Cactus, Inc. (NYSE: WHD)
Q3 2021 Earnings Call Transcript November 4, 2021 @ 09:00 AM Central
President, CEO and Director
Vice President, CFO and Treasurer
Senior Vice President, COO and Director
Vice President, Operations
Vice President of Administration and General Counsel
Director of Corporate Development and Investor Relations
Bank of America
Citigroup Global Markets
Stifel Financial Corp
Tudor, Pickering, Holt & Co.
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. [Operator Instructions] 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.
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.
President, CEO & Director
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 multi-yearup-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.
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 paid a quarterly dividend of $0.10 per share; and
We 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. Following his remarks, I'll provide some thoughts on our outlook for the near-term before opening the lines up for Q&A. Steve?
Vice President, CFO and Treasurer
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 percent 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 hire 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 thousand 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 a 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 19 cents per share, respectively, during the third quarter versus $12.3 million and 16 cents per share in Q2. The Q3 adjustments included the application of a 28% tax rate to our adjusted pre-tax 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 inventory levels over the last two quarters. Our goal is to secure equipment on a timely basis in anticipation of greater customer activity. During the 3rd quarter we made our annual TRA payment and associated distribution of $12.5 million. As a reminder, this 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 to $15 million.
That covers the financial review, and I will now turn you back to Scott.
President, CEO and Director
Thank you, 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 am more bullish on U.S. activity levels than I have been in some time. Assuming commodity prices remain supportive and key supplies such as OCTG are available, we would not be surprised to see U.S. land rig count grow by an additional 10% by the end of the first quarter of next year.
Despite nearly all the U.S. market's 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. In 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 percentage 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 have 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 have 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 DUCs at their lowest levels 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 percent 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 some improved 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 are 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 our 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 percent 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 insuring on-time deliveries. That said, we remain advantaged due to our Bossier City manufacturing capabilities, unparalleled experience and the relationships of our operations team. We simply don't tolerate missed committed 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 have always been successful in recruiting key talent.
There has been no change to 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
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Cactus Inc. published this content on 24 November 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 24 November 2021 15:29:01 UTC.