Cactus : 4Q Earnings Call Transcript

Cactus, Inc. (NYSE: WHD)

Q4 2020 Earnings Call Transcript February 25, 2021 @ 09:00 AM Central

Call Participants

EXECUTIVES

Scott Bender

President, CEO and Director Stephen Tadlock

Vice President, CFO and Treasurer Joel Bender

Senior Vice President, COO and Director Steven Bender

Vice President, Operations David Isaac

Vice President of Administration and General Counsel John Fitzgerald

Director of Corporate Development and Investor Relations

ANALYSTS

George O'Leary

Tudor, Pickering, Holt & Co Securities, Inc Tommy Moll

Stephens, Inc.

Scott Gruber

Citigroup Global Markets, Inc.

Blake Gendron

Wolfe Research Stephen Gengaro Stifel Financial Corp

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Cactus Q4 2020 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. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Mr. John Fitzgerald. Please go ahead, sir.

John Fitzgerald

Director of Corporate Development and Investor Relations

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, 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 over to Scott.

Scott Bender

President, CEO & Director

Thanks, John and good morning to everyone. During a year in which the U.S. rig count was down 55% year-over-year, Cactus showcased its ability to outperform by recording Adjusted EBITDA margins of nearly 35% and generating Free Cash Flow of $117 million. We were able to offset a portion of the general activity decline by growing our market share from 31% at year-end 2019 to a record 43% by the fourth quarter of 2020. We were further pleased to see overall activity begin to improve during the fourth quarter, a trend which continued in early 2021.

We ended the year with no bank debt and $289 million dollars in cash.

In summary:

• • 4th quarter revenues were just above $68 million;

• • Adjusted EBITDA approached $20 million;

• • Adjusted EBITDA margins were 29%;

• • Our cash balance increased to nearly $289 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. Steve?

Steve Tadlock

Vice President, CFO and Treasurer

Thanks, Scott. In Q4, revenues of $68 million were 14% higher than the prior quarter. Product revenues of $43 million were up 20% sequentially, driven by an increase in market share and rigs followed. Product gross margins were 31% of revenues, down approximately 1,400 basis points on a sequential basis due primarily to the Q3 impact of tariff refunds. Product gross margins were up nearly 100 basis points sequentially when excluding the impact of these refunds, which declined by over $5 million from Q3 to Q4.

Rental revenues were slightly under $9 million, down from nearly $10 million during the third quarter of 2020. Gross margins declined to negative 10% due to lower revenue on a relatively fixed depreciable base, a $600,000 decrease in tariff refunds and accelerated mobilization costs.

Field service and other revenues in Q4 were over $16 million, up 17% versus the third quarter. This represented just under 32% of combined product and rental-related revenues during the quarter, ahead of expectations. We expect Field Service revenue to be approximately 30% of Product and Rental revenue during the first quarter of 2021. Gross margins were 30% of revenues, down 350 basis points sequentially. The margin decline was less than the usual seasonal drop that occurs during the fourth quarter thanks to careful management of non-productive time during the holiday season.

SG&A was up $600,000 sequentially to $9 million during the quarter, in-line with expectations. The increase was primarily attributable to higher payroll related expenses associated with an increased bonus accrual and employee additions. We expect SG&A to be slightly less than $10 million in Q1 2021, inclusive of stock-based compensation expense of less than $2 million.

Fourth quarter Adjusted EBITDA was approximately $20 million, down from $25 million during the third quarter. Tariff refunds were down nearly $6mm sequentially, accounting for more than 100% of the sequential decline in Adjusted EBITDA. Adjusted EBITDA for the quarter represented 29% of revenues, down from 41% of revenues during the third quarter, or 31% of revenues last quarter when excluding the $6mm in tariff refunds. Adjustments during the fourth quarter of 2020 included $2 million in stock-based compensation.

Depreciation expense was $9.3 million during the period, down from $9.8 million during the third quarter, due largely to lack of additions to our rental assets, field service equipment and vehicle fleet.

Our public, or Class A ownership, was relatively stable in Q4 and was 63% at the end of the quarter. This should result in an effective tax rate of approximately 19% in Q1 2021, assuming no changes in our public ownership percentage.

GAAP Net income was $6.1 million in Q4 2020 versus $10.9 million during the third quarter of 2020.

Internally, we prefer to look at adjusted Net Income and earnings per share, which were $6.3 million and 8 cents per share, respectively, compared to $9.5 million and $0.13 per share in Q3 2020. Again, the 3rd quarter was aided by $6 million in tariff refunds, which contributed approximately $4mm in additional adjusted net income during the quarter, or 6 cents per share. We estimate that the tax rate for adjusted EPS will be 26.5% during the first quarter of 2021.

During the fourth quarter, we paid a quarterly dividend of $0.09 per share, resulting in a cash outflow of $5 million. As publicly announced in late January, the board has also approved a dividend of $0.09 per share to be paid in March of this year.

Our cash position increased by nearly $15 million during the quarter to approximately $289 million at year-end, highlighting the continued free cash flow generation of the company, above and beyond our current dividend. For the quarter, operating cash flow was $22 million, and our net capex was $2 million.

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 is for a range of $10 to $15 million.

That covers the financial review, and I will now turn you back to Scott.

Scott Bender

President, CEO and Director Thanks Steve.

We noted on our last call a strong management conviction that further market share gains were forthcoming. This certainly proved accurate as we achieved record Product market share of 43% during the fourth quarter, setting the Company up well for 2021 given the loyalty of our customer base, our strong track record of execution, and our reputation for delivering innovative products and services that meet customer demands in changing markets. On this call, I will provide an update on our near-term outlook excluding the impact of the recent winter storms that paralyzed much of the Southern U.S. before providing our current best estimate of the storm's effect on our first quarter financial results.

As mentioned earlier, customer rig activity continues to generate positive momentum, and we currently expect Cactus' rigs followed to increase by approximately 25% during the first quarter of 2021. Excluding the impact of the aforementioned winter storms, we expect product revenues to increase 20% or more on a sequential basis. Continued strength in production tree shipments may have indicated slight upside to this outlook, but the aforementioned weather-related delays provide reason for caution.

Product EBITDA margins are expected to remain in the low 30s percentage during the first quarter, despite pressure from rising steel prices and ocean freight costs.

On the Rental side of the business, we have been reluctant to chase low margin work and accordingly maintained our position that customers compensate us for the value our equipment and services provide. As such, revenues declined during the quarter as customers chose to award work to lower cost suppliers. However, we noted on our last call that we were optimistic regarding increased demand for higher-end providers in 2021, and that has certainly been the case to start the New Year.

For the first quarter, again excluding any weather-related impacts, we expect Rental revenue to be up more than 50% on a sequential basis. As we have seen historically, the redeployment of assets temporarily weighs on EBITDA margins, which we expect to be approximately 60 percent for the first quarter.

Revenue from our innovations in January was nearly equal to the total amount generated from that source during the fourth quarter, offering encouragement that customers are re-validating several of these technologies now that their budgets have been reset.

Regarding Field Service, revenues in this segment continue to be driven by both our Product and Rental activity. We expect to see EBITDA margins in the low-to-mid 30 percent range during the first quarter, down sequentially as we adjust wages to more appropriately reflect market activity, but still higher than we've typically achieved over the last few years. Utilization, however, remains a concern for the reasons mentioned previously.

I'd like to close by highlighting a few items before opening the line to questions:

To be clear, the guidance figures provided exclude the impact of the weather-related slowdown witnessed in February. At present, our best estimate of the total revenue-related impact from the storms is in the range of $3 to $5 million during the first quarter and proportional to our revenue generated by source. Uncertainty remains regarding the speed with which our customers fully remobilize, but we have been encouraged by the recovery witnessed over the last several days.