about that new wellhead system that you guys were about to introduce kind of 6, 12 months ago and then the market started softening. Where do you stand with that now? It seems like we're finding some potential stability in the market. We'll see where oil prices go. But you got your Pressure Control margins back up. You've kind of worked through the tariffs issue. Just give us your latest thoughts on introducing that new system in '26 or whether that's going to be delayed further.

Yes. So I can answer that question, Scott, Q1.

Our next question comes from Stephen Gengaro of Stifel.

I believe my first question relates to Scott's inquiry. In the previous quarter, you mentioned that supporting margins was becoming more difficult due to the tariffs, partly because of decreased customer activity. However, it seems that sentiment has shifted, and the recent results were quite strong. Could you provide any insights on that?

Yes. Just to remind you, in the previous quarter, the tariff rates changed unexpectedly, which made it difficult for us to communicate with suppliers and customers without knowing where we would land. We now have greater clarity on the situation, which aids our discussions with them. It's more about the increased tariff environment than activity levels. However, we have been pleasantly surprised with the resilience of our customer base. I want to emphasize that we expect those customers with holdings in the core areas of our basins, particularly the larger publicly held exploration and production companies, to hold up compared to the rest of the market.

Great. And the follow-up to that was without asking you about market share. But when you think about Pressure Control and you think about activity levels, you've been outperforming that, right? And I would imagine as we go forward here, notwithstanding how the rig count evolves, you'll continue to outperform that, driven just primarily by the stability of your customers. Is that fair as we think about? And I'm thinking like a North America comment?

Yes, as I mentioned, we're not seeing much clarity regarding next year. However, I believe it's fair to say that our market share will depend on attracting new clients, and we are noticing increased interest from some major players. I think this trend will continue, so I'm cautiously optimistic that we can defend and possibly expand our market share. The real question is how large the overall market will be, and I can't provide an estimate for that. I do believe our market will be significantly larger than some of our competitors'. Additionally, we've observed some very large competitors attempting to increase their market share during this period of slow growth, which seems to be affecting their profit margins negatively. Unfortunately, that's beyond my control.

Our next question comes from Arun Jayaram from JPMorgan Securities.

I wondered if you could provide any updated perspective on the Cactus SPC transaction, which you indicated you expect to close in early 2026. How is the integration planning going? But any updated views would be much appreciated because that is an important swing factor as we think about your earnings power next year.

So specifically, what are you asking me?

Yes. What are your thoughts on the earnings potential of that segment for next year? There have been some fluctuations in Saudi, but during the Nabors call yesterday, Tony mentioned there might be an uptick in activity as we move into the latter half of 2026. I was wondering if you've traveled to the Middle East recently and could share any insights or new data. There have been several factors to consider as we evaluate potential spending trends for next year.

Yes, I was there about two weeks ago. The Saudis seem to be indicating a possibility of increased activity in the second half of 2026, but that has not yet resulted in actual orders. This is simply a fact. Typically, when we experience a slowdown in the U.S., the international market tends to lag by about 12 months. Therefore, I anticipate that the international market, even in the Middle East, will be relatively weaker in 2026 compared to 2025. There is no solid evidence, which would be reflected through order placements. Consequently, I can't be overly optimistic about the Middle East. Brent prices will likely remain in the low 60s, which should result in decreased activity. However, we are observing some U.S. companies becoming more engaged in the Middle East, which is beneficial for us since they are our customers. There's a clear and undeniable focus on unconventional drilling, and they are quite open to Western companies. As a result, these Western firms are bringing in their preferred suppliers. I feel positive about that. Will it compensate for the overall decline? Probably not, but it will lessen the impact.

Great. That's helpful. I really appreciate that perspective. Maybe just my follow-up. Maybe give us an update on your sourcing plans internationally. How is the ramp going in Vietnam? And maybe just some thoughts on that.

Yes. So I can defer to Joel on that. He's in the room with us. Vietnam is progressing well, Joel, I'll let you handle it.

Yes, it's progressing well. We're starting to move some of the wellhead into the U.S. that we need to assemble and monogram. We're in line with API to get our audit for the monogram. We have completed the paperwork and submitted all the required additional documentation. We expect to have that audit done in about 90 days, likely after the first of the year. One of our requirements is to provide API monogram equipment from that facility. In the meantime, we've started moving wellhead housings and tubing head bodies into the U.S. for assembly at our Bossier City facility. Overall, it's progressing well, with expansion, increasing headcount, and adding fixtures for testing. I'm quite pleased with the progress.

Any sense once you do get API certification, what kind of mix Vietnam can have perhaps next year?

We're going to focus primarily on the wellhead out of there towards the end of the year. We'll start bringing some of our gate valves. But the primary focus for the beginning of the year and the year will be getting as many of the wellheads and the tubing head assemblies. I would say somewhere in the magnitude of at least half.

Our next question comes from Don Crist of Johnson Rice.

Scott, I just wanted to ask one question on kind of the macro front. I mean we're hearing a lot more chatter about unconventional drilling in many different countries around the world. And obviously, there's a lot more activity kind of moving in that direction. But I just wanted to know from your standpoint, what do you think the time frame would be to kind of see a material pickup in unconventional around the world, whether it be in Turkey or Libya or any other places that aren't big today in unconventionals. Just kind of a time frame perspective because nobody seems to give that number out.

We've observed a significant increase in unconventional requests across the Middle East. However, I’m not very optimistic about Argentina due to the limited number of rigs operating there compared to the Middle East. There’s considerable interest in Saudi Arabia and Abu Dhabi. By the end of 2026, we might see our first unconventional shipment scheduled.

It's probably going to go January to February.

Yes. So it's basically a U.S. product. So I don't anticipate, obviously, any issues with that. So I think we'll see a steady ramp-up. The real interest right now is to compare the results of using a design specifically addressing unconventional with what they're using in terms of flashed equipment. So this will be pending the results of the time savings. So if the time savings or anything at all approaching the U.S., I think that once word spreads and it spreads quickly, I think you're going to see a serious ramp-up. So let's call it fourth quarter because they need time to drill these wells and analyze the efficiency. So I can tell you, my gut feeling is '27 will be a significant contributor. And I think that by the fourth quarter of '26, we're going to see some meaningful shipments.

I'm showing no further questions at this time. I would now like to turn it back over to the Chairman and CEO, Scott Bender, for closing remarks.

All right. I want to thank everybody for their continued interest in the company, and I'm really pleased with this team's efforts in terms of dealing with sort of an anemic market and a very uncertain tariff landscape. This really is a reflection of not only how flexible our team is, but also the fact that we are and will always be heavily invested in consumables and variable cost businesses. So thanks again for your interest. Have a good day.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.