Q1 2021 Nov Inc Earnings Call
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Good day, ladies and gentlemen, and welcome ticket and O V first quarter 2021 earnings conference call. At this time, all participants are in a listen only mode.
Later, we will conduct a question and answer session and instructions will follow at that time, if anyone should require assistance. During the conference. Please press Star then zero on your Touchtone telephone as a reminder, this conference is being recorded I would now like to introduce your host for today's conference Mr. Blake Mccarthy, Vice President of corporate development and and.
Buster relations, Sir you may begin.
Welcome everyone to <unk> first quarter, 2020, One earnings conference call.
With me today are clay Williams, our chairman, President and CEO and Jose Bayardo, Our senior Vice President and CFO before we begin I would like to remind you that some of today's comments on forward looking statements within the meaning of the federal Securities laws.
All risks and uncertainty and actual results may differ materially.
No one should assume these forward looking statements remain valid later in the quarter or later in the year for.
For more detailed discussion of the major risk factors affecting our business. Please refer to the latest forms 10-K, and 10-Q filed with the Securities and Exchange Commission.
Our comments also include non-GAAP measures reconciliations to the nearest corresponding GAAP measures are and our earnings release available on our website.
On a U S GAAP basis for the first quarter of 2021, and Ob reported revenues of 1.25 billion and a net loss of 115 million on.
Our use of the term EBITDA throughout this morning's call corresponds with the term adjusted EBITDA as defined in our earnings release.
Later in the call we'll host a question and answer session. Please limit yourself to one question and one follow up to permit more participation now let me turn the call over to clay.
Thank you Blake 2000, Twenty's, one two punch of and oil supply price war, followed closely by and oil demand crushing global pandemic led to a sharp decline and demand for oilfield equipment and consumables through the year and.
<unk> results for its first quarter of 2021 reflect the full impact of the Shockwave emanating from the combination of these events that led to this historically painful downturn and and industry noted for painful downturns.
As we reported and our operational update on March 16th the quarter was further impacted by other factors severe winter weather and power outages, and Texas, and Oklahoma led to 63, and <unk> facilities being shuttered for a week or more.
Additionally, new pandemic control measures flared up overseas, which shut down another couple of large plants and disrupted our supply chain for certain raw materials.
Notably fiberglass and resin.
And as if that weren't enough. The quarter also ended up being impacted by higher costs on two projects related to poor execution on our part and one case, a new pipe design has proven more expensive to manufacture than expected and another and offshore platform component was delayed because our engineering took longer than expected both had been corrected.
Despite these the final quarterly result.
Slightly exceeded our March forecast due to better progress on cost reductions overall as well as and this is important and more and more green shoots emerging and the oilfield, particularly in Wellbore technologies, and particularly in North America.
Although we still face headwinds in many markets our confidence continues to Mount that the worst is behind us.
North American oilfield activity continued its recovery during the quarter with March revenues up sharply from January for certain of our earlier cycle domestic businesses. While international results began to point to early signs of a recovery as well.
Nevertheless, the first quarter sequential decline and capital equipment revenues reflect the pummeling our backlog took in 2020, which led to consolidated revenue declines of 6%.
EBITDA fell to breakeven, which is unacceptable and as prompting further cost reductions.
As a provider of capital equipment and spares to the oilfield our results lag those of our customers generally speaking.
The first quarter of 2021 reflects the preceding nine months are crashing oil demand and a virtual cessation of capital spending offset by substantial downsizing and cost reductions. We believe this down cycle is the worst our industry has ever seen.
Oil prices went negative in April.
In August the U S rig count hit its lowest level since records began and World War two.
North American Frac fleet utilization hit single digits by year and more than 100, North American oil and gas companies had filed for chapter 11 bankruptcy protection with a combined debt of over $100 billion.
We're not for a couple of large projects that were awarded before the lockdown.
For offshore projects and 2020 would've mark the lowest since 1960.
Although the recovery has begun taking hold and many markets average first quarter rig counts were down 46% for North America land, 36% per international land and down 31% for offshore year over year.
When I say that it has been historically bad downturn, what I mean is that it has been a measurably provably historically bad downturn.
In this environment, our oilfield service customers are sticking to the tried and true survivor playbook of cannibalizing equipment spares and consumables deferring maintenance, reducing spending spending to bear substance levels and hoarding precious cash.
And obese largest competitor in this environment is idled equipment.
And by fall every stacked rig had become and incremental source of drill pipe shaker screens and handling tools et cetera that same dynamic applies across all categories of oilfield equipment when utilization collapses and service companies fight to keep the lights on a year ago day rates began racing to find bottom and daily cash costs, which were insufficient to cover.
Long term maintenance cash cost much less the capital consumption costs represented by depreciation.
For many sectors year end 2020 day rates reflected desperation company's discounting to keep some assets and crews working and spinning cash only as a last resort.
Consequently, and obese oilfield backlogs fell throughout the year and first quarter annualized revenue run rate is down 45% from just five quarters ago.
Here's the good news 160 years of oilfield history demonstrates that this dynamic is always temporary the amount of idled equipment available to be parted out falls as activity resumes and dwindling spares and consumables must be restocked as utilization improves we are beginning to see the early signs of this and certain areas as rigs and free.
Fleets go back to work idled stripped drilling rigs must have must have cannibalized pumps and handling tools replaced to go back into service and this rebuilding restocking and reactivation phenomenon occurs at a time when service company desperation is evaporating and optimism is growing with rising oilfield activity we knew.
This because and Ob has lived it.
And through recovery cycles like this in the past.
And as the oilfield goes back to work customers will soon start to worry about non trivial cash investment required to reactivate rigs and equipment.
Think about the courage required to put your precious cash and to the business that almost killed you last year. That's what these customers face when it comes to reactivation, we believe our customers will require higher pricing on their incremental assets going back to work in order to mitigate risk by achieving quicker paybacks on the reactivation investments plus they'll need to cut.
Ever rising wage pressures and other inflationary forces and more on that and and just a moment.
And and if oil prices remain constructive pricing momentum will lift margins and returns significantly such is the nature of the cyclical business, we serve and Obi will be a key recipient of this unit reactivation and investment as various basins and categories of equipment passed through the inflection to emerge into higher day rate regimes there orders for.
Capital equipment will accelerate this is the sweet spot of our business model.
The historical oilfield events of 2020 have led predictably to an enormous disassembly of well construction capability by the oilfield services industry. The tried and true playbook I referred to earlier every.
Every surviving oilfield service company on the plan and has made at this four by downsizing extraordinarily well collectively are surviving customers are the dream team of cost cutters and they have been hard at it for several years before tripling their cost cutting ferocity and 2020. It stands to reason that the aggregate capacity to construct.
Wells has been materially diminished and our view.
If the global economies continue to recover out of COVID-19 and demand more oil the oilfield services industry will be tested to get back to normalized levels of wellbore construction sufficient to meet rising oil demand.
We think that's more likely than not.
First governments around the world responded to the economic turmoil of the pandemic with unprecedented stimulus packages for instance, the G to N plus China passed more than 20 trillion dollars of stimulus and the aggregate.
This has led to stunning money supply growth the U S. M. Two is up 27% year over year as an example, generally money supply growth and low interest rates and flight asset prices, including commodity prices like oil and.
Next drug companies and vintage of vaccine several actually.
While there are fits and starts global vaccination efforts are progressing positioning of world to emerge from the pandemic lockdown huge economic stimulus and a powerful catalyst vaccines to more or less simultaneously open economies, coupled with sharply improved household balance sheets and a widespread desire to get our lives back.
And to normal well I cannot conceptualize a more compelling recipe for synchronized global economic recovery of a size that we have not seen since the 19 fifties postwar boom. We believe the synchronized recovery will lead to rising oil consumption and fact, leading demand indicators for crude oil gasoline and distillate already point to a stronger recovery than many.
Economists as expected and global inventory levels appear to be normalizing ahead of schedule.
On the whole this is a highly constructive backdrop for oil prices for the next few years and our view key risk to this thesis include excess Saudi and OPEC capacity, which is scheduled to trickle in over the next several months and the possibility of the return of Iranian crude production. We acknowledged that these both remain prominent unknowns. However.
Record levels of crude inventories achieved through the first half of 2020 have to the extent, we have visibility into them largely dissipated that only happens because withdrawals have exceeded additions. So supply held artificially low by OPEC has been less and demand held artificially low by the pandemic Lockdown and the key question is what will the <unk>.
Picture look like as artificial constraints on both ease.
And other risk is the productivity of U S shales, which achieved extraordinary levels of growth off and on throughout the past decade simulcast <unk> and other advancements point to the relentless March and the domestic E&P industry toward greater efficiencies, but to be fair. The domestic E&P industry was helped in the prior era by one gobs of cheap capital debt.
Fuel drilling program seeking production growth and to duress and oilfield services that help pricing below that required to replace let alone on a return on the capital consumed and the construction of these well bores and things.
And things have changed.
Capital when they can get it is far far more expensive now and it.
And it feels like it is becoming even more so as ESG factors play a more prominent role and investment decisions and the incremental investments that would be required to restore oilfield service well construction capabilities will also demand higher returns layer and on top of that the consolidation among domestic E&P operators, the higher cost of attracting labor.
Back to the oilfield, while a major economic expansion is underway, giving workers a lot of other high paying options and well you get the picture a return to material production growth from U S. Shales will be more challenging this time around from where we sit.
But behind the artificial production constraints imposed by OPEC, Russia, and Saudi Arabia.
The artificial consumption restraints imposed by COVID-19 economic Lockdowns lies oppressive depletion math.
All oil wells decline to what level has the aggregate natural decline of oil wells been obscured by these artificial constraints, we can debate about what the true supply demand picture looks like but one thing. We can all agree on is that both are far more opaque and 2021 and then any prior year. After all we've never had and economic shutdown like.
This before.
My point is this when the industry materially cuts its exploration its development its steady construction of the platforms projects and wells that produce the oil that our global economy relies on and further is this rates the tools of the oilfield services industry that actually do the work there will be a day of reckoning.
Throughout this historic period, and Ob has been steadfast and one reducing our costs, which are down $12 $6 billion since 2014, including approximately $2 billion and annual fixed cost reductions to improving our cash flow, which has de levered, our balance sheet and three investing in the next generation of technologies both for the oilfield.
As well as emerging renewables opportunities, whether it's the next generation of rig for technology like a robotic pipe handling system controlled and our novo digital environment.
Our ideal E Frac fleet outfitted with our quick latch system and flex connect Frac host system to remove both emissions and manpower from the completion process or MOV Max our digital platform that brings out brings all the disparate data sources together for the operator to utilize as he or she sees fit.
<unk> remains at the forefront of the next generation of oilfield technology.
Our push into supporting the energy transition focuses on areas, where we believe we can carve out significant competitive advantages, while delivering superior economic returns for our customers and wind solar geothermal and other emerging energy sources.
Finally, before I turn it over to Jose to go through our segments and detail. Let me share. Some specific examples of the recovery that we believe is just getting started and the oilfield beginning with Wellbore technologies seven out of eight Wellbore technologies business units posted sequential growth and the first quarter, reflecting serve and for certain products. Consequently, we.
And to add shifts to manufacturing and we achieved the highest level of absorption we've seen since the first quarter of 2020 and.
And Ob witnessed share gains for our REIT high Kellogg bits, and West, Texas, and Saudi Arabia, despite increasing prices due to strong performance and rising activity drilling motor demand is also increasing and downhole friction reduction tools are completely sold out and certain north American markets as revenues were up more than 30% sequentially, we've pushed drilling motor pricing up double digits.
And some areas North American rig instrumentation, and solids control services pricing is up double digits on new work back to pre COVID-19 levels and poised to rise further and in international markets. We expect our wire drill pipe jobs to increase over 25% and the second quarter as operators become increasingly convinced of the value of real time high.
Bandwidth data from the bottom of their drill strings, something that's only available through our proprietary and <unk> wired drill pipe technology Global O CTG demand appears to be picking up which led to double digit sequential growth and and it'll be tuba scopes pipe inspection services worldwide and despite continuing day rate pressure on drilling contractors Grant Brightcove posted a book to bill greater than 100%.
And as operators are requiring larger five and a half inch drill pipe to accommodate better hydraulic performance, leading drilling contractors to purchase this pipe with our proprietary delta premium connections.
On the whole higher oil prices and higher rig counts, particularly in North America place Wellbore technologies at the forefront of the oilfield recovery on.
On the other hand completion and production solutions and rig technology segments continued to battle through low capital equipment backlog and stingy customer spending. However, the caps segment saw its book to Bill for new capital equipment orders above 100% for the first time since the fourth quarter of 2019 and indication of better results to come the group's North American quick turn business.
This has began to see improvement North American production chokes backlog popped, 30% and our reciprocating pump backlog grew 69% sequentially. We won another tier four dual fuel fleet upgrade for a domestic pressure pumping service provider and demand for coiled tubing strings tripled from its low point and the second quarter of last year, while we lost a large project and <unk>.
Lascar, we did win another large project for Brazil, and both projects are evidence that perhaps operators are moving forward with some decisions after protect protracted COVID-19 related delays.
Rig technologies these challenging conditions for rig capex and the near term, but it did see double digit growth and spare parts orders followed by two record low spare parts order quarters in a row.
It is also seeing rising inquiries for rig engineering around offshore drilling rig reactivation.
While our first quarter results were terrible I'm growing increasingly confident that results will improve significantly as the year progresses, our spare parts and consumables and services business is tied to activity are seeing it already and our sales force is wasting no time repairing pricing to acceptable levels and healing for our capital equipment businesses always.
Begins with rising orders, which we which we started to see and many businesses for the first time and a year and a half.
To and Ov employees listening I again want to thank you for your perseverance and professionalism you skillfully position the company to support our customers and to capitalize on opportunities to serve them better.
Most importantly through a year that has thrown a lot at our team you've taken care of each other I'm incredibly proud to serve with you and appreciate all that you do Jose Blake and I look forward to better days with you as things improve through 2021 now let me turn it over to Jose. Thank you clay Nov's consolidated revenue fell $78 million or 6%.
Italy to 1.25 billion during the first quarter of 2021. The sequential decline was the result of ongoing austerity from our customer base operational disruptions from severe weather and COVID-19 challenges, which continued to play global supply chain and <unk>.
A way to summarize the quarter is that January was extremely slow February was a frozen disaster and and March orders began to pour in and we made up a lot of lost ground, giving us confidence that our results will improve through the rest of the year.
Ongoing cost out initiatives higher margin revenue mix and better pricing limited sequential decremental margin to 22%.
However, we take no comfort and this performance given that we are breakeven EBITDA.
As unacceptable and any market environment.
We continue to challenge our organization and look for new ways to drive incremental efficiencies. During Q1, we realized $52 million and annualized cost savings and identified an additional $31 million and opportunities, bringing the total we expect to achieve and 2000 $21 million to $106 million.
During the first quarter, our operations used 27 million and cash and capital expenditures totaled $49 million. It's.
It's typical for the organization to consume cash in the first quarter and we expect to be free cash flow positive for the year.
We ended the first quarter with 1.61 billion and cash and $1 eight 5 billion and gross debt or net debt of $244 million.
Following the end of the quarter, we fully redeemed the remaining $183 million of our senior notes due in December 2020 two with cash on hand as a result, our next bond maturity does not occur until December 2029, and interest expense should decline roughly $1 million per quarter moving on to our segment results our Weber.
And our technology segment generated $413 million and revenue during the first quarter and increase of $40 million or 11% sequentially.
Cost cutting improved absorption and our manufacturing plants are more favorable sales mix and better pricing drove 55% incremental margins and a $22 million increase in EBITDA to $34 million or eight 2% of sales or read hike log drilled that business achieved 20% revenue growth with strong improvements across the western hemisphere.
Fear.
<unk> technology leadership is driving market share gains in most markets and the gains helped drive modest revenue growth and the eastern hemisphere during a quarter and which we typically see a seasonal slowdown.
Share gains improved absorption better pricing and cost cutting drove incremental margins of almost 50%.
We expect our REIT high clog business to post another solid sequential improvement in Q2 led by growing activity in the Middle East and Asia Pacific markets.
Our downhole tool business realized a 13% sequential improvement revenue led by sales growth that meaningfully outpaced the increase and drilling activity and the western hemisphere, partially offset by seasonal declines and the eastern hemisphere on.
Operators working to reduce trips maximize hydraulic flow and reduce friction and are driving improved demand for select shift drilling motor fluid hammer impulse axial pulse technology, and agitator tools, a more favorable sales mix higher volumes improved operational efficiencies and better pricing allowed the business to deliver 50% incremental.
Margins during the quarter.
Our well site services business realized a 16% sequential increase and revenue primarily from improving results and had solid control operations.
The business unit has steadily recaptured market share and North America from desperate competitors that have fallen out of the market over the last several quarters and is now starting to claw back pricing.
R M D Taco business realized low single digit revenue growth and the first quarter revenue from surface sensor and data acquisition offerings and the western hemisphere improved in line with drilling accurate activity, but was partially offset by the seasonal falloff and capital equipment sales to the eastern hemisphere. The.
The business unit's evolve wired drill pipe optimization services achieved record rental service revenue and as Clay mentioned picked up additional jobs for Q2, our track record of improving drilling efficiencies for operators is driving an increasing rate of adoption. However, the relatively high cost of wired drill pipe and a capital constrained market.
As mostly restricted the service offering to operators that have complex wells with tight drilling parameters.
We believe our new low cost next generation wired drill pipe technology could significantly expand the market and accelerate the adoption of a wired drill pipe enabled services.
Our tubes, and scope pipe coating and inspection business posted a 10% sequential increase in revenue and.
Demand for inspection services improved globally, and was particularly strong and the U S where piece counts from steel mills and outside processors improved 43%.
Revenue from coding operations fell due to seasonal declines and the eastern hemisphere, which more than offset improving demand in North America.
Our grant <unk> drill pipe business achieved a high single digit sequential increase and revenue.
Higher proportion of large diameter premium pipe and our sales mix drove outsized incremental margins despite meaningful costs associated with the winter storm, which included facility repairs overtime pay and scrapping and costs from power outages that occurred during sensitive heat treating operations.
The business unit achieved and 104% book to Bill, which should allow for another sequential improvement in Q2.
31% of our orders came from North America, the highest percentage and quite a while and.
Clay mentioned, we saw strong demand for five and a half inch pipe driven by operators seeking greater hydraulic efficiencies consistent with a driver, we're saying for our high flow rate drilling tools.
At a time when there continues to be ample supplies of four and a half and five inch customer on drill pipe and the U S.
For our Wellbore technologies segment, we expect activity gains and the U S and Latin America to moderate and activity and the eastern hemisphere to recover resulting in sequential revenue growth of 8% to 10% during the second quarter.
We also expect continued improvement and the segments cost structure, and better pricing, which should allow incremental EBITDA margins near 50% our completion and production solutions segment generated $439 million and revenue during the first quarter, a decrease of $107 million or 20% sequentially.
The sharp decline was primarily due to depleted backlog severe weather related disruptions and supply chain challenges and.
First to reduce cost and improve operational efficiencies limited decremental margins to 30% and EBITDA declined $32 million to a loss of $4 million.
Orders for the segment improved 57 million sequentially to $338 million, resulting in a book to bill of 127%. The segment's first book to Bill greater than 100% since the fourth quarter of 2019.
During the quarter. We began to include orders for subsurface fiberglass fuel storage tanks, and a capital equipment backlog. Excluding this addition, our book to Bill would have been 115%.
Our fiber glass systems business realized a 25% sequential decline in revenue difficulties faced by the unit were emblematic of what we saw on most of our capital equipment businesses during the first quarter.
We anticipate and absorption challenges, resulting from five straight quarters with a book to bill below one, but severe COVID-19, and weather related disruptions also impacted operations COVID-19.
COVID-19 outbreak shut down our two large manufacturing facilities in Malaysia for three weeks and the pandemic impact on global supply chains resulted and shortages of a pox, he resin and glass fiber, which limited manufacturing output at our facilities.
Severe winter weather further hampered operations and caused customers to defer deliveries due to transportation constraints and difficulties installing large subsurface storage tanks and frozen and soil.
Despite demonstrating the near perfect case study for Murphy's law, our team did everything within reason to protect the bottom line and was able to maintain positive EBITDA margins.
While ongoing supply challenges may not be fully resolved until August the outlook for this business seems to be improving with each passing day, a significant pick up and orders in March for fuel handling products allowed the unit to post a book to Bill North of 100%.
We're also seeing demand return for marine Scrubbers, and Asia, and fiberglass pipe and the middle east, providing us with confidence that the business should realize steady improvement and its results throughout the remainder of 2021.
Our intervention and stimulation equipment business realized and mid single digit sequential decline and the first quarter its fifth straight quarter of declining revenue. Despite continued weakness on the North American market. The segment achieved its second straight quarter with a book to bill greater than one demand for wireline equipment, particularly in the Middle East Europe, and Africa has been a bright spot.
And while our global coiled tubing business experienced a sharp falloff in Q1 quoting activity from international markets remains healthy and improving completions activity and the U S is driving greater demand for consumables.
And the pressure pumping space activity levels have increased significantly but pricing for our customer services remain well below pre COVID-19 levels force and cannibalization and low cost purchases of distressed equipment to sustain operations opportunities to cannibalize, our limited and wall equipment auctions continue the quality of <unk>.
And on the auction block is quickly deteriorating as a result, we're seeing a significant increase and quotes albeit off extremely low levels for new equipment or.
Our Q1 cementing equipment orders were double the amount we received the entire second half of 2020 and we're also seeing increasing demand for stimulation equipment with enhanced capabilities and reduced emissions during.
During Q1, we booked in order to convert 16 tier two frac pumps to new tier four DGB.
Dual fuel units that can run on a combination of diesel fuel and natural gas lowering operating costs and emissions. Additionally, we're seeing growing interest and our ideal E. Frac stimulation equipment, which recently finished its first field trial and trial, where our pump completed more than 200 stages at rates up to 'twenty two.
Barrels per minute nearly three times that of a traditional 2500 horsepower unit.
With improved bookings and growing demand for aftermarket services, we expect our intervention and stimulation equipment business will realize meaningful pick up and revenue during the second quarter.
Our XL systems conductor pipe business experienced a sharp sequential decline in revenue during the quarter, resulting from a backlog that was depleted after eight straight quarters with a book to bill less than one.
Our team limited decremental margins to only 17% and we achieved a 143% book to bill indicative of improving market conditions.
Interestingly, we've seen certain customers award work than delay deliveries, while other customers are scrambling hard with urgent orders for newly established near term spud dates. So sentiment remains mixed if not a little unusual but we take the current dynamics as a net positive. Meanwhile competition remains fierce with desperate competitors.
And as offering pricing and payment terms that we will not match Fortunately, our technological and quality differentiation allows us to win a sufficient number of projects that are not entirely driven by pricing such as the award we received associated with the industry's first 20000, and Tsi well development project.
Our subsea flexible pipe business realized a low double digit sequential revenue decline with outsized decremental margins, resulting from lower volumes, a less favorable product mix and the manufacturing challenges associated with the new pipe design that clay mentioned.
While bookings remained light customer dialogue and order outlook has improved particularly in Brazil, where we expect large projects to advance later this year.
However, exact timing remains somewhat uncertain as extreme COVID-19 related challenges and the country make it difficult to coordinate efforts and complete a central engineering work required to advance projects.
We believe the offshore production oriented components of our cap segment are at or near a bottom on our last several calls we've mentioned how we've been pursuing a large number of offshore production related projects that continued to push out quarter. After quarter. We finally started to see some of these projects shake loose and remain hopeful that stronger oil prices could some.
<unk> more <unk> through the year.
For the second quarter of 2021, we anticipate revenue for a mark completion and production solutions segment will improve between 15% to 25% sequentially with incremental margins in the mid 20% range.
Our rig technology segment generated revenues of $431 million and the first quarter, a decrease of $6 million or 1% sequentially.
<unk> increase in capital equipment sales related to offshore wind was more than offset by the seasonal falloff and aftermarket services.
A less favorable revenue mix and weather related disruptions resulted in a $6 million decline in EBITDA to $13 million or 3% of sales orders for this segment declined 78 million sequentially to $112 million, yielding a book to bill of 59% the segment's sixth quarter out of the last seven with a book to bill of less than one.
Orders for rig capital equipment remained weak as drilling contractors continue to cannibalize idle equipment and minimize spend.
Despite improving activity and dialogue there remains a distinct lack of urgency from our customers quotation levels increased 25% sequentially and the conversion of quotes to orders also improved however, only quotes for small orders converted the bookings, we arent, losing larger orders to competitors and customers are not canceling.
Projects, they're simply just a lack of urgency and potential orders keeps sliding to the right.
Ongoing waves of COVID-19, outbreaks and in international markets do not inspire confidence and neither does uncertainty around the timing of when several of our offshore drilling contractor customers will exit bankruptcy.
While customers and the Middle East and Asia continue to express the need for Newbuild rigs and offshore customers require meaningful upgrades for reactivation and we expect a lack of urgency will keep the book to bill for our traditional rig equipment business below one time. However, we are optimistic that a few additional quarters of stability and commodity prices and improving activity levels will do.
A bit to move projects forward.
On a more positive note we began manufacturing the first two rigs from our new manufacturing plant in Saudi Arabia near term revenue from these projects will help offset the expected weakness and our rig equipment order book as a reminder, the plant has a commitment for 50 drilling rigs over the next 10 years and accounted for $1 8 billion and backlog.
We expect to deliver the first rig at the end of this year, a rig and each quarter during 2020, two and five rigs per year beginning in 2023.
And our aftermarket business spare part bookings increased 22% led by demand from the Middle East and U S land markets as the event is the ability to cannibalize stacked rigs has nearly run its course, while the improvement is extremely welcome spare part bookings are down 36% year over year and demand for our off.
Sure customers was 43% lower than it was in Q1 and 2020.
As previously mentioned several of our larger offshore customers are and the late stages of restructuring processes and we currently have a large amount of their equipment sitting in there and our shops.
We're optimistic that once capital structures are reset and more F. These advance we will realize a meaningful pick up and service repair and recertification related work.
Our renewables business has a completely different field and our traditional rig business during the quarter, we booked an order for the designed jacking systems and crane for a European wind turbine installation vessel, our Q1 offshore wind order intake was modest relative to the opportunities. We are pursuing which include over $400 million and potential projects that could be.
Awarded before the end of the year.
Looking ahead to Q2, we expect growth and our renewables business, improving aftermarket activity and progress on the rigs in Saudi Arabia to offset the impact of weak orders from more rig capital equipment business, which should lead to results for our rig technologies segment that are in line with the first quarter with that we'll now open.
And the call up to questions.
Thank you.
To ask a question you will need to press Star then one on your telephone to withdraw your question. Please press the pound key.
We ask that you please limit yourself to one question and one follow up please.
Please stand by while we compile the Q&A roster.
Our first question comes on the line of David Anderson with Barclays. Your line is now open.
Hey, good morning Clay.
I have a kind of a near term question and then a bigger picture question.
I guess just starting on the Wellbore side. This is clear stand out this quarter I was hoping you could talk a little bit more specific about the international side International land side of this business and.
And how you're seeing this trending and which would you be would you be cable to call us and inflection yet and I'm just wondering if youre starting to build out some capacity for your middle East customers in advance of a ramp up we're hearing a lot of talk about this on the second half can you just kind of expand on that this is a little bit. Please you bet you bet happy too David and I. Appreciate the question, Yes, we're optimistic that international is now starting to go back to work and <unk>.
And markets, probably most excited about Latin America, and the middle East and as well and expect Russia to pick up a bit.
Typically it's low seasonally through the winter period, but specifically, we're starting to see.
Tenders.
And for for bulk sales of things like bits fishing tools downhole drilling motors and those sorts of things.
And be let and an indication that we think a lot of national oil companies are getting ready to go back to work.
Recently saw.
A compilation of and OS.
See budgets for 2021, and some pretty pretty solid double digit year over year growth rates as expected and generally the.
The group that was included or getting back closer to kind of where they werent and 2019 and so we think that's indicative of.
On the oilfield and international.
<unk> to recover and the way hopefully that North America has I.
I think I think higher crude prices are supportive of that and so we're we're optimistic that debt.
That should continue to unfold.
As we progress through the summer.
Great to hear.
And my other question is kind of a bigger picture topic here.
One other things that investors kind of underappreciated is how the skill sets on the Oss sector are really transferable and transferable to other markets and I think as energy markets adapt service companies at least the best ones the death rate with them, you've probably noted other than just about anybody.
So I guess with this coming energy transition I'd be really curious to know how certain product lines that you have could be repurposed or re engineered for this new type of customary emerging and market offshore wind installation is a very clear example of this transferable skill set but where else could you see this happening and get MOV.
And that's a great question I do think that the skill sets and the.
The.
The technology that we employ in this space the prosecution of large projects at scale and remote locations.
Transferable to renewables and many instances and so I'm actually very pleased as we started moving and exploring the renewables opportunities a few years ago here at Adobe was very pleased to see the overlap and skill sets and the possibilities for <unk>.
On the skills to work.
And the renewables challenges that the world faces and so yes. So you correctly pointed out the wind offshore spaces.
Almost a one for one.
Application on things like jacking systems lifting handling systems.
More specifically we.
We have a lot of experience as you know well and pipe handling and drilling operations pipe rackers those sorts of things that are tightly choreographed industrial mec.
Mechanize and robotics size processes in many instances and so our scientists are working on applying those sorts of things to the process of handling blades offshore and attaching these very long blades to the nacelle on these turbines for instance, so that's sort of a specific example of where we think we can bring a.
Lot of value.
Geothermal business as you know well.
As a direct application of oilfield drilling capabilities to hotspots around the globe that are that are that lend themselves to economically efficient.
Electrical electricity generation and so we've developed more specialized products for the hot temperatures that those drilling operations and counter as well as the hard rock that they encounter and so very pleased to put things like our our fluid hammer downhole.
Downhole device and to geothermal operations in Europe. This quarter, we've developed composite piping systems that can handle the temperature and scale challenges and geothermal.
More and more sort of fledgling opportunities, we're the largest provider of gas dehydration gas processing.
Assistance to traditional natural gas producing operations and so our mono mono ethylene glycol solvent based dehydration technology is very analogous to the solvent based Sidoti stripping technologies that will be required we think for carbon capture and sequestration and so we've got the.
A team looking at opportunities there just all the way around from from metallurgy to composites.
And to mechanical systems to permanent magnets.
And you name it I think theres a lot of expertise that the debt.
Not just in ov, but frankly, the whole oilfield services industry can bring to bear on the renewables challenge.
Thank you clay.
You bet.
Thank you.
Our next question.
Steven Zingaro with Stifel. Your line is now open.
Thanks, Good morning, gentlemen.
Steven.
Jose do you mind, maybe talking about the free cash flow expectations for this year and and how we should think about.
Movements in working capital.
As we think about free cash generation.
Sure. Thanks, David.
Yes.
Mentioned in her prepared remarks Q.
Q1 is typically a quarter on which we consume a little bit of cash due to the things that happen early in the year, but we remain very confident that we will be free cash flow positive.
Due to a full year and so obviously that has implications for the next three quarters that we will generate meaningful amounts of free cash flow. So.
And we feel good about that even despite the fact that we are factoring in and.
And <unk> and the topline revenue through the back half of the year.
We've made a tremendous amount of headway related to improving the processes within our organization tied to better management of working capital.
And so we see opportunities to continue reducing the capital intensity of our business, even with and improving topline. So we finished last year with working capital as a percentage of revenue run rate and the <unk>.
Low 30% range popped up a little bit with the falloff further fall off in revenue that we had this quarter but.
But as we progressed through the year, we see certainly getting at least back down to that range if not.
And to the upper Twenty's to 30 ish percent range, which should free up additional cash cash from from our working capital.
Thanks, and just as a follow up and a follow up to a prior question as well.
When you think about.
Alternative opportunities and I'm sick.
And if we're thinking about it and the near term the offshore wind side.
Any material incremental capex, we should be thinking about as it pertains to those opportunities.
The good news not no.
It's the same plants that make jacking systems for.
Offshore Jackup drilling rigs for instance that make jacking systems that go into these vessel Steven and.
At the same plants that make our cranes lifting systems and so.
Terrific terrific engineering team.
With all their creative innovations and.
So it's a really nice fit for.
And for what we do and and so I'm really.
And as challenging as it is and the drilling space and I think Jose <unk>.
Explain this well in his prepared remarks around around what's going on and the drilling space.
And the wind space is really getting interesting and lash.
Last quarter, we talked a lot about the impact of taller towers, accessing a better wind resource that flow steadier and harder and then.
And these larger turbines with the larger swept area and a bit higher loading factors and efficiencies and that translates to better economics for the wind developers and so since we did our last call of what I'd say is incrementally we're getting more enthusiastic about the prospects in this space and I think it has a lot to do with that phenomenon.
Oems are now offering larger 12, 13, 14 megawatt towers I think as the.
Offshore project developers and run those higher load factors and sort of new economics based on that they are coming up with better results and.
And so I think there's more projects moving towards FID for offshore wind development, and that's translating to a lot of enthusiasm and our customer base and so we've got customers that are looking at exercising options on this space and we get new customers.
Asking about it so on the whole very excited about the opportunity to apply our oilfield skill set directly to that to that opportunity.
Great. Thank you both you.
You bet, Thanks, Steve and David.
Thank you on.
Next question comes on the line of Chase Mulvehill with Bank of America. Your line is now open.
Okay.
And I guess, the first thing I wanted to touch on was just the margin progression here.
Obviously your guidance and cloud is about three 3% EBITDA margin, so a nice little uptick.
Without any help from the rig Tech mind you.
But as we kind of move forward.
And I don't know if you could kind of talk about how you see margins progressing and the back half of this year and <unk>.
Maybe just speaking to when do you think we could actually get back to kind of double digit EBITDA margins and maybe there is a.
Our revenue number that you need to reach to be able to kind of get to double digit EBITDA margins again.
Just kind of want to understand and the path of margin going forward and when we can get back to double digits.
Yes Chase it's Jose.
And I'll take that one and thanks for the question.
And it's a good one but obviously there continues to be.
Less than perfect certainty in terms of how the market environment plays out.
And obviously hearing from us that we're optimistic that things are headed and the right direction and we see opportunities for good pickup beginning in the back half of this year with obviously some improvement in Q2, so as we look ahead towards.
The exit of 2021 going into 2022.
We could easily see our wellbore technologies business getting back to the mid teens type EBITDA percentage rate and the other two segments being in the mid to upper single digit percentage range. So hopefully hopefully that helps a little debt and really it's going to take a little bit more time for <unk>.
Backlogs to rebuild related and art and both.
Both caps and rig technologies businesses.
And then back into the double digit and mid teens type range that we're very confident or not too terribly far away.
And the other thing I guess I'd mentioned related to the question about longer term revenue targets, probably won't get specifically into that you also have to recall the tremendous amount of cost that we've taken out of the organization really throughout the course of the downturn.
From the beginning of 2019 through the end of 'twenty 700 million of structural costs. We've got another $106 million coming out in 2021. So all of that means that we should be able to achieve.
Comparable margin as to what we did in the past at a much lower level.
New run rate and most importantly that will translate into.
Better returns on our capital employed so feel good about the way the company is positioned for the future and.
And we're looking forward to some marketing some market improvements to help with all the internal efforts that we've been.
And working really hard on over the last several years here at apogee.
And I appreciate the color if I can kind of switch gears, a little bit and just talk about rig aftermarket.
During the prepared remarks, you obviously talked about.
Drillers coming out of bankruptcy and.
A lot of equipment sitting on your service centers.
My math was right in 2020, you did about $1 1 billion of rig aftermarket revenues.
And at the peak in 2019, you did kind of a $1 4 billion and so as these offshore drillers start coming out of bankruptcy.
And activity starts picking back up how should we think about how aftermarket revenues progress over the next two to three years do you think the $1 4 billion you did in 2019.
And if you'd be able to kind of get back there and the next two to three years or do you think it's structurally a lower revenue run rate as we go forward.
I think chase.
Probably representative of something Thats closer to steady state in terms of the consumption of <unk>.
Aftermarket spare parts.
Repair services and those sorts of things and so.
And I'm looking forward to getting back to that level and we do think as Jose said in his comments, we do think that there are.
Many of the offshore drillers moving into bankruptcy restructuring has impacted <unk>.
Significantly impacted their aftermarket purchases because when you look at our decline like our Q1 two.
2021 bookings for spare parts just for the aftermarket compared to the prior year quarter was down 43% much more than the 31% year over year decline and the offshore rig count.
And do not think that structure I think it is tied to the <unk>.
Advisor expenditures and those sorts of things that they are going through as well as just trying to navigate the restructuring and so.
As the offshore hopefully gets back to work and rig count picks up they emerged from bankruptcy with cleaner balance sheet and theyre going to get back to buying spare parts of the way that they had and the past the other the other.
And on that we're hopeful about and that area too is that many of these rigs have been stacked in fact, many some of them have been cold stacked and reactivating those rigs is not a not for the faintheart it costs.
Potentially significant.
And the investments to get those rigs back and working and our aftermarket business.
We will be a major part of the reactivation process for many rigs that have been.
Both cold stacked and warm stacked and hot stacked and.
And so we're looking forward to participating in that and then one other thing that we mentioned on our and our prepared remarks, it's probably worth reiterating is the fact that we've received and.
Increasing inquiries around before our engineering group around potentially reactivating rigs. So that's kind of a very very early leading indicators.
And that hopefully some more rigs will be going back to work and the offshore.
Alright, it perfectly thanks, Jose I'll turn it back over.
Thanks, Jason.
Thank you.
Our next question comes on the line of Mark Bianchi with Cowen.
Your line is now open.
Maybe building on Chase's question, there about aftermarket if I, just sort of look and orders broadly.
And mid cap and and cuts it sounds like you are maybe more optimistic about recovery and caps.
How how would you characterize the kind of recurring level of orders that would be required for where the current level of oilfield activity is so if we kind of get past this cannibalization period that might be occurring in both businesses just not building any further rig count increase but just to get back to normal where we are.
Today, and what would you say those types of order levels are.
One other thing is it makes making capital equipment for the oilfield. So exciting is that it's.
It's almost hyper cyclical.
It's a great question, Mark, but really one that's really hard to answer because of that cannibalization phenomenon and it's something that we study what I would tell you it varies by category of equipment.
Across the oilfield.
But our customers have sort of.
Refined that that cannibalization process skill.
Skill.
Very very well and it's the playbook that they go to and it's hard to say, what we do know from prior upturns, though is that the increase can be dramatic.
And it usually goes with some pricing improvement on behalf of our customers. So as we start to see perhaps a day rates increase.
And various categories of equipment.
And that's that's sort of a helpful dynamic for them to go ahead place orders with us with a much higher level of urgency, but but yes.
I would just tell you it's very difficult to.
Quantify kind of what the.
Thank you are really asking what's sort of the normalized level of orders and certainly and you certain categories on the other hand.
And sort of tied to just through this downturn really is the aftermarket business it tends to be steadier.
The consumption of spare parts and consumables.
And services that are part of our aftermarket business is more directly tied to activity and a little less volatile vis vis the capital equipment demand and so that's.
And that's really been sort of a base load for us and so that's what's made it doubly challenging as we've navigated the end of 2020 and and the first part of 2021 is that is spare parts orders fell off for the aftermarket and aftermarket ticked down.
That's that's made it challenging to get through this.
Yes.
Makes sense thanks clay.
Our next question next question for Jose.
Net cash guidance for second quarter.
And that the incremental margin and the mid 'twenty looks.
Perhaps conservative considering out of the last couple of quarters on have evolved.
Always some supply chain issues that impacted first quarter.
And those things.
Being resolved, but maybe that's not the case and what might be might be driving the lower margin guidance. Just curious if you could provide some more color on that.
Yes, Mark.
It's a fair question, but really what it has to do with us.
Shift and in the mix of the business and at this point the orders that we've taken and and some of those businesses have been at more challenged pricing. So near term here a little bit of challenge related to incremental margins within the cap segment, but we anticipate that improving as we move through the course of the year.
<unk>.
Got it thanks, Jose it'd be fair, though we are continuing to battle through some supply chain issues that are going to linger through the through the summer hopeful that there. We've got teams focused on navigating through those.
I think that will be continue to be somewhat of a headwind here for the next couple of quarters.
Great.
And.
Thank you. Our next question comes from the line of Scott Gruber with Citigroup. Your line is now open.
Yes, good morning.
Good morning, Scott.
So looking at the.
Wellbore Tech guide, yes, it does look.
Like the second quarter guidance broadly on par with our expectations for spending growth.
By the global E&P industry.
Is it fair to assume that when you guys think about a stronger second half.
And when we look at wallboard, we should be thinking about growth rates that are in excess of the underlying A&P spending growth rate. It just seems that we're on the cusp of the.
The normal cycle beta for that segment kicking in.
And to get your thoughts.
Yes go ahead go ahead.
Got it and another good question and typically.
With our Wellbore business.
It tends to be and often tends to be a rig activity plus type performance and on the environment that we're expecting over the next several quarters and really over the next couple of years.
We see some additional opportunities to outpace the normal growth coming from a couple of different areas Clay spent some time talking about.
The new products that we're delivering into the market share gains that we've been making over the last several quarters. Those things will continue to contribute to hopefully some outsized growth as well coming off of the absolute bottom of the cycle to where we're just now starting to see some select opportunities to <unk>.
Regain.
Reising and so that will further boost.
Growth over the coming quarters.
Got you and then just thinking about the recovery here.
Wellbore picking up accelerating off the bottom aftermarket business coming back.
But obviously you had some supply chain issues.
Largely out of your control and fiberglass.
And given what we're hearing across the the.
And the general economy with issues cropping up as the global economy starts to snap back or their risk outside of fiberglass with supply chain issues.
Confine to the price inflation or the real kind of delivery delay issues that you could face.
Peter supply chain, just some more color on kind of around those issues as things ramp back up and.
Any commentary on and your ability to secure and net pricing.
And beyond input cost inflation.
It's a great question, Scott something we've been very focused on its Ben.
Suffice to say, it's been a very unusual year and sort of the latest manifestation of that is what we're seeing and our supply chain.
We have talked a lot about resins and fiber glass, we do think residence.
And kind of sort themselves.
And sales out and the second quarter and hopeful and the third quarter will sort out our supply chain challenges for fiberglass for that business, but as you can appreciate many if not most of our business units utilized steel and.
And given the.
The diversity of our product offering.
We utilize a lot of different kinds of steel so lots of different metallurgy that are sourced from various mills around the globe and that's probably where we're seeing.
Pricing increases and sort of supply chain challenges most acutely.
Put in perspective.
Some business units, we're seeing no change and steel prices others are seeing very high double digit changes sort of sequentially. So it's kind of all over the map and it's a function of which mills are up and running post COVID-19 and which are still not broadly speaking I think the mills and Asia are getting back to work a little more quickly than the mills and Europe, but that's an area that we're devoting a lot of Ah.
Tension to to make sure that we stay ahead of it on pricing I think we've had good success and our business units, putting in surcharges and those sorts of things to cover higher raw material costs that we're seeing but.
And I think as as the economies get back to work and these these nils and other raw material <unk>.
<unk> kind of get back up and running I think I think the supply chain will sort itself out.
So I don't think this is a long term problem, but rather just the next quarter or two that we'll have to put a lot of energy into making sure that debt.
And we navigated success.
Successfully.
Great. Thank you.
Thank you Scott.
Thank you. Our next question comes from the line of George O'leary with Tudor Pickering. Your line is now open.
Good morning, and good morning Jose.
Hi, George.
Yes.
And then during this time.
Thank you.
In addition to that equation.
Curious from an organic growth standpoint, if you guys alright.
Looking a little bit counter to that popular viewing.
And some opportunities on the oil and gas side of the business given the very impressive balance sheet, you guys have and it.
More attractive from a valuation standpoint, and that legacy oil and gas space.
Yes.
Good question George the short answer is yes, we are looking.
But.
And what we found is a pretty wide difference between the bid and the ask and so we.
And have had a couple of conversations with with some folks for interesting.
Franchises opportunities technologies, and those sorts of things but.
As we've discussed in prior.
On a quarterly calls I think there is frankly, a higher level of capital efficiency and more value for money.
And inorganic.
And.
Technology and product developments and so most of our focus has been there.
But were transactional we're opportunistic and we continue to look for opportunities to enhance and grow our franchises both in oilfield as well as renewables and and.
And.
Continue to continue to.
Look at opportunities to thoughtfully and profitably deploy deploy capital on that direction, but to sum it all up we haven't had.
We haven't made an acquisition and the oilfield and quite some time now and it's largely just because there's a difference in valuations.
Okay, Great that's very helpful and then.
Commentary on the press release and on the call and tell US there was interesting to me I remember that seem to be global.
Some of them and I have just a few short years ago. We spent some time on some land driller and the U S and particular that work.
And we're deploying it more frequently and and purchasing incremental screen debt cost reduction and 20 hours. A 20 minute seems like that could maybe re emerge as a theme I'm curious how dialogue is going with customers posted sales.
And whether you think that has a better shot at it and making a splash and the onshore market.
U S offshore market, just kind of how you think.
That played out and what the customer feedback has been.
Yes. Good question. Another good question George Yes, it's an area that we are excited about it's an area that has been steadily growing and.
Coming and more meaningful part of our business and.
We're gaining more and more traction with it and we've worked on several different on projects and several different continents. As you pointed out U S land on.
Offshore and recently started working for a major NOC and the middle East on some high profile land projects and things are going very well also particularly excited about the latest generation of the Intel share of wire drill pipe.
And that you referenced.
Technology that allows us to significantly reduce the total time to manufacture other product and also <unk>.
Very importantly, significantly reduces the amount of time and effort needed to service maintain and repair.
And that technology out in the field, so the incremental cost to.
To add the wiring technology to the drill pipe.
Has been significantly reduced which should lower capital cost requirement and a market where capital is very very precious and also lower day to day operating costs. So think that that certainly has potential to help open the doors.
To market opportunities.
Customers have been a little bit more challenge in terms of thinking the economics there.
And may not work for them so more.
More to come on that product, it's still early days, but.
It's ramping up pretty nicely.
Appreciate the color thanks, guys.
Thanks, George orders.
Thank you.
And with today's question and answer session I would now and turn the call back to Mr. Clay Williams for closing remarks.
Thank you Sarah and thanks to everybody for joining US today. It was obviously, a very challenging quarter, but we're optimistic things should get brighter as of year progressive and reflecting on what's been accomplished by our team.
Just can't thank them enough extraordinary reduction and our fixed costs out of our business reduction on our working capital intensity of the strengthening of our balance sheet, all while continuing to develop new products and technologies I think we're very well positioned thanks to the debt and Ob team.
And so I'm very grateful to our employees that are listening and their colleagues have positioned the company for the recovery. So thanks to everybody for joining US today, we look forward to discussing our second quarter results with you in July and in the meantime, please be safe. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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