Good morning. And welcome to the Cactus Q4 and Full Year 2019 Earnings Call. My name is May, 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 time, I would like to turn the show over to Mr. John Fitzgerald, Director of Corporate Development and IR. Sir, please go ahead.

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 afternoon, 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 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 us -- 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.

Thanks, John. Good morning to everyone. 2019 was a challenging year for the US oil field industry. Although, the US rig count was down 11% year-on-year and E&P spending was down around 7%, Cactus achieved impressive results. Our 2019 revenue was a record $628 million, up 15% over the previous year. We also reported record EBITDA of $229 million, up 8% year-over-year, record free cash flow of over $148 million, up nearly 60% year-over-year. The fourth quarter, while challenging from a general activity standpoint showcase the sustainability of our margin profile and free cash flow. In summary, fourth quarter revenues were $140 million, adjusted EBITDA was $48 million, adjusted EBITDA margins were approximately 35%, our cash balance increased by $35 million to $202 million and we paid our first quarterly dividend of $0.09 per share. I'll now turn the call over to Steve Tadlock, our CFO, who will review our fourth quarter 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?

Thanks, Scott. Q4 revenues of $140 million declined nearly 13% sequentially. However, revenues were up slightly year-over-year, despite a rig count drop of 24% from Q4 '18 to Q4 19. Product revenues at $83 million were 10% lower sequentially, due in large part to the 11% decline in the US onshore rig count, but were 6% higher than in Q4 2018. Our relative outperformance was achieved due to greater market share. Product gross margins were relatively stable on a sequential basis at approximately 37% of revenues, as the follow-through impact of Section 3O1 tariffs was less than expected. Rental revenues were $28 million down 21% from the third quarter. The decline was attributable to reduced industry completion activity at the E&P customers curtailed spending in order to stay within full year budgets. Rental gross profit margins decreased 620 basis points sequentially due primarily to increased depreciation expense on lower revenue. Field service and other revenues in Q4 were $29 million, down 12% from the third quarter. This represented just under 26% of combined product and rental-related revenues during the quarter, slightly ahead of expectations. Gross margin declined 640 basis points sequentially, which was less than the typical seasonal drop due to management of non-productive time during the holiday season. In Q1 2020, we would expect this field service ratio of revenues to be 24% to 25%. SG&A was down $1 million sequentially at $12.4 million for the quarter. We would expect SG&A to be approximately $14 million in Q1 2020 with stock-based compensation expense running at slightly above $2 million during the quarter. Depreciation and amortization expense during the quarter totaled $10.6 million, up $0.6 million sequentially. We currently expect first quarter 2020 depreciation expense to be approximately $11 million. Fourth quarter adjusted EBITDA was $48 million, down from nearly…

Thanks, Steve. Our margins held up well despite the challenging fourth quarter further validating the strength of our business model. During the fourth quarter, our product market share reached a record 30.9%, moving 230 basis points higher versus the third quarter. While our product market share figure for the period still did not reflect any changes in adoption from the majors, we continue to work on gaining share with a wide spectrum of new potential customers, assuming we can be appropriately compensated for the value provided. Down markets tend to provide us with opportunities as customers look to become more efficient. Based on results to-date, we expect Cactus as rigs followed to be up slightly on a sequential basis in Q1, despite the US land rig count being down 4% on average quarter-to-date. Product revenues are likely to be up mid-to-high single digits percentage-wise. Despite the increase in Section 301 tariffs to 25% that occurred in 2019 and overall market pressure during the latter part of the year, our product margins have continued to hold up well, as previously mentioned. Joel and his team of intensely focused on managing our costs. We expect product EBITDA margins during the quarter to be approximately 37%. On the rental side of the business, completion activity witnessed a noticeable decline particularly in the SCOOP/STACK. Overall, during the fourth quarter, customers work to stay within their full-year budgets. As noted in our previous call, we have made the conscious decision not to chase business at significantly lower prices nor to compromise the value proposition our innovations provide. The benefit of the strategy and our attention to controlling indirect expenses can be seen in our ability to sustain attractive EBITDA margins in 4Q despite reduced activity levels. Much like last year, our customers have quickly return…

Thank you, sir. [Operator Instructions] Your first question is from the line of George O'Leary. Your line is now open.

Good morning, Scott. Good morning, guys. Super impressive market share on the product side of the business and you guys seem to guide for increased market share in the first quarter. I wonder if there is more to go there as the year progresses or if you guys are kind of reaching a point at which you may be topped out on market share in the product side. It's a very impressive numbers, so curious kind of what the trajectory looks like your mind?

George, historically, downturns have been beneficial to Cactus and I think the team feels, while we're not happy about the downturn, we are happy about the opportunities that we see opening up.

Okay. And then, the rentals guidance for Q1 is super encouraging as well. I think you said, 20% quarter-on-quarter, correct me if I'm wrong. So, clearly, taken some market share there. Is that more legacy products scrubbing incremental share or the newer products that you guys commercialized last year, is that more of the driver?

Yes. George, it's really both and it's a reflection of our customer base, getting back to work. And that customer base, particularly the high end of the customer base, they tend to utilize a higher percentage of our innovations.

Okay. That makes a lot of sense. And then you mentioned the international expansion. I wonder if you guys could just provide us an update there. I think you are deploying some CapEx into Australia. In particular, if you kind of broadened the scope of what you guys are looking at there and the Middle East was a target for you guys as well. So just curious for an update on international?

Yes. George, as I said in the last call, I'm not really going to talk about the countries that we're focusing upon. But, yes, we're -- our focus is well beyond Australia right now.

Thanks very much guys.

Thanks, George.

Your next question is from the line of Sean Meakim. Your line is now open.

Good morning, Sean.

Thanks. Good morning. So, Scott, in a situation in which the Coronavirus leaves you with less Chinese capacity for an extended period, could you maybe just elaborate on the alternatives that you could pursue in around Bossier City to sustain product volumes and try to mitigate the margin impact and rather third-party flex capacity options. This is clearly the number one question on the minds of investors, so helping to frame out a more negative outcome, I think, it would be very much appreciate it?

Okay. Well, I'm going to really let Joel get into more details about the supply chain, but Sean just to remind that we have been doing this for a long time and Joel is long recognized that Chinese New Year always caused disruptions in our supply chain. So we heaved it up on our inventory during the fourth quarter and so we have ample stocks in the US. But I'll let Joel address Bossier City's capabilities and the alternative sourcing available outside of China.

Okay. So we've a significant amount of capacity in the Bossier City facility right now, mainly in the machining area, I think, we're probably at about 60% or so. The increase in the inventory that we brought in from China has really provided us with additional capacity in terms of the machining part of the business, the assembly part of the business continues to be strong and we certainly have plenty of assets there, and certainly, a lot of potential for adding additional people to the -- to a second shift and adding a third shift. In addition, we've been expanding our supply chain outside of the US and outside of China. So we have some developments going on in these other places at this point, which I don't want to speak about particularly in specifics. But we have been -- ever since the tariffs came into play, we have been looking at alternate sources and we do have products coming from their sources right now. In addition, we have additional supply base in the US, again, help us if we need to gap it, but like Scott said, I'm pretty comfortable with our inventory levels right now in the US. And I'd like to just follow up on China, we've had some really encouraging news from there. Our guys are -- majority of our guys are back to work, the majority of our critical suppliers are back to work and we've seen deliveries since, I guess, about the middle of February come into the facility, since then we've made shipments to Australia and shipments into the US. Trucking has been an issue, as Scott mentioned, but we've been fortunate that our freight port was able to secure drivers and trucks are moving the goods, the port has not been a problem and loading the vessels and getting vessel departures has not been a problem. So I'm really kind of encouraged at what I've seen so far from China and I feel like we can manage the disruptions in the US if we need to.

Thank you for that. That feedback is really helpful. And then if we -- so if we take all that together, we say in a more dire situation in terms of the impact of the virus for an extended period, how should investors think about margin and mix, are these other -- these alternative sources sufficient from a margin perspective that you can mitigate a lot of the impact or should we expecting such a scenario that there'll be more pressure on margins as that mix of sourcing changes?

Sean, look, there is -- we do business in China for a reason and there are very few areas in the world that can compete with China. So to the extent, China represents long-term, a smaller percentage will naturally struggle to maintain margins. I think the concern has to be more worldwide and as much as China is the source of so much of the consumable products in this business and that's not just for us, that's for everyone and it's not just for the US, it's throughout the world. So I'd be thinking more about the supply disruption, frankly, then the margin impact. My feeling based upon the years I've been in this business materially gets dear and scarce that margins will take care of themselves If you understand what I'm saying, it will be more an issue of the world's ability to produce enough consumable products.

Right. That point is very well taken. Thanks, Scott.

Thanks, John.

Your next question is from the line of Scott Gruber. Your line is now open.

Yes. Good morning. Just to stay on the same line of questioning, I heard 60% mentioned during the China commentary, was that the rough percentage of wellhead volume produced in China in 4Q?

That 60% was capacity at Bossier right now in terms of where we are. So we're just trying to indicate that we have additional room at Bossier for GAAP [ph], our near-term requirements, things of that nature.

And roughly how much of your 4Q wellhead volume was produced in China.

About half of it.

And it sounds like you given that the tariff situation that you were already looking to diversify your supply chain. Just from a high level, as you look out, call it, three years, four years, how big of an exposure do you want to retain in China, obviously, the lowest cost, but just from a diversification perspective, how would you want to balance things out kind of three years, four years, five years down the road?

Sean, I'm sorry, Scott, I don't really think we're prepared to answer that question, except to say that that four years or five years from now China will be hopefully less important to this business than it is today.

We have our next question from Tommy Moll. Your line is now open.

Good morning and thanks for taking my questions. I wanted to shift the conversation to your capital -- your CapEx budget for the upcoming year. Could you break down for us the different pieces of gross capital? Steve, I know you mentioned that there were several initiatives, but I didn't catch all of them. So any additional detail you could offer there would be helpful? Thanks.

Sure. So I think if you look at the budget for 2020, we are expecting to spend about $5 million to $10 million on general maintenance items, $5 million -- roughly $5 million on infrastructure, whether that's branch improvements or the R&D facility expansion that we talked about. And then the remainder, which would be $20 million to $25 million would really address the rental and that goes for Australia and International rental. Some of the higher pressure equipment that we talked about and the innovations and that's significantly down from last year when we were about $45 million on rental.

And then, following that up on the International side specifically, as we anticipate some revenue tailwinds may be in the 2021 timeframe, like you mentioned earlier, should we be thinking about any kind of incremental roofline requirements may not be baked into your budget for this year or just any kind of incremental SG&A or any -- anything on the capital spending or the cost side that we should anticipate in front of maybe when the revenue starts to hit?

Yes. So we've already begun to incur additional SG&A and our budget contemplates additional SG&A to take care of our International business. But I think, I probably mentioned before, Tommy, it doesn't require an extraordinarily high level of SG&A particularly at this stage, 2021 may be slightly different, and hopefully, it will be. Roofline wise, I wouldn't anticipate a great deal of CapEx that will be devoted to roofline expansion.

Your next question is from the line of Martin Malloy [ph]. Your line is now open.

Good morning. Nice quarter.

Thank you, Marty.

On the International initiatives, could you maybe, not speaking about specific countries, but talking about -- talk to us about the process and timing maybe in terms of getting products certified and when we might see revenue?

Yes. So I think, I mentioned in the last call, the process is, of course, getting on approved vendor list, that's the first step in being able to compete on a tender. Most of the tenders come out at the end of the year. So there'll will be the end of 2020 for deliveries in 2021. Now we might see some drop in ad-hoc orders come in before that, but in terms of any large or larger revenue impact you ought to think about 2021. In terms of how we look at the International market and think about the strength of this business. We're not very good. What's just simply because we don't focus on the commodity side of the business. So there are a lot of NOCs throughout the world who still buy commodity conventional type wellheads that would not be a market in which we would invest any time or money. And I don't want to, again, I'm not going to talk about countries, but you can imagine the NOCs that that take that approach in their buying.

Okay. And then on the rental side, you had multiple new product introductions last year. Can you maybe talk about if we should look for any new product introductions this year, I'm sorry if I missed that in the prepared remarks?

Yes. We've got quite a few that we're working on right now. I think it's probably a little premature for me to try to estimate when we will commercialize those. But we're moving about in the field test. So, yes, we have several new products both in the wellhead side and in the frac and the completion side.

Next question is from the line of Blake Gendron [ph]. Your line is now open.

Good morning. Thanks for taking my question. I hate to keep harping on it, but I'm going to ask Sean's question in a different way or the opposite way. It's easy to obviously think about the constraints in China, given the market team now, but we understand the government could potentially put more liquidity into that market. And if the trucking issue abates would there actually be a blue sky opportunity in which you could actually shift further to Chinese manufacturing just given some of the cost and currency tailwinds maybe later on in the year? Thanks.

So let's say, if I understand your question, you're asking if China loosens up, we all read the paper I'm sure this morning and the government is fighting the battle between health issues and trying to spur their economy. So if China loosens up more, what I see more emphasis on China that would be the lazy man's approach is to say that this problem is past and we don't face this risk. So, I think in terms of how you think about our company. Our view still is to become less dependent upon China in the -- in future years. That may not be the case by the end of this year, but certainly in future years.

Okay, that makes sense. And then, secondly, just on customer issues in the US as oil continues to pull back here, from one of your capital equipment peers, it seems like they had some modest issues in the fourth quarter with bankruptcy and bad debt expense. Just wondering if you can give us an idea of your customer exposure with respect to larger versus smaller and independent customers. And then maybe how you approach commercially aligning yourself with respect to creditworthiness and solvency that sort of thing?

Well, I'll let Steve maybe address the specifics of your question. But just at a high level, we are extremely aggressive when it comes to receivable collection. We're extremely aggressive in terms of scrutinizing our customers both at the time we add them to our list and we monitor their credit limits very closely. And as a result, we've had minimal impact from some of the bankruptcies that have occurred in the industry. I think we published. Go ahead, Steve?

Yes. I mean, generally, in our investor decks we publish based -- our overall activity based on large E&Ps, mid-E&Ps, privates, majors, et cetera, and on the large E&P side, we're about 50%, mids about 15%. These are Q3 numbers I'm giving you but should not change much. Majors about 10%, which is frac work mostly. And then on the private side, a little under 20%. But like, Scott said, we're very vigilant particularly in this environment and we're kind of all over. If we're not getting paid and monitoring credit limits, we will demand cash upfront or just not ship and that's just kind of the way it is. I mean, that's kind of how they expect to deal with us, if they expect us to jump through hoops to deliver on time, we expect to get paid for it.

Your next question is from the line of Kurt [ph]. Your line is now open.

Good morning. Scott, if you kind of curious as you look at your baseline view for 2020. You mentioned that the new technologies are going to represent, well, have represented so far in the first quarter about 15% of total revenue for the rental business. As you look out for the rest of the year, what do you think the new technology revenue contribution could be for 2020 in total?

You know, I thought it was going to be frankly better in the fourth quarter than it was, but we face this significant reluctance from our customers, despite I think the value proposition to spend another dollar on a frac location. So barring that, I think, we'll continue to march that percentage up about 20% as the year progresses.

Okay, great. That's great color. And then just one quick follow-up, the discussion here about the incremental SG&A related to the International expansion and that not really being meaningful but you did indicate that SG&A in the first quarter be about $14 million. That's higher than the run rate was throughout the course of 2019. So is it fair to say that that incremental SG&A pretty much will hold through the rest of the year and then incremental SG&A is all related to the International expansion, is that fair?

No, it's not fair. So there is a component of it that is related to International, the other is stock-based compensation. So I can let Steve explained to you, but we went public in February of 2018 and because of the way we invest, I think, we'll -- is it fair to say, we will peak?

Yes. We should be peaking this year in terms of SVC [ph] and then coming down next year as some of the IPO grants come off, so that's driving and we adjust that out in our adjusted EBITDA. And then just in terms of SG&A in fourth quarter, we were just extra vigilant and also reduced activity. We can pull some levers when we have reduced activity. So naturally as we're kind of growing again we would expect a little more SG&A.

Your next question is from the line of Praveen [ph]. Your line is now open.

Good morning, guys. I guess I wanted to clarify some of the China commentary here because, I guess, I think, of it as almost everybody being equally as competitively disadvantaged in the space. So, I guess, could you give us a sense as to how much you think of industry wellhead product supply comes out of China. And then I know you're not going to be able to pass along 100% of anything, but how do you think it affects the margin per unit?

So, that's a very good question and I'm going to wing this as I'm trying to think through my mind about all of our competitors. Joel would you say 90% of it is 80% comes, I mean, I think, it's definitely 80% and may be north of that the way certain people bring products out. Sometimes they bring finished products out. I know we have a competitor that tends to bring forgings out into other countries to produce from there. So I would say, it's at least 80% and probably greater than that.

So, then your -- the more important question is about the margin impact and in this environment you're not going to see any significant upward pricing until supply becomes tight. So right now there appears to be ample inventory both with us. And yes, probably, say, showing signs maybe to a lesser degree with some of our larger competitors.

Right, that makes sense. And then when we think about the product side, you mentioned some of the new innovations that you're working on. Can you talk about the potential, I know it's getting ahead of everything, but the potential addressable market of those compared to your current addressable market and then also how cross-selling has trended over the past few quarters, number of innovation that's on the well site?

So the new products that we'll be introducing on a wellhead side -- will really be upgrades to our existing product line. But you know this is consistent with the company's philosophy of building a moat around our wellhead business. It's a way we protect to retain customers. It's a way we protect margins. It's by always having a better mousetrap or continuing to at least try to have a better mousetrap. So think about -- it's not going to open up any new revenue streams, it's rather going to protect it and perhaps allow us to continue to ensure that we have good margins. What was your next -- what was your other question? Oh, cross-selling opportunities. Between frac I assume and wellhead, they really, I guess, it's fair to say, that we've seen more opportunities that in down markets customers tend to high grade their suppliers and not only high grade but reduce the number of suppliers on location. So I think, and as you've seen it before in our business, downturn seem to be very constructive in that regard.

Your next question is from the line of Matt Dushkin [ph]. Your line is now open.

Just circling back on the M&A doors opening up. Can you guys talk to maybe which segment you may be targeting or maybe where you may look to grow the portfolio through an acquisition?

Matt, I really don't want to talk about this. I think, that -- to be frank, we don't act -- we're not actively out there looking, but the deals, you know the kind of deals that are coming our way, because they're well-advertised. So they range anywhere from down hole to artificial lift to consumable products. And we probably, it's fair to say, prefer to stay away from downhole because we don't understand very well and it seems that everybody always says the next greatest mousetrap until they don't. And I think, there's been some very disappointing M&A transactions in that particular area. I like artificial lift [ph] and I have never made a secret of that. I don't really love the margins in artificial lift. But I do like the sector. So I'd probably say of those two, I would prefer something in the artificial lift area. I mean, we like the product business, but we want to be able to make the product and engineer the product. So the short answer is, we haven't really seen anything that makes sense to us so far. And but there is a lot more that's coming into this office then since we went public…

And…

I wish I could be more helpful, but it just, those are the fact.

No, no. No, it's actually extremely helpful. And I'll just actually follow-up on that with lift. I mean do you see some type of cross-selling opportunities with your businesses. This kind of get some color on why you would like it so much?

Yes. I mean, the same customers who buy our products, buy downhole products and they buy artificial lift products that may be different departments, but it's the same relationship, it's end-user business.

Okay, that's helpful. And I will go ahead and turn it back.

All right. Thanks, everyone, for joining today's call. We appreciate your participation and look forward to speaking with you over the next quarter.

Thanks, everybody.

Thank you, presenters. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.