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Cactus, Inc. (NYSE:WHD)
Q2 2020 Earnings Call
Jul 30, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to Cactus Second Quarter 2020 Earnings Call. My name is Joanna and I will be facilitating the audio portion of today's interactive broadcast. [Operator Instructions] Thank you. At this time, I would like to turn the show over to Mr. John Fitzgerald, Director of Corporate Department and IR. Sir, please go ahead.

John Fitzgerald -- Director of Corporate Development and Investor Relations

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. Please note that any comments we make on today's call regarding projections or our expectations for future events are forward-looking statements covered by the Private Securities Litigation Reform Act.

Forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to review our earnings release and the risk factors discussed in our filings with the SEC. Any forward-looking statements we make today are only as of today's date, and we undertake no obligation to publicly update or review any forward-looking statements. In addition, during today's call, we will reference certain non-GAAP financial measures. Reconciliations 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.

Scott Bender -- President, Chief Executive Officer and Director

Thanks, John. Good morning and 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 troughed 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-leading 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. So Steve?

Stephen Tadlock -- Vice President, Chief Financial Officer and Treasurer

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 a 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 a 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 million 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. There 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.

Scott Bender -- President, Chief Executive Officer and Director

Okay, thanks Steve. We've often highlighted that the two key factors in Cactus' success had been its variable cost nature and its modest capital requirement. This was validated during the second quarter as we reduced 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 received favorable news as the U.S. TR 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 as 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 so we've applied for extensions and are currently awaiting a response. Such extensions have 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 use [Phonetic] supported both by our mid-July market share reaching an all-time high and positive indications for 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 reduction 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 in evaluating business opportunities, recognizing the value of our equipment -- the value 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 continued 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'll achieve similar results despite our public company costs.

As noted earlier, we've reduced our capex guidance 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 that 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 and our ability to flex costs in line. We remain confident we will emerge as one of the few oil field service companies who maintained their 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 and 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?

Questions and Answers:

Operator

Thank you. [Operator Instructions] Your first question comes from the line of Sean Meakim from J.P. Morgan. Your line is open.

Sean Meakim -- J.P. Morgan -- Analyst

Thank you. Hey, good morning.

Scott Bender -- President, Chief Executive Officer and Director

How are you?

Sean Meakim -- J.P. Morgan -- Analyst

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

Scott Bender -- President, Chief Executive Officer and Director

Okay. Steve you want to take that or you want to?

Stephen Tadlock -- Vice President, Chief Financial Officer and Treasurer

Yeah, I think everything you said is correct, except for kind of the last part. First of all, these exclusions weren't on all of our products, 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're 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 -- Joel's been working, supplier is very hard and obviously in this environment everybody suffers and things tend to roll downhill. So we've been able to make 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 we'll be able to maintain something in the that low 30s range on the product margins.

Sean Meakim -- J.P. Morgan -- Analyst

Got it. Yeah, thank you for that. That clarification is really helpful. And then on market share, it sounds like there is some volatility, just given the unprecedented speed at which rigs were 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?

Scott Bender -- President, Chief Executive Officer and Director

Well, Sean. Yeah, I wish I could answer your question directly. I can say I feel very confident, the team feels very confident if -- 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 it this downturn with very large rig counts and they dropped rigs extremely rapidly, which increase the volatility and 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, yeah, I feel very confident. I wish I could give you more detail, but you know I can't.

Sean Meakim -- J.P. Morgan -- Analyst

Understood. Thanks, Scott.

Operator

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

Ian Macpherson -- Simmons Energy -- Analyst

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

Scott Bender -- President, Chief Executive Officer and Director

So 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. If the business we know, in fact, I think we know it better than anybody else. I hate 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 aren't 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.

Ian Macpherson -- Simmons Energy -- Analyst

Does that entail a U.S. onshore focus or anything broader than that potentially?

Scott Bender -- President, Chief Executive Officer and Director

I would say both. We just quite frankly want it to be related to frac rentals and wellheads.

Ian Macpherson -- Simmons Energy -- Analyst

Understood. Thanks very much. I'll pass it over. Appreciate it.

Operator

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

Scott Bender -- President, Chief Executive Officer and Director

Hey, George.

George O'Leary -- Tudor, Pickering, Holt & Co. -- Analyst

Good morning, guys.

Scott Bender -- President, Chief Executive Officer and Director

How are you?

George O'Leary -- Tudor, Pickering, Holt & Co. -- Analyst

I'm doing well. How are you?

Scott Bender -- President, Chief Executive Officer and Director

I'm doing great, thanks.

George O'Leary -- Tudor, Pickering, Holt & Co. -- Analyst

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't frame the exact number, has that mix shifted as we've progressed through this soft period and start to bounce off the bottom?

Scott Bender -- President, Chief Executive Officer and Director

It's about 15%, George. Right now the headwinds that we face are 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.

George O'Leary -- Tudor, Pickering, Holt & Co. -- Analyst

Okay, 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 wise? And then 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?

Scott Bender -- President, Chief Executive Officer and Director

That's a nice try, George. I sort of purposefully didn't tell you what that percentage was. But you can look at the chart, you know what it means broadly speaking, I guess when I say 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.

George O'Leary -- Tudor, Pickering, Holt & Co. -- Analyst

I figured that was the case but I'd take a shot.

Scott Bender -- President, Chief Executive Officer and Director

Sorry, George.

Operator

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

Scott Bender -- President, Chief Executive Officer and Director

Hey Tommy.

Tommy Moll -- Stephens Inc. -- Analyst

Good morning, Scott, and thanks for taking my questions.

Scott Bender -- President, Chief Executive Officer and Director

How are you doing?

Tommy Moll -- Stephens Inc. -- Analyst

Doing 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.

Scott Bender -- President, Chief Executive Officer and Director

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?

Joel Bender -- Senior Vice President, Chief Operating Officer, Secretary and Director

China, China has really returned to base -- capacity and production. I'm not really seeing any kind of distribution issues with the suppliers there. In fact, there's 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 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 venues 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.

Tommy Moll -- Stephens Inc. -- Analyst

Great. Thank you both. That context is all helpful. And shifting to a 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 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 would then have positive implications for your incrementals in a recovery?

Scott Bender -- President, Chief Executive Officer and Director

Okay. I'm going to answer that question in two parts. The first is if we took $85 million out going down and we returned to pre-COVID, we would not have -- had $85 million going up. That's the first part of the answer, OK, 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 answers the first part. The second part is, has to do a fixed costs. You know 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 in a large fixed cost platform. And as a result, there's just not that many opportunities for us to reduce. Certainly there are some and we've attacked those, but it's not going to be -- they're not going to be writedowns. I'm going to go off -- I'm off script already, which is not unusual. Taking writedowns 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 writedowns. So I think you need to look at us in a little different way.

Tommy Moll -- Stephens Inc. -- Analyst

Very helpful, Scott, and maybe we'll schedule a podcast for a more fulsome discussion on writedowns in fixed cost.

Scott Bender -- President, Chief Executive Officer and Director

You want to be on that podcast?

Tommy Moll -- Stephens Inc. -- Analyst

Love to lead it. Thank you. I'll turn it back.

Operator

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

Jacob Lundberg -- Credit Suisse -- Analyst

Hey, good morning guys.

Scott Bender -- President, Chief Executive Officer and Director

Good morning.

Jacob Lundberg -- Credit Suisse -- Analyst

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 anything coming out of this there could be greater appetite for stuff like that as kind of focus goes from immediate cash preservation toward thinking about driving better efficiencies?

Scott Bender -- President, Chief Executive Officer and Director

Yeah. So we saw very little appetite for any additional cost on a frac site 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 in the innovation part of our rental fleet. The other item of course, that's of significance is space 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 that begins to frac is a customer mix that supports safety and an innovation. So I feel much better about the future. This quarter though there was just no interest in spending money.

Jacob Lundberg -- Credit Suisse -- Analyst

Okay, that makes sense. And then just a question, I guess again on the rental segments, just kind of curious on the -- the top line guidance of 3Q. I would have expected with perhaps a little bit of rebound and completion activity in 3Q maybe revenues would have been flat to modestly up. I'm just kind of curious if you could help me understand what, it seems like a disconnect, but maybe you guys a different view on 3Q completions.

Scott Bender -- President, Chief Executive Officer and Director

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.

Jacob Lundberg -- Credit Suisse -- Analyst

Okay, fair enough.

Scott Bender -- President, Chief Executive Officer and Director

I think there is some upside there.

Jacob Lundberg -- Credit Suisse -- Analyst

Thanks a lot. Appreciate it guys.

Scott Bender -- President, Chief Executive Officer and Director

Sure.

Operator

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

Connor Lynagh -- Morgan Stanley -- Analyst

Yeah. Thanks.

Scott Bender -- President, Chief Executive Officer and Director

Connor, how are you?

Connor Lynagh -- Morgan Stanley -- Analyst

Good. How are you doing?

Scott Bender -- President, Chief Executive Officer and Director

Great.

Connor Lynagh -- Morgan Stanley -- Analyst

I was wondering if I could follow-up on Jacob'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 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 '21? Where do you think the customers are at these days?

Scott Bender -- President, Chief Executive Officer and Director

I see an 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 hopes that gas prices in the Northeast would be constructive. I'm not seeing that so much. Maybe a little bit of optimism on the Bakken but I would say primarily South Texas and the Delaware.

Connor Lynagh -- Morgan Stanley -- Analyst

Got it. That makes sense. Any order of magnitude you'd sort of have us think about for as we move later this year? I mean are we talking low double-digit, we're talking single digits? What's sort of your thinking there?

Scott Bender -- President, Chief Executive Officer and Director

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

Connor Lynagh -- Morgan Stanley -- Analyst

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

Scott Bender -- President, Chief Executive Officer and Director

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 Trees 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 -- our production trees pick up disproportionately faster than our Wellhead Product segment.

Connor Lynagh -- Morgan Stanley -- Analyst

Got it. That's the kind of question where I get stuck. That's something I didn't even ask. The one high 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?

Scott Bender -- President, Chief Executive Officer and Director

You know how much I love all my competitors. I don't want to make any 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.

Connor Lynagh -- Morgan Stanley -- Analyst

That's fair. Thanks.

Operator

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

Kurt Hallead -- RBC Capital Markets -- Analyst

Hey, good morning everybody.

Scott Bender -- President, Chief Executive Officer and Director

Good morning.

Stephen Tadlock -- Vice President, Chief Financial Officer and Treasurer

Good morning.

Kurt Hallead -- RBC Capital Markets -- Analyst

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 was that specific to completion activity or drilling activity or some combination of both?

Scott Bender -- President, Chief Executive Officer and Director

Yeah. I was really talk -- when I responded I was only thinking about drilling.

Kurt Hallead -- RBC Capital Markets -- Analyst

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 your perspective.

Scott Bender -- President, Chief Executive Officer and Director

Yeah, 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 continue -- 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 had 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.

Kurt Hallead -- RBC Capital Markets -- Analyst

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 refresher, if you will, as to what is driving the market share gains on the wellhead side of the business? Has there been any recent developments or new developments or improved elements of technology, efficiency? I was wondering if you can give us a little more color on what you think is ultimately driving that share dynamic?

Scott Bender -- President, Chief Executive Officer and Director

Yeah, 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 its outstanding execution. As everybody cuts back it's not going to surprise you to learn that service levels also suffered 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.

Kurt Hallead -- RBC Capital Markets -- Analyst

Okay, appreciate that. And if I may slip one in for Stephen, 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?

Stephen Tadlock -- Vice President, Chief Financial Officer and Treasurer

Yes, yes.

Kurt Hallead -- RBC Capital Markets -- Analyst

Okay, thank you for clarifying. Thanks.

Operator

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

Blake Gendron -- Wolfe Research -- Analyst

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?

Scott Bender -- President, Chief Executive Officer and Director

Well, Blake, there's a delay between rigs added and revenue realized, OK? 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 is more -- 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 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, as I said, the lag time between rigs being added and revenue being generated.

Blake Gendron -- Wolfe Research -- Analyst

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? Would you try to go through a commercial partner -- appreciating some of your comments about overheading and keeping fixed cost low? 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 it stands today if we were to see a little bit more expansion internationally?

Scott Bender -- President, Chief Executive Officer and Director

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 our technology to the whims of others to distribute it outside of our control. So no matter what structure we adopt, be it a stand-up 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, 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 along all service lines not just wellhead.

Blake Gendron -- Wolfe Research -- Analyst

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?

Scott Bender -- President, Chief Executive Officer and Director

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

Blake Gendron -- Wolfe Research -- Analyst

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 of scale yet in the Middle East?

Scott Bender -- President, Chief Executive Officer and Director

Yes, there is opportunity there.

Blake Gendron -- Wolfe Research -- Analyst

Great, thank you very much.

Operator

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

Stephen Gengaro -- Stifel, Nicolaus & Co. -- Analyst

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?

Scott Bender -- President, Chief Executive Officer and Director

Combination.

Stephen Gengaro -- Stifel, Nicolaus & Co. -- Analyst

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?

Stephen Tadlock -- Vice President, Chief Financial Officer and Treasurer

Sure. Yeah, I would say on the AR side, we had a great quarter in terms of collections. Obviously days lift 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'll remain free cash flow positive through the remainder of the year with the cash balance roughly flat after paying out dividends and taking into account the recent TRA payment.

Stephen Gengaro -- Stifel, Nicolaus & Co. -- Analyst

Great, thank you.

Scott Bender -- President, Chief Executive Officer and Director

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 we are -- I mean, I'm very optimistic that we're going to emerge from this thing with very little impact from customer payment problems.

Stephen Gengaro -- Stifel, Nicolaus & Co. -- Analyst

Okay, thank you.

Operator

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

Chase Mulvehill -- Bank of America Securities. -- Analyst

Hey good, gentlemen. Hey Scott.

Scott Bender -- President, Chief Executive Officer and Director

How are you?

Chase Mulvehill -- Bank of America Securities. -- Analyst

I'm doing well. It's finally sunny here in Houston. So it's nice to look out the window and see some sun rather than rain. No, it's Houston, right? I guess I wanted to come back to the market share question and doing the calculation and 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.

Scott Bender -- President, Chief Executive Officer and Director

I think that's a fair question about market share. You're a pretty good mathematician buddy. Let me just say that, OK? The next question really you ask about the majors, and 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 into next year. And I feel good about the customers with whom we do business and their ability to drill wells financially.

Chase Mulvehill -- Bank of America Securities. -- Analyst

Okay, alrighty. I'll take that as a yes.

Scott Bender -- President, Chief Executive Officer and Director

Don't change that as a yes.

Chase Mulvehill -- Bank of America Securities. -- Analyst

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?

Scott Bender -- President, Chief Executive Officer and Director

God, I wish I could tell you it was an immense amount 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 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.

Chase Mulvehill -- Bank of America Securities. -- Analyst

Okay.

Scott Bender -- President, Chief Executive Officer and Director

We're just not going to do that.

Chase Mulvehill -- Bank of America Securities. -- Analyst

Okay. And then on the rental side, 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?

Scott Bender -- President, Chief Executive Officer and Director

Not for legacy equipment. Obviously, we've got plenty of that but 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. But it will be incremental capex to be sure. I'll stand by I think our earlier statement that 2020 looks like a $10 million capex year.

Chase Mulvehill -- Bank of America Securities. -- Analyst

Got it, OK. I'll turn it back over. Appreciate the color.

Operator

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

John Fitzgerald -- Director of Corporate Development and Investor Relations

Thanks everyone for joining the call.

Scott Bender -- President, Chief Executive Officer and Director

Thanks everybody. Stay safe, kind of looking forward to seeing everybody again and we can all get together. Stay well.

Operator

[Operator Closing Remarks]

Duration: 51 minutes

Call participants:

John Fitzgerald -- Director of Corporate Development and Investor Relations

Scott Bender -- President, Chief Executive Officer and Director

Stephen Tadlock -- Vice President, Chief Financial Officer and Treasurer

Joel Bender -- Senior Vice President, Chief Operating Officer, Secretary and Director

Sean Meakim -- J.P. Morgan -- Analyst

Ian Macpherson -- Simmons Energy -- Analyst

George O'Leary -- Tudor, Pickering, Holt & Co. -- Analyst

Tommy Moll -- Stephens Inc. -- Analyst

Jacob Lundberg -- Credit Suisse -- Analyst

Connor Lynagh -- Morgan Stanley -- Analyst

Kurt Hallead -- RBC Capital Markets -- Analyst

Blake Gendron -- Wolfe Research -- Analyst

Stephen Gengaro -- Stifel, Nicolaus & Co. -- Analyst

Chase Mulvehill -- Bank of America Securities. -- Analyst

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