Good morning. And welcome to the Cactus Fourth Quarter 2018 and Full Year Earnings call. My name is Mary and I will be facilitating the audio portion of today's interactive broadcast. All lines have been placed on mute to prevent any background noise. For those of you on the stream, please take note of the options available in your event console. At this event, I would like to turn the show over to Mr. John Fitzgerald, Director of Corporate Development and Investor Relations. You may begin.

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 Brian Small, 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 Steve Tadlock, Chief Administrative Officer; and David Isaac, our General Counsel and Vice President of Administration. Yesterday, we issued our fourth quarter 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 to these non-GAAP measures to the most directly comparable GAAP measures are included in our earnings release. And with that, I will turn the call over to Scott.

Thanks, John, and good morning to everyone. 2018 was an outstanding year for Cactus with revenues of $544 million, up nearly 60% from 2017. In addition, adjusted EBITDA at $213 million rose almost 90% year-over-year. I'm proud to report we successfully managed the transition to a public company and our team is excited about the future. The fourth quarter while challenging for well-documented reasons further validated our value proposition. Although our customers delay completions to a greater extent than expected, our business demonstrated resiliency with total Company revenues declining by only 7% sequentially during the quarter. During the period, average US market share in our products business, which we defined as percentage of onshore rigs followed, increased from 27.4% to 27.8%. Further, we were pleased with our ability to hold margins relatively stable in both our product and rental businesses. So, in summary, revenues fell 7.2% sequentially, adjusted EBITDA decreased 12.7% sequentially and adjusted EBITDA margins declined from 40.7% in the third quarter of 2018 to 38.3% in the fourth quarter of 2018. I'll now turn the call over to Brian Small, our CFO, who will review our fourth quarter financial results and following his remarks, I'll provide you with some thoughts on our outlook for the near-term before opening the lines for Q&A. Brian?

Thanks, Scott, and good morning. Q4 revenues at $139.8 million were 33.4% higher than the equivalent period last year and 7.2% lower than in the third quarter, as Scott mentioned. Drilling-related activity was relatively flat, but completion-related activity witnessed a decline during the quarter. Product revenues, which include consumables used in both drilling and production, were 38.1% higher at $78.9 million than the equivalent period in 2017 and 0.6% lower than Q3. Product gross margin of 42% was 760 basis points higher than Q4 2017 and 100 basis points higher sequentially, but lots were due largely to product mix. Rental revenues at $31.2 million or $6.7 million greater than Q4 2017 and $6.9 million lower sequentially. The decrease was attributable to reduced completion activity from our customers towards year-end. While the increase compared to last year is due primarily to the increased investment in our rental fleet, allowing us to increase market share. Field service and other revenues in Q4 at $29.7 million were $6.6 million higher than Q4 2017 and $3.4 million lower than Q3 2018. Lower revenues versus the third quarter were driven by a decrease in billable hours for our work site to completions related activity and the typical Q4 seasonality during the quarter. The movement compared to last year is due to an increase in billable hours met by adding service technicians and related ancillary equipment. Field service revenues represented approximately 27% of combined product and rental-related revenues during the quarter. SG&A at $10.5 million for the quarter was $3.9 million higher than Q4 2017 and $0.5 million lower than Q3 2018. The sequential decrease was primarily from lower professional fees while the majority of the increase compared to 2017 was due to additional payroll expenditure and other costs associated with being a public company. We…

Thanks, Brian. Our products business continues to be primarily driven by the total number of wells drilled, which is abetted by improving secular trends such as more wells drilled per rig and larger pad sizes. So far this year, our rigs followed has remained relatively stable despite the slight decline in the US onshore rig count as we've successfully gained market share with new operators. Importantly, our customers have resumed completion activity, and we've seen a more normalized level of production tree shipments, which had declined towards the end of 2018. We now believe our Q1 2019 product revenues should be up in the high single-digits quarter-over-quarter. Looking further out, we remain cautious regarding the level of overall drilling activity despite the more modest than expected rig count decline to-date. As rigs roll off contracts, we would anticipate that private and public E&Ps will reduce spending. That said, with the recent recovery in crude prices and the tightening of differentials in the Permian, we believe that the pull back while delayed maybe more muted than previously thought within our customer base. Regardless, we believe, we remain well positioned to gain market share in 2019. During the fourth quarter, our customers displayed a willingness to drill new wells at a fairly steady pace, but were less willing to complete wells in that lower oil prices. However, as budgets have reset in the New Year, growth and completion activity has exceeded the growth of our product business during the first half of the quarter. As we look to 2019, improvements in general completion activity should outperform the change in E&P budgets due in no small part to cost deflation and large ticket service items such as pressure pumping and sand. We believe this improving backdrop could generate an increase in our rental…

[Operator Instructions] Our first question is from the line of Marshall Adkins from Raymond James. Your line is open.

Can you hear me guys? Okay. Sorry. I was getting some feedback. Let's go to the tariff impact. You gave us a lot of good detail on what you know right now. I'm curious on a couple of things. First of all, just your latest thoughts on where this ultimately goes. I'm not sure you have any more insight than I guess the rest of us, but it is a big deal for you. So I'm just curious on where you think it goes? And secondly and probably, and more importantly, how are you positioned on the tariffs versus your competition? I know you have the manufacturing here in the States that probably helps you. But I'm just curious as to how that position you in the competitive landscape given what the tariff situation are today?

Okay. Well - in terms of where this is all going, I think it's fair to say we're far more relaxed about the increase to 25% than we were during the fourth quarter of last year. And I think evidence of that is our behavior in terms of imports. So, we accelerated, as Brian mentioned, our inventory receipts during the fourth quarter in the anticipation of the 25% - of an increase to 25%. We have not taken similar steps this year and I guess that decision was validated by the USTR's decision to put on indefinite hold the increase to 25%. That's the reason also that Brian mentioned that he felt like our working capital ratios would revert back to normal over the next period of time. So I guess the short answer is it's not of I think a priority in terms of our concern landscape. And we were during the fourth quarter, sort of, aided by the three factors that we spoke about at the last call that I don't think I need to reflect upon again. What's your next question, Marshall?

The competitive landscape, how are you positioned? Let's just say it stays at 10%. How are you positioned versus all of your key competitors?

So most of our key competitors rely upon China. China, as we have remarked before, has a - still has a competitive advantage. We felt like it had a competitive advantage even at 25%. They're not very many US manufacturing facilities as you know and you made reference to about half of what we do, half of our cost of goods sold relates to Bossier, about half of our product cost of goods sold relates to China. So I feel like we're in pretty good shape in that regard. That's not to say we can replace China with Bossier City. We don't have nearly enough capacity to do so. You know that our major competitors, one of them have a manufacturing facility in Western Europe. Our view is it's probably not competitive with China, although it won't suffer from the tariff risk of China. The other major competitors and certainly the Tier II and Tier III suppliers rely very, very extensively on China. My gut feeling is and Joel can maybe expand upon this, we're probably less exposed than that next tier of suppliers in terms of China.

We are. And I think we've done a good job with our supply base in China. We've looked at other countries as well. And again the conclusion, we've come to and we did this again, we've got it repeatedly over the last several years, we've looked around at other options and still with the tariff being at 10% or 25%, there is still a cost advantage to bring your product in from China, which is where we continue to expand our supply base.

Perfect. That's very helpful guys. Last one for me is on the same issue. It appears that we're going to get some pretty - if you go back to historical levels of working capital that the build-up you had in Q4 should translate to a pretty healthy boost and just free cash flows this year. Is that the right way to be thinking about it?

I think you're directionally correct, Marshall.

Our next question is from the line of Chase Mulvehill from Bank of America Merrill Lynch. Your line is open.

Good morning. So I guess - I want to come back to the guide a little bit. Obviously, a pretty positive guide on the top line, do you care to kind of elaborate a little bit with - how you think margins unfold in the first quarter across each segment?

Well, I mean, I'm not something I really want to do, but I'm happy to give you some idea.

Just maybe directionally. I mean, you said slightly down. Is that slightly down overall?

I would say for rental and product, the margins should be down slightly. I think for service, they should be up considerably. Now, of course, services - 26%, 27% of what we do. The reason for, I guess what I think to be our realistic approach to margins in rental in particular is really two-fold. We did bring in some rental items into the fourth quarter, just like inventory to avoid the 25% potential tariff increase. Secondly, the product mix within our legacy rental fleet changed in the last, I'm going to say, 60 days, and we expect there to be a change going forward. And what that means is because we rely to a large extent our Far East supply chain for rental items. Some of the items that we had expected and were short supply in the summer became less gear and items that we had in our inventory - existing inventory of the high pressure valves they came in much greater demand. So we focused a whole lot of attention on redeploying those assets and I can tell you having done this for quite a while and reflected back on the end of 2016, whenever we have a period of fairly robust increase in rental valve demand, it's always manifested itself in increased repair costs as we begin to harvest the assets that we already have in stock in addition to buy new ones. In terms of product, the product margin compression is largely anticipated as we begin to roll out the pre-tariff inventory that we spoke about earlier, and an increasingly high percentage of the inventory that flows through cost of goods sold, it flows through at the higher tariffs applied costs.

Okay. And maybe you could help us, and I don't know if you know this off the top of your head, but in the fourth quarter, how much of that high tariff cost flowed through in the fourth quarter and how much of that do you expect to flow through in the first quarter?

I don't think I can answer that question. Maybe Brian, are you comfortable. I don't know that we've broken that down.

You can see obviously is that for Q1 2019, basically is the full Q1 time, new Q1 2019 is going have product coming through with the tariff price, and for Q4, broadly speaking, could be 50-50 - 50% pre-tariff, 50% post-tariff.

And Chase, I wish we can be more precise, but we don't really track it.

Yes. No, that's good. And I guess - and we think about - you gave some good top line guidance here especially kind of products and rentals, but coming back to products, what do you think your market share looks like quarter to date on the product side?

I think it's up slightly.

Okay. Right. Last one and I'll turn it back over. You know, I think we're all pretty excited about what you've got coming on the completion side, I know you don't want to talk too much about it. But maybe, could you just talk about barriers to entry with what you're doing, what kind of mode, I mean, how comfortable are you around the barriers to entry and do you feel like you have a competitive mode that you'll be able to sustain that business?

So, I will let Steven maybe respond to that.

Yes, I think that our goal with these completions innovations was to build a similar mode around our rental offerings that we enjoy with our products - our drilling products and there's no doubt that a lot of the industry focus right now is centered on completions efficiencies and we are being purposely opaque about the technologies, because we don't want to tip our hand. But some of these technologies were developed to improve upon existing technologies. So, things that we saw that were in the field that our customers came to us and wanted to try and do things better and some technologies are just completely new to the industry. So we're in the unique position that we work collaboratively with our customers to develop these. So, it's hard for me without going into more detail to answer that question maybe, but what I'd say is, this is a focus in the completions part of our business that previously had been reserved just for wellhead and I think you're going to see similar levels of innovation on the rental side that you've seen in drilling.

Chase. Let me just - I want to just slightly elaborate on that. So - and then we can move on. The Cactus' business model has been to innovate and execute, so you can't innovate without executing and that I don't know how much of our mode would be attributable to innovations as respect to drilling and how much to execution, but, don't need good innovate if you don't - if you can't be on time and service it adequately. So, it's sort of our same philosophy, yes, these are - these innovations are we believe are highly differentiated, but don't minimize the importance of the Cactus execution model.

Our next question is from the line of David Anderson from Barclays. Your line is open.

Well, Scott, that's quite a tease on the new products here, so I guess we just have to trust you and stay a little patient here. On a different subject, I want to ask about on the wellhead side, you're being gaining share basically every quarter, really kind of every year since 2011. I'm sure servicing, as you said, execution is a big part of that, but I also have to think you have to attribute a bunch of your share gain is differentiated offering, which is ideally suited for unconventional. I guess sort of begs the question what your larger competitors are doing? We don't really hear them much for them on the subject. I mean, should we take that to mean that they haven't really closed technology gap at all. I get the sense that may not they be trying. I mean you just kind of give us a little concept - a little color on kind of what you're seeing on the competitive side of the market?

David. Somebody asked me a couple of calls ago what keeps you up at night, and I said it two things keep me up at night, safety and our competitors. So, yes, our competitors see what we do, thanks in part to being a public company now, and you have to assume and we always assume that they're doing their best to close the gap. And that's part of what the pushes us to continue to innovate. So we talk about the frac innovations, but I want to give you some comfort from this call that we haven't stopped innovating in terms of our wellhead offerings. So, the shorter answer is, yes, they're responding. I think at a large degree, the industry is probably doing a better job overall than they did two years ago as because they view our success but it just pushes us harder.

Kind of curious if I can shift maybe on your frac tree side. I guess, obviously, another party business, which is clearly differentiated. Where are you today on kind of the utilization of your frac tree assets? Are you kind of 100% utilized and kind of a follow-up question, I'm just kind of curious, I know this is an area you'd be spending some capital and building this out on your rental fleet there, but can you just give us just kind of a rough sense of how much it's grown over the last year, how much is going to grow this year? I mean, is it 10% this year and 10% next year? I'm not asking for numbers just sort of kind of give me in the ballpark of kind of how you see that business growing?

So, David, are you asking about investment...?

Right. Well, I know it's kind of sort of one of the areas that you've been spending money on is building out those factories. I'm just kind of curious despite sort of kind of the number that you can put out in the field today. Kind of how much bigger is that today than it was last year? How much bigger is it going to be, say, at the end of this year do you think in terms of addressing that market?

Mr. Tadlock has offered us to respond it.

Thank you. At the end of 2017, gross rental PP&E was about $85 million and at the end of 2018 it was about $124 million. And I think we referred about $50 million of rental CapEx for 2019 that gives you a sense of the total. We really don't think about in terms of individual factories because factory is different. We always think about in terms of gross PP&E as well at paybacks.

Okay. That's helpful. I guess kind of the final question. So related there we've just heard from, Chevron and Exxon just came out their Analyst Days emphasizing the Permian programs, maybe can you just talk a little bit about how that's changing your market at all, maybe how this customer differs from nutritional E&Ps in terms of the technology they're requiring? How the pricing is procurement? Clearly, it's a shift in for your customer base; just curious what that actually means the Cactus in the next couple of years?

Well, first let me just tell you, David. We love all our current and potential customers, but I don't think it would be any secret or any surprise if I tell you that we find that independence and in the large publicly traded E&Ps embrace our innovations more enthusiastically. So we get a much better reception when we make a proposal to sort of the non-Chevron or XTO customer base. I would say that in terms - so that's on the drilling side. I'd say, on the frac side, the completion side, that's not the case that we see the IOCs very receptive to innovations.

So can you help me understand the difference between why on one side do they like the innovations but the other side the business you've done kind of surprised by how that look at one versus the other?

I don't want to - this is my very, very personal feeling. Majors or IOCs are just more risk averse. And so on the drilling side, if what they're using isn't broken, isn't shutting down a rig, they are less likely to embrace change or that Independent are going to take execution for granted, because they are very, very critical in terms of suppliers who don't perform and they focus more - they are focused at least in our brief history far more on efficiency gains and willing to take the risk of trying something new. So I think it's really a risk profile, it's the fact that the customers with whom we do business are probably flatter organizations, less committees and drilling has always been a very, very high profile despite the fact - item - despite the fact that it represents 1% or 1.5%. On the frac side, by contrast though, I think you probably know there are maintenance issues on our frac pad and maintenance issues on the frac tree or another supplier cause an out-sized impact on the economics. And so because perhaps the failure rate or the reliability rate has been lower, the majors view that to be - that risk of change is minimized in terms of the potential reward. So on the one hand, you have a product that may not be breaking down but promises rig time savings, on the other hand on the frac location, you have products that are more susceptible to reliability problems.

Our next question is from the line of JB Lowe from Citi. Your line is open.

Hi, good morning, guys. Just a follow-up on the question about the majors. The more accepting of - you're talking with guys, I guess, on the frac side of the business, is there any potential for you to kind of use the frac side of business as a pull-through to get them to talk about your wellheads and how do you go about doing that?

We try it every day. Two different departments, never mind - two different departments, you have the drilling department; you have a completion and production departments. It is very helpful, but it's much better to start with a customer who is used to - with whom we have an MSA. You have a record in terms of safety and reliability. It makes the net sale so much easier. But it's certainly not a slam dunk as evidenced by our market penetration or lack thereof.

All right, got you. And then just a question on the - you mentioned the your exit 2019 rental revenue could be 20% higher than your exit 2018 rental revenue due to the new innovations. Is that assuming that your legacy frac business is flat or is - does the growth rate on the innovation side bigger assuming and that means that the legacy side is getting a little bit smaller?

It does not assume that our legacy rental business will - it doesn't assume suffering in our legacy rental business.

Our next question is from the line of Tommy Moll from Stephens. Your line is open.

Good morning, and thanks for taking my questions. So recently, you - including this morning, you mentioned you're planning to add two more CNC machines at Bossier. So I think that brings you to 16 total. Pro forma for that, where does that put you in terms of utilization at Bossier or ask different way, if you keep taking wellhead market share like you have been in recent quarters and years, how long of a runway, do you see before there might need to be more growth CapEx there or is it far enough out that it's still hard to tell at this point?

This was - we made this decision last year basically to provide us with additional capacity for some of the drop in orders, plus additional capacity to continue to maintain the rental CapEx. So, I feel like we're in good shape. I don't really feel like we've gotten much in the way of further requirements. The facility right now runs at about, I would say, 60% to 65% of capacity. I do need to medicinal machine tools right now but some has changed that Scott spoke about with the rental CapEx fleet to be able to provide some of these higher pressure valves.

Okay. That's helpful. Thank you. And then as a follow-up, there's been quite a bit of discussion on the margin impact from tariffs and then how you have mitigated that to some extent by pulling forward some orders in Q4. If 1Q margins will be hedged a little bit, how far into 2019 should we expect that trend to continue?

I don't think you're going to see further pinching.

Okay.

That wasn't very eloquently stated.

Our next question is from the line of Martin Malloy from Johnson Rice. Your line is open.

Good morning. Just looking at the new products on - for the rental side. Will there be any impact as you ramp up through the course of the year and add field personnel related to these products on the margins?

No, in fact all of our existing personnel on location for operate these technologies, so there's no additional service required.

Okay, great. And then -

And that provide kind of a moat as well, if you can appreciate that. So the incremental cost of the customer won't include additional personnel as it may with competitive offerings.

Okay, great. And a follow-up question, just, this has been asked twice earlier, but just on the IOCs, is it a matter of time do you think for them to test and accept you wellhead products and eventually you're going to start to see more inroads made?

Well, yes, Martin, that's been asked many times, not just twice. The majors - the IOCs that are of interest to this group probably have 125, 135 of the US rigs, OK. There some other IOCs in there, but the ones that I guess have garnered all the attention. We wouldn't be doing our job, if we weren't hard behind those prospects and we haven't stopped.

Our next question is from the line of George O'Leary from Tudor, Pickering, Holt & Company. Your line is open.

Good morning, guys. I just had one question around - you guys tend to be very collaborative with your customers, and I think that's one of the under-appreciated parts of your stories. As E&Ps have pushed into more of a kind of cash flow and returns focused business model, is there any change on the items that they want to collaborate with you on or said another way, any areas that there are acutely focused on adding efficiencies to or reducing non-productive time?

So, George, that's a very good question and I have to answer it, but that there are two responses. The first is, NPT has - the focus on NPT has continued to increase, which we view as a positive thing. It's harder to quantify but it exists. And so it makes a pitch toward technology that addresses that - pardon me, much more compelling. That's one side of the equation. When oil prices dropped to $45 as you might imagine, the collaboration get sidelined in favor of procurement. Procurement is less interested in talking about NPT and more interested in talking about price. And that of course is not terribly constructive for this business, although it does as it did in 2016 and 2015, provide us with some introductions that we might not normally have had previously. So, we'll take an introduction on any basis, be it to discuss price or be it to discuss innovation because introductions and introduction, so I wish I could be more clear. But it really is coming - I think that the level of interest comes from two different areas.

No, that's helpful color and I certainly appreciate it. And then just following on from - you guys gave good color on the rentals guidance sequentially Q-over-Q in the first quarter of 2019. I was wondering if - maybe you could parse out how much you think of that is - that impressive growth rate is kind of underlying completions activity improvement versus the low levels we saw most notably in December and how much of that maybe market share? Maybe just talking about January versus December and February versus January would be helpful. And then, not to be too short term as we look at 2019, you mentioned you got completions might actually be given some of the other moving pieces on the completion side, so if you could speak to maybe your outlook for the cadence of completions in 2019 and how that progresses. Any color there would be greatly appreciated.

Let me talk to you about the cadence of completions. So we saw - and in terms of - well, I'll touch on all that and then I'll let Steven supplement my remarks. We saw a number of customers who at the end of the year had just flat laid down their frac crews. So we saw a return of that in January, but we also saw market share cadence in January. I don't think we've gone back to maybe quantify how much of it was market share gain versus how much of it was a return to just whatever normal activity levels, however, you define that. But I'm gratified to say that while we've normally maintain that our frac market share was in the 10% or below, we're comfortable in saying that now we are north of 10%, south of 15% probably more south than we are north, but there's no question that our market share has increased in terms of the frac rental side of our business. In terms of the cadence, well, you know what I think is - what I would caution and I mentioned this at the last Investor conference, don't look at these DUCs, the way you looked at them before. I think there are a lot of DUCs that probably will never be completed. I think there's a level of DUCs than most of our customers want to maintain in inventory for reasons of flexibility and efficiency. You know all that. So the question is what will this the takeaway improvements, how will that manifest itself in additional completion activity. We're just not assuming a tremendous benefit from that, although I think that we all share the thought that there will be a pickup in completion activity in the third and fourth quarter. I don't think that it's going to be perhaps of the magnitude that a lot of people have maybe mentioned, it's not going to be a panacea, but honestly, you know, we're happy to slug away with slowly increasing our market share paying attention to our capital investment, relying upon our new innovations to build a moat. So we are looking for more of a maybe a smooth increase I think in our frac rental business.

There are no further questions. Mr. John Fitzgerald, I turn the call back to you.

Thanks everyone for joining, and we look forward to speaking with you on our next call.

Enjoy your spring break everybody. Thank you.

This concludes today's conference call. Thank you all for joining. You may now disconnect.