Q1 2020 Earnings Call
Yeah.
Q3, nine it is giving me a cross graph friend.
Slide eight are I see what we get here.
For nine fighting 0588 is your comp but its name.
Apogee first quarter 2020 earnings call.
Exactly.
Okay.
All right your first and last name.
David Brown.
Yes, all w. when.
Yes.
All right, let's get in there you'll be a musical unless they have already begun.
[noise].
[laughter].
[music].
Good morning, welcome to Energy Corporation's first quarter 2020 conference call. Your host for todays call is David Skipper, Vice President and Treasurer, averaging I'll now turn call over to Mr. skipper you may begin. Thank you. Good morning, everyone with me today our summer.
So my Sundaram, President and CEO of allergy and Jay not senior Vice President and CFO of apogee.
During today's call. So, we'll discuss apogees first quarter highlights as well as our market outlook.
Dave will then discuss our first quarter results before turning the call back that summer for summary comments, then we will open the call for Q1 day.
During today's call, we will be referring to the slides posted on our website.
We'd like to remind our participants that some of the statements. We will be making today are forward looking these matters involve risks and uncertainties that could cause a material difference in our results from those projected in these statements information concerning risk factors that could affect the company's performance and uncertainties that could cause a material differ.
Since the actual results from those in the forward looking statements can be found and the company's press release as well as as an average annual report on form 10-K, and those set forth from time to time and Apogees filings with the Securities and Exchange Commission, which are currently available at apogee Dot com.
Except as required by law the company expressly disclaims any intention or obligation to revise or update any forward looking statements.
Our comments today May also include non-GAAP financial measures additional details on reconciliations to the most directly comparable GAAP financial measure can be found in our first quarter press release and slide presentation for this call, which are on our website I will now turn the call over to commit to discuss our.
Bridgette first quarter results.
Thank you David Good morning, everyone I would like to welcome our shareholders and analysts and I would employees to our first quarter Twentytwenty earnings call. Thanks for joining the call.
I'd like to begin by discussing of a response to the over 19 pandemic. This is a fast moving prices on a scale, we have not experienced before.
This crisis has touched every family and impact at every business.
During this period and shooting the health and safety outflow employees is paramount.
Additionally, apogees businesses on a path to fight Thats critical infrastructure, therefore, our manufacturing and field locations continue to operate and support the vital oil and gas infrastructure out on the walk.
In order to protect our employees. During this period, we have mobilized our crisis response team and have adopted a comprehensive response plan that details of which are included on slide five off the presentation.
Our response plan includes taking precautions consistent with the local state and National Government Health Authority guidelines.
Including the effect does flub disease control and prevention and the World Health organization.
Equipping our employees with addition of personal protective equipment and the enacting social distancing procedures, including stagnating ship implementing rotating work scheduled on modifying work spaces and break areas.
As we support the critical work that needs to be done to keep the world economy functioning. During these on president that time, we are committed to providing our employees, but they commitment.
That tools they need to operate safely through this period.
I'm proud of their continued dedication and the what they're doing.
Additionally, in the foster the significant decline in oil prices due to that demand destruction caused by Corbett 19 pandemic and the outcome of Opex plus meeting in early March.
We have implemented a comprehensive contingency response to protect the profitability up or businesses, while preserving the core capability.
We have acted swiftly and aggressively to reduce our cost structure, while preserving our core capabilities on key trends that gives us sustainable competitive advantage in the market.
On slide six of the presentation, we have outlined these actions.
Since our initial announcement on March 23rd we have increased action that we have taking I'm now we expect to achieve $85 million of annualized cost savings up $20 million from the previous $65 million savings target.
We will complete most of the planned restructuring actions as we exit Q2, and the remaining by middle of Q3.
We've also taken actions to reduce capital expenditures and improve working capital. We continue to monitor market conditions, and we have additional plants and plays and be stand ready to execute on them asset not necessary.
During these times of uncertainty, it's important to remember that our high quality portfolio, what's built to withstand significant downturn to note industry.
It is for periods such as this that we created and analyze our product lines through the lens sell for value creation framework.
Our production focused products are critical component in maintaining production from existing valve as well as providing more efficient operations and lower operating costs for our customers.
In low oil price environment, our ability to help customers lower their operating cost becomes even more critical.
The only field as being forced to look for new ways to operate.
We think digital will become even more critical during this period. Additionally, it will become even more important for operators to work with the best equipment and technology providers, what reliable have the right products and service networks and have the financial wherewithal to provide support through this downturn.
Our customers no we have working with them to come through this downturn, even more efficient that wed be stopped it and we believe we are well positioned to emerge as a long term bennetto in our industry.
With the anticipated closure for upcoming merger in June we will be adding champion ex of relatively stable and global production chemical product line to the high quality apogee portfolio.
Production chemicals are critical for the maintenance and continued production from flowing valve.
In 2019 production chemicals represented 87% of champion access revenue and 93% Dockets total segment operating income.
Additionally, champion excess geographically diversified with over half of it so revenue in 2019 coming from outside of the United States.
On slide seven up the presentation, we have provided an update on our progress for the merger.
Our integration planning with temkin excess proceeding very well and we have announced the executive leadership Committee of the combined company.
We are announcing the name of the combined company, which will be champion ex.
We will continue to preserve the strong brand support product lines, such as use synthetic harvest and Fisher Norris Pcls Ferguson Quad Stein Peyto when Brock at Tetra, which have valley earned reputation with our customers for high quality superior performance.
Outstanding customer service.
We are truly bringing together the best of both companies.
We are taking the global recognition of champion acts as a company name, while preserving the strong brands within apogee.
The strong purpose driven culture and reputation of apogee in the marketplace will not go away, but instead will become the foundation of our combined the company.
As you can see our apathy eight in the new logo of champion ex represents the continuation of apogee culture, which aligns very well with the heritage of Kpnx culture.
We see this merger at that transformative new stock for the combined company and feel that a new name captured the energy and excitement up the combination.
We expect apogee shareholder vote on the issuance of the shares in the merger to be up they end up the end of May and closing asked the transactions to be in June.
Additionally, we have developed a plan to capture the $75 million cost synergies and we have identified specific revenue synergy opportunities, which we intend to capture we'll be sharing additional details on these revenue synergies in the coming days.
While the oilfield of going through a difficult and challenging period. It is important to remember there are still opportunities where the combined company can win new customers and gain share globally, we want to use our strength that the combined company to capture growth opportunity.
I will allow our merger with champion Act will result in a stronger company to navigate the current downturn with reduced leverage and strong free cash flow generation.
The team offer integration is better together with drinks even stronger during periods of stress in the market.
Now I'd like to discuss our first quarter results for a few minutes.
During the first quarter, our teams executed well against a challenging market backdrop for the quarter. We delivered consolidated revenue of 261 million and adjusted EBITDA of $53 million, both of which were at the midpoint of our guidance range first quarter. Adjusted EBITDA margin was 20 point.
4%, which showed sequential improvement up 240 basis points.
With respect to free cash flow generation, we posted outstanding performance on this metric increasing it by 113% compared to Q1 of last year, we converted 8% afloat revenue to free cash flow in the quarter.
We believe our solid free cash flow performance demonstrates the quality of our portfolio the resiliency of our product lines through the industry cycles and our operating discipline.
Within production on automation technologies total segment revenue increased 1% sequentially, which was driven by a 2% increase in the segments North American revenues, partially offset by a modest decline in international revenue.
The decline in international revenues was driven by the timing of broaden the failed in the middle East.
On a year over year basis.
T segment revenues outside of North America increased 14% from the first quarter up 2019, driven by strong artificial lift fails in international markets.
From a profitability perspective, our teams continued to perform well with adjusted segment EBITDA, increasing 200 basis points sequentially.
Due to our proactive cost reduction actions productivity initiatives and isolate the charges in the fourth quarter of 2019 that did not repeat.
First quarter digital products revenue grew 8% year over year growth was led by our downhole monitoring product at a significant portion of our digital products, our hardware that may be lumpiness from quarter to quarter, particularly during periods of MBS capital production and discipline.
However over time, we expect our digital revenues to grow at a very healthy rate.
Moving to drilling technologies in the first quarter revenue increased 27% sequentially.
Driven by the completion of a diamond capital inventory destocking cycle by over drilling technology customers.
Within the quarter balance was a store between actual capital you page an order rate.
Additionally, diamond bearing revenues increased 10% sequentially.
From a profitability perspective, we achieved a 230 basis point sequential increase in adjusted segment EBITDA margin.
Before I turn the call over page eight to take you through the details of the consolidated and segment financial results. Let me take a few minutes to share our view on the current market for our products.
Due to the short cycle nature of our business and the reason global event visibility is very challenging.
We do expect market conditions to remain very challenging to wealth twentytwenty and potentially longer as we believe it will take time for global oil demand to recover from the core with 19 pandemic.
Our drilling technologies business, we'll see significant impact in Q2, driven by the dramatic decline in your rig count.
We expect our artificial lift products to experience meaningful sequential declines in Q2, driven by spending reductions by our customers and production shutdowns.
From a geographical perspective, we expect north American markets to be the more challenging due to the significant amount of amounts to MP capex reduction.
We expect international markets to hold up better, particularly in Australia in the middle East at the international sales cycles is longer and the spending reductions by customers up not as steep as in North America.
Given this environment, we have taken proactive and decisive actions to reduce our cost structure. We have a bell develop playbook to manage this downturn and we are confident that we will manage through this downturn responsibly and successfully.
We continue to remain focused on the factors under our control, including advancing our growth initiative, maintaining cost discipline implementing productivity improvements and generating free cash flow. Additionally, our planned merger with Tampa Annex will open new avenues for growth argument, our cash flow and the earnings.
Through substantial cost synergies and accelerate our strategic goals are broadening our portfolio and geographic footprint outside of North America, as well as expanding our customer relationships.
Particularly but the large I will seasonality globally.
This is a combination of to cash generator companies, who are recognized that technology leaders and our respective product lines.
We believe that the combined company will be even stronger to navigate the current downturn successfully and we expect to emerge from it.
Vertical production focused partner to our customers that enhances their well productivity through our architecture left chemical and digital solutions.
Now, let me turn the call over to date.
Good morning, everyone and I hope, everyone is staying safe and healthy.
As David noted I'll be referring to the slides posted on our website.
Beginning with slide nine consolidated first quarter revenue was $261 million compared to the year ago period revenue decreased $39 million or 13% and the $261 million in the current quarter represented an increase of $14 million or 6% sequentially.
Excluding the effects of acquisitions and divestitures revenue increased 5% sequentially in decreased 12% compared to the year ago period.
From a geographic perspective sequentially first quarter revenues increased 7% in North America and were flat internationally.
On a year over year basis, North American revenues were down 15% to the progressive reduction in the North American rig count that began in the second half of 2019, along with lower MP spending on artificial lift and other production equipment.
International revenues decreased 4% from the fourth year ago period, primarily due to lower international diamond bearing shipments.
Adjusted EBITDA in the first quarter of 2020 was 53 million, which came in at the midpoint of our guidance range and represents a 19% sequential increase.
As expected to sequential increase was driven by the higher revenue as well as continued strong cost discipline and the benefits of the cost reduction actions executed in the fourth quarter of last year combined with productivity initiatives in the current quarter.
Positive cash flow generation continued in the quarter with cash flow from operating activities of $29 million compared to $20 million in the year ago period.
Free cash flow in a quarter was $22 million compared to $10 million in the first quarter 2019, as better working capital performance helped offset the lower earnings.
Capital expenditures in the quarter were $7 million, a reduction of approximately $2 million in the first quarter 2019, and down $1 million sequentially.
Our cash balance at March 30, Onest of this year was $54 million up from $35 million at year end 2019.
We continue to generate healthy cash flow driven by the quality of our portfolio and our operating discipline.
Moving to slide 10, we expect to navigate a challenging market in 2020.
North American S&P capital spending is expected decline about 50% from 2019 levels.
Our customers began to rapidly cut their capital and operating expense plans exiting the first quarter and additional rounds of spending reduction continued to be announced throughout April.
We believe that over the last nine months of 2020 customers spending could be down significantly more than 50% from 2019 levels.
Although more resilient due to the longer sales cycle and more heavily weighted toward higher Seasonalities international spending is now projected decline about 12% from 2019 levels.
Looking at rig count the average us rig count in the first quarter declined 4% sequentially in the year over year change in the average rig count was a decline of 25%.
During 2020, we expected the us rig count will fall below 400 active rigs, possibly within the next few weeks given the most recent weekly declines.
To significant pullback and customer spending that we witnessed exiting the first quarter in the decline in order rates that were experiencing sell bar in the second quarter sets up for a very challenging series of upcoming quarters as someone mentioned, we've been proactively and aggressively reducing operating cost and capital expenditures to match.
We expected market environment.
We continue to assess the market developments and we're developing plans take additional actions as necessary to protect our profitability and cash flow.
We continue to believe that as a best in class provider of equipment and technology with industry, leading customer service capabilities.
We're better positioned than most to navigate this downturn.
Our team has been through these downturns before and we know how to execute through these challenging times.
In addition, after closing the merger with champion acts, we'll have the added benefit of the relatively stable production chemicals business, along with the diversification of our geographic footprint toward international regions.
Finally, we will also have increased exposure with larger customers, including more IR season, Nrcs, where capital spending can best be less volatile.
Moving on to slide 11, and looking at preliminary consolidated first quarter performance, we recorded a net loss in the quarter of $659 million, which included an estimated pretax noncash charge of $683 million related to the impairment of goodwill and long lived assets in our production in automation.
And technology segment.
We're in the process of finalizing the impairment calculations and we believe the final impairment value will be within a range of 650 million to $750 million.
On a more comparable basis after adjusting for the goodwill impairment acquisition transaction expenses, mainly associated with champion ex restructuring related items and other charges. Adjusted net income was $3 million, resulting in diluted earnings per share of four cents in the quarter.
Adjusted diluting earnings per share decreased 69% sequentially.
We generated adjusted EBITDA of 53 million during the first quarter as expected adjusted EBITDA increased 19% sequentially due to the higher revenue combined with the benefits of our cost reduction activities productivity initiatives and the non recurrence of isolated charges incurred during the fourth quarter of last year.
On a year over year basis, adjusted EBITDA decreased 23% to lower volume.
In the first quarter net interest expense was $9 million, which was 14% lower than the first quarter of 2019.
The decrease was due to the de leveraging achieved in the prior year.
In the first quarter 2020, our provision for income taxes was a benefit at $27 million.
The impairment of goodwill and other long lived assets in the quarter was only partially tax deductible.
In the first quarter, we invested 7 million in capital expenditures, including completion of some maintenance spending commenced in the prior year and limited growth capital associated with surface equipment for our SP leased asset portfolio.
Current quarter capital spending was favorable compared to capital spending of $10 million in the first quarter of 2019.
And investment was also down sequentially as we've increased the intensity on capital discipline to further align capacity to market activity in order to safeguard a strong return on investment.
Our cash flow to revenue ratio was 8% in the first quarter of 2020 and significantly improved from 3% in the first quarter of 2019.
Free cash flow as a percent of adjusted EBITDA was 41% in Q1 2020, compared with 15% in Q1 2019.
Turning to slide 12.
Production and automation technologies revenue finished at $205 million in the first quarter, an increase of $2 million or 1% sequentially and a decrease of $17 million or 8% from the first quarter of 2019.
Excluding the effects of executed acquisitions and divestitures revenue declined 7% compared to the first quarter 2019.
The sequential increase was due to higher spending by MP customers in North America for artificial lift their production equipment early in the quarter as a result of deferred spending at the end of 2019.
The higher North America revenue was partially offset by lower international revenues as the fourth quarter 2019 International revenue benefited from the delivery of Rod lift equipment to a middle east customer.
On a year over year basis, the decrease was driven by lower spending for artificial lift and other production equipment by our North American MP customers.
International revenue within production and automation technologies grew 14% year over year as we continued to gain strength in markets outside North America.
First quarter adjusted segment, EBITDA was $40 million, which represents a sequential increase of $4 million or 12% and a decrease of $3 million or 7% year over year.
The sequential increase was driven by our cost reduction actions productivity initiatives and the non recurrence of isolated charges incurred during the fourth quarter.
Year over year decrease was primarily driven by lower revenue levels.
Adjusted segment EBITDA margin was 19% in the current quarter compared to 18% in the fourth quarter of 2019 and 19% in the first quarter of 2019.
Regarding our MSP lease program, our upfront investment in downhole cables and pumps net of customer reimbursements at the conclusion of the lease is reflected in our cash from operating activities.
This investment was $4 million in the first quarter down substantially from $21 million in the first quarter of 2019.
As previously shared we've been pulling back our spending to align with lower activity levels. We've also began to be more selective on how we allocate capital to customers, resulting in a high grading of our leasing customer list.
As previously shared we'll continue to constrain capital available for lease and driving more customers towards purchases of equipment in 2020 to better balance the portfolio of revenue.
Moving to slide 13 drilling technologies posted revenue of $56 million, the first quarter, representing an increase of 27% sequentially.
Compared to approximately no change in the world wide average rig count and a 4% decrease in the us average rig count.
As conveyed in our quarterly guidance the $12 million sequential increase in revenue was due to the completion of the Diamond Carter inventory Destocking cycle fire drill that customers in the first quarter orders for cutters more closely matched actual usage. Additionally, diamond bearings revenues were up 10% sequentially.
Fair to the first quarter 2019 drilling technologies revenue decreased 28% or $22 million. The decrease in revenue was the result of lower worldwide drilling activities and a 53% decrease in diamond bearings revenues.
The first quarter of 2019 had particularly strong shipments of diamond variance to international customers compared to the year ago period to worldwide average rig count declined 11% and the us rig count declined 25%.
Adjusted segment, EBITDA increased 38% to $16 million in the current quarter from $11 million in the fourth quarter 2019 to the higher volumes and the benefit of cost reduction actions taken in the fourth quarter.
Year over year adjusted segment EBITDA decreased 46% from $29 million in the first quarter of 2019 due to the revenue decline, partially offset by the benefit of direct labor and SGN a cost reductions executed in Q4 of 2019.
Adjusted segment EBITDA margin was 28% in the first quarter of 2020 compared to 26% in the fourth quarter of 2019 and 38% in the first quarter of 2019.
Moving ahead to slide 14 on the balance sheet first quarter ending debt net of debt discounts in deferred financing cost was $560 million cash at the ended the quarter was $54 million.
At March 30, Onest 2020, Apogees net debt leverage ratio was 2.2 times up from 2.1 times at December 30, Onest due to the reduction in the trailing 12 month earnings.
Our available liquidity was $298 million.
On April 24th we continued to maintain healthy cash position at $55 million, but we also took steps to increase the company's cash balances by drawing on our revolver in an amount of $125 million.
We took the higher cash balances in anticipation of settling transaction expenses pertaining to the upcoming merger with champion X and to preserve financial flexibility in light of the current uncertainty in the markets, resulting from the cobot 19 pandemic.
As previously shared the company has a healthy balance sheet and does not currently intend to use all the borrowed proceeds but believes and abundance of caution regarding its cash position is prudent at this time.
Looking ahead at the close of the merger our revolver will increase in size to $400 million and champion ex will bring $45 million of cash at closing.
During this period of uncertainty, we're highly focused on managing our cash flow and preserving strong liquidity over time, we'll continue to execute on our capital allocation framework with the priority of using our free cash flow to reduce leverage.
Turning to slide 15, due to the uncertainty around global events associated with the covered 19 pandemic and the associated significant reduction in oil prices will now be providing income statement guidance for the second quarter.
Market conditions deteriorated in the second half of March and have continued to decelerate in April.
The levels of activity, our variable across the businesses and geographies, but visibility is extremely limited given the heightened level of volatility and uncertainty around the.
Oil supply and demand imbalance.
As Soma has described we've taken swift and aggressive action to reduce our cost base into lower capital expenditures and pace of the rapidly evolving market conditions.
During 2020, we'll maintain our focus on the continued implementation of cost reduction actions combined with capital discipline to preserve adjusted EBITDA margins and positive free cash flow.
As shared in our operational update on March 23rd, we're primarily restricting our capital expenditures to maintenance requirements and replacement capital only and we expect our capital expenditures combined with investments in leased assets for SP, downhole cables and pumps and our cash from operating activities to be approximately $30 million.
Others.
With that I'll turn the call back over to Soma for some summary comments before we open the lines for Q in a.
Thank you Jay before we open the call to question I would like to make a few somebody common and update you on our progress on the key growth initiatives what 2020.
As I mentioned at the start up the Paul we are very focused on executing against our comprehensive Duncan playbook. However, we want in shoot apogee and soon champion FX will be well position to stay strong and be advantage for the eventual marketplace Committee, which will ultimately come.
Even in the middle of the downturn. It is important not to lose sight of the progress we continued to make on our growth initiatives. Therefore, I would like to share some of the work we have recently accomplished on them.
Nobody SP product line, we have making good traction on the transition to multi DSP purchases, we're seeing good traction on the new power fit motors being introduced at the end of Q4, we have sold 16 power for unit in the first quarter.
On broad left for the 12 months ended March 31st Twentytwenty, We've achieved low single digit revenue growth rate in order to broaden the product line in the us market, which is against the backdrop off a significant decline in Dnbi capital spending in North America.
We do expect the Capex reductions will lead to slower conversion in the near term and the production shut in will impact rod lift walliams starting in Q2.
Turning to digital we think smart fit for purpose digital solutions to enhance customer productivity and lower their operating costs will be increasingly important in the new oil price environment.
Wonderful subsidiaries East Downhole commercially released the reliance downhole gauge what slim qualification. This new gauge will provide customers with highly accurate and durable gauge for small board wealth.
Our will drop subsidiary received a payment for a novel magnetically mounted ultrasonic sensors that provide plug and play monitoring on industrial machinery in an easily deployable define both of these new products at a demonstration of our commitment to delivering technology with impact in important applications.
With respect to with Diamond Sciences technology in the quarter up in the fourth quarter of Twentytwenty, Our drilling technology segment had seven new patents issued bringing that totally should peyton since the beginning of 2008 to 813. We also continued to test diamond solutions in bearings and material cutting applications outside of oil and.
Markets, while applying for additional patent protection in the field is.
Finally, we continue to see progress in adoption of our diamond bearing seemed downhaul applications as I stated earlier sequentially first quarter of Twentytwenty revenues grew 10% in the product line.
Twentytwenty, we do expect significant deductions of North American BNP capital spending for drilling activities to slow the growth of this product line. However over time, we expect this important technology to become widely used in the oil fields as well as potentially in non oil and gas application.
As you can see well our focus has been on taking actions to reduce cost and drive strong cash flow, we have not forgetting about oil growth and innovation. We are confident the actions. We have taken will allow us to maintain our profitability as well as meet all of our obligation. We will continue to monitor market developments and take additional acts.
Those actions as necessary.
Additionally, we will work to successfully execute our planned merger with SAP MX and move forward as a stronger and more diversified company.
Finally, I want to thank all of our employees for their continued efforts and passion in improving the lives of our customers our employees, our shareholders and our community I'm proud of our apogee teams that dedication and hard work as we work through these extraordinary times.
We will emerge stronger from this I'm proud of their accomplishments and it is a privilege for me to lead to such a great team with that I'd like to open the call for questions.
Thank you we will now begin the question and answer session.
You have a question. Please press Star then one on your Touchtone phone if you wish should be removed from the Q. Please press the pound sign or the hash key.
There will be at the labor for the first question just announced if using your speaker phone you may need to pick up the handset first before pressing the numbers and we also ask that you limit yourself to one question and one follow up.
Once again, if you have a question press Star then one on your Touchtone phone.
And our first question is from Dave Anderson from Barclays.
Hey, good morning Soma.
Clearly the market loves the name change the power of Brandings remarkable.
I'm kidding of course on drugs, obviously, the visibility reaction on.
The results today, but I was wondering you guys talked a little bit more about the shut in production and how thats working so lot of.
It's a lot of the chatter out there in the world can be you'd mentioned rod lift being shut in what about the ASP side, our customers looking to shut in wells that have dsps and there are they looking at dial them back deserve some customers looking to go to low flow can you talk about that dynamic and then separately with the rod lift when.
When when wells would rather get shut in do you expect them to be permanently shut in or.
What does the experience of them coming back.
Yes, good morning, Dave.
We love the name Temping snacks.
Say that they can do X with that hands. So.
The group going to be a fun going forward.
With respect to Shannon.
Dave I think you that a few factors that goes into how customers feasible Shannon.
We are clearly.
Operating cost per barrel is an important element and the concentration of Shannon.
Typically you tend to see lower producing wells.
To be more candidates while Shannon.
And.
The way those operators also tried to do Shannon, especially on the lower producing wells is sometimes you feed them run two failure.
And then Shannon because the cost of risk driving.
Men.
In fact on as well.
So.
So let me think about it.
I think we will see as the sharpens progress I.
I think that we will see more impact on that rod lift.
Dan BSP side, we don't expect SB bounce.
As proportionately more shut ins on the vivo now SB will get impacted because of the completion catching up at the completions.
And the getting over bye bye.
But we expect the rod lift to fee they impact.
Normally we don't see asthma jump on rod lift impact in the past downturns.
We have.
The customers we are seeing these.
Yes.
Downturns, mostly now we are seeing new across most basins, but I will say that it's the more pronounced in.
Mid Con Bakken Eagle Ford and.
Well as an extended in Permian now so, but we are seeing the production shut ins starting to happen more on the no producing wells.
And on those low producing wells do you, but do you think those get permanently shut in I guess, if I think what the other side of that.
The cost is required to to get them restarted and also I guess the unknown other sort of course of production comes out of that what's the experience. There I know, we're a little bit uncharted territory here.
It's a little bit of uncharted territory, but I do think that you know.
The.
The.
In the past most of these well, especially unless they have really stripper wells.
Most of these wells tend to come back.
Selling prices and to improve.
With that.
Really very low producing wells when you're talking about under $10 and balance on the 20 barrels at me and you probably thats much more of them.
They were permanent plug and abandonment as well.
Separate question on the drilling side.
We've just navigated through an inventory correction.
That it came pack this past quarter comes back just in time for.
Another.
Demand shock here.
How are you thinking about your facility in Utah of how your staffing that kind of how of how you're looking at.
The utilization of that facility, you're going to have a big drop off in demand of and clearly is going to come back. This is the most cyclical part of your business. So that has to be a challenge just thinking about what this looks like and how you manage that can you just kind of walk us through a little bit of how youre thinking about managing that in how easy is that is to flex.
Up and flex down while I guess flex down first for the flex up that facility.
Yes.
Good question.
Ill tell you we have a fantastic leadership team managing that business, who have gone through this ups and downs.
Three of four times now and the Highland really really good playbook on how they do that and the do it quickly and they do it thoughtfully and.
We that we can point back and.
Maybe think about it is that our three layers.
Up offline actions that goes on as you know the workforce. There we have one is all the cold workforce.
And then we have one I would on it at that temporary workforce and then we also have flex workforce, which becomes I would call it's kind of.
Uhhuh, but type workforce, which for equity in everyday they come in for three hours for hours. So we havent trained to pull up people will come in and out so as we layer.
Appealed the layers at this downturn those we've finally come down to our pooled workforce with 2000 group of people, who preserve the capabilities everything from our shop floor on the be too.
Our our technology people and the customer application support people. So I would say that we have under the decisively gone down that path and might be bye.
End of this month by a suite of may be will be down to the pool level, which is almost a 50% reduction in the full time equivalent of employees, we are already there and.
So from.
And from there and our company comes back you know we have these pull off people, whom you button hour work environment, given the technology given the account shown in our company and to come back our past expedience tends to be seen 80% to 95% off the people.
Return back.
So we will be able to quickly ramp up.
Because these employees that are done back would lead to.
To this business so.
Again.
We have gone through those few times then.
And then really good meltblown playbook payer.
Our next question is from James West from Evercore.
Hey, good morning, guys.
Morning, Jamie.
Some of you alluded to.
Additional actions if necessary to some action plans if necessary.
But this gets kind of worse than it already appears to be which from a little bit cans. It looks prepare for.
Work with kind of specifics can you share around those additional measures.
And cost reductions.
Yes, I mean, I don't I don't want to go into lot of specifics the games, but I would say that you know so the that are.
Some product line rationalization, which we can still do.
That are.
Facility rationalization, we can still do because as you know you know the baby think about it is to Brazil flexibility and Optionality. So we have two or three facilities there on.
Thats along with them not you know bleeding cash are in our not being.
Negatively impacting us, we'd like to Brazil, those capabilities and Optionality.
I would think step down we can take the next laying off duals.
And.
Our also options off while until the time offs.
Are those type of options, but we are very thoughtful about making sure that we are able to manage that in a manner that if any maintenance impact our workforce and for those on capabilities as well.
Okay. That's helpful.
None of that as you look into your artificial lift business over the last month for six weeks or so.
Has there been obviously, there's been a decline in sales, but has there been any mix shift in sales over or customers going towards the lower priced options would run both directly skipping is the time period or gas lift lenders discernible trends there.
Yes, I think that I would say that I think with this time around I think the agreements we are seeing is that.
Our lift volume seems to get impacted because of that.
Swift decline in spending and shutdowns.
And.
From time to time, we see some pricing issue, which.
To me it feels like somebody is trying to clear inventory right. So you will see to get due to monetize some inventory sometimes you see.
Isolated pricing situations.
Outside of that I would say that.
It's been a normal type of declines, which you'd see in a downturn.
Our MSP side I would say that we did really being a really good.
Uptake for our new our fifth motors.
It's been a real positive auto and I also think James that I think.
These downturns during this downturn.
In in product line, SEC DSP, you'll start to see customers migrating more towards.
The quality of support through this downturn.
I do think back you know that should.
[music].
For your were somewhat.
And our next question is from George O'leary from Tudor Pickering.
Morning, guys.
Thanks.
Just wanted to.
Add on to Dave's second question, you guys make it a point in the deck to talk about.
Drilling technologies proactive cost reduction measures being implemented.
Partially in the first quarter 2020.
How do you expect this to impact the and I. Appreciate you guys aren't giving specific guidance that impact decrementals in the second quarter versus history is 2015 in 2016.
A decent historical bogey to go back and look at or there's something about being a standalone company. This downturn that maybe accelerate your ability to take costs out of the system and mitigates the impact to those decrementals in that business such that the comment was interesting in that in the deck that you got a lot of those cost cuts done in.
First quarter, so any color there would be greatly appreciated.
Yes, just to be clear and I think the lot of the reductions.
Happened in the second quarter right.
Most of these will be done in the second quarter.
[music].
No.
Given the two with respect to be Decrementals for George I think.
Yes historical Decrementals are good guidepost for this right now only thing I would say.
If you go back, let's say the last downturn.
Q4, 2014 to Q1 of 2015 with lots of flipped to sequential decline.
During the downturn.
I think if you looked at it hour.
Rig counts when down.
About 27%.
Now I think.
The Swiss nature.
Much much faster right. So I think.
I personally think Q2 Q1 Q1, two Q2 US average recount maybe down as much of 50% right. So I think that may push up the betterment of higher in the Q2.
Thanks, Ben push up the victim of higher because of the Swift nature of the decline now.
All that means to me is that will hit the trough much faster.
Than ever before right. So I would say that Q2 Q1, I mean, you won't be Q2, decrementals can be higher than historical.
Okay, Great. That's that's super helpful color Soma on.
Historically, we see your free cash flow conversion ratio as a percentage of EBITDA increased in a downturn one EBITDA falls to you guys can release some working capital.
And you Didnt Zagg trim back on Capex. As you guys are doing now is that a phenomenon you guys expect to recur here or is there anything different from this go around that should kind of mitigate that free cash flow conversion.
Uptick and as we progress through the year that.
Yes.
George.
Eliza J to make a comment I don't feel a profile changing in the down compared to last down Jade you may want to Georgia for the reason someone just mentioned I think our cash flow profile should look similar to previous downturns as the.
The percentage of EBITDA conversion tends to get a little bit higher as EBITDA come down comes down, but the working capital release off the balance sheet.
Helps replaced those lower earnings so we would not expect this one to be different than previous cycles.
And our next question is from Marc Bianchi from Cowen.
Thank you.
You guys mentioned so many you just mentioned a 50% decline potential for the rig count second quarter and you have in the slides about a 50% decline for us in 2020 in like a 12% decline for international.
How how should we think about your business in the context of the market. So can you talk about you know ship production automation.
Maybe outperform those declines or would you anticipate that maybe it it does worse than those declines because.
People are deferring DSP installations, and so forth and then same kind of question on drilling technologies, we saw the destocking kind of come to an end, but maybe there is another wave of destocking that BBU underperformed the rig count initially here, so any kind of color around how the business should behave relative to the market would be great.
Okay.
So mark I think let's start with the drilling technology I think you're right about that will be another round of destocking given that.
A significant step down in.
In.
In the.
And.
But I do expect to that de stocking impact to be not as significant as what we have seen in the previous downturn because we have now onto lab comfortable one so what I mean by that as if you. If you refer back to the sequential decline in the last downturn Q4 of 2014 to Q1 off.
2015.
I'll give you a little bit more baseline NAND so good.
The main countless rig count declined 27% on average.
Q4, 40 to Q1 15, and other revenue at that point declined 42% and that has that destocking impact in the beginning of the.
Beating up that sequential decline, so we will see that our drilling technologies when experience.
Sequential decline maybe.
More than that rig count, but not to the same level up underperform and it will underperform the rig count, but not to the same level.
And the stocking.
Now as you move the production automation technologies.
So if you again I'll use the last downturn sequential decline right and.
Production automation technologies in the math sequence ubiquity and same timeframe Q4, 2042, Q1 2015 declined about 20%.
But I do expect this time it would be more than back because of that rapid you know.
Declined nature of the spending.
And as well of the.
The production shut ins happen now within production automation technologies, I expect our digital to be more resilient.
I do expect our digital will be more rapidly than that.
Yes.
Than some of the other product lines.
So hope that gives you some color.
Because it's hard to predict how.
So that the near term because it's so challenging the visibility is challenging but.
You hope that helps with some historical baseline on an hour and inform us how to see it now.
Sure sure that that is helpful perspective, thank you.
Maybe just moving over to the cost cut realization that you anticipate for second quarter is there any way to say.
Forgetting about what profitability will be or anything like that but just how many dollars of cost benefit we should be expecting to realize during the quarter. So on a calendar quarter basis, how much better that that can help the the bottom line.
Yes, so you know.
I think we've looked at about $85 million up annualized.
Savings.
And also we think in 2020, we may be able to get about 60 to 65 million off that.
So.
And fee.
Most of our actions, we will get completed as being with Q2.
And then we still some remaining actions to be done than the as part of Q3.
So that hopefully that gives you some idea.
Okay. Thank you.
Our next question is from Tom all from Stephens.
Good morning, Thanks, Thanks for taking my questions.
Sure.
I wanted to follow up on your.
Commentary about drawing on the revolver.
Advance of some transaction related expenses could you frame for us what the size and timing of those cash transaction expenses looks like.
And then on a related point are there.
Are there cat or they're going to be cash outlays in order to achieve some cost saves, particularly in Q2. Thanks.
Sure Tommy this Jay.
So as we noted we have some upcoming transaction expenses at the consummation of the merger anchor Peters and other professional fees and we would estimate that those are about $50 million to $60 million.
On the completion of the merger.
With regards to the cost relative to the actions that we're taking we would estimate those total cost to be somewhere in the range between seven and $10 million.
Fair amount of that he spent on head count reduction in Q2.
Some other expenses regarding lease termination and facility.
Closures that would come later in Q2 in Q3.
Okay. Thank you can tell me going back to that while we're right M&A.
I personally think it's prudent for any company to be looking at liquidity management.
So again.
Throughout this proactive liquidity management as we look at that we had the market.
Yes.
Makes sense and shifting gears.
To champion.
You have moved very quickly to just capex and the size of your footprint.
As the macro has gone against you and in the last few weeks.
Champion next what the merger pending able to take similar actions.
[music].
Both in terms of cost and Capex reductions or do a lot of those get pushed until post close and then Youll go back in for another round on.
Their assets.
Yes.
So I mean, we stood still operate as two separate companies and I want to be respectful of that Bob.
But tempting acts as a really strong management team and that they need.
Into downturns before.
And.
Based ecolab release there.
Tony Stewart today, as well and you look at in the earnings you will see.
Champion acts actually no year over year debt revenues up I since attempted acts upstream energy year over year.
Declined 3% in there in there and in the earnings release right and.
And.
You can see that resiliency of that of the business on the operating income was even better up 6%.
Over a year.
Given the global nature of that business, there was more resiliency in that business.
Now beyond adjusting taking actions I am aware that you know they have taken actions both in terms of.
Back in a meeting spending.
Reducing capex and they've also contemplating.
Additional actions as well, so well get there bet on top of it.
And our next question is from Ian Macpherson from Simmons.
Thanks, Good morning.
Somewhere just.
Looking on the lift side beyond sort of effect.
Just rapid market correction over the next.
Two or three quarters, when you dialogue with your customers now what sort of structural changes are they contemplating were towards the lift programs in a.
Smaller.
Footprint for the U.S. basins.
And how they're thinking about the interplay or.
Suitability of.
Yes fees versus.
Transitioning to lift over given timeframe or is it just through releases.
So really indicate any structural changes that might be beginning to.
Big place.
Yes, I would say, it's too early to contemplate any structural changes that we know that.
Our customers are very very.
Focused on.
In the near term.
Actions at that point, it's too early to kind of comment on it but I would say that one of the one of the trends that we are seeing is Nick.
Customers are.
More open.
Though from a couple of aspects one is in a more value added type of work around what BLT do So for example, we noted in our press release a gas lift.
We have been able to increase our gas lips deal and that is because today, what we offer it's a full gas lift downhole solution not just thought she lived component of the gas lift.
So customers are more open to.
Getting a full solution, particularly around things like gas left now so that those type of things, which we have to be.
The other thing I would say we are seeing is again the that transition move towards the quality suppliers because customers are concerned about.
The financial.
You know.
And with all with their suppliers to make sure that they get that support through the downturn.
So those up a couple of things, which we are starting to see right now.
That's helpful. Thank you so that's it from informed thanks.
Our next question is from Blake Gener on for more.
Thanks. Good morning, Thanks for squeezing me on here. So helpful color on that you see lease fleet in the initiatives to both high grade the customer base.
And also push customers towards purchase versus lease so 30 million in lease fleet investment. This year I was wondering just given market conditions in the longer term outlook. How you see this progressing over time, particularly with those strategic initiatives that you laid out do you see the lease fleet investment shrinking as you cannibalize the fleet somewhat or are there technological.
Upgrade drivers.
That will keep it kind of at this level for the time be.
Well I, what I would say that from our strategic approach perspective, I would say.
They could that.
It's a mix of.
Lease was purchase you should see the purchase.
Continues to improve.
As at the market covers you should see that trend continues to improve because that is deliberate strategic.
Approach from our side and as we continue to innovate and continue to simplify.
These so you should expect that.
The mix you continue to improve more towards the purchase side.
Okay. That's that's helpful and shifting over to the shut ins.
A lot of works and Don on on using production chemicals, possibly to mitigate the negative productivity effects of shut in so this might be more on the champion ex side and we'll give more color post deal close but I was wondering if you any qualitative comments with respect to how chemicals fit into the shut ins and potentially a ramp back up as a lot of us production comes back online.
Yes, no I think bill you're exactly right I think production shut ins due impact.
The production chemical business right.
Well, it's not flowing that even the need for chemicals.
No no load up much reduced so that is.
So you will affect the production for business, but on the other side effect just slight.
Followed rod lift business.
And the production volumes and the Veltassa starting to come back on that is that will be a pent up demand off well servicing and of demand of replacement.
So that that will resume at the same is true for production chemicals. In fact, they initially use of production chemicals and be more at that well get to opened up the cost to.
Let scaling issues and other things.
So.
As they shut didn't happen that would be an impact, but then Monday resume lead to see an incrementally better demand for the production chemicals in the initial phases.
That's a that's totally fair I know, we're a time here, but if I could squeeze in one quick one here of $85 million you might just breaking down for US the segment operate out there and then also whats fixed versus variable we can do the math on decrementals here over the next few quarters, but just trying to understand how much cost mid may have to be added on the back end of this downturn as we.
We start to recover.
Yes.
So I would say look.
We take this actions in a manner that we as we come out effect that we have an advantaged incremental so I would say at this point.
30% of the thought more towards a structural and though and.
The remaining I would say is more.
Variable and as we have discussed before lot of our medieval actions happen in drilling technologies, as we scale up and down and.
But I would say I don't know in about 30% is.
Structural.
And we have no further questions at this time.
Well. Thanks, Thanks again, everyone for your continued interest in apogee, we look forward to talking to our second quarter earnings call up before thank you.
Thank you ladies and gentlemen that concludes today's conference. Thank you for participating in you may now disconnect.
Okay.