Q4 2019 Earnings Call
And and welcome to the National Oilwell Varco fourth quarter 2019 earnings Conference call. At this time all participants are in listen only mode. Later, we'll conduct a question and answer session and instructions will follow at that time Infineras should require assistance during the conference. Please press star zero on your Touchtone.
The phone as a reminder, this conference call is being recorded I would now like to introduce your host for today's conference Mr. Blake Mccarthy, Vice President of corporate development and Investor Relations. Sir you may begin.
Welcome everyone to National Oilwell Varco fourth quarter 2019 earnings Conference call with me today are clay Williams our.
Chairman, President and CEO, and Jose Bayardo, 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 meaning of the federal security laws.
I'll risks and uncertainties and actual results may differ materially.
No one should assume these forward looking statements remain valid.
During the quarter or later in the year for more detailed discussion of the major risk factors affecting our business. Please refer to latest 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 in our earnings release available on our website.
On.
The U.S. GAAP basis for the fourth quarter of 2019.
The reported revenues of 2.28 billion and a net loss of 385 million or one dollar and one cent per share.
Our use of 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 will 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 you know these results continued to improve sequentially. During the fourth quarter 2019 as revenue increased 7% from the third quarter EBITDA increased to $288 million were 12.6% of revenue.
Despite continued deterioration of the North American market, all three of our segments increased EBITDA sequentially on a year over year basis. He was able to post an increase in EBITDA during the fourth quarter 2019, despite revenue being down more than $100 million from the fourth quarter 2018.
Aggressive cost reductions in facility down.
Sizing contributed significantly to these improving financial performance in Jose and I will speak more to this and just a moment.
Revenues for the full year 2019 were $8.48 billion, a 0.3% improvement from the prior year full year EBITDA of $885 million declined 3% from the prior year.
2019 was a pivotal year for the energy industry, we entered 2019 with commodity and equity markets signaling strongly to market participants that growth for growth sake without commensurate returns to capital providers would no longer be tolerated.
Sources of all forms of capital to the industry public equity private equity bank debt public debt.
It became scarce and expensive as evidence for example by the collapse in trading multiples of oil field public equities in early 2019 at the time, we interpret this as evaporation of a widely held narrative God you conventional wisdom that a commodity price spike with someday soon we just back to a more prosperous oilfield and save us all.
Through the first four years.
So the downturn 2015 to 2018. This narrative was responsible we think for a significant structural option value component in equities and asset values in the oil field.
This makes sense to me because oil and gas industry has a 160 year history of extreme volatility and sophisticated investors recognize the corresponding option value that.
Goes with this volatility as the leading provider of capital intensive capital equipment to oilfield service companies, we tend to watch trends our customers frequently rely on external capital to body equipment that we provide them.
At the beginning of 2019 providers of external capital to oil and gas producers and service companies were exhausted tired of waiting patiently for recovery that felt like.
We continued to slip over the horizon. So the choke back on the capital that they were previously pumping into the operations of our customers.
No capital is to oil and gas what oxygen is to the rest of US petroleum is arguably the most capital intensive undertaking of all industrial enterprises and oilfield services is probably second.
Operators react.
Really when you choke off the air supply.
They pulled back hard on Capex budgets, particularly in the US unconventional plays resulting in a peak to trough decline of 27% in the us land rig count over the course of the year, while international and offshore projects with favorable return characteristics continued to receive if I'd green lights.
The.
As a whole, particularly the U.S. finally seem to be resigning itself to the fact that commodity price spike is not going to say today and the old way of doing business is not going to cut it.
I will unfortunately, the lower for longer and that is the new conventional wisdom that emerged at the beginning of 2019.
I wanted to step through this perspective with you this.
Turning because I believe it has important implications for our company and our industry over the next few years and this perspective has guided our strategic decisions through 2019.
First with respect to the elusive recovery through this year of capital austerity, some might say capital starvation I've been struck by the number of conversations I have had with other oil patch old timers.
Where we agree that this lack of capital is as bad as anytime we saw during the 19 eighties or 19 nineties.
Therein lies the seeds of a return to prosperity because the new grim view that has taken hold is not driving the industry to reduce its structural overcapacity, taking actions that will return this industry to health.
Asset retirements facility closures regional withdrawals exits from businesses and consolidations got underway in earnest in 2019, while individually none of these will heal the space collectively they inevitably lead the industry to better disciplined pricing and shareholder returns.
It'll be share the task began materially back in 2015, we started reducing our.
Overcapacity facilities footprint and SGN, a but our efforts were accelerated sharply beginning in 2019 as reality of the new market normal became apparent our team has undertaken many difficult decisions, including pulling back from unprofitable markets and closing numerous facilities around the world some of which.
Had been mainstays for decades.
Since 2015, we've closed 483 facilities to shrink our own internal capacity to better fit market demand, we've adopted a more efficient shared services model in many regions and through the hard work of our team through this past year, we've established a clear intangible path to at least $230 million in annual cost savings.
As compared to the first quarter of 2019.
As far we've attained approximately 170 million in annualized savings up about $82 million sequentially in the fourth quarter.
And we continue to evaluate every opportunity to increase that number.
Second every product line no matter, how well established has fallen Adams.
The microscope of an in depth returns analysis those that do not currently meet our internal threshold have either developed a tangible plan for near term improvement or have been slotted for divestiture or closure.
Ultimately 2019 was a year about building and solidifying our staying power operationally, we're a leaner more efficient and more.
Digital to react to the shifts in the market.
Third from a balance sheet perspective, we continue to increase the strength of our capital structure in order to maintain the flexibility to act opportunistically during the fourth quarter, we called $1 billion in debt due in 2022, repaying a portion with cash and a portion with longer tenor notes a new in a new issue that is.
As due 2029.
Fourth we tailored our strategy to fit a world where oilfield services customers have limited access to capital commercially in the one much of this race during the period from 2006 to 2014, when we won a significant portion of the largest build out of oilfield service equipment. The industry has seen in the generation.
We delivered 379 offshore newbuilds.
Drilling packages since 2006 for instance, so today, we benefit from having the largest installed base of oilfield equipment in the world. This enormous installed base gives rise to new attractive business opportunities that are unique to innovate aftermarket spares and services support software system enhancements.
It's the application a big data driven predictive analytics products to drive efficiencies the evolution of mechanization to automation of processes in the oilfield for instance.
We are creating differentiated digital offerings built on over three decades of gathering big data in the oilfield through our MD Tyco products and Hawk service.
Brings among others.
Due to our installed base of equipment that touches nearly every well site in the world, we're uniquely positioned as perhaps the only common thread between hundreds of unique.
Equipment suppliers with thousands of non standardized sensor tax.
Our new product development with capital scarce and oilfield equipment oversupplied it.
Sit less sense for oilfield service contractors to spend millions of dollars on new units, rather we see the next attractive opportunities that's being smaller dollar investments that our customers can make in bigger impact enhancements that will enable them to differentiate their equipment in a crowded marketplace. While there will be certain large new build project opportunities that arise.
Even in this tough market, we will remain discipline and we'll choose not to follow our competitors and doing the stupid stuff that desperate competitors inevitably do a strong balance sheet and a large installed base of equipment requiring ongoing Oems support is the best way to ride out and industry downturn. The good news for Adobe is that we have both.
New product development.
Element has zeroed in on bolt on products that carry a price tag our customers can afford with value added efficiency are useful life improving profile that they can justify to their shareholders think in terms of track I'd tags for drill pipe monitoring and auto tallies on rigs Novos operating system enhancements that our customers can charge their oil company customers.
For new directional drilling tools like select shift, which have no similar appear in the marketplace power blade energy management systems, which reduced diesel consumption and carbon footprint for offshore drillers affordable products, which can be used to retrofit existing capacity to improve its attractiveness in the marketplace.
Lastly, with respect to our outlook for.
For the year, we're prepared to endured continued levels of reduced activity in North America with a meaningful market recovery unlikely to take hold before 2021, the kind of market that suits affordable fit for market solutions International activity continues to be a bright spot as we enter 2020 for inovios customers in the middle East and other regions around the.
World look to harness the technologies that enable to us unconventional revolution.
Where our rig technology segment is experiencing limited demand for new equipment in North America were scheduled to deliver multiple new rigs and rig upgrade packages. This year to the middle East as several countries in the region seek to upgrade their fleets. We're pleased with our progress on our Saudi joint.
Venture and expect to begin delivering the first of 50 modern highly efficient super spec rigs to the kingdom in 2021.
Offshore drilling and production continues to grow at a measured pace, our wellstream processing business and industry leader in production processing technologies, including Monto ethylene glycol regeneration units is tendering at twice the pace.
That was at this time last year indicative of greater activity in the offshore.
As a world continues to learn more about the Corona virus outbreak. We're hopeful first that authorities around the globe, we're able to ease the suffering that is causing so many we also hope that its impact on the world's economy broadly and the oil and gas industry, specifically is short live but we're realistic.
Sticking acknowledging that globalization leaves us exposed to market uncertainty as it does for other industries, we expect that our scale and global footprint will help us mitigate any direct supply chain repercussions, but the situation. Nevertheless remains fluid in early 2020.
Finally, before I hand, it over to Jose I'd like to finish where I began.
If I.
Let me anything from business, it's to be skeptical skeptical of conventional wisdom, because collectively we are all well frequently wrong I.
I'd be surprised to see a robust global recovery emerge in the oilfield in 2020 or even 2021. So we are managing the business. Accordingly, However, I do think a recovery will emerge when no one is predicting it the only fact sanofi.
Certain is that the oil industry has seen global growth in demand for almost every single one of its 160 years and at the industry has always been highly cyclical. The current time feels an awful lot like the 19 nineties. When then as now capital providers to oil and gas for fatigued and frustrated another period of capital starvation and then.
And as now the industry responded by trimming overcapacity history doesn't repeat itself, but it does rhyme and I'm encouraged that that here in the six year of the downturn the oil and gas industry is serious about reducing a structural oversupply.
There is a parallel narrative embedded in conventional wisdom about a looming energy transition one that fully displaces fossil fuels and therefore.
For one that likely further diminishes the option value of oil field assets at least in the mines of some investors while I'm confident me in kind of will transition a better forms of energy in the future the shape and pace of that transit transition are probably going to surprise us all in the near term oil and gas remain critical fuels that play key role in for instance air travel.
And feeding the planet so they will be part of the energy mix for many years, perhaps generations to come.
Nevertheless, an energy transition is emerging as potentially the most valuable and interesting business opportunity of the 20 Onest century.
So there is one more small but important element to our strategy, which is figuring out how we can capitalize on this and how weak.
Can make money by facilitating it.
Quietly launch this initiative a few years ago to play offense, rather than defense against this emerging backdrop.
We're not spending much money in this area, but I have been very encouraged by what our teams are developing and hope to be able to share more with you on future calls about the opportunities emerging for it will be in this space.
To our employees listening around the way.
Thank you for all that you do your resiliency or your dedication your hard work made a tough year, a great year for innovative and Jose and I could not be more thankful to have you on our team.
With that I'll turn it over to Jose.
Thank you Clive.
These consolidated revenues increased 155 million to 2.28 billion or.
Or 7% sequentially as the continued momentum in international and offshore markets helped drive a 15% sequential improvement in international revenues more than offsetting the impact of a rapid decline in north American activity levels during the fourth quarter.
EBITDA increased 26 million sequentially to 288 million driven by strong.
Operational performance and continued progress on cost savings initiatives, partially offset by favorable project closeout variances from Q3, not repeating and a less favorable product sales mix in our completion and production solutions and rig technology segments.
As Clay mentioned, we continue to make progress on efforts to rightsize, our business and improve.
Once these across the organization and expect to realize another 24 million in annualized cost savings in the first quarter or a 6 million dollar improvement in Q1 over Q4.
We've also been reducing the working capital intensity of our business, we converted 246 million of working capital to cash in the fourth quarter.
Order and generated 473 million in cash flow from operations after deducting $67 million of capital expenditures free cash flow for the quarter was 406 million, bringing our second half 2019 free cash flow to 689 million significantly exceeding our target.
Despite our expectation that capital expenditures for Inovio will increase to around 325 million in 2020, as we ramp spending on our new rig manufacturing facility in Saudi Arabia. We believe we will increase free cash flow by at least $100 million year over year and that working capital will be a source of cash for anchovy and 20.
Morning.
During the fourth quarter, we took measures to further strengthen our balance sheet by redeeming a billion dollars of senior notes due December 2022, and issuing $500 million new senior unsecured notes due 2029.
These transactions extended the maturity of 500 million of existing debt by seven years and.
Our debt by approximately 500 million, leaving us with $1.989 billion in gross debt as of December 30, Onest cash flow generated in Q4 allowed us to reduce net debt to $818 million at yearend.
Our actions demonstrate what we've long said the defending the balance sheet is our top.
Capital allocation priority. Our actions are designed to ensure anybody can successfully managed tumultuous market conditions and provide the flexibility to be opportunistic with compelling high return investments that we may identified.
As you know NPV has a share buyback authorization that is contingent on the company achieving gross debt to annualized EBITDA of.
Less than two times, if 2020 continues to unfold as we expect we will likely begin stock buybacks later in the year.
A few housekeeping items before we dive into our segment level results. During the fourth quarter, we took 537 million in mostly non cash impairment and other charges due to the further deterioration.
In North American market conditions in our ongoing restructuring efforts lower intercompany sales from cross segment projects resulted in a $3 million sequential decrease in revenue eliminations.
In the first quarter of 2020, we expect intercompany sales to remain in line with the fourth quarter of 2019.
Other expenses increased.
$44 million sequentially and included 26 million in expenses associated with the retirement of $1 billion of our 2022 notes and a $14 million increase in foreign exchange losses, and finally, while our effective tax rate may continue to be volatile over the near future. We expect our tax rate will average approximately 35%.
For 2020.
Moving to results from operations are Wellbore technologies segment generated 764 million revenue in the fourth quarter, a decrease of 29 million or 4% sequentially.
Revenues from North America declined 13% slightly more than the fall off in drilling activity, while revenues from the segments.
Actual operations increased 7%.
Despite the decline in revenue EBITDA for the segment increased by 10 million sequentially to 143 million, primarily due to the successful implementation of cost savings initiatives and structural improvements to operational efficiency across the business units in this segment.
Our rate hike log drill bit.
Business posted a less than 1% decline in revenue due to continued weakness in the north American market that was mostly offset by growth in most international markets and continued market share gains in the us or high performing bits are allowing us to gain share and preserve pricing in a competitive market.
Revenues in our downhole business unit fell 12%.
As reduced demand and increased pricing pressures in North America were partially offset by higher revenues and most eastern hemisphere markets. Despite the challenges in the North American market, we continue to see healthy demand for our leading edge motor elastomer and other technologies, including our select shift adjustable motors, which are enabling customers.
First complete single run wells with greater consistency and reliability.
During the fourth quarter, we helped to customer in the Marcellus basin drill a record setting 19132 foot single parent well or MD Taco business unit realized a slight increase in revenue as the contribution from our growing number of drilling automation projects.
In the Norwegian let's see more than offset a decline in revenue for MB tacos business in North America.
Our twob scope business unit saw revenues fall, 5% sequentially revenue from the business units coating operations were down slightly in inspection service revenues fell 6% as lower drilling activity levels in the us.
And holidays reduced output for mills and outside processors.
Revenues in our Wellsite services business unit declined 12% sequentially on fewer us fluids jobs, but the units core solids control business only experienced a 5% sequential decrease in revenues. It's us operations performed in line with 11%.
All off and drilling activity, but was partially offset by growing opportunities in international and offshore markets. We're encouraged to have begun working on several projects in the Gulf of Mexico recently in addition to seeing rising demand overseas.
Our grant Prideco drill pipe business realized a sharp increase in revenues in the fourth quarter as we.
Shift large volumes of high spec drill pipe for international markets. Additionally, as was the case in the third quarter more than 50% of the business unit revenues were derived from offshore products, while orders for drill pipe in the U.S. have been sparse over the past few quarters customers Drillpipe inventories that we hold in the us or at the lowest.
Levels in recent history.
We believe any material increase in drilling activity will require a healthy increase in orders.
Meanwhile, as international customers restock diminish inventories, we continuously rising demand for our delta drill pipe connection technology.
Looking into Q1 for the Wellbore technologies segment, the Corona virus oil prices. These.
Banality and evolving MP budgeting practices, all remain wild cards, but at this time, we expect revenues for our Wellbore technologies segment will decline between 6% to 12% with decremental margins in the mid 30% range.
Our completion and production solution segment generated 799 million in revenue in the fourth.
Quarter, an increase of $71 million or or 10% sequentially growing demand from offshore and international markets was partially offset by lower demand for completion equipment us land markets EBITDA increased $14 million sequentially to 96 million or 12% of sales incremental margins were limited to 20% as.
As modestly higher sequential cost savings were offset by favorable credits related to close out projects in Q3 that did not repeat in the fourth quarter.
Segment began realizing a considerable increase in orders during late 2018, largely driven by offshore and international projects. This trend continued through the fourth quarter.
The resulting in orders of 502 million and its fifth straight quarter with a book to bill in excess of 100%.
While the project pipeline remains robust for 2020 at this point, we expect lower orders in the first quarter due to the timing of specific projects.
Our fiberglass systems business unit posted an 8% sequential improvement in.
News TV in the highest levels of revenue in its history.
Increased deliveries of Spoolable pipe from our new manufacturing plant and mom, Saudi Arabia, and Marine scrubbers system components needed to retrofit vessels for IMO 2020 compliance drove the sequential growth, but was partially offset by rapidly contracting demand in North America orders decreased.
10% sequentially.
We expect the need for additional scrubber systems to remain robust with experts estimating that owners of shipping vessels can achieve paybacks on their investments in less than a year based on current price spreads between low sulfur and traditional bunker fuel.
Or intervention and stimulation equipment business realized a 3% sequential increase in.
Revenue on strong year end shipments of coiled tubing and wireline units. However margins decreased roughly 100 basis points on less favorable product mix as revenues from pressure pumping aftermarket parts and services declined to a level there is less than half its recent highs.
Results from this business unit remained depressed due the structural overcapacity.
Steve.
The North American completions market. However, the business continues to advance as technological leadership by assisting our customers and finding new less capital intensive ways to improve profitability for themselves and their end customers.
Our fracmax big bore quick latch and Frac whos products or examples that are lower cost solutions for.
Improving operational efficiencies and safety in a cash constrained environment.
Business is also focused on pursuing opportunities in other markets such as the Middle East Latin America in China, where the development of tight and unconventional natural gas formations is driving equipment needs. The mirror what is used in North America.
In the fourth quarter.
We booked in delivered a large package of high pressure equipment to an operator in northwestern China, where there has been a rapid increase in the amount of hydraulic fracturing activities and is therefore experiencing a corresponding increase in demand for high pressure flow line equipment in the Chang cleaning and thing Jang gas fields.
Our process and flow.
Jeez business unit realized revenue growth in each of units major product lines units production midstream product offerings saw sequential decrease in demand in North America that was more than offset by large shipments pump packages to India and an uptick in sales of production chokes, including the first batch of chokes built in our new manufacturing facility into.
Saudi Arabia.
Business unit also realize its third straight quarter of improved results from its offshore market focused wellstream processing and LPL turret mooring product offerings, primarily driven by growing LNG related activity headlining the order book was a model ethylene glycol regeneration in reclamation unit for an LNG project.
In Mozambique, and in order for our newly developed electrostatic call lesser technology NPAC that will be installed at the Eleanor Johan Sverdrup.
Tendering activity for the offshore market remains the strongest in recent memory, which is reflected in the businesses ability to post a book to bill in excess of 150% and.
It should begin to allow for incremental pricing improvements during the year.
Our subsea flexible pipe business posted a 15% sequential increase in revenues, but at low flow through as the market for flexible pipe remains very price competitive.
Bookings improved from the third quarter generating a book to Bill, 134% and included more than 56 miles a.
Couple pipeline systems for our project in the North Sea.
Our team continues to use this technology advantages to focus on higher value add projects.
For the first quarter of 2020, we expect revenues from our completion and production solutions segment declined 10% to 15% sequentially with decremental EBITDA margins in the upper 20 to lower 30.
Went range.
Our rig technology segment generated 759 million in revenue in the fourth quarter, an increase of $110 million sharp increase in land rig equipment sales, including sales of older inventory at low margins and improved progress on offshore projects drove the 17% sequential improvement revenue. However.
However, an unfavorable shift in product mix together with old inventory, we've moved at a discount were only partially offset by cost savings, which limited incremental margins and resulted in a $7 million increase in EBITDA to $112 million or 14.8% of sales.
Orders declined $10 million or 5%.
211 million in the fourth quarter and total segment backlog at year end was 2.99 billion.
Sharp improvement land revenues resulted from a significant increase in year end equipment deliveries and better progress on land rig projects during the fourth quarter, we booked orders for six land rigs destined for more multiple customers in the middle East.
With three of the rig orders specifying or Novos control system.
We are seeing NFC is more frequently pushing their contractors to provide high spec land drilling rigs that can meaningfully improve performance and operator returns the growing number of international operators pursuing development of tight gas formations is accelerating the demand for this equipment and similar to what we're seeing in our.
Intervention and stimulation equipment business unit. The equipment. These customers are seeking is begin to look like the high spec equipment found in West Texas.
We've seen this in Argentina for several years and are now seeing customers across the middle East and Asia pursue 1500 horsepower rig packages with Threeg handsets that are almost identical to what we are selling into the.
Yes.
During the fourth quarter, we also realized a substantial increase in revenues from deliveries offshore capital equipment and from improved progress on our offshore wind construction vessel projects. We continue to see gradual improvement in offshore markets with steady demand for rig equipment and technology upgrades as well as a growing opportunity set for our marine.
Action business, including replacement cranes for F dsos equipment for Pipelay vessels and additional offshore wind construction vessels.
No V continues to leverage our core competencies to assist in the development of solutions that help our customers reduce their environmental footprint will also improving operational efficiencies in the fourth quarter, we introduced our power blade.
Grid system that is currently being installed on a rig in the Norwegian Continental shelf power blade allows drilling contractors to reduce their carbon footprint and fuel cost by recycling the captured energy back into the rig we estimate that the power blade system will allow the drilling contractor to reduce diesel consumption by 771000 gallons per year saving.
$1.75 million in cash, reducing a 110 tons of nox emissions per year, and reducing reducing their carbon footprint or cotwo emissions by 6200 tons per year.
Revenues from our rig aftermarket operations were flat sequentially due to a decrease in spare.
Part sales that resulted from budget exhaustion that said and with our customers near the end of the year. Additionally, the significant increase in the number of rigs enrolled in our total cost of ownership programs moderates. The Q4 uplift we've historically seen in our service and repair operations. We've increased the number of offshore rigs in our programs to 83 at year end.
Increase of over 2.4 times since the end of 2018.
In the first quarter of 2020, we expect lower deliveries of capital equipment to be partially offset by a slight increase in aftermarket sales, resulting in a 10% to 15% sequential decrease in revenues and a 100 to 300 basis point reduction in EBITDA.
Vince.
Well, we know there is much more work to be down in 2020, we were pleased with a strong finish to 2019 and the progress the organization made on key initiatives throughout the year actions taken by the talented hard working employees of Inovio allowed us to balance our efforts to reduce cost and improve operational efficiencies with advancing our.
Knowledge and supporting our customers with cost effective solutions those actions have and are well positioned for the future.
With that we'll now open the call to questions.
Thank you as a reminder to ask a question you any tapas style one on your telephone.
So with all your question pest upon key and.
At this time, we ask that you. Please limit yourself to one question and one follow up please stand by when we come out again they've asked.
Our first question comes from Brian.
With Tudor Pickering holding company. Your line is now open.
Hey, guys right borrowings.
Recognizing the extra uncertainty injected into.
The market by the recent pullback and Brent prices could you just frame for us at a high level. How you think about the international growth drivers among the three business segments again to set a high level.
Yes were.
Big picture.
North America, we expect to I think like everyone else to endure.
A slowdown continue slowdown in activity and we're preparing for that but we're more much more encouraged overseas and in.
Offshore markets in particular so.
That continues to move higher and what we're hearing from our customers is that they're moving forward with a lot of projects that they've been working on reducing costs and engineer.
During in over the last several years and so.
We're excited about that for 2020 and then the Middle East has has continued to remain very active and as you're well aware we've increased our our presence in.
Those markets and are encouraged by.
The needs that that our customers have therefore equipment and technologies that we provide so generally north America.
Drifting down in.
Offshore and international moving up.
Current oil price volatility notwithstanding our.
Thanks.
Second question.
Just again and qualitative terms because as you think back on the five incremental growth drivers growth opportunities that you guys laid out back at the 2018 analyst day, just from your perspective, how things are progressing again, notwithstanding the near term North America headwinds British how those that played out relative to your expectations well.
The main the main thing I'm. Most proud of is our continued investment in technologies and products through the downturn and we certainly highlighted that in our analyst day, which was.
Well over a year ago and in a very different sort of commodity price price environment, but I look back on the progress we've made.
Since the downturn started.
I think probably introduced more new products and new technologies than any of our peers out there we launched our.
Now to soda test rig.
At the very end of 2014, and Thats been responsible for dozens of products and technologies, we've come out with.
Very impactful digital solutions through this time period.
Predictive analytics for Vo piece for example, or Novos operating system go connect.
Digital products things like that and so I think I think weve.
Balance the cost cutting and the retrenchment this has been necessary.
With continuing to invest in the long term future of the company and and the technologies that are going to make that that happen and so I'm very proud of our organization in terms of progress on these things and I think.
A lot of ways through the downturn, we've been focused on.
In addition to efficiencies and getting better working capital.
Management are really laying the foundation for what the next up cycle looks like.
Thanks I appreciate it.
Thank you bye.
Thank you.
Next question comes from Tommy Mall with Stephens, Inc. Your line is open.
Good morning, and thanks for taking my question.
Our topic.
So.
One of the to touch on the portfolio review that you've been undertaking for sometime now.
It it's clear it's a returns driven analysis that you are running through.
So my question is as you're evaluating.
What the keep and what to prune.
How many years forward are you willing to look for.
Business line or unit.
To hit the kind of returns that you'd like to see to keep it in the portfolio and the reason I'm asking is.
Clearly offshore in international have some momentum.
But we need to play that forward for some.
Reasonable time horizon to get comfortable to where you are willing to underwrite. So anything you could do to help us frame that up would be helpful.
Yes, that's a that's a great question I will let Blake chime in here in a minute because he is heading up this effort, but I would I would say.
It depends on the potential to achieve what we always amax anyway.
Allocation of capital, which is a defensible.
Business that has demonstrably competitive advantage over the long hole is the ultimate goal and so when we look at these different businesses and kind of the current state of affairs in the current state of their markets and so forth, we take a view necessarily on what's the likelihood probability that we'll get to that state.
That defensible competitive advantage in a reasonable period of time, and so I would say our patience level is somewhat dependent upon the potential payoff and attractiveness of that particular.
Business opportunity, but it's really kind of opportunity by opportunity that we that we.
Yes Tommy.
We touched on this last quarter, but this is not just a quantitative exercise, but also qualitative and so we just take a step back and say like.
If this business is below the return threshold, but it's been bouncing along the bottom of the down cycle and we could see clear.
Tangible path to hate it the orders of completely pivoted on this one and done a couple 180, we're not going to sell that at the bottom of its earnings potential.
Now I will say, we have quite touched upon our patients level for a lot of these that did fall below the threshold, we were able to implement some discrete action plans that are in process right now that we will.
Most of these action plans only take about three to nine months. So just more self help which is part of our job is managing these businesses.
And those that we find our.
To be on fixable.
Those will be evaluated for divestiture or just pure exit yes, that's our that's our first inclination is around.
Fixie sinks and run these things and so.
Are there steps we can take.
First so that's probably what were default is.
For business as a fall below the threshold initially.
Very helpful. Thank thank you both and as a follow up I wanted to double back on the international and offshore outlook.
Again.
Looks like.
We'll be up.
2020 versus the prior year just in terms of the addressable market there are.
Are there any particular.
Aspects, where you think and of the could maybe outperform the broader market business lines or or parts of the world where you're most excited that you would.
Call out for us.
Yes, probably probably what we're we're certainly well known for.
Drilling equipment offshore rigs all the all things drilling, what's probably less well known by investors on Wall Street is the fact that we've sort of quietly assembled a really interesting portfolio.
Of products that are more focused on production.
Going into.
Fpsos fix platforms.
Processes around production in terms of sand separation oil water separation Mano Mano ethylene glycol regeneration units things like that and so.
So I'm really really proud of that portfolio and I think theres really interesting opportunities.
That are going to continue would emerge.
In the offshore.
Where were Inovio is likely to play maybe a little larger role than we would have been prior upturn.
Thank you Thats all.
For me and I'll turn it back thank you.
Thank you. Our next question comes from Chase Mulvehill of Bank of America. Your line is now open.
Hey, good morning.
So I guess, you know clay you talked a bit about kind of energy transition.
So I'm just kind of curious.
If you can kind of flush it out a little bit more here in can you talk about.
Your strategy.
Towards energy transition and you know maybe organically, what you're doing and also maybe on the M&A side.
Yes.
First I'd say there.
We have a presence in this space going.
Like many years and in fact, many decades with respect to geothermal for instance, where you'd probably be hard pressed to funded geothermal well that doesn't have the technology involved with it anywhere in the globe and secondly, I think last year, we had a couple of.
Announcements around.
Offshore wind.
Installations vessels, which is the space that Inovio has has a very.
As a market leading position in terms of the technologies and vessels install offshore wind turbines.
And so we've been renewables.
For going back along a long time my comments in the.
Care remarks, though really or just.
So let you know that we're thinking about other ways to participate in this and viewing it as potentially a terrific business opportunity I think about energy energy really is all about infrastructure about capital deployment historically.
Pivoting from one form of energy.
To another is sort of a decades long process, but involves enormous amounts of capital involves project execution and involves application of technology and involves creative ideas.
If he has a lot of those in abundance and so I do think there's a role here that we can play.
And in helping make that happen, but what I want to stresses.
We're aiming at at capital returns coming out of that at.
The opportunity to develop technologies and and.
Services and methods that help in that transition, but but also our an.
What returns for our shareholders and so that's how I am framing. This I don't have a lot more to add to that other than what I said earlier some ideas in the space that we think are unique potentially can turn into really interesting and profitable businesses and but we generally don't.
Well get into the details until.
Where we are.
Turning to making revenue for these things.
Okay. Thanks Bye.
Yes, if you kind of come to the supply chain a little bit we think about the accrual of ours. You know you mentioned you a little bit on Theres, obviously, a direct impact can maybe maybe some direct and indirect impact from as we think about the supply chain being.
So interconnected.
Certainly segment that we should look at and try to understand better about the impact from kind of what's going on over in China.
And then help us understand what how much of that is actually in your guide their Blake.
Hi, Jason today I'll feel this.
And quite can chime in but no. It is it is a situation that is evolving rapidly and it's something that we're monitoring very closely.
So our part I think our base exposure to this is more from the supply chain standpoint than it is from.
Customer revenue opportunity set but as we did talk about.
And some of the prepared remarks.
China is an emerging and growing market for and production which were having.
More and more success with our differentiated technology offerings.
We do have a very global and diversified supply chain, but as we sit here today and we're looking at.
At.
The next and extended shutdown.
Of the Chinese Chinese new year holiday system.
That is that is impacting our ability to produce certain products to a certain degree at this point, we still have a lot of lot of two to make up lost ground.
But if this were to extend much longer.
Are there areas for instance, with our fiber glass business, where.
We have limitations in terms of the amount of resin that's on the ground out our manufacturing plants right. Now. So there is some some risk there, but so far so good similar type of exposure related drill pipe manufacturing.
Other businesses to a lesser extent, but so far we think our team is managing through it pretty effectively.
But still lot of uncertainties related to the extent to which this will impact operation. Yes, yes. Those are sort of first order impacts equally concerned about second quarter impacts which is the.
Impact at this hasn't global demand for oil the what it's done in the commodity price markets and and more to the point kind of what it does to the psychology of oil and gas producers as they think about how much to drill.
In 2020, so it's as we said the situation remains very fluid.
Yes.
Understood Alright ill turn back over thanks.
Okay.
Thank you. Our next question comes from Scott Good, though with Citi. Your line is open.
Yes, good morning, I Scott Scott.
Turning to CMP, how should we think about the CMP margin profile over the course.
We have 2020, I'm just thinking about the interplay between the mix shift in the revenue stream towards more international and offshore but also the cost out program.
I know you don't want to provide convey specifics beyond one quarter out, but just any general color on how that margin profile should progress given.
That interplay.
Yes got it it's Jose also I'll start off on this one so we're not going to really deviate from the typical I would describe in terms of thinking about margin progression for the cap segment, which is really think of it in terms of incremental margins.
Basically dollar dropping between 25.
Assessed 35 cents down too.
EBITDA line, and obviously that is dependent.
On the mix of the business and really what you're getting at is with the.
Decline that we're saying and.
A man for equipment in the North American market.
And you know the solid growth that we're saying.
Overseas, particularly for offshore.
Markets.
Typically some of those offshore projects.
In the early phases of recovery have been.
Slightly more challenged from a margin perspective, but as clay alluded to I think we touch on a couple times during our.
Prepared remarks.
Now with the amount of tendering activity, we think we're starting to now see more opportunities for pricing improvements, but here as we stand today.
Let me think about the latency time associated with some of these offshore projects, where they sort of reside in our backlog.
A bit longer than the shorter cycle.
North American centric product offerings, so what's going through.
Converting to revenue right now is low to large degree stuff that was booked 912 months ago and so as we start.
Capturing better.
Pricing.
You should see.
Incremental margin profile improve along with.
Being further supported by the cost cutting initiatives efforts that we had underway.
Got you, but overall for the year do you think that we should be thinking about that are lighter than normal margins.
We're getting from the pricing trends to end up doing closer to the normal incremental for the year.
I think on a blended basis, yes, it's more if theres a lot to put a lot of parts and pieces. So I would assume.
Fairly normal.
Okay.
And then maybe if you could just give us a quick.
On the the rental.
Initiative that you guys.
Push forward a couple of years ago.
Particularly on the drilling tools side of the business, but more broadly just an update on the.
Rental model initiative, you, particularly as the international markets.
For the 20 or 20.
Scott you're talking about our drilling tools business.
The rental we have a couple of general business around the no. We've I think you're talking about the investment we've made in directional drilling technologies rotary steerables.
And select shift and would tell you that we're continuing to gain traction in that we've.
But.
Three different rotary steerable.
Tools in the marketplace, including what we think is the lowest cost.
Very highly differentiated rotary steerable tool, our select ship motor that we.
Introduced.
Last year.
Which is the adjustable bed.
Housing motor that could be adjusted down hole, a very large operator in the US is testing that this week, we've had a lot of excitement around that.
MWD tools also that we have in the in the space. So we're continuing to make progress in here, but that strategy was built on the recognition that unconventional drilling.
Vishal shales really rely on.
Geosteering on horizontal drilling and.
It is it kind of enabling a key technology for unconditional technologies or after vishal shales and innovate.
Has the opportunity here to be.
Larger provider of technology in that space.
Yes.
And then maybe one thing I'd just add just so there's no no confusion about it so as clay mentioned there is it theres a number of areas where we do.
Provide rentals of equipment.
This space that we're talking about a combination of both rentals and sales, but just want to make it clear, yes that were somewhat agnostic on that but we do want to make clear is that.
This is not a service that we are providing we are enabling those directional drilling service companies out there yes.
Got it appreciate the color you bet. Thank you.
Thank you. Our next question comes from Kurt Hallead with RBC capital markets. Your line is open.
Good morning, everybody.
Okay, great. Thanks for that historical perspective resonates with me that's for sure.
So in the context of what you guys see going forward and clay, yes, it'll be though has been at the forefront of evolving on the technology front and creating some value propositions.
That ultimately oil companies and and service company.
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Find useful.
Throughout that teaser about some things that you're working on.
In the Hopper.
Yes.
Yes, maybe elaborate a little bit maybe give us a little bit more of a teaser as to what kind of value propositions you maybe looking at.
For the next leg of growth for.
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On our renewables I'm going to dimmer on that.
On the.
Are you talking about renewables, you're talking about treaters traditional oilfield, Kurt well, yeah, I'll I'll I'll go wherever you want to take it clay. So if you want to dimmer on renewables that well they matter, we like we'd much prefer to talk about things are in the marketplace.
That are starting to get get traction and so in terms of what I'm most excited about really.
The predictive analytics products that we introduced a few years ago continue to gain traction I think jose referenced the growing number of rigs in our programs.
We're monitoring equipment and and able to.
Two.
Prediction advance.
Operational challenges before those happen Novos operating system for drilling rigs, both land and offshore is gaining a lot of traction.
And really beginning to contribute meaningfully our wire drill pipe.
Hello serve.
Data transmission downhole date of transmission technology, combined with machine learning and Intel and artificial intelligence is improving.
Results for operators in factors are a great article in this month's journal patrolling technology about what we've done for us for you estriol or in that space. So.
I again, just a reader reiterate could not be more proud of.
For the enhancements that we have going on and those are actually just a few of many many things that that enter in he has introduced through the through the downturn.
Got it and then just a follow up and the context I appreciate that color by the way and the.
Thanks for the capital allocation you indicated that go if all goes well it could be potentially position to kind of restart of share repo program, just kind of curious as to the decision framework between the say that share repo versus maybe.
But bumping that dividend a bit any any insight to be.
Appreciate it on that front well. Thank you, yes, with with respect to our stocks been trading.
We think there's good value in that and have gone through that it's in a great deal the tail with our board will continue to look at it by the way, but where I think the way we view that right now is that share repo repurchase is preferred.
But.
The key thing is that our capital priorities remain unchanged and Oliver you look back in 2019, all of our actions were really geared towards continuing to improve we implemented a lot of cost savings that are driving better EBITDA.
We refinanced and pay down a lot of our debt.
And so we're continuing to work towards being in.
The achieving the credit metrics that we talked about that will pave the way for us greater level of capital returned to shareholders.
Okay. Thanks appreciate that.
Thank you. Our next question comes from Sean Meakim with JP Morgan. Your line is now open.
Thank you good morning on Sean.
So I'll try to ask the prior question just with the different angle. So in terms of the free cash guide for 2020 and uses of that cash. So we noted buybacks could be coming later this year, obviously dividends while covered.
Capex media that elevated this year, but thats discrete.
Very specific.
Also in effect supplement some of your Capex spend with technology bolt ons over time, it's been a big part of the strategy. This cycle in particular is something like $200 million a good run rate for for bolt ons, just I'm trying to capture other uses of cash that could come before the buybacks and 20.
Yes, that's a great point, Sean we're always looking at.
Opportunities.
In the M&A space, and I think you've been pretty transparent about that and so what I'd say is in 2019 in the sort of fits with my prepared comments around the.
The fact that oil field assets.
In equities I've got a lot cheaper.
In the current environment and so.
We're always looking at that.
Kind of what's the.
Next best application of.
Shareholders capitals, and and to the extent and that M&A outlook changes from time to time.
Yes.
As we kind of kind of work through the year.
This is Blake here I, just like the AD that.
We both clay and our board gives us the.
The.
Flexibility like we don't have a run rate on like a target for acquisitions for it for your every every acquisition is an individual investment decision.
We phrase we also compare relative to the investment in our own stock. So at this point like.
Think there's a lot of opportunities out there, it's a very crowded field of sellers right now and a very limited set of buyers.
So that we think that there could be some attractive valuations out there, but we're going to be very very patient.
Got it thank you for that.
That's helpful feedback.
And then so well done to see all the efforts on working capital start to come through and convert the cash and Thats been.
Top priority, especially for Jose so with the four key result, and your expectation that working capital. The a source of cash again in 20 I'm just curious if any updated thoughts on seasonality as we.
We go through the year in terms of working capital and then just how you're targeting working capital efficiency by end of 2020 or 21, maybe.
Any any.
Updated thoughts around working capital of sales or.
Dsos inventory turns dps et cetera.
Yes, I think we'll get super granular in.
Specifying the targets, but what I would like spend just a moment talking about is.
We are seeing is a lot of good progress and a lot of good momentum by a lot of hard working people across the organization. We've been added a while but obviously the results really started to come through.
And the second half of 2019, and we have a lot more work to do but with the momentum that we have and opportunities that we've identified.
We are confident.
Our ability to harvest more cash from our working capital and just become a lot more capital efficient as we progress through 2020.
We have.
Finished 2019.
With that working capital to revenue run rate, just a tiny bit over 30%.
Which was a good outcome for us.
Now what we're really going be focused on during 2020, you asked the question related to seasonality.
It's really going to be.
More focused on kind of the average level of working capital intensity really throughout the life of the organization. So lot of progress through the course of year, but.
Look at average for 29 team average the starting balance sheet ending balance sheet apply the total annual revenue to it that was.
37%, so we're trending in the right direction, but we certainly want that averaged to come way down during the course of 2020 and that would put us at Q4 run rate that will be.
Better than where we finish this year.
Fair enough that's really helpful. Thank you you bet. Thanks, Sean.
Thank you.
Our next question comes from Vebs Vaishnav with Scotiabank. Your line is open.
Hi, Thanks.
Hey, good morning, and made good quarter.
I guess just a clarification you guys talked about 230 million of cost savings is I guess I just wanted to confirm that that's competitive ended at 200 million.
The number.
Yes, yes, we found another $30 million in annualized both those numbers are annualized.
Cost savings as compared to our structure in the first quarter of 2019.
Got it okay.
CMP artist you talked about it could be.
Somewhat lower in one Q can you just talk about what what kind of visibility you have beyond that and that's both for CMP August and Dick artist.
Getting the can we sustain what we saw buying the four skew goodness stand what be selling to play 19.
Q4 was our thank our first quarter in a row of book to Bill North of one for completion of production solutions along a lot of these orders, particularly for offshore projects. We have a lot of lead time into because a lot of work that goes into them, sometimes there's feed studies behind them things like that and so.
A lot of that kind of near term the.
Turn that we expected Q1 and orders and completion of Russian solutions is really just the timing of how those things fall and.
But that notwithstanding what I'm, most encouraged about as affected our our tendering activity across the.
Portions of completion and production solutions are focused on the offshore.
He is very strong.
I think we mentioned that are PFT group for instance.
The pipeline there is twice what it was a year ago and so it feels to us like.
Offshore.
Infrastructures continue continuing to move forward and that so that's a really good.
I think to move into 2020 with respect to orders for completion production solutions.
Great.
Maybe just one last question for me.
On the guidance by both itself. It seems like yes, you guys did make on deep dive down revenues for the question was his guidance of five to seven certainly not.
Different from the guidance you talked about not to make on declined 11%, so right exactly that and for Q.
And then set price by the guidance down six to 12 question for one Q I think like you talked about China and could have yet back could you just basic what is what guiding that.
Nick and how should we think about not that many comments is international into guidance.
Part of the part of the Overachievement in Q4 was.
Higher drill pipe sales than we had expected going into the quarter part of our expectation for Q1 is that turns around that's that's a little lumpier than some of the other businesses within wellbore.
Technologies.
Yes, I'd also add you look at the guidance across the board related to sequential decline from Q4 to Q1.
We do.
Look back the last couple of years in terms of the fall off that we've had from Q4 Q1.
Built like that the MP budgeting.
Both within North America, and the international markets is getting a little bit more prolonged gets certainly gets amplified when you add and a pullback in commodity prices and the fear is related to the Corona virus. So.
That is.
Certainly.
Factored into to extend into the into the Q1 Guy down one more thing to our like rate hike analog business for instance has seasonality exposure in Russia.
The Rockies in places like that so there is just.
Our expectation is that that will those will all contribute to what were technologies moved down in Q1.
That's very helpful. Thank you for taking my call you back. Thank you.
That concludes our question and answer session I would now like to turn the call back over to Clay Williams for any further remarks.
I want to thank everyone for joining today and in particular I want to take the opportunity once you get to think any employees that might be listening.
Frankly.
Thank you for the great job that you're doing so I hope everyone has a great weekend. Thank you. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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Good day, ladies and gentlemen, and welcome to the National Oilwell Varco fourth quarter 2019 earnings Conference call.
Next time, all participants are in listen only mode.
Later, we'll conduct a question answer session and instructions will follow at that time.
Sure require systems during the call French Please press Star then yeah, well you've touched on telecom I am I know this conference call is being recorded.
I would now like to introduce your host for today's conference Mr., Blake Mccarthy, Vice President corporate development.
No that's relations Sir you may begin.
Welcome everyone to National Oilwell Varco Sport quarter 2019 earnings Conference call with me today are clay Williams, our chairman, President and CEO and Jose Bayardo Senior Vice President and CFO.
Before we begin I would like to remind you that some of today's comments are forward looking statement within the meaning.
Any other federal security laws.
They involve risks uncertainties and it and actual results may differ materially.
No we 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 forms 10-K, and 10-Q filed with the securities industry.
Range Commission.
Our comments also include non-GAAP measures reconciliations to the nears corresponding GAAP measures are in earnings release available on our website.
On the U.S. GAAP basis for the fourth quarter 2019, it'll be reported revenues of 2.28 billion and a net loss of 385 million or one dollar and one cent 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 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 you know these results continued to improve sequentially during the fourth quarter.
For 2019 as revenue increased 7% from the third quarter EBITDA increased to $288 million were 12.6% of revenue. Despite continued deterioration of the north American market. All three of our segments increased EBITDA sequentially on a year over year basis. You know he was able to post the increase in EBITDA all during.
In the fourth quarter of 2019, despite revenue being down more than $100 million from the fourth quarter 2018.
Aggressive cost reductions in facility downsizing contributed significantly to you know these improving financial performance and Jose and I will speak more to this and just a moment.
Revenues for the full year 2019 were 8.48.
In dollars he 0.3% improvement from the prior year for your EBITDA of $885 million declined 3% from the prior year.
2019 was a pivotal year for the energy industry, we entered 2019 with commodity an equity markets signaling strongly to market participants that growth for growth sake.
Without commensurate returns to capital providers would no longer be tolerated.
Sources of all forms of capital to the industry public equity private equity bank debt public debt became scarce and expensive as evidenced for example by the collapse in trading multiples of oilfield public equities in early 2019 at the time, we interpret this as youve.
Operation of a widely held narrative God, you conventional wisdom that a commodity price spike what Sunday, certainly just back to more prosperous oilfield and save us all.
Through the first four years or the downturn 2015 to 2018. This narrative was responsible we think for a significant structural option value component in equities and asset values in the oil field.
This makes sense to me because oil and gas industry has 860 year history of extreme volatility and sophisticated investors recognize the corresponding option value that goes with this volatility as the leading provider of capital intensive capital equipment oilfield service companies, we tend to watch trends our customers frequently rely on external capital to.
Body equipment that we provide them by the beginning of 2019 providers of external capital to oil and gas producers and service companies were exhausted tired of waiting patiently for recovery that felt like it continued to slip over the horizon. So the choke back on the capital that they were previously pumping into the operations of our customers.
No capital is to oil and gas what.
Oxygen is to the rest of US petroleum is arguably the most capital intensive undertaking of all industrial enterprises and oilfield services as probably second.
Operators react quickly when you choke off the air supply.
They pulled back hard on Capex budgets, particularly in the U.S. unconventional plays resulting in a peak to trough decline of 27% in.
The U.S. land rig count over the course of the year, while international offshore projects with favorable return characteristics continued to receive if I'd green lights.
The industry as a whole, particularly the U.S. finally seem to be resigning itself to the fact, the commodity price spike is not going to say today and the old way of doing business is not going to cut it.
I will unfortunately be lower for longer and that is the new conventional wisdom that emerged at the beginning of 2019.
I wanted to stepped through this perspective with you. This morning, because I believe it has important implications for our company in our industry over the next few years and this perspective as guided our strategic decisions through 2019.
First with.
Respect to the elusive recovery through this year of capital austerity, some might say capital starvation I've been struck by the number of conversations I have had with other oil patch old timers, where we agree that this lack of capital is as bad as anytime we sold during the 900 eightys or 19 nineties.
They are in light of seeds of a return to prosperity.
The new Grim view that has taken hold is not driving the industry to reduce it structural overcapacity, taking actions that will return this industry to health asset retirements facility closures regional withdrawals exits from businesses and consolidations got underway in earnest in 2019, while individually none of these will heal the.
Based collectively they inevitably lead the industry to better discipline pricing and shareholder returns.
Sure. The task began materially back in 2015, we started reducing our overcapacity facilities footprint and SGN, a but our efforts were accelerated sharply beginning in 2019 as reality of the new market normal became apparent.
Our team has undertaken many difficult decisions, including pulling back from unprofitable markets and closing numerous facilities around the world some of which.
Then mainstays for decades.
Since 2015, we have close 483 facilities to shrink our own internal capacity to better fit market demand, we've adopted a more efficient shared services model.
In many regions and through the hard work of our team through this past year, we've established a clear intangible path to at least $230 million in annual cost savings as compared to the first quarter of 2019, thus far we have attained approximately 170 million in annualized savings up about $82 million sequentially.
In the fourth quarter.
And we continue to evaluate every opportunity to increase that number.
Second every product line no matter, how well established has fallen under the microscope of an in depth returns analysis those that do not currently meet our internal threshold.
Peter developed a tangible plan for near term improvement or had been.
Slotted for divestiture or closure.
Ultimately 2019 was a year about building and solidifying our staying power operationally, we're a leaner more efficient and more agile to react to the shifts in the market.
Third from a balance sheet perspective, we continue to increase the strength of our capital structure in order to maintain the flexibility to act opportunistically.
During the fourth quarter, we called $1 billion in debt due in 2022, repaying a portion with cash and a portion with longer tenor notes a new in a new issue that is due 2029.
Fourth we tailored our strategy to fit a world where oilfield services customers have limited access to capital commercially the one much of this.
Race during the period from 2006 to 2014, when we won a significant portion of the largest build out of oilfield service equipment. The industry has seen a generation, we deliver 379 offshore new build.
Drilling packages since 2006 for instance, so today, we benefit from having a largest installed base of oilfield equipment in the.
This enormous installed base gives rise to new attractive business opportunities that are unique to innovate aftermarket spares and services support software system enhancements the application a big data driven predictive analytics products to drive efficiencies the evolution of mechanization to automation of processes in the oil field for instance.
We are creating differentiated digital offerings built on over three decades of gathering big data in the oilfield through our MB Tyco products and he Hawk service offerings among others.
Due to our installed base of equipment that touches nearly every well site in the world, we're uniquely positioned as perhaps the only common thread between hundreds of unique.
Equipment suppliers with thousands of non standardized sensor tax.
Our new product development with capital scarce and oilfield equipment oversupplied. It makes it less sense for oilfield service contractors to spend millions of dollars on new units, rather we see the next attractive opportunities that's being smaller dollar investments that our customers can make in.
Bigger impact enhancements that will enable them to differentiate their equipment in a crowded marketplace. While there will be certain large newbuild project opportunities that arise even in this tough market, we will remain disciplined and we'll choose not to follow our competitors and doing the stupid stuff that desperate competitors inevitably do a strong balance sheet and a large.
All base of equipment, requiring ongoing OEM support is the best way to ride out an industry downturn. The good news for Inovio is that we have both.
New product development has zeroed in on bolt on products that carry a price tag our customers can afford with value added efficiency are useful life improving profile that they can justify to their shareholders.
I think in terms of track I'd tags for drill pipe monitoring and auto tallies on rigs Novos operating system enhancements that our customers can charge their oil company customers for.
New directional drilling tools like select shift, which have no similar appear in the marketplace power blade energy management systems, which reduced diesel consumption and carbon footprint for offshore drillers.
Affordable products, which can be used to retrofit existing capacity to improve its attractiveness in the marketplace.
Lastly, with respect to our outlook for the year, we're prepared to endured continued levels of reduced activity in North America with a meaningful market recovery unlikely to take hold before 2021, the kind of market that suit.
Affordable fit for market solutions International activity continues to be a bright spot as we enter 2020 for inovios customers in the middle East and other regions around the world look to harness the technologies that enable to us unconventional revolution.
Our rig technology segment is experiencing limited demand for new equipment in North America were scheduled to deliver.
Liver multiple new rigs and rig upgrade packages this year to the middle East as several countries in the region seek to upgrade their fleets. We're pleased with our progress on our Saudi joint venture and expect to begin delivering the first a 50 modern highly efficient super spec rigs to the kingdom in 2021.
Offshore drilling and production continues to grow at a measured pace.
Our wellstream processing business and industry leader in production processing technologies, including Mando ethylene glycol regeneration units is tendering at twice the pace that it was at this time last year indicative of greater activity in the offshore as a world continues to learn more about the Corona virus outbreak. We're hopeful first that authorities around the globe we're able.
The ease the suffering that is causing so many we also hope that its impact on the world's economy broadly and the oil and gas industry. Specifically is short list, but we're realistic in acknowledging that globalization leaves us exposed to market uncertainty as it does for other industries, we expect our scale and global footprint will help us mitigate any direct supply chain.
But the situation Nevertheless remains fluid in early 2020.
Finally, before I hand, it over to Jose I'd like to finish where I began.
I've learned anything from business, it's to be skeptical skeptical of conventional wisdom, because collectively we are all well frequently wrong.
I would be surprised to see a robust global recovery emerge in the oil.
Oilfield in 2020, or even 2021, so we are managing the business. Accordingly, However, I do think a recovery will emerge when no. One is predicting it the only facts I know for certain is that the oil industry has seen global growth in demand for almost every single one of its 160 years and at the industry has always been highly cyclical the current time fields.
An awful lot like the 19 nineties. When then as now capital providers to oil and gas for fatigued and frustrated another period of capital starvation and then as now the industry responded by trimming overcapacity history doesn't repeat itself, but it does rhyme and I'm encouraged that here in the six year of the downturn the oil and gas industry is serious about reducing.
And get structural oversupply.
There's a parallel narrative embedded in conventional wisdom about a looming energy transition one that fully displaces fossil fuels and therefore, one that likely further diminishes the option value of oil field assets at least in the mines of some investors.
Confident mankind will transition a better forms of energy in the future the shape and pace.
Of that transit transition are probably going to surprise us all in the near term oil and gas remain critical fuels that play key role in for instance, air travel and feeding the plant. It. So they will be part of the energy mix for many years, perhaps generations to come.
Nevertheless in energy transition is emerging as potentially the most valuable and.
Getting business opportunity of the 20 Onest century.
So there is one more small but important element to our strategy, which is figuring out how he can capitalize on this and how we can make money by facilitating it we quietly launch this initiative a few years ago to play offense red than defense against this emerging backdrop.
We're not spending much money in this area, but I have been very.
By what our teams are developing and hope to be able to share more with you on future calls about the opportunities emerging for Adobe in this space.
To our employees listening around the world. Thank you for all that you do your resiliency or your dedication your hard work made a tough year, a great year for innovate and Jose and I could not be more thankful to have you on our team.
With that I'll turn it over to Jose.
Thank you for life.
These consolidated revenues increased 155 million to 2.28 billion or 7% sequentially as the continued momentum in international and offshore markets helped drive a 15% sequential improvement in international revenues more than offsetting the impact of a.
The decline in North American activity levels during the fourth quarter.
EBITDA increased 26 million sequentially to 288 million driven by strong operational performance and continued progress on cost savings initiatives, partially offset by favorable project closeout variances from Q3, not repeating and a less favorable product sales mix.
And our completion and production solutions and rig technology segments.
As Clay mentioned, we continue to make progress on efforts to rightsize, our business and improve efficiencies across the organization and expect to realize at a 24 million in annualized cost savings in the first quarter, whereas 6 million dollar improvement in Q1 over Q.
Before we.
We've also been reducing the working capital intensity of our business, we converted 246 million of working capital to cash in the fourth quarter and generated 473 million in cash flow from operations.
After deducting $67 million of capital expenditures free cash flow for the quarter was 400.
Third and 6 million, bringing our second half 2019 free cash flow to 689 million significantly exceeding our target.
Despite our expectation the capital expenditures for NRG will increase to around 325 million in 2020, as we ramp spending on our new rig manufacturing facility in Saudi Arabia.
We believe we will increase free cash flow by at least $100 million year over year and that working capital will be a source of cash for Lv in 2020.
During the fourth quarter, we took measures to further strengthen our balance sheet by redeeming a billion dollars of senior notes due December 2022, and issuing $500 million.
You senior unsecured notes due 2029.
These transactions extended the maturity of 500 million of existing debt by seven years and reduced our debt by approximately 500 million, leaving us with $1.989 billion in gross debt as of December 30 Onest.
Cash flow generated in Q4.
Allowed us to reduce net debt to $818 million at year end.
Our actions demonstrate what we've long said the defending the balance sheet is our top capital allocation priority. Our actions are designed to ensure anybody can successfully managed tumultuous market conditions and provide the flexibility to be opportunistic was compelling high return.
Segments that we may identified.
As you know NPV has a share buyback authorization that is contingent on the company achieving gross debt to annualized EBITDA of less than two times. If 2020 continues to unfold as we expect we will likely begin stock buybacks later in the year.
You housekeeping items before we dive into our.
Current level results during the fourth quarter, we took 537 million in mostly non cash impairment and other charges due to the further deterioration in north American market conditions, and our ongoing restructuring efforts lower intercompany sales from cross segment projects resulted in a $3 million sequential decrease in revenue.
Eliminations.
In the first quarter of 2020, we expect intercompany sales to remain in line with the fourth quarter of 2019.
Other expenses increased $44 million sequentially and included 26 million and expenses associated with the retirement of $1 billion of our 2022 notes and a $14 million increase in.
Exchange losses, and finally more effective tax rate may continue to be volatile over the near future. We expect our tax rate will average approximately 35% for 2020.
Moving to results from operations or Wellbore technology segment generated 764 million in revenue in the fourth quarter decrease of 29 million or 4% sequentially revenues from North America decline, 13% slightly more than the fall off enjoying activity well revenues from the segments International operations increased 7%.
Despite the decline and revenue even for the segment increased by 10 million sequentially to 143 million, primarily due to the successful implementation of cost savings initiatives and structural improvements to operational efficiency across the business units in this segment.
Are read hiker log drillbit business posted a less than 1% decline in revenue due to continued weakness in the north American market. It was mostly offset by growth in most international markets and continued market share gains in the U.S. or high performing bits are allowing us to gain share and preserve pricing in a competitive market.
Revenues and our down whole business unit fell 12% as reduce demand and increase pricing pressures in North America were partially offset by higher revenues in most eastern hemisphere markets. Despite the challenges in the North American market, we continue to see healthy demand for our leading edge motor elastomer and other technologies, including our selection.
Adjustable motors, which are enabling customers to complete single run wells with greater consistency and reliability.
In the fourth quarter, we helped a customer on the more cells basin drill a record setting 19132 foot single run well or N.B. taught go business unit realized a slight increase in revenue as the contribution from our growing number of drilling automation projects and then when we can let's see more than offset decline in revenue for M.B. taught goes business.
In North America.
Or tuba scope business unit saw revenues fall, 5% sequentially revenue from the business units coding operations were down slightly and inspection service revenues fell, 6% and lower drilling activity levels in the U.S. and holidays reduced output for mills and outside processors.
Revenues in our Wellsite services business unit declined 12% sequentially on fewer U.S. fluids jobs, but the units core solids control business only experienced a 5% sequential decrease in revenues. It's us operations performed in line with the 11% fall off and drilling activity, but was partially offset by growing opportunities in the internet.
Excellent off shore markets were encouraged to have began working on several projects in the Gulf of Mexico recently in addition to seeing rising demand overseas.
Grant Pride cold Drillpipe business realize the sharp increase in revenues and the fourth quarter as we shipped large volumes of high spec Drillpipe for international markets. Additionally, as was the case and the third quarter more than 50% of the business units revenues were derived from offshore products all orders for Drillpipe in the U.S. have been sparse over the past.
Few quarters customers Drillpipe inventories that we hold in the U.S. or at the lowest levels in recent history.
We believe any material increasing drilling activity will require a healthy increase and orders.
Meanwhile, as international customers restock diminish inventories, we continually rising demand for our Delta Drillpipe connection technology.
Looking to Q1 for the Wellbore technology segment, the Corona virus oil prices seasonality and evolving E.N.P. budgeting practices all remain wild cards, but at this time, we expect revenues for a Wellbore technology segment will decline between 6% to 12% with detrimental margins in the mid 30% range.
Or completion and production solution segment generated 799 million and revenue in the fourth quarter of an increase of $71 million or or 10 per cent sequentially growing demand from offshore and international markets was partially offset by lower demand for completion equipment U.S. landmark, it's even die increased $14 million sequentially to 90.
6 million or 12% of sales incremental margins were limited to 20% as modestly higher sequential cost savings were offset by favorable credits related to close out projects and Q3 that did not repeat in the fourth quarter.
Segment began realizing a considerable increase in orders during late 2018, largely driven by offshore in international projects. This trend continued through the fourth quarter, resulting in orders of 502 million and it's it's straight quarter with a book to bill in excess of one 100%.
While the project pipeline remains robust for 2020 at this point, we expect lower orders and the first quarter due to the timing of specific projects or fiberglass systems business unit posted an 8% sequential improvement and revenues cheating the highest levels of revenue in its history increase deliveries of Spoolable pipe from our new manufacturing plant and mom Saudi Arabia.
And Marines scrubber system components needed to retrofit vessels for I.M.O. 2020 compliance drove the sequential growth, but was partially offset by rapidly contracting demand in North America, where orders decreased 15% sequentially.
We expect the need for additional scrubber systems to remain robust with experts estimating that owners of shipping vessels can achieve paybacks on their investments in less than a year based on current price spreads between low sulphur and traditional bunker fuel.
Or intervention in stimulation equipment business realized a 3% sequential increasing revenue on strong your end shipments of quilting and wireline units. However margins decrease roughly 100 basis points on less favorable product mix as revenues from pressure pumping aftermarkets parts and services declined to a level, there's less than half its recent highs.
Results from this business unit remained depressed do the structural over capacity of the North American completions market. However, the business continues it advances technological leadership by assisting our customers and finding new less capital intensive ways to improve profitability well themselves and their and customers.
Are fracmax Big Board quick latch and Frack hose products are examples that are lower costs solutions for improving operational efficiency and safety and a cash constrained environment.
Businesses also focused on pursuing opportunities and other markets such as the Middle East Latin America in China, where the development of tight and unconventional natural gas formations driving equipment needs. The mirror what is used in North America.
And the fourth quarter, we booked in delivered a large package of high pressure equipment to an operator in northwestern China, where there has been a rapid increasing the amount of hydraulic fracturing activities and is therefore experiencing a corresponding increasing demand for high pressure flowline equipment, and the Chang Queen and then Jang gas fields.
Or process and flow technologies business unit realize revenue growth in each of the units major product lines. The units production midstream product offering saw a sequential decrease in demand in North America that was more than offset by Lord shipments pump packages to India and an uptick in sales of production jokes, including the first batch of chokes built in our new manufacturing.
City into mom, Saudi Arabia.
Business unit also realized third straight quarter of improve results from its offshore market focused wellstream processing and <unk> moehring product offerings, primarily driven by growing LNG related activity.
Headlining the order book was amano ethylene glycol regeneration reclamation unit for an L. and G. project in Mozambique, and in order for or newly developed electrostatic coalesce or technology eat pack that will be installed the Ecuador johanns for up to.
Hindering activity for the offer market remains the strongest in recent memory, which is reflected in the businesses ability to post a book to bill in excess of 150%.
What should begin to allow for incremental pricing improvements during the year or sub see flexible pipe business posted it 15% sequential increasing revenues, but at low flow through as the market for flexible pipe remains very price competitive.
Bookings improved from the third quarter generating a book to bill, 134% and including more than 56 miles a flexible pipeline systems for our project in the North Sea.
Our team continues to use this technology advantages to focus on higher value add projects.
For the first quarter of 2020, we expect revenues from our completion and production solution segments decline tend to 15 per cent sequentially with detrimental event dumb margins in the upper 20 to lower 30% range.
Are rigged technology segment generated 759 million and revenue in the fourth quarter of an increase of 110 million sharp increase and land rig equipment sales, including sales of older inventory at low margins and improve progress on off shore projects drove the 17% sequential improvement revenue however, an unfavorable shift in.
Product mix together with old inventory, we've moved at a discount we're only partially offset by cost savings, which limited incremental margins and resulted in a 7 million dollar increase and even 212 million or 14.8% of sales.
Whereas declined to $10 million or 5% to 211 million in the fourth quarter and total segment backlog at your end was 2.99 billion.
Improvement land revenues resulted from a significant increase in your end equipment deliveries and better progress on land written projects during the fourth quarter, we booked orders for six land rigs destined for more multiple customers in the middle East with three of the recorder specifying or novo's control system. We're seeing an L.C. is more frequently pushing their contractors to provide high speed.
Land drilling rigs that can meaningfully improve performance and operator returns the growing number of international operators pursuing development of tight gas formations is accelerating to demand for this equipment and similar to what we're seeing or interventions stimulation equipment business unit. The equipment. These customers are seeking is beginning to look like the high spec equipment found in West Texas.
We've seen this in Argentina for several years and are now seeing customers across the middle East and Asia pursue 1500 horsepower rig packages with three gensets, they're almost identical to what we're selling into the U.S.
During the fourth quarter, we also realize a substantial increase in revenues from deliveries offshore capital equipment and from improve progress on or off shore wins construction vessel projects. We continue to see gradual improvement in offshore markets with steady demand for rigor equipment and technology upgrades as well as a growing opportunity set for all marine construction business include.
Replacement cranes for episodes equipment for Pipelay vessels, an additional offshore wind construction vessels.
Continues to leverage or a core competencies to assist in the development of solutions that help or customers reduce their environmental footprint will also improving operational efficiencies in the fourth quarter, we introduce our power blade hybrid system that is currently being installed on a rig and the Norwegian continental shelf power blade allows drilling contractors to reduce their carbon footprint and fuel.
Cost by recycling the captured energy back into the rig we estimate that the power blade system will allow the drilling contractor to reduce diesel consumption by 771000 gallons per year saving them $1.75 million in cash.
Reducing 110 tons of knocks emissions per year, and reducing reducing their carbon footprint or C.O. two emissions by 6200 tons per year.
Revenues from a rig aftermarket operations were flat sequentially due to a decrease in spare parts sales that resulted from budget exhaustion that sit in with our customers near the end of the year.
Additionally, the significant increasing the number of rigs enrolled in our total costs of ownership programs moderates the queue for uplift historically seen in our service and repair operations. We've increased the number of offshore rigs in our programs to 83 at year end and an increase of over 2.4 times since the end to 2018.
And the first quarter of 2020, we expect lower deliveries of capital equipment to be partially offset by a slight increase in after market sales, resulting in a 10% to 15% sequential decrease in revenues and at 100 to 300 basis point reduction in even margins.
Well, we know there is much more work to be done in 2020, we were pleased with a strong finished 2019 and the progress the organization made on key initiatives throughout the year actions taken by the talented hardworking employees of envy allowed us to balance our efforts to reduce costs and improve operational efficiencies with advancing our technologies in supporting.
Our customers with cost effective solutions, those actions have and auvi well positioned for the future with that will now opened the call to questions.
Thank you I don't mind it to ask a question you any tapas style one on your telephone.
Try a question past the pankey.
And just a timely assets you. Please let me just after one question and one follow up to stand by by the <unk>.
I first question comes from <unk>.
Typically halting company Yeah mine is how open.
<unk>.
Okay, recognizing the the extra uncertainty injected into the market by the recent pull back and Brent prices could you just frame for us at a high level. How you think about the international growth drivers among the three business segments again to set a high level.
Yeah we're.
Sure.
North America, we expect to I think like everyone else to enter a slowdown continue slow down and activity and we're preparing for that but they're more much more encouraged overseas and then offshore markets in particular so.
That continues to move higher and what we're hearing from our customers is that that they're moving forward with a lot of projects that they've been working on reducing costs and engineering in over the last several years and so you know excited about that for 2020, and then the middle East as as continued.
Very active in as you're well aware, we've increased our our presents.
In those markets and are encouraged by the needs that that our customers have there for equipment and technologies.
So generally you know North America drifting down in offshore an international moving up current well price volatility notwithstanding alright.
Thanks, and then my second question, just getting qualitative terms because like what you think back on the five incremental growth drivers growth opportunities that you guys laid out back at the 2018 analysts day just from your perspective, how things are progressing again, notwithstanding the new term North America headwinds British how those that played out relative to.
Your expectations.
The main the main thing I'm most proud of his our continued investment in technologies and products through the downturn and we certainly highlighted that in a real estate, which was you know well over a year ago and and in a very different sort of commodity price price environment, but you know I look back on the progress we may really since.
The downturn started.
You know if he's probably introduce more new products and new technologies than any of our peers out there. We we launched are.
Test rig at the very end of 2014, and that's been responsible for dozens of products and technologies, we've come out with very impactful digital solutions through this time period.
Predictive analytic suffer vo piece for example, or no voice operating system or go connect digital products things like that and so I think we've.
You know balance the cost cutting and the retrenchment this has been necessary.
With continuing to invest in the long term future of the company and and and the technologies that are going to make that that happened. So I'm I'm very proud of our organization in terms of progress on these things and I I think you know a lot of ways through the downturn. We've been focused on in addition to efficiencies and getting better at working capital management.
Oh really laying the foundation for what the next upcycle looks like.
<unk> appreciate it.
You bet. Thank you bye.
Yeah and next question comes from Tommy <unk>.
Oh.
Good morning, and thanks for taking my question.
Monotonic.
So one of the to touch on the portfolio review that you've been undertaking for some time now.
It it's clear it's a returns driven.
Plousis that you're running through and so my question is as you're evaluating.
What the keep and what to prune.
How many years forward are you willing to look for business line or unit to hit the kind of returns that you'd like to see to keep it in the portfolio and the reason I'm asking is.
Clearly offshore an international have some momentum, but we we need to play that forward for some reasonable time horizon ticket comfortable to to where you're willing to underwrite. So anything you could do to help us frame that up would be helpful.
That's that's a great question, a mullet Blake chime in here in a minute because he's heading up this effort, but I would I would say it depends on the potential to achieve what we always aim at any application of capital, which is indefensible business that has a demonstrable competitive advantage over the long haul.
Goal and so when we look at these different businesses and kind of the current state of affairs in the current state of their Marcus and so forth. We take of you necessarily on what's the likelihood probability that we'll get to that state.
Sensible competitive advantage in a reasonable period of time, and so I would say.
Patients level is somewhat dependent upon the potential pay off and attractiveness of that particular business opportunity, but it's really kind of opportunity by by opportunity that we we evaluate this.
I think we test on this last quarter, but you know this is not just a quantitative exercise, but also qualitative. So you know we we we just take a step back and say like Oh, you know if this business you know is below the return threshold, but it's been you know bouncing along the bottom of of the down cycle and we could see a clear tangible path to <unk>.
Orders of completely pivoted on this one I've done a couple 180, we're not going to sell it at at the bottom of its earnings potential.
Now I will say, we have quite touched upon our patience level for a lot of these it fall below the threshold.
We were able to implement discrete action plans that are in the process right now that we will reevaluated. Most of these action plans only take about three to nine months. So just more self help which is you know part of our job is managing these businesses.
And those that we find or.
To be on fixable.
We'll be evaluated for divestiture or just pure exit yeah. That's our that's our first inclination is around.
These things and run these things and so we are there steps we can take first so that's probably what we're we're default is for for businesses affordable below the threshold initially.
[noise] very helpful think thank you both and as a follow up I wanted to double back on the international on offshore outlook again.
Looks like will be up.
For 2020 versus the prior year, just in terms of the addressable market there.
Are there any particular.
Aspects, where you think end of the could maybe outperform the broader market business lines or or parts of the world, where you're most excited that you would call out for us.
Yeah, probably probably what we're we're certainly well known for drilling equipment offshore rigs all the all things drilling was probably less well known by investors on Wall Street is the fact that we've sort of quietly assembled a really interesting portfolio of products that are more focused on <unk>.
Action going into.
A F.P.S.O.'s fix platforms processes around production in terms of San separation, well water separation motto motto ethylene glycol regeneration units things like that and so I'm really really proud of that portfolio and I think there's really interesting opportune.
Studies that are going to continue would emerge in the offshore where where in over you is likely to play maybe a little larger role than we would have been a prior uptown.
Thank you that's all for me and I'll turn it back.
Thank you.
Yeah. I'm next question comes from Chase them, all fell to think of America.
<unk>.
Hey, good morning.
So I guess, you know clay you talked a bit about kind of energy transition. So I'm just kinda curious if if you can kinda flush it out a little bit more here in income to talk about.
Your strategy towards energy transition and and you know you know maybe organically what you're doing then also maybe only in the Navy side.
Yeah.
I'd say that we have a presence in the space going back many years and in fact, many decades with respect to geothermal for instance, where.
Be hard pressed to find a geothermal well that doesn't have you know v. technology involved with <unk> with it.
You were in the Globe and secondly, I think last year, we had a couple of announcements around offshore wind installation vessels, which is the space that you know V. has has a very has a market leading position in terms of the technologies in vessels install offshore wind turbines.
And so we've been renewables.
For you know going back along a long time my comments into prepared remarks, though really are just to to let you know that we're thinking about other ways to participate in this and viewing it as potentially a terrific business opportunity.
Think about energy energy really is all about infrastructure.
Capital of the point that historically have any from one form of energy.
To another is sort of a decades long process, but involves enormous amounts of capital involves project execution involves application technology.
Creative ideas, you know and you know he has a lot of those in a <unk> and so I I do think there's a role here that we can play and and helping make that happen, but the what I want to stress is we're aiming at at Capitol returns coming out of that at the opportunity to develop technologies.
And services and methods that help in that transition, but but also are earn excellent returns for our shareholders and so that's how I'm framing. This I don't have a lot more to add to that other than what I said earlier some ideas into space that we think are unique potentially can turn into really interesting and.
Profitable businesses, and but I generally don't getting into the details until we're we're you know, earning making revenue with these things.
Okay.
I guess.
Coated the supply chain, a little bit and think about the role of virus. You know you mentioned a little bit.
You know, there's there's obviously a direct impacting maybe maybe some direct and indirect impact as we think about the supply chain being so interconnected certainly you know segment that we should look at and and try to understand better about all the impact from kind of what's going on over in China.
Help us understand you know what how much of that is actually in your God there's like.
<unk>, Oh feel this and and quick and shy man, but no. It is is a situation that is evolving rapidly and it's something that we're monitoring very closely so you know or or I think our biggest exposure to this is more from the supply chain standpoint than it is from a customer revenue opportunities.
But as we did talk about and some of their prepared remarks, you know China is an emerging and growing up market for our end products in which we're having more and more success with our differentiating technology offerings.
We do have a very global one diversified supply chain, but as we secure today and we're looking at you know the <unk> an extended shut down of the shiny Chinese your holiday system.
You know that is that that is impacting our ability to produce certain products to a certain degree at this point, we still have a lot a lot of to to make up lost ground Ah, but if this were to extend a much longer other areas for instance, with our fiberglass business, where we have limitations in terms of the amount of rather than.
On the ground at our manufacturing plants right now so there's some some risk there, but so far are so good a similar type of exposure related drillpipe manufacturing other businesses to a lesser extent, but so far.
Came as managing through it pretty effectively but still a lot of uncertainty related to the extent to which this will impact operations. Yeah. Yeah. Those are sort of first order impacts equally concerned about second quarter impacts, which is the impact that this has on global demand for oil to what it's done in a commodity price.
<unk> and more to the point kind of what it does to the psychology of oil and gas producers as they think about how much to drill a and and 2020. So it's just as we said the situation remains very fluid.
Yep, well understood already okay makeover. Thanks. Thanks.
I.
Yeah, I'm next question kind of stuff Scott.
Oh.
Yeah, that's good morning, I Scott Scott.
Turning to C.N.P., how should we think about the seem keen margin profile over the course of 2020, I'm just thinking about the interplay between.
Shift a in the readily stream towards more international and off shore golf. So the cost program. I know you don't want to provide can they specifically on one quarter out, but just any general color on how that margin per files to progress given that interplay.
It's Jose also start off on this one so you know we're not going to really deviate from the typical why would describe in terms of thinking about origin progress for the cap segment, which is really think of it in terms of incremental margins basically dollar dropping between 25 cents to 35 cents down too.
Even line and obviously that is dependent.
On the mix of the business and really what you're getting at is you know with the you know decline that we're saying and demand for equipment in North American market.
And you know the solid growth that we're saying overseas, particularly for offshore markets.
Typically some of those off shore projects.
In the early phases of recovery have been slightly more challenges from a margin perspective, but as clay alluded to I think we touch on a couple of times during or prepared remarks with the amount of tendering activity. We think we're starting to now see more opportunities for pricing improve.
But here as you know we stand today, you'll suddenly you think about the latency time associated with some of these offshore projects, where they sort of reside or backlog a bit longer than the shore cycle North American centric product offerings. So you know what's going through converting to revenue.
Right now is <unk> to large degree stuff that was booked 912 months ago, and so as we start capturing better pricing, we should see the incremental margin profile improve along with you know being further supported by the cost cutting initiative effort.
We have underway.
Yeah, but overall for the year do you think that we should be thinking about that or lighter than normal margins are getting from the pricing trends you end up doing closer to the normal incremental for the year.
I think about a blended basically yeah, it's it's more but if if there's a lot of put that takes care a lot of course, some cases, so I would assume a fairly normal.
Okay.
And then maybe if you just give us a quick update.
The rental.
<unk> you guys push forward a couple of years ago near particularly on the the drilling tools the business, but even more broadly just then update on the the rental model a a initiative you, particularly as the international market pick up for them 20 or 20.
It's got you're talking about our drilling tools business. The rental we have a couple of general business around it will be but I think you're talking about the investment we've made in directional drilling technologies rubber <unk>.
Shift and would tell you that we're continuing to gain traction in that we've got three different rubber <unk> tools in the marketplace, including what we think is the lowest cost <unk> very highly differentiated <unk> tool <unk> motor that we.
Introduced last year, which is the adjustable Ben housing motor that can be adjusted down a whole very large operate in the U.S. is testing that this week, we've had a lot of excitement around that.
M.W.D. tools also that we haven't in the space. So we're we're continue to make progress in here, but that that strategy was built on the recognition that unconventional drilling a unconditional shales really rely on a geosteering on horizontal drilling and is it kind of enabling and key.
Technology for unconditional technologies artificial shells and that you know v. has an opportunity here to to be larger provider of technology in its base.
And then maybe one thing that just add just so there's no no no confusion about it. So his claim actually there's a there's a number of areas, where we do provide rentals of equipment you know that space that we're talking about it in combination of both rentals and sales, but just want to make it clear yeah that were somewhat agnostic on that but we didn't want to make clear is that this is not a service that we are.
Providing we are enabling those directional drilling a service companies out there yeah.
Got it appreciated the color you back thank you.
Thank you.
Question comes from current have it with I.V.C. capital markets.
Hey, good morning, everybody I <unk>, they quite thanks for that historical perspective resonates with me that's for sure.
So in the in the context of of what you guys see going forwarding and clay, Yes, I don't think it's always been at the forefront of evolving on the technology fronting, creating some value propositions that ultimately oil companies and in service companies you know find useful throughout that teacher about some things that you're working on you know in.
In in the Hopper you know.
10, yeah, maybe elaborate a little bit maybe give it a little bit more of a teaser as to what kind of value propositions. You may be looking at you know for the next like a growth for <unk>.
On on renewables I'm gonna dimmer on that.
On the are you talking about renewables, you're talking about <unk> traditional oilfield, Kurt well, yeah, I'll I'll I'll go wherever you want to take it clay. So if you want it them or on renewables that they matter policy. We like we have much prefer to talk about things are in the marketplace at ours, you know starting to get get traction and so in terms of what I'm most excited about.
Not really the predictive analytics products that we introduced a few years ago continue to gain traction I think Jose reference to the growing number of rigs and our programs, we're monitoring equipment and and are able to to prediction advance you know operational challenges before those.
Happened Novos operating system.
Join rigs both landing offshore is gaining a lotta attraction.
And and really beginning to contribute meaningfully our wired drillpipe.
He tell us or data transmission the whole data transmission technology combined with machine learning and tell him in artificial intelligence is improving.
Results for operators in fact, there's a a great article in this months General Petroleum technology about what we've done for for U.S. driller in that space. So I I again, just to read her reiterate could not be more proud of sort of enhancements that that we have going on and those are actually just a few of many many things.
Set <unk> you know V. has introduced to the to the downturn.
Got it and then just to follow up in the context I appreciate that color by the way in the context of the capital allocation you indicated that go if if all goes well he could potentially position to kind of restarted share repo program. Just kinda curious as to you know the decision framework between the say that share repo over.
Maybe you know bump it bumping the dividend a a bit any any insight to be appreciated on that front.
Yeah with with respect to our stock trading you know we were teachers good value in that and have gone through that it's in a great deal the tail with our board will continue to look at it by the way, but we're I think <unk>. The way we view that right now is that <unk> repurchases is preferred.
But the key thing is that our capital priorities remain unchanged in all of her.
I was in 19, all interactions were really geared towards.
It would improve we we implemented a lot of cost savings that are driving better even <unk>.
We refinanced in a pay down a lot of our debt and it's okay to work towards being in.
Cheating their credit metrics that we've talked about that will pave the way for all the greater level of capital return to show.
Okay. Thanks appreciate that.
Thank you next question kind of sound <unk> J.P. Morgan.
<unk>.
Thank you the morning on Sean.
I see I'll I'll try to ask the prior question just with the different angle. So in terms of the free cash Guy for 2020 and uses on that cash. So we noted buybacks can be coming later this year, obviously dividends, while covered cutbacks maybe a bit elevated this year, but that's discrete you know very specific you've also in effect supplement.
Some of your cat back spend with technology bolt ons ever time, that's been a big part of the strategy dislike on particular, if something like $200 million a good run rate for for both times just I'm trying to capture other uses of cash that could come before the buybacks and 20.
Yeah, and that's a great point, Sean we're always looking at opportunities.
In in a space and I think it'd been pretty transparent about that and so what I'd say is in 2000 in 19, and it's sort of fits with my prepared comments around the the fact, it oilfield assets inequities of getting a lot cheaper in the current environment and so we're always looking at.
That kind of what's the.
Next best application of you know v.'s shareholders capitals, and and to the <unk> and then.
Outlook changes from time to time, you know as it as we kind of kind of worked through the year.
<unk> display here I, just like to add that you know, we both clay and our board gives us the you know they'd be.
Flexibility like we don't have a runrate almost like a target for acquisitions parade for your every every acquisition as an individual investment decision that we phrase whether we also compare relative to the investment in our own stock. So at this point like I think there's a lot of opportunities out there. It's a very crowded field of sellers right now and a very limited set of buyers.
So that we think that there could be some attract evaluations out there, but we're going to be very very patient.
God, Yes, that's that's helpful feedback and then so you know well done to see all the efforts on working capital started to come through and convert the cash and that's been you know a a top priority, especially for Jose So with the four key result, and your expectation that working capital D. a source of cash again and 20, just curious is getting updates.
It's on seasonality as we go through the year in terms of working capital and then just how you're targeting working capital efficiency by into 2020 or 21, maybe.
Any any updated thoughts around working capitalist sales or dsos inventory turns D.P.S. et cetera.
Yeah, I don't think well get Super grant or in terms of specifying the target spoke <unk> wouldn't like spend just a moment talking about is.
We are seeing is a lot of good progress and a lot of good momentum by a lot of hard working people across the organization we've been at it a while but obviously the results really started to come through and the second half of 2019, and we have a lot more work to do but with the momentum that we have.
I have and opportunities that we've identified.
We're coughed it in our ability to harvest more cash from are working capital and just become a lot more capital efficient as we progress 320 20.
So we finished 2019 without working capital to revenue run rate, just a tiny bit over a 30% which was a good outcome for US now what we're really going to be focused on during 2020, Yeah. You ask the question related to seasonality it it it's really going to be.
More focused on kind of the average level of working capital intensity really throughout the life of the organization. So a lot of progress through the course of the year, but.
You know if you look at the average for 2019 average the starting balance sheet and ending balance sheet apply the total annual revenue to it that was 37%. So we're training in the right direction, but we certainly want that average to calm a way down during the course of 2020 and that would put us at a cue for run right that will be.
Better data, where we finish this year.
Fair enough that's really helpful. Thank you.
Sean.
Yeah and next question comes from that they snap let's go shopping.
I bet.
Hey that nodding and made good quieter.
<unk> vacation you guys talked about two and get that email enough cost savings.
I guess I just want to confirm that that's dumb calculated at 200 million dollar number.
<unk>.
Yes, Yeah, we found a another $30 million an annualized both those numbers are annualized cost savings as compared to our structure in the first quarter of 2019.
Okay C.N.B. artist you talked about it could be somewhat lower in one q. can you just talk about what what kind of <unk> you have beyond that and that's bullets for C.N.P.R. dust and debris artists.
Getting the can sustain what these all buying <unk> <unk> 2019.
Well you know queue for was our thank our fifth quarter in a row of booked to build <unk>. One for completion of production solutions walk a lot of these orders, particularly for offer projects. We have a lot of lead time into because a lot of work that goes into sometimes are seen studies behind them things like that and so a lot of that kind of near term the downturn.
We expect if you want an orders and and completion of Russian solutions is really just the timing of how those things fall and but that notwithstanding what I'm. Most encourage about is the fact that our our tendering activity across the portions of completion of production solutions that are focused on the offshore.
Remains very strong I think we mentioned that R.P.F.T. group for instance, the pipeline. There is twice what it was a year ago and so it feels to us like the offshore infrastructures continue continuing to move forward and that's a that's a really good backdrop.
I think to move into 2020 with respect to orders for completion production solutions.
Quick and maybe just one last question for me.
And guidance <unk>.
It seems like yes, you guys did like on the dots down Damon is full of bus endless as guidance of five to seven so like not very different from the guidance you talked about not not to make on D. declined 11% so right.
Four q. I wasn't little surprised by the guidance down 6% to 12% for one <unk> I think like you talked about China could have yeah.
Elaborate like what is what.
Guiding that in like and how she they think about not to make almost as international ended guidance.
Part of the part of the Overachievement in Q4 was a higher drillpipe sales than we had expected going into the quarter part of our expectation for Q1 is that that turns around that's that's a little up here than some of the other businesses within Wellbore technologies.
Yeah.
Also add you know it look at the you know the guidance across the board related to this one should decline from Q4 to Q1, you know we do you know look back the last couple of years in terms of the fall off that we've had from Q. for Q1.
Feels like that the E.M.P., a budgeting process, both within North America, and the international markets is getting a little bit more prolonged gets certainly gets amplified when you add and pull back and commodity prices and the the fears related to the Corona virus. So yeah that is.
Certainly a factored into doing it to an extent into the into the Q1 God Damn one more thing to our like read hike a log business for instance has seasonality exposure and in Russia and.
<unk> and places like that so there. It's just you know our expectation is if that will build wall contribute to welfare technologies movie down into one.
Let's be helpful. If I take my call you back thank you.
I think yeah that concludes that question and answer session I wouldn't I like to tend to call back over to claim Williams any further Max Oh, I want to think everyone for joining today and in particular I want to take the opportunity. Once you get to think any employees that might be listening frankly to thank you for the great job that you're doing so have hope everyone has a great weekend. Thank thank you.
Ladies and gentlemen, discomfort cities conference call. Thank you for participating you may not disconnect.
[laughter].