Cactus, Inc. (NYSE:WHD) Q4 2023 Earnings Call Transcript
Cactus, Inc. (NYSE:WHD) Q4 2023 Earnings Call Transcript February 29, 2024
Cactus, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for standing by, and welcome to Cactus, Inc. Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today's program is being recorded. And now, I'd like to introduce your host for today's program, Alan Boyd, Director of Corporate Development and Investor Relations. Please go ahead, sir.
Alan Boyd: 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 Al Keifer, our Interim 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'll turn the call over to Scott.
Scott Bender: Thanks, Alan, and good morning to everyone. We closed out the final quarter of 2023 with strong margin performance in both segments. Free cash flow was substantial and with the debt raised to finance the FlexSteel acquisition repaid in Q3, we increased our cash balance by over $70 million in Q4. For the full year 2023, both businesses set records for revenue and adjusted EBITDA despite the decline in US land activity over the course of the year. Our company remains well positioned in the market as a provider of highly engineered, differentiated products to premium customers, and our strong financial performance reflects this. Some fourth quarter total company highlights include: revenue of $275 million, adjusted EBITDA of $100 million, adjusted EBITDA margin of 36.4%, we paid a quarterly dividend of $0.12, and we increased our cash balance to $134 million.
I'll now turn the call over to Al Keifer, our CFO, who will review our financial results. Following his remarks, I'll provide some thoughts on our outlook for the year -- for the near term rather, before opening the lines for Q&A. So, Al?
Al Keifer: Thank you. Before I begin, I would like to highlight the changes to our reporting structure. Beginning in Q4, we are now presenting our corporate and other expenses separately from our two operating segments. The cost within corporate and other consists of personnel whose activities support both operating segments as well as other public reporting and administrative overhead costs. All of these costs were previously reported within the Pressure Control segment. Prior periods have been recast in the earnings release to conform to this new presentation. To assist analysts and investors with understanding this reporting change, we have provided a historical reconciliation for 2021 through 2023 on the Investor Relations section of our website.
I'll now begin the results review. As Scott mentioned earlier, total Q4 revenues were $275 million. For our Pressure Control segment, revenues of $180 million were down 1.1% sequentially, driven primarily by decreased customer activity. Operating income increased $1.2 million or 2.2% sequentially, with operating margins increasing 100 basis points. Adjusted segment EBITDA increased $1.5 million or 2.3% sequentially with margins increasing by 120 basis points. The margin improvement was due to lower rental equipment repair costs, partially associated with the recent modification of our frac valve design and efforts to limit our branch expenses in response to reduced activity levels. For our Spoolable Technologies segment, revenues of $94 million were down 10.4% sequentially due to lower customer activity levels.
Operating income decreased $11.6 million sequentially due largely to the quarter-over-quarter change and the expense resulting from the remeasurement of the FlexSteel earnout liability. Adjusted segment EBITDA decreased $4.5 million or 10.2% sequentially, while margins increased by 10 basis points, as reductions in operating leverage were offset by reduced input costs. Corporate and other expenses were $5.7 million in Q4, down $1.3 million sequentially due to lower transaction-related expenses and stock-based compensation. Adjusted corporate EBITDA was approximately flat in Q4 at $3.8 million of expense. On a total company basis, fourth quarter adjusted EBITDA was $100 million, down 2.9% from $103 million during the third quarter. Adjusted EBITDA margin for the fourth quarter was 36.4% compared to 35.8% for the third quarter.
Adjustments to total company EBITDA during the fourth quarter of 2023 include non-cash charges of $4.6 million in stock-based compensation and a $1.9 million expense related to the FlexSteel earn-out liability remeasurement. Depreciation and amortization expense for the fourth quarter was $15 million, which includes $4 million of amortization expense related to intangible assets booked as part of purchase accounting. Total depreciation and amortization expense during the first quarter of 2024 is expected to be approximately $15 million, of which $7 million is associated with our Pressure Control segment and $8 million is associated with Spoolable Technologies. Income tax expense during the fourth quarter was approximately $17 million. During the fourth quarter, the public or Class A ownership of the company was 82%.
Barring further changes in our public ownership percentage, we expect an effective tax rate of approximately 22% for Q1 2024. GAAP net income was $62 million in the fourth quarter versus $68 million during the third quarter. The decrease was largely driven by the change in remeasurement of the earn-out liability. Adjusted net income and earnings per share were $65 million and $0.81 per share, respectively, during the fourth quarter compared to $64 million and $0.80 per share in the third quarter. Adjusted net income for both the fourth quarter and full year 2023 were net of a 23% tax rate applied to our adjusted pre-tax income generated during their respective periods. This rate was lower than anticipated due to the one-time release in 2023 of valuation allowances associated with the FlexSteel acquisition.
We estimate that the tax rate for adjusted net income and EPS will be 26% during the first quarter of 2024. During the fourth quarter, we paid a quarterly dividend of $0.12 per share, resulting in a cash outflow of approximately $10 million, including related distributions to members. The Board has also approved a quarterly dividend of $0.12 per share to be paid in March 2024. We ended the quarter with a cash balance of $134 million, a sequential increase of approximately $70 million. Net CapEx was approximately $9.5 million during the fourth quarter of 2023 and $38.6 million for the full year 2023. For the full year 2024, we expect net CapEx in the range of $45 million to $55 million. The increase from 2023 is due to increased spending on efficiency improvements at FlexSteel's Baytown manufacturing facility and approximately $20 million budgeted for international growth and supply chain diversification in 2024.
That covers the financial review, and I'll now turn the call back over to Scott.
Scott Bender: Thank you, Al. Well done. I'll now touch on our expectations for the first quarter of 2024 by reporting segment. Pardon me. During the first quarter, we expect Pressure Control revenue to be down mid-single digits versus the $180 million reported in the fourth quarter of 2023, as strong production equipment sales in Q4 led to stronger revenues than the level of industry activity would imply. We expect the US land rig count to be approximately flat from today's level in the remainder of the first quarter, although recent weakness in natural gas prices suggest a cautionary outlook beyond this period. Anecdotally, the number of inbound inquiries for frac rental equipment have increased in the past 45 days, suggesting potential for the second quarter of 2024.
Adjusted EBITDA margins in our Pressure Control segment are expected to be 33% to 35% for the first quarter, exclusive of corporate and other expenses, which are now reported separately. This adjusted EBITDA guidance also excludes approximately $2 million of stock-based compensation expense within the segment. Margins are expected to be down sequentially as reduced product sales impact our operating leverage, partially offset by the supply chain initiatives previously announced. We expect our low-cost manufacturing diversification to enhance product margins by the middle of 2025. As mentioned last quarter, new wellhead and valve product improvements are in the process of being introduced, and we expect the rollout of these to more significantly impact operating results late this year as we responsibly replace our current inventories.
Our Middle East expansion plans are underway, testing continues and are still targeting customer acceptance first orders by late 2024. We continue to evaluate opportunities. And while we don't have any further news at this time, we're pleased with the outlook and look forward to sharing a meaningful update on our efforts within the next 90 days. Switching over to Spoolable Technologies segment, we expect first quarter revenue to be up low-single digits relative to the fourth quarter, which would represent a record setting Q1 for FlexSteel, largely on stronger demand for the majors. We're also seeing increased interest from international and midstream customers who recognize the value proposition of the FlexSteel product. We expected adjusted EBITDA margins in this segment to be approximately 37% to 39% for Q1, moderating from Q4 levels on increased input costs that will begin to work through our inventory late in the first quarter.
Note, this margin guidance excludes approximately $1 million of stock-based compensation in the segment. Adjusted corporate EBITDA is expected to be an approximately $4 million loss in Q1, flat from the fourth quarter, which excludes approximately $1 million of corporate stock-based compensation. Consolidation of our customers continues in the sector, improving our industry's efficiency. At this time, we cannot predict the near-term impact on our business other than to reiterate that our business model favors larger operators. That said, we expect a reduction in the US land rig count by year-end following consolidations as the combined entities, high-grade drilling prospects and increased drilling efficiencies. Further risk to the rig count remains, as operators respond to low natural gas prices.
Our company's focus on safety, execution and servicing our customers allowed us to close out a milestone 2023 for Cactus. Although 2024 US drilling and completion activity expectations are modest at this time, Cactus remains well positioned with two segments that generate high margins and attractive returns while operating differentiated, pardon me, value to customers. We expect to generate substantial free cash flow in 2024 that will provide us with optionality to increase shareholder returns over time or pursue organic and inorganic growth opportunities in the disciplined manner that our shareholders expect. With that, I'll turn it back over to the operator, and we can begin Q&A. Operator?
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