Q4 2019 Earnings Call
[music].
Good morning, welcome to the upper Gi corporations full year and fourth quarter 2019 conference call.
Your host for this morning's call is David Skipper, Vice President and Treasurer at Upper GI I will now turn the call over to Mr. Stepper you may begin.
Thank you good morning, everyone with me today are somewhat summer Sundaram, President and CEO apogee and Jay not senior Vice President and CFO of apogee.
During today's call somebody will discuss apogees for year end fourth quarter highlights as well as our market outlook.
Jay will then discuss our full year and fourth quarter results and we'll be referring to the slides posted on our website.
Before turning the call back to Soma to discuss the progress on our growth initiatives and then we will open the call for QNX.
I would like to remind our participants that some of the statements we will be making today are forward looking.
These matters involve risks and uncertainties that could cause material differences in our results from those projected in these statements.
Information concerning risk factors that could affect the company's performance and uncertainties that could cause material differences. The actual results from those in the forward looking statements can be found in the company's press release as well as in Apogees annual report on form 10-K, and those set forth from time to time in the upper Gi.
Filings with the Securities and Exchange Commission, which are currently available at <unk> Dot com.
Except as required by law the company expressly disclaims any intention or obligation to revise or update any forward looking statements.
Our comments today May also include non-GAAP financial measures.
Additional details on reconciliations to the most directly comparable GAAP financial measure can be found in our fourth quarter press release and slide presentation for this call which are on our website.
I will now turn the call over to someone to discuss allergies full year and fourth quarter results.
Thank you David.
Good morning, everyone I'd like to about come over shareholders. Our analysts I know what employees to all the full year I'm fourth quarter 2019 earnings call. Thanks for joining the call.
The past year has been uneventful untapped homemade can be a for apogee.
During 2019, we executed well during a period of changing market conditions and the amount that consummation of the merger with attempt Nx, which will help to propel our growth and value creation into the next decade.
I'm pleased to report that champion next performed well I'm met expectations in 2019, our integration planning, but champion ex yes, well underway and we expect to close our merger with Chuck annex by end up the second quarter.
Asked me what through our integration planning you have becoming even more excited about the future. We will build with champion act, including delivering meaningful synergies, we will be uniquely position to offer customers you have full suite of production optimization solutions.
Well as solidifying our position as a focused leader in the production segment.
Greater scale enhance customer touch points and larger geographic footprint supported by strong cash flow generation through the oil and gas cycle.
After closing of the merger, we will have well what 8000 talented employees working collaboratively to solve customer problems that I'm the world and that's the second largest provider up production optimization solutions in the marketplace will be an even more valued partner to our customers on flights fight through seven after.
But some patients we have included more details regarding the strategic rationale up the merger the timeline to closing and champion excess 2019 dissolved.
Additionally for the second yet in that go beyond that top well, what all blanking <unk> total customer satisfaction and yet and bad ranked first in eight additional categories in the Twentytwenty oil field products and services customer satisfaction survey conducted by energy point research.
This independent annual survey, if the industry benchmark for measuring customer satisfaction across our global oil field and it's comprised stuff I was on the top end up their valuations.
We believe these awards validate the effects of support strong cultural foundation, our differentiated technology portfolio as well that's how it operating philosophy, which is centered on advocating for our customers delimiting technology, but the impact on driving continuous improvement across our organization.
In the survey apogee rate at first in total satisfaction artificial lift digital oil field.
Engineering and design.
Comments on the liability intelligent sensors, some controlled shale oriented applications, how does on telecom directional wells on high pressure high temperature applications.
Turning to our full year on fourth quarter dissolve onshore activity levels in the U.S. remains subdued with particular weakness in December.
Driven by budget exhaustion I'm capital discipline, you won't be operators against this backdrop, we continued to maintain our focused execution and strong cost discipline.
Excluding 7.7 million of isolate the fourth quarter charges, you know what do you have to artificial lift business related to estimate bankruptcy fixed asset that gets mens and fuel customer concessions full year 2019, adjusted EBITDA was 259 million.
52 million in the fourth quarter.
I'm pleased that on on the operational basis, our business continued to perform well.
Excluding nicely to charges, our adjusted EBITDA margin was 21% in the fourth quarter on 23% what fully at 2019.
Additionally, we estimate that the restructuring actions, we took that they end up the third quarter, that's up to them 5 million up savings in the fourth quarter.
We ended up 2020, we expect to build on those savings.
Full year International revenues outside of North America, Best strong in 2019, achieving 12% growth to over prior year.
With respect to free cash flow generation, we posted outstanding performance on this metric we can vote at 10% off a revenue to free cash flow for both the full year and fourth quarter. In 2019, we grew free cash flow, 10% more than 2018, the presenting an incremental 10 million dollar.
Close on a dollar basis.
We believe our solid free cash flow performance demonstrates the quality of our portfolio that as the latency off what product lines through the industry cycles, I know what operating discipline.
Consistent with our capital allocation priorities during 2019, we repaid hundred and $5 million off tone term loan debt of which 30 million what's in the fourth quarter.
Bringing the total repaid 250 million since our spinoff in May of 2018.
Turning to our segments in the fourth quarter production on automation technologies segment revenue decreased 8% sequentially, which was driven by the capital discipline on for U.S.P. customers that somebody was particularly weak ask about customers work to keep their 2019 capital spending within cash flow.
Although the fourth quarter was challenging photo we're off to share lip products and the U.S. Twentytwenty has started off about real provida chalked up our monthly yet be installation in the presentation on slide 13.
As you can see insulation in January we had up significantly from December as customers start they have new budget year.
In the fourth quarter, we continue to perform well internationally within our production on automation technologies segment International revenues was up 33% sequentially with particular strength in the middle Eastern Australia in 2019, I would international growth outside of North America in the segment what.
8%.
2020, we continue to expect strong growth outside of North America for our artificial lift on digital or product lines at international and National oil companies continue the have international development work I.
Additionally, after the closing out for merger with champion next we will be working to drive additional international growth through deeper relationship with the international and National oil companies, including cross selling opportunities for our artificial lift on production chemicals.
Fourth quarter digital revenue grew 6% year over year and full year 2019 revenue was up 13%.
Growth was led by a lot of downhole monitoring products as a significant portion now for digital products. Our hardware there may be lumpiness from quarter to quarter, particularly during periods of BNP capital discipline. However over time, we expect our digital revenues to grow at a healthy rate and I'm very pleased at the traction outflow.
Our digital portfolio is getting in the market.
You know what are your speed product line, we continue to remain disciplined in deploying our leased assets to opportunities that maximize return.
To this effect in Twentytwenty, we will reduce the amount of capital deployed into at least asset portfolio.
We feel prioritizing cash flow and but a turn so what role is that right decision in a wallet, Thailand challenging market environment.
Moving to drilling technologies, consistent with our expectations auto rates, what polycrystalline Diamond Pepto stabilized and subsequently improve towards the end up the fourth quarter as customers completed their inventory destocking activities.
In the fourth quarter drilling technologies revenue decreased 20% sequentially. The revenue decline was driven by the sharp 11% sequencing the claim in the average rig count as well as an estimate at 4 million incremental impact from the third quarter due to our customer destocking that poly displaying diamond.
Inventories.
As we noted in our <unk> last earnings call. Historically after we have seen tools sequential quarters up revenue declined due to customer destocking that inventories.
In the subsequent quarter, we've seen a rebound in auto rates and revenues.
System with past experience, we have seen healthy order rates in January and February and we expect to post sequential revenue growth in the first quarter.
Even during periods of significant but we need to claim in the what drilling technologies segment. We continue to maintain our investment in research and development activities, which cost us higher than normal decrementals to adjusted segment EBITDA.
We believe that it is important to maintain our technology cooladvantage aswell as to continue the development of new non oil and gas applications leveraging of a diamond sciences knowledge.
During the fourth quarter, 46% afloat revenue was from products developed in the last three years, which demonstrates the importance of keeping our technology still the edge.
Before I turn to follow what the Jay to take you through the details of the consolidated and segment financial results. Let me take a few minutes to share that view of the current market for our products.
Consistent with outlook, we provided on our third quarterly earnings call. During the first quarter of Twentytwenty, we expect activity levels to sequentially improve driven by new budgets and restocking by a group of customers as well as continued international growth our results in January and February orders so far.
Have confirmed this outflow and we expect to deliver sequential growth in the first quarter.
Do you need to remain focused on the factors under our control, including advancing our growth initiatives, maintaining cost discipline implementing productivity improvements and generating through free cash flow. Additionally, our plan to merger with Tempe Annex will open new avenues for growth.
The mentality earnings through substantial cost synergies and accelerate our strategic goals of broadening our portfolio on geography footprint as well as expanding our customer relationship overall, we're pleased with our progress on our strategic operating and financial goal underdeveloped position.
Continued to deliver top box performance through cycles.
Now, let me turn the call over PJ. Good morning, everyone. Thank you for joining our call as David mentioned I'll be referring to the slides posted on our website.
Beginning with slide eight for the full year 2019 revenue was 1.1 billion a decrease of 7%.
International revenue was up 12% on North America revenue was down 10% driven by the sharp decrease in U.S. rig count the second half of 29 team and a strong pull back and spending in the fourth quarter by a north American GMP customers as they exercise capital discipline.
Consolidated fourth quarter revenue was $248 million compared to the year, though period revenue decreased $65 million or 21% and the 248 million in the quarter represented a decrease of $29 million or 11% sequentially.
Excluding the effects of acquisitions and divestitures revenue is down 20% compared to the year ago period.
The fourth quarter year over year revenue decline in North America was $68 million or 26%, partially offset by international revenue growth of 3 million or 7%.
Full year, adjusted EBITDA was $251 million with fourth quarter, adjusted EBITDA of 45 million.
Full year and fourth quarter results include charges of approximately $8 million, which are primarily for reserves for bad debt, including a bankruptcy and other customer concessions related to contested billings for an isolated number of artificial lift customers in the U.S. as well as a fixed asset adjustment as someone mentioned.
We can ceded some disputed items at year end in order to accelerate the collection of receivables from these customers.
Moving the higher than usual reserves for customer concessions that debt and other charges for year 2019, adjusted EBITDA was $259 million and fourth quarter of 2019, adjusted EBITDA was 52 million.
In spite of the increasingly challenging market conditions in the last half of the year cash flow generation continued to be a bright spot for apogee.
Cash flow from operating activities for the year remains strong at 156 million as working capital was reduced year over year and helped offset partly lower operating earnings.
In addition, due to our capital discipline full year 2019 capital spending was constrained and ended the year down $18 million compared to 2018.
As a result free cash flow improve year over year and ended 2019 at 10.3% of revenue.
Turning to slide nine.
We've continued to navigate a challenging market environment in North America.
Looking at rig count the average U.S. rig count in the fourth quarter declined 11% sequentially and year over year change in the average rig count was an unfavorable decline of 24% as a result at an estimated 9% reduction in North America S&P capital spending.
Looking into 2020, North American S&P capital spending is expected to further decline an additional 11% within international spending projected to be a better been offset as international spending should be up in the mid to single digits.
We expect that our north American customers will remain disciplined in the coming year, while the longer cycle projects will lead to growth opportunities in the international markets.
We continue to believe that as the best in class provider of equipment and technology with industry, leading customer service capabilities, we need to take advantage of these capabilities can maintain and gain share even in a tough market environment.
In addition, after the closing of our merger with champion acts, we'll have a much larger international footprint to leverage and drive increased growth, including access to international and National oilfield customers were apogee does not have large presence today.
Moving on to slide 10, and looking at consolidated full year performance revenue declined 7% due to lower North America activity levels, including the impact of the decrease in U.S. rig count and the related influence of Destocking of PDC inserts buyer drilled that customers and drilling technologies.
The lower S&P capital spending of course also constrained artificial lift revenues in production and automation technologies.
Excluding the higher than usual reserves for customer concessions bad debt and other charges in the fourth quarter 2019, adjusted EBITDA decreased 12% due to the lower revenue, which was partially offset by the benefits of cost reduction actions and productivity initiatives.
Free cash flow generation remained strong during 2019 with more than 10% of our revenue and 46% of our adjusted EBITDA converting to free cash flow. Both metrics. We're ahead of 2018 performance.
Turning to slide 11, and looking at the full year segment performance both of our segments felt the impact of capital discipline in North American 2019.
On an operational basis during 2019, our production and automation technology segment performed very well.
Excluding the higher than usual fourth quarter charges adjusted segment EBITDA margin for the production automation technologies was 21% 40 basis points higher than the 2018 performance.
Additionally, within production and automation technologies digital product revenue grew 13% from 2018.
Against a difficult North America backdrop, we maintained solid year over year operational performance.
Our drilling technology segment was more heavily impacted by the Destocking of polycrystalline Diamond cutter inventories buyer oilfield service customers in the second half of 2019.
We estimate the impact of this destocking in 2019 to be approximately $27 million of revenue.
Within both segments, we took significant cost reduction actions in 2019.
As we move into 2020, we'll be working to build on these cost reductions and continue to demonstrate our cost discipline designed to match operational capability to market demand.
Moving to slide 12, and looking at the consolidated fourth quarter performance, we recorded a net loss in the quarter of $2 million and the diluted loss per share was two cents.
After adjusting for the impact of spinoff acquisition transaction expenses, mainly associated with champion acts and restructuring related items as well as other charges related to intellectual property defense and extended filing cost in the quarter. Adjusted net income was $10 million, resulting in diluted earnings per share of 13 cents in the quarter.
Yes.
We generated adjusted EBITDA of $45 million during the fourth quarter, excluding the higher than usual reserves noted earlier fourth quarter. Adjusted EBITDA was $52 million decrease of $11 million or 18% compared to 64 million in the third quarter of 2019 and decrease of 26 million or 33%.
Compared to the fourth quarter of 2018.
Year over year and sequential decreases were primarily driven by the sharp decline in U.S. drilling activity in third and fourth quarters of 2019, and the related destocking impacts fire drill bit customers of their polycrystalline Diamond cutter inventories.
Were also affected by the pull back and customer spending on artificial lift buyer MP customers in North America.
In the fourth quarter net interest expense was $9 million, which was 5% lower than the third quarter as we're seeing the increasing benefits of our deleveraging plan.
In the fourth quarter, we continued our debt reduction efforts and repaid another $30 million of term loan debt from available cash.
In 2019, we retired 105 million of term loan debt and since completion of the spin off on May nine to 2018, we've repaid $150 million a term loan debt or 21% of the initial 715 million in debt taken out at the time at the spin.
In the fourth quarter of 2019, our provision for income taxes was a benefit of $9 million. The decrease in taxes was primarily due to tax benefits, resulting from a true up of adjustments from the filing of our 2018 federal tax return.
And a reduction in our combined state tax income tax rate from 2018 to 2019.
In the fourth quarter, we invested $8 million and capital expenditures, including limited growth capital associated with surface equipment in our SP leased asset portfolio.
Current quarter capital spending was favorable compared to capital spending of $15 million in the fourth quarter of 18.
And then investments was also down sequentially as we've increased the intensity on capital discipline to further align capacity to market activity in order to safeguard strong return on investment.
Our free cash flow conversion from adjusted EBITDA and free cash flow as a percentage of revenue metrics in the fourth quarter of 2019 remains strong at 54% and 10% respectively.
Turning to slide 13 production and automation technologies revenue finished at $204 million in the fourth quarter, a decrease of 34 million or 14% from the fourth quarter of 2018, and a decrease of $18 million or 8% sequentially.
Excluding the effects of executed acquisitions and divestitures revenue declined 13% on a comparable basis to 2018.
The year over year and sequential revenue decline was due to the pull back and customer spending in North America for artificial lift and other production equipment, partially offset by increased international MP spending and digital revenue growth.
Fourth quarter adjusted segment, EBITDA was $43 million, excluding $8 million for the higher than usual charges described earlier, which represents a sequential decrease of $7 million or 14% and $8 million or 15% year over year, driven by MP budget exhaustion with particular.
The weakness in December which was partially offset by the initial benefits of our cost reduction actions.
Excluding the charges previously discussed adjusted segment EBITDA margin was 21% in the current quarter compared to 22% in the fourth quarter of 2018, and 23% and third quarter of 2019.
Regarding our SP lease program, our upfront investment in downhole cables and pumps net of customer reimbursements at the conclusion of the lease is reflected in our cash from operating activities.
This investment was $6 million in the fourth quarter.
For the full year 2019, we invested $41 million and new cables and pumps managing down to the low end of our guidance.
For full year 2020, we expect to invest between 20 million and $25 million net of customer reimbursements in the cash from operating activities section of our financial statements supporting the least asset portfolio.
The significant year over year reduction plan for 2020 is due to the forecasted decrease in North American MP capital spending as well as our efforts to be much more selective on how we allocate capital to customers, resulting in a high grading of our leasing customer list.
We'll also be constraining capital available for lease and attempting to drive more customers towards purchases of equipment in 2020 to better balance the portfolio of revenue.
Moving to slide 14 drilling technologies posted revenue of $44 million in the fourth quarter, representing a decrease of 20% sequentially compared to a 5% decrease in worldwide average rig count and an 11% decrease in the us average rig count.
The $11 million sequential decrease in revenue was consistent with our guidance and came about as a result at the continued decline in the us rig count and ongoing Destocking of polycrystalline Diamond cutter inventories by our drillbit customers.
Compared to the fourth quarter of 2018 drilling technologies revenue decreased 42%.
Additionally, in the fourth quarter revenue from Diamond variance was $6 million down from $7 million in the third quarter due to capital discipline, our oilfield service customers that they differ spending on downhole drilling tools.
We estimate that Destocking had an incremental negative impact of $4 million to our fourth quarter revenue on top of the negative $12 million effect in our Q3 results.
In addition to the influence of Destocking as a result of the reduction in the US rig count. We also experienced lower deliveries of bearings due to capital discipline buyer oilfield service customers.
Adjusted segment, EBITDA decreased 31% to $11 million in the current quarter from $17 million in the third quarter of 2019 due to lower volumes, partly offset by the benefits of cost reduction actions.
As we've previously shared we experienced higher decrementals to adjusted segment EBITDA in the drilling technologies business during periods of sharp declines in revenue.
Year over year adjusted segment EBITDA decreased 61% from $30 million in the fourth quarter of 20.
18, due to the steep revenue declined tied to the reduction in the us drilling activity.
Adjusted segment EBITDA margin was 26% in the fourth quarter of 2019 compared to 30% in the third quarter of 2019 and 39% in the fourth quarter of 2018 as cost actions taken exiting the third quarter, we're only able to partially offset the effect of the revenue decline.
As you can see on the chart at the bottom of this slide weekly orders for drill bit inserts bottomed in September of last year and after hitting the inflection point orders began to stabilize in the fourth quarter.
In January February of this year, we've continued to see improvement in order rates and as a result, we expect a sequential increase in our drilling technologies revenue.
Moving to head to slide 15 on the balance sheet fourth quarter, ending debt net of discounts and deferred financing cost was $560 million cash at the ended the quarter was $35 million.
As previously noted we repaid another $30 million at that on our term loan consistent with our commitment to our capital allocation priorities, which include funding our organic capex needs tied to our growth accelerators as well as reducing our leverage through debt reduction with excess cash flow.
At December 30, Onest 2019, Apogees net debt leverage ratio was 2.1 times.
From 1.9 times at September Thirtyth due to the reduction in the trailing 12 month earnings and our available liquidity was $279 million.
Turning to slide 16, consistent with our expectation of market activity sequentially improving in the first half of 2020 for the first quarter of 2020, we expect consolidated revenue of $255 million to $265 million and adjusted EBITDA of 50 million to $56 million.
While improvement in revenue and earnings is expected in both of our segments. We do anticipate some increased cost in support of our digital growth initiatives as well as incrementally higher expenses across the businesses sequentially due to resetting of bonus accrual assumptions payroll taxes and other payroll related items.
For the first quarter, we anticipate that interest expense will be approximately $9 million and then depreciation and amortization expense will be approximately $30 million.
Our effective tax rate is expected to range between 22 and 24% in the first quarter.
Our full year 2020 capital spending forecast as approximately two and a high percentage of revenue for infrastructure related growth and maintenance and $5 million to $10 million per capital investment in surface equipment for our portfolio of PSP leased assets.
For 2020, we anticipate another solid year of cash flow generation and expected free cash flow as a percentage of revenue to be consistent with 2019 performance at approximately 10% of sales.
At this time I'll turn the call back over to somewhat for some closing comments before we open the lines for Q anyway.
Thank you Jay.
Before we open the cost to questions I'd like to update you on our progress on the key growth initiatives, what 2020 and beyond.
Yes be growth initiative being commercialized a new product in the fourth quarter call power fit water flood slim whole SB applications. The profit motive will provide customers increased productivity in smaller diameter unconventional low.
And it is a demonstration of the efforts to continually improve our products what are the benefit of customers.
We have seen good adoption for this new technology by our customers and we are excited about this new product.
We continue to remain focused on expanding our presence with international oil companies, we have making good progress with the I will see be secured and Q3 up last year.
We expect to capture field trials with at least one in addition to like we'll see in the first half of Twentytwenty.
With the S&P capital spending in the U.S shifting to the Super majors, we believe that it is important to grow over relationship with these important customers. Additionally, we expect to leverage that relationship of champion ex with these customers once the merger closes.
Second both initiative is focused on existing welcome lotion store rod lift as production decline.
Against the backdrop off a 9% decline in full year 2019, MP capital spending in North America, we achieved low single digits revenue growth in about Rod lift product line flux fully of 2019 during 2019 that relative performance up this product line. This impressive.
Demonstrates the value we provide to customers through our high quality William products I'm excellent aftermarket support as they work took on what the growing pull up rod lift conversion candidates.
Turning to our digital growth initiatives during the quarter, we announced an important technology development agreement with the DCP midstream, which will enable us to augment our artificial intelligence predictive models and our spotlight Smart heart vantage technology with the Dcps process data I'm operational knowledge.
To increase asset liability enhance safety and improve efficiency for midstream operators, we have privileged to partner with such a well respected midstream operator in DCP and and believe it is a testament to our digital capability and the quality of the products and services we provide a.
Additionally, we launched export 3.2 oil production optimization software. This software has a number of powerful updates driven by artificial intelligence and advanced physics based models that help our customers reduce lifting costs and increased production efficiency through real time optimization mouth artificial lift and chemical injection.
Performance enhance the surveillance for safety and environmental protection in 2019, we achieved 13% growth in the digital products and services, we expect to achieve on of the yet off strong growth in twentytwenty.
Our fourth growth initiative is the continued innovation and advancement offload Diamond Science. This technology in the fourth quarter of 2019, our drilling technology segment had 21, new paid them see shoot bringing the total issued patents since the beginning of 2008 to 806.
Also continued to develop application specific designs for our polycrystalline diamond pet owners across multiple basins to enhance performance in both operation on the impact of applications, we have committed to advancing our diamond sense of technology, and bringing the best technology to adult with customers to enable them to build fast.
So while reducing yet be operate does overall drilling costs.
Final growth initiative is focused on driving continued adoption offload diamond bearings in downhaul applications, including rotary Steerables mud motors on public generators.
Full year 2019 revenue in this product line grew 7% compared to 2018 in the second half of 2019, our diamond bearings product line was impacted by the capital discipline offload oilfield service customers due to the effects of capital discipline, we do expect the adoption rate by I would always feel.
So with customers to slow however, we continue to make good progress on developing non oil and gas applications flub. This important technology.
During the fourth quarter, we continue to at massive a growth initiatives and against a challenging macro environment. We continue to operate with caught this cost discipline, while achieving important strategic goals.
Duty Twentytwenty, we will look to successfully execute our planned merger with SAP Nx and continued to drive growth across our businesses.
Finally, I want to thank all of our employees for their continued efforts on passion in improving the lives of our customers our employees our shareholders I'm, though to communities.
I'm proud of that accomplishments and it's a privilege for me to lead to such a great team.
With that I'd like to open the call for questions.
Thanks, very much we can begin our question and answer session. Now if you have a question. Please press star one on your phone.
If we remove from the question to you May press, the pound signed or the has G.
There may be a delay before the question is amounts. If you are you thinking speaker phone you may need to pickup in suffers from for Prosigna numbers. Once again. If you have your question. Please press star one on your phone and our first question comes from Chase Mulvehill.
Hey, good morning.
Good morning integrated.
I guess first thing if I can just come back to the guidance for one Q a bit in.
And maybe if you could just provide a little color about.
How you think revenue growth will be split between the segments and then maybe some help on the.
Pat margin outlook for one Q given that there was some moving pieces in the fourth quarter.
Yes.
So.
Good.
Looking at that both the segments starting with the drilling technologies. So we do.
As we mentioned in his prepared comments.
We also see that sequential growth in auto rate. So we expect a drilling technologies to.
Showed sequential improvement.
And along with that we expect margins.
Improve compared to the fourth quarter.
Now with respect to.
Segment.
We expect up sequence show.
In revenue.
But on the cost side very ugly to see some reset off certain costs.
Particularly around digital making some investments in digital.
And the bonus lease that as well as payroll related costs will reset. This is something we typically see in the foot portal up the of the year. So people back and looked at Q4 Q1 look last year, you will see a similar phenomenon.
So you see.
Sequentially, we expect the PD margin to be marginally lower compared to what we saw in Q4.
But we would expect that margin to improve that yet progresses. So.
Chase, we we typically talk about.
Just to be in that 20% to 21% range. So.
May be a tad bit low of them.
The 20% in the first quarter, but we do expect.
Phd margins to get back into that range as me.
Progresses.
Okay, all right Thats helpful. Appreciate the color.
And then noticeably absent from from the prepared remarks at least I Didnt hear anything about the impact from China owns the supply chain side, whether it's from the Damen grid immuno or anything related to the to the lift business. So you guys expect to have any impact in one Q.
Or maybe in Twoq.
Yes, I think for us its chase I would say that in the you know that the two areas view conducting mentioned the diamond great. That's well open the in the auction lift, particularly around the B product line.
And we don't expect any major impact upon the diamond side I think.
And at least for the Q1 in Q2.
On the fee side, I think that the impact on Q1 will be margin, though in though.
But.
If things continue to.
Progress and we don't see opening up meaningful opening up off the supply chain.
Well into let's say in March then we may stop.
And impact in Q2.
And I would say that that that would be.
I would expect it to be an industry wide impact.
For us our main supplier in the product line.
It's actually back to work.
We had in constant types with them.
Bye bye.
We do have some other components water, which.
The supply of sub so not back to work we have enough inventory.
At least asset portfolio, if you have seen the low.
Enough of that to continue Q1, I think we have to see how Q2 shapes up.
Okay already so I have I'll turn it back over thanks. So.
Okay.
Our next question Hughes from George O'leary.
Good morning, guys.
Morning.
The the international activity outlook, you all mentioned the could see just kind of underlying activity up in the mid single digits ballpark.
Last year, you guys kind of outpaced that international activity granted the revenue line. You noted 12% grows in international revenues when energy could frame the expectation for international revenues. This year, even at just as a percentage or a multiplier versus that expected.
Gross in international activity.
Yes.
I think we.
I think.
What what we have said before.
The next three four years, we expect to consistently outperformed.
The market, but thats back to international growth. So I think you should expect us to.
Meaningfully outperform.
The.
Be spending, which we think would be up about.
Lower to mid single digits internationally, and you should expect us to meaningfully outperformed that.
Okay. That's that's helpful. So thank you and then the chart do you guys have on page 13 in the lower ride sharing the SP demands netback isn't intriguing when I was just curious for that production and automation technology segment are you seeing.
Similar trend across the other forms of list and then just generally how our conversions to rod lift progressing our guys slowing that conversion cadence down.
Given the desire to preserve cash flow or NPS doing that.
Curious about those two items.
Yeah, So I think.
When Shelly.
Seeing activity.
From.
Yes, and pretty much I would say.
On a photo.
Artificial lift product line.
The domestic to the Rod I think one thing be monitoring with rod lift as a capital discipline.
A down the conversions.
One of the thing.
Couple of customers we have noticed.
Yes.
They.
Yes, plugging and abandonment, some low flowing well think about.
Set up flowing at 50, not 20 barrels a day type wells.
Sometimes that reuse that acute and what the conversion.
No I'm going to 50 of 200 Boes, a day about converting them to rod lift so we've seen a little bit of that so but I do think that the conversion will be an ongoing process, but we are seeing this.
Interesting phenomena of how the using data and by plugging some real low flowing well so thats only.
The thing we noticed.
New in the fourth quarter.
Very helpful color. Thank you some I think you Jay.
Our next question from Scott Gruber.
Yes, good morning.
Good morning, Scott Moneta.
Starting on the digital business.
Just to try to frame up the growth for this year, we think about the the lift business being kind of flattish this year exit to exit how should we think about growth on the digital side.
[music].
Yes, I mean, I think Scott, Yes, we said in the prepared remarks, we expect.
Expected growth.
Strong growth in the year end.
I would say what aspiration in that digital businesses continued to have at least the low.
You know low double digit type of growth.
Digital business year over year.
No.
13% in 2018.
2018 in that and what I would call it a challenging north American market backdrop.
So.
We expect twentytwenty market backdrop to be challenging, but right now about new products, we are introducing.
That continued adoption.
We believe we should be able to achieve again.
I would say aspiration of low double digit growth in digital.
Got it.
And just turning to the cost side of equation, you and peers continue to adjusted cost base, given the backdrop hearing us.
Are you able to quantify how much more savings as possible as you addressed the cost through June 2020.
Yes, I mean I think.
What I would say here.
[music].
Scott is that I think in fourth quarter. If you look at the year over year, I think that cost savings roughly about $5 million.
And.
We expect to build on that.
As we come into the second quarter third quarter because.
Continuing to look at options and continuing to make that as part of our ongoing effort.
So I don't want to quantify much on this call, but you should expect that that $5 million to get better.
Got it maybe ill sneak one last one just an update on the non oil and gas applications for your Diamond technology are we going to see.
The announcement on on that front.
From a commercialization standpoint.
2020.
We are progressing well on that.
Scott I think we've mentioned before.
It takes time, we said that it takes about two to three years before we can.
Break into a new application because of that testing requirements.
So I would say that could be up.
Progressing well along that we have.
We are investing more in that area directing some up what investments.
Into those into those areas.
So I think you know you should see US continued to update in the calls about of yield progressing on that.
Great I appreciate the color. Thank you.
Thanks Scott.
Next question from Cole Sullivan.
Hi, good morning.
On the.
Drilling business.
What is your sense of.
Centuri levels at customers currently obviously, we've been picking up on the order front over December January and February I was just kind of curious on how low they got.
During the Destocking and how much catch up they may need to do.
Yes, I mean, I would say at this point I would say pretty much.
All of the customers.
So when we talk to have literally reach that destocking water and the process.
I have started the process of restocking.
Now how far they will go with the restocking coal is is that something hard to predict and given.
That is count trajectory.
Assumptions, so, but but that to the to paying that.
For our sequential growth.
Yeah.
In the link technology, if you look at that rig count trajectory, we count does not move right. If you think about from Q4 actually.
I'm extended modestly come down.
We had we exist that Q4.
How Q1 now.
But that lease talking aspect as being a big driver.
In the initial face us up January.
Then I won't share gain capital.
The other aspect of it which is also.
Driving our our continued auto rate.
So.
I think a.
Feels that Q1, you should see a meaningful growth in that drilling technologies business, but the combination of both the.
Restocking in the initial stage of January and.
And then that what we have seen now with more at all.
What youre seeing in.
Most of February is.
I would want.
Shale growth plus those stable auto rates, which we see so I expect the ability kind of water waste.
Is to continue.
Okay.
And then.
You mentioned margins, obviously improving in drilling.
In the first quarter with with the rebound is there anyway is there any reason.
We should see these margins get back to above 30% later this year.
Even despite of the North American headwinds that we're seeing.
I think.
That is no reason it wouldn't get above 30%.
As we get as we go further into the year goal I don't see any reason weight. So you will act as long as activity stabilize yes, where we're at right now we would we think thats a safe assumption coal.
Alright, Thank you I'll turn it back.
Our next question from blood trend.
Thanks. Good morning, My first is on the U.S.P. side, you gave us the spending bogey down 11%. You also mentioned that you're trying to high grade. Some of your customers. You also mentioned biopsy penetration continuing wondering if you expect to outperform or underperform just organic yes.
Spending in fiscal 2000, given those inputs.
I would say Alaska, Jay to make couple of comments related to these fit but I would say that set us back to we expect to Oh on.
That spending down on our own capital spending down on profit as Blake I would say that we are focused on converting some of these customers purchases.
So I think that that will that will help and the continued penetration, but that I will see.
You mentioned that we are making really good progress with the one.
To be secured in the Q3 up last year, so thats continuing well. So we will we will outperform the ending.
I would want to spending down.
So Dave any for the yes as someone mentioned Blake.
What we're taking the number down but we.
Like we have in prior years, we tend to outperform the overall markets.
Based on share gain initiatives.
Penetration and we would expect at that.
Technology and customer service focus would allow us to continue to outperform in 2020 relative to 2019, but we are taking some capital down just to make sure that we are.
Preserving the best returns and allocating capital to the best pain customers.
2020, so that we can top grade to customer list.
Understood. That's helpful color and then another on the artificial lift.
Business some of your larger peers has talked about the challenge state.
The Commoditized state of that business I'm, just wondering what you would say to push back on that sentiment and then maybe if you've seen a step change in commerciality from some of the larger peers, whether or not that would be an opportunity for you to maybe take additional share or at least buoy the profitability in that business moving forward.
Yeah.
I think you know.
In August should lift outs as we have said before.
The important part of our differentiation and artificial lift while Saddam Hussein.
Our customer service.
Pure play offers and lift player we have enabled on mellow field.
Network.
Extensive in North America outlets.
Lead to customer meat.
Second as deep applications knowledge ability to argument that with the digital solution to continuously customers that use the lifting costs. So I think enough for us I think stay focused on customer service and.
Can you do we have while lower product lines.
Help customers improve productivity.
Can you help us.
Thats correct too.
Improving.
Margins I would say look I think the competitive landscape, particularly in broad lift is evolving.
You are probably seen him.
So I think it's something we are watching it guesstimate showed that.
Steve landscape is going to your wall.
And.
Maybe the opportunity be yet you know we are always looking to see how weekend.
Increase our share position as well as you know glow of margin profiles.
Got it I mean, I meant to satisfy rod lift there, but thats helpful perspective, then one more if I could squeeze it in I'm just going into the nature of the cost reductions in the drilling technologies segment, specifically just wondering to characterize how much of that was structural.
Versus perhaps cyclical and maybe as you add those costs back on with the restocking phenomenon that you're seeing in the first quarter should we expect slightly lower incremental margins moving into the back half of the year versus what we've seen historically or should they largely be on par.
So this is Jay with regard to the drilling technologies cost reductions most of that has all been variable as we saw the significant drop off in.
Rig count and cutter volume due to de stocking in 2019.
The other half the cost reductions that we talked about on the Q3, Paul was really more structural on the artificial lift side and we continue to evaluate more opportunities on structural cost savings on artificial lift, but with regards to drilling technologies. We would expect to see continued high incrementals as volume improves it just.
As we see large decrementals when the volume drops off in drilling technologies, but.
Following up on the previous question, we would expect to see.
On a run rate basis with stable drilling activity margins above 30% exiting 2020.
Helpful. I'll turn it back thank you guys.
Our next question from Tommy Mall.
Good morning, and thanks for taking my questions.
Hey.
I wanted to double back to your comments for the U.S.P. business, where you're looking to shift to more of a sale versus a lease model.
What's the level of appetite from the customer standpoint on that and are there others. Other suppliers in the markets that are approaching this the same way versus you see yourselves isn't early mover.
Yes.
I.
I would say that.
The customers and obviously clearly though in a capital.
Constrained environment.
That is.
It does set of customers always want to lease rather than.
But.
The right kind of service and technology.
Some of.
So what.
We cannot leave out if you decide not to lead to a particular customer in oil there'd be willing to invest in purchase.
I just want to be.
Good to clarify it's not that we are getting out of leasing that's not what you're saying I think what we're saying is in a market environment, because wallet, Thailand and challenging we want to make sure that we de risk our leasing.
With that type of customer base as well so that so so leasing will continue to be an important part of our.
Yes the.
We'll go to market and revenue generation mechanism.
What we're saying as we will prioritize.
Cash generation and.
So between means we will deploy.
Those leasing leased assets to that.
Right opportunities and great opportunities.
Now purchasing we are seeing if for example, the new products. We are introducing right. We are the causes cloud technology differentiation. It gives us an opportunity to.
Due to shift those type of.
Products with job differentiated technologies, more and more towards purchasing so those opportunities do exist.
But it will take the focused effort.
Okay. Thank you some of that that's a helpful clarification.
As a follow up I wanted to move to little bit bigger picture question here.
Specifically.
For the transaction that's pending.
You go.
For champion ex rather.
There's an opportunity to pull through.
Sales of your existing lift portfolio through their international footprint, I think thats clear and part of the rationale for doing the deal to begin with.
Could you drill down a little bit on that theme in terms of what geographies.
And or types of of.
Or parts of your lift business you feel most excited about the synergy opportunity for.
Yeah, No I think you're exactly right I think of that the that as a meaningful opportunity for us too.
No.
Leverage the international footprint of champion.
I think if you look at it.
If that region internationally.
Have you looked at some of the prioritize the us.
That is good opportunity.
We'll be in the us like Egypt, Indonesia.
Certain parts of Latin America, as well as base looks like Ecuador. So these are some of the prioritized areas, but we don't have a apogee.
Good international footprint, and we can give us an opportunity to leverage if you look at the product line that will range between rod lift.
With the cavity pump.
And even espeed, particularly in places like Ecuador, right. So it goes up that's both of them. Other examples of opportunities we've looked at.
Okay. Thank you that's all for me.
Thank you that concludes our question and answer session I now like to turn the call back over to Soma.
Yeah. Thanks again, everyone for do you have continued interest in the apogee and once again I want the tank our employees for their great contribution during the quarter.
Look forward to talking to you.
Quarterly earnings call. Thank you and have a great day.
Thank you ladies and gentlemen, this concludes todays conference. Thank you for your participation.
You may now disconnect.
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Yes.
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