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Operator: Good day and thank you for standing by. Welcome to the Cactus Q4 2022 Earnings Conference Call. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, John Fitzgerald, Director of Corporate Development and IR. Please go ahead.

John Fitzgerald: Thank you and good morning. We appreciate you joining us on today’s call. Our speakers 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 Will Marsh, our General Counsel and Vice President of Administration. 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.

Scott Bender: Thanks, John, and good morning to everyone. During the fourth quarter, the company set records for both quarterly revenue and adjusted EBITDA. This was also our eighth consecutive quarter with adjusted EBITDA growth. I was particularly pleased with the margin performance in each of our revenue categories. The fourth quarter is usually our weakest due to seasonal factors, but results were strong across the board and highlighted the company’s best-in-class margin and return profile. Some fourth quarter highlights include revenue increased 2% sequentially to a company record $188 million; adjusted EBITDA improved by 4% sequentially to a company record $66 million; adjusted EBITDA margins were 35%, up 90 basis points versus the third quarter.

We paid a quarterly dividend of $0.11 per share, and we increased our cash balance to $345 million. 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. So, Steve?

Steve Tadlock: Thank you, Scott. Note that all the historical and forward-looking data referenced today will be for Cactus on a standalone basis only and not inclusive of any potential impact from the pending FlexSteel transaction, which is expected to close in the coming weeks. As Scott mentioned, Q4 revenues of $188 million were 2% higher than the prior quarter. Product revenues of $125 million were up 2% sequentially, driven primarily by an increase in rigs followed. Product gross margins of 41% rose 120 basis points sequentially due largely to operating leverage and lower branch costs. Rental revenues were $27 million for the quarter, up 1% versus the third quarter. Gross margins were up 420 basis points due to better asset management and lower repair costs as well as declining depreciation expense.

Field service and other revenues in Q4 were approximately $36 million, up 1% sequentially. This represented approximately 24% of combined product and rental-related revenues during the quarter, in line with expectations. Gross margins were 24%, up 20 basis points sequentially, driven by lower supplies costs and branch-related expenses. SG&A expenses were $23 million during the quarter, up $6.9 million sequentially. The increase was attributable to higher professional fees and expenses, $7.4 million of which were related to the pending acquisition of FlexSteel. Excluding these transaction-related expenses, SG&A was $15.5 million and 8% of revenue. We expect SG&A exclusive of transaction-related fees to be relatively flat in Q1 2023 with stock-based compensation expense of approximately $3 million.

Fourth quarter adjusted EBITDA was approximately $66 million, up 4% from $64 million during the third quarter. Adjusted EBITDA for the quarter represented 35.4% of revenues compared to 34.5% in the third quarter. Adjustments to EBITDA during the fourth quarter of 2022 included approximately $3 million in stock-based compensation, $7 million in FlexSteel acquisition-related fees and expenses, and an add-back of $2 million in other expense related to the revaluation of the company’s tax receivable agreement. Consistent with the fourth quarter’s presentation, we’ve now revised the adjusted EBITDA for the third quarter of 2022 to exclude $1 million in FlexSteel acquisition-related expenses that were not previously added back to our adjusted results.

Depreciation expense for the fourth quarter was $8.1 million, approximately $8 million is expected in the first quarter of 2023. Income tax expense during the fourth quarter was $7.9 million. During the fourth quarter, the public or Class A ownership of the company averaged 80% and ended the quarter at 80%. Following the equity offering we completed in January of this year, our Class A ownership is expected to average 81% of the total shares outstanding during the first quarter. Barring further changes in our public ownership percentage, we expect an effective tax rate of approximately 21% for Q1 2023. GAAP net income was $41 million in Q4 2022 versus $42 million during the third quarter. The decrease was driven by higher transaction-related expenses, which more than offset increased gross profit across our various revenue categories.

We prefer to look at adjusted net income and earnings per share, which were $44 million and $0.57 per share, respectively, during the fourth quarter versus $40 million and $0.52 per share in Q3 2022. Adjusted net income for the fourth quarter applied a 25% tax rate to our adjusted pretax income generated during the quarter. We estimate that the tax rate for adjusted EPS will be 25% during the first quarter of 2023. As previously stated, we’ve revised the adjustments for the third quarter of 2022 to include the $1 million in acquisition-related expenses that were not previously added back. During the fourth quarter, we paid a quarterly dividend of $0.11 per share, resulting in a cash outflow of approximately $8.4 million, including related distributions to members.

In January, the Board approved a dividend of $0.11 per share to be paid in March. We ended the quarter with a cash balance of $345 million, up $24 million sequentially. Operating cash flow was approximately $39 million during the quarter, with net working capital representing a cash outflow of approximately $21 million. This was driven in part by a decrease in accounts payable due to the timing of seasonal payments. In addition, payables declined in advance of anticipated first quarter inventory declines. Excluding non-routine items associated with the FlexSteel transaction, we expect net working capital to be relatively flat during the first quarter of 2023 and down as a percentage of revenue following a strong January. Net CapEx was approximately $6 million during the fourth quarter of 2022.

Capital requirements for our business remain modest, and we’ll continue to exercise discipline with regards to capital expenditures. For 2023, we expect net capital expenditures to be in the range of $35 million to $45 million. This is inclusive of the potential purchase of a currently leased domestic property for approximately $7 million, the build-out of a new R&D facility in Houston, and it assumes $5 million to $10 million in growth capital dedicated to international expansion toward the end of the year. That covers the financial review, and I’ll now turn the call over to Scott.

Scott Bender: Thanks Steve. As stated earlier, the company generated record revenue and EBITDA during the quarter. US product market share increased to 40.2% during the period as rigs followed rose by approximately 7%. From 3Q 2022 through December of 2022, we added 26 rigs in line with projections provided during our last earnings call. Product EBITDA margins improved by 110 basis points during the quarter to 41%. During the fourth quarter, the majority of our rig additions came from public companies, but we also increased our rig count with private operators. Thus far, during 2023, we witnessed a mid-single-digit percentage increase in public rigs followed, which has been partially offset by a slight decrease in private rigs followed, particularly in gas basins.

For the first quarter of 2023, we still expect Cactus’ average rigs followed to be up 3% to 5% sequentially despite the overall decline in the US land rig count. As you know, our core customers tend to be larger, well-established oil producers who are less reactive to short-term swings in commodity prices. Nonetheless, we’re prepared to deal with the impact that lower natural gas prices will likely have on the industry, particularly in the Haynesville, an area weighted towards privates. We are also excited to be introducing several technical wellhead enhancements, which are in the final stages of testing. First quarter of 2023 product revenue is expected to be up approximately 5% versus 4Q. Product EBITDA margins are forecasted to be in the 41% to 42% range for the first quarter.

We feel good about the prospects of market share gains as evidenced by our ability to achieve market share of over 42% in February. From an international perspective, there are really no changes regarding our plans for product commercialization in the Mid-East by 2024. In addition, we continue to benefit from opportunities outside of Saudi. On the rental side of the business, revenues increased 1% during the fourth quarter and were up over 40% year-over-year. International increases drove the sequential top line improvement. For the first quarter of 2023, we expect rental revenue to remain relatively flat. EBITDA margin should be in the low 60% range, with potential for expansion late this year as we introduce cost-saving enhancements. In field service, EBITDA margins improved by 20 basis points during the fourth quarter, overcoming what is typically the weakest seasonal quarter of the year.

Revenue was 23.6% of combined product and rental revenue during the period. Fuel service revenue for the first quarter of 2023 is expected to remain between 23% and 24% of product and rental revenue. Fuel service EBITDA margins are expected to be approximately 28%. Regarding the FlexSteel acquisition, management is excited and optimistic about this unique combination. As noted earlier this month, we received no comments from the FTC or DOJ during the HSR waiting period. From a financing perspective, we successfully raised $166 million of net proceeds from an equity offering in January and have made substantial progress regarding our permanent debt financing. At this time, we expect to close on a new $125 million Term A facility with a new $225 million upsized revolving credit facility upon transaction closing, which had occurred during the first quarter of this year.

FlexSteel’s fourth quarter financial performance was in line with our expectations. Following the closing of the transaction, Cactus will provide additional details on the expected financial impact of the first quarter. We look forward to sharing the same once we close. Despite recent weakness in natural gas prices, we’re optimistic regarding our customer base, which is larger and primarily oil-focused. Cactus remains well positioned to deliver for shareholders unmet an overall healthy market backdrop. And with that, I’ll turn it back over to the operator, and we can begin Q&A. Operator?

Operator: Yes. Thank you. Our first question comes from the line of David Anderson of Barclays. Your line is open.

David Anderson: Hey, good morning Scott. How are you?

Scott Bender: Hey David. How are you?

David Anderson: I’m doing great. I was hoping maybe you can just kind of step back a little bit and talk about the US — kind of the overall US onshore market overall and really kind of how you see duration of this cycle compared to, say, other cycle, it looks like kind of the 2008 to 2012 or 2013 timeframe. You touched on the end there. Everyone is sort of waiting for this natural gas story. You have this ripple effect. Some people are thinking is going to collapse the US services market. But would you make the cases in a more resilient market? I mean there’s fewer players. Everyone seems more disciplined in terms of capacity and pricing. I think you’re seeing in your business as well. Shouldn’t this all kind of result in a cycle with more duration? Can you maybe expand on that a little bit?

Scott Bender: Wow, David. All right. So, I think that we’ve seen — let me first talk about natural gas. What we’ve seen is weakness in the Haynesville. I’m sure you know that. We’ve not seen the same weakness in the Northeast. The Haynesville is a very high cost area to operate, and it’s dominated by private players. So, one would expect that with lower gas prices, the Haynesville would suffer. For those of our customers that have multi-basin exposure, we’re seeing a redeployment of rigs out of the Haynesville and into those quarterly basis. So, let me maybe now turn my attention to the areas that we expect to see continued activity strength. I can only tell you what our customers tell us, and you know that we visit personally with all of our large customers on a regular basis.

They indicated no reduction in activity. And you know that none of them planned on $100 oil so that if I think about our major customers, I’m actually seeing evidence of increases, and they’re all basin activity. And those increases will likely offset losses in the Haynesville. And David, that said, I don’t know how well you could go on to Haynesville. I just feel like there’s enough indication of demand in the Permian, actually in the Bakken as well. I think that in terms of fundamentals, I’m probably more bullish on oil fundamentals than maybe a lot of people. I think US production rates are disappointing right now. Well efficiencies are disappointing. I think that we’re going to see China open up, which also has implications in terms of cost.

But China opening up, I think that Russian sanctions are going to start biting. I feel pretty good about the duration of this current oil base cycle. Gas, I don’t even want to offer opinion on gas except that I think the $2 gas makes some sense more for Haynesville.

David Anderson: So, you’re not really concerned that kind of natural gas and sort of tip the apple cart here that — it doesn’t seem like that could be big enough to really be more than an air pocket. Is that a fair way to look at it?

Scott Bender: Well, David, I’m always concerned about our customers’ cash flow. And so, to the extent that natural gas prices are low, the cash flow is going to be reduced. And I don’t think it’s going to — I’m not — I don’t have this overreading concern about the impact of natural gas on the rest of our customers. And I’ve visited with many of them over the last two weeks. So, it’s been very, very recent.

David Anderson: That’s good to hear. I know everybody always love to ask you about M&A, and you’re just dying to tell us about all the deals you’re working on right now. But outside your — you just gave us this FlexSteel, a little smaller deal, it’s around kind of the well site, different things that you’re already doing. But I just want to look at this market. The reality is kind of most of the bad actors are gone. There’s really no private equity money on the side we can tell. Is it fair to say that the M&A route is going to be pretty hard over the next two or three years? And then maybe the organic opportunities you’ve talked about in the Middle East — I know Latin America is another area you sort of expanded. Does that make that more — a more likely growth route organically than M&A because of just — there’s just — it seems like there’s fewer opportunities in a more consolidated market?

Scott Bender: I would say there are certainly no fewer opportunities, David. There are fewer buyers, but there are no fewer opportunities. There are an awful lot of people who are interested in monetizing in the — during this period of time. But my — I’m going to reiterate what I’ve said before. My preference has always been and will continue to be to consolidate this market. And so, when I think about M&A opportunities, I need to think about — I think about consolidation. FlexSteel was an incredibly unique opportunity for this company, and you know all the reasons. I can’t think of another company that we looked at that checked all the boxes. Is there another FlexSteel out there? We haven’t seen another FlexSteel. That’s not to say there’s not another FlexSteel, but I would probably tell you look for organic growth or an opportunity internationally.

David Anderson: Thanks a lot guys.

Scott Bender: Thank you, David.

Operator: Thank you. This question comes from the line of Steve Gengaro of Stifel. Go ahead your line is open.

Steve Gengaro: Thanks. Good morning everybody.

Scott Bender: Good morning Steve.

Steve Gengaro: Two things for me. If you could start — and I know you gave some good color on the first quarter outlook. When you — you had very strong margins in the fourth quarter across the board. Can you just talk a little bit about your conversations with customer on the product side and what you’re seeing from a pricing perspective relative to inflation and how we should be sort of thinking about margin trajectory for the rest of the year? And maybe as part of that, you did talk about some technical enhancements, which I would assume would be a net positive in the back half of the year.

Scott Bender: Yes, I think that this team feels pretty good about sustaining margins in terms of the cost impact. I think we’ve done — Joel has done a remarkable job of managing our costs, and a lot of our input costs are just now beginning to flow through. We still have to get rid of some of this higher cost inventory, but we’re seeing the replacement costs decline. So, I think that from a cost perspective and the impact that, that has on margins, I’m feeling pretty positive.

Steve Gengaro: And just along those lines, you — I know you talked a little bit about maybe using more capacity out of Louisiana because of some of the supply chain issues. Where do the supply chain issues stand now?

Scott Bender: Transit times are much improved. I mean I can — I’ll refer to Joel on this, but–

Joel Bender: The supply chain is actually sort of return to some normalcy. There are pockets of it that are still problematic, elastomers, resin material, things like that. It’s available. You just have to plan ahead for it, which we’ve done. In terms of vessels and things, you can ship out of China now and pick up a weekly shipment, drop it off of the port and pick it up in about a week. So, that’s returned to normal. I think the only challenge there is maybe light sailings. But if you prepare yourself and you have contracts like we do, there should be no disruption in terms of getting the product.

Steve Gengaro: Okay, great. Thank you, gentlemen.

Scott Bender: Thank you, Steve.

Operator: Thank you. Our next question comes from the line of David Smith of Pickering Energy Partners. Your line is open.

David Smith: Hey, good morning. Thank you for taking my questions and congratulations on the quarter and really looking forward to the first to close Q&A. But for now, my bigger questions were asked. So, we’ll ask a couple of minor ones. Circling back to the natural gas theme. Sorry if I missed this, but I wanted to ask if you’re having any conversations with clients who indicate that they might accelerate oil programs if additional frac spreads became available to them.

Scott Bender: The short answer is no. Because we’re — our customer base is so dominated by larger players, they’re not nearly as reactive. And so most of our major customers have indicated slight increases in activity, and they have not mentioned any change in their plan as a result of the availability of additional frac pressure pumpers.

David Smith: Makes perfect sense, but I had to ask. And just circling back to the enhancements or innovations you plan to introduce in the product segment. Just wanted to ask — really looking forward to hearing about those. I’m all ears if you want to share any color on those, but should we be thinking about those as potentially beneficial to market share or maybe just more accretive to margins? And I ask it because your market share and margins are already so strong.

Scott Bender: Yes, David, we’ve always believed that if we don’t continue to innovate — innovation is one of our greatest defenses in terms of our market share. And so yes, I think that these enhancements will be attractive to people who perhaps were not Cactus customers. But the real reason for this is to continue and expand the gap between what we offer and what our competitors offer. It provides us not only with the ability to retain market share, but it provides us, importantly, with the ability to protect our margins.

David Smith: Great answer. Appreciate the color. And if I can slip in one minor one. The field service margins fall up remarkably well in the fourth quarter. And I wanted to ask if that was just exceptional execution, if you were able to get maybe better margin protection, basically trying to think through this year and going forward, whether you figured out how to mitigate the historical seasonality hit to the margins.

Scott Bender: Yes, I’m going to let Steven answer that. That’s his department piece. We were all very, very pleasantly surprised with our fourth quarter as our field service results.

Steven Bender: Yes, I think just to reiterate, we were very proud of what we achieved in the fourth quarter. I think we’re optimistic that things will continue in that trajectory. There’s still quite a bit of pressure on wage inflation in the field service levels, so we’re keeping an eye on that, but concentrating more on utilization at this point.

Scott Bender: David, we probably do — I haven’t worked for a lot of competitors, obviously, but we do an extraordinarily good job of monitoring utilization. So, we’re particularly sensitive to that during the fourth quarter when it usually drops because of the holidays. So, I think we planned better this year. We executed better this year, and I don’t — I think it will continue to take those lessons forward.

David Smith: Thank you for all that color. Between the acquisition and the international expansion, there’s a lot of good stuff we’re looking forward to. Thank you all for your time.

Scott Bender: Thank you.

Operator: Thank you. We have another question from Stephen Gengaro of Stifel. Stephen, your line is now open.

Steve Gengaro: Thanks for taking the questions gentlemen. Two quick ones. One was on the market share improvement we saw sequentially and what you highlighted in February, is this more rigs from existing customers? Or is it new customers? Or is it a combination?

Scott Bender: It’s a combination.

Steve Gengaro: Okay, great. Thanks. And the other one — and I know I asked you this on the call — on the FlexSteel call, but maybe just to refresh, and we’re getting this question from investors. The differentiation that FlexSteel brings, can you just give us a minute on sort of the key differentiating factors? And obviously, that’s a big part of the Cactus story. So, I think it’d be useful for me just to kind of get another summary on the big differentiation of FlexSteel versus their competition.

Scott Bender: Steve, do you want to take that?

Steve Tadlock: Sure. Yes, I think it comes down to a lot of what makes Cactus in the wellhead side so special, which is really, in our mind, they just have a superior product and they do a better job of executing on the service and customer interactions than everybody else. When you look at the sort of the formulation of their product, they’re the only spoolable composite that utilizes steel. So, it has a robustness that the others lack. And in my experience, customers really value that just because less problems, less things to worry about, they’ve got enough to worry about out there in the field.

Steve Gengaro: Is the ultimate benefit to the customer one of sort of cost savings, efficiency, less maintenance? How should we think about sort of the value prop to the customer?

Steve Tadlock: Yes, it’s really multifold. You get a cost benefit in terms of more rapid installation, getting wells online faster. What are some of the other aspects?

Scott Bender: This product handles higher pressures. So, it has a much larger addressable market.

Steve Tadlock: Larger diameters offered.

Scott Bender: Larger diameter, which means that it can be used further downstream of the choke or the wellhead. So, it has greater exposure to the market.

Steve Tadlock: You do have less maintenance as well versus steel corrosion.

Scott Bender: It’s had zero fuel failures since they introduced the product, and I think that’s a function of the fact that it’s not fiberglass or aramid fiber. It’s steel. And so, you still have to join it. You have to put couplings ultimately on this product. And it’s — you can imagine it’s a lot better to couple of steel to steel, couplings or steel and steel to plastic.

Steve Gengaro: Great. Thank you. And if I can ask one more around FlexSteel. The equity raise — I mean when you did the deal or when you announced the deal, our math suggested you could deleverage this thing very quickly. You didn’t necessarily need to do equity. And I was just curious on the thought behind that. And does that maybe trying to tell us that there’s potentially more that you’re looking at and you wanted the financial flexibility?

Steve Tadlock: I think that’s right, Stephen. We’ve certainly been rewarded by having the strength in our balance sheet to date, and we let the cash balance to grow over time with no debt, and that gave us an opportunity like the one we saw with FlexSteel. And so, it doesn’t necessarily mean that it’s because there’s some other M&A trades that would be imminent or that’s out there right now, but having the flexibility to provide those options is something that we certainly had in mind when we did the equity raise.

Scott Bender: And to summarize it, it’s definitely on our minds.

Steve Gengaro: Great. Okay. Thank you all for the color. Appreciate it.

Operator: Thank you. I’d like to now turn the call back to John Fitzgerald for closing remarks.

John Fitzgerald: We appreciate everyone’s interest in Cactus and look forward to speaking with you on the next quarter’s earnings call.

Scott Bender: Thanks everybody. Have a great day.

Operator: Thank you for your participation in today’s conference. This does conclude the program and you may now disconnect.