Good morning and welcome to the Cactus Second Quarter 2020 Earnings Call. My name is Joanna and I will be facilitating the audio portion of today's interactive broadcast. All lines have been placed on mute to prevent any background noise. For those of you on the stream, please take note of the options available in your event console.

[Operator Instructions] As a reminder, please limit your question to one and then one follow-up question. Thank you. At this time, I would like to turn the show over to Mr. John Fitzgerald, Director of Corporate Development and IR. Sir, please go ahead..

Thank you and good morning, everyone. We appreciate your participation in today's call. The speakers on today's call will be Scott Bender, our Chief Executive Officer; 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.

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 expectation. 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 will turn the call to Scott..

Thanks, John. Good morning, everyone. Last quarter we were among the first to set realistic expectations for our industry.

Since then oil prices have rapidly recovered to approximately $40 a barrel, completion activity looks to have trough and we appear to be approaching a bottom in the U.S, Rig Count that is marginally higher than previously forecasted.

Nonetheless, we remain committed to further streamlining our existing operations as we expect activity to remain below the levels needed to support the current industry capacity. The second quarter was better than expected for Cactus. Although, drilling and completion activity in the U.S.

fell by more than half, we demonstrated the variable cost nature of this business through industry EBITDA margins and significant free cash flow generation. In summary, second quarter revenues were $67 million. Adjusted EBITDA was over $22 million. Adjusted EBITDA margins were approximately 34%.

Our cash balance increased by $40 million to $271 million and we paid a quarterly dividend of $0.09 per share. I'll 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 for Q&A. Steve.

Thanks, Scott. In Q2 revenues of $67 million were 57% lower than the prior quarter. Product revenues at $41 million were 53% lower sequentially, as the U.S. onshore Rig Count fell by more than 50% quarter-over-quarter.

Product gross margins increased to 36% of revenues, up 100 basis points on a sequential basis in part due to $3.1 million in tariff related benefits received during the quarter. Rental revenues were $12 million, down 68% from the first quarter. The decrease was attributable to significantly lower industry completion activity.

Although gross margins declined on a sequential basis, we were able to maintain positive margins through the achievement of cost reductions in both direct and branch expenditures. Field service and other revenues in Q2 were $14 million, down 54% from the first quarter.

This represented just under 27% of combined product and rental related revenues during the quarter, slightly ahead of expectations. We expect this to represent approximately 26% of product and rental revenue during the third quarter.

Gross margins decreased 440 basis points sequentially, largely due to lower revenues which were offset by lower payroll expenses, better labor utilization and rationalization of our field service vehicle fleet. SG&A was down $5 million sequentially to 8.7 million during the quarter.

The decrease was primarily attributable to lower payroll-related expenses, despite the sequential increase in non-cash stock-based compensation expense. We expect SG&A to be between $8 million and $9 million in Q3 2020 with stock-based compensation expense flat at slightly over $2 million.

We recorded just under $1 million of severance expense in Q2 2020. Second quarter adjusted EBITDA was $22 million, down from $54 million during the first quarter. Adjusted EBITDA for the quarter represented 34% of revenues. Adjustments during the second quarter of 2020 included 900,000 in severance expenses and $2 million in stock-based compensation.

Depreciation expense was $10.5 million during the period down from $11 million during the first quarter. Our public or Class A ownership was relatively stable in Q2 and was 63% at the end of the quarter. This should result in an effective tax rate of approximately 19% in Q3 2020, assuming no changes in our public ownership percentage.

GAAP net income was $9.1 million in Q2 2020. Internally we prefer to look at adjusted net income and earnings per share which were 7.4 and $0.10 respectively compared to 31 million and $0.41 per share in Q1 2020. We estimate that the tax rate for adjusted EPS will remain at 26%.

During the second quarter we paid out $6.8 million resulting from our quarterly dividend of $0.09 per share. The Board has also approved a dividend of $0.09 per share to be paid in September of this year net of the dividend and associated distribution payments.

Our cash position increased by an impressive $40 million during the quarter to almost $271 million at June 30, highlighting the strong free cash flow generation of the company. For the quarter, operating cash flow was $57.4 million and our net CapEx spend was $8.2 million.

As disclosed in our release Cactus recognized $7.5 million in refunds during the quarter associated with tariff exclusions granted in March of this year. The refunds reduced inventory values by $4 million and cost of revenue by $3.5 million during the second quarter.

The remains over $6 million in additional potential refunds not yet recorded as of June 30. These will be recognized as a reduction to cost of goods sold if and when received with the amount substantially allocated to product costs. Early in the third quarter we made our annual TRA payment and associated tax distribution of approximately $23 million.

We expect this payment and associated distribution to be substantially lower in 2021 as such disbursements vary directly with imputed tax liability. The recent payment reflects our strong 2019 results and the associated tax savings arising from our corporate structure.

The capital requirements for the business remain modest as evidenced by us reducing our net CapEx guidance for 2020 to be between $20 million and $25 million. That covers the financial review and I'll now turn it back to Scott..

Okay. Thanks, Steve. We've often highlighted that the two key factors in Cactus' success have been its variable cost nature and its modest capital requirements.

This was validated during the second quarter as we reduce payroll-related expenses by approximately $85 million on an annualized basis and reduced the midpoint of our 2020 CapEx guidance to 60% below 2019 levels.

The $85 million in annualized payroll cost savings was achieved through reductions made by the end of May requiring less than $2 million in total associated cash severance charges during the first half of 2020.

Looking to our products business, we receive favorable news as the USTR granted exclusions on specific goods that we manufacture internationally. This produced a favorable impact on product gross profit during the second quarter.

And as Steve mentioned, we're optimistic that we'll receive a little over $6 million of additional refunds in the coming quarters so the timing and final amount remains uncertain. These exclusions are currently set to run through August of this year though we've applied for extensions and are currently awaiting a response.

Such extensions if granted portend well for future margins. Notwithstanding the foregoing, our strong financial position is allowing us to leverage lower costs throughout our supply chain. This should support incrementals looking further out.

With regards to market share, we believe the quarter played out largely in line with our previously communicated expectations for volatility given the magnitude of the week-to-week declines in April and May and our specific customer profile.

Now that the rig count is exhibiting signs of stabilization, we're confident that we'll emerge with higher market share during the second half of 2020 than both our June and pre-downturn levels of you supported both by our mid-July market share reaching an all-time high and positive indications from long-term and recently acquired customers.

As witnessed during prior downturns customers cannot afford to ignore efficiency gains as further service pricing concessions become scarce and untenable. Assuming the U.S. onshore rig count is relatively flat from current levels in the near-term the average Q3 rig count will be down approximately one-third sequentially.

We currently expect Cactus' rigs followed to be down in the 20% range sequentially outperforming the broader market.

From a financial perspective -- production in our Q3 product revenues to be slightly less than the percentage reduction in our rigs followed during the third quarter with some modest level of production related activity increases and with EBITDA margins in the range of 30%.

On the rental side of the business, revenues declined to a similar degree as onshore completion activity during the second quarter as operator ceased activity given limited ability to move barrels to market. In addition, desperation pricing mirrored levels witnessed in early 2016.

We continue to maintain discipline and evaluating business opportunities, recognizing the value of our equipment and services bring to customers. This discipline was key to our ability to maintain EBITDA margins just below 70% during the second quarter.

Looking to Q3, we expect low double-digit revenue declines quarter-over-quarter given the lower starting point with margins in the 60% range. Regarding field service revenues in this segment continue to be driven by both our product and rental activity and expect to see EBITDA margins in the mid 20% range for the coming quarter.

We were very pleased to record total adjusted EBITDA margins of nearly 34% during the quarter. If you recall, we were able to maintain adjusted EBITDA margins above 20% during the prior downturn, while private and we believe we will achieve similar results despite our public company costs.

As noted earlier we've reduced our CapEx guidance to $20 million to $25 million for 2020 given expected levels of activity. We foresee continued annualized levels of spending below $10 million for at least the back half of 2020 and into 2021. I'd like to close by highlighting a few items before opening the line to questions.

Internationally, we continue to believe our strategy to expand into target markets will bear fruit in 2021 as we develop viable business opportunities outside of the U.S. Not surprisingly however, travel restrictions have impeded our momentum.

Regarding M&A, we continue to believe the consolidation within our industry where we have visibility to tangible synergies makes the most sense. Regarding capital allocation we set our dividend level with our industry's cyclicality in our ability to flex costs in mind.

We remain confident, we will emerge as one of the few oil field service companies who maintained our dividend level through this downturn. As I remind you regularly management are long-term investors in this business and highly aligned with our shareholders.

Given the almost 75% reduction in activity levels since last year our continued success in generating cash returns has never been more important. In summary, Cactus is well-positioned to navigate this challenging market environment. And with that I'll turn it back over to the operator so we may begin Q&A.

Operator?.

Thank you. [Operator Instruction] Your first question comes from the line of Sean Meakim from JPMorgan..

Thank you. Hey, good morning..

How are you?.

Scott, I'm doing great. Thank you. Well done on managing the quarter and you're right. Just really highlights the variable nature of your costs and it's highly differentiated in the sector the tariff revelation is quite constructive for margins going forward.

If as you said in the past maybe half of your cost of goods sold from China and the tariff just maybe 25% of those costs is the blended impact on COGS something like 10% to 15%. I'm assuming you are going to give me some caveats to attempt that down, but would love to hear some elaboration on that..

Okay. Steve, you on it now..

Yes, I think, everything you said is correct as of kind of the last part. First of all, these exclusions weren't on all of our products. What -- but they were on a significant number of our products.

So as we kind of look at what the margin impact would have been for the quarter because it did happen in March so you've got a full quarter's impact you probably looking at something like 3% on the product margins on an absolute basis impact once you factor in that 50% is coming from China and all the other caveats you mentioned.

I think something Scott mentioned on the phone call is important I think, Joel is in working suppliers very hard and obviously in this environment everybody suffers and things tend to roll downhill.

So we've been able to take concessions there and so regardless of the tariff extension outcome, we feel pretty confident that as we get some of these cost benefits in our inventory and they roll through the system will be able to maintain something in the low '30s range on that product margins..

Got it. Yes. The clarification is really helpful. And then on market share, it sounds like there is some volatility. Just given the unprecedented speed at which rigs are getting dropped but you sound pretty encouraged by how you came out of the quarter and then where you stand today in terms of market share.

So you're executing a similar playbook to the last downturn.

Can you just talk about some of those puts and takes and what the implication is looking forward in terms of market share?.

Yes, well Sean. Yes I wish I could answer your question directly. I can tell you, I feel very confident, the team feels very confident. This is such a volatile market though. I think you're going to see I mean -- I'm confident you're going to see record market share at this company by the end of the year. I really want to leave it at that.

Part of the problem that we've had is that as you know we have some very high-profile customers that went into this downturn with very large rig counts. And they dropped rigs extremely rapidly which increased the volatility in our month-to-month market share.

That volatility has now subsided to a large degree and we're beginning to see the benefits of adding new customers as well as some of those customers returning to work. So we have the best financed customers I think in the industry the most financially responsible customers. And our adoption rate is going up. So yes I feel very confident.

I wish, I could give you more detail but you know I can't..

Understood. Thanks a lot..

Your next question comes from the line of Ian MacPherson of Simmons. Your line is open..

Thanks good morning and congrats on the quarter. Scott, you mentioned just briefly that with regards to the M&A opportunity landscape in front of you, it --anything that -- that is logical and accretive. I incurred from last quarter's call that, M&A was not a hot plate issue but obviously the -- we've seen some stabilization in the U.S.

market have a better sense of what the dimensions of it are? Looking forward and just curious what types of extensions or bolt-ons for Cactus could make sense conceptually. given the redefinition of the U.S.

market over the course of this year?.

So right. Let me be clear right now. We have nothing on the horizon in terms of M&A. There clearly are a lot more opportunities that are surfacing. But I think that because of the cautious nature of this team, we now believe that the best M&A opportunities will appear within our own industry.

It's the business we know, in fact I think we know it better than anybody else I like to sound like somebody else who makes public announcements, but I think it's true we have more experience in this business. We understand that there're surprises and we want M&A opportunities, whereas I mentioned, there are we see tangible synergy benefits.

And the best place to look is within our own industry for that reason..

Does that entail U.S.

onshore focus or anything broader than that potentially?.

I would say both. We just see now quite frankly want it to be related to stockholds and wellheads..

Understood. Thanks very much. I will pass it over. Appreciate it..

Next question comes from the line of George O'Leary from TPH & Company. Your line is open..

Hey George.

How are you doing?.

Good morning guys. I am doing well.

How are you?.

I am doing great. Thanks..

Just curious, if you could frame what percentage of your rental revenues are kind of the newer generation of technology that you rolled out last year and what percentage are older technologies and just curious, if there is any -- if you can frame the exact numbers? Has that mix shifted as we've progressed through this soft period and start to bounce off the bottom?.

That it's about 15% George. Right now the headwinds that we face are that the customers who appreciated our technologies the most, really cut back on their completion activity. And as a result, we've been unable to move that number up.

Having said that I think that collectively this group feels extremely good that that's the same group that will ultimately have the money to start completing wells in the latter part of this year and certainly in 2021 and for that reason I'm optimistic that that adoption rate as a percentage of our total revenue is going to increase..

Very interesting and very helpful. Thank you, Scott. And then just one more from me you said July market share is already at a record.

So apologies for taking a stab at a previously asked question, could you frame what the July market share of rigs followed was? And then does that -- is that level in July kind of what you're targeting by the end of the year or what you think is feasible by the end of the year?.

I have a nice try George. I sort of purposely didn't tell you what that percentage was, but you can look at the chart you know what it means broadly speaking, I guess what I'd tell you that we had a record. I think that we can move up from that record additionally by the end of the year. I feel good about that..

Thank you. Figure that was case but I dig a shot..

All right, sorry George..

Okay. Your next question comes from the line of Tommy Moll from Stephens. Your line is open..

Hey Tommy..

Good morning Scott. And thanks for taking my questions..

How are you doing?.

Good. Fine, thank you.

So we haven't talked about your Asia supply chain much today, but I wonder if you could give us an update on the extent to which there maybe any interruptions for product coming out of China? And then on a related point, the level -- the priority level for alternative sources of supply in the future, you've commented on that before.

And any update you'd be willing to share would be helpful?.

Yes I'll let Joel talk about China, but I can tell you that as we discussed in the last call, we're moving with increased I think focus on diversifying our supply chain out of that area, but Joel you want to talk about China..

China, China has really returned to base -- capacity and production. I'm not really seeing any kind of distribution issues with the suppliers there that there is lots of capacity right now. I think the only issue that we see right now it's just relates to vessel availability.

So it might take us two weeks longer to get product in than it did before because you typically deliver to the port and it used to be they would load you same week now it may take you two weeks to get it in, but again, in terms of production there's just been no disruption in production from there.

And going to the other point in terms of alternate then use for product, we are actively as Scott said, working on that, and I think you'll see some that produce some sort of fruit in 2021. Lots of good options right now. A couple of different locations for that, but that is our focus right now between now and the end of the year..

Great thanks. Thank you both that context is all helpful and shifting to different topic now on your cost save initiatives. You took $85 million annualized out pretty quickly, which as you indicated earlier Scott again, underscores the variable cost -- the variable nature of your cost structure. Maybe I'm getting a little bit ahead of things here.

But as we think about a potential recovery, should we think about all of that $85 million as variable on the way back up or having gone through this process have you seen opportunities or have you already moved on opportunities to take fixed cost out as well, which we didn't have positive implications for your incrementals and recovery..

Okay, I'm going to answer that question in two parts. The first is if we took 85 out going down and we return to pre-COVID, we would not have to add 85 going up that's the first part of the answer. Okay.

Even though that was payroll related, so that $85 million does not include the non-payroll related costs that we've attacked with vengeance, so I hope that answer to first part. The second part is has to do with fixed costs. We just don't have a whole lot of fixed costs in this business.

We don't have multiple layers of management in fact it's about the flattest organization I think you'll see. In terms of facilities, our average lease duration is in the neighborhood of three years, so we have a lot of flexibility in terms of managing our long-term facility costs in that regard, should we need to.

But I think the point is we never invested at a large fixed cost platform and as a result there's just not that many opportunities for us to reduce. We certainly there are some and we've attacked those, but it's not going to be - they're not going to be write-downs, I will -- I'm going to go off, I'm off script already, which is not unusual.

Taking write-downs, for example, to reduce your fixed cost well, I guess that reduce your fixed cost. We never put ourselves in a position to have to take the write-downs, so I think you need to look at us in a little different way..

Very helpful Scott and maybe we will schedule a podcast for a more fulsome discussion on write-downs in fixed cost..

You are beyond that podcast?.

I'd love to lead it. Thank you. I'll turn it back..

Your next question comes from the line of Jacob Lundberg from Credit Suisse. Your line is open..

Hey, good morning guys..

Good morning..

Just wanted to go back to the discussion on some of your new innovations within the rental segment. I'm curious if during the downturn you've seen any change in the way your customers are thinking about some of those products, so I understand some negative customer mix kind of took down the numbers temporarily in 2Q.

But in terms of your conversations with customers any changes in the way those operators are thinking about, I'm thinking broadly just the application of innovative technologies in their business, but obviously specifically as it relates to your business and you think coming out of this there could be greater appetite for stuff like that as kind of focus goes from immediate cash preservation towards thinking about driving better efficiencies..

Yes, we saw very little appetite for any additional cost on a frac side during -- during the quarter. Interestingly enough over the last, I'd say couple of two, three weeks as some of our larger accounts are beginning to talk about going back to work, we're seeing renewed interest and the innovation part of our rental fleet. Yes.

The other item of course that it's of significance is stage costs have gone down a lot, which means that the value of reducing NPT is not quite as great.

And so the payback on an innovation, which we've always thought was extremely high just naturally becomes slightly less compelling in an environment like today's environment, so the best thing that happens for us frankly and probably the industry pressure pumping pricing stabilizes begins to move up and the customer mix -- supports safety and innovation.

So I feel much better about the future this quarter though there was just no interest in spending money..

Okay. That makes sense. And then just a question, I guess, again on the rental segments. I was kind of curious on the top line guidance of 3Q.

I would have expected with perhaps a little bit of rebound in completion activity in 3Q maybe revenues would have been flat to modestly up, I just kind of curious if you could help me understand what seems like it disconnect, but maybe you guys have a different view on 3Q completions..

I think the first part of the quarter was pretty good. And then it deteriorated in the last couple of months. Probably the most honest answer is we're conservative..

Okay. Fair enough..

I think there is some upside..

Makes sense. Thanks a lot. Appreciate it guys..

Okay..

Your next question comes from the line of Connor Lynagh from Morgan Stanley. Your line is now open..

Yes. Thanks..

Connor, how are you doing?.

Good.

How are you doing?.

Great..

I was wondering if I could follow up on Jack's question there more on the rig side of things, I think you guys gave one of the more realistic assessments last quarter where things were heading.

I think you've addressed to completions there, but on the drilling side of things I think you guys have highlighted you get a little bit more visibility than some of the other contractors.

So what's your thinking on people's appetite to put some rigs back to work later this year or early 2021 where do you think the customers are at these days?.

I'd see appetite in believe it or not the Eagle Ford, I see an appetite in the Delaware, I see sort of no indication of any increased appetite in the Mid-Con I see sort of a waning appetite in the Northeast.

We had really hoped that gas prices in the Northeast would be constructive on that seeing that so much may be a little bit of optimism on the Bakken, but I would say primarily South Texas and the Delaware..

Got it. That makes sense. Any order of magnitude you sort of have us think about for as we move later this year.

I mean we're talking low double-digits, we're talking single-digits what sort of your thinking there?.

I would say probably low double-digits by the end of the year..

Got it. Right I wanted to pivot maybe -- go ahead sorry..

Let me just caveat that by saying that that really is off the top of my head I'm trying to think about customer-by-customer and I think I said earlier we're blessed with some customers that are capable of adding rigs financially some of them are some of them aren't but I think it's fair to say low double-digits. What I really think will happen.

You didn't ask this question, but I'm going to answer it anyway. Our production tree business which is historically in the 26% or so range 27% range of products really fell off the face of the map because of completion activity. You're going to see much better results from our production tree segment.

We're already seeing some light there and as frac activity in general picks up I think you'll see production act. Our production tree pick up disproportionately faster than our wellhead product segment..

Got it. That's kind of question where I stock about something I didn't even ask. The one higher level question I had here is you've had some of your large competitors. I mean probably for the better part of the past 12 to 18 months here, but there is a serious mandate to generate returns.

And I think it's clear to many that you've taken a lot of share and the returns that some of those larger players are a lot lower than they used to be, have you seen any shift in behavior there as we've kind of gone into the downturn.

These organizations have done another round of cost cutting do you have a lot more opportunities or is it too early to tell..

You know how much I love all my competitors I don't want to take a disparaging remarks about them. This business doesn't really probably move the needle as much with our competitors I think they have a lot of other problems besides their surface wellhead business.

The short answer is I haven't really seen any indication of any change in their behavior..

That's fair. Thanks..

Speakers your next question comes from the line of Kurt Hallead of RBC. Your line is open..

Hey good morning everybody..

Good morning..

Hey Scott. Just wanted to clarify see if I can clarify one thing when you talked about the prospect of increased activity in South Texas and the Delaware with that specific to completion activity or drilling activity or some combination of both..

Yes, I was really talk I was -- but I have responded I was only thinking about drilling..

Okay, great. I appreciate that.

In the context of completion related activity, can you give us your perspective on how you may see things evolving it seems like there's going to be a pickup of activity here in the third quarter and then I'm kind of getting a little bit of a mixed read on the prospects for sustainability of that dynamic into the fourth quarter.

So, maybe pushing a little bit beyond your comfort zone about quarter-to-quarter dynamics but I know you're really tied in close to your customer base so would really appreciate perspective..

Yes, I think that in our view is that the improvement in completion activity will be in West Texas to a far greater degree than any other basin and I don't really have a good visibility beyond the next 90 days in that regard. So, we know that a couple of our customers are going to be adding some crews.

But they are not talking about the continued adding of crews. Having said that our customers have built a lot of DUCs sooner or later they're going to have to address those. I think that the industry is probably going to maintain a higher level of DUCs than they have in the past but I feel pretty good about 2021 in that regard.

Maybe I'm probably not as optimistic that you're going to see a large increase from Q3 to Q4 though..

Okay, that's great color. And then I think at least from my perspective, be curious to get a read from you as to or refresh for if you will as to what is driving the market share gains on the wellhead side of the business.

There have been any recent developments or new developments or improved elements of technology efficiency wonder if you can give us a little more color on what you think is ultimately driving that share dynamic..

Yes, I think it's a combination of customers, customer mix, the right customers adding rigs. I think it's -- it's so hard for anybody outside the business to appreciate it, but it's outstanding execution as everybody cuts back. It's not going to surprise you to learn that service levels also suffer and we made the decision.

Because we were financially capable of maintaining our core group of field service and branch operating people so and I think our level of execution has in my opinion has never been better than it is today. And so as our competitors perhaps begin to maybe pay less attention to that aspect of the business. I think we're seeing the benefits of that..

Okay, I appreciate that. And if I may slip one in for Steven. Just wanted to also clarify on this in terms of the margins for the products business that low 30% margin would be exclusive of any tariff refunds in the back half of the year..

Yes..

Yes..

Okay. Thank you for clarifying. Thanks..

Your next question comes from the line of Blake Gendron from Wolfe Research. Your line is open..

Hey thanks. Good morning. Thanks for taking my questions here. The first on products, so it sounds like trees fell off a cliff, so products revenue underperformed the rig count quarter-over-quarter on average. I wouldn't assume the pricing improved in the quarter, but still revenue and products per rig followed increased slightly.

So is it just an efficiency thing where the rigs that were left were drilling far more wells.

And is this a trend you see continuing that may not be fully appreciated in the way we think about this business for a lower growth rig count moving forward?.

Well Blake, there is a delay between rigs added and revenue realized. Okay. So we went into the downturn with a very, very high rig count and you saw the benefit of that I think during the quarter. As I said because of the lag. That's one point.

I think the next point is our product mix has become more favorable in that the areas with the lowest cost wellhead fell off the most and areas like the Delaware held up the best and the average wellhead is -- it's a good deal more expensive in the Delaware than this for example in the Bakken or in South Texas.

So it's a combination of product mix as well as I said the lag time between rigs being added and revenue being generated..

Totally fair. Shifting gears to international. I know we have some time obviously to nail this down as we move forward here right now with logistical constraints it's tough to get traction here.

But how do you think about the international expansion and I guess specifically the Middle East is one that investors anticipate you eventually getting back to just because you're very familiar in your prior businesses in that part of the world.

What would be ideal commercial structure look like would you basically stand up your own operation in that part of the world, when you try to go through a commercial partner appreciate some of your comments about overhead and keeping fixed cost low.

I'm just trying to understand I guess what sort of the optimal strategy is? And then how you think about roughly margin accretion versus the U.S.

business as a stance today if we were to see a little bit more expansion internationally?.

Well I think I might have some competitors on the line which always gives me a little bit of concern, so I'm not going to, I'm going to have to be a little bit vague in my response.

I would say you're going to see a combination of the two, but one thing we will never do and that is subject to our technology to the whims of others to distributed outside of our control. So no matter what structure we adopt be it a standout facility, be it a JV or a partnership. We're going to maintain control so we can control the technology.

In terms of margins, it's just a fact that margins internationally. I know that some of our larger competitors take a different view. My experience as I've said many times before is margins are lower internationally.

I think that maybe the industry doesn't appreciate the fact that while international is held up extremely well this year simply because it's project oriented and the orders were booked last year. Margins internationally are going to take a beating in 2021.

As particularly, the NOCs negotiate their 2021 purchases, so margins are going to be even worse than what we had anticipated, but nonetheless we are staying the course. We're going to continue to pursue this and I still feel like 2021 you're going to see some results of that.

So general margins worse than I had anticipated worse than maybe some people have disclosed to you and we're not the only company obviously that's turning its attention internationally which is just going to increase competition long all service lines. That's just still it..

Totally fair. Is that lower -- that's lower margin than the U.S. business.

Just to be clear or just lower than international has been in recent history?.

Lower in the U.S. lower than it has been..

Got you.

And just one quick follow-up, any opportunity you think on the unconventional gas side as it relates to your rental products or is it just not have scale yet in the Middle East?.

Yes, there is opportunity there..

Great. Thank you very much..

Your next question comes from the line of Mr. Gengaro of Stifel. Your line is open..

Thanks. Good morning, gentlemen. Just a quick follow-up for me.

When you talk about market share gains going forward is it a function of more work by existing customers, new customers or a combination of those two?.

Combination..

Okay. Thanks.

And then just one other follow-up on the working capital front as we look at the second half of the year, any guidance the benefit you might get from working capital either based on the dynamics of DSOs and payables or in aggregate?.

Sure. Yes, I would say on the AR side we had a great quarter in terms of collections obviously days left some, but we think we'll continue to see some harvesting in AR and certainly in inventory we would expect some.

I think looking at the overall picture, we think we will remain free cash flow positive through the remainder of the year with the cash balance roughly flat after paying on dividends and taking into account the recent TRA payment..

Great. Thank you..

Yes. Let me just add to that even though you didn't ask the question. This team has done a really remarkable job on AR, and I mean I'm very optimistic that we're going to emerge from this thing with very little impact from customer payment problems..

Okay. Thank you..

Your next question comes from the line of Chase Mulvehill from Bank of America. Your line is open..

Hey. Good morning, gentlemen..

How are you, Chase?.

I’m doing well. It’s finally sunny here in Houston, so it’s nice to look off the window and see some sun rising ring. But….

[Indiscernible].

No. It’s Houston, right..

Yeah, exactly..

I guess, I wanted to come back to the market share question and doing the calculation what the rig count expectations probably are for 3Q for the industry, and your comment about rigs followed down around 20%. If I'm doing the math right that kind of implies that you'd have about 35% share in the third quarter.

Can you confirm that number, and then also on the share gains. This has been asked a lot, but I guess maybe I didn't hear if you've actually had success penetrating the majors yet..

I think that's a fair question I've got about market share. Certainly you're pretty good mathematician buddy, so let me just say that. Okay. The next question really you asked about the majors. I'm not going to comment on that except to say that think about the people are going to be drilling wells to the second half of the year and in the next year.

And I feel good about the customers with whom we do business and their ability to drill wells financially..

Okay, all right. I'll take that as a yes..

No, Chase I didn't say yes..

You didn't say no. All right. I guess a lot of other things have been covered here, but just wanted to talk about CapEx and longer-term CapEx. Obviously the back half is kind of mostly maintenance. Maintenance, I think you've said is kind of below $10 million on an annual basis.

As we look over the next couple of years and you think about building out internationally.

How should we think about the moving pieces for CapEx? How much growth do you think that you need to spend over the next couple of years as you push internationally?.

God, I wish I could tell you we’ve got immense of money, it's not going to be. I think I've said this in the last call or the call before, do not concern yourself with international CapEx. We're going to do it in a manner that's going to be a very conservative, because that's just the way we operate.

You're not going to see us announce a $10 million facility in Kazakhstan or someplace like that or anywhere. Okay? We're just not going to do that..

Okay. And then -- is there anything I mean, I imagine you probably don't need to spend on the rental side anytime in the near term, but over the next couple of years.

Do you foresee kind of any big bumps in growth for rental?.

Not for legacy equipment. Obviously, we've got plenty of that. I've got a couple of very interesting products that I'm not going to discuss on the completion side that we have not introduced, but we intend to introduce. But, it's still not going to be a significant amount of money..

Okay. Understood..

But it will be incremental CapEx to be sure. I would stand by I think our earlier statement that 2021 looks like a $10 million CapEx year..

Got it. Okay. I’ll turn it back over. Appreciate the color..

Thank you. Speakers, there are no more questions at this time. You may continue..

Thanks everyone for joining the call..

Thanks everybody stay safe. Kind of looking forward to seeing everybody again when we can all get together. Stay well..

Thank you, speakers. Once again, ladies and gentlemen this concludes today's conference call. Thank you all for joining. You may now disconnect..