Q4 2019 Earnings Call

February 28, 2020

Dead dead dead.

Refer to the fourth quarter $29 2019 financial and operational results announcement. We release yesterday for full disclosure on forward-looking statements and reconciliations of knowing got measures wage now like to turn the conference over to Blake the berry drill clicks president and chief executive officer, please go ahead sir.

Directly you are talking about a hundred million and maybe eight to ten million of higher R&D that is despite forty to fifty million of cost savings that you guys had Kathy bridge the gap between the two.

So the the hundred million sg&a and the $28 million R&D. The sg&a is flat year-on-year. The R&D is up that forty to fifty million of cost savings comes across all lines. Not just those lines and the vast majority of that actually comes more than manufacturing and supply chain slide.

Ladies and gentlemen, thank you for standing by welcome to drill Clips conference call during today's call. All participants will be in a listen-only mode following the company's prepare comments. The call will be open for questions answers during the question-and-answer session. We ask that you limit your questions to do one and a follow-up. You can always rejoin the queue and update it invest your deck was posted under the investors tab on the company's website yesterday along and will be referenced during today's call. The conference is being recorded and a replay will be made available on the company's website following the call before we begin. I would like to remind you that real quick comments. May I am looking statements and discuss non-gaap Financial measures. It should be noted that a variety of factors could cause your Eclipse actual results to differ materially from anticipated results or expectations expressed in these forward-looking statements. Please refer to the fourth quarter 2019 financial and operational results announcement. We release yesterday for a full disclosure on forward-looking statements and reconciliations of New Jersey.

So the the hundred million sg&a and the $28 million R&D. The sg&a is flat year-on-year. The R&D is up that forty to fifty million of cost savings just across all lines. Not just those lines in the vast majority of that actually comes more on the manufacturing and supply chain slide.

Thank you on behalf of the management team. I would like to welcome all of you to today's you're in conference call last February. We hosted our initial conference call and said we believe that home these calls annually made the most sense for Grill quip and the investment Community. We received positive feedback from that call along with our plan to do them once per year and are pleased to have you join us again this year to discuss the strong results. We had in 2019. I will begin with a high-level review of our 2019 results and highlight many accomplishments that we were able to deliver wage being a detailed review of our highly successful transformation launched in late 2018. I will then turn the call over to Jeff Byrd senior vice president of production operations and financial officer to review the financial results and give General guidance for 2020.

Got it versus versus the F and Engineering there were some very early wins on sg&a and Engineering beds, but those really happened in in late eighteen early nineteen. So the back of your savings from those would have been booked would have been booked in late eighteen and you had that full Europe savings there. So you're not going to see incremental savings, not much incremental Savings in sg&a Sunday from 19 to 20.

Got it versus versus ESPN and Engineering there were some very early wins on sg&a and Engineering beds, but those really happened in in late eighteen months early nineteen. So the full year savings from those would have been booked would have been booked in late eighteen and you had that full year savings there. So you're not going to see incremental savings not month savings in sg&a and R&D from 19 to 20.

Most of that remaining twenty million that needs to come out is going to be in manufacturing and supply chain.

Thursday Thursday

And is the implication that he has in the past first quarter of the margins would be some pass some headwinds because of the shift in Duty coronavirus, but beyond that margins should get back to where where we saw second half nineteen or maybe better. Yeah. I mean, I think with the profile that you'd see is there will be a little bit ahead wins on margins because of that and then look just the lower volume off obviously puts a little bit of pressure on margins as well. But candidly as you go back as you go back to the back end of the year and you start to see the twenty million dollars would go through that should improve the margins as well through the back half of the year. So you'll probably start with a little bit of margin headwind in q1.

most of that

Remaining twenty million that needs to come out is going to be in manufacturing and supply chain.

And is the implication that he has in the first first quarter of the margins would be some pass some headwinds because of the shift in do the coronavirus but beyond that margin should get back to where where we saw second half nineteen or maybe better. Yeah. I mean, I think the profile that you'd see is there will be a little bit ahead wins on margins because of that and then look just the lower volume off obviously put the little bit of pressure on margins as well. But candidly as you go back as you go back to the back end of the year and you start to see the twenty million dollars on a roll through that should improve the margins as well through the back half of the year. So you'll probably start with a little bit of margin headwind in q1 and ramping up through Q4.

Got measures I would now like to turn the conference over to Blake the berry.

I will then provide some closing.

And open the call to questions.

Drill Clips president and chief executive officer, please. Go ahead sir.

I'm particularly proud of the many achievements we made in an improving but still uncertain offshore energy environment over this past year our employees and management team continue to provide new products, which deliver permanent cost savings to our customers transform or operating model to drive efficiencies execute operationally and generate free cash flow while we reduce cost and rationalize our Global footprint as part of our transformation our commitment to our customers remained unchanged and we continue to provide the highest level of service and support standing customer base.

Thank you on behalf of the management team. I would like to welcome all of you to today's you're in conference call last February. We hosted our initial conference call and said we believe at home these calls annually made the most sense for drill quip and the investment Community. We received positive feedback from that call along with our plan to do them once per year and are pleased to have you join us again this year to discuss the strong results. We had in 2019 over again with a high-level review of our 2019 results and highlight many accomplishments that we were able to deliver wage being a detailed review of our highly successful transformation launched in late 2018. I will then turn the call over to Jeff Byrd senior vice president of production operations and financial officer to review the financial results and give General guidance for 2020.

Thursday

That's all for me. Thank you for

Our operational focus and execution led to a $30 million dollar or 8% year-over-year growth in Revenue to 415 million. We saw Revenue growth throughout 2019 with q1 2019 Revenue at $94 million in Q4 2019 Revenue at $109 million more importantly though. We translated took a new growth to quarterly adjusted ebitda increases as well adjusted ebitda grew by thirty six million or 209% year-over-year to fifty three point eight million dollars.

Deb

we have time for one more question and I will come from Blake of wolf research, please. Go ahead.

I will then provide some closing.

Comments and open the call to questions.

many of the fine

Angel and operational gains we achieved were directly attributable to our ability to deliver on our ambitious sales transformation and cost savings initiatives as we previously announced in 2018. We began implementation of a full business transformation centered around a structured approach to sales and cost performance.

We see the results of these efforts in our 2019 operating performance. Our retool commercial teams delivered increases in product bookings created an organization to specifically Target new customers and expand sales of new products and solutions to our existing client base.

Our operational focus and execution led to a $30 million dollar or 8% year-over-year growth in Revenue to 415 million. We saw Revenue growth throughout 2019 with q1 2019 Revenue at $94 million in Q4 2019 Revenue at $109 million more importantly though we translated in a new growth to quarterly adjusted ebitda increases as well adjusted ebitda grew by thirty six million or 209% year-over-year to fifty three point eight million dollars.

Ladies and gentlemen, thank you for standing by welcome to drill Clips conference call during today's call. All participants will be in a listen-only mode following the company's prepare comments. The call will be open for questions and answers during the question-and-answer session. We ask that you limit your questions to do one and a follow-up. You can always rejoin the queue and update it invest your deck was posted under the investors tab on the company's website yesterday along with earnings release and will be referenced during today's call. The conference is being recorded and a replay will be made available on the company's website following the call before we begin. I would like to remind you that Joe quipped comments. May I am looking statements and discuss non-gaap Financial measures. It should be noted that a variety of factors could cause your Eclipse actual results to differ materially from anticipated results or expectations expressed in these false statements. Please refer to the fourth quarter 2019 financial and operational results announcement. We release yesterday for a full disclosure on forward-looking statements.

The changes we made were systemic and are now part of our DNA moving forward. We initially announced a target of forty to fifty million dollars of total annualized cost savings from our company-wide initiatives to reduce operating costs and improve efficiencies. I'm very pleased that through the efforts of our Global Workforce. We were able to deliver annualized Savings of $52 of dollars above the high end of our expectations. We maintained a footprint and key markets while leveraging an integrated supply chain model, which will create more flexibility in addressing our customers needs.

many of the finance

And operational gains we achieve or directly attributable to our ability to deliver on our ambitious sales transformation and cost savings initiatives as we previously announced in 2018. We began implementation of a full business transformation centered around a structured approach to sales and cost performance.

the sustain

No cost savings initiatives. We accomplished are optimizing and improving our infrastructure across manufacturing supply-chain sg&a engineering and R&D team and have certainly contributed to the strong growth in adjusted ebitda be generated in 2019 as we look to 20 20 and Beyond we will focus on productivity Improvement and further leveraging our supply chain and procurement capability.

We see the results of these efforts in our 2019 operating performance are retooled commercial teams delivered increases in product bookings created an organization to specifically Target new customers and expand sales of new products and solutions to our existing client base.

The fourth quarter saw Revenue continue to increase to $109 and adjusted ebitda grow to nearly $16 in addition to strong revenue and adjusted ebitda growth month. We were also able to sustainably grow our product bookings. The fourth quarter of 2019 was the first time in twenty two quarters that we achieved non-project product bookings above $1,000 for the full year of 2019. We saw our product bookings increase year-over-year by $144 million dollars or 59% to 358 million dollars are Innovative and award-winning R&D remains a key component to the Future growth and continued commercial excellence.

the sustain

new technology product

Looking screw in 2019 to approximately 13% of total product bookings or $51 more than tripling the 15 million dollars. We achieved in 2018 in 2019. We received orders for our new big ahead system specifying the DXE profile as well as for high-strength high fatigue Badger connectors. We also received another Spotlight on new technology award from OTC for the X-Pac d e liner system, which is the industry's first double expansion pack system, and it's particularly. Well suited for large-diameter casing strings used when drilling Wells and deep water.

In October 2018. We entered into a front-end engineering and design or feed contract and frame agreement with Premier oil exploration and production Limited in relation to the subsea production systems for the sea. Lion phase one development located offshore the Falkland Islands. This project has continued to move forward towards project sanction, and we continue to work with Premier on Post Feed clarification and project development to conclude fully term contract agreements for project execution. We encourage that this project continues to move forward.

new technology product

Things grew in 2019 to approximately 13% of total product bookings or $51 more than tripling the 15 million dollars. We achieved in 2018 and 2019. We received orders for our new big ahead system specifying the DXE profile as well as for high-strength. Hi fatigues larger connectors. We also received another Spotlight on new technology award from OTC for the X-Pac d e liner system, which is the industry's first double expansion system, and it's particularly. Well suited for large-diameter casing strings used when drilling Wells and deep water.

as we announced

Last year in February of 2019 our board authorized an additional $100 a share repurchase program. This was an addition to the 100 million share repurchase program that we completed in 2018 in 2019. We were purchased over six hundred fifteen thousand common shares for a total of 26.6 million dollars under the current program as you can see, we still have over 70 million of available remaining to opportunistically buy back more shares.

With a debt-free balance sheet and $399 in cash at year end 2019. We have significant dry powder for future repurchases as well as investing in possible funding needed for key projects supporting an upturn and pursuing strategic acquisitions.

As you can see we worked hard in 2019 executing on our business and sales Transformations and remain focused on achieving our strategic goals while operating efficiently and generating free cash flow through this downturn with that. I will turn the call over to Jeff to review the financials and provide more details on our cost-cutting initiatives.

as we announced

Last year in February of 2019 our board authorized an additional $100 a share repurchase program. This was an addition to the 100 million share repurchase program that we completed in 2018 and 2019. We were purchased over 650,000 common shares for a total of 26.6 million dollars under the current program as you can see, we still have over 70 million of available remaining to opportunistically buy back more shares.

Thank you.

Good morning, everyone our financial results for the fourth quarter showed continued Improvement revenue for the fourth quarter increased from the prior quarter to $109. This was at the height of our guidance range of 100 million to $110 and was primarily driven by increased service and leasing activity for the full year 2019. Our revenues were $415 an increase versus 2018 of about 8%

With a debt-free balance sheet and $399 in cash at year end 2019. We have significant dry powder for future repurchases as well as investing possible funding needed for key projects supporting an upturn and pursuing strategic acquisitions.

on a segment basis our Western Hemisphere revenue for the fourth quarter of 2019 continued to increase from the prior quarter by $5 or 8% primarily driven by in Chrome and subsea. Well heads and trees as well as aftermarket Revenue in the Gulf of Mexico and parts of Latin America are Eastern Hemisphere Revenue decreased by approximately four million dollars month or 14% in the fourth quarter compared to the prior quarter to the timing of product sales asia-pacific revenue was flat. Sequentially we continue to see that our cost initiatives translated to Stronger overall operating margins for the full year 2019 gross operating margin was 29% which was up from the 24% off I realized in 2018.

Thank you.

as a reminder Revenue

To increase over thirty million dollars yet cost of sales only increased one point four million dollars. This is despite a negative mix impact from higher fabricated joint Revenue agent mostly seen in the second half of 2019 moving to sg&a expenses for the fourth quarter of 2019 sg&a was $21 month reduction of six point five million dollars compared to the third quarter primarily due to a one-time year-end adjustment to stock compensation expense.

on a segment basis our Western Hemisphere revenue for the fourth quarter of 2019 continued to increase from the prior quarter by five million dollars or 8% primarily driven by increase in subsea wellheads entries as well as aftermarket Revenue in the Gulf of Mexico and parts of Latin America are Eastern Hemisphere Revenue decreased by approximately four million dollars month or 14% in the fourth quarter compared to the prior quarter to the timing of product sales asia-pacific revenue was flat. Sequentially we continue to see that our cost initiatives translated to Stronger overall operating margins for the full year 2019 gross operating margin was 29% which was up from the 24% realized in 2018.

For the full year 2019 sg&a expenses decreased to $97 from $101 in 2018. We captured meaningful Savings in 2019 and brought our organization in line with anticipated future needs these gains were partially offset by salary inflation as we return to a more normalized Merit cycle despite these head winds sg&a expenses as a percentage of revenues decreased to 23% for 2019 down from 26% for 2015.

as a reminder Revenue

Increase over thirty million dollars yet cost of sales only increased one point four million dollars. This is despite a negative mix impact from higher fabricated joint Revenue off mostly seen in the second half of 2019 moving to sg&a expenses for the fourth quarter of 2019 sg&a was $21 month reduction of six point five million dollars compared to the third quarter primarily due to a one-time year-end adjustment to stock compensation expense.

as we move into

We would expect sg&a expenses to average approximately twenty-five million dollars a quarter.

As Blake discussed we have delivered transformational cost savings that helped us expand our ability to generate adjusted ebitda in 2019. And we expect the full impact of money savings will be seen in 2020. If you look at the presentation, we posted to the website on slide ten, you'll see that we ambitious is set our savings goal at forty to fifty thousand dollars and we were able to exceed that goal by methodically executing our transformation initiative while optimizing our operating capability. We deliver at $52 in annual savings and we break that out by area where we be able to capture those savings We are continuing to transform the way we do business with a view towards leveraging operating costs while ensuring we meet and exceed customer expectations.

For the full year 2019 sg&a expenses decreased to $97 from $101 in 2018. We captured meaningful Savings in 2019 brought our organization in line with anticipated future needs these gains were partially offset by salary inflation as we return to a more normalized Merit cycle month despite these headwinds sg&a expenses as a percentage of revenues decreased to 23% for 2019 down from 26% for 2018 month.

Early in 2019. We began Arlene Journey. This journey is touched every location and every function within our business this past year 230 employees participated in seventy events across are four major manufacturing locations, and we are on Pace to double that amount in twenty-twenty. Probably the most important element of this transformation is our daily gimba walks each day at every one of our manufacturing facilities cross-functional teams walk the shop for reviewing performance from the prior day. God allows us to quickly understand and react to problems in real time earlier. I use the word Journey.

as we move into

20/20 we would expect sg&a expenses to average approximately twenty-five million dollars a quarter.

As Blake discussed we have delivered transformational cost savings that help us expand our ability to generate adjusted ebitda in 2019. And we expect the full impact of money savings will be seen in 2020. If you look at the presentation, we posted to the website on slide ten, you'll see that we ambitious is set our savings goal at forty to fifty thousand dollars and we were able to exceed that goal by methodically executing our transformation initiative while optimizing our operating capability. We deliver at $52 in annual savings and we break that out by area where we'd be able to capture those savings We are continuing to transform the way we do business with a view towards leveraging operating costs while ensuring we meet and exceed customer expectations.

This was intention.

The tools are employees learned and embrace in 2019 will continue to reap benefits in 2020 and Beyond.

We expect to see additional gains in productivity across all aspects of our business as they continue to apply the tools learned in 2019 to be clear. We realized not only 30 million dollars of savings in 2019 and expect the balance of the $52 million dollars to be realized in 20 20. In addition. We are targeting 8 to 10% gross productivity Improvement that will benefit 20 21 looking ahead to 20 20. The recent Corona virus outbreak has resulted in in Supply disruptions. We can in commodity prices and causing uncertainty for Global demand for oil and gas.

early in 2019

We began Arlene Journey. This journey is touched every location and every function within our business this past year 230 employees participated in seventy events across our faith or major manufacturing locations, and we are on Pace to double that amount in twenty-twenty. Probably the most important element of this transformation is our daily gimba walks off each day at every one of our manufacturing facilities cross-functional teams walk the shop for reviewing performance from the prior day. This allows us to quickly understand and react to problems in real time earlier. I use the word Journey.

We are proactively taking steps to minimize our supply disruptions the newly-built out supply chain organization and operating model allows to shift production to our facilities and a birthday Houston and this will help mitigate any disruption to our Singapore facility, but more importantly allow our employees to focus on more urgent personal needs to be looking at that income for the fourth quarter of 2019. We reported net income of 7.4 million dollars or Twenty One cents per diluted share adjusted income for the fourth quarter was 8.1 million or 23 cents per diluted share.

This was intentional the tools are employees learned and embraced in 2019 will continue to reap benefits in 2020 and Beyond we expect to see additional gains in productivity across all aspects of our business as they continue to apply the tools learned in 2019 to be clear. We realized approximately Thirty million dollars of savings 2019 and expect the balance of the $52 million dollars to be realized in 2020. In addition. We are targeting 8 to 10% gross productivity Improvement that will benefit twenty twenty-one.

as shown on

By Twenty One and the fourth quarter of 2019 our capex total $3. And for the full year was twelve million dollars. We estimate our normal annual maintenance capex off to run between $10 and $15 per year. However, as a result of the rapid acceptance of our new products, we will invest $5 to $10 off new running tools and 2020. This would bring our full-year capex guidance to 15 million to twenty-five million dollars in 2020. We will continue to monitor a global demand off and adjust our Capital expenditures accordingly.

Looking ahead.

20/20 the recent Corona virus outbreak has resulted in in Supply disruptions. We can in commodity prices and causing uncertainty for Global demand for oil and gas. We are proactively taking steps to minimize our supply disruptions the newly-built out supply chain organization and operating model allows to shift production facilities in Aberdeen Houston, and this will help mitigate any disruption to our Singapore facility, but more importantly allow our employees to focus on more urgent personal life.

Free cash flow for the fourth quarter of 2019 was $5 and the full year 2019 was three million dollars.

Looking at that income for the fourth quarter of 2019. We reported net income of 7.4 million dollars or Twenty One cents per diluted share adjusted. Net income for the fourth quarter was 8.1 million or 23 cents per diluted share.

Despite strategically investing in subsea tree and down whole tools inventory as Blake noted free cash flow is a key priority of ours and we remain focused on generating positive cash flow. This is a seventh consecutive year of positive free cash flow.

As shown on slide twenty one and the fourth quarter of 2019 our capex total $3000000 and for the full year was twelve million dollars. We estimate our normal annual maintenance capex to run between $10 and $15 per year. However, as a result of the rapid acceptance of our new products, we will invest five million dollars to ten million dollars in new running tools and 2020. This would bring our full-year capex Guidance the 15 million to $25 in 2020. We will continue to monitor our goal and and adjust our Capital expenditures accordingly.

Nation of our new operating model and focused efforts of Arlene tools. We are targeting reductions in overall working capital between now and mid twenty Twenty-One. If you look at slide 13 in the presentation, you will see that we are targeting a 45 to 60 day reduction in our cash-to-cash cycle across all elements of working capital for 20 28. We have redesigned our compensation metrics to include working capital turns as a key objective.

Your end we had cash-on-hand of $399 and thirty-three million dollars available in our abl facility resulting in approximately $432 off of available liquidity. We remain committed to Investing For the long-term returning cash to shareholders and pursuing strategic acquisitions.

free cash flow for the fourth quarter

For 2019 was $5 and the full year 2019 was three million dollars.

We are well positioned to capitalize on opportunities in the future and remain focused on continuing to optimize our operating model and allocate Capital efficiently.

Through a combination of our new operating model and focused efforts of Arlene tools. We are targeting reductions in overall working capital between now and mid twenty Twenty-One a look at slide 13 in the presentation. You will see that we are targeting a 45 to 60 day reduction in our cash-to-cash cycle across all elements of working capital for 20. We have redesigned our compensation metrics to include working capital turns as a key objective your end. We had cash-on-hand of $399 off $33 available in our abl facility resulting in approximately $432 of available liquidity. We remain committed to Investing For the long-term returning cash to shareholders and pursuing strategic acquisitions.

with

That said I will turn the call back over to Blake.

Thanks Jeff as we look to 20 20 and Beyond we remain cautiously optimistic about the offshore energy recovery despite the recent decline in oil pricing and downward pressure on global man due to the Coronavirus.

Our proactive approach in 2019 to focus on our Bottoms Up strategic plan with a vision toward the long-term viability of drill clip has made us a stronger company with the flexibility to adapt to changing markets while we experience some Supply delays due to the coronavirus. We are able to ramp up our production and Facilities outside of the asia-pacific region to meet our customer's demands. This near-term disruption has this forecasting revenue for the first quarter of 2020 to be between $95 and $105 million dollars prior to this month. We were expecting providing more favorable guidance in the range of 110 to $115 despite these uncertainties. I am encouraged that our product bookings office for the fourth quarter remains between $85 and $105.

We are well-positioned account.

So as an opportunity in the future and remain focused on continuing to optimize our operating model and allocate Capital efficiently.

With that said I will turn the call back over to Blake. Thanks Jeff as we look to 20 20 and Beyond we remain cautiously optimistic about the offshore energy recovery despite recent decline in oil pricing and downward pressure on global demand due to the Coronavirus.

We spent the past.

T months re-evaluating our overall business and product lines and believe that we realigned and reorganized our entire company to operate more efficiently in any macro environment will no longer manufacture everything and every location but instead we will find the cost effective manufacturing solutions that leverage our newly created supply chain capability and ensure customers get quality products while maximizing the returns for the company. We will continue to make strides in fine-tuning our supply chain to ensure that we capture long-term sustainable improvements.

Our proactive approach in 2019 to focus on our Bottoms Up strategic plan with a vision toward the long-term viability of drill quit has made us a stronger company with the flexibility to adapt to changing markets while we experience some Supply delays due to the coronavirus. We are able to ramp up our production and Facilities outside of the asia-pacific region to meet our customer's demands. This near-term disruption has us forecasting revenue for the first quarter of 2020 to be between $95 and $105 million dollars prior to this month. We were expecting providing more favorable guidance in the range of 110 to $115 despite these uncertainties. I am encouraged that our product bookings s office for the fourth quarter remains between $85 and $105 million dollars.

We have an experience results-driven organization delivering first-class service and a strong clean balance sheet with nearly four hundred million in cash on hand. We walk you to focus on R&D and leverage are technologically Innovative products to grow revenue and product bookings. Most recently. We are getting interest from both dependents and Majors regarding our impressive new product pipeline as a result. We expect to spend an incremental eight to ten million dollars on research and development and twenty twenty-two accelerate a product development and future growth in revenue for these new products.

We spent the past eighteen.

Re-evaluating our overall business and product lines and believe that we realigned and reorganized our entire company to operate more efficiently in any macro environment. We will no longer manufacture everything and every location but instead we will find the cost effective manufacturing solutions that leverage our newly created supply chain capability and ensure our customers get quality products while maximizing the returns for the company. We will continue to make strides in fine-tuning our supply chain to ensure that we capture long-term sustainable embankment.

Therefore we estimate quarterly.

engineering expense to now average around $7

Finally, we will build on our long history of generating free cash flow and delivering profitable growth which should meaningfully add value to our shareholders with that. I will turn the call over to the operator to open the line up for questions.

Thank you. We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys to enjoy your choice, please press * then two at this time. We'll pause momentarily to assemble our roster.

We have an experienced results-driven organization delivering first-class service and a strong clean balance sheet with nearly four hundred million in cash on hand. We walk in you to focus on R&D and leverage are technologically Innovative products to grow revenue and product bookings. Most recently. We are getting interest from both dependents and Majors regarding our impressive new product pipeline as a result. We expect to spend an incremental eight to ten million dollars on research and development and twenty twenty to accelerate product development and future growth in revenue for these new products.

And our first question will come from David Anderson of Barclays, please go ahead. Thanks. Good morning Blake. So question Brazil in your presentation. You would highlight Brazil is one of the main growth areas Monday through 2023 and seems to be one of the few offshore markets is actually starting to move right now. So I guess two questions there one. Can you remind us where you stand now kind of contracts for well heads with your customers. I think a big carry over from some of these contracts from last cycle. So just kind of curious. Is there any left on those contracts or do they need to be renewed and then secondarily, can you give us a status on your inventory on the ground? And I think you suck. I think I kind of maybe I missed it, but I think you said something about taking some of those Wells from arcade to supply other parts, but is it in is that recall there's a lot of inventory on the ground it goes already paid for but I never installed. Can you refresh our memory here where we stand on that?

therefore we estimate

ordering engineering expense to now average around $7

Thank you. We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys to withdraw your office, please press * then two at this time. We'll pause momentarily to assemble our roster.

Absolutely. Thanks David. So on on your first question with respect to existing contracts primary with petrobras in Brazil that contract

Did did expire petrobras if you remember we renegotiated the contract petrobras had an obligation to acquire a minimum or a place purchase orders for a minimum of amount of products, uh for the extended period they have fulfilled that requirement and so that contract although we may still Supply some items under I don't I don't expect it will get any new orders under contract specifically secondly with respect to inventory. Your your your recollection is pretty is pretty good. I think it was about two years ago. We were down in Mockingjay and at that point petrobras commented to us that they had 300 we'll head systems in inventory at that time. They have been burning through that inventory. It's it's actually been quite positive for us. We've we've worked hard to try and make drill quick the preferred provider in there. I think currently, you know, five out of every six wage

Absolutely. Thanks David. So on on your first question with respect to existing contracts primary with petrobras in Brazil that contract did did expire.

That petrobras drills uses a real quick Bullhead. So the good news is they're consuming are wellheads.

Petrobras, if you remember we renegotiated the contract petrobras had an obligation to require a minimum a place purchase orders for a minimum of amount of products out for the extended. They have fulfilled that requirement and so that contract although we may still Supply some items under I don't I don't expect it will get any new orders under that contract specifically off secondly with respect the inventory your your your recollection is pretty is pretty good. I think it was about two years ago. We were down in and at that point Peppa Pig commented to us that they had 300 Wellhead systems in inventory at that time. They have been burning through that inventory. It's it's actually been quite positive for us. We've we've worked hard to try and make drill quick the preferred provider in there. I think currently, you know, five out of every six Wells that petrobras drills username.

At a faster pace and we are hearing indications that petrobras is going to come out for a tender for about seventy Wellhead systems sometime in 2020. So we're looking forward to to them resume resuming. I'm more normal purchase and consumption operation. It's great. That was actually my next question is any tenders on the horizon that that's great to hear second kind of different subject altogether. I'm a substitute treeside. Can you just tell us how much of the kind of 2019 orders came from trees but a little bit bigger picture here substitute free market, you know, probably flat again for 2020. Is it fair to say kind of any material orders for you guys is unlikely I would think the big three guys out. There are pretty aggressive or not. Typically a game you guys like to play. So is it fair to say that probably twenty one is probably a better time frame for for some some of these orders on the on the tree side.

Actually, no sew 2019. We we had a pretty successful year. We booked nine subsea trees in 2019. So we were pleased with with that result and for 2020 we're actually internally expecting a little bit better bookings. You know, should the should the office environment hold we're expecting a little bit better bookings than than nine. So, you know, we're pretty positive about that. That's one of the reasons that we've bought a guided up our R&D. We've spent a lot of time on the subsea tree space trying to get a differentiated product. I believe we have one. We're going to leave sold the first one of those we call it a v e x t e so you can watch this space at OTC we're going to we're going to unveil that product at OTC this year and that product has gotten a lot of interest both from Independence, but yep.

Real quick. Go ahead. So the good news is they're consuming are wellheads at a faster pace and we are hearing indicates.

Options that petrobras is going to come out for a tender for about seventy Wellhead systems sometime in 2020. So we're looking forward to to them resume resuming a more normal purchase and consumption operation. It's great. That was actually my next question of any tenders on the horizon. So that that's great to hear second kind of different subject altogether. I'm a subsea treeside. Can you just tell us how much of the kind of 2019 orders came from trees? But just kind of a little bit bigger picture here substitute remark, it looks you know, probably flat again for 2020. Is it fair to say any material orders for you guys is unlikely I would think the big three guys out. There are pretty aggressive as not typically a game you guys like to play soja fair to say that probably twenty one is probably a better time frame for for some some of these orders on the tree side.

partly for major operators cuz

Does provide a significant differentiation that can save them some money during the installation and we have sold the first of those products and we we expect to deliver that package in the third quarter and hopefully get that installed in the in the fourth quarter of 2020. It's a great place. I've been covering you guys for fifteen years now and this is the first time I've ever asked a question on one of them. So I'm not going to third question. Okay. I think I think I've waited long enough. So just curious on the supply chain. You talked about that a couple of times. Can you just give us an update on your forging operations? It's not being run by global. Is that transition complete? How is it gone kind of what your your thoughts and kind of where we stand right now?

Actually, no sew 2019. We we had a pretty successful year. We booked nine subsea trees in 2019. So we were pleased with with that result and for 2020 we're actually internally expecting a little bit better bookings. You know, should the should the office environment hold we're expecting a little bit better bookings than than nine. So, you know, we're pretty positive about that. That's one of the reasons that we've bought a guided up our R&D. We've spent a lot of time on the subsea tree space trying to get a differentiated product. I believe we have one we're going to we've sold the first one of those we call it a v e x t e so you can watch this space at OTC we're going to we're going to unveil that product at OTC this year and that product has gotten a lot of interest both from Independence, but yep.

Sure, actually, it's it's been it's it's very positive. So the transmission is is complete Global is fully operational in that Ford facility. We do have a supply contract of them are supply chain people interact with a f Global probably almost daily on looking at Fordham and they're setting up a stocking program for us. So, we believe, you know, the lease arrangement of that Force facility afglobal is beneficial to both companies and quite honestly Jeff and I meet with the leaders at a f a global on a regular basis just to do a health check to make sure things are going well because in our view is this is a this Arrangement is beneficial to both companies.

partly for major operators cuz

Does provide a significant differentiation that can save them some money during the installation and we have sold the first of those products and we we expect to deliver that in the third quarter and hopefully get that installed in the in the fourth quarter of 2020. It's great lake. I've been covering you guys for fifteen years now and this is the first time I've ever asked a question on one of them call. So I'm not going to start question. Okay. I think I think I've waited long enough. So just curious on the supply chain. You talked about that a couple of times. Can you just give us an update on your forging operations? It's not being run by is that transition complete? How is it gone kind of what your your thoughts and kind of where we stand right now?

Right. Thank you very much.

Our next question will come from Shaun Meachem of JPMorgan, please go ahead.

Thank you. Hey, good morning. Good morning Shawn.

Sure, actually, it's it's been it's it's very positive. So the transmission is is complete Global is fully operational in that Ford facility. We do have a supply contract offer them our supply chain people interact with a global probably almost daily on looking at Fordham and they're setting up a stocking program for us. So we believe, you know, the lease arrangement of that Force facility afglobal is beneficial to both companies and quite honestly Jeff and I meet with the leaders at a mobile on a regular basis just to do a health check to make sure things are going well because you know our view is this is a this Arrangement is beneficial to both companies.

Can I start off with you? Just help us think about how to lower expectations for 1 Q Revenue flow into the rest of the year. It's like in other words. Is there a catch up opportunity will just the rest I get pushed to the right in terms of the the Cadence and and is there a margin impact from the shift away from Singapore in the near-term. Do you have you want to take that? Yeah. So, um what we experienced in what we're experiencing q1 candidly is just a temporary disruption and candidly that's just a result of an extended Lunar New Year and a number of our co-workers in Singapore. Go back to China for that new year and as they came back in we essentially lost about three weeks worth of production and then kind of a slow Ram from there. We are setting up operations in Houston to mitigate any future risk there. There'll be a really an immaterial impact from a margin standpoint. It will primarily be as we're setting that up in q1 wage.

Right. Thank you very much.

Our next question will come from Shaun Meachem of JPMorgan, please go ahead.

Thank you. Hey, good morning. Good morning Shawn.

due to less than a million dollars, I would imagine and right now we view this as very temporary will be up and running in Houston by the end of the first quarter be

Can I start off? Can you just help us think about how to lower expectations for 1 Q Revenue flow into the rest of the year. It's like in other words. Is there a catch up opportunity or just the rest I get pushed to the right in terms of the the Cadence and and is there a margin impact from the shift away from Singapore in the near-term you want to take that? Yeah, so long, uh, if what we experienced in what we're experiencing in q1 candidly is just a temporary disruption and candidly that's just a result of an extended Lunar New Year and a number of our office workers in Singapore. Go back to China for that new year and as they came back in we essentially lost about three weeks worth of production and then kind of a slow ramp from there. We are setting up operations in Houston to mitigate any future risk there. There'll be a really a material impact from a margin standpoint. It will primarily be as we're setting that up in q1.

Ending of the second quarter and we're fully operational in Singapore now again.

Got it, very helpful. Thank you for that. And then, you know just thinking a lot of the heavy lifting on self-help last year, you know in our recent discussions you talk about em, and I mean with being cut back on the table you brought back a decent of stock in the fourth quarter, your long-term business hasn't changed and get your stocks a lot cheaper as we've seen the move and the rest of the month it maybe could you get your latest thoughts on use of cash Beyond Organic capex and how that's evolving consider what happens with your stock versus maybe what sellers are expecting out there.

Sure. So first, you know through 2019 we were intently focused on the cost out program. I mean we did not spend a lot of energies on on anything other than let's execute on the cost out and and quite honestly that shows in the result that we had. You know, we exceeded the top end of the month or Target as we roll into twenty-twenty. We're we're stepping back and we're doing just a bottoms-up strategic review again based on what's the market doing, you know what our new capabilities and and quite honestly, you know is Jeff and I have have said before, you know through this self-help program. We basically integrated ourselves and in so doing developed a lot more skills within our management team that changes how we view uh-uh Acquisitions going forward. So, you know, we're going to hit the pause.

Due to less than a million dollars, I would imagine and right now we view this as very temporary will be up and running in Houston by the end.

the first quarter beginning of the second quarter and we're fully operational in Singapore now again,

Got it, very helpful. Thank you for that. And then, you know just thinking a lot of the heavy lifting on self-help last year, you know in our recent discussions you talk about em, and I mean with being picture back on the table you brought back a decent of stock in the fourth quarter, your long-term business hasn't changed when your stocks a lot cheaper as we've seen the move and the rest of them get any could you get your latest thoughts on use of cash behind organic capex and how that's evolving consider. What's happening with your stock versus maybe what sellers are expecting out there.

In here and and do that strategic review.

And and see where that takes us as we go forward share repurchase will probably always be in the mix that is our preferred method to return cash to the shareholders due to the system nature of our business. But you know, we we want to do that strategic review first and have them more broader. Look at what the market is offering before we make a call.

Sure. So first I'll see you know through 2019. We were intently focused on the cost out program. I mean we did not spend a lot of energies on on anything other than let's execute on the cost out and and quite honestly that shows in the results that we had. You know, we exceeded the top end of the month or Target as we roll into twenty-twenty. We're we're stepping back and we're doing just a bottoms-up strategic review again based on what's the market doing, you know what our new capabilities and and quite honestly, you know is Jeff and I have have said before, you know through this self-help program. We basically integrated ourselves and in so doing developed a lot more skills within our management team that changes how we view Acquisitions going forward. So, you know, we're going to hit the pause.

He's been up to me. Great. Thank you guys. Thanks John. Our next question will come from what Simmons? Pardon me. Cohen, please go ahead.

Thank you. I wanted to ask on the order Outlook you guys tempered the revenue outlook for obvious operational Reasons. I'm curious, you know, we didn't have this virus concern and and kind of the concern on the oil price. Would your order out look look any different and and Flake? I know it's early days here with the with the impact virus. Can you kind of talk to any customer conversations you've had and and how customers might be thinking about what to do from here. Sure. Thanks, Mark look, you know as long as we said in the call, you know, we we were prepared to forecast a a q1 revenue kind of in the 110 to 115 range. We were entering 2020 very optimistic done the heavy lifting our sales transformation and execution was is paying dividends and still is we did not change our bookings forecast for the quarter dead.

in here and and do that strategic review and

And see where that takes us as we go forward share repurchase will probably always be in the mix that is our preferred method to return cash to the shareholders due to the cyclical nature of our business. But you know, we we want to do that strategic review first and have a more broader. Look at what the market is offering before we make a call.

Please turn off to me, please. Thank you guys. Thanks John. Our next question will come from what Simmons dead Cohen, please go ahead.

We're having conversations with our customer.

Most of our customers are still in the wait-and-see mode most believe this is transitory. It's going to come and go and particularly in the offshore space unlike wage the shorter cycle business, you know, our customers use our much longer-term and and you know from from the, you know plan to development and first oil. It's just a broader time. So I think you know, I'm hoping that we don't really see any change in in our bookings profile as the year progresses.

Thank you. I wanted to ask on the order Outlook. You guys are tempered the revenue outlook for obvious operational Reasons. I'm curious, you know, we didn't have this virus concern and and kind of the concern on the oil price. Would your order out look look any different and and Blake? I know it's early days here with the with the impact virus. Can you kind of talk to any customer conversations you've had and and how customers might be thinking about what to do from here. Sure. Thanks, Mark look, you know as long as we said in the call, you know, we we were prepared to forecast a a q1 revenue kind of in the 110 to 115 range. We were entering twenty-twenty very optimistic done the heavy lifting our sales transformation and execution was is paying dividends and still is we did not change our bookings forecast for the quarter dead.

Okay, that's encouraging on the margin side for first-quarter Jeff. You mentioned the the million dollars related to this page repositioning of throughput just the other factor. I think that's going on or maybe there's a couple of factors you had the higher bad joint off mix in the in the second half of nineteen. So it sounds like maybe that could be a tail. One two, margin is that rolls rolls to a lower share going into twenty, but I'm also wondering a new products are also a a tail and could you kind of talk about how that progresses here into the first quarter and Beyond and and maybe quantify to the extent you can how much that can help me? Yeah. So on the on the Fab joints, we would see that that high level of Fab joints really continued into the first quarter of 2020 and then as we get near the end of the year will start to see that Goldberg.

We're having conversations with our customer. Most of our customers are still in the wait-and-see mode most believe this is transitory. It's going to come and go and participate in the offshore space unlike the shorter cycle business, you know, our customers use our much longer-term and and you know from from you know plan to divestment and first oil. It's just a broader time. So I think you know, I'm hoping that we don't really see any change in in our bookings profile as the year progresses.

to a more normalized level

But that'll only probably happen in the back half of the year and from a quantify standpoint getting we're not giving full year guidance right now. Probably not going to comment on on a an exact phone number there. And then the other spot on Marge is the million dollars you mentioned in the in the first quarter. It'll probably be below that million dollars in the first quarter, but that'll be transitory in the first quarter.

Right, I would say I would say Mark is is Blake jump in here. I would say that the the the product mix two more Fab joints. We actually view as encouraging because the dynamic that's happening. There is that our customers are consuming well has that they have in inventory buying the tubular products to go with that. And so that means that inventory is drawing down and and educating, you know, a likely increase in demand for the Wellhead products, which will improve the mix.

Right, right. Okay guys, thanks for that. I'll turn it back.

to a more normalized level

And our next question will come from Ian MacPherson with Simmons, please go ahead.

But that'll only probably happen in the back half of the year and from a quantify standpoint getting we're not getting full year guidance right now. Probably not going to comment on on a an exact phone number there. And then the other spot on Marge is the million dollars you mentioned in the in the first quarter. It'll probably be below that million dollars in the first quarter, but that'll be transitory in the first quarter dead.

Thanks. Good morning, Blake. And Jeff. I also need wanted sorry to flog the horse here on margins are just there is a lot that's moving and and Jeff. You still have twenty plus million of Manulife benefits to capture this year. But I just I'm struggling to bridge from Q4 to q1 given there will be some decremental with a revenue Decline and then you've got 5 g n a and your engineering and and product development expenditures higher as well. So

Right, I would say I would say Mark is this is Blake jump in here. I would say that the the the product mix two more Fab joints. We actually view as encouraging because the dynamic that's happening. There is that our customers are consuming well has that they have in inventory buying the tubular products to go with that. And so that means that inventory is drawing down and and indicating, you know a likely increase in demand for the Wellhead products, which will improve the Mix song.

In my mind, I am seeing five to ten million of ebitda decrement from Q4 into q1. Is that too extreme or or not?

That's too extreme. So when when we and and we're talking about on it adjusted ebitda basis. So let me just talk about the the different elements there. If I look at it on the margin side a little bit of headwind as we reposition the manufacturing from Singapore to Houston. That's the million dollars. We spoke about on the sg&a side because of the downtime nature of the Stockholm charge that makes that number look artificially low in the fourth quarter. But if you think about the $25 million that we guide on sg&a, that's a really in line with exactly what we did on a full year 2019. So that's $25 million a quarter and that's in spite of the fact that you know, we're returning to a more normal Merit cycle. And then when you get to M R and D or or engineering your right to say there will be some headwinds there on the engineering side. We've said we're going to invest eight to ten million dollars in incremental R&D projects this year that wage.

Right, right. Okay guys, thanks for that. I'll turn it back.

And our next question will come from Ian MacPherson with Simmons, please go ahead.

Thanks. Good morning, Blake. And Jeff. I also need want to sorry to flog the horse here on margins. They're just there's a lot that's moving and and Jeff you still have twenty plus million annualized benefits to capture this year, but I just I'm struggling to bridge from Q4 to q1 given there will be some decremental with a revenue Decline and then you've got home DNA and your engineering and and product development expenditures higher as well. So

In my mind, I am seeing five to ten million of ebitda decrement from Q4 into q1. Is that too extreme or or not?

Pop up throughout the year, you know.

How we starting on the low side and q1 and then ramping up to a full number by the fourth quarter. So if you think about that as call it to 2 and 1/2 million dollars a quarter start on that low side in q1 and probably wouldn't be at the full two and half million dollar run rate until the fourth quarter.

That's too extreme. So when when we and and we're talking about on it adjusted ebitda basis. So let me just talk about the the different elements there. If I look at it on the marja side a little bit of headwind as we reposition the manufacturing from Singapore to Houston. That's the million dollars. We spoke about on the sg&a side because of the downtime nature of the Stockholm charge that makes that number look artificially low in the fourth quarter, but if you think about the $25 million that we guide on sg&a, that's a really in line with exactly what we did on a full year 2019. So that's $25 million a quarter and that's in spite of the fact that you know, we're returning to a more normal Merit cycle. And then when you get to M R and D or or engineering your right to say there will be some headwinds there on the engineering side. We've said we're going to invest eight to ten million dollars in incremental R&D projects this year that wage.

Perfect that that super helpful. Thanks on the working capital side. You've already made a lot of improvement over the past couple of years and your inventory turns coming down. I guess preternaturally high levels of closer to the normal levels for your business now, but still some more ways to go there but then on the receivables it's been moving away from you recently. Can you just talk about what you think are the easier and harder objectives within working capital this year that you're going after? Yeah. So if you look at the presentation that we posted on slide thirteen, we walk through the cache to Cache Improvement that we expect over the next year and half from you know, if I look at the easy things the easy things candidly are probably going to be the bottom to which is inventory reduction and improve vendor payments. We did invest a little bit in inventory in 2019 and will invest a little bit more in 2020, but not much more. There's a lot of Opera

Pop up throughout the year, you know.

We starting on the low side in q1 and then ramping up to a full number by the fourth quarter. So if you think about that as call it to 2 and 1/2 million dollars a quarter it'll start on that low side in q1 and probably wouldn't be at the full two and half million dollar run rate until the fourth quarter.

Opportunity there though as we get ourselves.

Set up and we burn through some of the access inventory in those cells to move from you know, a model where we might have been speculatively buying products. We're not buying this close to actual production long time. So that's what we working on there and that that 20 25 days of reduction that you see there. The vendor payment terms actually is a side benefit of the supply chain work that we did in 2016. So we did a lot of good work in 2019 to drive costs down there. But at the same time we were doing that work the drive costs down were also being more aggressive around then their term. So you did see an improvement from 2015 the 2019 Indy po we believe we can expand that even further over the next 12-18 months the tougher part because it's not within our control is the is the vendor on my life on payments and candidly, you know, we get a lot of questions around price as it relates to our customers what we don't get a lot of questions around our payment terms and candidly wage.

Perfect that that super helpful. Thanks on the working capital side. You've already made a lot of improvement over the past couple of years and your inventory turns coming down. I guess preternaturally high levels of closer to the normal levels for your business now, but still some more ways to go there but then on the receivables it's been moving away from me recently. Can you just talk about what you think are the easier and harder objectives within working capital this year that you're going after? Yeah. So if you look at the presentation that we posted on slide thirteen, we walk through the cache to Cache Improvement that we expect over the next year and half from you know, if I look at the easy things the easy things candidly are probably going to be the bottom two, which is inventory reduction and improve vendor payments. We did invest a little bit in inventory in 2019 and will invest a little bit more in 2020, but not much more. There's a lot of birth.

Is as payment.

It's price was pushed during the downturn payment terms were also pushed during the town downturn as well. So what we're looking at this year is the first step back if you think about a pricing environment off. The first step back in gaining price is really starting to gain more reasonable terms. So we're going to be working a lot with that on our customers this year just from a milestone payment, you know Blake mention the 9th reason being more aggressive around Milestone payments around those trees, but then there's also an opportunity with a number of our customers to really work hand-in-hand with them on with some of our lean tools and reducing my billing cycle and the number of Errors. We see between ourselves and our customers is actually a couple of customers that we've actually had joint kaizens with were working on those type of projects. So hopefully that's helpful very helpful go forth and Conquer. Thanks for the answers today. Thank you.

Opportunity there though as we get ourselves setup and we burned.

Through some of the access inventory in those cells to move from you know model where we might have been speculatively buying products. We're not buying this close to actual production time. So that's what we working on there. And that's that 20 to 25 days of reduction that you see there. The vendor payment terms actually is a side benefit of the supply chain work that we did in 2019. So we did good work in 2019 to drive costs down there. But at the same time we were doing that work the drive costs down were also being more aggressive around vendor terms. So you did see an improvement from 2018 to 2019 and we believe we can expand that even further over the next 12 days eighteen months the tougher part because it's not within our control is the is the vendor on Milestone payment Thursday and candidly, you know, we get a lot of questions around price as it relates to our customers what we don't get a lot of questions around our payment terms and candidly just as dead.

And our next question will come from George O'Leary with Tudor Pickering Holt and Company, please go ahead.

You guys want George the The increased spend on R&D makes a lot of sense to me as you guys have always been innovators and I'm always very focused on the technology side of the equation. I wonder if you couldn't share a little bit about you know, kind of where that R&D spend that incremental aren't you spend your every year is directed at what types of problems your customers are looking for you to solve just any incremental color or where you guys are focused on deploying that that incremental R&D spend would be super interesting.

as payment as price was put

During the downturn payment terms were also pushed during the town downturn as well. So what we're looking at this year is the first step back if you think about a pricing environment one of the first step back and not gaining price is really starting to gain more reasonable terms. So we're going to be working a lot with that on our customers this year just from a milestone payment, you know Blake mentioned the nine trees being more aggressive around stone payments around those trees, but then there's also an opportunity with a number of our customers to really work hand-in-hand with them on with some of Arlene Tools in reducing that billing cycle and the number of hours. We see between ourselves and our customers is actually a couple of customers that we've actually had joint kaizens with were working on those type of projects. So hopefully that's helpful very helpful. Go for a Cocker. Thanks for the answers today. Thank you.

Certainly. So first off let's say, you know, we we've invested in in R&D throughout the downturn that's the one of the benefits of having the balance sheet that we have in in the free cash flow and and our Focus really has been on developing products that structurally change the way our customers drill Wells to provide them permanent cost savings going. So, what were what you really talk about there is giving them time right you're giving them back time to reducing installation time, which is which is incredibly meaningful to them. It helps on both the IR on a space and and quite honestly, it helps very SG, right if I spend less days offshore. I got a smaller carbon footprint. So I'm looking at 2019. I talked about the new vxt product and and really are three products in general. We got a lot of traction in the in that SPS space and as we look dead

And our next question will come from George O'Leary with Tudor Pickering Holt and Company, please go ahead.

Morning, George the The increased spend on R&D makes a lot of sense to me. As you guys have always been innovators and always varies based on the technology side of the equation. I wonder if you couldn't share a little bit about you know, kind of where that R&D spend that incremental R&D spend your every year is directed and what types of problems your customers are looking for you to solve just any incremental color on where you guys were focused on deploying that that incremental R&D spend would be super interesting.

if that one of the things that we value

What it is is the whole package of of trees which includes subsea controls. We do have a subsea controls business and we haven't been funding R&D in that subject control space as much as we have the hardware products. And so the bulk of this R&D is really focused on our subsea control product line and business to update that controls modernize it and also make it a much more flexible product going forward and we believe that's going to help us in the back tire SPS space right selling trees and controls in an integrated package.

Certainly. So first off let's say, you know, we we've invested in in R&D throughout the downturn that's the one of the benefits of having the balance sheet that we have in in the free cash flow and and our Focus really has been on developing products that structurally change the way our customers drill Wells to provide them permanent cost savings going. So, what were what you really talk about there is giving them time right you're giving them back time to reducing installation time, which is which is incredibly meaningful to them. It helps on both the IR on a space and and quite honestly, it helps very SG, right if I spend less days offshore. I got a smaller carbon footprint. So I'm looking at 2019. I talked about the new vxt product and really are three products in general. We got a lot of traction in the in that SPS space and as we look dead

Where you guys?

Very interesting. I I appreciate that color Blake and then you guys mentioned on the call your kind of looking at your manufacturing footprint and moving to a model where you don't make em everywhere. I wondered if you could provide some examples of some products that once upon a time you were making it at a certain facility and now you'll only be making them at one or two facilities and that's kind of how that translates into cost savings for you guys. So I just thought that was an interesting comment sure my hand that one to Jeff his bailiwick. So so if we look at our facilities, we usually we really set it up as centers of excellence. So if you step back and you went back to 2018, you know virtually every facility made product of their region and and that made them inefficient different products going over different machines, um a little bit more complicated not able to rearrange the shot for in a way that's most efficient for dead.

if that one of the things that we have

I waited is is the whole package of of trees which includes subsea controls. We do have a subsea controls business and we haven't been funding R&D in that sucks control space as much as we have the hardware products. And so the bulk of this R&D is really focused on our subsea control product line and business to update that controls modernize it and also make it a much more flexible product going forward and we believe that's going to help us in our entire SPS space right selling trees and controls in an integrated package.

specific products

So we started nineteen really looking at a center of excellence and and these are the large products obviously a center of excellence for well heads in Houston, and we rearranged can we rearrange machine off so that the machines were closer together to make producing just well heads in Houston much simpler. So the example we often give is you know pre this rearrangement a Wellhead would have traveled to New Jersey half miles in our Houston facility beginning to end and now it's literally a a matter of feet that it travels beginning in and so you can imagine the opportunity there for clips and inventory and expeditors and all the things that happen there. So that's that's Houston. We manufacture are connectors largely all are connectors now in Singapore and those cells are back up and running and we're continuing to optimize those cells and we'll expect some more some more savings for those in the future as well. And then we manufacture our subsea trees in Aberdeen now that cell is dead.

Very interesting. I I appreciate that color Blake and then you guys mentioned on the call your kind of looking at your manufacturing footprint and moving to a model where you don't make anything everywhere. I wondered if you could provide some examples of some products that once upon a time you were making it at a certain facility and now you'll only be making them at one or two facilities and that's kind of how that translates into cost savings for you guys. I just thought that was an interesting comment sure if you have a hand that one to Jeff his bailiwick. So so if we look at our facilities, we usually we really set it up as centers of excellence. So if you step back and you went back to 2018, you know virtually every facility made product of their region and and that made them inefficient different products going over different machines a little bit more complicated not able to rearrange the shot for in a way that's most efficient for wage.

Not quite up and running yet.

Um because we had to make some capital investment there that should be up and running by the middle of this year. So we should see benefit as that comes up and running they'll be benefit obviously in Aberdeen, but if we knock on benefits because some of the other regions that are helping them produce those trees right now are running less efficient than they will post when that Co is up and running. So hopefully that's helpful. Yeah, very helpful the color blinking Jeff.

specific products

So we started nineteen really looking at a center of excellence and and these are the large products obviously a center of excellence for well heads in Houston, and we rearranged can we rearrange machine so that the machines were closer together to make producing just well heads in Houston much simpler. So the example we often give is you know pre this rearrangement a Wellhead would have traveled to Asia half miles in our Houston facility beginning to end and now it's literally a a matter of feet that it travels beginning in and so you can imagine the opportunity there for a clips and inventory and expeditors and all the things that happen there. So that's that's Houston. We manufacture are connectors largely all are connectors now in Singapore and those cells are back up and running and we're continuing to optimize those cells and we'll expect some more some more savings for those in the future as well. And then we manufacture our subsea trees in Aberdeen now that cell is dead.

Thank you. And our next question will come from calling Orleans of Morgan Stanley, please go ahead.

Sure. So if you if you take a a subsea tree, the controls portion of that is going to be is going to add about additional 1,000 half to two million dollars per tree. So that's that's the prize, right? So as you grow your SPS business.

Not quite up and running yet because we had to make some capital investment there. That should be up and running by the middle of this year. So

We should see benefit as that comes up and running they'll be benefit obviously in Aberdeen, but if we knock on benefit because some of the other regions that are helping them produce those trees right now are running less often than they will post when that Co is up and running. So hopefully that's helpful. Yeah, very helpful. Thanks for that color blinking Jeff.

having a

You're you're basically going to add a million half to two million dollars per Tree in in the control side. It's additive to the the sales price the tree and then I think I think the other jobs are knock-on effect. Is that the controls speech but then as you have a world-class tree and you have the controls built out as well and you look at the fact that we've looked nine trees in 2019 and you look at a job market. That's essentially three hundred plus degrees awarded every year. There's an opportunity really for us to drive share gain there as well. So that's really the the win is a Zagat more every time you sell a tree but also the opportunity to to drive share in the in the tree Market as well.

Thank you.

And our next question will come from Connor Lynn off of Morgan Stanley, please go ahead.

Yeah, thanks. Good morning. Good morning. I was wondering if we could expand a little more on the the incremental engineering expense. I mean, how how would you think about what you're growing your address will Market or what incremental Revenue could look like from some of these things you're investing in just just any way to think of of the the the return on that investment sure. So if you if you take a a subsea tree, the controls portion of that is going to be is going to add about additional 1 and 1/2 to 2 million dollars per tree. So that's that's the prize, right? So as you grow your SPS business

Okay, that makes sense. I mean, do you guys have any any higher level targets for you know if we're in a relatively flat Market just for the sake of argument. You know, how much how much would you expect market share innovating cetera to drive growth relative to to that market bring that up?

So right now, you know our our our market share is relatively low entry sub 5% And so there's just a lot of Runway there and and all the other challenge that we've had is the breadth of of the subsea tree products. We didn't we couldn't fulfill all the different varieties that our customer needs the what we first scene is we've expanded our available market so of the 300 to 350 degrees a year, you know, maybe we had you know, 15% of them was our available Market, you know, we're moving that up now with um, you know to the to the twenty Thirty forty percent of the available market and and that's just giving us more to bid on there's still some areas that are always challenging cuz of local content. So we you know, there's some areas that we won't participate in but you know, we we believe with our new products. We definitely have a differentiated wage.

having a

You're you're basically going to add a million and half to two million dollars per Tree in in the control side. It's additive to the the sales price the tree and then I think I think the other the other wage, in fact, is that the control speech but then as you have a world-class tree and you have the controls built out as well and you look at the fact that we've looked nine trees in 2019 and you look at a a Mark. It's essentially three hundred plus degrees awarded every year. There's an opportunity really for us to drive share gain there as well. So that's really the the win is a get money every time you sell a tree but also the opportunity to to drive share in the in the tree Market as well.

product that's that's

Attractive to our customers from you know, right now we have four major operators reviewing our vxt design as we make the first one month so that they can quickly qualified it and get it accepted giving us an opportunity to bid, you know, and that that's something that we haven't had in the past. Right? We've been really good with the independence but getting a major operator interested in in real quick subsea production systems has has been Elusive and you know, like I said, we got four of them interested at the present moment.

So right now, you know our our our market share is relatively low entry sub 5% And so there's just a lot of Runway there and and the the other challenge that we've had is the breadth of of the subsea tree products. We didn't we couldn't fulfill all the different varieties that our customer needs the what we first scene is we've expanded our available market so of the $300 to $353 a year, you know, maybe we had you know, 15% of them was our available Market, you know, we're moving that up now with um, you know to the to the twenty Thirty forty percent of the available market and and that's just giving us more to bid on there's still some areas that are always challenging cuz of local, so we you know, there's some areas that we won't participate in but you know, we we believe with our new products. We definitely have a differentiated dead.

Got it. That's that's helpful. Just to sneak one more in here and just the broader Market more on the Wellhead side of things. I think you guys have talked about for the past couple of years. There's been a bit of a catch-up ordering effect sort of a restocking would you say that's played out at this point or is there a little more to go and I appreciate the the uncertainty on the oil price. But yeah, I mean it was like, let's set the game aside. I think every customer has a little bit different inventory position. I think it is winding. Most of them are winding down. We're getting feedback. Even from the independence. Hey, it's time to reorder, you know, money's are people that have been dormant for three or four years in the offshore Arena that are they're picking back up and and consuming inventory. They've had and so our view going for them is were more back to a more normal order consumption.

Product. That's that

Attractive to our customers, you know right now we have four major operators reviewing our vxt design as we make the first one so that they can quickly qualified it and get it accepted giving us an opportunity to bid, you know, and that that's something that we haven't had in the past. Right? We've been really good with the independence but getting a major operator interested in in real quick production systems has has been Elusive and you know, like I said, we got four of them interested at the present moment.

portion in the cycle

And our next question will come from leaves of Scotiabank, please go ahead. Hey, good morning, and thank you for that month. So typically you get about 40% of any product bookings in Brazil. Any reason why that should not hold the same 4th at 7 a.m. And that you spoke about in Brazil coming up this year.

Got it. That's that's helpful. Just to sneak one more in here and just the broader Market more on the Wellhead side of things. I think you guys have talked about for the past couple of years. There's been a bit of a catch-up for during effect sort of a restocking would you say that's played out at this point or is there a little more to go and I appreciate the the uncertainty and the oil price. But yeah, I mean it was like, let's set the game aside. I think every customer has a little bit different inventory position. I think it is winding. Most of them are winding down. We're getting feedback. Even from the independence. Hey, it's time to reorder, you know off are people that have been dormant for three or four years and the offshore Arena that are they're picking back up and and consuming inventory. They've had and so our view going for us is we're more back to a more normal order consumption.

You know, it's so Brazil is is interesting. They're changing their their model a bit. And so they're going to a more shorter cycle shorter quantity but broader tender base. So I think I think the model of the past is is waning beb's. I think it's it's a competitive bid process and and a lot of it I think is because their partner was so many ioc's that it's it's changed their their bidding model. I will say that our relationship with petrobras is very very good. We've done a lot of work to to allow them to consume their existing inventory, even though they've changed their own technical specifications wage in some additional qualification made some new products that you know, and that's what's allowed them to or driven them to use more of our well heads.

portion in the cycle

And our next question will come from leaves of Scotiabank, please go ahead. Hey, good morning, and thank you for that month. So typically you get about 40% of any product bookings in Brazil. Any reason why that should not hold the same 4th at 7 a.m. At 10. You spoke about in Brazil coming up this year.

you know on a per well, but

Basis, so we're optimistic about the tender. But but yeah, it is going to be an open tender process not necessarily a split Arrangement as they've done in the past month. We have seen increase product bookings has the mix shifted any one one way or the other if you can talk about that long. You mean in the in our

All right. Thanks very much.

You know on a per well base.

All right. Thanks very much.

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