Q4 2020 Dril-Quip Inc Earnings Call

Good morning, and welcome.

Real quick your end of 'twenty 'twenty conference call.

I'll make the turn event over to Mr. Blake Holcomb director of Investor Relations. Please go ahead.

Welcome to drove group's full year 2020 conference call today's call all parties will be in a listen only mode. Following the company's prepared comments of the call will be opened for questions and answers. During the question and answer session. We ask that you limit yourself to one question and one follow up.

You can always rejoin the queue, an updated investor deck was posted under the investors tab on the company's website yesterday, along with the earnings release and will be referenced during today's call.

This call is being recorded and a replay will be made available on the Companys website. Following the call before we begin I would like to remind you that drove <unk> <unk> comments may include forward looking statements and discuss non-GAAP financial measures. It should be noted that a variety of factors could cause real <unk> actual results to differ materially from the anticipated.

The results or expectations expressed in these forward looking statements.

Please refer to the fourth quarter 2020 financial and operational results announcement released yesterday for full disclosure on forward looking statements and reconciliations of non-GAAP measures.

Speaking on the call today from Joe Quip, we of Blake Deberry, Chief Executive Officer, and Raj Kumar Chief Financial Officer, We also have Jeff Bird, President and Chief operating officer on the call for the Q&A portion following the prepared remarks I.

I would like to turn the call over now to Blake Deberry.

Thank you on behalf of of the management team I would like to welcome all of you to today's year end conference call.

I'll begin with a high level review of our 2020 results and highlight the many accomplishments that we were able to deliver during the year. These accomplishments were achieved despite the tremendous challenges presented by the global pandemic.

I will then turn the call over to Raj to review the financial results and give general thoughts on our 2021 financial outlook.

I will then provide some closing comments and open the call to questions.

I'd like to begin with thinking drillship employees globally for the resilience dedication and remaining focused on performing their jobs with excellence.

The pandemic brought immense challenges to our industry customers and our employees and their family.

One of their jobs were performed in our manufacturing facilities on a rig servicing our customers are working remotely all of our employees adjusted their lives for the good of the organization and in service to our customers I.

I am grateful for all of their contributions.

Although our 2020 results were challenged by the pandemic and associated oil and gas demand destruction. It was not a year without significant progress and accomplishments for drop with the.

The transformation and productivity journey, we started in 2019 positioned us well for this challenging environment.

We were able to conclude 2020 with $365 million of revenue and $32 million of adjusted EBITDA.

Although a decrease from our 2019 results.

We successfully responded to the challenging environment my mitigating the impact of the pandemic as seen in our operating and financial results and continued delivering products and services to our customers.

We also celebrated many accomplishments in our research and development efforts during 2020.

In May we were presented with our fifth spotlight on New Technology Award by the offshore Technology conference for our VX T E subsea tree system.

The VX T system is a disruptive technology in the subsea production system space.

The X D E provides significant cost and time savings for our customers, which improves their IRR by reducing capital and time to first oil with the added benefit of reducing their carbon footprint.

The VX T offers the operator of the ability to drill the well to completion and land the tubing hanger in the wellhead as part of their normal drilling operations without regard to its orientation.

This eliminates the traditional development well scenario, whereby the operator will cease drilling operations pull the B L. P stack and run the horizontal tree, our tubing spool and then reran the B O P stack to drill the well to completion we.

We estimate that this combined with our other E series technology products will save operators of approximately $5 million per well and five days of rig time.

We have seen incredibly positive response from our customers about the potential to improve their operations with this technology, our R&D and manufacturing teams worked hard through the pandemic to complete all qualification tests and maintain the production schedule of the first VX tea tree with.

With the tree now in final Assembly, we expect to make delivery in the first quarter and hopefully installing the first VX T E. This year.

While we are aware of that consolidation is needed in our sector. We also know the difficulties and quickly executing that strategy. Accordingly, we embarked on the strategy of consolidation through collaboration and.

In 2020, we entered into a strategic collaboration agreement with pro serve for the manufacture and supply of subsea control systems. This nonexclusive collaboration achieved two main priorities.

First it allowed us to offer our customers the latest subsea controls technology without having to make the significant research and development investment of 8 million to $10 million per year over the next three years as well as eliminated the associated operating costs of maintaining that product line.

This win win scenario allows us to bundle our award winning subsea trees with pro Serv state of the art control systems and offer our customers significant value.

The collaboration with pro Serv was part of a larger strategy to continue down our transformation path to align our business with market activity.

Allowing us to refocus our engineering and manufacturing resources towards solutions that set us apart from our peers and offer the highest return on invested capital.

This strategy led us to the difficult decision to transition and consolidate our subsea tree manufacturing from Aberdeen to Houston as we solve the subsea tree market decline from close to 300 subsea trees to a little over 100 tree awards in 2020.

Aberdeen is a critical location for our operations and therefore, we still have a significant presence there.

This includes sales project management fabrication final assembly and aftermarket operations, serving our customers.

In total the productivity initiatives executed in 2020 reduced our costs by approximately $20 million on an annualized basis and helps us to continue on maintaining profitability and a strong balance sheet.

As we view the market today, it seems probable that a longer more gradual post pandemic recovery is likely.

This means it could take several years to return to 2019 activity levels.

The recovery is also likely to vary by geography and customer profile.

Low cost areas of offshore development like the Caribbean or with the support from subsidies in parts of the North Sea are expected to see activity levels remained steady.

The same can be said for national oil companies that typically drill for domestic energy consumption in.

In contrast, the most recent developments in the U S regulatory environment through executive order has created uncertainty around future projects in the U S Gulf of Mexico.

Overall, our outlook on the market takes into account multiple factors, including demand recovery supply control from OPEC and increased emphasis by government regulators on transitioning toward less consumption of fossil fuels in favor of alternative energy sources.

The energy transition is a process, we believe should be guided by market forces and approached rationally with regulatory consistency.

We recognize the transition is underway, but will take time and resources to accomplish. Furthermore, we believe hydrocarbons will continue to play an important role in this transition.

Continuing to provide a portable reliable and often cleaner energy to help lift developing nations out of poverty, while developed nations move more toward alternative energy sources.

Drove group has a role to play in both parts of the transition solution.

As part of our commitment to this transition we have always prioritized, helping our customers efficiently produce hydrocarbons and our latest E series suite of products continues that legacy.

Many of our customers have made pledges to reduce emissions are become carbon neutral in the coming years, a large part of these commitments in some cases as high of 70% reduction in carbon emissions will come from the vendors who supply. These companies drove grips innovative line of products are green by design.

Offering significant reductions in material or equipment that must be installed.

This design methodology, which has always been part of the brokerage DNA eliminated.

<unk> eliminated the carbon associated with manufacturing equipment as well as reducing the offshore installation days.

These products are thoroughly tested to improve reliability, which leads to better well integrity and fewer Workovers. For example, the combination of our E series technologies can help reduce roughly 40 tons of steel from traditional operations. The elimination of this component alone reduces carbon emissions by approximately <unk> <unk>.

70 tons as the process needed to produce the steel is no longer required.

We look forward to continuing to lead in the technologies and products that help our customers achieve their operational objectives. However.

However, as we make the energy transition together, we do not lose sight of the very important role of the industry. Currently plays today in providing reliable affordable energy and we take great pride in being part of that solution as well.

With that I will turn the call over to Raj to review the financials and provide more details on our cost cutting initiatives in 2021 outlook.

Thank you Blake and good morning, everyone.

I'm going to walk through Q4 performance and also provide a review for the full year of 2020.

We executed well given the challenges we saw in the overall market.

Revenue for the fourth quarter fell slightly from the prior quarter to $87 million. This decline was mainly due to lower manufacturing production hours related to increasing levels of quarantines from rising COVID-19 cases seen mainly in the U S.

Adjusted EBITDA for the fourth quarter was $9 million, a decrease of $1 million from the prior quarter.

The same factors impacting our revenue fell through to the bottom line.

We also saw regional government subsidies implemented as a result of the pandemic being reduced during the quarter.

For the full year 'twenty 'twenty, our revenues were $365 million a decrease of 50 million of Bush's 2019.

This was driven by the impacts of the pandemic on overall oil and gas demand.

Adjusted EBITDA for the full year 'twenty 'twenty was 32 million a decrease of $22 million from the previous year.

We were successful in addressing this market declining by swiftly taking steps to reduce costs and optimize our global footprint. As a result of this execution. We saw our margin profile improved significantly in the second half of 'twenty 'twenty as we realize the benefit of these cost actions.

We met our 20 million cost reduction target in 2020.

These are always difficult decisions, but when necessary in this environment. We expect these cost reductions to be sustainable going forward.

While most of our regions saw headwinds the product in leasing revenues during the year.

Our service revenue saw an increase year over year.

This was primarily due to an increase in installations from orders booked in previous years, coupled with the growth in our downhole tools business.

The downhole tools business was able to outpace the market by gaining share in key markets in the Middle East and Latin America as the result of service quality and execution.

I'll now move on to margins.

Gross margins were under pressure.

But given the environment it held up falling by only 3%.

Our decision to take actions early in the helped the spot margins as the year progressed.

We saw EBITDA margins improved 3% from the first half due to the second half of 'twenty 'twenty after normalizing for mix and the impact of disruptions related to COVID-19.

Moving to SG&A expenses for the fourth quarter of 2020, SG&A was 26 million, an increase of 5 million compared to the third quarter.

This increase was mainly due to short term legal expenses.

We expect these legal expenses to continue into the first half of 2021 mostly in connection with the trial currently scheduled for April for.

For the full year 'twenty 'twenty SG&A expenses decreased by 8 million to $90 million after excluding the short term legal expenses the.

These improvements in SG&A stem from our 'twenty 'twenty cost out initiatives.

On the engineering R&D side, we saw a modest increase in 'twenty 'twenty 219 million as we work to bring the VX D to market now.

Now looking at bookings for the year product bookings were negatively impacted by the difficult market conditions in 2020.

After approximately $388 million in bookings during 2019, the uncertainty surrounding the pandemic and its impact on commodity prices led to customers holding off of delaying decisions to book orders for the upcoming projects.

We saw of smaller orders with less predictable timing.

We now see one of two orders being the difference between a 40 million or a 60 million bookings quarter.

We expect the effects of the pandemic to persist into the first half of 'twenty 'twenty, one the cautiously optimistic that things will gradually recover as the year progresses.

We believe there is some upside if operators the increased stability in prices and confidence in the global economic recovery returns with the recent rollout of COVID-19 vaccines.

We expect the road to recovery to be more gradual we are taking actions related to our productivity initiatives driven by our lean management philosophy, and our targeting of 10 million cost improvement on an annualized basis.

These savings will come primarily from changes in our manufacturing and supply chain functions, including an increase in outsourcing for our downhole tools business.

The timing of this productivity actions will take place over the course of the year and is expected to deliver of roughly $5 million of realized benefit in 2021.

Moving onto capital expenditure of Capex in the fourth quarter of 2020, our Capex total just under $2 million and for the full year it was around $12 million.

This represents a minimum maintenance level of capex that we have seen over the past two years.

We are however, anticipating an increase in capex to range in between $15 million to $17 million in 'twenty 'twenty. One the increase is partly related to growth in our downhole tools business. We are also investing in manufacturing safety and equipment and our information technology infrastructure.

We will monitor conditions to adjust our capex if necessary, but we believe these investments will support growth and improve our long term efficiency and profitability.

Now, let me turn to the balance sheet.

We continue to maintain a strong balance sheet and remain focus on protecting our cash position with no debt.

At year end, we had cash on hand of $346 million and a further $40 million of availability in our ABL facility.

This resulted in approximately $386 million of available liquidity.

Our balance sheet and liquidity position are critical for us it gives our customers confidence in our ability to execute on our commitments and provides financial flexibility.

Moving onto free cash flow free cash flow for the fourth quarter was the negative $18 million for the full year was negative $33 million, both the quarter and full year free cash flow was slowed by several headwinds many of which were related to the pandemic.

Firstly, we saw a number of large customers whole payments that would view at year end until early in January while we are accustomed to this type of balance sheet management by our customers. This amount was beyond our normal experience set.

Secondly, we saw inventory build in 'twenty and 'twenty driven by customers requesting delays in shipments and our need to continue to procure materials for upcoming projects. We also strategically added inventory fall expanding downhole tools business and subsea trees for stocking programs.

Both of these factors led to an increase in inventory the.

These working capital increases were partially offset by of federal tax refund.

We believe we have laid the foundation for a strong recovery, we executed and improving billing turnaround and work to improve our collection efforts and expand payment terms with vendors. We expect we will see benefits of these efforts more clearly in 2021 free cash flow is of primary focus for us as a management team we have tied all.

Annual incentives for our entire leadership team to free cash flow we.

We are focused on all aspects of working capital we have dedicated of cross functional team working on inventory reduction in a more gradual recovery environment.

Our audit of cash teams are gaining traction on reducing time to build and we are continuing to leverage of supply base by moving to a more vendor managed inventory program.

In the current environment and given the initiatives I just mentioned, we expect to be able to generate 5% free cash flow yield. The bottom line is debt free cash flow is the key metric for the management team.

Wanted to turning the call back over to Blake for closing comments I will give some color on what we expect to see in 2021.

Based on the current view of the conversations with customers, we expect 'twenty to anyone bookings to be around $200 million for the year.

At these product booking levels and with the anticipated growth in our downhole tools business, we expect to see revenue to come in flat to slightly down from 2020, we.

We are forecasting 40% decremental margins for any given decline in revenue as we hold cost critical to address the recovery actually.

I mentioned earlier, we are forecasting of free cash flow yield around 5% in 'twenty and 'twenty one.

We are well positioned to achieve this goal and have aligned management objectives and incentives towards meeting the saga.

To sum up while we see near term headwinds from the hangover of the pandemic, we see a gradual recovery in sight, we have a proven track record of executing and meet these near term challenges head on as we prepare for the recovery and focus on our strategic initiatives.

We have a strong financial position and a strong management team to execute in this market environment.

With that I will turn the call back over to Blake.

Thanks Raj as we enter 2021, we believe there are signs to be optimistic that of recovery, even a more gradual one is beginning to take form.

We have established several strategic initiatives, which will position drove quit to thrive in the years ahead.

First we are continuing to progress our consolidation through collaboration strategy through peer to peer collaborations that help to expand market access for our technology.

We see these collaborations through several lenses with respect of VX T. We believe via conversations and significant pull from both customers and peers in the market that VX T. E monetization remains a mid term opportunity via drove group, providing the IP kit to our peers for the.

Leverage to end customers.

With Wellheads as a best in class wellhead provider, we believe both our superior technology and qualification lend themselves to partnering with multiple peers in integrated offerings.

Finally, with our connectors, we believe that real opportunity exist to partner with tight providers around the world to build out better supply chains to improve delivery to our customers.

The common theme of the strategies is to expand share while reducing overall industry capacity.

Second we have of downhole tool business that we believe is not fulfilled its potential we would expect to have a business here that has a market share similar to our wellhead franchises in most markets quite frankly, we struggled over the last few years with that business, but we've laid the foundation in 2020 for significant growth.

In 2021.

We have a new leader, we've shuttered underperforming bases, we play smart bets with stock and added business development resources in key regions. Further we are the only beginning to capitalize on our technology as outlined via our ex packed day technology.

Finally, as I'm sure you followed we've moved from an organization of transformation to an organization that demands real annual productivity improvements. These productivity initiatives span, our organization and will make us nimble and difficult times, while allowing us to scale up when the market returns and productivity.

<unk> and lean are now the way, we do business and will serve us well in good and bad times.

As we look to the market increasingly focused on energy transition, we are continuing to be green by design delivering lower carbon options for our customers continuing to drive R&D that reduces the carbon footprint for our customers and following our customers in their transition while we're in the early stages of our R&D.

Rest assured that you can expect us to bring the same level of innovation to the energy transition that we have to our customers over the last several decades, Inc.

In conclusion, the culmination of all of these efforts leads to increasing market share by using technology and execution as a differentiator we will be keenly focused on free cash flow generation and a competitive free cash flow yield to attract investment and ultimately benefit our shareholders.

As Raj indicated we are continuing several key working capital reduction initiatives in 2021, we take these commitments seriously and have tied our annual performance compensation towards meeting these goals.

Look forward to providing further updates on the progress we are making across all our strategic areas in the coming quarters and sharing the benefits of success with our employees customers and shareholders I will now turn the call over to the operator to open up the line for questions.

Well now begin the question and answer session task of.

A question you May Press Star then one on your Touchtone phone.

Usually the speakerphone, please pick up your handset before pressing the keys.

Withdraw your question. Please press Star then two.

At this time of pause momentarily to assemble the roster.

First question comes from Sean Meacham with Jpmorgan. Please go ahead.

Thanks, Hey, good morning.

Good morning, John.

I'm really starting to enjoy these annual chat you guys put together a lot of great information. So thanks for doing it.

To start off with orders I think it was really one of the key focuses for investors.

From the short term in the $40 million to $60 million per quarter guide.

Is in effect.

Setting the bar, none of it not only trough levels and maybe the the midpoint implies a bit better than what you've got in 2020, but it's a similar range or how have you been thinking about the business.

So beyond 'twenty, one I think there's more room for optimism as you noted in terms of where in the macro where offshore spending can go and then specifically the drug but there's the potential for new the new product innovation to garner more awards and in the peer partnerships also seem to offer the possibility of faster.

Growth relative to what the overall market offers so maybe could you just.

Help us think about.

What are the.

The board has had this conversation a year from now.

We look back on what 'twenty one offered you.

What are the potential outcomes that could deviate from that base case range and if anything it would be nice to kind of do a little more block building towards what the medium term looks like at some of these initiatives actually.

Flow through rate of the financials.

So Sean let me pass that the Jeff because he is doing a lot of work on the peer to peer stuff, which I think is probably the biggest focus here. So yeah. So so a few of few comments there we talk about that $40 million to $60 million range. If you. If you look at the first half of the year, it's probably going to be closer to that $40 million range ramping up in the back half of the year.

If we think about things like peer to peer and some of the large tenders, let me separate those out.

There are a number of items right now from a tender standpoint that are in play they keep getting pushed out month to month quarter to quarter right. Now. So we're optimistic those are going to land in the year, but we're optimistic the but they're likely to land in the back half of the year now as we've talked about earlier, you know theres not a lot. It doesn't take a lot the move something above or below that 40 to 60.

The range, but I think you should expect that to be $40 million to $60 million on the other side of the beginning high side of the and if we think about the peer to peer of we're already working on a number of those relationships today.

You likely won't see a big splash around that in the first half of the year, but I think if you're sitting here a year from now what you'd probably see is increased bookings as a result of those peer to peer relationships. So we're having great conversations in a number of areas.

Those will start to show up in the bookings probably the last half of this year, probably candidly more of the fourth quarter of this year in a meaningful way of maybe early next year. If we think about the peer to peer just touching on those theres really two or three areas. We see that we've talked a lot about wellheads and our wellhead conversations are probably more advanced than any of our other.

<unk> and think about that as really an opportunity of that instead of us selling the wellhead to an end customer often our customers like the by the tree in the wellhead together and this is an opportunity for us to work with other tree providers to provide the wellhead to them. So if they've got a more competitive offering to the end customer on the connector side, we're a little bit earlier.

Stages in the connector side, but there is really some opportunities there we believe to pair up with pipe manufacturers around the world and be more thoughtful about how we can provide a better supply chain to our end customers and then we've talked a great deal about the <unk> monetization.

And that's probably a little that's probably the farthest out of any of them.

The technology work that needs to be done with the number of the true providers there, but there is interest both on our customer side.

And and on a tree provider side as well.

That's great Yeah, I think that really frames the short term of the medium term well.

So that may be on margin progression.

You noted revenue flat to down in 'twenty, one that makes sense based on how order shook out of what you're expecting for this year.

40% Decrementals, you're holding for recovery can.

Can we maybe just focus on gross margins and talk about the potential range of outcomes there the different levers whether its mix throughput et cetera, just how we think about.

The progression per gross margins I think would be helpful.

Hey, Sean this is Raj.

Yeah talking about profitability actually true in relation to gross margins.

If I if I look into 2021, I talked about the 40% Decrementals, we are holding a bit of cost in anticipation of the recovery of that Jeff alluded to.

Uh huh.

You know in terms of mix, we're seeing a very similar mix from 'twenty going into 'twenty. One so I wouldn't say there is there was any major shift there the thing.

The thing that we're gonna be cognizant of office the cost actions that we did last year are going to flow through the full year annualized call sections are going to flow through into this year. So that's going to be of help there. We're also shifting our focus I mean, we've always had this lean focus of this productivity focus and that's going to help us. This year, we're looking at 10 million.

All of this of upside there of which $5 million, which hit into 'twenty 'twenty. One so on an annualized standard five is a good guy.

We are seeing some headwinds.

<unk> talked on the call about the early on in the script I talked about the.

The lapsing of the government subsidies, so that's going to be a headwind for us in terms of margins that's around $3 million to $4 million of headwind that we're going to see and we have in this environment reinstated some the variable compensation I mentioned, we have tied that to the free cash flow initiate it because that is so critical for us in this environment, but that's also.

And in some estimation of headwind for us. So those are the puts and takes with that look look at margins going forward.

That's really helpful. Thanks, everybody.

Thanks, Sean.

Thank you next call comes from James West of Evercore ISI. Please go ahead.

Hey, good morning, guys.

Good morning, James.

Oh, there's a question on free cash flow.

And.

Understanding that you guys are focused on at the management compensation is tied to it so there's definitely a target.

The target area for you is there something within perhaps the inventories that the true.

We're unable to move because of the longer cycle.

Weapon the or is this what are we missing what why are we not converting.

Some of the working capital faster than.

Then one would expect.

So so James Thanks for the question on the inventory of aspect of the working capital.

The last year the last year was a unique year right. So we had we had to deal with the delays the both of them both on the customer side as well as from the vendor side, where we had to receive stuff a bit early and then be at shipment interruptions et cetera. So there was some headwinds against what on the inventory side.

One of the shift in 'twenty one.

And you know.

With what we've put together in terms of information technology around inventory and being better able to manage it given the tools that we've put in place I think youre going to see a very different environment in 'twenty. One granted that were either flat to slightly down in terms of revenue. So it's more of a gradual recovery and that's a headwind that's our inventory of liquid.

<unk>.

But I can I can quite confidently say that we should see a year over year of decrease on total inventory levels should expect anywhere from 15.

The stretch maybe up to $20 million of inventory reduction.

Okay, Okay, Great day here and then.

The second question for me.

Maybe maybe maybe for Blake.

Within the customer base right now I would assume that any of your.

The inventory they had taken from you already or is it taken from you the kind of destock this already whether you're in the wellheads the laws, especially but I guess, one is that the case and two could that lead to perhaps the you know some type of.

And the market would be a gradual recovery, but maybe it would be even a little bit more of a bump when people get back to as people get back to work.

Because they need to kind of restock of their own inventories.

Yeah, that's a good observation James so.

You know unlike the.

In the $14 15 timeframe, where our customers had a pretty high anticipation of activity level they cut back.

We don't have that in this down cycle and in our customers had pretty much burn through their inventory in that period and so you know currently where we're we believe inventory as a M with.

With the activity level, it's not going to take much of many wells drilled before that inventory is burned down and then the reorder cycle will commence so.

Once once the activity level picks up I think youre going to see bookings respond pretty quickly.

Right, Okay, all right great. Thanks, guys. Thanks.

Thanks James.

Thank you next question from Taylor Zurcher of Tudor Pickering Holt. Please go ahead.

Hey, good morning, guys good morning Barton.

First question is on some of the comments you made on the on the energy transition.

Yeah.

Alex you have is one avenue to.

The kind of effectuate that change at least within your existing product portfolio. You also mentioned in the presentation some opportunities you're exploring around carbon capture and storage in geothermal and so I'm curious on that kind of a suite of.

The market our section of the market are those things that.

You can apply your existing skill set and the existing technology knowhow to the kind of Wade into where would we be thinking more about sort of some inorganic growth opportunities to kind of wait until those markets.

Yeah. So so this is Jeff we've done a couple of things there rightly as you as you point out you know all of our customers have a carbon reduction target and most of those targets. We believe we're going to come in the back of of their vendors. So you know we're doing the right things there from green by design standpoint to help our customers reduce.

Their carbon footprint if.

If you think about carbon capture specifically that scenario, where candidly theres a fair amount of overlap right now and we have products that we can bring to bear almost immediately around carbon carbon capture and then if you think longer term on the renewable side.

We'll follow our customers you know, we've really done a good job I think over the last five 610 years on the R&D front. So we do think we have the intellectual horsepower internally to to bring R&D to bear and in that area as well to that end, we've actually recently carved out a specific group.

<unk>, that's now working directly for me to start to look at both the carbon reduction carbon capture and then you know longer term around the renewable side as well.

Wouldn't be we wouldn't be afraid of of the M&A, but right now I think we're looking at it more from an organic standpoint, and an inorganic standpoint.

Okay great.

My follow up you touched on sort of the margin profile of moving forward in line.

You'll get some extra cost out with the lean initiative.

On the flip side, the government subsidies rolling off all of it will be a bit.

Of a negative had one and then the other negative.

Many of the Covid impact of it.

We're still having a meaningful impact on the margins today.

Just talk about how you see some of that Covid impact.

Hopefully the lessening over the first half of the year, maybe it takes longer than that but any color there would be helpful.

Yes so.

Hello. This is raj here by the way.

If you look at last year, I think we had about a 15 million other headwind from Covid. This was skewed all of the delays in all of the issues. We had in terms of manufacturing et cetera.

Going into the sea I would expect that as the year of progresses and as vaccinations get rolled out.

As the year progresses, I would expect that debt sort of that's sort of headwind trend line is going to abate.

All evidently of the first half of the year I'm not as confident that stepped back off of the Taylor.

Okay understood. Thanks fair enough of the answers.

Thank you next question comes from our line of Morgan Stanley. Please go ahead.

Yeah. Thanks.

Thank God.

<unk> was asking something along these lines, but I was wondering if you could just sort of sketch out.

Thinking about cash flows for 2021, and ultimately where I'm, where I'm driving with this just trying to think through the exit rate, but can you just help us.

Understand you know big Big cash moving pieces, how much of a working capital release, you are expecting and basically what I'm wondering is if you could sort of frame for us as we look out longer in time. If this mid single digit free cash margin. How we should think about your business do you think of you can do better or do you think the worst just thoughts around that.

Hello, Paula this is Roger Yeah. So you know talking about the major facets of free cash flow right looking at working capital on the AR on the DSO side on the accounts receivable side.

The loss last quarter was was the horrendous quarter in terms of our customers managing the balance sheet and doing window dressing at the end of the end of the year, we expect that situation to.

Improve it's just that we're stepping up of collections efforts, we are getting more in tune with our customers and understanding.

How are they going to convert.

Accounts receivable to cash I do expect that those gymnastics that they play out going to happen every quarter. So we've got effect of that and we're going to do what we can control I'm I'm going to say that I expect the C. O with whatever we are doing the DSO should improve of about 30 days year over year.

On the inventory side I already talked about you know I mentioned the James.

I'm looking at a $15 million to $20 million release of inventory given all of the actions that we've put in place put in place around there on the GPO side, it's probably going to be around the periphery. We're running around 60 days there is still some opportunity, but it's not going to be debt actually materialize. What are you seeing one of the inventory and the AAR site.

We also have from a cash position opportunity that was delayed due to the pandemic last year from real estate sales. So we do expect a six $6 million to $7 million of real estate sales that should come in.

This year to help them out of cash position.

With all of these I would say that I expect you know of 5% of yield on average on revenue right on revenue is achievable in 2021 in fact, if I was looking at Q1, I'd say, we could potentially meet or exceed that number.

I don't know a longer term basis, you've got to understand that we are a long cycle business. We have of projects component of our business and when there is a when there is a recovery there is going to be some build to inventory right because of the project nature and when we look when we look over the cycle I would say that of 2% to 5% yield on.

The revenue is it's a reasonable expectation.

Got it that was there was a lot of.

For context, there so I appreciate it.

I mean, I guess I guess just at a higher level you you've got very substantial cash balance you'll be free cash positive. This year admittedly some of that is working capital.

But but how do you think about that cash balance what's the.

What's the sort of the.

The investment priorities return of capital you've talked in the past somewhat about the M&A, but I think if we look at.

Other sectors of the economy.

The context has been that valuations are quite high because of what's coming out of the public markets, but just any thoughts around around that would be great. Yes. So you know I talked about.

Keeping some dry powder for a recovery.

We remain cautiously optimistic of what 'twenty, one, but going into 'twenty. Two we think the you know the mark.

It's going to you know.

It'd be a bit more buoyant than what we're seeing right now evidently so we have to put it put aside maybe 150 to two out of a million dollars to help us out in the on the upside we do look at we do look at M&A. We look at the R&D side of things that can accelerate out of technology roadmap that that'll probably be.

Cash cash related but on transformational R&D, if you don't see using cash or debt for that matter.

In terms of getting of transaction done on the transformational side, we will always stick to.

I think all of equities, the best currency for Us right now.

Makes sense. Thank you.

Thank you again, we have a question. Please press Star then one.

Next question is from David Anderson of Barclays. Please go ahead.

Hey, good morning, guys a question on Brazil.

This is the country you've had a strong presence in for many years, Brazil might be one of the few of us offshore markets to grow this year.

I'm pretty sure you fulfill all most of not all of the prior contract I was wondering if you kind of talk about the status.

Down there just petrova of still have an inventory to work through I believe a lot of that equipment wasn't still okay to move through but maybe just kind of talk about in terms of what you're hearing about of new tender.

Blake I think you had talked about some of that a little bit in the past. So maybe just an update on Brazil. Please yes, certainly so your memory is correct. The Petrobras had a substantial amount of of inventory.

You know when we first got those numbers, we kind of ran the math in the run rate and you know we figured the 'twenty 'twenty would be.

The logical time, they would come out for bid and in fact, Petrobras had announced they were doing.

Multiple tenders for a total of 70 wellhead systems.

That was in the works during 2020 all of that work is still on the cards. The bids are still out there, but it has just slid to the right. So at present, we haven't.

We're in discussions with them about tenders coming up but there is nothing active but we do expect that to happen. The early on in 'twenty one.

And if assuming that does come through like where are you with your facility and located on the I'm, assuming it's ways scaled down now.

Are there challenges to bring that back up to meet that if you're talking 70, that's not a huge number in terms of wellheads, but chunk of how you think about that.

Yes. This is this is Jeff we are we still have the facility in Brazil, and candidly you're right to say, we did we did scale of down somehow ever we have had some recent activity there and we're able to scale. It back up again pretty quickly. So we're confident that the if and when that order is received that we'll be able to scale back up again it shouldn't be.

So all of a significant amount of work there from a operate from an aftermarket operations standpoint. So of course I saw the new new new CEO and Petrobras, the who knows where that's going to probably the progression. We don't have to talk about that today. One. Other question of you do you have you are talking about these partnerships with tree manufacturers on the wellhead side.

Some of them always kind of thought about it.

Certainly do go hand in hand, Youre talking about of the pursuing those with some tree manufacturers. You of course are also of tree manufacturer trying to build that market out for many years. So it doesn't the screen some conflicts out there with that of course, we know that one of your major competitors there.

So of the tree manufacturer. So maybe you can just expand a little bit on that partnership agreement. Please.

Yeah. So the way we think about it is this are our sweet spot really from a tree standpoint are the smaller independents. If you will is our sweet spot when you get into the larger the IOC and some of the larger NOC is we're a little bit more challenge there from a tree standpoint, and but all of them candidly we're probably.

Better positioned from wellhead standpoint, but a lot of other tree manufacturers, so all of those customers where.

It's not necessarily our sweet spot, that's where we think it makes sense for us to partner with other true providers and go to market and really while we're talking about them independently of the VX T E and that wellhead peer to peer of kind of go hand in hand, if you think about it right imagine us providing the the wellhead to those tree providers, but also perhaps supplying the V.

<unk> technology as I said earlier of VX, he's going to take a little bit longer because theres. Some technical hurdles that we've got to work through with the tree for riders, but those are both opportunities that we don't really think of conflict there might be a little bit of conflict at the edges, but not large.

Okay and then in terms of when you say of partnership is that mean of partnership in terms of how you're bidding out projects together does that mean, that's the that's a partnership in terms of kind of marrying the technologies together and kind of integrated now I'm, just maybe just a little bit more of that sorry, sorry, I'm, taking up so much time of the call today, Yes, no no no worries I think all of the other wells.

Head side, you'd probably likely see just think about it very simply as as the price list with lead times.

And pricing that we would negotiate with the tree provider that we'd be able to provide them. They would integrate our technology, our wellhead into their tree on that side of the VX day side, it's a little bit more integrated think about them, providing the tree and that's really providing the kit. The IP kit. If you will the underneath the tree, which would which by the way on the <unk> would also include the world.

Got it makes sense. Thank you very much guys. Thanks. Thanks.

This concludes our question and answer session I would like to turn.

The conference back over to Blake.

Area for closing remarks.

Okay.

Well first off just wanted to thank everyone for attending the call. This morning, and I appreciate the questions and your input just close with the we are.

Much more optimistic going into 'twenty, one than we were at the start of the pandemic and.

We believe we've positioned the company pretty well.

For the environment that we're in and we like our strategy going forward and I look forward to updating you on our progress as we come to the close of each quarter with our fireside chats. So until then take care.

Yeah.

Conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Okay.

Yeah.