Q3 2019 Earnings Call
Please continue to standby. Thank you for your patience.
My name is Michelle and I'll be your coordinator for today's call.
At this time all participants are in listen only mode and all lines have been placed on mute to prevent any background noise.
Well be facilitating the question answer session. After the speaker's remarks.
As a reminder, this conference calls being recorded for replay purposes.
After the speaker's remarks today I will instruct you on the procedures Braskem question.
I'll now turn the conference over to Mark Common director Investor Relations.
Please proceed sir.
Thank you Michelle good morning, and welcome to form Energy technologies third quarter 2019 earnings conference call with US today to present formal remarks, or Cris Gaut Forum's, Chairman and Chief Executive Officer involves problem are caught in our Chief financial Officer, and while Williams Senior Vice President of operations.
We issued our earnings release last night and it is available on our website statements made during this conference call, including the answers. Your questions May include forward looking statements. These statements involve risks and uncertainties that may cause actual results or events to differ materially from those expressed or implied in such statements.
Those risks include among other things matters that we had described in our earnings release and in our filings with the Securities Exchange Commission, we do not undertake any ongoing obligation other than that imposed by law to publicly update or revise any forward looking statements to reflect future events information or circumstances.
Right. After this call. In addition, this conference call contains time sensitive information that reflects management's best judgment only after the date of the light call management's statements may include non-GAAP financial measures for a reconciliation of these measures refer to our earnings release.
This call is being recorded a replay of the call will be available on our website for two weeks following the call.
I'm now pleased to turn call over to Cris Gaut, our Chief Executive Officer, Chris.
Thanks, Mark and good morning, everyone.
I believe form performed well in the third quarter, despite a difficult market.
We have a dedicated team that is working very hard and achieving good results around our three strategic objectives.
Which are.
Underwriting strong free cash flow to reduce that that.
Operating and cost efficiency.
Emphasizing our winning products to improve on our market position.
I would like to report on our progress in each of these areas.
On the first objective I'm pleased to report that we made significant strides in Q3 by reducing our net debt position by $70 million.
This was achieved through a combination of free cash flow.
And the previously announced divestiture.
Our free cash flow in the third quarter was $32 million, that's up $14 million from the second quarter and was generated from operating cash flow and monetization of excess inventory.
This was our fourth consecutive quarter of strong free cash flow during which time we've generated.
$86 million, representing a best in class free cash flow yield of well north of 50%.
We also closed on our previously announced divestiture of our joint venture interest in Ashtead, which we sold for $39 billion on cash at an $8.5 million seller note.
These efforts allowed us to fully pay down our revolving credit facility by the end to the third quarter.
I expect further debt reduction in the fourth quarter as we generate strong creek free cash flow for the fifth consecutive quarter.
Year to date, we reduced our net debt by $100 million.
And we ended the quarter with $308 million of liquidity.
Okay.
Regarding the second objective operating efficiency, we increased our adjusted EBITDA by $4 million sequentially to $22 million.
Despite a difficult market and lower revenue.
This improvement was due to increased international sales cost efficiencies and tariff mitigation.
While we'll talk more about our efficiency initiatives.
Finally, the third pillar of our 2019 strategy that we laid out the beginning of the or what's to drive growth with our winning products.
We have seen continued success in growing these products despite.
It's a.
Challenging market.
Some examples include our direct coil coiled tubing strings.
Which has gained significant traction in the market our quarter line pipe product, where we are seeing increased quoting activity onshore for gas injection lines and offshore for tie backs.
Our edge, the Salter, where we are seeing multiple opportunities and the refining space.
Lastly, our pipe handling equipment for the next generation of drilling rigs for the middle East market.
I would like to highlight some commonalities in each of these products. They all have significant international or offshore opportunities. In addition to U.S. presence they provide critical value to our customers and remain in high demand even in an environment.
We're spending remains constrained.
And there are barriers to entry for all these products, including protected intellectual property.
As we look at the market today drilling and completion activity is being depressed by cash spending constraints of operators and lackluster oil and gas prices.
There was clearly budget exhaustion, taking effect for the remainder of 2019.
As a result, the service companies have further reduce their spending on replacement capital items and consumable products.
We expect fourth quarter U.S. land activity to be especially solved more so than last year with extended Frac holidays for example.
Also our service company customers will want to demonstrate their discipline in Q4 by showing more cash flow.
Less capital spending and lower inventories.
All of this will have a direct impact on four of them that we are seeing through reduced orders and lower expected revenue for the fourth quarter.
A way to think about forms fourth quarter operating results is that we will have roughly the equivalent of about two months to revenue and many of our U.S. land businesses against three months of fixed costs.
As a result, we're now expecting a fourth quarter revenue to be down significantly with EBITDA in the low double digits.
We strongly believe that the underspending on maintenance and replacement equipment is unsustainable and that our customers will need to resume spending on the types of products for and provides.
Also we believe we get announcements you are seeing from surface companies about scrapping a portion of their fleets and so that mission of the cannibalization that has already taken place.
During this period of low demand, our focus will be on cash flow generation and developing and growing market share with our winning products.
Now, let me ask Pablo to take you through our results and financial position Pablo [laughter].
Thank you Chris good morning.
Our third quarter revenue was $239 million.
Down $6 million sequentially due to the continued slow down the U.S. drilling and completions activity, partially offset by higher deliveries of drilling equipment for international markets.
Our adjusted EBITDA for the third quarter was $22 million or 9% of revenue.
Up 4 million from the second quarter.
The improvement in profitability in the third quarter was primarily due to a more profitable sales mix and our continued cost reduction efforts.
I would note that our adjusted EBITDA, that's not an add back the $4 million of non cash equity based compensation, but we do subtract out the $3 million a foreign exchange gain.
Net loss for the quarter was $533 million or $44 to 83 cents per diluted share.
The recycle lots in our stock price cost a large divergence between the book carrying value of our asset.
Compared to the market value reflected in our stock price.
I Sercel, we paid all of our goodwill and some intangible and other asset assets and we recorded a pretax non cash charge of $535 million.
In addition, we had other special items of $3 million for restructuring and other charges.
And $3 million and foreign exchange gains.
We provided a reconciliation table up the special items in our earnings release for your reference.
Adjusted net income for the third quarter was two cents per diluted share excluding special items.
I will now summarize our segment results on a sequential basis.
And our drilling and downfall segment orders were $80 million at 2% increase.
The book to Bill ratio for the segment was 91%.
Segment revenue was $88 million, an increase of $6 million or 7% due to higher deliveries of capital equipment for international markets.
It is noteworthy that two thirds of our trailing product lines third quarter revenue was where market outside of the U.S.
Adjusted EBITDA for the second that was $11.8 million or 13% of revenue.
This was an improvement of over 430 basis points, driven by better sales mix cost efficiencies and operating leverage.
I would note that our segment EBITDA included the equity earnings of the asked that joint venture for only the two months that we owned the business in the quarter.
In our completion segment orders decreased 9% to $65 million.
Segment revenue was $71 million, a decrease of 11 million due to lower demand for our stimulation products. That's pressure pumping service companies continue to cannibalize their idle fleets and destock their consumables.
In contrast, our coal tubing and intervention product sales well the feeling as we continue to penetrate the market with new products and benefited from international sales.
Adjusted EBITDA for the segment was $10.7 million.
A $1 million decrease from the second quarter.
A higher mix of high margin coil tubing intervention products and cost containment and mitigation actions helped this whole EBITDA margins approximately flat.
Production segment orders were $55 million.
A sequential decrease of 27%.
Orders for both Wellsite production equipment and valves were lower that's MP operators slowed their completions activity and valve distribution customers continued does these talking strategy.
However, we have already we see some good orders and a letter of intent totaling almost $20 million.
Process equipment in the fourth quarter.
Segment revenue was $81 million at 3% decrease due to lower sales of surface production equipment.
Adjusted EBITDA margins were 7% for the segment essentially flat from the second quarter.
I will now discuss some additional details about a result and financial position at the form level.
Oh free cash flow after net capital expenditures in the second quarter was $32 million and improvement of $14 million from the second quarter.
Our program to reduce excess inventory yielded meaningful results as we decreased our net inventory position by $26 million in the quarter.
We expect this inventory reduction to continue into fourth quarter and beyond.
Also in the third quarter, we closed our previously announced divestiture, which generated an additional $39 million of cash proceeds.
As a result and in combination with our free cash flow, we reduced net debt by $70 million and ended the quarter cash on balance sheet.
300 million dollar Undrawn revolver.
And just our $400 million in unsecured notes due in the fourth quarter of 2021.
Our primary use of free cash flow will continue to be to reduce met that and improve liquidity.
Our net capital expenditures into third quarter were $3 million.
We expect our total capital expenditures for 2019 to be under $17 million.
Our reported diluted share count for the third quarter was 110 million shares.
Interest expense in the third quarter was $8 million and we expected to be slightly lower into fourth quarter with the low at that level.
Depreciation and amortization was $16 million into third quarter, and we expected to decreased by approximately $1 million into fourth quarter as a result of the asset impairments.
Corporate expenses were six and a half million dollars into third quarter and will remain at a similar level in the fourth quarter.
Our corporate expenses are down about 15% in the first three quarters of 2019 compared to the prior year.
We will continue to have some tax expense. Despite an overall net losses as we are not recognizing tax benefits and loss, making jurisdictions, but continue to recognize tax expense for some international jurisdictions, we think huh.
Once we turn profitable in the loss, making jurisdictions, we will have a relatively low tax rate as we begin to use our net operating losses.
For more information about our financial results. Please review the earnings release on our website.
Now, let me turn the call over to while discussing key operating initiatives.
Thank you Pablo Hello, everyone.
Forums employees continue to make good progress toward achieving our strategic objectives.
In light of the challenging market, which Chris described our teams are executing on the things we control.
We're pleased with the 26 million dollar inventory reduction this quarter.
Inventory came down in almost every product line as our reduction initiatives gain traction.
In particular, our drilling in downhole segment has made significant strides in reducing work in progress inventory in the past two quarters.
Through further implementation of lean pull systems between the front office and the shop floor in each of our plants.
Despite the softness of the current market, we expect further reductions in inventory in the fourth quarter as we continue to increase sufficiency in this area.
And this quarter. We also saw our third consecutive sequential reduction in our adjusted EPS Junaid costs.
We continue to drive cost efficiency in every aspect of our operations.
As of this point our S. You in a reductions total nearly $25 million on an annualized basis, when compared with the fourth quarter of 2018.
Based on actions already taken we expect that's today to decline again in the fourth quarter.
In addition to ask Gionee reductions, we're managing our direct and indirect costs in our manufacturing facilities.
For the fourth quarter, we've announced a number of facility closures during holiday weeks to better align our costs with temporarily lower activity levels.
On the revenue growth front.
We're also taking advantage of improving conditions in international and offshore markets.
Our subsea product line recently won in order to sell remotely operated vehicles to an Asian customer for non oil and gas use.
Prior orders for offshore defense and renewable market applications are keeping our subsea operations busy and increasing profitability.
Our completion segment is also seeing opportunity in Asia.
Specifically, our intervention products saw strong revenue in the third quarter with shipments of our intervention deal piece for an order received earlier this year.
Opportunities continue to grow as this market demands western technology for unconventional operations.
The middle East market remained strong with increased inquiries for consumable products and capital equipment.
We are seeing steady demand for coiled tubing products for the middle East, which currently represents 15% of the product lines revenues.
On the drilling products from a number of contractors are tendering to build new rigs in the region and our offerings of handling tools and return capital equipment are well suited to the applications.
We have also leveraged our Saudi Arabian operation to capture increased revenue opportunities.
Recently, our downhole product line received Aramco approval for our well regarded packer stage color product.
Our valves Assembly operation received approval from Aramco.
And we are establishing service and consumable sales capabilities in the kingdom for intervention and drilling product lines.
Also on the international front, we're completing a significant order for offshore core line pipe, which we expect to ship near the end of this year for the North Sea.
Overall sales outside of North America represent around one quarter of our total revenue.
We expect our share gaining initiatives and a strengthening international market to benefit our results in 2020.
Now, let me turn the call back over to Chris for closing remarks.
Thanks slow.
We're pleased with a third quarter results, but expect to fourth quarter to be particularly challenging.
We continue to believe that the under investment deferred maintenance and cannibalization of equipment by our customers is not sustainable.
But is still difficult to determine how long this behavior can continue.
Having said that forms balanced portfolio in the international and offshore markets as well as our exposure to non upstream markets were partially offset the current destocking weakness in the U.S. land market.
Our operating efficiency and cost reductions are starting to come putting up for long term success.
We will continue to focus on the things, we can control to improve our cash flow.
Your working capital management, and managing our costs at both the cost of goods sold and SGN eight levels.
We will also continue to focus on our winning products, which we can grow even in challenging markets.
Our international revenue as a percent of total revenue currently stands at about 25% compared to only 15% in the prior period.
We expect this contribution to increase in the coming quarters, as we see a greater percentage of future incremental growth coming from the international and offshore arenas versus the U.S. onshore market.
Thank you for your interest and at this point, we will open the line for questions.
Michelle Please take the first question.
Ladies and gentlemen to ask a question you would need to press star one new telephone.
Your question press the pound key.
First question comes from Sean Meakim of JP Morgan Your line is open.
Hey, good morning, I shot restaurants.
Maybe just to start on that that the international opportunities that.
We think international spending might decelerate next year from a growth perspective, but you're relatively underpenetrated. Most of your product line. So I think you should be able to I'll kick whatever the market offers can you give a sense of how you think about topline growth next year and I think importantly.
Does the mix shift towards international versus North America impact gross margins.
Or how you think about how that could impact your your initiatives to streamline DNA.
Yes, so some of the drivers of the international growth, our artificial lift portfolio as well as.
The drilling.
And downhole products that Oh, that's Lyle mentioned.
I'm also yes, some of our completions products, particularly in the.
Coil tubing quarter line pipe arena.
Some of those are from a mix standpoint quite favorable including.
The completion products and the downhole products.
And.
So accretive from a margin standpoint, we feel like we have the infrastructure, we preserve the infrastructure to.
Address these international markets, we are shifting some resources around to put more focus on the.
Larger middle East area for instance, but Sean no I don't think that that will cause us to help too.
Invest in essence DNA.
Nor in inventory.
One thing we're also doing is leveraging our presence and.
Saudi Arabia across multiple product lines.
Were initially if it had more of a.
Focusing in just one product line, but the valve space.
So.
We think that the middle east market will be a one of the stronger growth areas next year.
In general when you look across where opportunities are for revenue growth and Oh I think we're we're putting more chips on that marker.
Thanks for that feedback or is that was that's very helpful. I was hoping we could also digging a little more into the.
The acceleration in inventory reductions it sounds like from while lean initiatives are getting traction in.
Drilling and downhole I'm not sure if completions are still more of a drag maybe if we get a little bit more about come within segment, how things are going in.
Did the pivot to more international opportunities have an impact on.
How you manage working capital needs. So is there any impact on how dsos could shift over time.
He select inventory builds that can mitigate some of the progress you're making elsewhere.
Sure Sean this is while the team is making really good progress overall in inventory reduction you mentioned that each one of our product line almost each one of our product line saw reduction this quarter in their inventories and and in our initiatives are really across the board has for us making reads.
Auction highlighted the drilling a downhole group as they've made a specific emphasis in the recent quarter on leaning out operations some of their shops and made some really nice progress on work in progress reduction don't take that to me that the other product lines art also seeing big reductions.
I think when we look to the international mix similar to Chris we're already well positioned to take advantage of the opportunity there and don't see a significant change in any kind of working capital requirement.
All the to the contrary the ability to continue.
Leveraging the inventory of already have into those markets will be favorable.
And to the extent, we have on large ticket capital equipment for international market for example, in our edge to salter's and refinery business or <unk>.
Large project in the sub sea space, where we will be building up work in process, we try to match that.
With cash.
Payments, so that from a cash.
Standpoint, although inventory will be going up we're we're protected.
And not cash out of pocket on those big projects.
And even in terms of inventories since it's a working and process. It's a percentage of completion type of a.
Revenue recognition for those big projects, we do recognize that revenue overtime.
Got it that feedback is very helpful. Thanks, Thanks, a lot.
Our next question comes from James West of Evercore ISI. Your line is open.
Hey, good morning, guys.
Hi, Jane and congratulations on another quarter of a strong free cash flow and more debt reduction here.
I guess the first thing for me interesting comments from from while around the sub sea side of the business recognizing it's a smaller part of your mix, but are we starting to turn the corner here I mean, the subsea equipment.
Manufacturers are showing good growth in.
Borders rigs are getting contracts and going back to work or or do you think we're at a turning point here for your part of the subsea business.
We are seeing more bidding activity.
That has not yet turned into backlog for us.
The increase bidding activity is for a combination of different projects.
While the James and.
Some of it for oil and gas and some of the non oil and gas.
There are still quite a few are obese available out there right, but what we are seeing is for new long term projects operators.
Would prefer to have.
New equipment for a five year project, rather than taking on equipment that is already five or seven years old and would be 12 years old at the end of their project so that as a factor in there Mike.
Okay. Okay. That's helpful and then Chris on the <unk> just cannot continue cannibalization issue certainly for Q I understand the the market is going to be pretty pretty tough, but some of the contract drillers some of the.
Completions oriented companies have suggested.
We said in some some movement hiring activity as we pivoted into 2000.
20 or are we at a point where their their inventory destock is going to cause EU quicker snapped back in orders as we go into the early part of the years. They can get back to to work. If indeed, there is some type of at least short term bounce back.
Historically that is what we have seen and if we just take pressure pumping as an example.
Good job in the past eight years, we've seen.
Three ups in three Dallas and when it snaps back from a a de stocking it's a very high percentage increase in revenue in the subsequent quarters.
We are not yet.
Seeing that light in the tunnel, but.
Our experience is.
That when it happens it happens in and that a significant way.
And as I said in the prepared remarks, we think the retirement announcements that we're seeing art and admission that this equipment has been cannibalized isn't competitive and is not economic to put back to work.
And so that I think.
We will bode well for.
This.
You know it.
Transition point when it comes.
Got you step I definitely agree thanks, Chris.
Thanks.
Our next question comes from Georgia, Leery of Tudor, Pickering, Holt and company. Your line is open.
Hi, Good morning, guys good morning centered.
On the artificial lift side of the equation that multi list portfolio, obviously, a lot of opportunity here in North America to continue gaining share, but can you talk a little bit about the strategy for that business on the international front and maybe where your attention is focused from a geo markets perspective, as we sit here today.
Yeah, Hey, George its Pablo.
Yeah that that acquisition or or kind of combination of businesses.
With a focus on artificial that has been.
Really good for us.
As you pointed out it has been a story about market penetration so even in a down market. We have continued to add customers.
On the U.S. side, and I really benefiting from offering a full package of solutions.
Who MP operators.
Now.
As you pointed out we do still have a route to go and the U.S.
The next leg of growth, we think can come from international growth, particularly in the middle East. It's an area of focus for US as we mentioned, we're leveraging our footprint there that we have four other product lines, such as Davis Lynch, such as the local process and Saudi.
To drive sales of these new products and we think that they work we will definitely be a solution that works for that market.
Okay. That's helpful color Pablo and then the international revenue as a percentage of the mix jump at 25% quarter on quarter obviously.
Impressive thing to see I think we've seen plenty of green shoots for the international and offshore markets in recent quarters as you kind of Guy your Crystal ball, or just think strategically, Chris and Pablo and Lyle.
How big do you think that international business could get through time.
The next five years could that be 50% of revenue is a good goal. How you guys think about that just strategically longer term.
Yeah, I don't know that it would get to 50% just given the size of the the U.S. market.
But.
That's a third.
In the near term and potentially a bit above that but.
The U.S. market is just so big and.
Works the equipment, so hard [laughter] that in a normal environment, where we're not into this de stocking.
You know that's just as is.
Going to continue to.
B. I think.
Very.
Big part of our business driven by.
Assumable products.
Great. That's very helpful frame, how sneak one more and on that you guys have historically been fairly acquisitive.
Clearly the focus now is really on de levering and continuing to.
Generate free cash flow cut costs and pay down debt, but.
You had sold.
Business recently.
They're incremental levers you have to pull on the asset or business sale.
But at the equation and then kind of what is that broader India market look like today.
Yeah, George its Pablo again.
I think Thats sub sea rentals joint venture divestiture was a bit of a unique situation, where we had a partner that really wanted to bias out.
We had just divergent interest in terms of how we want to manage the business.
Given that our entire focuses on free cash flow generation, and reducing net debt and one or two on things for cash flow.
So you know in this kind of market.
What we are focused on doing is driving to winning products investing in those and really de emphasizing the other products working down the inventory shifting the SGN a resources.
Sales folks engineering folks to those winning products and winning regions and monetizing you know the other products by turning the inventory into cash overtime.
Great. Thanks for the color Pablo Chris.
Good thanks.
Our next question comes from JB Lowe of Citi. Your line is open.
Hi, Good morning, guys, Hey, so you.
You guys have done a great job you hit your annualized hundred million dollar free cash flow target.
This quarter.
You pay down your revolver continued to liquidate inventory.
And the stock price is still you know almost almost to the dollar I guess the next step is is debt repayments are there any restrictions on on buying your 2021 notes.
At a discount there down here in your 80.
Yes, there are some restrictions, but there's some basket available for that and it of course is one of the options will considering but really in the context of dealing with the whole maturity.
Okay fair enough.
My other question was on you guys are about a year into your after the acquisition of Ghd has there been any progress there on expanding that sales in that business outside of just the pressure pumping market into other industries maybe.
Yes, they do serve.
The non oil and gas market.
But that still oil and gas has.
Has been the bigger part of their business it is more capital equipment oriented.
It has a very large market share, but obviously there's a.
Very little in the way of capital equipment being ordered.
I think that does give us a great leverage to when.
There needs to be a reinvestment in equipment again.
Regardless of the the type of.
Hi move or type of engine, that's put on the new pressure pumping equipment, you want to make sure.
That those.
Those probably movers, whether turbans or or diesel engines, or whatever type or are well protected and.
The the jumbo Tron ghd product as the best way to do that.
So we've got a good product there, but you know, it's it's kind of on the bench at the moment here ready to come into again.
Understood last one for me is a well I think you mentioned that you guys received approval from Saudi on the the valve facilities out there just wondering if we can update on.
On.
On a potential customers out there.
Sure we did a in the quarter receive our approval as a manufacturing facility in Saudi.
From Saudi Aramco, which is a long awaited approval that sets us up well not only to be able to make sales directly to aramco, but also hasn't approved supplier or expect to see more pull through whether that's through sabic.
Which is in the region and some of the smaller fabricators that bill product.
For Aramco and for savings so the activity level is there and strong and our facilities ready. In addition to our Ramco approval. We also had passed out were a pie six D audit in the quarter. So we'll be an atheist approved facility here in the near term and so between those two.
Approvals, we feel really good about about the position of our facility there and the opportunity to take advantage of the market.
Great. Thanks, that's all for me.
Thanks.
Our next question comes from John Watson Simmons Energy Your line is open.
Thank you good morning, John .
Hey, I on the free cash flow front for for Q.
Thinking through the puts and takes versus Twoq, you EBITDA will be lower capex will be lower and you're making good progress on inventories.
Is it fair to think that Fourq, you free cash flow could be similar to what we saw in to Q.
So let me give you some of the other puts and takes I think you have those right. There's also the interest payment.
Right. We you know, it's a semiannual interest payment on the bonds goes out right at the beginning of the quarter. So right at the beginning of October . It went out so that that is a difference but on the working capital front. We the 26 million dollar inventory reduction in the third quarter I think will help us see.
Yes that turning to cash in the fourth quarter.
Okay, Okay, great so little better than than Twoq you. That's helpful. Thank you Pablo.
And then just as a follow up to one of jbs questions.
Youre generating great free cash flow year maturity date is still two years away.
Can you give us any further color on what type of conversations you're having regarding that maturity I am just conceptually I know, we're a long way away.
Yes, so clearly we're very focused on debt maturity.
You know the good news is the bonds don't mature until October of 21, which is going about two years.
And we're also fortunate that our capital structure has a lot of flexibility built into it.
As I mentioned before with an Undrawn revolver, we have a lot of liquidity and also with the bonds being unsecured.
You know, we've got a lot of secured debt capacity as well. So we are evaluating all the financing options, but the midpoint. This we've got a little bit of time and options.
And importantly will continue to generate cash and therefore, I wont, it's unlikely that will need to refinance the full amount.
Okay. Thank you problem lastly, on the production business front and orders were down significantly quarter over quarter, but like how said you've got smell a wise.
Early in the quarter I was wondering if you could help us put those two to think about Q4 revenues for that business just a general trajectory.
Sure John can definitely do that the first off the the orders were driven by by really two things first was a delay in our surface production equipment orders.
He is the operators have exhausted their 2019 budgets and are working to firm up their 2020 plan.
And so given the uncertainty in the commodity prices deck, many have yet to firm up their plans for next year.
What we saw early here in the fourth quarter was was a decent amount of orders for the U.S. market for that and as you recall our orders in the production equipment space are pretty large and lumpy.
And so really a timing factor when those orders came in the coming into the fourth quarter. So a lot of that big slug of orders is really for 2020 revenue.
So our fourth quarter was set based on orders received in prior quarters, and we feel pretty good about that.
The other part of the orders slowed down was in the valves business.
And we had seen some level of destocking of inventory by our distribution customers and we saw that in a much more pronounced away in the third quarter.
That the underlying activity in the businesses, primarily midstream and downstream as is stable and steady and so we think thats a matter of time before the destocking, there and inventory reductions run its course.
And we see order levels pop back to a more order more consistent with underlying activity.
Okay, Great. That's helpful. Thanks, guys I'll turn it back.
Our next question comes from Daniel Pickering, a fixed wing energy partners. Your line is open.
[noise] morning, guys. Thanks for taking the question.
Pablo you talked about.
An expectation that you wouldn't have to refinance your entire debt maturity I'm trying to think about the next two years the free cash generation don't want to get.
I don't want to make you predicted specifically in the short term but.
That's a 400 million dollar issue now you know you you've kind of got cashed offset a decent piece of it already I mean is your expectation that'll be a 200 million dollar number to re Fi and 2020 150, I'm just thinking about the next two years of cash flow what do you think model looks like.
And that's desktop too far off from our thinking however, we wouldn't wait quite that long.
To address it.
But yeah, we've hit that hundred million dollars run rate here and the and the back half of 2019 as was our objective and we think we can continue to generate strong free cash flow.
[laughter], So I guess, what you're saying as you think the inventory reductions the cash generation from operations.
Et cetera that can continue so it's a 100 million dollar a year on an ongoing basis, so 2020 ought to be another hundred.
Given that you're at that run rate now.
The working capital lever.
It's still significant for US we are trying to get to two and a half or three inventory turns here over time.
You know so a lot of the inventory is things that we built up for a recovery that didn't happen in 2018, So just a matter of.
Moving that overtime.
Sure and and.
Oh count that first one is one question then and Chris you talked about.
Three up and down cycles in the last eight years and each time, the when the business snaps back at snaps back, notably what would be the longest in those three time periods on the downside what would be the longest period of cannibalization and de stocking in kind of where are we relative to that historically longest.
Period, and we're getting.
At the long end to that now Dan this is okay longer than than the others had been yes, yeah. So it sounds like it's not Q4 back first half has not a real unreasonable expectation or or hope.
That's right.
That is right okay.
Great. Thank you guys.
Thanks.
Our next question comes from Matt Duncan of Bank of America. Your line is open.
Hey, guys good morning.
All right.
Just given the capital discipline, you're seeing from your office customers.
Are they passing any.
Pricing pressures down on you.
So can you talk how much pressure to maybe seen and how you manage that not likely soft 2020 U.S. market.
Yes.
I wouldn't say pricing is the is the biggest a biggest issue here it they're buying it when they need it and when they needed they need it right.
So.
You know.
No I don't think that we're expecting.
It's huge amount of additional pricing pressure there probably are some specific products across our offering that are seeing more pressure than others, but.
No it's more of a yes or no.
Thing I would say in terms of.
Buying decisions.
Yes.
Yes, we need to be competitive we need to be in.
In the market, but.
No, we're not calling for huge pricing pressure.
To impact our results.
That's simple enough.
I guess, just shifting gears, but not drilling in downhole margin outperformance this quarter.
Are you <unk>, well that breakout how much that improvement last product niche versus maybe just cost improvements and better absorption.
However, our drilling down whole team has been working and restructuring for awhile and so significant amount of cost realignment has been done there by the team I'd say really met over over the last year.
So so we've definitely seen uptick in.
Margin from an operating perspective.
Both from the volumes, but but also from that so that cost restructuring, so probably pretty good combination from both of them.
Okay I think shares.
I'll leave it there okay well. Thank you all very much we appreciate the good questions and we'll we'll sign off at this point Michelle.
Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.