Q3 2019 Earnings Call
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Great so placements in the market.
Which is a company for quite some pool.
No I wouldn't move onto the show some of whom fall business.
They all know to free up to that reserves and I'll group bookings cool, we still expect who your high single digit international rugby rule excluding double.
Sequentially. However to go to include the seasonal activity declines in the northern hemisphere, and real dissipate only regions your handset.
We're also cruising monitoring the situation the quarter of putting the recent events and are preparing for further decline in Argentina.
In addition, we expect she's always that's North America as the fourth quarter develops.
Well anticipating a year and slowdown North America similar to last year due to operate the budget constraints.
However, this year the activities actually started earlier than last.
And we anticipate the sequential decline in Q4 to be more pronounced than last year.
Moving on to the Michael and medium term view.
The market environments.
Remains challenged with limited visibility.
Finally in view of the global trade concerns that are challenging world economy growth and the rate of oil demand growth.
Other sometime the U.S. potential role play out decline for the last eight months.
And it is expected to drop further and 2020 as a result of the reduced activity this year.
Therefore, and that's sort of recession, the prospects for international activity growth remain firmly in place.
In this market context approach not sound like land is under evaluation for both the medium and long term.
We are already scaling to fit the ones in business and we will be stacking fleet as the market complex during the fourth quarter.
At the same time as Cotter you review of this market is well underway and will be completed during the fourth quarter.
For execution early next year.
This gives me the opportunity to update you on our strategy execution.
Last month, we put another four key elements of that strategy that included leading and driving digital transformation in our industry.
Developing people basing solutions, capturing value from the performance impact for our customers and fostering capital stewardship.
Performance is at the half of this new strategic direction.
We are already off to an exit on stop on digital.
But other our vision of the industry to 800 customers and technology partners at the global assays for one in September .
There we demonstrated our firm commitment to an open digital environment that you believe can unlock further customer performance.
This go home.
A new shutter for the digital feature of our industry.
Deter us from our customers and these two factors was far beyond our expectation and he's already cost basic into sizeable opportunities.
The sensor JV is also being put on part of the toward strategy and the announcement of excluding reinforces our leadership of and commitment to the industry digital transformation.
Well, so making progress with our new FIFO based in strategic approach in the released today. There are multiple examples of fill promising technologies, all of which drive our customer performance.
Such as you'll see a bit deliver sustained and edges drill bit technology.
In addition, North America.
Im pleased to report early success of the technology access strategy, which says and leasing of rotary Steerable tools.
This is a new channels that access new market, where our participation was previously minimal.
Also in North America, our flagship project with Oxy in double time Basin is now operating at scale, we continuously improve operational efficiency setting new frac recalls in the Delaware.
The value being created is share through a nine commercial model and is a good example of our new strategy performance model approach.
Finally, as another base through our SPM strategy, we are grateful that in our divestiture of Argentina assets. As we are few offers enhanced that you are hearing we don't see patient to finalize with the overcapacity during the upcoming mobs.
Since taking the whole as CEO fossil Murray has made a point or visiting many of our customers.
Our people and our locations.
The reception by our customers, both while engagements and strategic direction as being very positive.
Deltas asthma of our people as been highly motivating and that could result in Libya.
The industry is acknowledging the need for higher performance in EMEA.
Well you know I'm very pleased with the initial steps of our cutting execution and with internal and external alignment with our vision.
To become performance partner of choice in our industry.
I'll now pass the call I've got to Simon.
Thank you negotiate lower.
Ladies and gentlemen, thank you for participating in this conference call.
Third quarter earnings per share was 43 cents, excluding charges and credits.
This represents an increase of eight cents sequentially.
And a decrease of three cents when compared to the same quarter last year.
During the quarter, we recorded 12.7 billion dollar of pre tax charges driven by market conditions.
These charges, primarily relate to goodwill intangible assets and fixed asset impairments.
As such this charge is almost entirely noncash.
Details of the component of this charge can be found in the eight queues at the end of our earnings press release.
These impairments were calculated as of August 31st 2019.
Accordingly, the thirdly quarter's results benefited from a 27 million dollar reduction in depreciation and amortization expense.
Approximately $21 million of the this $27 million monthly reduction relates to the production group.
The remaining $6 million is reflected in our corporate and other line item.
The after tax impact of this one month reduction is approximately one and to have sense in terms of EPS.
Our third quarter revenue of $8.5 billion increased 3% sequentially.
Largely driven by our international operations.
Pre tax segment operating margin increased by 113 basis points to 12.8%.
Highlights by product group were as follows.
Third quarter reservoir characterization revenue of 1.7 billion dollar increased 6% sequentially.
While margins increased 149 basis points to 21.8%.
These increases were primarily driven by strong international wireline activity and higher Westerngeco multi client license sales in North America.
Drilling revenue of $2.5 billion increased 2% driven by stronger drilling activity in Russia, China and Australia.
However, this was partially offset by lower revenue in North America land and Saudi Arabia.
Margins.
Were flat at 12.4%.
Production.
Revenue of $3.2 billion increased 2% sequentially, primarily driven by strong international completions activity.
Margin increased 148 basis points to 9.1%, primarily driven by improved international margins from higher activity.
The reduction in depreciation and amortization expense as a result of the third quarter impairment charge accounted for just under half of the margin improvement.
Cameron revenue of $1.4 billion increased 3% sequentially, primarily driven by one subsea margins increased 29 basis points to 12.7%.
The book to Bill ratio for the Cameron long cycle business was 0.8 in the Q3.
The one subsea backlog increase decrease to 1.8 billion dollar at the end of the third quarter. This decrease reflects a cancel project in the North Sea.
Now turning to Schlumberger as a whole the effective tax rate excluding charges and credits was 16% in the third quarter as compared to 16.7% in the previous quarter.
We generated 1.7 billion dollar of cash flow from operations during the third quarter.
Our net debt improved by 300.
$47 million during the quarter to 14.4 billion dollar.
We ended the quarter, we spoke of cash and investments of $2.3 billion.
We received 250 million dollar in cash and just after the quarter as a result of the closing of the CENTRIA joint venture.
During the third quarter, we issued the three branches of 500 million euros notes each.
The first the doing 2024 zero percent.
The second due in 2027 at 0.25% and the third with you in 2031 at 0.5%.
These notes were subsequently swapped into us dollars with a weighted average interest rate of 2.5%.
During this quarter, we also repurchased $783 million of our outstanding.
3% notes due in 2020.
And $321 million of our outstanding 3.6% to 5% notes due in 2022.
These actions have served to improve the company's capital structure.
During the quarter, we spend $79 million to repurchase 2.2 million shares at an average price of 36.6 to four.
Other significant liquidity events during the quarter included Capex of 415 million dollar and capitalized cost relating to SPM projects of $194 million.
During the quarter. We also made 692 million dollar of dividend payments.
Full year 2019 Capex.
Excluding SPM on multi client is expected to be between 1.6 and 1.7 billion dollar.
And now I will turn the conference over to operator for acuity.
Thank you, ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad, you will hear atone, indicating you have been placed in Q you may remove yourself from this Q bypassing the pound key once again star one to place your line into the question Q.
First we got your line of James West with Evercore ISI. Please go ahead.
Hey, good morning Olivia.
Good morning, James.
So today as you exited the the third quarter could you describe what the market conditions were how we should think about the fourth quarter. It sounds like sequentially down and then also how it was 2020 in your view starting to shape up.
Yeah, Let me comment on this Jan so.
Cepheid, Mike amongst between International and North America land specifically.
So first on the international side I think.
Similar to what we see every year, there's a seasonal effect in the northern hemisphere due to.
Due to the winter season that affects hamadi.
Russia, Let's say Sunshine on the North Sea and we see an effect the area on the receptivity and.
Our revenue that we collect from those photos region. So this is not unusual we don't expect any.
You more impact than we have a every over here, but I think this is something to account for.
We typically on the year ends also our view and sense of product equipment.
And we believe this will happen, but this will be as we have seen the last two or three years fairly muted and yourselves as the Brazil remain cautious on their budgets in preparation for 22000.
On the flip side.
On the on the North America lands.
The lead Cullompton bye.
Introduction remarks, I believe that.
The rate of decline will be at the risk it to be higher than last year as of for two reasons.
Usual.
Holiday season, a break even in the winter our visa is looming, but also we have seen the budget exhaustion and the discipline on operating within cash flow as let of Brazil to seize ablation earlier than they did last year, we are solid to give notice of.
Alpha operation gap.
From a from September and the rates of this of the decision has been accelerating so we expect as a consequence that the rate of decline quarter on quarter in North America might be a higher than last year sequential decline.
Now turning into.
Next year I think.
Absent of a major as I commented the measure recession or measure isn't.
Geopolitical or economic events, we foresee that international growth will remain in place, albeit placebo the difference.
Lower rate, possibly but he believes that the same software offshore activity deepwater offshore shallow we've not seen overall overnight and we'll continue to see both.
2020 international growth.
When it comes to North America, it's too early to call I believe that the market is still lack visibility.
And we cannot make alone on the rebounds in the Q1 that is a usual rebound from the from the during the season that we foresee happening we strengthening of activity from January and possibly.
Strengthening of pricing, but this is too early to call.
Okay. That's very helpful. Today, Thank you and then with respect to the.
Charges that were taken during the quarter understanding they only help the P.S. by about a.
Turning in a half here.
What drove the the timing here of the uptake in these charges.
Especially.
Mid year, why not end of last year.
Hi, James Simon I got here ill take this.
Basically hi.
During the last two events that took place in the third quarter that made us look at closely at the carrying value of our assets.
One is the new strategy by Olivier, which has been now publicly announced and discussed and we continue to develop its I was as we go forward. The other one is in the the market valuations that we have seen.
Although we have touched lower points before I'll take the second second the recent first and then discuss our first one although we we've seen lower valuations before but the during this in the third quarter with more consistent and frankly very low point, Unfortunately that forced us to look at our go.
When an intangible carrying value.
As you are aware most of the goodwill and intangible comes from two major acquisition in 2010 within dismiss acquisition, which is was almost 100% paid by stock we should hundred 38 million shares at that.
Fine and then.
Cameron in 2016, with where we paid almost 70% install the book value of those two acquisitions were booked for Smith at $56 per share for a for Cameron at $72 per ship as such our carrying value of the of the goodwill.
And the and intangible.
It's inflicted given where our current.
You know valuation is and this is taken very long analysis pretty scientific actually and we reached to this number.
Why it is into Q3 as because it is a through Q3 events, we record thinks as they happen. We don't we're not influenced by timing, yes normally at the end of the year you do a more thorough review, but given the changes we've seen into Q3. We did this photo review in Q3, the other items.
That you've seen which is mainly fixed asset.
Impairments and.
Mainly in one still North America is a reflection of our actions to work this activity.
As Olivier mentioned, we're looking at this activity, we have excess capacity there and we've taken the.
The decision that this is impaired we don't see it as a re activated in the near future and we took the decision to write it off so.
I covered the reasons behind that I know I answer more than north you asked but I wanted to them. So that everybody understand our approach and why you could just Q3 is not to just because we have which you know change of might it is a reflection of real issues that took place in the third quarter got.
Thanks, gentlemen.
Sure. Thank you.
Next to go to Angie Sedita with Goldman Sachs. Please go ahead.
Morning Olivier.
Owning Angie.
So I appreciate the color on the international markets and a follow up there on page seven growth for 2020, I know, it's early but do you still feel comfortable with mid single digit revenue growth and 2020 or is it fell a bit early to tell for sure and then also I would guess I would add to that asset sales that occur.
Kurt in 2019, the impact on both revenues and margin.
Yeah, Let me take the first and then was the second one solid.
I think to be upgrade to the mid single digit Ramadan during a low or high I think is too early to pool.
And call at this point not that we don't have good visibility, but I think.
The customer loyalty in the process offsetting their budgets for 2020 and now serving the macro economic factors that.
We all know about and I think well to be cautious here.
We believe that the continuum of offshore activity and the momentum that the industry as I've said there is not here to stop partially on the deepwater side.
But I think.
Some other region on some of the basin would be more risk of offer decline in a in activity or declining in budget for next year. So it's too early to call, but clearly we see growth International next year.
So when it comes to the impact of the announcement announced divestiture. So we are three divestiture in the underway.
One is already closed at essentially up there is to be closed two weeks ago.
The second one whereas today.
To that message of asset to your JV that we own with NBC and the field one related to your drilling and tubular accessories tools fishing that.
Divesting so when you look at the impact of these three on a yearly basis.
The revenue will be.
So 2% of global revenue as an impact the when combined the three when the three will be completed closed and exhibit and the impact on the.
Earnings will be.
One to two cents per year so.
Subtle may want to avoid the macmall that that's the impact on a full year basis I just want to explain that two of the transactions or the divestitures.
Basically, creating jvs or one one is occurring in the JV Santiago and the other one enhancing the JV of HTC drilling in the middle East So we'd using the revenue and the reason we're not losing as much in earnings because we will have a higher because of our equity.
Two station in the two geographies.
And the third one has a really minimal impact on on the the profitability and therefore as we mentioned it's a one to two cents per year impact on margin. However, the revenue is a larger impact.
Less than 2% of the total thing.
Okay perfect. That's very very helpful. I appreciate the color.
And then I guess, a little bit further on the international side.
It's around the pace of margin growth for 2020, giving your initiatives on the transformation digital and.
Obviously, these asset sales as well, but and then these contracts that you're trying to address in the middle East. So I was just talking about margins for next year on international and the pace.
Well I will comment on the on the the targets I can tell you is obsessed with ambition, we obviously continue to be.
To grow and expand our margin internationally and you've seen a did come on that we have the hi.
Double digits.
Basis points improvement during the quarter.
We continue to see Luke and walk a using the study to execute through a part of margin expansion for the for years. So if we get from a very high level down three buckets what were that we see the first one relates to.
Our ability to resolve some of the underperforming.
This insulates the holidays in diabetes compact that on Ingredion impacting our results and we are made some progress not to the pace.
I would have expected the city on being very ambitious this year, but I think I'm confident that we have a past improve this that would impact over the next year.
Similarly in the first because I would put the continued to execute.
Using.
New modernized platform of operating system and I think we are setting a two years robots to complete our transformation the internationally and I look for walks you have also some pull through on that a button, but morel with efficiency offset fab as recorded impact on our margins.
Next buckets is overseas.
I would according to the digital and all the technology access.
23 to get some of the success, we have seen North America overseas data rich excess.
Two first party, presumably layers for accessing our optical GM and using it with a little lower capex intensity market.
And digital where we expect that the outcome of what we are just Dom.
The last notes at a momentum that's got gains industry will give us.
And increased share of the digital market and as such will be contributing to margin. So last will be further long term outlook on the performance motel and over a rise of growth that we will disclose later, but I believe this too but we clearly.
In fact, the the next two or three years, but it's difficult to say at this moment, but don't mission to grow the international margin next year.
Thanks, I'll turn it over guys.
Q.
Your.
Mexico to David Anderson with Barclays. Please go ahead.
Good morning, Olivier Sonya formation strategy, you're obviously, you're focused on a north American business right now.
After write down assets during the quarter, you talked about more of a strategic review in the fourth quarter.
We're talking about 2020 numbers, but it's kind of hard hard to get there with all these changes have the North America I was wondering if you could just kind of just lay out a little bit kind of what you guys are looking at like what parts of the North America business are under the strategic review and should we expect kind of a broader retrenchments in certain parts of the U.S. Lan business next year.
No very good question, Dave So.
As as we've explained during their this cut the presentation back.
Months on hospital.
We are being a deep review of.
The entire ER business, we are operating in North America line.
This is not only one symbol every part of our business there and the first thing we're doing this we are going.
Scaled to fit approach to the basket and if you believe thats ramping up the scale welding after away. We believe these fit for every business in every basin. So this is what square meters of doing as we speak.
For one seem in each of the basin, where we operate and for each of the polar Cline well. We are currently operating in the North North America lands. So that's the discount defeats the approach to our strategy to redo the outlook to review our market position to review our strength, obviously, better the technology and an opportunity.
With customers and making a decision at that point on the on how to treat this portfolio and move forward with reduced before you more 51 or multiple basis as opposed to all basis.
All make a decision to change of business model to a rule for there is excess setting up technology as opposed to operating at the cars. So lots of either the approach we're taking as we speak what complemented by organizing that.
There are some technology that we've developed a highly successful as we continue to feed of technology team with.
What is the need to be fell shale basin to credit performance.
Yes in some of the release of the and the success will that help us actually and then is not last quarter slightly improve our margin excluding impairment effect not chemical and due to the effect of these said dignity success. So we'll continue to biggest technology and working in our portfolio of business.
Students in North America, and making decision to exit or continue and expense or ER moves to a new business for them. So too early to say.
But just optional table battery for for the one thing as it is certainly as you know that diabetes business too old business in North America.
Thank you.
From a slightly different question on North America, you highlight some offshore strength, which was a bit of a surprising graders from seismic here.
But you made a few comments about offshore sort of being a support for the market next year, you're actually highlighted international there I'm. Just wondering if this is a harbinger of things to come for offshore in general.
And just trying to tie that into the lower sub sea Cameron orders this quarter.
How do you see that trending over the next few quarters could I sounds like you're somewhat optimistic on offshore, but I don't put words in your mouth there.
No.
Let me comment on the so.
At the review I have is that the offshore market is a market that doesn't.
Complex and expense on a monthly or quarterly basis is more steady and is more longer longer long cycle, and that's particularly true fourth quarter. So we have seen growth recall, we slow recovery of the border for the last 18 months well see faster recovery of the show in the last the last.
12 months. So we believe that some of this phenomenal we stay in place now must not necessarily long long term, it's too early to go but but to the mid meet the medium term. It is the case. So I believe that the momentum that this market have yet to say for the foreseeable 69.
Beyond that is is too early to say.
The next Friday underweight, the society for subsea as well as Sallie slowdown I think some of them are being delayed for technical reasons, but we expect the some of the key if I need to be approved in the late about this early next year the subsea onesubsea.
Looking this quarter I think is.
He is a matter of scheduling of how and when this this book income in segments, we are still having.
A book to be ratio year to date, a larger one for Onesubsea, who has confirmed that the the sub sea recovery.
They're still in place and we continue to unfold.
Okay. Thank you.
Next we got a line of Scott Gruber with Citigroup. Please go ahead.
Yes, good morning.
Always go.
Can you provide some color around the outlook for improvement under the new strategy.
The EBITDA dollars and free cash dollars year since assets are being removed from the portfolio to optimize around the core margins were obviously improve could you provide some color around your ability to grow cash flow in free cash dollars, assuming limited market assistance.
Please the first and foremost stability that we have to grow cash will improve margins.
Clearly and Thats, the first and foremost the next one for cash flow is our ability to.
Improve working capital efficiency.
Both of which we have demonstrated.
This quarter.
No WCS it depends on the mix and where we are we are seeing growth and margin improves the believes that the fundamental international.
Growth that we see the place where we have a premium on a margin compared to North America, the ER effects and execution of our cut the scan to fit to fix North America and to enhance our net margin in data as well as inputs on page, we both combined two or.
To improve margins, we believe that the.
Asset efficiency.
That's we have improved over the last the last couple of years due to our transformation combined with mobilization of operating platform.
Two we continue to have positive effect on working capital efficiency. So you combine will lead.
We believe that.
The ability to deliver cash will only improve and and the total.
Total cash can swing I'm sort of recession will improve going for.
You want to add anything Simon.
You said you know most of the things deepening the issue of the cash flow definitely is earnings first and then management of our capital structure.
And the working capital.
We normally do very well in the second half as you have seen certainly quarter was 1.1 billion and we anticipate the fourth quarter to be even better than this performance in terms of next year, we have a plan to.
Continue to be very cautious in our capital deployment.
And this would help the free cash flow and continue the performance on our working capital of our working capital is normally subject of receivables inventories, we know where we stand we almost have pockets of collections here and there and we intend to is holding up and we feel comfortable between.
Our generation of cash from operation and.
And the.
The.
Some of the divestitures about coming would be more than sufficient to meet all our commitments, including the dividend one more thing to add about next year, you're going to see a lower SPM investments because of.
What we already announced that too long to divest and we don't do it doesn't require as much as we have done in indifference here.
Yes and I.
Thats why are you comfortable dimensioning, the drop industrial Capex.
I'm sorry.
Good question are you willing to dimension that were upstream capex is going next year.
Well actually on Capex. This year is around 750, and we anticipate this will be quite much lower next year I mean when.
I don't know exactly where we have not finalized on all the plans but.
You know sort of 500 400 to cover.
Gotcha, and then what additional question.
One tweak to the strategy seems to be a willingness to selectively sell or lease technologies and in various markets to third parties, which will then provide the services of Wellsite deployment could provide some color on this tweak to the strategy.
What is the breadth of the strategy by product line.
Which geographies are you looking at deploying the new strategy and importantly, how do you get comfortable around not creating additional competition in these various markets.
Yes, Scott.
This strategy realistically success subset of FIFO basis, where we believe that.
Target basis, particularly the hybrid in basin, the capital intensity that is required to fulfill and prospects within the basin and the.
Hi competitiveness.
By local players.
Selling both condition.
That is capping our market access so we have a variety than we have tested this in North America and will that we are accelerating the opportunity to lead offset is selected technology that you believe can help us access markets that we were not accessing before.
So these are two consequence.
This is Ted a new new business model.
That.
Executives to our growth and our returns and certainly low capital intensity as we typically sell is I said possibilities. So we don't require capex to expand this marketplace, So where we do this.
Typically ways.
Set of local competitor.
For one AD, which is how do the case in North America, well, if you had to take the drilling space dominant 50 local competitor that can be into the drilling services.
We expect these to be the case in middle East, whether our regional players and Nova part of the walls, where they are characteristic of hybrid in basin when it comes to climb.
The Dream is one obviously this is why we started but will not stop there we are doing it for some of the 40 equipments in wireline and continue to expand and we are currently assessing and as part of the strategy for every product line the portfolio that we are ready to.
You said, which is designed for sale and ollie's too far above the digital.
We took committee we out as well has here because we provide the two seven seas and monitoring of those agreements to assure that the performance of these technologies.
On par with the capability of this technology.
So I Michael possible, yes, when we put the wide tenant commission with those are those.
About the company to operate in a defined scope, we for defined set of customer were clear and radicalism physical comfortable as well as they are as they are successful in doubling of technology and we are successfully supporting them and expanding our market access.
Got it appreciate the color. Thank you.
Thank you welcome. Thank you.
Mexico to Connor Lynagh with Morgan Stanley . Please go ahead.
Hi, good morning.
Good morning I.
I wanted to stick with the with the Capex theme here in in the core oil services business. How would you think about how much you can take out in 2020 spending obviously with with production group activity coming down I would think there would be a decent amount of sustaining capex reduction there, but any thoughts around that.
I think is too too early to be specifically in Canada down to the production group at this stage produced bounce on how do these digital strategy North America, where there are several element of the pollution group operating there and this is too early as some of the activity level is not set yet for North America.
Popular now globally speaking.
Our gallons that we shared before as been 5% to 7% a review we believe weve the limits of product line that we have the recent divestiture of some asset a heavy product line combined with what's going to spend in North America.
Well I would say almost independently of the cottage execution, we mean that we stay within these gap.
Okay. That's helpful. Thank you yeah, I get to a broader question here you've continued to highlight your digital strategy I think many investors have a hard time thinking through that the addressable market or how big a business. This could be for you. How do you think about what the opportunities that isn't a multi year view for that business.
Actually it's a it's a very big market I think we studied the long term for the oil and gas industry, though the biggest market that will grow over the next five to 10 years I believe if not the judge by the response.
For more customers the desire to have to what we first and the alignment from all partners industry leaders need, though technology costs of industry, which are all aligning to what we first so the prize is big and now the challenges to monetize so as we said that three factor on three a direction there.
Why is the one is you know what well being with US I asked this has had established leadership into digital workflows.
And we believe they will only expand the adoption of Decene by 100 customer today is only about two years.
Grow and this expansion will mean that accelerating the rate of growth of aside as a segment.
Portfolio and concept margin that I Couldnt do obviousness everywhere. So I believe this will only continue and accelerate where essentially go is the data digital data digital.
Branch of all of our pipeline of our business and I think.
Yeah.
And transform with success with as you go from an asset heavy into an asset light product line last year, and we are complemented with negative digital strategy, where we are establishing a data data platform Galleria nudge agreed that will become the industry.
Phones for changing and monetizing data as well as you have seen with the announcement of I just markets joining us on the spectrum.
Finally, we continue to deploy.
Digital at the edge in operation the Sunset JV part of this ambition for depletion space and you have seen that we're expanding beyond putting them into drilling you will see that we'll continue to make announcement in that space Threeg operation and.
The wireline.
Latest generation of free sampling characterization damone.
Becoming full digital and success and expansion will become a key factor will be so success. So this redemption is large and move them and we are leading this space.
Thank you very much.
Next we gotta, Kurt Hallead with RBC. Please go ahead.
Good morning.
Good morning, I think.
Thank you. Thank you for all the great color here this morning.
Hi, Paul question I had a candidate that scales back to the strategy presentation from a month and a half ago and in that presentation you.
Olivier clearly stated intention to increase international North American margins by at least 500 basis points and so my curiosity that in the context of that 500 basis point improvement how much of that can be maybe attributed to the improvement in the current contractual dynamic.
These are the execution of the strategy you outlined specifically the digital the fit for base and the performance models is if you could provide some additional color on how you see that kind of mapping through Libya that'd be great.
No our Kirk I think.
Come on to LNG before I see that.
The expansion another 500 bps, we've gone for two or three buckets, one of them shop them and is the one addressing is more personal and contractual is the one addressing underperforming essentially and his ability to operate at the benchmark.
Being.
And thats the the performance transformation, rather you terminate that this has helped to fuel so that is is.
The target of for all of our team and the focus is very high on this and have personal overview of each of these every quarter, but the next you mentioned the the next bucket and I think the one that we certainly are the most impact. The next the 25 years would be the mix of digital photography, and think there's excess internationally, we're not figures accessing the in.
The middle East without.
Diesel everywhere and we'll have some fees were basing the from Russia Latin America from China.
To Mexico, So thats, what we expect to that.
I'm confused on that as we deploy this over the next few years.
Threec progressing.
Promotes model and a and digital will contribute.
On this.
Right I appreciate that and then a follow up I have was on the.
Hey, somebody brought general guidance in terms of business direction.
I'm just kind of curious when you look at the lower depreciation.
About a one and half cent impact for the call for the quarter that against was only one month. So what do you annualize that you should get a positive 18 cents per share benefit from lower depreciation.
I don't know it seems to me like the headwinds.
The market could potentially offset that benefit as you head out into 2020, you have any.
Kind of initial perspectives on on on that you think my my assumption is kind of my gut instinct is correct on that.
So first I think you you're not correct I think there and rising this 1.5 cents.
Will generate more as the 18 cents.
And that impact.
Incense scope now would you be upsetting to.
The decline a thing is a reduced too early to say I think again, we are looking at the outlook as I commented before the outlook international remain a slightly positive on growth, though to come naturally. These two jody due to cool at this point that we rush reached the bottom in now and we're expecting to expect a 23 flat.
So uniting all retail reached another another another bottom in 2020 to 32 said.
So I will remain cautious about about putting putting diesel respond.
Balancing your assumption glycol fodder for impact.
Okay, Great no one maybe one last one I noticed in the press release, you mentioned that there was a project cancellation in sub sea.
With that was that a project that came through earlier in the year or was it kinda back a dynamic.
Yeah.
No actually not it's an old booking.
That was awarded the two onesubsea.
Sometime ago.
More than one or two years ago that was put on the on the by both from a future Friday and these assets was actually subsequently sold for one operator to the next and the mix operator, why but I'm not going on the seller to content and we think its option for the Friday and as such we have to remove.
The booking from the.
On the backlog, that's that's a simple as that.
Okay. That's great. Thank you so much of that appreciate it.
Next we go to Sean Meakim with JP Morgan. Please go ahead.
Thanks, Good morning.
Good morning so.
So let me to follow up on SPM Isnt, a challenging few months in terms of the macro in Argentina in Ecuador.
Based on your comments of lower Capex spend next year does that suggest you're still confident and effecting the asset sale in Argentina in the near term and also just you wrote down some smaller SPM assets can you maybe elaborate on their impact in terms of Capex and just are we still confident that cash flow.
SPM as a whole is exiting 2019 positively now we have some an impact on production in Ecuador.
Yes.
So let me come on one by one so first.
The process of for the asset divestiture in for bundle. We are soon as on Tonight is progressing well completed the first phase where we received.
Actually.
Offer and we are offering a few offers enhanced that we're looking as we speak so we see dewalt space than we walk every step to get to signing and closing fully month. So yes, we account for this as an impact for 220.
We are not that religion at this point to that is there any of the asset.
The Ecuador the.
The talks and will be the main assets that we remain on the extent portfolio the overstepped addressing with.
Two.
In the region as much smaller were initiated a few goes back and have no meaningful in terms of the impact on Capex no long term of a production revenue for SPM. So instead of cash true, yes upcoming bonus did to avoid within cash flow and the cash really positive and improving.
Next year compared to this year considering the divestiture we are we are making.
And we are committed to continue to keep it at these so he will be lower capex and increased cash flow from best in contribution.
Thank you for that's very helpful. And then just given the growing importance of digital and your go forward strategy are able to quantify the baseline of digital contribution today I know some parts it'd be difficult to quantify but a reference point of the common investor question and with respect to the margin impact is it mostly accrue.
Action from software I was just higher margin product or the internal opex benefits you can get as well.
So I.
Sean I think we look at it from a diesel is the business led us to calculated first it is something that this comes from a different industry and it's something that is having high priced all operator, so we need to be this does that and we believe the rate of go for diesel is here to stay and only accelerate so we'll be above that and that's.
So these are the ones. The most important factor the other characteristic is that when we appointed well and we have the right I'd and operating model. There we've been able to the agility margin at a highly accretive which has been the case for the last 10 to 15 years, We society. So it will continue to increase.
Its contribution going forward, but I cannot come up at this point until we see the 2020 plan and we see that add outcome of all the lead and opportunity that we have built during last month pulling the size for.
Okay fair enough. Thank you.
And ladies and gentlemen, our final question will come from Chase Mulvehill with Bank of America. Please go ahead.
Hey, Thanks for squeezing me in I guess.
I guess first we'll start opening for Q.
Trying to think about the outlook for fourth quarter.
I guess Threeq you were 43 cents, if we kind of gross it up for the three since Oh.
The lower.
DNA for the full quarter, that's a 46 number.
And it sounded like North America will be significantly down in the fourth quarter and I wasn't sure about international if it will be up or not from your commentary, but can you maybe help us kind of bridge the gap from that 46, it number and how much EPS could potentially be down.
I would comment on the activity I would not give a quantitative guidance on the on the Dsos at this point and I will repeat what I shared during my interests on insulation remarks.
The what we see on international is sequentially, we see.
And anticipated activity decline in Reais and actually got large will be.
Weve down due to seasonal effect winter season enough for a novel and see if that is that is here to stay up and severe the magnitude of fit with the bond in Russia basketball in the North Sea, Russia on churn out to the sex them have this effect.
We don't anticipate to see a sizeable if any.
Yes, and said that could offset this partially.
Fleet and we have some exposure as mentioned and as a as prompted before in Argentina that could also further decline.
Due to investment climate that as a new them and fund the you heard about the Ecuador.
Ecuador.
Well that's happened we cannot go on which which had some consequence on our operation for fall bumps.
We will be less than a week well we restored production at this stage, but so this this is a combination of of impact that we foresee for international.
That means.
No not activity increase for sure now.
In the North America, I think it's it's more difficult you exactly bodes be point, where the market we end up until now.
But the rate of decline on the on the permit the rate of decline on the on the lease that has accelerated from July through September the rates of.
Decision.
Last few days and weeks on the putting a part coming down for the following three months has accelerated and as such we anticipate that.
Year on year, the sequential decline from Q3 to four North America will be greater.
It was last year.
Okay, all right understood can all that.
And then just coming back to Sean's question on the on the digital side you know it sounds like that you got a lot of revenue opportunity.
On the digital side as we kind of move forward over the medium to longer term.
Could you talk about which businesses you see the the most opportunity to opportunity to leverage.
Digital and then ultimately how meaningful revenue opportunity do you think this could be for summary.
The one first and foremost abuses none of you benefit is I guess.
And then westerngeco, which already fully vested into the need to walk through and digital data.
Marketplace. So thats we continue.
To expense.
That's a broad continues to be to be seen but the momentum there and early success early indication of.
While encouraging the next one of them say.
We have helped drive a platform improved his future and some software include he lost and his land that we announced commercial during these assets from that when combined gives the opportunity creates additional information at the scatter for we are full operation what the scale of.
For supporter in a drilling rig and this can be prototypes and applied.
Two platform of show two platform in Threed, NAND and were working with operator, as we speak to accelerate this politicisation and to make it to meaningfully back onto the dream and foundry pollution.
We believe own the success, we are willing to trade with the JV Cynthia JV working very closely with a with a hot weather formation I will be bumping today.
Automation fair in the months in a in Chicago and missing the boat to make sure. We are fully aligned to build the to build the support for this sanchez.
Got it understood already I'll turn it back over thanks.
Thank you very much so before we conclude the call today, we'd like to refill athree keyboards.
First our Q3 performance was basically.
We expanded international margins, while mitigating the north American land activity headwinds.
We delivered strong free cash flow and recall safety telephones.
So the new company vision gaming industry wide acceptance and the initial progress on the Scottish execution is very encouraging.
Should we have adopted capitals to actually as I look Arsenal mindset.
To date Encaje returns to investment discipline.
In addition of working capital and overall margin expansion.
Ladies and gentlemen, thank you very much for your participation. Today. We are you may now conclude the call. Thank you ladies and gentlemen that does conclude your conference for today. Thank you for your participation you may now disconnect.