Q1 2020 Earnings Call
[music].
Good day, ladies and gentlemen, and welcome to the National Oilwell Varco first quarter 2020 earnings conference call. At this time all participants are in the listen only mode. Later, we'll conduct a.
A question and answer session and instructions will follow at that time.
If anyone should require assistance during the conference. Please press Star then zero on you touched on telephone.
As a reminder, this conference call is being recorded.
I'd now like to introduce your host for today's conference Mr., Blake Mccarthy, Vice President of corporate development and Investor Relations. Sir you may begin.
Welcome everyone to National oil Varco as first quarter 2020 earnings Conference call with me today are clay Williams, our chairman President and CEO Jose Bayardo, our senior Vice President and CFO.
Before we begin I would like to remind you that some today's comments are forward looking statements with the meaning of the within the meaning of the federal Securities laws.
They involve risks and uncertainty.
Actual results may differ materially.
No we should assume these forward looking statements remain valid later in the quarter for later in the year for more detailed discussion of the major risk factors affecting our business. Please refer to our latest forms 10-K, and 10-Q filed with the Securities and Exchange Commission.
Our comments also include non-GAAP measures reconciliations to the nears corresponding GAAP measures are in our earnings release available on our website on the U.S. GAAP basis for the first quarter 2020, Inovio reported revenues of 1.88 billion and a net loss of 2.05 billion.
Are you said the terms EBITDA throughout this morning's call corresponds with the term adjusted EBITDA as defined in our earnings release later in the call. We will host a question and answer session. Please limit yourself to one question and one follow up to permit more participation now let me turn the call over to clay. Thank you Blake.
This has been a challenging time for all of US as we always do Jose and I will be discussing the results of operations through the first quarter of 2020 interactions and expectations as we look to the future.
However, first I want to say that our thoughts or would those most affected by koby 19, particularly those on the front lines of this crisis.
In the past several weeks, we have sought to both protect the health of our employees.
And to serve our customers were facing daunting challenges in our relying on interview to keep their operations running.
This has been no easy task.
As of today 64 facilities around the world remains shut down due to government mandates, which means approximately 3300 of our valued employees globally are unable to come to work.
This number varies daily with evolving government restrictions and was as high as 4000 employees a few weeks ago. Additionally, thousands of other until the employees have been working from home or are working reduced hours.
The rest of our facilities remain operational although challenge midyear short handed in some working flex yes.
We are committed to operating in a safe in a safe a manner as possible and we've been able to do that thanks in large part to the multitude of social distancing measures implemented by our management and the careful adherence to these measures buyer employees.
Social dispensing and it'll be includes modified scheduling staggered lunch breaks mandatory periodic handwashing incremental facility cleanings working from home where possible telephone videoconferences instead of in person meetings and increase spacing on shop floors.
These facility managers has stepped up to do an amazing job leading their teams safely to the scary pandemic and I'm grateful for their leadership.
You know these employees were also working to help support our communities during this pandemic, including donating personal protective equipment and cleaning supplies to frontline emergency personnel and delivering portable generation systems from Inovio is well site services business to provide critical power in air conditioning to Kogan 19, quarantine testing and distribution centers in fact.
Engineer helped design a low cost mechanical ventilator is now working with the Massachusetts Institute of technology to validate the design and create a threed model that will be used to print the ventilator using additive manufacturing.
During the first quarter of 2020 in obese consolidated revenue declined 17% sequentially and EBITDA fell to $170 million or 9.5% of sales.
Continued deterioration of the North American market.
International seasonality and operational challenges posed by the code 19 crisis led to all three segments reporting sequential EBITDA declines.
Although difficult to measure precisely we believe the koby 19 disruptions through March 30, Onest 2020 negatively impacted our reported adjusted EBITDA EBITDA by approximately $40 million.
Delayed shipments, which may or may not be made in future quarters and services that inovio could not perform due to travel restrictions made up the bulk of this.
When we reported our fourth quarter 2019 results in early February we noted that our fiberglass pipe plant in China was closed in early example of what I'm talking about that plant reopened in March but it continued to experience supply chain disruptions, including difficulties in obtaining resins and other raw materials and accessing freight to ship its products.
The facility work short handed throughout the quarter because certain employees that had traveled home for the holidays could not returned to work limiting the plants absorption and efficiency. The good news is that things have slowly gotten back to normal for us within this particular facility in fact, all of our Chinese facilities are largely back to normal the bad news is that many facilities.
In other countries have been pulled into a similar trajectory as we entered the second quarter, which has seen similar challenges employees prohibited from coming to work shutdown suppliers shortages of freight and freight containers service technicians prohibited from entering customers facilities or rigs or at times, even be required to quarantine.
Two weeks prior to entering these.
Our offshore drilling customers and those with remote international operations typically rely on skilled international Workforces that may travel in from several countries to work. There 28 day hitch. These operations also count on specialized experts like in obese service technicians to travel internationally to and from these facilities to perform.
Our specific tasks related to the maintenance repair and efficient operation of these rigs and facilities.
The position of two we quarantine requirements or outright travel bans has proven highly disruptive to the normal flow of these kinds of operations to say at least interestingly the threat of disrupted supply chains has presented in Ob with the opportunity to introduce new ways of doing business. For example, inovios proprietary tracker vision system from.
One of our customers to perform at factory acceptance test of his equipment remotely by satellite linkup with augmented reality keeping his project on schedule. Despite the disruptions tracker vision also enables efficient remote troubleshooting and support of ongoing operating equipment.
Selecting auvi businesses also outperformed expectations as result of the pandemic orders for spare parts for rig equipment actually increased 4% sequentially increasing in February and March as concerns began to grow around the supply chain disruptions from customers that did not want to be caught short of a critical spare part with no way to access it demand for certain other endeavor.
Aerial products for pharmaceuticals, and consumer products increased in response to the war effort to defeat the virus. Nevertheless, overall cobot 19 has affected in Ob and our customers quite negatively and unfortunately, the destructive nature of this deadly viruses doesn't in there it impacts its impact on our economy even.
Gary will present additional longer term challenges the economic shutdown to slow the viruses spread has resulted in an unprecedented decline in global economic activity and crude oil demand.
With a third of global population quarantined in their homes instead of driving and flying demand for crude oil has declined 20 to 30 million barrels per day or 20% to 30% of roughly 100 million barrels per day that we consumed in produced before as production has continued at more or less the old rate storage tanks around the world are filling wrap.
Certainly and we will soon be full oil prices have been crushed and prices in many reasons or regions are now below.
Cash operating costs, meaning producer spin more to produce oil from existing wells than they make in revenue. This will lead to shut ins by their owners to conserve cash in other regions pipelines and transportation companies have refused acceptance of crude regardless of its lifting costs.
Because there are simply no place for it to go which will lead to additional force shut ins in the aggregate. We're on the precipice a forced well shut ins totaling 15 to 20 million barrels of oil per day, a skilled never before seen in this industry.
Rig and well servicing activity around the world, particularly North America is plummeting as it is difficult to make an economically rational argument that anyone should be drilling a new well against the current commodity backdrop.
While international markets tend to react a bit more slowly due to the longer time horizons of the INO season AOCF. They are not immune to the stock realities of this price collapse and will significantly curtailed their spending later in the year.
This will likely be the worst downturn than any of us in the oil and gas industry will experience in our lifetimes. Many companies will not make it but it'll be will.
He is fortunate to have a strong balance sheet and $3.1 billion and liquidity. Nevertheless to ensure that we survive now and prosper later, we must continue to take measures and maximize cash flow avoid consuming cash and protect defend and strengthen our enterprise through this downturn.
Critically inovio offers a diverse portfolio of products and services that span all phases of oil field activities.
He possesses the largest installed base of products across several categories and as OEM benefits from our customers need for Oems support to run their assets.
Geographically diverse we work in every major oilfield basin globally, where we are legally permitted to do so we are balanced between North America, and international markets land and offshore and drilling and production Inovio is a technology and market leader benefiting from first mover scale economies and intellectual property advantages in the basic inputs required.
For safe and efficient oil and gas operations.
All of this stabilizes and strengthens our enterprise through periods of hardship.
Through the past few years, we've taken several tangible steps to improve our resiliency and performance to adapt to a more challenging set a market conditions in 2017 unsatisfied with our cash generation from working capital we implemented measures to reduce the working capital intensity of our business, including directly time management compensate.
I want to net working capital targets in 2018, we saw our working capital intensity fall from 44% the prior year to 37% by year end and we added economic value add criteria to our long term incentive compensation awards to improve focus on return on capital.
In 2019, we strengthened our balance sheet by reducing our debt by $500 million and refinanced another $500 million extending maturities out to 2029 and further reduced working capital to 31% of annualized revenue by year end, we also analyzed our product portfolio to optimize.
Capital allocation to the highest return opportunities and exited business lines, where we are no longer eight the best.
We also analyzed our product portfolio to optimize capital allocation to the highest return opportunities and exited business lines, where we are no longer the best owner importantly, we avoided the temptation to pursue large empire building acquisitions that would have levered up our balance sheet and eroded our return on capital in 2019, we.
Also in or took another company wide cost savings initiatives that by year end achieved $170 million of annualized savings and dinner and identified another $60 million for a total of $230 million in anticipated annualized cost savings.
These measures formed our foundation for 2020.
On a year over year basis for the first quarter Inovio posted an increase in EBITDA of $38 million. Despite a reduction in revenue of $57 million, reflecting the hard work the team put in during 2019 to reduce our cost structure and improve the operating leverage of the company.
But as we face the harsh realities of the oil and gas market. In early 2020 is clear that we must do more as it will be continued to adapt its operations to very fluid cobot 19 pandemic countermeasures through the first quarter of 2020. The company has remained focused on cash generation and continued to shrink inventories and improved collections our sales professional.
Have heightened they're focused on improving collections in coordination with our credit collections teams, our supply chain managers are seeking and achieving discounts from our suppliers, including our landlords for the facilities that we will retain we reduced our expected capital expenditures for 2020 by about 25%.
Most importantly, we have accelerated our cost cutting efforts.
We now estimate that we will increase our previously stated goal of 230 million in annualized cost savings to $625 million a year and we expect to achieve this run rate by year end 2020, we have reduced our workforce our facilities footprint and management compensation, although we have trimmed and so.
Slowed spending on certain technologies, we continued to invest in new products and technologies that will shape, our organise organization and extend our competitive leads as the market emerges from the current downturn.
By making the right moves now Inovio will exit this downturn stronger and leaner and where the capital necessary to take advantage of strategic opportunities that will emerge capital in the oil and gas base gets more valuable everyday and inovio will be in the small club oilfield service companies that habit, our customers recognize this as several have expressed their intentions to put.
More of their business, our way knowing that we will survive to support them in the future.
Before I turn it over to Jose to discuss financial results.
I want to make one thing clear.
This virus is not going to keep the global economy down forever and when the world wakes up from this we're going to need oil and gas again, and we're going to need it for decades to come this massive historic contraction in a critical industry will affect the future supply curve dramatically when demand recovers this industry will.
Find itself short of capital of people of equipment, a huge opportunity for those of us in the oilfield services industry still left standing.
Through our employees listening around the world.
We have a very difficult two years ahead of us.
It is your focus your resiliency and your hard work they are going to get us through these tough times and I have never been more thankful to have you on our team.
Jose Blake and I appreciate all that you do stay safe and know that better days lie ahead with that ill turn it over Jose.
Thank you Clive envious consolidated revenue decreased 398 million or 17% sequentially due to seasonal declines in certain international markets. The ongoing contraction in us drilling activity and Covance 19 related disruptions. Despite the sharp contraction in revenue our accelerated and expanded cost out efforts limited sequential EBITDA decline.
Metal margins to 28%, resulting in a $110 million decrease in EBITDA to $178 million.
Year over year revenue decreased $57 million, and EBITDA increased 38 million, which when adjusted for pricing and mix reflects the approximately $63 million per quarter or 250 million in annualized cost savings realized since the beginning of 2019.
After we recognize the magnitude of damage covert 19 would inflict on global energy demand. We immediately began implementing numerous additional cost cuts which include the elimination of certain layers of management and the acceleration of decisions to exit operations, a did not meet our return thresholds.
Decisively executing on these new initiatives, we have now were moved cost as exceed our prior target for year end 2020.
We continue to execute on many longer lead time initiatives and therefore increased our total targeted cost savings relative to the beginning of 2019 to 625 million, which will require us to achieve an incremental 375 million in annualized cost savings during the remaining three quarters of 2020.
Cash flow from operations was $39 million for the quarter and capital expenditures totaled 68 million, resulting in a small use of cash during the first quarter.
While we expect to generate positive free cash flow the remainder of the year. The outlook remains opaque and we anticipate working capital metrics will deteriorate due to the pressure on our customers to preserve liquidity and an increasing proportion of business from international markets.
As Clay mentioned, we believe we have more than ample liquidity to navigate through the severe downturn at March 31, our net debt totaled $887 million with 1.1 billion in cash and 2 billion in debt.
We have $400 million notes due December 2022, which we intend to pay off with cash well before that date.
Our other maturities are in December 2029, and December 2042, our primary $2 billion credit facility expires in October 2024 remains unused and has only subject to a 60% debt to capitalization covenant.
As of March 30, Onest are calculated covenant debt to cap ratio was 29%.
During the quarter, we took $2.3 billion and mostly non cash impairments and other charges due to the deterioration in global market conditions, and our ongoing restructuring efforts, we expect our depreciation and amortization expense decreased to $80 million in the second quarter as a result of these impairments.
Moving to results from operations are Wellbore technologies segment generated 691 million in revenue in the first quarter of 2020, a decrease of 73 million or 10% sequentially revenue from North America declined 2% inline with the average decrease in drilling activity during the quarter.
While revenue from the segments International operations declined 18% due to combination of seasonality Lord year end sales of equipment that didn't recur in Q1 and impact from covert 19 related disruptions.
Incremental costs incurred from these disruptions along with a less favorable business mix and the anticipated ratified from an aggressive cost savings realized in the preceding two quarters led to outsized decremental margins and a corresponding EBITDA declined $40 million sequentially to 103 million.
Cost savings realized to date have resulted in significant improvement in profitability for Wellbore technologies segment as demonstrated by the 12% decremental EBITDA margins when comparing this quarter's results to Q1 of 2019. This equates to capturing more than 110 million of annualized cost savings during the past year.
As cobot 19, and ensuing collapse in commodity prices have thrown our customers plans into disarray, we continue to move quickly and decisively and rightsizing our operations to successfully navigate through rapidly deteriorating market conditions.
Our rate hike log drill that business posted an 8% sequential decline in revenue, which was primarily due to seasonal declines in eastern hemisphere falling activity in the us and covert 19 related disruptions revenue declined only 1% in North America as stronger activity in Canada, mostly offset declines in the us.
In our international operations covert Nineteens disruptions amplified seasonal declines and began to affect this business units operations late in the quarter.
Mandatory shutdowns of all our eastern hemisphere bit manufacturing facilities required that our Texas plant supply or global customer base.
While we've been able to meet the delivery needs of our international customers, having to hot shot deliveries using shipping service providers facing their own covert 19 related challenges resulted in higher costs.
Looking ahead, we expect seasonal recoveries in certain international markets and tenders in which read high Claude captured additional market share will only partially offset the sharp activity declines across most of the western hemisphere in Africa, and the ongoing covert 19 related disruptions in the middle East and Asia.
Revenue in our downhole tools business unit fell 6% sequentially slight decrease in US revenue was mostly offset by stronger Canadian activity, resulting in a 1% decline in revenue in North America, where our new drilling motor agitator and other drilling tool technologies have enabled us to gain market share due to their proven ability to meaningfully reduce costs for our customers.
Revenue from international markets declined 11% due to the regular seasonal fall off and delayed deliveries in certain eastern hemisphere markets from covert 19 related disruptions.
Our downhole management team is working to quickly reduce the businesses footprint and cost structure, while continuing to focus on execution and leveraging our technology leadership to gain market share.
Despite their efforts, we expect to see a shortfall and downhills revenue during the second quarter with high Decrementals.
Our MD Taco business units core rig instrumentation business declined 5% sequentially market share gains drove a slight sequential improvement in revenue from North America, which was more than offset by seasonal declines in the eastern hemisphere, and koeppen 19 related slowdowns across most of Latin America.
Revenue from Mt. Todd goes drilling automation services realized a sequential decline in revenue due to projects, which completed in Q4 and in early Q1.
However, we expect several new automation projects to commence throughout the second quarter, which should drive sequential improvement in revenue associated with this growing product offering. Unfortunately, this growth will not be enough to offset the rapid contraction and global drilling activity, which will directly into impact and the tacos core operations and results in a harsh sequential fall off in revenue at high.
Decrementals.
Our grant Prideco drill pipe business realized a sharp revenue declined due to combination of seasonality and covered 19 related challenges. These challenges included the closure of one of our manufacturing plants for 22 days and hold up of shipments at the border between Mexico, and Texas, Despite softer than anticipated revenue, we realized a surgeon orders during the early part of Q1.
And resulting in the highest level bookings for this business since the fourth quarter of 2014.
The strong Q1 order flow of which over half the bookings were for the US supported the assertion we've made over the past several quarters that drill pipe inventories were unsustainably low for the then current levels of drilling activity.
Unfortunately with these with the recent collapse in the price of oil we expect our recent orders and the drill pipe from stacked rigs to satisfy the bulk of the industries need to replace went out pipe on a limited number of rigs that we'll continue to operate near term.
Accordingly, the business unit is taking decisive actions, including shutting manufacturing facilities in France, and Dubai to prepare for volumes that we anticipate will fall below prior cyclical low.
Our twob scope business experienced a slight revenue decline in both coating and inspection operations due to falling rig activity and covert 19 related disruptions with a sharp decline in customer activity. We anticipate the tubes scopes operations will realize a sharp falloff in revenue once our existing backlog begins to find out mid may.
Our Wellsite services says business unit saw revenue declined 5% sequentially driven by declining us activity covered 19 related logistics issues that slowed certain international and offshore projects and the shutdown for us fluids business, an action, resulting from Indepth returns analysis, we've recently completed.
As we previously described we developed tangible plans for near term improvement or slotted for divestiture or closure businesses that do not meet our internal return thresholds. The recent significant deterioration and global market conditions has meaningfully reduced our tolerance for fixing operations and we have accelerated plans to exit certain product offerings and markets over the next.
Several quarters.
Over the past several years or Wellbore technologies segment has been relentlessly focused on improving operational and process efficiencies developing technologies that materially improve our customers economics and fixing or exiting product lines in markets that do not meet our returns thresholds.
These efforts taken together with our customers recent push to better align themselves within Lv because they know we will be there to meet their needs regardless of market environment will enhance the segments ability to navigate through the challenges that lie ahead.
Despite the segments solid positioning.
Businesses are highly correlated to global drilling activity levels and is dependent on the ability to move its people and goods around the world.
While the rapidly declining activity levels and the increasing frequency of covert 19 related disruptions do not allow for a great deal of confidence in the precision to our outlook. Our best current estimate is at the segment will realize a sharp sequential revenue decline in the mid 20% range with decremental margins in the upper 30 to lower 40% range as increasing price.
Casing pressures offset additional cost savings.
Our completion and production solutions segment generated $675 million of revenue in the first quarter, a decrease of 124 million or 16% sequentially continued weakness in the north American completions market seasonality and logistical disruptions caused by the covert 19 virus all contributed to the sequential decline.
EBITDA fell to $71 million or 10.5% of sales decremental margins were limited to 20% due to ongoing efforts to quickly reduce costs and right size operations net bookings for the segment fell 33% sequentially to 335 million, yielding a book to bill of 81% and a backlog of 1.2 billion down 9%.
From year end 2019 levels last quarter, we expressed optimism regarding order outlook for 2020, as our tendering activity and potential project pipeline was robust.
Although our orders were inline with expectations due to strong order inflow in January and February we had anticipated a bit of a pullback in Q1 due the timing of various projects.
However, the recent collapse in commodity prices has considerably altered our outlook for the remainder of 2020.
While certain projects may still be awarded we think most new f. ideas will push into 2021, which will delay orders.
Revenue in our production and flow technologies business unit declined 9% sequentially sales from the units production midstream product offerings experienced double digit percent decrease due to declining demand in North America, and the postponement of deliveries, resulting from the inability to complete final acceptance testing due to covert 19 restrictions the offshore or.
CNN components of this business unit collectively posted a sequential improvement by capitalizing on a healthy backlog built over the four preceding quarters.
Much of units backlog relates to LNG projects for which customer still express the intention to move forward.
While new bookings were light in Q1, and while we anticipate significant deferrals of meaningful of a meaningful number of new project out if ideas that we previously expected to occur during the course of 2020, we're working closely with several customers who remain confident they're projects will proceed in 2021 and are asking us to help them use extra time to optimize the.
Designs through expanded feed stripped studies.
Our subsea flexible pipe business realized a 22% sequential decline in revenue, primarily due to reduction and deliveries and slower progress on certain projects bookings for the quarter were light of the units healthy backlog should partially insulate the operation near term, while we still currently anticipate a slight uptick in Q2 revenue and orders outlook for late 2000.
20, and for 2021 has become murky at best.
Our fiber glass business unit posted a solid Q1 with only a slight decrease in revenue. Despite covert 19 headwinds in China. During February and March continued improvements in deliveries of large diameter composite pipe for water systems in middle East and US was offset by mandatory facility closures in China.
Orders for this business unit also remained solid with a 92% book to bill, including an additional 25 million in orders for Marine scrubber equipment.
Despite the business units solid backlog, we anticipate second quarter results will be hampered by the increasing frequency of operational disruptions, particularly in Malaysia from covert 19 related facility shutdowns and shelter in place directives, which are causing delays of product installations in numerous jurisdictions around the world.
We also expect these delays and weaknesses industrial markets to caused customers to take a wait and see approach toward new orders.
Our intervention and stimulation equipment business realized at 21% sequential decline in revenue due to reduced demand for completions equipment seasonality and a few covert 19 related logistical challenges that made customer final acceptance testing impossible.
After several quarters in a row, a strong coil tubing equipment deliveries revenue fell sharply for this product line due to these factors. However, our backlog of coiled tubing equipment for the international markets remains healthy, which could drive a sequential increase in revenue for this product line, even though we might achieve better results from our coil tubing equipment product line and the broader interventions.
Stimulation equipment business unit posted a 100% book to bill from healthy demand for wireline equipment destined for international markets, Our international customers will not be immune from the rapid deterioration of the global energy markets. As a result, we expect business unit to post another double digit percentage decrease in revenue and management is moving as quickly as possible to rationalize.
Right size their product offerings and manufacturing footprint.
With the uncertain market drop backdrop, and an environment of increasing frequency of covert 19 related disruptions for the second quarter 2020, we anticipate revenue from our completion and production solutions segment will decline, 8% to 12% with decremental EBITDA margins in the mid to upper 30% range.
Our rig technology segment generated $557 million of revenue during the first quarter, a decrease of 202 million or 27% sequentially.
EBITDA fell to $56 million or 10.1% of sales, representing 28% decremental leverage sequentially.
The segment realized a sharp sequential decline in capital equipment sales as several previously anticipated equipment orders did not materialize. These deferred orders also led to a 65 million dollar were 31% sequential decrease in bookings orders totaled 146 million, yielding a book to bill 70% and the segment ended the and ended the call.
Order with a backlog of 2.9 billion looking ahead. The order outlook has materially we can do to the falling commodity prices and ensuing decline in global rig activity customers are focusing on conserving cash wherever possible and the recent momentum in demand for rig upgrade packages that was realized over the last few years is likely to come to a standstill for the time being.
We expect orders over the next few quarters to consist primarily of equipment in parts that are essential to keep active rigs turning as contractors focus on minimizing capex and preserving liquidity.
Aftermarket revenue also experienced a double digit percentage sequential decline bookings for spare parts were robust during the first two months the quarter, but fell sharply in March.
As clay mentioned order intake through February was bolstered by customers working to mitigate potential logistical disruptions from covert 19 by ensuring critical spares were readily available such disruptions did materialize and have increased in frequency as border restrictions mandatory quarantines and general shutdowns handicap, the industry's ability to move people freely.
Around the globe.
To put this disruption in perspective today, we have 39 service technicians that are working outside the borders of their home countries. Normally we would expect to have around 400 technicians trouble suit shooting and fixing customer issues around the globe. Fortunately, we're able to leverage our tracker vision augmented reality technology that clay reference to stream real time.
Audio and video from rigs to our subject matter experts anywhere in the world or professionals can then utilize augmented reality tools to provide specialized instructions along with visualizations to the rig contractors personnel, who can then make necessary repairs.
In light of the weak market conditions installed base has never been more important and we expect our aftermarket business to be key and sustaining our rig technology segments activity.
Despite the recurring revenue nature of our aftermarket business and the segments, 86% waiting to international markets No market will be immune from this downturn and we expect minimal demand for new capital equipment sales as a result, we expect revenue from our rig technology segment to be down 8% to 12% in the second quarter with decremental margins and.
The upper 30% range with that we'll now open the call to questions.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound cake again Thats star one on your telephone.
Please standby, while we've compiled the culinary roster.
Our first question comes from the line of Bill Herbert of Simmons. Your question. Please yes. Good morning. Thanks.
For the detail.
And the realistic outlook.
Clay.
A question for yes, I was struck by the fact that.
You.
So the issue is good.
On the guidance internally for a very difficult two years as what I heard correctly with regard to your.
Your partners within in the and your Labor Force on the one hand on the other hand, I think you correctly talked about the damage that's being done to the supply chain in terms of the energy supply chain.
The evaporation of for oil supply.
And the need for hydrocarbons going forward, so I would've thought that given the severity of the inclusion in production the damage to the us upstream supply chain.
With even modest reflating economic and demand growth next year.
We will be an expansionary mode for 2020 ones I'm just curious as to your two year comment with regard to district and at the a slot for two years I hope you're a write down what concerns me and I don't spend a lot of time typically talking about the macaroni sees but what concerns me is 26 million Americans finally.
For unemployment.
Yes and.
I think the level of unemployment and economic uncertainty that has been injected into not just the us economy, but developed economies around the world as a result of all of the countermeasures against Cobot 19 means that we set ourselves up for a global recession.
And I think the prospects of us bouncing quickly back out of that are going to be limited because I think folks that are have lost their jobs are going to be hesitant to go back to spending what they did prior.
So and so.
No one really knows and I'll stress on terrible at forecasting is sort of stuff, but I think that means that.
A recession that dress on for.
On the order of two years or so means that we'll have suppressed levels of demand for oil.
Through that time period, ultimately, we are going to recover and I think osprey emphatic in my opening statement on that.
I don't know the timing, but we are bracing ourselves for longer and but I'd add I hope were wrong I hope demand comes back strongly.
And intersects with supply, which is going to clearly going to be be destroyed through 2020 lack of spending and for shut ins are going to see that that happens.
Got it and that's it, yes, and and and as a global manufacturer.
Just given that dislocations that we're seeing.
The continued and aggressive decoupling away from China for good reasons.
There any parts of your supply chain significant parts of your supply chain that need to be re wired.
And thus will mute the rate of profit recovery on a rebound in activity.
That's a really good question and what I would say bill is that are overwhelmingly our primary focus is taking costs out of our supply chain with respect to sort of hypothesizing some future black Swan scenario, where we're going to wish we had a different rewired supply chain, that's not really the immediate concern in the immediate concern is.
Taking cost out to re size ourselves to the diminished view.
We see for demand.
In the coming eight quarters, and so that's really what's guiding our actions rather than trying to for instance move away from from China.
Okay. Thank you and build as Jose I'd also add that.
Well, we had our disruptions.
Certainly created challenges during the during the quarter, we have been and continue to be very thoughtful in terms of how we scaled down the organization and how we position our manufacturing capacity around the world and it has served us very well even during that very challenged quarter. So some additional costs incurred in some slight delays, but really we were.
We're able to meet all major customer.
Needs by rerouting.
Or goods around the world using the redundancies that we do have within the supply chain. Yeah. The scale of the organization I think gives us flexibility to smaller enterprises might not have Indianapolis. Thanks. So yes, that's very helpful something like this.
Thanks, a lot guys you guys. Thank you.
Thank you. Our next question comes from Tommy Mall of Stephens. Your line is open.
Good morning, Thanks for taking my question.
Good morning economy.
I wanted to start on any.
Got you could share from conversations with customers I would assume that here in North America.
Dialogues pretty grim.
And that there adjusting just like we see every week with the rig count updates.
But really on the international side, how much visibility that you or they have into what the rest of this year could look like.
Good and on a related point any update you could give us on any adjustments to planning for the Saudi JV. Thanks. Good. Good question Tommy first in North America, Yeah, they're reacting.
I mean, the reaction has been swift as any I've seen in in my experience with respect to laying down rigs as quickly as possible once a rig finishes drilling up a pad, they're getting laid down.
The industry's never faced shut ins like we are facing right now and so.
No one's wasting any time the request for discounts have been immediate and.
So that business really is I think I think one of the respondents to the Dallas Fed Survey said the business in North America, as just shutting down and it just kind of feels like that right now.
International fits.
It's a little more measured I think I.
I think we're definitely going to see an impact, but it's going to unfold a little more slowly we are having conversations with our customers about their specific plans for projects I'm not sure they know.
Exactly how thats going to is going to shape out but generally the.
Hearing a lot of customers are planning on pushing back F.I.D.'s projects. They already haven't launched the ones that they had launched generally we're hearing it tend to move forward with are going to go ahead and execute and so we're pleased to have the backlog that we have.
But I think Jose mentioned this in his prepared remarks that feed studies for instance on projects internationally.
We're in conversations with customers that are saying, hey, let's let's take a little more time and maybe do another iteration of looking at how we make the take costs out of this project or so forth. So.
Our expectation is international will be down, but not nearly to the degree that North America will be.
With respect to our Saudi JV things are progressing well there.
Got a bit of a late start on construction last year, but it's underway now were about 30, 35% to 40% complete with construction and although we've seen some.
Coated 19.
Little bit of delays and disruption on the construction side of things in the Kingdom generally that's moving forward and.
Very excited about the prospects for for that joint venture course, just as a reminder for everybody else.
That that joint venture in the build out of a plant there.
In Saudi Arabia is tied to the 1.8 billion dollar order that we secured for 50 land rigs.
And I think.
Customers expectation is to continue to push forward without it.
As quickly as they can.
Thank you play that's all very helpful shifting to a bigger picture thing here.
Over the history of the company you've been involved.
Or emphasized Latin America land versus international land versus offshore to different degrees at different points and cycles.
As we go into this downturn and you're looking at what businesses.
To continue to invest in where to prune investment and potentially exit altogether.
Can you give us any examples of.
Decision, making around those product lines and potentially as those decisions may be impacted by how you think the recovery takes place.
And which markets you're what a focus your exposure to.
As you said earlier say a couple of years from now sure sure I think by the way I. Appreciate the question because I think it emphasizes the diversity of products that we offer the diversity of basins in places that we work I think diversity is hugely important.
As we move through a downturn diversity and scale and that shortly you're saying. It is we'll work anywhere that we can make money and a return on capital that we.
Invest.
But I think it's just it's been a prudent.
Responsible steward of company assets, we need to look at that portfolio from time to time and recognize that technology changes things the customer practices change things on the outlook change. This thing so Jose for instance referenced our drilling fluids business in the us that we.
We shut down this this we're in the process of shutting down.
Currently and part of our analysis there is that although we have terrific folks that worked very hard in that business is very challenged from a competitive standpoint.
Logistics of scale matter, there too and such as such a fragmented.
A competitive landscape, it's very difficult there to earn an acceptable return on capital that's the sort of process that we are going through with our portfolio.
And figuring out where can we invest to make.
The highest returns for our for our shareholders.
Finally, when when we kind of look to the recovery.
And.
Frankly, I think if.
The supply and demand.
Lines for oil cross as quickly and as dramatically as they might given the scenario that I was just discussing earlier with bill.
I could see basins all around the world begin to come back if we are fortunate to experienced a strong commodity.
Price increase that drives activity across the oilfield. So I think the fact that it'll be supports all of these operations around the world land and offshore North American as well as international.
Production as well as drilling as well as exploration I think thats or Keith Keith strength of our of our enterprise and and.
Investing within that framework. It always is a is a search for competitive advantage ultimately competitive advantage is what drives returns on capital and so so that's that's what we're seeking.
Thanks ill turn it back.
Thank you.
Thank you. Our next question comes from Kurt Hallead of RBC. Your question. Please.
Hey, good morning, everybody occurred occur.
Okay. All your families are well, thank you and likewise I hope everybody listening is doing well too.
Thank you.
Well I always appreciate the perspectives that you bring in the insights and also appreciate the fact that you're you're willing to take a stab at offerings late may play out even if it's on a near term basis.
Just kind of curious as you kind of our navigating this is challenging time.
Well talk about maybe working capital, we are generating free cash flow, but working capital being a little bit challenged in prior down cycle dynamics I know he was able to generate substantial cash flow from working capital. So I was wondering if you might be able to help us put that in your commentary and for perspective.
How to think about maybe a working capital Remy.
20 point I'll hand, it to Jose here, just a second before I do I want to say I think your organization through the last few years, because because of the focus on working capital is developing better and better processes in Mosul muscle memory around working capital and that's driving better efficiency on working capital, but I'll, let Jose address.
I actually think Thats a really good.
Thats the overarching theme I think we have been.
Credibly focused on improving every facet associated with managing working capital across the organization.
We've gotten much better at it and that will serve us really well as we enter into this.
Much more challenged operating environment.
But there's some things that are certainly outside of or control and so as I highlighted.
The customer base is certainly a much more stressed and they're going to be doing what they can in order to maximize their liquidity. We also have our business mix that's going to.
Shift more international.
International markets, where the payment terms are generally a little bit longer.
Basically the way that we kind of see the next several quarters as we certainly expect working capital metrics overall.
To deteriorate and I think as it relates to looking at Dsos.
26, 2015 2016.
Time period.
It's probably a regional a reasonable benchmark for how things could progress over the next several quarters.
We certainly don't expect.
Inventory turns and overall working capital as a percentage of revenue run rate to deteriorate to those levels in the past because or much improved.
Processes and management at the end of the day.
We're hesitant to put a number out there for you guys. Because there is such a lack of visibility as to how the back half of the year will play out.
But as you highlighted.
With a contraction on the top line and that type of environment.
We are usually able to generate some some of that free cash flow.
And Thats what thanks.
I appreciate I appreciate that incremental.
Thanks, and maybe just as a follow up so quite you you have been able to sidestepped the Empire building temptation that.
Stretched the balance sheets of a lot of other companies.
So kudos to you for doing that as you kind of looked out.
On the.
2020 dynamic.
Pruning our portfolio as what did you give some insight as to what areas.
I know he could potentially will improve or enhance their existing position.
So.
Through M&A, but once.
I will start to normalize yeah, well, yeah, Blake sitting here he runs that effort.
For us, but what I would tell you is that.
We continue to look at opportunities, we continue to think through our strategic positioning and our competitive advantage that drives returns on capital and we continue to look for ways that transactions could potentially enhance that but we also recognized.
We're in the middle to heavy lift on taking costs out of our organization and scaling to kind of fit the near term.
Level of demand and and we're going to be very careful before we add more complexity to that effort or risk to that effort by piling on.
Yes.
An acquisition we have done.
Small acquisitions, we did a couple of last year, there were very strategic rate fits and are executing well on those.
But we're just recognizing the value of the capital that we have access to and that that value will increase.
In coming quarters and.
Really try to make sure that we that we get that right. So so I think M&A, it's quite a big role in our past and helping build the company in the first place and it's going to play a role.
As we as we evolve into the future, but we're kind of a passing through this inflection point right now.
It's going to bring asset values down is going to make opportunities more and more attractive and so we're monitoring that closely.
Great. Thanks, again, so that it will take care. Thank you Kirk.
Thank you. Our next question comes from Sean Meakim of JP Morgan Your question. Please.
Thank you.
I was hoping to get more detail in the cadence of the cost out as we go through the year 375 million across three quarters, yes. The increment the incremental in Twoq was pretty high but of course, given how quickly revenues following its tough to match the cost in that quarter right. Just curious how to the back half the year looks in terms of realizing those savings and would you characterize.
Thats principally fixed.
Yes first on the pace the answer as quickly as possible.
As you correctly point out revenue is is moving down rapidly and we're working to try to try to adjust to that as as rapidly as we can and so quarter by quarter. We'll continue to update you, but theres a lot as you can appreciate we went from 230 million in our model to 625 in our.
Model and there's a lot of moving pieces with that but I think that our team gets it we were spring that as quickly as we can with respect to the nature of the cost savings.
No, it's what I would say in round numbers it's.
Roughly half fixed half variable.
With a little more detail around that about 35%.
Of the overall.
Cost savings effort.
Pertains to direct labor.
A little bit less than 50% at 47% is indirect labor plus overheads plus corporate efforts.
Some benefits changes.
And then the.
About 8% or so pertains to facilities leases and facilities fixed costs.
And then their balance, which I think is about 11% or so.
Is.
Not sure if its fixed or variable things like.
Travel entertainment trade shows that sort of thing that were that were reducing so you got to sort through all of that.
I would say that's roughly half fixed half variable another way to look at it is so far about third of it has been SGN a related and about two thirds of its centers lost sales related based upon.
21 million dollar year over year improvement.
DNA.
That we see on our income statement does that answer your question Sean.
Very much yet I was really helpful. I appreciate that.
Somewhat related.
Free cash was a little light relative to what would be implied by EBITDA on working capital benefit just the cashless payments condensed and the release of the Great thing is maybe help us with.
Restructuring cash impacts in the first quarter and maybe what we how would you characterize cash out.
One time associated with the restructuring as you go through 2020.
Yes, Sean as Jose.
So.
To Q1.
They're certainly we're.
Some minor cash costs associated with the cost out.
Program that will continue through the through the course of the year.
And also with some of the restructuring and impairment charges, we did have some.
Some noncash charges related to inventory as well, which also impacted the quarter, but if you compare this Q1 to the prior to Q ones, we actually had improvement in the free cash flow typically Q1.
As a lot of seasonal type expenditures that flow out making that quarter, a little bit more challenged so we certainly anticipate improvement as we move into the remainder of the year and typically from a cash.
Cost associated with some of our restructuring charges you can look at between.
15% to 20% of the cost savings.
Annualized cost savings basically being.
<unk> costs are real cash cost associated with getting those costs out of the system.
Got it great. Thank you very much thanks, Sean.
Thank you. Our next question comes from George O'leary of TPH and company. Your line is open.
Good morning claims like it has a day hi, George George.
It just given how important wellbore technologies is can become to the EBITDA stream.
Curious given your prepared remarks as you talk to that segments result, and kind of the pruning the portfolio and decision to exit businesses and and regions as well I think if I heard that.
Right.
That the Decrementals are expected to be relatively elevated in the second quarter, historically thats a high incremental decremental business.
But as wondering if you could.
Talk to beyond Q2, and I realize if revenue falls are fairly sharply thats, a totally different discussion, but if theres an opportunity to.
Lower those decrementals again absent a sharp revenue fall off and as we progress through the year for that business in particular.
Yeah, Hey, George has they'll take a stab at that here initially and as we were.
I think kind of touched on and one of the prior questions.
One were hit one revenue does decline.
So quickly and so rapidly it's very difficult for the cost out efforts to keep pace.
With those reductions and even last quarter as we're talking about.
Q1 of this year, we do the timing of some of those cost out efforts, we expect a little bit of a slowdown which that combined with the shortfall often revenue that we saw from Q4 to Q1 outlet to some fairly high incrementals and maybe sort of take the midpoint of the guidance of roughly 25% decline for.
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Q1 to Q2, that's another very challenged environment in order to maintain.
Relatively low decrementals, so certainly as we start getting closer to bottom and things start to level off some of those cost savings will catch up and we certainly expect.
Decremental or incremental margins to improve considerably.
But overall that segment has done a phenomenal job really sense. The depth of Q2, 2016, which is sort of the prior cyclical low where the from trough to the recent Pete.
Delivered roughly 57% incremental margins gave the example earlier about the year on year comparison.
Q1 of 2019 to Q1 of 2020 is reflective of about $110 million of cost savings.
The Dave achieve achieved which really mitigated.
Decrementals to 12% so.
They're doing phenomenal job they will continue to do that as we move forward in time.
Great Thats very helpful color Jose and then.
Just.
Last call you guys noted that Youve closed I think 483 facilities. Since 2015, and then you kind of talked about things like renegotiating.
Real estate cost with your landlords and things like that but how much is left to do on facility closure or consolidation front as you contemplate that $625 million in cost savings.
How much is really left to do there seems like you guys have done a lot of work on that front already.
Well we have.
We have but again don't I mean, we're we're resolute and in doing whatever we have to do to adjust to the marketplace. So.
We do have additional facility closures planned and have.
Made some announcements around those I think we have 29 closures that are pending right now and.
27 that were actually closed in the first quarter.
So so I mean, we're doing whatever it takes to to make sure that were size too.
Continued to generate as much cash and EBITDA as possible through that through the downturn.
Hey, George also had that we certainly done quite a bit in order to it to this point in order to consolidate some of our key manufacturing operations and by doing that improving efficiencies.
A lot of that has been done theres more left to be done is quite tough touched on there still number facility closures that are underway I mentioned, a couple of manufacturing facilities that were closing and consolidating in my prepared remarks, but one of the other things that we have available to US is that we still have a large number of service.
Repair aftermarket type facilities around the world, which are easier to scale up and scale down and when the market gets challenged.
Particularly in certain markets that are no longer meeting our returns thresholds.
Those are some of the targets that we started going after as well.
Doing in a very thoughtful manner to make sure that we continue to take care of or customers and can scaled back up quickly and efficiently one more called upon to do so.
Great. Thanks, very much the color guys.
Thank you George.
Thank you at this time I'd like to turn the call back over to Clay Williams for closing remarks, I want to thank all of you for joining both investors as well as any employees it might be listening as bill Herbert brought up early in the questioning.
We do believe we're in for a very challenging two year period ahead of us, but there is one thing that I really think it's important to emphasize to to everyone listening and that is it bill. If you really is built to whether this the diversity of our business model along multiple dimensions, our access to capital our strong balance sheet, but above all just could not be more proud of.
The employees of the we're well practiced in controlling costs when times get tough. So thank you for all that you're doing please everybody remain safe and well speak you again next quarter take care.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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