Ladies and gentlemen, thank you for standing by and welcome to the Cactus Q2 2021 Earnings Call. [Operator Instructions] I would now like to hand the conference over to John Fitzgerald, Director of Corporate Development and IR. Thank you. 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, we issued our earnings release which is available on our website. Please note that any comments we make on today’s call regarding projections or our expectations for future events are forward-looking statements covered by the Private Securities Litigation Reform Act. Forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to review our earnings release and the risk factors discussed in our filings with the SEC. Any forward-looking statements we make today are only as of today’s date and we undertake no obligation to publicly update or review any forward-looking statements. In addition, during today’s call, we will reference certain non-GAAP financial measures. Reconciliations to 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.

Thanks, John. Good morning to everyone. Cactus demonstrated its ability to achieve meaningful sequential growth during the second quarter. Revenue and adjusted EBITDA were each up over 25% versus Q1, significantly outpacing the 16% increase in the U.S. land rig count. Our product market share remained robust at just under 42% during the period. We believe we are well positioned to capitalize on the U.S. market recovery given expectations for activity gains beyond the private operators as we head into next year. In summary, first quarter revenues increased 29% sequentially with each revenue category reporting growth of more than 15%. Adjusted EBITDA was up 27% sequentially. Adjusted EBITDA margins were 27%. Free cash flow was above $25 million. For the quarter, our cash balance rose to $309 million. And our Board of Directors approved an 11% increase in our quarterly dividend to $0.10 per share. I will 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 to Q&A. Steve?

Thanks, Scott. In Q2, total revenues of $109 million were 29% higher than the prior quarter. Product revenues of $70 million were up 35% sequentially, driven by an increase in rigs followed improved drilling efficiencies, production-related equipment demand and cost recovery initiatives. Product gross margins were 32% of revenues, up approximately 190 basis points on a sequential basis, as we began to address the impact of the significant cost inflation, which commenced in late 2020. Rental revenues were nearly $15 million for the quarter, up approximately 17% from the first quarter of 2021. Rental gross margins decreased 90 basis points sequentially due primarily to higher repair costs, as we deployed more equipment in the field. Field service and other revenues in Q2 were nearly $24 million, up 20% versus the first quarter of 2021. This represented 28% of combined product and rental-related revenues during the quarter and was in line with expectations. We expect field service revenue to be approximately 27% of product and rental revenue during the third quarter of 2021. Gross margins were 26% of revenues, down 160 basis points sequentially, with the reduction largely attributable to wage reinstatements completed for our associates during the quarter. The adverse impact on utilization of time spent on new hire training and over time required to meet the aforementioned increase in activity levels. SG&A expenses were $11.4 million during the quarter, up $1.8 million versus the first quarter. The sequential increase was primarily attributable to higher payroll-related expenses associated with higher bonus accruals, wage reinstatements and employee additions. Additionally, the quarter included an increase in stock-based compensation expense related to previously granted PSUs. As a percentage of revenue, SG&A expenses decreased from 11% during the first quarter to 10% in the second quarter. We expect SG&A to be $11 million to…

Thanks, Steve. The second quarter again highlighted our ability to outperform domestic drilling and completion activity. While the U.S. land rig count gained 16% during the quarter, our total revenue grew 29% with product revenue up 35% over the period. Despite the majority of rig count additions in the quarter being driven by private operators, who have historically represented a smaller portion of our business, we reported market share at nearly 42% during the period. Additionally, our product revenue generated per rig followed increase by approximately 20% due to a combination of rig efficiency gains, greater production tree revenue and cost recovery efforts. Looking to the third quarter, we currently anticipate our rigs followed in product revenues to increase by high single-digit percentage. We remain of the opinion that our publicly traded customers will respond to the improved commodity environment, as we head into 2022, thereby contributing to tightness in this competitive market. Product EBITDA margins are by slightly higher for the third quarter as increased direct costs are offset by cost recovery initiatives. That should more fully materialize over the coming months. The supply chain headwinds that we referenced on last quarter’s call continue to persist. As you may know, steel prices make up the largest portion of our material costs. While our input cost increases have not been as drastic as the hot-rolled coil steel index prices you see on your Bloomberg screens, we’ve seen a double-digit increase since last year in some cases. The cost of freight, specifically ocean freight continues to experience even higher inflation. Moreover, delivery disruptions have emerged as increasingly problematic, highlighting the important role that our Bossier City facility plays and our ability to execute effectively and retain and enhance customer loyalty. Cactus has diligently worked with our customers in managing the impact…

[Operator Instructions] Your first question is from George O’Leary of TPH & Company. George O’Leary: Good morning, Scott. Good morning, guys.

Hey, George. How are you? George O’Leary: I am hanging in there, man. You all doing alright?

Great. Thanks. George O’Leary: Good. First question is on the Middle East now that you should have some revenues there by the end of the third quarter, but more of a longer term question. Just given you have built multiple businesses during your career, how long do you believe it will take to ramp up in the Middle East such that it becomes a meaningful piece of the business call it 10% plus percent of revenue somewhere in that market? Is it a 3-year-time horizon, a 5-year time horizon, just bracket what’s reasonable and what’s unreasonable to think about?

Yes, alright, George. It’s going to take about – to meaningfully ramp up our Mid-East revenue to up – in the range of 20% – 15%, 20%, we are going to have to build a facility. And building a facility is about an 18-month proposition. So, as our comfort level increases, which we expect to happen with the introduction of these rental assets, you can figure 18 months to 24 months from the end of the year. George O’Leary: Okay. That’s very helpful, Scott. And then just the super strong revenue growth in products in Q2 caught my eye, and you mentioned rig efficiencies. There is just – there are also production trees go heads. Was the increased revenue driven more by those drilling efficiencies and selling more wellheads or did the production tree sales really kicked in and induced the revenues? What was the larger contributor there?

Yes. It was a mixture of a variety of things really. So, we can’t point to any one factor, but it was production tree and completion-related increases on the product side. It was obviously the cost recovery efforts. And just kind of catch up, we have seen a rapid recovery in rigs, and we still even had pretty healthy rig count growth over that period. But as that increase sort of settles in, you tend to see more revenue per rig. There is always a lag there. George O’Leary: Great. Thanks for the color guys you all have given.

Thanks George.

Your next question is from Tommy Moll of Stephens.

Good morning.

Good morning Tommy.

Scott, I wanted to start on supply chain. Just any anecdotes you can share with us on measures that you have taken to try to address some of the issues that have arisen? And then secondarily, anything you can do to quantify what the impact has been or might be going forward and what you have attempted to do on what I think you are referencing as cost recovery there?

Tommy, that’s pretty easy, easily answered question there. But first and I have – Joel is in here, and he can add some color to the supply chain issues. First, I am not going to disclose the impact of our – of the cost increases nor – I will talk about cost recovery though. So, we started that fairly early as you would expect, and it accelerated during the second quarter – towards the end of the second quarter. These things don’t happen overnight. A lot of pushback, but we were – we have been very – by the end of the second quarter, we were successful in reaching agreements with virtually all of our customers. That’s not to say that the price increases were fully implemented by the end of June because they were not. So, you will see a much greater impact from those negotiations in the third quarter. In terms of supply chain, I mean, I can tell you that I think the area that’s been the most impacted has been ocean freight. But I will let Joel answer that.

I mean that has – I mean, we saw that coming around the first quarter or so. So, we actually ordered up inventory, and for two reasons; one, to protect the supply chain and have availability for our customers, and secondly, to try to, as best we could protect our margins by ordering up, and we had the cash to do it. So, it allowed us to put some inventory on the ground and maintain those costs as best we can, as I mentioned. That’s really been the issue. It’s just trying to keep product on the ground and trying to really protect our margins. So, we have stocked up on most of our common products in anticipation of what we have seen. And honestly, the disruption we have seen with the vessels and the containers has probably been greater than we anticipated. But fortunately, end of June, beginning of July, a lot of this product started showing up. So, that’s allowed us to make our deliveries and increase our product revenue.

Yes, Tommy, I think we have seen ocean freight double. Would you say that’s fair?

It’s more than double.

More than double. And ocean freight is a pretty high percentage of our total cost. It’s a meaningful percentage of our total cost.

Related to all these issues, I wonder if you have had or anticipate having some share gain opportunities just given the flexibility you have with Bossier and the balance sheet you have got and have deployed to order in advance of a lot of these big bottlenecks, maybe where some competitors, they have not been as nimble?

Yes. Tommy, I would be very disappointed as the year progresses, particularly into the fourth quarter and first quarter of next year, if that doesn’t result in some meaningful gains. We have already had to bail out a customer or two who don’t use us exclusively. Most of our customers do use us exclusively. But yes, our larger competitors are not as flexible and nimble in terms of supply chain response. So this, as I mentioned in the script, we do view this as a positive, having Bossier City.

Great. And we will look forward to watching the progress. Thanks for the time and I will turn it back.

Your next question is from Chase Mulvehill of Bank of America.

Good morning Chase.

Good. How are you Scott? Thanks for squeezing me in here. I guess a few questions. I guess let’s first just kind of go back and touch on kind of supply chain friction and raw material inflation, and I hate to beat the dead horse here. But just kind of thinking about supply chain pressures, if you were to look at them today, are they accelerating or decelerating? And the same question really on the raw material costs. We can look at HRC, hot-rolled coil on our Bloomberg stream, but we don’t know the exact steel cost and stuff that they are flowing through P&L. So, just help us understand if that pressure is starting to kind of decelerate yet.

Not really, Chase. We don’t really think we are going to see an easing – I mean, Joel can add some – again some color, but we don’t anticipate an easing freight for steel until the end of the year.

I am going to say maybe into the first quarter of next year, honestly.

That’s why it’s incredibly important that we stay close with our customers. And I can’t overemphasize the job that this organization has done in ensuring that this incredibly rapid and severe increase in cost has not been reflected in severe margin degradation. So, we have done an exceptionally good job in my opinion of protecting this company in that regard.

And I think as Joel mentioned, he has been proactively ordering to protect that going forward as well and lock in prices, so that as we see rates go up, it’s not necessarily – that could be the next order, but is heavily ordered correctly in Q1.

That makes sense. And I guess kind of two quick follow-ups or a quick follow-up on that one. Are you able to kind of provide – or push surcharges through related to kind of incremental shipping costs? And then what about – how much can you save by shifting more to Bossier City from a production standpoint to avoid some of the higher – the elevated cost of shipping?

Yes. Our foreign supply chain is still more competitive even including the higher freight cost. So, it doesn’t really make sense to do that.

No, because you have to remember, too, that if steel is going up in China, it’s going up everywhere at this point. So, it’s any product you buy today that steel or has a component of steel in it, you are going to see an increase, whether it’s coming from China, the U.S., Italy, India, any of these locations, you are seeing the same kind of increases on the steel.

So in an answer to your question about freight recovery, so we are now implementing freight surcharges with our clients.

And I think historically, and this hasn’t changed. If we get a drop in order that was not forecasted, Joel is not shy about requesting.

No, that’s going to go at a market price. It’s not going to go at necessarily a contract price.

Okay. Perfect. I guess coming back to the questions around kind of market penetration on the international side. And obviously, you are starting on with rentals. But maybe could you speak to kind of the wellhead market, us, investors are really not too well educated on the wellhead market structure internationally. So, maybe just talk about that market structure and how fragmented it is or is not?

Yes. So it’s clearly not as fragmented as the U.S. market. You have got three major players internationally. And it used to be four. So, it’s a much tighter market. The better markets internationally are the markets that require indigenous manufacturing. So, if you think about the world, think about the areas that have the most attractive margin potential. Those are the markets that require that you have a facility, and that’s why I responded earlier to see a meaningful contribution from the Mid East, in particular, is going to require that we build a factory. Fortunately – a factory will cost about $15 million. Fortunately, we are in a position to do that. The U.S., though, is so fragmented that the competitive pressures are just much more acute here.

Okay, perfect. I appreciate all the answers. I will turn it back over.

[Operator Instructions] Your next question is from Connor Lynagh of Morgan Stanley.

Yes. Thanks. Good morning guys.

Good morning.

I was wondering what we should read into from the magnitude of your dividend increase. Certainly, good to see you guys returning extra capital. But if we think about the sustainability or the durability even in, to your point, the worst downturn you have had in this industry in decades, you guys have very easily covered even the new dividend run rate. So, I am just curious, what’s your sort of thinking? Are you continuing to think that there is incremental M&A opportunities? Do you – would you just prefer to see this grow more long-term as opposed to a big step change, just curious the calculus around that?

So, two – you really asked two questions. The first is, as I mentioned, we set it low to make sure it was sustainable. We would have raised it earlier had it not been for, I think, morale of the company. We asked our associates to take some very painful hits to their wages and benefits, and we didn’t feel like it was appropriate to increase the dividend, although we have the capacity to do so until we would address those. Those are behind us, and they are fully reflected or will be fully reflected in this quarter. And so our plan is to much more frequently address incremental increases in the dividend. So, I think that barring the unexpected that’s still on the horizon. We do not absolutely view that as mutually exclusive with M&A opportunities. So, we are absolutely focused on accretive M&A opportunities that don’t impair our balance sheet and our ability to continue to pay a dividend or increase the dividend.

Yes, understood. I definitely understand the portion around the people. Maybe just sticking with that theme, what are you seeing in terms of labor market? How is your sort of capacity at your facilities and then in terms of your field service?

We have – we added, I think, this quarter about 125 or so associates. Since the beginning of the year, we have added over 200. We have about 90 open positions right now. Is that right, David?

Correct.

Something like that. It’s a struggle to be sure. We are not – we are no different from anyone else. Fortunately, when we go out into the field, unlike a pressure pumper, we typically only go out with one associate, sometimes two. So, the burden in terms of service tax is not quite as high. We have been able to hire. And we have been able to control our labor costs surprisingly well. But it’s a full-time job to try to bring these folks on. So, it’s impacting us. It’s just not probably as impactful to us as it is to pressure pumpers and perhaps drilling contractors.

That’s fair. Are you anticipating significant wage increases for the duration of the year here?

So, I think that we are going to see some increases towards the end of the year, but I don’t think there will be a cause for concern.

Alright. That’s helpful. Thank you.

Your final question is from Stephen Gengaro of Stifel.

Thanks. Good morning gentlemen.

Good morning.

Two things for me. One is I just wanted to get back to the revenue per rig followed number that you guys talked a little bit about earlier. And I think you said, and I might have missed this, that you expected, I don’t know if you said it 7% to 9% or high-single digit increase in the third quarter. I think you said in rigs followed, if that was correct? How does that revenue per rig number evolve? I mean I know there are some puts and takes with the tree sales, etcetera. But given the pricing and given what you are seeing, does that stabilize? Does that trend back towards a more normalized level in the next quarter? How do we think about that?

Yes. This quarter, we are expecting it to more stabilize as production activity maintains. And as Scott said, the cost recovery initiatives came throughout the quarter. And we are growing at more – well, high-single digits. So, I think we would expect that to be relatively flat quarter-over-quarter.

Okay, great. That’s helpful. Thank you. And then just on the market share question, I mean, I understand the dynamics of the privates versus the publics and your share being so strong with the publics. How is the share with the privates evolve because my sense was that it has improved just based on what you guys did in the first quarter. But how has that evolved over the last couple of quarters and how do you see that playing out, as it fits into the puzzle?

Yes. So, it’s – there is absolutely no question our market share gains with the privates have been meaningful and substantial. I think that John helped me out here. I think we have gone from – at the end of last year from about 20% to now 27% or so percent, something like that.

Yes, middle of 2020, we were probably down in the mid, maybe even lower-mid teens. Through this year, we kind of got into the 20s in the first quarter and second quarter. And despite the fact that the overall market share number ticked down in the second quarter, our share with the privates actually ticked up a little bit. But as you know, Stephen, the privates went from 45% of the rigs to 55% of the rigs. We can gain share there a little bit. But just given the mix issue, it’s going against us from that perspective from an overall market share standpoint.

Exactly. That makes sense. And as publics pick up activity, we should see that benefits, I would expect. The other quick one and I think Chase asked about the international landscape on the wellhead side. But on the U.S. front, have you seen any changes? I mean, I know one of the businesses changed hands a couple of quarters back. And just curious if you have seen any change in the U.S. competitive landscape or anything you are watching closely?

Yes. So, we had a couple of competitors, small competitors that were treated since the beginning of the year. And we have seen an equal number of new competitors enter the market. I think that – I think people think that, frankly, that replicating the Cactus story is easy. And so it seems that everybody wants to try it. And apparently, they don’t view the barriers to entry as being very significant. So, I think on a net basis, we probably have the same number, maybe one more competitor today than we did at the beginning of the year.

Okay, great. Thank you for the color gentlemen.

Thank you, Stephen.

There are no other questions in queue. Do you have any closing remarks?

No, we just want to thank everybody for your support. I think the rest of this year is going to be incredibly challenging. It’s – people don’t realize managing in a downturn in some respects is pretty easy. You have to cut your expenses. Managing in an upturn is much more challenging. And I think that we are blessed with the very best management team in the industry in taking advantage of this really unexpected growth that we have had in our top line. So anyway, stay tuned. Thanks for your support. Everybody, have a great day and stay safe.

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.