Good day, and thank you for standing by. Welcome to the Cactus Q3 2024 Earnings Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Alan Boyd, Director of Corporate Development and Investor Relations. Please go ahead.

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 Jay Nutt, our Chief Financial Officer. Also joining us today are Joel Bender, President; Steven Bender, Chief Operating Officer; Stephen Tadlock, CEO of Flex Steel; 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.

Thanks, John, and good morning to everyone. I'm pleased to report our third quarter results, which highlighted the unique resilience of both of our business segments. Despite the continued decline in U.S. land rig activity, total company revenue improved sequentially during the third quarter. Our spoolable Technology segment reported record quarterly revenue. As I noted on last quarter's call, we expected that most of the domestic activity decline was behind us. While that has largely played out as anticipated, software activity continued throughout the third quarter. Given the subdued market conditions, I continue to be very proud of our associates' ongoing commitment to customer execution that's led to this consistent record of outperformance. Some third quarter total company highlights include revenue of $293 million adjusted EBITDA of $100 million adjusted EBITDA margin of 34.2% and we increased our cash balance to $303 million. I'll now turn the call over to Jay Nutt, our CFO, who will review our financial results in more detail. Following his remarks, I'll provide some thoughts on our outlook for the balance of the year before opening the lines for Q&A.

Good morning. As Scott mentioned, we had another solid quarter resulting in total Q3 revenues of $293 million which were up 1% sequentially. Total adjusted EBITDA of $100 million was down 3% sequentially. For our Pressure Control segment, revenues of $185 million were down 1.1% sequentially as forecast unforecasted shipments of production equipment that benefited the second quarter didn't repeat to the same extent during this period. Operating income decreased $3.1 million or 5.6% sequentially with operating margins decreasing 130 basis points. The decline in operating margin was driven by miscellaneous charges incurred in the quarter, including reserves taken in connection with customer bankruptcies and other litigation claims. Adjusted segment EBITDA decreased $3.3 million or 5.1% sequentially with margins decreasing by 140 basis points for the reasons just noted. Excluding the aforementioned charges, segment adjusted EBITDA margins were essentially flat versus the second quarter. In our spoolable Technology segment, revenues were up 4.3% sequentially due largely to resilient domestic customer activity. Operating income increased $2.9 million sequentially, primarily due to lower expense booked as a result of the remeasurement of the earn-out liability associated with the Flexsteel acquisition offset by some higher input cost. Note that the earn-out liability was paid in full and closed out during the quarter. Adjusted segment EBITDA at $42.5 million was flat sequentially while margins decreased by 160 basis points resulting from the increased input cost. Corporate and other expenses were $8.7 million in Q3, up $2.8 million sequentially resulting from professional fees associated with pursuit of an inorganic growth opportunity that we're no longer pursuing. Adjusted EBITDA was flat sequentially. On a total company basis, third quarter adjusted EBITDA was $100 million. Adjusted EBITDA margin for the third quarter was 34.2% compared to 35.7% for the second quarter. Adjustments to total company adjusted EBITDA…

Thanks, Jay. I'll now touch on our operational expectations for the fourth quarter by reporting segment. Based upon preliminary revenue for October, we expect Pressure Control revenue to reflect a mid-single digit dip versus the third quarter due to the combination of lower average U.S. land drilling activity and seasonal factors, including potential customer budget exhaustion. These factors are resulting in less visibility into production equipment shipments around year end. Although we are closely monitoring the potential impacts of operator consolidations, preliminary discussions with our current customers indicate activity increases in the early part of next year. Adjusted EBITDA margins in our Pressure Control segment are expected to be 33% to 35% for the fourth quarter as cost management and ongoing cost efficiencies are expected to offset the impact of the anticipated revenue decline. The adjusted EBITDA guidance excludes approximately $3 million of stock-based comp expense within the segment. We believe product costs will trend lower during the second half of 2025 due to ongoing efficiency improvements as well as our supply chain diversification efforts. Regarding our spoolable Technologies segment, we expect fourth quarter revenue to be down in the mid to high single digits quarter-over-quarter. As a reminder, seasonal declines approaching 10% in this business during the fourth quarter are not uncommon. We expect adjusted EBITDA margins in this segment to be approximately 36% to 38% in Q4, which excludes $1 million of stock-based comp in the segment. Lower operating leverage in Q4, combined with some ongoing higher material costs, are the primary drivers of the expected Q4 margin progression. The higher material cost and impacted results during the third quarter are expected to persist through year end before easing. These higher material cost increases have been partially the result of spot purchases to address increased demand relative to…

Thank you. [Operator Instructions]. Our first question comes from the line of Arun Jayaram of J.P. Morgan Securities LLC. Your line is now open.

Hey, good morning, team.

How are you doing?

I'm doing great. How are you?

I'm doing fine. Great.

Well, it's great to get through the roof. Is that my first question? I'm going to ask for maybe a little grace this morning. Quickly, I'd love to hear your thoughts on obviously, you pursued an inorganic kind of growth opportunity. I'd love to hear about just thoughts on your overall portfolio and strategically at a high level, how are you thinking about kind of augmenting the portfolio? Obviously, you've had a really, really interesting acquisition with spoolables, which has been really, really successful, but wanted to get your thoughts on just the portfolio.

Okay. That's your only question?

I have a follow-up.

How do you know you have a follow-up if I have an answer to this question? Okay. So, I've changed my medication. I guess I'm a little snarkier than normal. Okay. So, I think that consistent with what I've always said before, our primary objective would be international. However, should another Flexsteel looking opportunity present itself, we would take advantage of that. We have the balance sheet. You know that. We have the capacity in terms of our line of credit and I think about Flexsteel that even after the earn out payment, we paid six -- What, John? They've already given us back $190 million. So, I'd be kind of foolish in terms of value for our shareholders in not looking at that, but primarily, it would be an international opportunity that I would focus on.

Understood. And just maybe a separate question. We're just days away from the election, and I'm not going to ask you to comment who you think is going to win, but one of the candidates has talked a lot about tariffs and I just wanted to get your general thoughts on that. It does appear that you're mitigating that risk through your expansion to a third manufacturing base. But just talk about that general risk and how you think about that for Cactus, just given your current production base between the U.S. and China?

Yes. I would say that of all of our competitors, we're in the best position because we have Bossier City that takes care of about half of what we produce. That's the first point. The second point is every one of our competitors imports goods, and most of them obviously import goods from China where Section 301 applies. The big question is, will tariffs be applied -- or tariff increases be applied disproportionately to China? Will they be -- will all -- I mean, we've heard President Trump say he's going to apply tariffs everywhere. I mean, I've heard numbers as high as 200%. I've heard 60%. I really don't know. I think that he's going to get tremendous pushback. And we've even heard Kamala say that she wanted to increase tariffs. Of all of our competitors, I think that this move that we're making right now and will be complete by the end of next year puts us in a -- that coupled with Bossier City gives us a significant competitive advantage and keep in mind that Flexsteel is 100% U.S.

Yeah. You make that in Baytown, right, that product?

Yes. Short answer is, I think we're in the best position of anybody I know in this business.

Great. Thanks a lot.

One moment for our next question. Our next question comes from the line of Scott Gruber of Citigroup.

I wanted to, kind of ask a follow-up to Arun's question. You mentioned continued interest in pursuing acquisitions, but can't help but notice that your cash balance keeps rising after another strong free cash quarter. So should the expectation be that you'll continue to grow the cash balance as you pursue acquisitions or is there a level of cash I wish you'd consider returning some of it to shareholders? Just your latest thoughts on the cash balance and deployment.

That's a good question, Scott. We have too much cash. So, if we weren't interested in actively pursuing some expansion, I would have returned this cash already. So, there is a like I told you before, when you became -- when you were all very patient about our growing cash balance -- I ask you to be patient because we were looking at some things. There'll be a point in time if nothing actually occurs, and I would suggest that by the end of the year, by the end of the coming year when we would increase the amount of cash that we return to our shareholders. We do not have, frankly, an optimal capital structure right now, but you also know, Scott, I have this tremendous aversion to debt.

Right. And actually, by the end of 2025, just to be clear, you can let it go for a few more quarters?

Yes.

Okay. And then just a follow-up on the getting your wellhead system qualified in the Middle East. Can you just provide an update on that process and timing of building a facility there? It seems to be pushed to the right a bit, but some color there would be great as well.

Okay. I think that we're continuing our testing, and I don't think, frankly, that testing is the limiting factor. It's the decision about the direction that we're going to go and so I wouldn't worry about the former. We have several alternatives, and this has taken us way longer than I had expected, but we are by nature very cautious people. But Scott, it's full speed ahead. We're going to get this done. It's just we're going to get it done in a very responsible way. Yes, I'm incredibly proud that we have survived all of this without ever having to take an impairment charge, and I don't intend to ever take an impairment charge. So just bear with us, Scott. I'm going to tell you trust me because I've never lied to you. I'm not going to lie to you now.

Got it. I appreciate these guys. Thanks, Scott. I'll turn it back.

Thank you. Our next question comes from the line of Stephen Gengaro with Stifel. Your line is now open.

Good morning, everybody. Thanks for taking the questions. I think the first one, when we think about what we see in the U.S. from a consolidation perspective and it feels like the dynamics of the business have changed. Have you seen much change from your perspective and your conversation with customers versus sort of prior cycles and how they either utilize or view your high-performance products versus peers and pricing? I know you don't love to talk about pricing, but just in general, has the world changed much versus prior sort of soft periods?

Yes, because I've spoken about this before. We're going to see -- I used to laugh -- I don't remember, do you remember when Scott Sheffield made this comment about he expected there to be only five or so operators left in the Permian? And I thought, gee whiz, is that possible? Well, I still don't believe it's possible. But I do believe now that we might see a large percentage of the market controlled by just a handful of majors. This is the first time I've ever seen that. And I think that with that comes a serious high grading of their supply chain, and high grading of their supply chain is a net positive for us. I think that some of our smaller competitors are going to have a very difficult time because we're moving much more this time from relationship buying to technical buying and that means that the host of small independent wellhead providers are going to struggle. So I think that while -- you've heard me say before, when Company A with 20 rigs buys Company B with 20, it doesn't end up at 40. I think that's still true, but I do think that in terms of market share, this would bode well for us.

Great. Thanks. No, that's good color. And my follow up, I'm not sure you want to go here quite yet, but when we think about 25% and you sort of think about the what you laid out for this fourth quarter softness, and I think you said some customers maybe have some indication of maybe small increases early next year. But do you think in a flattish -- if the rig counts kind of flattish from current levels that Cactus can deliver modest growth in EBITDA next year?

Yes.

Okay. Good. That's how we've been modeled, so I'm glad you said that. No, thank you for the color. This is very helpful.

Thank you. Our next question comes from the line of David Anderson with Barclays. Your line is now open.

So question on kind of the level of sales per rig in the second quarter in Pressure control. You kind of highlight how they were much higher and they've kind of revised they're going to revise a bit lower in fourth quarter. Can you just expand a little bit more about how that moves up and down? I would think kind of the wellhead demand relative to rigs would say pretty consistent. So is it really just a function of utilization of the rest of the queue on your site? And does the shift in 4Q, is that just a function of just like as you said, the customer is just a little bit more overly cautious on the rest of your business?

Yes. David, it really is most it's primarily impacted by the production tree call offs, and they are so difficult to predict. So we see customers take a large number of production trees, then they kind of go quiet, then they take a large quantity of production trees. And that's really the primary driver for the change in revenue per rig.

Got you. And then the other question. So I was looking at the model kind of going back over time and kind of getting back to this hypothetical tariff question. That happened in 2018. So in 2019 and 2020 your revenue per rig went up substantially. And I'm just kind of thinking back and I don't remember maybe to refresh on a little bit here. I don't remember you necessarily expanding your manufacturing in the U.S. or did you? And I guess sort of my question is, is this just sort of a natural function, hey, you have kit you're making this in the U.S. versus out, so you can provide a lower cost to your customer therefore share increases and the like. Do you think the same thing can happen again this time? Would you do anything different? Do you ramp up manufacturing capacity like faster?

Are you asking me if we're going to if we would ramp it up faster in the U.S?

Well, I'm yes, right. I mean is that and like would you have done anything different the last time or is it just sort of a natural function of your -- of how this transitions. I'm just looking at the numbers, in fact, in 2019 and 2020, they went up substantially on a revenue per week basis. I'm just wondering how much of that contributed to the tariffs and people kind of go into your product versus others?

Yeah. I don't think really that tariffs had much impact because even with the tariffs, our costs are lower importing than they are producing domestically. So I really don't think that's an issue. I think that what really was an issue was that we did have a period of tariff exclusion, which helped. I don't know if you remember that. There was a brief period. What was it, Joel? A couple of two, three months?

A little bit longer than that.

How long was it, you mentioned?

I think it was I want to say, I think it might have been 12 to 18 months. It had a decent run for a while on it.

I don't think it was that long. So the tariff exclusion had a big impact there. But what would I have done differently? I can't think -- I still believe strongly in a low-cost manufacturing source. I just believe right now very strongly that the geopolitical risk coming out of China have got to be addressed and I think we are very far along in getting that addressed.

Great. Okay. Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Jeff LeBlanc with TPH. Your line is now open.

I guess the question I wanted to ask is if you could quantify the magnitude of the International swoopable Technologies revenue. And then also should we think about this as a base load moving forward, on which future growth would be good? So just steady revenue in international moving forward?

Yes. We're in the kind of high single digits as a percent of spoolable that's coming from international. And like Scott mentioned that's double over where it was last year. And yes, we view this as like an active growth area for us, dedicating resources, both additional hires, repurposing some people in the organization to focus on international as well as expanding service capacity to support that.

I think further to that, if I could just interject, we're even doing very preliminary work on some capacity expansion because we think that this international business for Flexsteel in the next couple of years could be 40% of our business. That's a lot.

Is that 40% of spoolables or 40% of overall?

I'm talking about spoolables.

Okay. Thank you very much. I'll hand the call back to the operator.

Thank you. This concludes the question-and-answer session. I would now like to turn it back to John Fitzgerald for closing remarks.

We appreciate your interest in Cactus. Thank you for joining us, and we look forward to speaking with you on next quarter's call.

[Operator Closing Remarks].