Q3 2019 Earnings Call
Good day, ladies and gentlemen, and welcome to the National Oilwell Varco third quarter 2019 earnings Conference call.
His time, all participants are in listen only mode.
Later, we'll conduct a question and answer session and instructions will follow at that time, if anyone should require assistance. During the conference. Please press Star then zero on you touched on telephone as a reminder, this conference call is being recorded.
I would I like to introduce your host for today's conference Mr. Bleak Mccarthy, Vice President of corporate development and Investor Relations. Sir you May begin. Thank you welcome everyone to National Oilwell Varco third quarter 2019 earnings Conference call with me today are clay Williams, our chairman, President and CEO and Jose Bayardo our senior.
Vice President and CFO .
Before we begin I would like to remind you that some of today's comments are forward looking statements within the meeting of the federal Securities laws.
They involve risks and uncertainty and actual results may differ materially.
No one should assume these forward looking statements remain valid later in the quarter or later in the year.
For more detailed discussion of the major risk factors affecting our business. Please refer to the latest 10 forms 10-K, and 10-Q filed with the Securities Exchange Commission.
Our comments also include non-GAAP measures reconciliations to the nearest corresponding GAAP measures are in our earnings release available on our website.
On the U.S. GAAP basis, where third quarter 2019, you know the reported revenues of 2.13 billion and the net loss of 244 million or 64 cents per share.
Are you said the term EBITDA throughout this morning's call corresponds with the term adjusted EBITDA as defined in our earnings release.
Later in the call we'll host a question and answer session. Please limit yourself to one question and one follow up to permit more participation now let me turn the call over to clay. Thank you Blake.
The third quarter 2019, it'll be generated EBITDA of $262 million of $67 million sequentially. Despite a modest revenue declined from our second quarter.
Our third quarter benefited from credits related to the close out at a handful of projects in our completion and production solutions and rig technology segments, which contributed nearly $20 million to our improvement the more important driver behind our improving profitability was our cost savings work, which added over $20 million in EBITDA sequentially.
The balance of the sequential improvement related to favorable product mix shifts for instance, rising revenues in our rig technologies aftermarket.
It'll be made excellent progress on restructuring to drive efficiency and in a moment Jose will update you in more detail on our revised cost savings targets.
Additionally, we are pleased with the progress one improving cash flow.
Cash flow from operations was $352 million into third quarter, reflecting improving working capital intensity arising from the organizations heightened focus on receivables inventory and payables.
Despite the challenging market backdrop in obese team performed well and I'm proud of everybody's hard work.
Our third quarter International revenues grew 3% sequentially fully offset by 5% sequential declines in North America.
The U.S. land rig count is now down more than 20% from its recent high in late 2018 and while this will eventually result in decelerating U.S. production growth is currently pressuring our domestic customer base and consequently, our short cycle U.S. business lines on the other hand international and offshore activity continue.
Used to grow at a modest pace, both the Io sees and in overseas have used the prolong down cycle to pull costs out of their planned projects in F idea approvals appear to be increasing international and offshore growth helped into the post an overall book to bill ratio North of one in the third quarter.
As cross currents and deep cyclicality continue to affect the global oil and gas business.
V continues to benefit from one it's broad geographic and product diversity, a key strength of our business model to its market leadership, which provides numerous scale advantages in three it's enormous installed base of equipment.
These business model attributes when it'll be the necessary durability to navigate the extreme volatility experienced in oil and gas and are in my opinion important to understand with regards to the investment case for Adobe at a time when oil and gas is deeply out of favor I believe there's no single greater determinant of long term.
Turns that accompanies strategic positioning and Inovio is unique among oilfield ecosystem participants.
Our diversity along several dimensions as a great example, we make a broad array of oilfield tools and equipment and consumables, which we sell to more than 8000 discrete customers. Some energy services companies, some producers and even some an unrelated industrial enterprises.
We operate in exploration development and production phases in both land and offshore markets across 65 countries, although almost all are affected by oil and gas.
Commodity prices, which are cyclical rarely do all the sub sectors move exactly in lockstep, So as North America cycles down, we can pivot and redeploy assets to areas like the offshore in international markets that are exhibiting growth Q3 is a good example.
Our business has low capital intensity.
No. These manufacturing assets are generally not specialized even though they are used to make specialized equipment machine tools assembly plants and rig up yards can be re purpose to areas of highest demand.
There are also relatively small capital investments as compared to the revenues that they can generate.
Our ongoing maintenance capital investment needs are far lower than most oilfield participants as measured by Capex as a percentage of revenue over the trailing 12 months for example, our Capex has only been 2.8% of sales.
Lower capital expenditure requirements equate to higher free cash flows and represent another attractive and differentiating attribute of inovio versus other in the oil field.
We focus on market leadership, our size and scale provide us clear advantages and procurement manufacturing logistics and distribution.
We have built the largest installed base of equipment globally within most of the equipment categories. We serve we supply something that would take many years for our competitors to replicate this provides it'll be the opportunity as OEM to sell spare parts and maintenance services to the owners of this equipment, even during downturns as a result, our rig technology.
Segment saw higher margin aftermarket revenue grew to 57% of its mix in the third quarter.
Our installed base also provides proprietary opportunities to develop and sell digital enhancements to the owners of our equipment like Surber us and Novos operating systems software optimization tools condition base maintenance programs and predictive analytics.
These are all digital enhancements, we capitalized on through the downturn made possible buyer are enormous installed base.
Market leadership positions in will be best to help our customers achieve standardization, which which helps them drive better service training and procedural consistency across their own operations.
All of this improves efficiency, which in turn drives greater financial performance and capital returns for our customers.
Standardizing on technology from the market leader with global support capabilities and strong financial resources is the logical choice for an entrepreneur in the oilfield seeking to to profitably grow up grow his or her business.
Many in our senior leadership team started our careers in the brutal Ats and ninetys another generational downturn in the oil field, we know that diversity and strategic positioning are critical to successfully navigating a tough down cycle.
So is executing well on cost savings initiatives and effectively managing working capital to maximize cash flow.
In the third quarter Inovio benefited from all of the above pulling oil and gas out of the ground remains one of the most capital intensive activities in the world one that consumes equipment steadily and one that will continue to be required for decades to come as a key part of the mix of supplying rising global demands for energy eventually there will emerge and need for <unk> for sustained rina.
Yes men and retooling across the oil and gas value chain that said in the near term. We are focused on the things that are directly within our control in this market costs and working capital.
Our capital allocation continues to focus on strategic positioning and returns we are using the current period to review our portfolio of businesses to ensure that we are engaged in activities, where we have a clear and demonstrably competitive advantage or where we see a low risk capital efficient opportunity to develop a new bids.
Miss It demonstrates competitive advantage and can be expected to generate solid financial returns within a reasonable timeframe. So.
Some of our products won't make to cut and will be divested to free up capital with respect to capital deployment, we remain committed to maintaining a strong balance sheet to preserve our investment grade credit rating and ample liquidity.
After our Capex needs, we will continue to execute smaller M&A transactions, which enhance our business positioning and competitive mode, and which can typically be further enhanced by organic investment in technology and product development and integrated into Inovios Global network.
Overall, despite a very tough five year downturn inovio has materially improve its positioning and its prospects and I remain optimistic about our long run success.
Finally to our employees listening your hard work perseverance and professionalism during these rough times Humbles me.
We're truly what differentiates inovio and I consider myself fortunate to be a part of your team. Thank you with that I'll turn it over to Jose.
Thank you clay and if he is consolidated revenues were essentially flat sequentially as the continued momentum in our international and offshore operations was offset by deteriorating conditions in the north American market or revenue decreased 5%.
Revenues from offshore markets improved 7% sequentially, bringing the percentage of our consolidated revenue from offshore markets to more than 40% for the first time since the first quarter 2017.
Improving conditions in the offshore in international markets also helped us achieve our third quarter in a row with a company wide book to bill of over 100%.
EBITDA increased $67 million sequentially to 262 million, reflecting great progress on our restructuring efforts a more favorable business mix and some favorable project completion variances as noted we made great progress on realizing incremental cost savings, which totaled roughly $80 million on an annual basis.
To date, we are realizing greater savings than initially anticipated on certain of our restructuring initiatives and we are continuing to find additional opportunities that will help make the organization more efficient.
We now believe we will realize a total of approximately 200 million in annualized cost savings from our restructuring efforts by the end of 2020.
For the fourth quarter, we expect to realize an incremental 40 million of annualized cost savings.
During the third quarter. We also made great strides in our efforts to reduce the capital intensity of our operations by reducing our working capital and improving our cash flow, we generated $352 million and cash flow from operations and after deducting 69 million in capital expenditures, we netted $283 million of free cash flow.
During the third quarter. We also collected a 65 million dollar note receivable related to a divestiture, we completed a few years ago.
Even though the $65 million was on our balance sheet as a current asset and therefore part of working capital it flowed through the cash flow from investing activities on our cash flow statement.
If you included the 65 million in our free cash flow number it would total $348 million.
No matter, how you look at it we're well on our way to achieving our target of between 300 500 million a free cash flow in the second half of 2019.
Couple of quick housekeeping items before we jump into our segment results SGN a declined 124 million during the quarter returning to a more normalized level relative to the second quarter. Additionally, during the third quarter or intercompany eliminations fell to a lower than normal level due to the timing of projects.
In the fourth quarter, we expect eliminations and corporate costs to returned to levels inline with what we saw during the second quarter.
Turning to our results of operations.
Our Wellbore technologies segment generated 793 million in revenue in the third quarter, a decrease of 57 million or 7% sequentially. Excluding results from our drill pipe manufacturing business, which tends to behave more like a capital equipment business revenue in North America declined 7% inline with the fall off in drilling active.
I'd.
EBITDA for the segment was down only $1 million sequentially as cost savings initiatives helped decremental margins to approximately 2%.
A testament to the effort of our team to flex the size of our operations with the changing market conditions are read hike log drill bit business posted a slight revenue declined due to weaker domestic activity, partially offset by growth in international markets.
A contracting north American market is causing fears pricing competition, among our competitors, but our ability to deliver superior value to our customers through technology leadership has to date helped insulate our business from the pricing pressures without ceding market share.
Our MD Taco business unit experienced a mid mid single digit drop in revenue due to the same north American headwinds affecting the rest of our business.
We'll Mt. Todd co is certainly not immune to the headwinds in the current market environment. We expect our list of close loop automated drilling and surface optimization projects in North America, the middle East and offshore Europe , we will continue to grow as operators around the world look to our digital solutions to improve their ability to generate returns.
Revenues in our downhole business unit also declined due to lower motor agitator fishing tool sales in the us.
International revenues were mostly flat and we are seeing rising demand for agitators and other drilling tools in the middle Eastern Europe .
Part of this growing demand is coming from service companies seeking to drive additional efficiencies and their drilling operations as they execute on lump sum turnkey contracts.
We're also seeing more customers leverage our agitator technologies to improve efficiencies and completion operations or tariff holes coil tubing agitator system is enabling customers to meaningfully reduce the time and cost to complete long lateral multi stage drill out operations.
Our Twob ASCO business posted results that were roughly flat for both revenue and EBITDA as a falloff in North American operations was offset by growth in international markets. The decline in two Discops US coating revenue was compounded by downtime associated with planned equipment upgrades as well as lost days in our Houston area plant, which resulted from tropical storm Imelda.
Strong demand for coating services and an increase in deliveries of our through coats leads to the middle east more than offset the fall off in North America. Additionally, the decrease in drilling activity in the U.S hurt demand from steel mills pipe processors, resulting in a slight decline in revenue from our inspection service operations.
Our Wellsite services business unit experienced a high single digit drop in revenue like the other business units in the segment US operations were impacted by slowing activity levels, which will continue to be a near term challenge, but we did begin startup operations for projects in the Gulf of Mexico, which tend to drive higher revenue and profitability due to the sophisticated technique.
Algae employed in offshore operations.
We're also excited about a series of additional offshore projects scheduled in 2020 for which the team is currently preparing.
Our Grand Primeco drill pipe manufacturing business recorded double digit percent decrease in revenue as demand for new pipe has fallen sharply in North America as a result in the fall off rig count.
The decline in revenue from North America was only partially offset by increasing demand from international and offshore markets. While orders have been solid international orders typically take more time to convert from bookings into revenue.
However for the first time and quite a while grant pride goes topline is more than 50% offshore and wall. The business units revenue declined in Q3 bookings actually improved 30% as international and offshore orders continue to flow and welcome pace.
In the fourth quarter of 2019, we expect continued capital strength across North American NP complex combined with the holiday season to result in further declines in us activity, while international and offshore markets are expected to continue their measured recovery.
We therefore expect revenue for our Wellbore technology segment to decline, 5% to 7% with continued focus on cost savings limiting our decremental margins to approximately 25%.
Our completion and production solutions segment generated 728 million in revenue in the third quarter, an increase of 65 million or 10% sequentially.
Hi, revenues cost savings and favorable adjustments associated with the completion of certain projects drove 46% incremental margins, resulting in a $30 million increase in EBITDA to 82 million or 11.3% of sales.
Order intake remains healthy and we captured 535 million in bookings during the third quarter orders exceeded shipments by 24%, providing us with our fourth quarter in a row of a book to bill in excess of 100% for this segment.
Backlog at quarter end totaled $1.3 billion.
Sharp improvement realized by the segment over the past few quarters for is a further testament to the diversity of our operations, we've been able to more than offset the rapid deterioration in demand from completion service providers in the us by capitalizing on improving fundamentals in the international and offshore markets, which allowed us to drive sequential revenue improvements in all but.
One of our business units within this segment.
Our intervention and stimulation equipment business experienced a 7% sequential decline in revenue, resulting from the sharp falloff in us completions activities that is once again, causing customers to delay acceptance of equipment ready for pickup and other customers to request deferrals on more recently placed orders.
Despite the sequential deterioration in performance the business or is this is great example of how our leadership breadth and scale enhance our ability to navigate through difficult market conditions and give us the flexibility to pivot we're opportunities exist.
While the need for new pressure pumping spreads has been virtually nonexistent for the past year and more recently, we've experienced a sharp decline in orders from new coil tubing equipment in the us demand from international markets remains robust.
In Q3, we booked orders for nine coiled tubing units 24 nitrogen units and a significant amount of other support equipment from a wide range of customers that will deploy the assets and numerous international markets. We also saw an increase in international orders for wireline and flow line, including a sizable order for our Anson 20000, PXI rated flow line.
Destined for China and.
And despite generally weak demand for pressure pumping equipment and aftermarket support we were still able to book a few orders for blunders control systems and support pumps.
Or unparalleled global footprint service infrastructure technology quality and customer base can even create a safety valve or at least some optionality for our customers that can't be obtained from other vendors.
One of our loyal us coil tubing customers was seen rapidly deteriorating demand and was able to sell their order slot and associated deposit to an international service company that still sees unmet pent up need for more modern equipment in the markets. They serve.
We believe no other vendor in the space has more customers that standardize on their equipment and has an installed base as large as and auvi.
Our market position global footprint service infrastructure technology, and quality make us uniquely positioned to help our customers and ways that others cannot.
Well this type of transaction could temporarily cannibalize, our near term opportunity set it ultimately creates a healthier market over the long term term and did not prevent us from realizing a respectable 92% book to Bill order intake for intervention and stimulation equipment business in the third quarter.
Revenue for our process and flow technologies business unit was roughly flat as growing contributions from the execution on projects to build offshore production equipment booked over the past several quarters were mostly offset by a deteriorating north American market that is dampening demand for production chokes and pumps.
EBITDA margins improved on a on a better mix cost savings and favorable adjustment on a legacy project close outs.
Near term, we expect growth from our process and flow technologies international and offshore operations to more than offset the challenges associated with North American production at midstream markets that continue to contract in response to tightening NP capex budgets.
Tendering activity for our appeal on Wellstream processing operations remained strong, particularly for large scale offshore gas development projects, which supported the second sizable award for a submerged hurt production system in as many quarters and allow the unit to post its third quarter in a row with a book to bill more than 100%.
Our fiber glass business unit posted another strong quarter of growth steady improvement in our core composite tubular offerings was supplemented by the first shipments from our new manufacturing plant into Moms, Saudi Arabia.
An acquisition that was completed during the second week of July and rapid growth in demand from shipping companies for Marine scrubber system components as they scrambled to retrofit vessels to comply with IMO 2020 requirements.
Excluding additions from the acquisition orders for our fiberglass business unit improved 34%.
Lastly, in our subsea flexible pipe business bookings were light despite the continuation of the steadily growing opportunity set that allowed us to realize three straight quarters of improved bookings prior to Q3 and led to 22% sequential revenue growth.
Looking at the fourth quarter, we expect improved international and offshore directed activity.
To offset the impact from rapidly deteriorating market conditions in the U.S. completions market, resulting in fourth quarter revenues that are flat with Q3. We also expect Q4 EBITDA to remain in line with third quarter results for our completion and production solution segment as cost savings realized should make up for the fall off and favorable project.
Those out settlements.
Our rig technology segment generated 649 million in revenue in the third quarter, a decrease of 22 million or 3% sequentially.
Aftermarket revenues, which improved 5% will more than offset by an 11% decrease in revenues from capital equipment sales.
Growing contributions from our never Naval design jacking system, and pipe lay tension or offerings from our marine construction operations were more than offset by a falloff in drilling equipment project revenues associated with completion of several projects in late Q2 in early Q3.
While revenue declined we realized a much more favorable shift in our product mix and when combined with project closeout variances and strong progress on our cost savings initiatives, we realized a 31 million dollar improvement in EBITDA to $105 million or 16.2% of sales rig technologies capital equipment orders totaled 221 million. So.
Sequential decrease of 89 million or 29%.
Shipments of 246 million outpaced bookings, providing us with a book to bill of 90%.
Total segment backlog at quarter end was 3.14 billion.
We continue to see a growing opportunity set in the renewable sector, where we are able to leverage our core expertise in lifting in handling and enable architecture to serve this rapidly growing industry.
After booking a record size order for the jacking system of European offshore wind construction vessel in the second quarter. We received another large order associated with a 28000 tonne offshore wind turbine installation vessel that will be constructed at Japan Marine United Shipyard for Shimizu Corporation.
And if he was awarded the design work telescopic led crane and the jacking system for this 142 meter long 50 meter wide vessel that is being purpose built to efficiently construct the next generation of offshore wind mills, which will incorporate turbines with capacities of up to 12 megawatts and rotor diameter years of up to 200.
Third 20 meters.
And of these proprietary telescopic led crane will provide a unique combination of high elevation hoisting capability for turbine installation and heavy load capability for foundation installation.
The Crane will have a maximum lifting capacity of 2500 tons and a maximum lifting height of 158 meters. The unique design of the telescopic boom also provide avoids protrusion outside the whole dimensions during transit, which increases the maneuverability of this vessel.
Larger more economically efficient ultra large scale wind turbines ranging from nine to 12 megawatts and size will greatly improve the economics associated with the offshore wind industry.
We're excited about this opportunity, which has a dollar value roughly equivalent to a full equipment package associated with a high spec jackup rig and fee the need for healthy number of additional vessels over the coming years due to the limited fleet of installation vessels currently capable of installing wind turbines eight megawatts or larger.
As offshore rig activity continues to recover at a major measured pace, we continue to see steady order intake associated with upgrading and differentiating the performance of offshore rigs with a heavy emphasis on automation and multi machine control enabled by our notice control platform.
While the number of rig contract tenders has increased these processes remained very competitive and operators are increasingly insisting that these capabilities are included in bid packages, we booked for novus orders associated with these automation upgrades during the third quarter. In addition to two novo systems for land rigs, bringing our total number of notice orders to over.
130.
While land rig capital equipment orders remained challenged in the western hemisphere, as North American customers cannibalize equipment off their stacked assets and the sharp devaluation of the Argentine peso models. The near term outlook in that particular market. We continue to see pent up demand for cutting edge drilling technology and equipment and other international markets, including the middle.
At least where we were able to secure in order for two land rigs during the quarter.
In our rig aftermarket business the positive booking momentum continued with another double digit sequential increase in orders, yielding our highest order flow since Q1 of 2015.
Well service and repair work was roughly flat we continue to maintain a steady backlog of reactivation upgrade and recertification project volumes.
In addition, we're continuing to realize greater adoption rates of our condition based monitoring solutions and total cost of ownership service model.
Looking at rig technologies fourth quarter, we expect revenues to improve between 4% to 6% on higher revenues from land rig sales and service and repair work.
EBITDA margins are expected to decline between two and 400 basis points due to less favorable mix a falloff in favorable cost variances on project Closeouts and limited incremental contribution from cost savings between now and the first quarter of 2020, while we expect market conditions will remain challenging we're pleased with the strides our people and.
Making to improve or profitability or working capital intensity and are already strong competitive positioning with that we'll now open the call to questions.
Thank you Sir as a reminder to ask a question you would need to press star one on your telephone to withdraw your question first of how key.
Please standby, while we've compiled acuity roster.
Our first question comes from Byron Pope from Tudor Pickering Holt. Please go ahead.
Hey, guys printer.
Really encouraging the here.
International recovery continues steady fashion for you guys and I was particularly struck by the growth in caps play you want to ask you to speak to specific countries are customers, obviously, but could you just frame for us the maybe the regional international drivers for caps as you see it as we stepped through the next 12 or so month, yes.
What's encouraging to us bar and is the pickup in.
In activity in the offshore in particular, I think that's been driving a lot of worst horse in the completion production solutions group. So generally.
The world seeing rising demand for LNG and Asian markets, and that's contributing to I think some decisions by operators to move forward with development of gas discoveries in places like.
East Africa and elsewhere.
Our customers there in.
Many of the major basins that had five years of reengineering and focusing on cost through this downturn and have been high grading or their prospects have been.
Taking advantage of deflation in the supply chain to reduce our costs of development I think you're up to a point where.
They're getting getting more confident about about moving forward.
I think you have a lot of operators around the globe that are have seen.
Normal depletion and declines of the base loads around some offshore infrastructure.
Gathering hubs and pipelines and things like that who recognize the need to work to replace some of that production and so I think thats kind of giving.
Olympics as to the operators to move forward on some of these developments so it's really.
It's been a slow but steady recovery and very pleased to see it continue on through the third quarter.
But really kind of a kind of a global phenomenon, we're seeing I think jose in his prepared comments referenced some of the.
But we expect to go to work in the Gulf of Mexico and Us.
Non interest in the Mexican side of the Gulf of Mexico, Brazil offshore.
North Sea, so again very.
Very steady and slow and encouraging for kind of the outlook in lots and lots of markets around the globe onshore.
The Middle East has remained fairly active through the downturn and just continues to be.
A lot of things going on there and so we've got a number of tenders that there were looking at with respect to providing equipment into that market Weve opened a number of facilities in the kingdom of Saudi Arabia.
That came online.
Specifically for instance, our fiberglass.
Pipe manufacturing plant in demand that Jose also referenced we opened that in April and its ramping up production.
Production now, we're making both real pipe and jointed pipe there and so just a lot as.
As opposed to North America, we're facing headwinds international offshore seems to be much brighter.
That's really helpful. I appreciate it and then they just one quick question.
The strong free cash flow generation in Q3, but I think I heard you'd say that the back half free cash flow.
Target is still intact. The way you guys that previously characterized that is that fair.
It is fair. So you obviously, we made some really good progress during the course of the third quarter.
Made more progress than we had anticipated related to.
Collection of receivables were continuing to tighten up and improve our processes. So even as the business mix becomes a little bit more challenging as it relates to collections organization is doing.
Great job getting our arms around the process and it's squeezing down.
The days receivable.
So as we look at the fourth quarter, we are holding our prior guidance intact. The three to 500 million in free cash flow for the second half of the year, but obviously, we've made great strides in getting there and so you could be pretty confident that we would look at the upper under that range.
Great. Thanks, guys appreciate it thanks burn.
Thank you.
Our next question comes from Bill Herbert from Feltl. Please go ahead.
Good morning sticking with the.
The free cash flows scene.
So if you're going to hit the upper enter your guidance for free cash flow for the year that imply yet another significant working capital harvesting Q4, thats not necessarily dissimilar to what what was witnessed in Q3.
Is that correct.
It certainly involves some additional contribution working capital and we're confident our ability to to realize that.
Later today once you once we assure our Q, you'll be able to see a little bit more granularity from the cash flow statement as I mentioned, we made great progress as it pertains to.
Harvesting cash flow from receivables and other elements.
Of our working capital.
We started to get.
Cash from or inventory. However, the contribution in Q3 was pretty light. So I think you'll see a little bit a shift in terms of where the source of cash is coming from you'll have continued.
Source just from operational performance.
But you will see a shift from more contribution from inventory versus receivables as we move into the yeah. We're really going to focus our attention is I think on getting better at inventory. We did so as I mentioned was a source of cash, but thats, where the I think remaining opportunity is for us.
Okay. So we have a shift from receivables to inventories in Q4, but none lots of working capital harvest in Q4 is still fairly.
Fairly considerable.
Our expectation is to see continued contribution from working capital.
Got it and with Roth capital spending Im not sure if you touched on this.
In your commentary Jose, but what should we expect with regard to Q4 and also if we can just take a look into 2020 and what your expectations.
The for capital spending intensity.
It's been fairly low as clay pointed out year to date and I'm, just curious as to whether it can stay that low.
Sure I think there a couple of questions and extend their one.
Just a question related to working capital. So yes, we as we move forward into the fourth quarter as we've touched on we expect to continue continued improvement on the working capital intensity of the business and we're certainly not going to sit still as it pertains to 2020 still think there are more opportunities for improvement to the.
Course of 2020 to bring down that ratio of working capital to our revenue run rate, yes, as it pertains to the capital intensity of or business associated with.
Capital expenditures.
I guess, most folks are well aware, we have a very capital light business. This operating in a pretty capital intensive business, which is prone to generation of cash flow and we continue to view, our business and that way and and manage it.
That way as Youve.
Highlighted our capital expenditures for this year certainly below the plan, which we laid out at the beginning of the year.
69 million in Capex in Q3, Q4 is normally our highest capex quarter of the year, but thanks, we'll probably finish up the year at about 260 million of Capex full year, one of the several reasons why our capex for 2019.
As a little bit below or is a bit below our original plan is no surprise.
That things are going.
Yeah, we factored the budget around sort of best case scenario in terms of progress associated with the.
The new rig manufacturing plant in Saudi Arabia things take a little bit more time, and so we're not surprised that that's that's taking a little bit longer when you're building a facility.
In completely undeveloped territory within within Saudi So some of that Capex will shift into 2020, and so we can see a little bit of an increase.
For 2020, but then after that expect or capital expenditures to get back in line with history, which should be plus or minus 3% of our revenue run rate.
Okay Fine so is basically a little bit of an increase for 2020 is that splitting the difference between Q3 Q4.
Well, we as we share we're in the middle of our planning process.
Right now, but I think.
I think thats a safe assumption.
Okay. Thanks, very much. Thanks, Thank you bill.
Thank you.
Next question comes from that's five snuff from Howard Weil. Please go ahead.
Hey, good morning, and congratulations on a very good quarter. Thank you Thats excellence.
I guess just following up on the last questions.
If I think about the Capex for next year My my sense from what we were talking is.
It could be flattish.
Is that India thinking.
No no fabs. So when we came into this year already our initial expectation was a capex plan, just a little south of $350 million. So as we move into 2020.
We will see that step up associated with.
With the increased spend related to that rig manufacturing plant.
So.
Yes, as bill was kind of indicating I think you'll see.
Somewhere between the 260 million that we're calling for now this year and that 350 million dollar number four.
For next year, but subject to revision next quarter as as I mentioned, we're in the Middle We're planning process right now, yes, the planted Jose referenced in Saudi Arabia is the big piece. This year I think if you recall when we came into 2019, we basically said were taken 20 eighteens level capex at about 250, and another 100 million for that plant Saudi Arabia. The reason our.
We're a little bit as an it is is it depends on health construction is progressing there and as Jose mentioned.
Some minor delays there, but on the whole.
We're developing kind of our fine tuning I think our outlook for Capex as we move it 2020, yes, and there there is spend that is occurring on that plant.
So therefore, we certainly wouldn't expect.
2000, Twentys capex to be in line with what our original plan was for this year, which had assumed everything went as quickly as possible yes.
Got it.
Im sorry, if I missed it but did you guys on that how much was severance cost and your free cash flow number in threeq.
We did not specifically called out but I think in Q2, you saw the noncash charges associated with some of or severance expense of the majority of that would have flowed through as a real cash expense in the third quarter.
And that should decline in Fourq you.
Yes, it should.
Okay and I guess last question for me just if I think about those cost savings can you. Just help me think about event from 160 million to 200 million like what.
Good mental steps.
That you guys that they can do have been very proactive at that yes, we.
It's been all time on that on the last couple of calls Vebs and we've continued to evolve our plans, but as we've mentioned before.
We're kind of more fundamentally reorganizing how we execute our businesses and as you're well aware, we operate through fairly autonomous business units.
But as we enter 2019 and men market outlook was diminished a little bit. We said you know now's the time really to go into in particular, the administrative support functions that support those business units see where we can capture more savings and so a lot of the effort thats going on through the summer and now into the fourth quarter has been around that reorganization.
And along with other cost savings measures that were undertaking kind of business unit by business unit across all three of our segments and so the difference between the 160 million target that we talked about in the second quarter and now the revised 200 million dollar target that we're talking about in the third quarter is just kind of the.
Getting getting deeper into it and refining of the steps that we can and are taking and so the so the savings have continued to Mount.
But also I want to add very very proud of the organization for stepping up to this to this challenge and for.
Our employees and our managers looking for ways to run our business more efficient way of doing doing a great job on us.
That's helpful. Thank you for taking cushion entry Jeff. Thank you Thats.
Thank you. Our next question comes from Scott Gruber from Citigroup. Please go ahead.
Yes, good morning, I Scott Scott.
Just staying on the same line of questioning the cost out program now up to 200.
Is it more to go here do you think it could keep moving beyond that 200 market 2020 in the absence of any divestitures and then as you start to think about that portfolio mix. It sounds like there could be some divestitures or on the horizon could the cost out program continued to grow some businesses come out.
Or should we think about their through a separate.
Yes, that's a great question I'm I'm.
To compete effectively in oilfield services, you always has to be paying attention to cost inefficiencies and and I think it's kind of in our DNA to continue to look for cost savings efforts and so I think that really is part of the reason we.
Have overachieved on cost savings and around our plans.
But as I mentioned in my prepared remarks, we are reviewing.
Parts of our portfolio products and services around the globe to see kind of where there maybe opportunities to further improve our returns on capital effective Aspen Blake to comment on that on that process, but one of things. We I think about is.
What if you take some product revenue stream out of a business then how do you just fixed costs to support that business. So you don't run into absorption right. Scott I think we're looking at this more from a returns basis than just a pure cost standpoint, and we are being pretty methodical about it.
More than just a math exercise, we're looking at it from a qualitative basis as well right, where we don't want to sell businesses that we feel we have a real competitive advantage our the end.
Looking at a trailing 12 months return, where it's been bouncing along the bottom of the down cycle.
So we're looking at both from the number standpoint, and where we stand in the business and we're looking at.
Across all of our different product lines and taking our time on this.
As we look to AG, either exit through whether it's through divestiture or whether we just have close product line.
Yes, we will obviously take a long hard look at at the Remainco fixed cost structure.
Yes, and yes, I think you'll probably there maybe some options come out of that but too early to say.
Got it and then just a follow up on that portfolio review great to hear the returns focused.
Are you guys starting to think about the mix of businesses within the portfolio that mix of kind to upstream downstream other industrial.
You've taken on some contracts.
To access the renewables, Mark and the bigger way with those vessels.
Part of the review.
It.
I would say I think were more of a bottoms up sort of analysis than a top down we don't sort of think of what's an optimal mix of exposures for inovio in as much as we think about eight years or really interesting business that has the marketable competitive advantage to me I think and I think I said it in my opening remarks, I think the strategic positioning.
The businesses is critically important to returns and so kind of understanding how businesses.
Can outperform competition in the space and can.
Carve out long term returns that are that are very attractive.
It's more of a it's more of a granular sort of thinking through what's what's what sort of competitive advantage or what sort of moat does this particular business have and that tends to guide our decisions more than hey, I would like to optimal mix to be.
20% midstream and something like that if that makes sense. So it's less of a view on on kind of.
Sector exposure and more of a view of Hey, how do you get sort of classic competitive advantage and I think over the years, that's probably been much more of an important guide in terms of our strategic capital allocation decisions here and I'll be.
Got it.
Great color. Thank you Ben Thank you Scott.
Thank you. Our next question comes from Kurt Hallead from RBC. Please go ahead.
Hey, good morning, Kurt Hey, Congrats great job guys.
A question follow up with getting the cost saving dynamics you guys have put in place.
Just curious as to whether they give us an update as to the incremental margin profile for the respective segment.
As we kind of move forward from here.
In the past that that Youve.
Given some indication on what they were maybe on a pre cost savings dynamics. So just curious as to how these cost savings may may change that incrementals on a go forward basis.
Sure occurred yet so the the prior guidance that we have provided related to what we believe and normalized incrementals are for each of the segments.
Still stands but as you.
Touched on you've got to adjust for the nuances that take place from quarter to quarter and right now as we're undergoing or cost savings initiatives, you could expect incrementals to be bigger than that prior guidance and you can expect decrementals to be smaller right.
And then you also have those individual nuances quarter to quarter, such as pricing dynamics et cetera that come into play, but so if you. If you look at the guidance that we provided for Q4 in our prepared remarks those factor in the impacts of cost savings that we anticipate.
Materialize during the fourth quarter.
Okay, Great appreciate that color and then.
Why is this kind of curious you know as you've you've had a very ready discussions you know with the number different customers and things are pretty.
Certain as it relates to the North American market going into next year, but.
I want to get your sense as to how you might see this thing evolving and given your experience in prior cycles and what's what similar what's different and what we from the outside looking in can potentially drawn to determine what kind of growth rate. We could see from this business over the next three to five years potentially yeah. I think it's a great question Kurt I.
I think that.
The challenge through the first five years. This downturn is that every time, we start to see the signs of recovery.
There's a another big production report coming out of West, Texas, and you've had unconventional shale surprise to the upside on on production through this five year period, which I would characterize as you know a lot of entrepreneurial aggressive smaller MP companies and kind of a land rush base still of securing acreage in drilling it up.
And.
As as as the Permian Basin, and other Unconventionals across North America evolve into.
To move to a.
A handful of larger players, who I think are going to be steadier and kind of their drilling and production than maybe the possibility of big production surprises to the so the upside diminishes a bit it's kind of a steadier more workman like undertaking a developing that acreage.
I think that could.
Basically provide maybe a little more confidence in in other employees around the globe more confidence to their price decks.
And lead to the return to normalcy over the next few years in terms of development, that's more balanced in international markets and offshore markets I think we're starting to see the early signs of that perhaps.
In 2019 and.
But but certainly 20, the near term works in North America looks pretty challenging in Q4 2020 is remains opaque.
What's been missing through the five years of the downturn really is the offshore in international markets and so we're pleased to see progress over the last several quarters.
Slow and steady in those marketplaces, but kind of like more levelized level of production out of out of the Permian and North American Unconventionals I think could help maybe accelerate that just a tad and we could get back to a greater level prosperity.
Globally, which is really what we've all been and seeking the other big factor too, which is really come to bear.
Here in 2019 is affected a lot of the North American producers responsible for those production outperformance is are finding it much more challenging to get capital.
And the level of.
Capital austerity and discipline, that's going into their drilling programs and living with cash flows and so forth got to think thats going to that's going to.
Fact.
You asked production growth going forward and I think.
One of the building blocks for us.
Healthier industry.
Great. Thanks, Clay I appreciate that color you bet. Thanks Kurt.
Thank you. Our next question comes from Cole Sullivan from Wells Fargo. Please go ahead.
Congrats on a good quarter guys.
Within within Wellbore.
The the North American decline kind of hit in Threeq, you and obviously fill out a lot more and over the September timeframe.
And you guys held in pretty well on the margin side actually kind of beat guidance.
Obviously on cost savings and the fourth quarter guidance looks like it's holding and that's well pretty pretty strongly.
Is that as that cost savings, that's really driving that.
Stronger stronger performance expected in Fourq, you, there and what were.
Yes, there's there's certainly an element of cost savings, but I think that really the contributions we provided from a consolidated standpoint is consistent with what we're saying across each of the segments, where the contribution from cost savings in the fourth quarter will be a little bit less than what we experienced.
In Q3, so yes, we're also seeing mix shifts across all of our businesses would.
Which contribute to the performance and.
And I'm not entirely clear I got your question precisely rival and thanks to recall is that Wellbore technologies.
Is still.
46% of its revenues is coming from international markets that'll that'll help but to the so in the third quarter coming from the second quarter topline went down 7% and the group there did a fantastic job managing decremental leverage to only 2% sequentially really basically holding EBITDA flat, despite a 7% topline decline.
Going from the third quarter fourth quarter, we're guiding down I think Jose said, you said, 567% topline.
Decrementals more like 25% set so which is lower than.
Otherwise expect on that operating leverage a normal variable margins to be in that space, which probably 30, 35% something like that so that's that's where it kind of cost savings show up but to be clear we are guiding down again in Q4.
Around on the top line of Wellbore technologies.
Right. That's that's helpful. Thanks.
On CMP.
Revenues were guided to kind of flattish for for revenues.
To help us think about the backlog conversion there with the higher orders that have been flowing through this year that or I guess implied in the fourth quarter number and then how to think about the non backlog revenue side for the shorter cycle items in Fourq you got it.
Yes, so coal.
That's that's a good question so with the shifted the mix it we're saying you're right we are.
Guiding to effectively.
A flat quarter in the fourth quarter, but an increasing proportion that revenue will be from our backlog oriented businesses. So we expect that revenue from backlog to pick up just a little bit from Q3 to Q4.
All right. Thanks, great. Thanks Carol.
Thank you next question comes from Connor Lynagh from Morgan Stanley . Please go ahead.
Yes. Thanks.
During if you could just characterize we've spent a fair bit of time on an already I know, but just what drove.
The cost out to surprise to the upside what specifically with the things that moved along faster than you expected.
Hard to generalize honestly other than just really I mean, I've said it before it is probably worth repeating.
It's a pretty volatile business and you got to be able to downsize when called upon and I think our our teams are really good it sort of moving quickly and acting decisively and taking costs out and so we entered this.
Latest round in the first quarter of 2019 and begin to get traction in the second quarter and then in that in the third quarter I think you're seeing a lot of the results of steps that have been taken and.
I can't say this enough we have a great team, who really understands we have to constantly size our business to market requirements and in the Downmarket your downsizing, but it up market were also pretty good.
Flexing upwards to meet market demand, which can rise pretty should pretty sharply in this places in this space as well. So just really good execution, all the way around and again difficult difficult to generalize other than to say I think it's embedded in our DNA here and.
And the good news is we're there.
We're continuing to take the steps necessary to position the company and.
And.
Making good progress on that.
Got it Thats helpful, maybe maybe to pivot a little bit since we're talking about the portfolio I would assume that you will still be active on the.
Building portfolio as well, where you see opportunities wondering if you could just characterize how you see.
The M&A market right now and just any portions of your portfolio that you find interesting to add onto in the current market environment.
I'll hand, it off the Blake to speak to yes, I mean, theres definitely as we've mentioned in the past like the.
The buyer universe with.
Running parallel with the limited access to capital in the space is definitely getting smaller and so we fund or so we think we're in a pretty optimistic situation.
Yes theres.
There are some business lines that we definitely think we can augment through M&A over the next year.
But also like I think we're at a pretty good spot when I look at the overall portfolio. There's others are huge gaps that I think that we need to.
To fill so we're definitely to be very disciplined and take our time I think patients as an end game right now, yes, I'd add to in contrast, with prior arrows. We're more we're using M&A in conjunction with organic investments in technology and kind of.
These are smaller more rifle shot sort of acquisitions were mostly doing.
And then investing internally to enhance their technology to take their products through the.
The infrastructure.
So it really we think thats the most efficient use of capital.
Now, but it is to Blake's point, it's becoming more of a buyers market. So.
Watching.
Watching that intently.
Got it thanks a lot.
Thank you. Our next question comes from Sean May come from JP Morgan. Please go ahead.
Thank you Hey, good morning.
So clear Jose just one point of clarification I was curious how much.
Did to what extent did the write downs of inventory in the second quarter aid the margins in Threeq you across any of your segments can you give us a sense of.
Magnitude if there is one and two extended then a tailwind for you going forward.
Yes, there are there really is not a contribution or any sort of tailwind that comes from us writing down our inventory.
So yeah, we have been.
Very consistent in terms of our approach related to how we've dealt with.
Items that go through our RPL or come out of RPL via other items and well first of all the vast majority of inventory that we write down.
It's heading for the scrap heat and really over the last three years, we scrapped over $700 million of the inventory there are times to where we are lighting things down to a lower cost of market and occasionally those do sell and usually they are at zero margin to the extent they or at any.
Real margin.
We will actually reverse the write down through or other items and so if you go back and you look at some of our prior quarterly press releases and 10-Q's and you have any study those other items you actually see that there are places where we are reversing.
Those charges because there have been a couple areas I think Q1 of 2018 you two of 2017, specifically you can go back and look and see that there are reversals of some of those charges and Thats why that's happening is because we were pleasantly surprised with the outcome on a couple of those write downs, but we do not take that back.
Back to the PL to insulate our margin, yes, that's really where for us to.
Something down and then be able to sell it for margin, but when it does happen were pretty.
It's pretty consistent taking it to other item.
Thank you have that clarification that thats really helpful did point out on working capital.
You are targeting free cash in the back half a year, obviously, a very good shape. There could you maybe just give us your latest thoughts on.
Working capital the sales maybe by accident 2020, because again, you've made significant progress there.
Has that changed and maybe just Jose how you think about Dsos deemphasize depots, what's kind of the the normalized run rate that you're trying to accomplish from that angle.
Yes, I think you guys were sort of going through our planning process and trying to determine what all the right metrics or for 2020 is probably a little bit premature for us to give you precise guidance, but pleased with the progress that we have made so far in the back half of 2019 getting extremely close to.
The targets that we set at the beginning of this year.
And we look for continued improvement.
Moving into.
Into 2020, and so as I mentioned earlier.
It is about focus on all of the blocking and tackling detailed associated with improving our processes.
We have made considerable strides, but they're still meaningful room for improvement so with our Dsos are thinking about 77 days I think we can get a little bit better than that our turns as I mentioned earlier, we've made some progress but not nearly enough progress in terms of inventory turns. So we can do better with that in 2020 and so.
We'll be working on setting that guidance, but needless to say, we're going to continue to squeeze it down and get as efficient as we possibly can as it pertains to working capital intensity in our business.
Got it fair enough. Thanks, Thanks, a lot thanks, Sean.
Thank you. This concludes our community session at this time I'd like to turn the call over to Clay Williams CEO for closing remarks. Please go ahead. Thank you Dylan and thank you all for joining US. This morning also thanks to our employees that that are listening.
We look forward to updating you on our fourth quarter full year results in early 2020.
Thank you goodbye.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect good day.