Q1 2020 Earnings Call
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Good morning, and welcome to the Cactus Q1, 2020 earnings call. My name is me and I will be facilitating the audio portion of todays interactive broadcast all lines have been placed on mute to prevent any background noise for those of you Onstream. Please take note of the options available in the event consoles at this time I would like.
To turn the call over to Mr., John She has got about director of corporate development and I are Sir. Please go ahead.
Thank you and good morning, everyone.
We appreciate your participation in today's call.
The speakers on today's call will be Scott vendor or Chief Executive Officer, and Steve Tadlock, Our Chief Financial Officer.
Also joining us today, our job vendor senior Vice President and Chief operating Officer.
Steven vendor Vice President of operations, David Isaac Our General Counsel and Vice President of administration.
Yesterday, we issued our earnings release, which is available on our website.
Please note the any comments, we make on todays call regarding projections or expectations for future events or forward looking statements covered by the private Securities Litigation Reform Act.
Forward looking statements are subject to a number of risks and uncertainties many of which are beyond our control.
These risks and uncertainties can cause actual results to differ materially from our current expectations.
We advise listeners to review our earnings release and the risk factors discussed in our filings with the FCC.
Any forward looking statements, we make today or only as of todays to date and we undertake no obligation to publicly update where have you any forward looking statement.
In addition, during today's call, we will reference certain non-GAAP financial measures.
Reconciliations of these non-GAAP measures for the most directly comparable GAAP measures are included in our earnings release.
With that I will turn the call over to Scott. Thanks, John Good morning, everyone.
This year, Joe what I will mark over 40 years, and the wellhead and related pressure control business.
And I'd venture to say that a few management teams of witness much less navigated the vicissitudes of this industry to the same degree.
For example, I can recall all to vividly the first half of 1986, when the U.S. rig count declined 65% within the span of six month as the Saudis dramatically increased production and attempt to get recapture lost market share.
Clearly today's confluence of factors makes the inevitable market correction far more complicated.
Nonetheless, the lessons learned from that period and later downturns remain valid.
Those service provider to benefited most during the subsequent recovery had aggressively reduced systemic cost and operate in segments bettered addressed overcapacity through proactive consolidations.
Painful in the near term I believe that a sharper downturn may lead to a more substantial recovery for those you prioritize the interests of their shareholders.
On today's call will briefly discuss our first quarter results and then provide some color on the current environment.
Q1 was a strong quarter for cactus and all the U.S. rig count was down 4% sequentially. We treat we achieved impressive relative outperformance. Once again in summary, first quarter revenues were 154 million up 10% sequentially. Adjusted EBITDA was 54 million up 12% sequentially.
Adjusted EBITDA margins were park, approximately 35% our cash balance increased by 28.
The 230 million and we paid a quarterly dividend of nine cents per share.
So I'll turn the call over to Steve Padlock, our CFO overview, our first quarter financial results and following his remarks I'll provide some thought on our outlook for the near term before opening the lines for acuity.
Steve Thanks, Scott in Q1 revenues of 154 million increase 10% sequentially product revenues at 87 million were 4% higher sequentially. Despite the 4% decline in the U.S. onshore rig count our relative outperformance was achieved due to greater market share product gross margins were nearly 36% of revenues.
Down slightly on a sequential basis due to the full impact of section 301 tariffs and a noncash increase in our inventory obsolescence reserve. Excluding this inventory reserve gross margins would've been 160 basis points higher.
Rental revenues were 36 million up 28% from the fourth quarter. The increase was attributable to higher industry completion activity and better than expected growth from our recent innovations rental gross profit margins increased 110 basis points sequentially due primarily to leverage the fixed cost base.
Field service and other revenues in Q1 were $31 million up 8% from the fourth quarter.
It's represented just over 25% of combined product and rental related revenues during the quarter slightly ahead of expectations.
Gross margin increased 710 basis points sequentially and utilization improved following the holiday season.
That's you know it was up 1 million sequentially at 13.7 million for the quarter. The increase was attributable to higher foreign exchange losses, as well as higher stock based compensation given cost reduction measures implemented to date, we would expect SGN aid to be $10 million to $11 million in Q2, 2020 with stock based compensation expense running at approximate.
Only 2 million during the quarter.
Due to head count reductions announced in March we recorded $1 million of severance expense in Q1 2020.
First quarter, adjusted EBITDA was $54 million up 12% from 48 million during fourth quarter adjusted EBITDA for the quarter represented 35% of revenues.
Adjustments during the first quarter of 2020 include only 1 million dollar related $1 million related to severance expenses and $2 million and stock based compensation, we'd like to keep formal adjustments to a minimum and to be clear. We did not adjust for 600000 noncash provision for credit losses, a 1.4 million noncash inventory obsolescence.
Vision, and approximately 1 million related to foreign exchange losses during the period.
We added these additional items back adjusted EBITDA would have been 57 million with an adjusted EBITDA margin of 37%. We recently began layering in balance sheet hedges to address some of the FX volatility.
Our public or class eight ownership was relatively stable in one Q and was 63% at the ended the quarter. This should result in an effective tax rate of approximately 19% in Q2 2020, assuming no changes in our public ownership percentage.
GAAP net income was $33 million in Q1, 2020 internally, we prefer to look at adjusted net income and earnings per share, which were $31 million.41, respectively compared to 28 million and 37 cents per share in Q4 2019.
We estimate that adjusted EPS in 2020 will reflect an effective tax rate of 26% due to relatively higher contributions from our foreign operations year over year.
During the first quarter, we paid out six and a half million dollars, resulting from our quarterly dividend of nine cents per share. The board has also approved a dividend of nine cents per share to be paid in June of this year.
Netted the dividend and associated distribution payments, our cash cash position increased by $28 million during the quarter to over $230 million at March 31st highlighting the strong free cash flow generation of the company for the quarter operating cash flow was $45 million Internet Capex spend was $8 million.
Regarding working capital due to protect production curtailments amid the extended Chinese new year at a Suzhou facility significant decreases in inventory offset a decline in accounts payable during the quarter with accounts receivable, representing a cash outflow total net working capital was the use of cash.
We would expect working capital to be a source of cash for the remainder of the year, primarily driven by accounts receivable.
Our Chinese facility is back up and running with no noticeable disruption to our operations.
As announced in early April we reduced our 2020 capital expenditure budget range to $20 million to $30 million down approximately 50% from 2019.
Our capex is expected to be first half weighted this year with the annualized run rate approaching $10 million by yearend.
That covers the financial review and I will now turn you back to Scott Thanks, Steve.
Although the dramatic decline in activity has been well documented analysts forecast for a fall of over 60% for March through the end of Q2 may be optimistic given the lack of crude storage capacity available. We fully expect completion activity can material materially underperformed the rig count.
In the near term however, the more aggressively the production to shut in conjunction with a dramatic decline to new wells pardon me.
The greater the long term impact to supply for this reason, we're optimistic regarding the eventual recovery and activity required.
Although the timing remains uncertain.
The cactus playbook will be similar to that implemented during the 2015 in 2016 downturn in which the company maintained adjusted EBITDA margins above 20% and generated free cash flow. Despite over 20 million an annual interest payments I remind you. The cactus is a variable cost business.
At heart and our continued focus will be to actively managed folks all those costs that we can control without compromising our attention to safety and execution. This was evidenced by our decision to reduce executive and board compensation by 25% to 50% back in mid March. Additionally, we made the decision in light.
Large to reduce associates salaries on a company wide scale and cut U.S. head count by nearly 30%, resulting in 35 million an annualized cost savings 5 million of which was related to ask DNA.
In April we've implemented additional rounds of cost savings. These have resulted in the U.S. head count reduction of an additional 28% and have increased our expected annualized payroll related cost savings to be 60 million 25 million above the amount announced in early April these cost cutting efforts are immediately effective.
Income at limited cash cost of the company as evidenced by the 1 billion and severance expense recorded during the first quarter and Associate and association with the first 35 million of savings.
Giving given where activity appears headed to the near term further cut your plan.
On top of these savings the company's discretionary bonus payment is expected to be dramatically reduce this year. The this payment totaled 8 million in 2019 half of which was allocated yes DNA.
Looking to our product business, we expect revenue to be down by more than the rig count during the second quarter as the installation of production trees is being deferred primarily due to take away and storage limitations in response to volume declines were able to flex associated variable or direct expenses.
Which are largely material costs and freight.
We believe these direct costs make up approximately 80% of our total costs and the product business with indirect cost reduced accordingly.
From a market share perspective, we're proud to achieve 32.9% share during the first quarter a company record given the large recount drops witnessed on a week to week basis near term figures are expected to be volatile as customers are simply dropping rigs as quickly as they can.
Recall downturns historically provided cactus with significant opportunities to increase market share from year end 2014 to year end 2016 cactus is market share went from less than 10% to over 20%.
Operators increased focus on efficiency gains and nonproductive time, 10 scope indoors and we've historically enjoyed a high success rate once we're able to go on trial with the potential customer as a quad as a consequence, we're optimistic that the current downturn provide meaningful opportunities to pick up new business.
During the first quarter, we commenced work with one of the majors.
Given our balance sheet, our ability to command is variable costs and our supply chain. We believe cactus will be able to weather the downturn more successfully than many of our peers.
Regarding our Chinese supply chain facility capacity returned to more normalized levels at the end of the first quarter and we're not currently witnessing any notable disruptions keep in mind that our seashell plan, both extremely modest levels of fixed cost, which reduces the impact of declining utilization.
On the rental side of the business, we were extremely pleased with customer adoption for our suite of innovations during the first quarter as evidenced by innovations representing over 20% of rental revenue during the period. Unfortunately operators are cutting any and all activity in the near term given limited our ability to move barrels to market.
In this environment, we're not willing to pursue business at significantly lower prices and compromise the value proposition value proposition, our equipment and services provide thus while the near term environment will be extremely difficult. We remain confident in the value proposition a potential of our rental business once activity.
Resumed and more customers acknowledge that the benefits, resulting from efficiency gains far exceed the incremental costs.
Regarding feel service the first quarter witnessed a recovery and margins following the seasonally impacted fourth quarter revenues. In this segment continued to be driven by both our product and rental activity.
And under appreciated attribute of Cactus is the low capital requirements of the business is highlighted by our ability to reduce our 2020 capex budget to between 20, and 30 million down approximately 50% from 2019 levels.
We typically have a three or four month Lee tie between commitment and the subsequent deployment of equipment. Thus, we expect the annualized capex right.
Run rate to drop below 10 billion by the ended the year and we expect to generate significant free cash flow and 2020.
I'd like to close by highlighting a few items before opening the line to questions.
Although it has not had a direct impact on our operations in the field Cobot 19 has without a doubt and an indirect impact on all of our associates I want to thank our team for their focus dedication commitment to safety and excellence during these unprecedented circumstance.
Many in our industry are being forced to shutter business units right down investments and Rick car record large impairment charge charges.
This points to a more favorable environment for those who survived this downturn and the absence of these issues to cactus highlights our organizations longstanding commitment to prudent investment strategy.
Management, our long term investments investors in this business.
So while the macro it back backdrop provides ample reason for caution we remain confident in our ability to execute more importantly, our business model and historic focus on cash and returns have placed us in the enviable position of being able to fully participate in the eventual recovery.
Internationally, we continue to believe that our strategy to expand into targeted markets will bear fruit and 2021, as we continue to identify and develop viable business opportunities outside the U.S.. Despite emerging pricing pressures in Australia. Our work is predominantly natural gas focus.
And we expect this activity to hold up better than the U.S.
Regarding capital allocation, our management teams compensation philosophy remains uniquely aligned with our shareholders and we'll continue to make decisions regarding the business in this light.
We set our dividend level with the industry cyclicality in our ability to flex costs and expenditures in mind, given the unprecedented nature of this downturn will carefully evaluate this and all decisions with a focus on shareholder returns.
So in summary, cactus is well positioned to navigate this challenging market environment and with that I'll turn the call back over to the operator, and we can begin QNX operator.
Thank you Sir to ask a question via the telephone. Please press star one if you would likely draw your question breast Uptown key please limit yourself to ask one question and one follow up again, please limit yourself to ask one question and one follow up.
My first question from the line of Jami Mall from Stephens. Your line is now open.
Thanks for taking my questions good morning, Tommy.
Scott you hit on the market share issue and how you were able to take a significant.
About a share in the last downturn. So I wanted to start there of the trial period. As you indicated that is often key to getting your foot in the door and expanding the relationships. So sounds like you're on trial or maybe of advanced further with one of the majors. So anything you could give us there, but then as you look to the downturn.
And second quarter anyway, it seems like it might be premature for operators Stephen start trial in new new vendors, but just as you look forward how long of a process is it to get those conversations going.
As the industry goes through a downturn.
And then how long to convert that into a more substantive relationship.
Yes, I can only speak historically to that these are.
Right now you can't it's actually difficult as you know to get into a customer's office since the customers aren't in their offices right now so.
You're now seeing the benefit of work that we did.
Last year in the beginning of this year.
Once were able to present to a customer.
You're you're looking at somewhere between 30 to 60 days for us to begin work and then once we begin work.
Maybe 90 days.
Thereafter for them to fully evaluate the benefits of the system.
Your next question is from the line of George O'leary from Tudor Pickering, Holt and company. Your line is now open.
Good morning, guys, Hi, George how are you.
That's hanging in there I hope you guys are doing well too and all this craziness.
You guys had better relationships than most with your customers. So theres an argument out there being positive by some people and you seem to me in Peace mentioned this in their press releases around activity and cuts and things of that nature that.
And they May go on a quote unquote frac holiday in the second quarter, we'll need to add activity back later in the year I just.
Area to the extent you guys or have any dialogue with your customers about that and whether or not that seems.
Realistic or that's more kind of hopeful that crude oil prices are better in the back half of the year and ramping activity into those better prices any color there would be greatly appreciated George you're not going to like the answer to that question, but I'm going to give us see straight.
[laughter]. The Frac holiday is is is well underway, so thats undeniable and.
And although we are hearing.
The work could could commence again.
I'm.
Obviously, yeah, I think that there's it's undeniable that we're going to have a lot ducs that are gonna have to be addressed but the timing.
I would just I'd be very wary of counting Donna.
Specific month, maybe by the fourth quarter maybe.
I wouldn't look to see a resumption in the third quarter frankly.
No I think that's that's actually helpful that was kind of the more honest answer I was actually working for.
You guys is part of your business will put and.
Please excuse me if I get the term wrong, but temporary abandonment caps on wells on occasion, you mentioned selling less production equipment are we starting to see that where guys maybe completed a well, but they're not actually going to go ahead and turned that inline and you're drawing those caps on for a longer than you typically do.
Yep.
Awesome. Thanks for the color guys I'll stick with my two questions.
We have our next question from the line of Scott Gruber.
Citigroup Your line is now open.
Hi, good morning.
Turning to Scott how are you.
Okay. Okay goals can be thanks, you're thinking about Oh your cost structure splits between variable.
Fixed.
To provide some color on kind of how your Cogs split along those lines.
So the cost savings.
Think about dressing.
More variable, but also also more fixed I realize there's a lot of variable that you can move but.
Just some color on that front.
Sure.
So Steve you want to address that yeah, I think I'll, just going to skip to the punch line of Decrementals.
I mean, as Scott mentioned in the and the scrip. There obviously, it's very highly variable and we're addressing those those aspects I'm certainly as activity comes down and then.
And payroll as you can see with the announced reductions.
And then even to the fixed cost we have a pretty low fixed cost base anyway, but wherever we can.
Get some relief, where we're going forward obviously.
So kind of moving to Decrementals I think the best way to think about them Simplistically is just to to.
View them as a bit higher than our current EBITDA margins, So and products you would see in the forties and ran all you would see in the seventies and field service probably high Thirtys, maybe low fortys. So all in with SGN now you're probably looking at mid Fortys Decrementals, if you look back.
Our 2016 historical margins.
I think thats sort of a good place to start, but obviously that was a much.
Slower steadier downturn felt bad at the time, but this is this is much much faster. So we're getting to that 2016 level in a in a more rapid pace and I think the only difference here is that we have a public company costs obviously.
And so the challenge will be kind of keeping that total line below yesterday.
Above that 20% that we had historically.
Got it a lot of good color there are several us an unrelated follow up.
Yes, 230 million cash on the balance sheet.
Scott, how you're thinking about M&A.
In this environment.
I'm not thinking about it right now Scott.
It's.
It's really we're busy running this business right now.
And and I wanted to add something what Steve mentioned.
We we made very very substantial head count reductions and process I can't speak for all of our peers, but we tend to make these on and on anticipatory basis. So we don't we don't really make him retrospectively were reactively. We're looking at the next few.
Weeks.
Because of the flat nature of this business I feel like we're closer with our customers.
Certainly, but our field people.
So.
These are pretty dramatic reductions, but it.
Yes, we're trying to stay ahead of the curve a little bit.
M&A It just doesn't make sense right now first of all it doesn't make sense to spend any money I think you'd agree and secondly, it doesn't make sense for us.
To detract from our current focus which is running this business.
And preparing the business, where we think will be.
Much more prosperous.
Future, perhaps at the end of.
Sometime late next year, so just not on the radar right now.
Thank you touched on it but at the 60 million in cost you think it realistic those out into Q.
Hello.
Its immediate so those those reductions were only payroll related reductions.
So we Didnt <unk>, we didnt include the non payroll related.
Cost cuts that we've implemented so those are those have immediate effect. So the yeah. The first round the first announced would be the whole quarter. The second announcement would be throughout the month of April and second two months so virtually immediately.
Thank you.
Next question is from the line of Salveen narrow from.
Lehman and James Your line is now open.
Hi, Good morning, guys Hi, good morning forget how are you.
I'm doing great Hope you guys are doing well.
I guess, just given layoffs at the customer level can you talk about how the decision points within those in fees are changing and how that changes your.
Eventual market share gains as it rolls over.
And I really can't I can't comment on what our customers are doing.
In terms of personnel.
I guess frankly, I don't know.
But I haven't seen much in the press have you.
No I mean, I guess, our base assumption is that we're seeing decision points move up structure within <unk> and I didnt know whether that would be beneficial or.
How that would flow through to cactuses ability to sell into those customers.
I don't think we haven't seen any change in that regard.
That's fair.
So then I guess, what we think about.
The pricing.
And as we were saying how should we think about that and whether there's any changes to how you guys, maybe think about bonus payments or other pricing structures and you see as we come through the cycle.
So I'm a little bit unclear as to your question are you asking me about our our.
Our incentive compensation.
No I guess I'm, saying it from the customer side, obviously that many of them by asking for pricing concessions because the downturn activity or are you are you guys contemplating changing the way you price any of your products, whether its including more bonus payments or more incentive comp from the customers. How do you think about how that's moving.
I would say just historically it is volume related the more volume a customer does with us the more potentially if they if they have 20 rigs they're going to you know likely get a better deal and if they got two rigs running and as far as pricing itself. We never comment on that just from a competitive standpoint.
Thank you very much Chris.
Yep.
We have our next question from the line of Conor lineup.
Morgan Stanley Your line is now open.
Thanks, Good morning, good morning.
I was wondering if you could comment maybe less so on pricing more competitive dynamics.
Yes, some business that you upgrading or a little less transparent to us. So are there competitors that you feel.
I have been relatively weak and will be exiting the business scaling down significantly.
The business.
So let me just speak in general terms I think that I think I mentioned that the narrative that.
The competitive landscape.
I have absolutely no doubt will be much more constructive on the other end of this so you know we.
You May have heard me say before this is a fairly bifurcated industry, where you have.
Small group of of large players and then you have lots and lots of of smaller players who.
Many of whom I, just frankly don't think will survive and I think thats, probably more true in the Frac space Frac rental space than it is in the wellhead space, but it it's equally true in the wellhead space.
They're just absolutely no way if you don't have a strong balance sheet. If you don't have the ability to flex your costs.
It.
I, just don't see survival for that lower tier group of of competitors.
That's fair, Yes, yes would you say.
Our competitive set makes up 10%, 30% of the market just just how how big it.
[music].
Well in the Frac space, it's a much larger percentage so.
I'm looking to bother team members here in the Frac space I think the smaller guys.
Our.
50% maybe more.
I would I would have suggested maybe 60%, but maybe 50% to 60%.
And the Wellheads space.
Maybe.
Maybe 20% to 30%.
Got it alright, thank you.
Next in line isn't Blake Gen Chang from Wolfe Research. Your line is now Olson.
Thanks, Good morning, I'm just wanted to follow up on the working capital comments, you mentioned it was going to be a source of cash the next three quarters.
But I'm trying to compare I guess, it's the last downturn. It was a pretty modest source of cash in 2016, if it's warranted.
Do you mind, just going through the major drivers of working capital here and what we should expect in the second quarter versus the second half of this year as it relates to a cash contribution.
Sure I think you know 16, if you're just looking 15 to 16.
Probably part of why you're not seeing a big working capital releases, because you had a more gradual downturn.
This one happening sharper you would see you know more release quicker and then on top of that 16, you saw recovery in the back half of the year. So that would have been a a use of working capital. So I think.
Maybe why it's not kind of that's clear just looking at the one year. If you look at what we expect for Q2 and beyond.
I'm not going to get into specifics, because we're not providing any kind of activity guidance, but clearly a our is the one that will release the fastest aipu will.
Adjust accordingly, along with days.
We talked about the China impact on ATP as well as.
You know purchasing programs, we take advantage of in terms of fast pay sometimes brings the days down in downturns, but.
Inventory is the one that's you know not as not as big or release of working capital. So I would focus more on that they are side, maybe you have a slight slippage in days, but hopefully nothing too severe.
And that's going to be your primary release.
Got it that's helpful. Your your business is also growing on a on a relative basis I guess, two last downturn as well shifting focus to supply chain. It seemed like China's normalized at this point you'd already diversified fairly well out of China into other parts of the world.
And I know the near term focus for analysis Rightsizing, the business and focusing on operations, but I was wondering if you maybe thought about the longer term.
Potential shift away from Chinese manufacturing or maybe it's just sentiment driven now just given what's going on and there's not a whole lot of visibility into what you us firms are going to do but I'm wondering if it's something that you've discussed and maybe you have a view on at this point.
Oh, Yeah, I don't think that.
Yes, but clearly that was the direction, we were headed and.
We'd be foolish not to accelerate.
That initiative.
So.
To be clear China is still the most competitive source of equipment.
But.
If I did look down the road in five years, it'll be less important to cactus and it is today.
Got it.
Appreciate the color. Thanks.
Next in line is Jacob Lundberg of Credit Suisse. Your line is now open.
Hey, good morning, guys. Thanks for taking my question.
Hi, Jason.
I guess could we just go back to the earlier discussion on on market share just thinking about some of the individual drivers of that so weird of bucket it sort of between winning more business with your existing customers, adding customers, which obviously referenced in his prepared remarks.
As well as simply your customers recounts outperforming the broad market I'm curious, how you'd kind of attribute recent market share gains, particularly just just Q1, among those three buckets and to the degree that the last of those three youre your customers your accounts outperforming the broad.
Market has been a driver do you think there's any risk of seeing any reversal and market share as we go through the year.
Yes, that's a very very interesting question, because it's kind of surprise you maybe not.
What I'd tell you that the large and piece with whom we do business.
Were the most aggressive and cutting rigs early so we saw much more dramatic reductions from those and I don't know if it's because of of investor sentiment investor pressure.
But it was it was fairly dramatic so.
That we see that plateauing.
We see the.
Maybe a later cycle drops being more the smaller players.
Which comprises you know a smaller percentage of what we do.
The short answer is we have just we've added rigs not so much with existing customers, we've added rigs with new customers.
Okay. Thank you that's helpful. And then my second question would be just around any co bid related kind of safety measures. You guys are taking out the boes your facility I imagine maybe need.
Extra spacing on the floor or anything like that would you expect that to have any any cost and bath.
We've actually taken we took those precautions probably over a month or so ago, we actually have by a protocol in place before all of our employees to enter the facility for their different shifts. An addition of that we've kind of spread people out. So you guys and machine shop The assembly guys.
We've opened up some additional base for testing so we have spread out and to date I'm happy to say that we have not had any issues at the facility and the cost to do this was really negligible.
Okay. Thank you very much.
Thank you next question is from the line of Chase Mulvehill.
From Bank of America Securities. Your line is now open.
Hey, good morning, everybody anything shape that hey that veered off.
No no longer.
[laughter] so.
What do you guys are doing all right.
Yes.
Certainly we are all doing great. Thank you.
Good to hear good to hear Steven I guess on the call. It was mentioned about.
Some some FX hedges.
Maybe it's kind of worth taking them in it and just reminding us how much of your cost base is expose directly to rename be.
And if there's any other.
Material FX exposure that we should be aware of.
Yeah. This so the losses were really related to Remeasurement of Australian U.S. de payables, and Chinese U.S. de receivables and really the culprit here was actually Australia, they experienced sort of a wild currency movement during the quarter as much as 17% at one point so.
What we've done is layer on balance sheet hedges to address this in the future so that those remeasurement gains and losses will be offset.
We've done things like on that on a cash flow side, we've done things like prepayments in the past and we have board authorization to do cash flow hedges in the future, but we don't intend to do that given the uncertainty around purchases and needs and things of that sword. So and then just getting to your kind of base question.
How about 50% of our product generally is coming from China. So that's that's the exposure there so whatever our receivables with our.
With our Uh huh.
Subsidiary over there are as well as a few other vendors.
Okay right you should filler.
And I guess, if we think about R&D spend through this downturn you. How are you guys approach in R&D spend as we tend to go through this.
Downturn I mean, it seems like that maybe some of your competitors might pull back on R&D do you also expect to kind of pull back or do you think you can take advantage. It didn't seem kind of broaden your lead me think about the technology versus your peers.
The latter.
So although no departments have been immune from from rationalization, we protected those involved in R&D and we intend to continue to protect those and R&D, but you also have to robot remind yourself that R&D has always been a fairly small percentage.
Of our of our revenue and cost.
But the short answer is no. We don't have any intention of relaxing our efforts in that area.
Okay. Also appreciate the color you guys they say.
Thanks.
Next question is from the line of Sean Meakim from JP Morgan. Your line is now open.
Thank you good morning.
Sean how are you.
Great. Thank you so you mentioned earlier.
Great.
Hi, Mark projectors, and you're right.
[laughter]. Thanks.
You mentioned the market structure gets better through the downturn, particularly in Frac rental and I think that makes sense to see casualties among smaller competitors.
But if there maybe.
50% of market today when activity comes back how does that equipment luck in 612 18 months is that how viable as that couldn't to come back in a better market.
Well I don't get better with age I can tell you that unless you Miss you take care of it and if you don't have the money to take care of that.
He most of the if you drive around the Permian, you'll see that most of it is stored outside.
No I wouldn't.
You're going to have some attrition in that area could be sure plus a lot of the manufacturers who produce that of questionable origin. I don't think are going to be in business as well, which is going to make spare parts problematic as well.
So it's it's.
There'll be some significant attrition I think.
Got it yeah that's helpful.
And then so similar question for Wellheads.
In a recovery lets say sometime in 21 or beyond whenever that is would there be any customer inventory issues to work through before you start falling more rigs or would you expect activity to pick up Im just in time as rigs start standing up again.
So we never ask our customers to buy in advance.
So our customers don't have any inventory they they don't hold any cactus inventory whatsoever.
That's what I thought okay, great restocking yeah I appreciate that thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you all for participating you may now disconnect.
Thanks, everybody be safe.
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