Stephen Tadlock - VP and CAO Scott Bender - CEO Brian Small - CFO Steven Bender - VP of Operations.

Sean Meakim - JPMorgan Bill Herbert - Simmons George O’Leary - Tudor, Pickering, Holt & Company JB Lowe - Bank of America.

Good day, ladies and gentlemen, and thank you for standing-by, and welcome to the Cactus First Quarter 2018 Earnings call. Today’s call is being recorded. At this time, I would like to turn the call over to Steve Tadlock, Vice President and Chief Administrative Officer. 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 Brian Small, our Chief Financial Officer. Also joining us today is Joel Bender, Senior Vice President of Chief Operating Officer; and Steven Bender, Vice President of Operations.

Yesterday afternoon, we issued our first quarter earnings release, which is available on our website at www.cactuswhd.com. 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 risk 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. And finally after our prepared remarks, we will answer any questions you may have. So with that, I’ll turn the call over to Scott..

Okay, thanks Steve, and good morning everyone. On our fourth quarter call we told you we expected our growth to continue in 2018 after a solid financial and operational performance in 2017. There were several reasons for that optimism.

We took steps to capitalize on growing demand for our frac rental services by increasing and accelerating to the extent practical, our investment in large bore valves. During the second-half of 2017, we added field service tax to a level that was in excess of demand at that time positioning the company for expansion in 2018.

We further explained that we expected to realize a positive impact from this decision in the coming quarters. We commenced work on the expansion of our Bossier City facility to accommodate increased product receipts from Suzhou.

We acknowledge that opportunities remained to expand our wellhead market share with smaller private equity backed entrants and with majors albeit at a slower pace for the latter group. And finally, we intend to increase our focus on innovations related to our completions of frac rental business.

I'm pleased to report that we made progress in all of these areas, some of which contributed directly to our strong first quarter results. We brought forward rental asset additions to around $15 million during the period, which contributed to a 19% increase in associated revenues compared to the prior quarter.

Field service margin percentages improved over 20% during the period, as we began to convert Q4 is not billable hours to billable hours. And despite a customer profile heavily weighted in favor of publicly traded ENPs, we grow our recount faster than the overall growth in the U.S.

onshore count and we progressed our strategy of expanding our rental business with majors. Finally we completed design work on our next wellhead offering and importantly we are soon to deploy prototypes for a new completion innovations all designed in-house that will reduce human intervention at the well site.

Each technology may be employed independently or in concert to maximize efficiency and safety. The products are being developed in coordination with the few of our major customers and should be brought to market over the coming two quarters.

We believe that the tremendous strain on human capital in our industry and the push toward minimizing non-productive time between frac stages will highlight the value of these innovations and further enhance Cactus’ position as a reliable source of solutions for our customer’s high intensity completions operations.

So moving on to our operating results, while sequential growth exceeded our expectations, our year-over-year growth was truly remarkable validating our value proposition in the U.S. onshore marketplace. Here are a few highlights of our year-over-year performance.

Revenues rose 97 %, adjusted EBITDA increased to 179%, adjusted EBITDA margin rose from 26.2% to 37.1% and our markets here for U.S. onshore wellheads rose to 26.4%. Turning to our first quarter results.

Following a decline in the onshore rig count in Q4, our product business a portion of which lags changes in our rig count delivered reasonable growth and revenue while margins benefited from increased sourcing from our Suzhou facility.

Although the number rigs we service continue to increase thanks in part to success with private E&Ps, several of our core clients did demonstrate the capital discipline the industry anticipated. As I mentioned earlier, the biggest story for the quarter was our rental business.

In March, we announced that we were increasing our 2018 capital program by approximately $10 million to respond to missed opportunities.

With paybacks of 10 months, we leveraged the flexibility of our internal supply chain to more quickly address the market share available to us and successfully made ready approximately 40% of our currently projected additions.

Our team did an outstanding job of accelerating and deploying these additions during the first quarter and provided we can continue to bring forward our deliveries, we believe that this business line will demonstrate growth in excess of overall activities.

As expect that our field service business benefited from a surge in billable hours and higher utilization most of which related to frac work which requires greater labor intensity than product installations.

So now I'll turn the call over to Brian Small our CFO who will review our first quarter results in detail following his remarks, I'll provide you with some thoughts on the outlook for the near term before opening the lines to for Q&A.

Brian?.

Okay. Thanks, Scott and good morning everyone. Scott mentioned our Q1 revenues are a $150 million. We're almost double the equivalent period last year and almost 10% higher than Q4 2017. Product revenues are just under $59 million or 78% higher than the equivalent period in 2017, and 3% percent higher than Q4 2017.

Product gross profits are just over 37% was over 7% higher than Q1 2017 and 3% higher than in Q4 2017. The margin improvement over the last 12 months was due largely to price increases and product mix.

Well, we believe the more recent increase versus Q4 2017 can be partly attributable to an increase in the proportion of products sourced from China and improved absorption in Bossier City plant. Rental revenues are just over a $29 million or $16 million and $4.7 million higher in than Q1 2017 and Q4 2017 respectively.

The increase was primarily attributable to an increase in demand for our products. As Scott discussed we accelerated some of revenue rental CapEx plan for 2018. And I’m pleased to comment that the additions to the fleet were rapidly put to work and have generated additional revenues on gross profits.

This is reflected on rental gross profits for Q1, just over 58%, being 22% and 8.6% higher than Q1 2017 and Q4 2017 respectively. We also commented in our Q4 earnings call, that field service revenues had been impacted by some seasonal factors.

As expected, we saw a rebound in Q1 versus Q4 with revenues at just over $27 million being almost $4 million higher than the previous quarter, and $14.5 million higher than the same period last year.

Improved utilization was a primary driver and service gross profits at 20.5% showing an improvement of over 5% versus Q4, and almost 8% higher than the same period last year.

The increase in SG&A from $6.6 million in Q4 2017 to $9.1 million in the current quarter rose from stock-based compensation and additional headcount costs, as we successfully recruited personnel to support our growth and the additional responsibilities associated with being a public company. Net income came in at $26.4 million.

Given we went public mid-quarter our income statement reflects the net income attributable to the pre-IPO period as well as that attributable post-IPO to both the non-controlling interest owners and the public owners of Cactus, Inc.

To provide additional clarity on net income per share given our Up-C structure and the timing of the IPO mid-quarter, we detailed in our earnings release how did the reported GAAP diluted EPS of $0.14 per share can be adjusted to reflect what we believe would have been the diluted EPS across first quarter if the IPO occurred at the beginning of the quarter.

On this basis, the diluted EPS would have been $0.34 per share as adjusted.

Adjusted EBITDA which is arrived at by adding to EBITDA the cost of stock-based compensation and the write-off of the remaining balance of original issue discount and deferred costs relating to the term loan taken over in 2014 that was repaid on February 18 following the IPO was just under $42.7 million.

This was almost 180% higher in Q1 2017 and 22% higher than Q4 2017. Sequential incremental adjusted EBITDA for Q1 represented 74% of the incremental revenue in the period and adjusted EBITDA fourth quarter just under $42.7 million represents 37.1% of revenues which compares to 33.4% in Q4 2017 and 26.2% for Q1 2017.

Our operating cash flow for the quarter was $38.6 million. Following the completion of the IPO, we are debt-free as we also repaid in full during the quarter, the $26 million draw on our revolver in January that was used to fund the tax distribution to our members related to income earned prior to the IPO.

As we become a corporate tax payer we expect in Q2 to disperse $6 million of tax-related payments of which $4 million will be distributed to the legacy owners of the LLC.

Our CapEx for the quarter were $60 million and we believe that our CapEx for the full year maybe closer to $60 million provided we determine that strategic additions to our rental fleet are warranted to take advantage of business opportunities that arise. That covers the financial review and I’ll now turn you back to you Scott..

Okay. Thanks. Brian. As we made clear during our roadshow and in numerous conversations since that time we are not at this early stage in our public company like comfortable providing detailed guidance.

However at near the midpoint in Q2 our growth across all business lines has exceeded our internal expectations including our product sales and we still missed opportunities due to a lack of available rental assets. So to that end we continue to review the size of our fleet, mindful of maintaining our attractive ROCE profile.

We believe our top 10 rental customers use us on far less than 50% of their active frac sites. Having more equipment we believe these customers could provide immediate opportunities for asset deployment.

Despite upward revisions in growth CapEx we believe that our business will continue to generate impressive amounts of free cash flow as evidenced by our repayments full of the $26 million we drew down during the quarter.

Finally as I mentioned we're making progress and attracting the group of wellhead customers which has been less well represented in our client list and our early presentation to the completion innovations and process are being met with enthusiasm. So with that I'll turn it back over the operator and we can begin the Q&A.

Operator?.

Thank you. [Operator Instructions] And we'll go first to Sean Meakim with JPMorgan..

Thank you. Good morning..

Good morning, Sean..

So just starting, I thought it will be helpful just to get a little more granularity on the innovations that you're ready to bring to market on the wellhead business and it might be -- it’s a little bit early here but could you just help us quantify to a degree the economics and your ability to capture some of that value as you deliver these differentiated offerings to your E&P customers?.

Sean the latest innovation, the latest major innovation I think we’ve mentioned involves what we refer to as our 40 wellhead system that was primarily developed in response to some customer needs in the Delaware Basin. I really - I don't believe at this point I can quantify the market size or the market demand for that product.

But you know we don't ever develop something that we don't have a market for itself. This will be a very accretive addition to our product offering..

Sure. And I guess I was thinking more on an individual level in terms of a way to quantify compared to the existing offering your ability to extract more value for Cactus, Bossier offering is comparable in terms of cost but you're able to charge a premium because of the incremental value through the E&P.

I guess how do you think about the kind of the Economics at that level?.

Okay. Because this system actually handles four strings of casing and you know our 3D system handles three strings of casing, you're going -- you're going to completely eliminate one hot work cycle, one BOP [ph] nipple down and nipple up cycle.

You know I don't have the hours handy, but I would imagine it's going to be in the neighborhood of 10 hours or so of rig time savings..

I think it’s seems substantial. So thank you for that. And then just moving over to the frac rental business you know given the incremental capital you’re spending certainly you’re chasing a lot of opportunities out there more than you can get your hands on at the moment.

Could you maybe just remind us how we should think about maintenance CapEx for that -- for the rental fleet? And then I guess just how you approach returns and paybacks for that business relative to the core wellhead business?.

Well, so the first question is pretty easy. The amount of maintenance CapEx in our rental business is diminish so this just to remind you the repairs on rental equipment are borne -- cost of repairs are borne by our customers. So the maintenance that occurs really has to do with replacement of the internal parts.

So it's not the same as the maintenance CapEx, perhaps you're used to thinking about in terms of a pressure pumper. So that maybe a short answer to diminishes amount. In terms of how we view the return on our rental business versus the return on a regular business it is substantially the same.

I would say that probably slightly better in the rental business that trade off of course is -- is as we've discussed is the risk and the fact that you spend the money today and although our payback is about 10 months we believe that are 10 months, we believe that our incremental CapEx returns about 10% of its cost per month following deployment.

The fact is the rental business just has inherent risk, it's not I think associated with the product business where our greatest risk is we may have a few months of additional inventory..

Got it. Okay. Great. Thank you very much for that feedback..

We'll go next to Bill Herbert with Simmons..

Good morning. Scott, couple of questions here with regard to on the cost front.

You talked a little bit about what you're seeing and what you expect with regard to steel cost inflation you know labor cost inflation and I know it's a very fluid environment on this particular topic, but any thoughts with regard to your exposure on the tariff front relating from your China-sourced product?.

Well, I mean, Joe is in this call with us as well this morning. But we talk about this all the time and that’s I have been paying attention, we don't really believe it's going to be have a material impact on our business even with the set of revised items that we’ve released I guess with the three old one..

Correct. And we haven't seen much and typically our product comes in as a machine product in that kind of product has not been covered and what we've seen in the tariffs. With that, we reviewed all of the harmonized tariff codes, they come in and I review everything that comes in right now from China.

And there were maybe a few items on there but they were just accessories type items. They are not the major components that we sell today..

Okay. And with regard to steel cost inflation and labor cost inflation, what you guys seeing and is that source of inflation and labor cost inflation, what do you guys see and is that sources are concerned for you or just your thoughts on those fronts please. Thank you..

You know but we -- you may recall we passed through a fairly substantial increase for our field service techs at the - in the fourth quarter of last year. And you know our -- internally we're thinking that we might by the end of the year have another 10% with techs -- our techs keeping in mind that our techs do earn a considerable amount of overtime.

I think that -- that believe it or not, we're a little bit more concerned about shop employees right now because they earn less over time and their rate of pay is so much less. So we're thinking that shop employees particularly in the areas that we're all concerned about could approach 15%..

Okay. Thank you. Thank you very much..

Okay..

We'll go next to George O’Leary with Tudor, Pickering, Holt & Company..

Good morning, guys..

Good morning..

Good morning..

The -- I think a quarter or so ago, you guys kind of couched the frac rentals businesses pricing thereof 40% versus the 2014 levels and it seems like clearly there is a desire to deploy more cash flow, and more CapEx into that business; were you guys given the attractive economics there? I was just wondering if you could update us on where prices sit today and just kind of how that pricing momentum is trending within that business?.

You know I'm really not going to give you any pricing details other than to say there is still positive momentum in frac rental pricing right now..

Perfect. That’s helpful. And then from a capital allocation perspective on the -- again clearly investing into the frac rentals fleet at this point, how do you think about capital deployment beyond that obviously innovation is always one thing that’s been a real arrow in your quiver historically.

How do you think about cash returns to shareholders through time at this point it's clearly a very free cash flow generative business, just curious for an update there?.

Well, if you're concerned that we're going to consume our cash with CapEx you don't have anything to be concerned about. We're pretty careful I think as you know even though we have moved up and increased our rental CapEx.

So let me first discuss that, if we look at the profile of our major frac customers as I think I mentioned we believe we do less than half of their frac work. And by and large the reason is we can't deliver it more than that. So we and -- I think it's also fair to say that I look at the profile of our top 10 frac customers.

They're all well capitalized and active customers. So we do very little work with the smaller E&Ps at least on our frac side. So I'm comfortable that their activity levels will be sustained albeit with the risk that we all know in the West Texas with takeaways. I'm comfortable that they like our product. So I'm comfortable with our levels of CapEx.

I think I may have mentioned before that the mistake we made last year is we didn’t anticipate the demand for our frac assets had we done. So I think we would have had even better financial results but we are prudent.

So we want to be, we want to be in a position where we don't have enough assets to go around and without great visibility to what our competitors are building, it's we are regarded and how much money we spend and deploying frac valves.

So you're -- the last part of your question is what we -- we do with this excess cash? Again we're in our very, very early stages of being a public company.

We're in early stages of being as liquid as we are having just recently repaid that term loan and we are seeing acquisition opportunities at least ideas that come forward, none of which have been of interest to us. So we'd like a chance to look at that.

We've got a couple of new -- as we mentioned innovations on the frac side which as we begin to see crystalize and accepted, it's going to require some capital beyond that if we're unable to deploy capital and I think in a measured fashion that would be consistent with our policy profile then of course we're going to consider dividends..

Right. Thanks very much for the color, guys..

We'll go next to JB Lowe with Bank of America. Please check your mute button. Once again Mr. Lowe please check your mute button..

Yeah.

Can you guys hear me?.

Yeah..

Yeah..

Good morning. Sorry about that, I wasn't on mute. I don't know what happened. Scott you mentioned that you are seeing some capital discipline amongst your customers, have you noticed any change given how oil prices are actually acting over the past couple of months.

I mean we're already in the May now and people set their budgets at the beginning of the year.

Have you noticed any uptick in orders or are people doing any plans above what they had originally said earlier in this year?.

I have seen really no evidence of that a lot of conversation but nothing that is actionable I think from our standpoint..

Okay. Fair enough.

In terms of sourcing from Suzhou, what -- I guess how much of your product you are currently sourcing from there and what potential margin expansion beyond what you've seen so far do you think you can get on the product side I guess over the balance of 2018?.

Well I think that Brian correct me if I'm wrong, George is stepped out we’re - work our product receipts are running now just under 60% from China as opposed to non-China sources. So I think that we mentioned that the optimal given the fact that we do get a lot of parachute orders that can only be sourced to Bossier City.

We're nearing -- we're probably nearing the point at which they're going to be diminished - a diminishing impact from China, maybe 65% would be optimal and of course that's not insignificant. It really depends upon our ability to standardize our customers production plans, which heretofore we've been up successful in doing.

So production really gives rise to this sort of built in limitation on how much we can bring out of the Far East. In terms of the margin impact you know honestly these margins are pretty good and if I look back historically on my 40 years in this business, I'm pretty -- I'm very pleased with our product margins right now.

I think we do a really good job and maybe a couple of more points but that's probably it..

Okay, that's helpful. Lastly on I know you guys have hired a bunch of service techs last year, but it seems that you've kind of gotten to the place where you want to be in terms of utilizing those guys.

Do you still see you know increased margins going forward as you kind of spread out that cost basis on a better activity or is that kind of -- if we’ve kind of seen all the benefits of that?.

What do you think Brian?.

Well, if I look at where our service utilization rates are today that they have been higher than the past so I think there is scope for upward growth..

Okay. Thanks Brian. All right, thanks guys. That's it for me..

We'll go next to Dan Pickering with TPH Asset Management..

Good, morning guys. Dan Barrel [ph] here from TPH. Scott, I was wondering if you could just talk a little bit about you mentioned West Texas takeaway issues as we kind of get out into the back part of this year and early next year. Do you -- do you see any risk that your customers start building docks as opposed to continuing their completion cadence.

And what are the implications then for your frac business?.

You know Dan, they're clearly building ducks right now although we're about as busy as we could possibly be in our completions and production side, but it's undeniable that they're building DUCs. I guess what I -- what I've always wondered about is his how many DUCs are the right number of DUCs. I think that -- I don't think it's 3,000.

I don’t think it’s 4,000. It may be 7,000 or 8,000. I've actually heard some customers that have -- that actually have and I'm sure you know more about this than I do, they strategically want to hold an inventory of DUCs. I'm not sure I understand that but I hear that all the time.

That has focused to the extent that their desire as I would to reduce their DUCs. There would seem to be some built-in backlog or at least some built-in safety nets or drilling drop off and people rotate into doing more completions and say how the inventory. You know Dan I’d probably -- I don't think about this very much beyond as William..

Yeah. I mean the way I'm thinking about it, is obviously you're building capacity for on the frac side both people and equipment, and if take away is a problem and folks stop completing wells or start building more DUCs.

It is just a question of timing around do you wind up with some excess capacity or -- and I think you partially answered it with the -- you're only doing half your -- half of the work for some of your customers and so, maybe there's some built-in ability to take share if things were to pause a little bit with DUCs..

Yeah..

Second….

Let me just -- there's another thought I have on that..

Sure..

If I look at our portfolio about findings in West Texas, who use our frac services, the last which so use our frac services. The vast majority of them are very large and they have -- I think they probably have better in-house infrastructure than some of the smaller players..

Great. Thank you. And then on ….

Yeah..

Second question would just be away from the Permian which everybody likes to stare at.

Are you seeing any you know pluses or minuses in your business that surprise you kind of versus plan in other regions pockets of strength and the pockets of weakness?.

And we've been pretty busy everywhere. I think I'm surprised that it's clear that the Bakken is showing some light again I don't know if that's of a redeployment of cash out of the Permian. I don't know if it's just simply $70 oil, but the Bakken has surprised us. I think that actually our South Texas business has surprised us.

The only area that we really have not done a really a great job and it has been the Haynesville and we have probably on a relative basis the greatest opportunity there. So honestly, we're busy just about everywhere we operate right now..

Great. Thanks. Nice job out of the box, guys. Keep it up..

All right. Thanks, Dan..

It appears there are no further questions in queue. I’d like to turn it back over to today's speakers for any additional or closing remarks..

Thank you for joining the call. We'll see you at the Citi Conference next week..

Thanks, everybody. Have a good day..

And this concludes today's conference. Thank you for your participation. You may now disconnect..