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Thank you for standing by, and welcome to Cactus, Inc. Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today's program is being recorded. And now, I'd like to introduce your host for today's program, Alan Boyd, Director of Corporate Development and Investor Relations. Please go ahead, sir.

Thank you, and good morning. We appreciate you joining us on today's call. Our speakers will be Scott Bender, our Chairman and Chief Executive Officer; and Al Keifer, our Interim Chief Financial Officer. Also joining us today are Joel Bender, President; Steven Bender, Chief Operating Officer; Steve Tadlock, CEO of FlexSteel; and Will Marsh, our General Counsel. Please note that any comments we make on today's call regarding projections or expectations for future events are forward-looking statements covered by the Private Securities Litigation Reform Act. Forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to review our earnings release and the risk factors discussed in our filings with the SEC. Any forward-looking statements we make today are only as of today's date, and we undertake no obligation to publicly update or review any forward-looking statements. In addition, during today's call, we will reference certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in our earnings release. With that, I'll turn the call over to Scott.

Thanks, Alan, and good morning to everyone. We closed out the final quarter of 2023 with strong margin performance in both segments. Free cash flow was substantial and with the debt raised to finance the FlexSteel acquisition repaid in Q3, we increased our cash balance by over $70 million in Q4. For the full year 2023, both businesses set records for revenue and adjusted EBITDA despite the decline in US land activity over the course of the year. Our company remains well positioned in the market as a provider of highly engineered, differentiated products to premium customers, and our strong financial performance reflects this. Some fourth quarter total company highlights include: revenue of $275 million, adjusted EBITDA of $100 million, adjusted EBITDA margin of 36.4%, we paid a quarterly dividend of $0.12, and we increased our cash balance to $134 million. I'll now turn the call over to Al Keifer, our CFO, who will review our financial results. Following his remarks, I'll provide some thoughts on our outlook for the year -- for the near term rather, before opening the lines for Q&A. So, Al?

Thank you. Before I begin, I would like to highlight the changes to our reporting structure. Beginning in Q4, we are now presenting our corporate and other expenses separately from our two operating segments. The cost within corporate and other consists of personnel whose activities support both operating segments as well as other public reporting and administrative overhead costs. All of these costs were previously reported within the Pressure Control segment. Prior periods have been recast in the earnings release to conform to this new presentation. To assist analysts and investors with understanding this reporting change, we have provided a historical reconciliation for 2021 through 2023 on the Investor Relations section of our website. I'll now begin the results review. As Scott mentioned earlier, total Q4 revenues were $275 million. For our Pressure Control segment, revenues of $180 million were down 1.1% sequentially, driven primarily by decreased customer activity. Operating income increased $1.2 million or 2.2% sequentially, with operating margins increasing 100 basis points. Adjusted segment EBITDA increased $1.5 million or 2.3% sequentially with margins increasing by 120 basis points. The margin improvement was due to lower rental equipment repair costs, partially associated with the recent modification of our frac valve design and efforts to limit our branch expenses in response to reduced activity levels. For our Spoolable Technologies segment, revenues of $94 million were down 10.4% sequentially due to lower customer activity levels. Operating income decreased $11.6 million sequentially due largely to the quarter-over-quarter change and the expense resulting from the remeasurement of the FlexSteel earnout liability. Adjusted segment EBITDA decreased $4.5 million or 10.2% sequentially, while margins increased by 10 basis points, as reductions in operating leverage were offset by reduced input costs. Corporate and other expenses were $5.7 million in Q4, down $1.3 million sequentially due to lower transaction-related expenses and stock-based compensation. Adjusted corporate EBITDA was approximately flat in Q4 at $3.8 million of expense. On a total company basis, fourth quarter adjusted EBITDA was $100 million, down 2.9% from $103 million during the third quarter. Adjusted EBITDA margin for the fourth quarter was 36.4% compared to 35.8% for the third quarter. Adjustments to total company EBITDA during the fourth quarter of 2023 include non-cash charges of $4.6 million in stock-based compensation and a $1.9 million expense related to the FlexSteel earn-out liability remeasurement. Depreciation and amortization expense for the fourth quarter was $15 million, which includes $4 million of amortization expense related to intangible assets booked as part of purchase accounting. Total depreciation and amortization expense during the first quarter of 2024 is expected to be approximately $15 million, of which $7 million is associated with our Pressure Control segment and $8 million is associated with Spoolable Technologies. Income tax expense during the fourth quarter was approximately $17 million. During the fourth quarter, the public or Class A ownership of the company was 82%. Barring further changes in our public ownership percentage, we expect an effective tax rate of approximately 22% for Q1 2024. GAAP net income was $62 million in the fourth quarter versus $68 million during the third quarter. The decrease was largely driven by the change in remeasurement of the earn-out liability. Adjusted net income and earnings per share were $65 million and $0.81 per share, respectively, during the fourth quarter compared to $64 million and $0.80 per share in the third quarter. Adjusted net income for both the fourth quarter and full year 2023 were net of a 23% tax rate applied to our adjusted pre-tax income generated during their respective periods. This rate was lower than anticipated due to the one-time release in 2023 of valuation allowances associated with the FlexSteel acquisition. We estimate that the tax rate for adjusted net income and EPS will be 26% during the first quarter of 2024. During the fourth quarter, we paid a quarterly dividend of $0.12 per share, resulting in a cash outflow of approximately $10 million, including related distributions to members. The Board has also approved a quarterly dividend of $0.12 per share to be paid in March 2024. We ended the quarter with a cash balance of $134 million, a sequential increase of approximately $70 million. Net CapEx was approximately $9.5 million during the fourth quarter of 2023 and $38.6 million for the full year 2023. For the full year 2024, we expect net CapEx in the range of $45 million to $55 million. The increase from 2023 is due to increased spending on efficiency improvements at FlexSteel's Baytown manufacturing facility and approximately $20 million budgeted for international growth and supply chain diversification in 2024. That covers the financial review, and I'll now turn the call back over to Scott.

Thank you, Al. Well done. I'll now touch on our expectations for the first quarter of 2024 by reporting segment. Pardon me. During the first quarter, we expect Pressure Control revenue to be down mid-single digits versus the $180 million reported in the fourth quarter of 2023, as strong production equipment sales in Q4 led to stronger revenues than the level of industry activity would imply. We expect the US land rig count to be approximately flat from today's level in the remainder of the first quarter, although recent weakness in natural gas prices suggest a cautionary outlook beyond this period. Anecdotally, the number of inbound inquiries for frac rental equipment have increased in the past 45 days, suggesting potential for the second quarter of 2024. Adjusted EBITDA margins in our Pressure Control segment are expected to be 33% to 35% for the first quarter, exclusive of corporate and other expenses, which are now reported separately. This adjusted EBITDA guidance also excludes approximately $2 million of stock-based compensation expense within the segment. Margins are expected to be down sequentially as reduced product sales impact our operating leverage, partially offset by the supply chain initiatives previously announced. We expect our low-cost manufacturing diversification to enhance product margins by the middle of 2025. As mentioned last quarter, new wellhead and valve product improvements are in the process of being introduced, and we expect the rollout of these to more significantly impact operating results late this year as we responsibly replace our current inventories. Our Middle East expansion plans are underway, testing continues and are still targeting customer acceptance first orders by late 2024. We continue to evaluate opportunities. And while we don't have any further news at this time, we're pleased with the outlook and look forward to sharing a meaningful update on our efforts within the next 90 days. Switching over to Spoolable Technologies segment, we expect first quarter revenue to be up low-single digits relative to the fourth quarter, which would represent a record setting Q1 for FlexSteel, largely on stronger demand for the majors. We're also seeing increased interest from international and midstream customers who recognize the value proposition of the FlexSteel product. We expected adjusted EBITDA margins in this segment to be approximately 37% to 39% for Q1, moderating from Q4 levels on increased input costs that will begin to work through our inventory late in the first quarter. Note, this margin guidance excludes approximately $1 million of stock-based compensation in the segment. Adjusted corporate EBITDA is expected to be an approximately $4 million loss in Q1, flat from the fourth quarter, which excludes approximately $1 million of corporate stock-based compensation. Consolidation of our customers continues in the sector, improving our industry's efficiency. At this time, we cannot predict the near-term impact on our business other than to reiterate that our business model favors larger operators. That said, we expect a reduction in the US land rig count by year-end following consolidations as the combined entities, high-grade drilling prospects and increased drilling efficiencies. Further risk to the rig count remains, as operators respond to low natural gas prices. Our company's focus on safety, execution and servicing our customers allowed us to close out a milestone 2023 for Cactus. Although 2024 US drilling and completion activity expectations are modest at this time, Cactus remains well positioned with two segments that generate high margins and attractive returns while operating differentiated, pardon me, value to customers. We expect to generate substantial free cash flow in 2024 that will provide us with optionality to increase shareholder returns over time or pursue organic and inorganic growth opportunities in the disciplined manner that our shareholders expect. With that, I'll turn it back over to the operator, and we can begin Q&A. Operator?

Certainly, one moment for our first question. And our first question comes from the line of Luke Lemoine from Piper Sandler. Your question, please.

Hey, good morning.

Luke, how are you?

I'm doing well. And yourself?

Good, thank you.

Scott, you talked about Spools being up some in 1Q due to the majors. Have you been adding some program accounts here, or is this just kind of general increase in activity from the majors?

I'm going to let Steve Tadlock, who now runs that, respond.

Luke, yeah, we've just been seeing increased activity from the majors in particular. And then, as we alluded to earlier in the script, also international orders from Latin America, Middle East, and one other positive is on the midstream side, significant interest from a large midstream company with which we hadn't done much business and inquiries from other midstream. So overall, we're feeling very good about the outlook for the next year.

Okay. Got it. And then, also my second question, Steve, just kind of on the product mix, I mean, you mentioned the midstream customer. So, it sounds like there's some uptake on kind of the gathering in distribution side. If you could just speak to that maybe a little more kind of what you're seeing this year?

Yeah, I think it's -- with midstream, you have more regulatory hurdles or a different mindset to get through. And the team has been working on that for years, and I think they're starting to see the fruits of that effort. So, I think that's really the driver of it.

Okay. Perfect. Thanks so much.

Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Arun Jayaram from JPMorgan. Your question, please.

Yeah, good morning. I was wondering if you could maybe provide more details on some of the new product introduction? Sounds like the new frac valve was a tailwind to margins in the quarter. But give us a sense of the roll out of that new frac valve as well as your new wellhead offering.

The frac valve is being rolled out right now, and I think it's important to recognize that this is a modification of our existing frac valve, which doesn't lead to any obsolescence. However, this modification pretty significantly reduces the amount of repairs required. As you may know from previous conversations, unlike a lot of our peers, we tear down valves completely after every job, which gives rise to a large repair cost in terms of replacement parts. And we've seen a pretty significant reduction in the damage to our internals with this new frac valve design. So, as soon as we can cycle these valves through their normal repair, we'll be replacing the internals with this new design. The wellhead design, we're looking to roll that out in Q3 to Q4, which I think is one of the more exciting iterations. I don't know how many iterations we're on now. Maybe 10? Nine?

Yeah, with all the different changes.

Yeah. And this one offers the advantage of increased features, which for the sake of my competitors, I'm not going to detail, but also pretty significant value engineering went into this particular project. So, think about third and fourth quarter for that.

Great. And just my follow-up, obviously, Saudi Aramco has been in the news over the last several weeks, been a focal point for investors. So, wondering if you could give us your perspective on what you see going on from a CapEx perspective, and how does this influence your thoughts of potentially committing capital to a new facility there?

Yeah, I don't think it changes my thought on the potential business in Saudi. Although, to be honest, we talked about this before, the fact that Saudis are thinking about selling 1% of Aramco is a little concerning. On the one hand, I know they need the money for 2030. On the other hand, it's -- one could interpret this as taking some chips off the table. But in terms of messaging that Aramco is sending out, no, this doesn't change my opinion at all.

Great. Thanks a lot.

Thank you. One moment for our next question. And our next question comes from the line of Kurt Hallead from Benchmark. Your question, please.

Hey, Kurt.

Hey, good morning, everybody.

How are you?

Good. Thanks, Scott. Yeah. So, Scott, you got some new product coming out now, and as you said, a very exciting stuff, especially on the wellhead front. You guys have always done a very good job at growing faster than the market, and your product has proven its value by gaining share. So, kudos on all those fronts. I guess where I'm going with this is, your message seems to be that you're setting up really, really well for some accelerating revenue growth in the second half. I know you tend to be conservative and you want to outperform expectations. But just wanted to see if you'll give us some additional color on that ramp. And do you agree with that in the second half, or do you think it's going to be much more of a 2025 impact?

Yeah, it's probably more of a -- I think you'll start to see it in the latter part of this year. But I'm probably less optimistic about the US rig count in 2024 because I'm not sure that people fully understand the overall reduction in rig count that's going to occur once these consolidations are completed as customers high grade their prospects. Now, this may not impact -- it certainly won't impact well count to the same degree, and we're very well count driven. These natural gas prices cause me some concern. So, our focus -- you're right, our focus this year is upgrading our supply chain, and by upgrading, I only mean one thing, and that is lowering our costs. So, what we're doing by this diversification from our existing Suzhou facility is both derisking us politically and also meaningfully we expect decreasing our cost. I'm not going to tell you where we're locating the facility, but it's not going to be in a section 301 country. Don't ask me anything else, please.

That's fair. So, just one more follow-up then on the international front, right? This has been a strategic play in the making for some time now, and you're now at the cusp, it looks like, of making some meaningful market penetration. I don't know, can you give us some general sense with the Spoolable business right now, just give us an update on what percentage of revenue is coming from outside North America right now and what kind of -- where do you think that might go over the next couple of years?

Steve, yeah?

Yeah, I would say, it's ranged sort of from 5% to 10%, but there's no reason it shouldn't be materially higher than that over time. There's a lot of interest, like I said on that, both in Latin America and the Middle East for our products.

No, I mean, to be fair -- forgive me for interrupting you. The previous management at FlexSteel sort of retracted from their push internationally because they were so busy domestically, not unlike the way we were. But we've noticed with a refocus -- and by the way, we've combined our sales efforts between Pressure Control and Spoolables. There's an incredible amount of interest internationally for these FlexSteel products.

That's great. Appreciate that color. Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Stephen Gengaro from Stifel. Your question, please.

Thanks. Good morning, everybody.

Good morning to you.

Thanks. So, two for me. The first -- and obviously, there's a lot of moving pieces with activity and consolidation. But when we think about the legacy Cactus business and the wellhead side, do you think in the environment you see right now in the US that, that business can grow in '24?

You're talking about from a market share standpoint or from an absolute standpoint?

Well, you won't tell me the market share anymore, but I imagine it's pretty high. But I think from -- maybe address both. But I assume, yes, on the market share side. But on the absolute side, do you think that's enough or do you think it's -- how should we think about that? I know the back half of the year is going to have an impact.

Yeah. As I mentioned earlier, I'm not -- I'm probably more pessimistic about the overall rig count than some of you are and maybe some of my peers, having been through this so many times, gas prices at this level, consolidations. One customer has 22 rigs, one has 20. We never end up with 42 rigs, and we won't end up with 42 rigs. So, I'm optimistic market share. And by the way, the fact that we have stopped disclosing market share shouldn't give you any concern. Our market share is very, very healthy. You'd be very pleased. I'm not quite sure that it can overcome a rig count that drops down into the 550 to 570 range, 575 range.

Okay. No, I'm actually -- I'm actually -- I would actually think that on the market share side, I'm not concerned at all. I would actually think it's the opposite. So -- no, that's good color. And then, when you -- and you mentioned this a little bit. But when we think about the international markets for the wellhead, particularly for the wellhead, I know there's some areas that you've been looking into. You've had I think some early success. What are the two or three key markets and kind of where do you think that -- how do you think it evolves in '24 and '25?

Believe it or not, there's parts of Europe where I think that we're going to penetrate, the Middle East and possibly some Latin American businesses.

Okay, great. No, thank you for the color.

Thank you. One moment for our next question. And our next question comes from the line of Scott Gruber from Citigroup. Your question, please.

Hey, Scott.

Yes. Good morning. Scott, previously you discussed getting Pressure Control margins back into the mid-30%s. Looking at the cost reallocation, that looks to boost margins by a couple of 100 basis points, right around 200. So just to calibrate, is the upside potential now something on the order of 37%, maybe 38%?

Gosh, I don't know, Al, if we've projected that far. We're still working on 2024. But I think that -- I just would hate to speculate, although I can tell you that our investments this year will be to bolster our low-cost manufacturing. So, we are in a cost reduction mode right now. And I think that -- both in terms of product redesign and in terms of manufacturing. But yes, we are quantifying that internally, but I'm not prepared to talk about that right now.

Okay. And just...

But I feel -- let me just say that [indiscernible].

Okay. And the drivers were again, right, you have some low-cost inventory coming through now, which should help in the near term, and then you're waiting for...

End of the year.

Towards the end of the year, okay.

Yeah. Because we have to -- one of the things that we pride ourselves on or Joel does, is that as we introduce innovations to our product, we do it in a very, very responsible, measured fashion, so as not to obsolete anything we have in stock. So, as we replace our current inventories, this stuff is already on order and being manufactured when it reflects -- when it becomes reflective in our results, end of the year, but certainly next year. And the new low-cost manufacturing facility will be partially operational by the end of this year, fully operational in 2025.

Okay. Great. I was looking for that color. Thank you. Appreciate it.

Thanks, Scott.

Thank you. [Operator Instructions] And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Scott Bender for any further remarks.

All right, friends, I just want to thank you all for attending the call. Hang in there. We'll have some information for you on the international front I hope within the next 90 days. Have a good week. Thank you.