Q2 2019 Earnings Call
Good morning, and welcome to the oil States International second quarter 2019 earnings Conference call.
My name is in there and I'll be the operator for today's call.
At this time, all participants on a listen only mode.
Later, we will conduct a question answer session.
During the question answer session. If you have a question. Please press Star then one on your Touchtone phone.
Please note that this conference is being recorded.
I will now turn the call over to Ms. Patricia Gil.
Investor Relations.
Patricia you may begin.
<unk> and good morning, and welcome to oil States, a second quarter 2019 earnings conference call. Our call today will be led by Cindy Taylor oil States is president and Chief Executive Officer, Lloyd Hajdik oil States as executive Vice President and Chief Financial Officer, and we are joined by Chris Cragg Oil States Executive Vice President operations.
Before we begin we would like to caution listeners regarding forward looking statements to the extent that our remarks today contain information other than historical information.
Please note that we are relying on the safe harbor protections afforded by federal law.
Any such remarks should be weighed in the context of the many factors that affect our business, including those risks disclosed in our Form 10-K , along with other FCC filings. This call is being webcast and can be accessed at oil states is web site and a replay of the conference call will be available one and a half hours. After the completion of the call and will be available for one month I will now turn the call over to Cindy.
Thank you Patricia good morning to all of you and thank you for joining us today to participate in our second quarter 2019 earnings Conference call.
Our reported results for the second quarter showed sequential improvements and two of our three business segments with consolidated revenues and EBITDA up 6% and 24% respectively.
In particular, our offshore manufactured product segment was a standout in the quarter exceeding the upper end of our previously provided revenue and EBITDA margin guidance ranges.
In addition, we received two notable project awards during the second quarter, leading to a 21% sequential increase and backlog, which totaled $293 million at June Thirtyth, resulting in a 1.6 times book to Bill ratio for the quarter. Our June Thirtyth 2019 backlog level. It's the highest it's been in three years.
In our well site services segment revenues increased 7% sequentially due to stronger international activity levels, and our completion services business, coupled with some recovery in our land drilling operations.
And our downhole technologies segment results for the quarter were negatively impacted by the ongoing development of our integrated perforating gun system, the cost a field trial and $1.4 million of inventory write off due to product design changes.
Our cash flow from operations in the quarter was strong at $32 million.
A portion of that cash flow was used to repay $21 million of our revolving credit facility debt outstanding.
Well I will take you through additional details of our consolidated results and also provide highlights regarding our financial position I will follow with more details by segment and provide additional comments on our guidance and market outlook.
Thanks, Andy and good morning, everyone.
During the second quarter, we generated revenues of $265 million.
While reporting a net loss of $10 million or 16 cents per share.
Our second quarter EBITDA totaled 26 million.
With an EBITDA margin percentage up 10%.
Reported EBITDA was negatively impacted by 1.3 million of severance and facility closure charges.
As we continue to adjust our cost structure and right size, our global operations to better align with the industry outlook.
We also reported 1.4 million of inventory write offs.
Due to product design changes associated with the continued development of our integrated perforating gun system.
During the second quarter, we generated $32 million in cash flow from operations.
And invested $14 million in capital expenditures.
On a year to date June 30 basis, we have generated $34 million of free cash flow.
And it paid down $37 million, an outstanding borrowings under our revolving credit facility.
At June 30.
Our net debt to book capitalization ratio was 17%.
And our available liquidity position at the end of the second quarter was approximately $108 million.
Inclusive of cash on hand totaling $12 million.
Regarding our common stock share repurchase program.
Our board of directors extended the program for one year to July 29 2020.
We have $120 million remaining available under the repurchase authorization.
In terms of our third quarter 2019 consolidated guidance.
We expect depreciation and amortization expense totaled 32 million.
Further we expect net interest expense to totaled 4.8 million.
And corporate expenses are projected to totaled 12 million.
We are lowering our total capital expenditures for the full year 2019.
To range between 60 and $65 million.
Compared to prior guidance of $65 million to $70 million.
And at this time I would like to turn the call back over to Cindy who will take you through the details for each of our business segments.
Thank you Lloyd a leading off with our offshore manufactured product segment, we generated revenues of $102 million EBITDA $16 million and ice segment EBITDA margin of 16% during the second quarter. This represented a 16% sequential increase and segment revenues and a 45% sequential increase in segment EBITDA. Our improved results were driven by an increase in project driven revenue and short cycle product sale, coupled with improved facility cost absorption at the higher revenue levels, our incremental EBITDA margins were strong at 35% as a result.
As I mentioned in my introductory comments, we received two notable project awards during the second quarter of 2019, which included production facility equipment destined for southeast Asia and connector products destined for the middle East.
Our orders booked in the quarter totaled $163 million, resulting in a 21% sequential increase and backlog and book to Bill ratio of 1.6 times.
At June Thirtyth, our backlog totaled $293 million, which is our highest reported backlog since June 32016.
Customer conversations remain constructive and visibility for additional project awards is developing favorably as we progress into the second half of 2019 and into 2000.
Into 2020.
In our well site services segment, we generated $116 million of revenues $18 million of EBITDA and our segment EBITDA margin averaged 16% in the second quarter 2019, compared to 12% reported in the preceding quarter.
These results benefited both from higher international activity and improved margins and our us operations.
Utilization of our land drilling rigs averaged 20% in the second quarter of 2019 compared to 12% in the earlier quarter.
In our completion services business, our revenues grew 3% sequentially, which was driven primarily by international activity our incremental.
Completion services EBITDA margins were 119%.
Sequentially, reflecting our cost reduction initiatives and an improved mix of international and Gulf of Mexico work.
Overtime, we believe that completions related activity and international markets will continue to grow and we are proactively expanding our completion services offerings abroad.
In addition to growing internationally, we are focused on research and development efforts within the completion services business and are currently developing stepped out technology offerings responsive to customers' needs.
By continuing to invest in our product lines that are tied to well completions and longer lateral lengths and us unconventionals.
We are able to maintain a leadership role in the equipment and services that we offer to the industry.
One such product line that is pushing the limits of completion technology is our temperature hotter pool tool and bottom hole Assembly, which holds the record in West, Texas, where it mill down 94, Frac plugs and a single coil tubing run all 94 plugs were mailed out and 66 hours without tripping out of the hole and without short trip, resulting in significant well cost savings for our customers.
And our downhole technologies segment, we generated revenues of $47 million and EBITDA of 4 million with an EBITDA margin of 8% reported in the second quarter.
In addition to the impact of the sequential decline in revenues during the quarter segment results were negatively impacted by ongoing unabsorbed cost associated with field trials are integrated gun system, coupled with $1.4 million of inventory write offs due to product design changes.
These design changes are considered one off items and part of the field Trialing testing and development of new products.
As trolled products are brought to market, our technical solutions group will become more billable and should generate revenues sufficient to offset their cost.
We expect to recover market share and sales in our engineered perforating solutions business once our proprietary integrated gun system is fully commercialized.
Field testing and early commercialization efforts continue on our integrated gun system addressable switches and other associated downhole tool.
The lights are inherent in bringing new technology technologically advanced products to market.
We continue to incorporate key field trial learning to improve the ultimate integrated gun system, which we plan to commercialize in the fourth quarter. This is a one quarter delay due to product design changes.
I would now like to share our thoughts on our outlook for the third quarter. We expect to continue to show sequential growth in the third quarter. Despite a north American land market that is expected to be slightly down the majority of our revenue and EBITDA growth in the third quarter is expected to be generated by our offshore manufactured products and downhole technologies segments.
In our offshore manufactured product segment, we are forecasting that third quarter revenues for this segment will range between 101 hundred $10 million Boyd by higher starter, starting backlog level, which will begin to convert and the greater major project revenues.
Along with improved demand for our short cycle products.
Segment EBITDA margins are expected to average, 15% to 17% depending on product and service mix.
We estimate that third quarter 2019 revenues for our well site services segment should range between 114 and $121 million with segment EBITDA margin is expected to average 15% to 17%.
Our downhole technologies segment, we currently estimate that our revenues will range between 46 and $52 million with segment EBITDA margins, averaging 14% to 17%.
To conclude we continue to invest in research and development efforts across all of our business segments in an effort to bring efficiencies to the industry and to our customers.
While modestly increasing expectations for the third quarter compared to the second quarter carefully controlling our cost and continuing to generate positive free cash flow, we strive to generate sustained returns for our stockholders.
In a challenging market environment.
Before we close I would like to highlight what I see as the near term drivers of improvement for oil states.
First expanding backlog in our offshore manufactured products segment provides revenue visibility into the future.
Also by generating a higher baseline of revenues in this segment, we are better able to absorb our cost and deliver improved margins.
Second international contributions will become increasingly important to each of our segments in the months and years to come.
We are positioning our operations to capture incremental revenue outside of the United States.
Third we need to recover market share and our downhole technologies part of writing business and we are focused on doing so.
Lastly, we have been a technology leader within our industry for years and continue to invest in research development and new product initiatives.
These initiatives span multiple product lines and should bear rewards over the longer term that completes our prepared comments.
Scenario would you open up the call for questions and answers at this time.
Yes, absolutely. Thank you we will now begin the question answer session.
If you have a question. Please press Star then one on your Touchtone phone. If you are using a speakerphone you may need to pick up the handset first before pressing the numbers.
Once again, if you have a question. Please press Star then one on your Touchtone phone.
And our first question comes from Marshall Adkins from Raymond James. Please go ahead. Your line is open.
Good morning, Simeon guys.
So.
It seems like on this offshore.
Theme.
We have we're setting up for kind of a sustained ability to grow.
And.
Relatively flat commodity price market.
We've heard from from the bigger guys that Theyre looking to offer international continues to grow for the next couple of years.
That's what's feeding the improvement in this this business number one number two.
Could you talk about.
The margin improvement via pricing versus absorption.
Yeah, Good morning, Marshall and thanks for your questions I think they are absolutely great ones.
I think you know if you just kind of track the industry right now Weve spent three to four years of customers kind of de risking their capex investment dollars and that created a shift away from deepwater activities as customers really tried to high grade their project rebid projects and lower their overall completed cost of the product project in order to respond to lower commodity prices, which most people believe well sustain themselves at some level over the course of time I think whats really happening right. Now is customers have landed on key projects that I think are very economic at lower commodity prices and those are now beginning to come to market and we've always enjoyed high technology positioning some proprietary products that we've always felt if we could just get a little bit of tailwinds from improving activity that we do.
Well and I think that is clearly reflected in our backlog, which is up to a three year high at least we're not forecasting we go back to peak levels. We attained in 2014, but over the course of that three to four years. We've also had to be responsive in terms of repositioning manufacturing capacity to capture near term demand. We've brought some newer products to market that are a little more land sensitive. The good thing is we have those and our suite now and we're enjoying improvements in backlog now more so than our towards our major project work, which again gives us visibility at least for about 12 months in terms of.
Revenue generation and important for us cost absorption like many companies, we haven't sat around and waited for the market to retire and we've done a lot of cost rationalization facility streamlining such that we feel like as the market does recover our margins should be resilient and respond to that and I think we're already seeing that with the 35% sequential incremental that we had in offshore products even though.
This is fairly early days in terms of backlog build and revenue generation. So.
I clearly feel like we do have a runway for improved sustained higher revenues better cost absorption better margins.
As we continue to build out that backlog, but again, we do hope that we retain that base load of short cycle work in service work as well.
So so you're making it sound like a lot of the improvement is margins through better absorption.
But you have some of these new products are you getting any pricing traction at all there or is it just all absorption.
Well to be honest with you we are continuing and we have every year to invest in research and development efforts. We've had many kind of cost and I'm speaking specifically to offshore products is permeates every segment in every business really.
But as it relates to offshore products, we have product new product introductions, but most of our backlog development to date has been existing technology, even though we may have an upgraded that existing technology I would say any kind of new product deliveries that we've been working on is yet to bear fruit.
Okay. Thank you.
Thanks Marshall.
Thank you. Our next question comes from Ian Macpherson from Simmons. Please go ahead. Your line is open.
Yes. Thanks.
Cindy I think the word you were looking for 1.3 to 1.5 book to Bill for products coming into the year, you're well ahead of that and you mentioned that you had positive.
Visibility for orders in the second half as well would you be willing to share an updated target.
Based on the visibility for the second half or is it too early.
Yes, you know, it's always worry some to know what quarter.
Backlog awards here, but I would just generally side we would.
Probably take out the low end of that range and up it just a little bit I don't want to go to 1.6 at this time, so maybe 1.4 to 1.5, but clearly biased to the upside based on the first half.
I always say book to Bill at the factor of two things, though which our bookings and billings and if I keep growing my revenue that target, obviously moves up as well.
Yes sure.
One downhole.
No that was the one thing that was kind of well outside of expectations of the low end and the and the second quarter I know that you see a pathway towards normalization, but.
Besides I mean, you talked about the under absorption and the write down issues on the margin side, but with the revenues down 25% sequentially in the second quarter what else.
Was it play besides just the slow roll with the commercialization of integrated gone is there.
Is there pricing pressure that is showing up or do you think of assist market share within the quarter that you can do you can recapture.
Yes, I mean, that's the tough thing, there's a number of things and.
Does the downhole side of the market is changing rapidly in response to what customers are looking for at the well site I'm pretty sure you've heard that from all the competitors in the space.
Throughout the first half of this year, but maybe more particularly.
On second quarter conference calls with that as an example, we've all moved from long guns to short guns and so the short guns everybody's talking about most of that the key third party competitors are offering that including oil states, but with that means you have to let lighten up on the long gun inventory you have at reduced pricing.
So they're part of that is yes, that's all about pricing at the end of the day. It's also responding and staying ahead of market technology changes that.
You know even mix of customers has changed and so there are some good things in the sense that we have.
Hi quality technology, we've been a market leader on technology.
Along this space and I, clearly think that weekend keep up or stay ahead of.
Those changes in the market, but all those things you mentioned have a factor, but I would still probably point to a couple of things, which is not number one the market changes around perforating systems moving more from individual product sales to more systems sales in the fact that we're still work. We're working on what we think will be one of the best solutions by the market, but that doesn't always work perfectly as I've communicated to investors before but the good thing as our field trials are progressing slowly improving we did make some design changes along the way it did lead to a large write up of inventory that we had built up in order to conduct an appropriate level of field trials, but again I view that as kind of a one off item. The other thing is just kind of the customer base and you've got NPS contracting directly sometimes we work with wireline companies theres certain amounts of vertical integration.
And building on.
In the in the market. So we have to pivot just a little bit around that shifting customer mix and they all kind of on the margin has some impact, but I guess I would just like to leave all of you with the thought number one this is.
Key technology that our customers want we are very committed to delivering top end technology to our customers right now the whole segment is 18% of my revenue base and so while I'm very focused on bringing a top quality integrated gone.
To market is certainly not all about what this company.
That is built upon and even the segment has many product lines not just.
Obviously been in an integrated guide.
That's helpful. Thanks, and did I hear you say before that the commercial ramp is now Q4 and Q3 for the integrated.
We believe so.
And in addition to we've had multiple cost customer contacts and feedbacks about.
Our systems and.
We are just cautious that we want it to be a very high performing system before we bring it to commercial sales, obviously I do think that the process. We went through a delight us about a quarter.
Okay.
Thank you and maybe maybe I should add a point of emphasis on that we don't have any revenue in our third quarter guidance that is predicated on.
And if I could go on sale.
Got it.
Thank you. Our next question comes from Cole Sullivan from Wells Fargo. Please go ahead. Your line is open.
Hi, good morning.
Backhaul.
You guys mentioned growing more internationally and.
In services.
How much investment do you see as needed to.
Achieved that and then does that.
Impact or biased higher any 20, 2020, capex levels to get that versus 19.
What we're really doing is not that capex intensive we're working with some partners in various regions as opposed to spending a lot of capex for on the ground facilities. We've been in many of these markets really working on a consigned equipment and rotating personnel basis. We are finding improved go to market strategies and were also.
Beginning to leverage some of our tools that have not really been deeply penetrated in international markets. So as Lloyd mentioned were actually modestly reducing our capex guidance range as opposed to increasing it and as I commented in my notes part of well sites significant success in terms of incremental margins was largely associated with a better mix of international and Gulf of Mexico work.
Relative to our very key base North American activity.
Okay.
And you guys have had.
Good strong free cash flow this year.
With the movie with the movements and downhole tools over the back half and North American headwinds.
How do you kind of see working capital trending over the second half and then also any kind of initial.
Peek into how you guys are thinking about 2020 capex versus 19.
Yeah, I'm going to let Lloyd give you specific comments there I would just generally side that you know if we have ebbs and flows as generally around mix of segmental contra contribution towards working capital needs and what does that mean, well I have a 1.6 times book to Bill ratio. So I fully expect this offshore products began to increase top line revenues, you'll have some working capital needs with that but I'll also leave you with the thought that makes me happy as I can be because that segment happens to be my highest free cash flow generating business that I have and so if I have a little working capital over time, as we expand that business I'm fine with that but I'm only like to really answer. Your question. Yes. Thanks, you did answer the question that exactly.
No I'm forecasting a slight working capital build in third and fourth quarter.
But certainly expect to be free cash flow positive for that the second half of the year.
And we'll target the free cash flow like we did in the first half of the year largely.
Designated to.
Further debt reductions.
Okay, and then any.
The initial kind of peak on 2020 capex levels often 19.
Not yet.
Okay.
Thanks, I'll turn it back.
Okay.
Thank you. Our next question comes from George O'leary from Tudor Pickering Holt. Please go ahead. Your line is open.
Morning, Cindy long and Chris.
As of March form.
First question just curious it seems like overall completion activity in the us for the second quarter was.
Up modestly, albeit tailing off at the end of the quarter, but just what we've seen from other folks who have perforations businesses and they are selling similar tools to a you guys cells.
Generally it seems like volumes were lower in the quarter.
Not even just thinking about someone taking share, but just volumes for perforations.
For guns, and energetics and all that stuff seem to have been.
A little bit lower so I'm just curious do you guys typically see customers if they are going to slow activity and a destock their own internal.
Inventory was that part of what was playing out this quarter or is it really just share gains by one player another someone kind of pushing more aggressively into the market just curious how customers behave as they as completions activity. It looks like it may have lower.
In that business.
Yeah, I'm going to just kind of side, we had a mixed result, there with some share gains in non perforating product lines, because I think it really focused solely on perforating.
But if I look at some of our other product lines, whether it's.
You know downhole plugs as an example told that falls.
Decommissioning products, there to actually sit where some increases there so I wouldn't just isolate on perforating.
And I really don't think that customers hold a lot of inventory of perforating. It could be that you know all of us have some out and distribution channels or some add on out on the field, but I don't think that.
Inventory stocking or Destocking is really.
An item there I'd have to say if theres some kind of modest.
Industry kind of delay is probably one customer specific.
Cindy.
<unk>.
This is the conference operator, please stand by.
She said that the standby yeah [laughter] sufficient.
Yeah.
This is the conference operator, we're having some technical difficulties. Please stand by thank you for your patience.
Thanks, Tim.
Having seen some technical issues.
Hi, George.
Well I don't know.
<unk>.
Would you like me to go into the next question.
That would be great.
We apologize to everybody on the phone fallout every phone line apparently has gone down so.
Not a problem. Our next question comes from Kurt Hallead from RBC. Please go ahead. Your line is open.
Hi, good morning.
Hi, Kurt.
Hey, Thank you for all the color you provided so far Cindy and.
I guess the.
Follow up question I have would be along the lines of the North American market, it's pretty clear that the the offshore business has some pretty good momentum as does it does international and clearly a lot of question marks around.
They dynamic shifting dynamics in the North American market.
Yeah, you know as we as we move beyond that to say to the third quarter Cindy can we start thinking.
Kind of through cycle dynamics, you know DTC, so really the structural changes in place.
And in how you guys are going to have to run your business and the overall cost structure of the business and so when you're having conversations about you know, bringing on new technology like you've already mentioned.
You know is the discussion with the client base going to have to be a little bit different and make sure that you actually get compensated for the technology, you're bringing any insights on that would be really helpful.
No current those are just fantastic questions and we're not alone obviously and doing everything that we can to respond and what I'll just characterize as a fairly challenging market environments and we've all probably a benefit and also been guilty here when crude prices are really hot customers spent fairly and we'll try to grow production its Alex I as one of the greatest success stories in the United States.
In terms of crude oil production, but the reality is I think we as an industry have been successful to some degree that we'd gotten ahead of ourselves and just in terms of productivity and you know I know you know who follow the industry as long as I've been in it that.
What's really happened is growth and U.S. production has exceeded global demand and and it's created an out of balance situation in fairly small movements in terms of that supply demand balance obviously have a significant in fact, I'm fine whether it's ours or our customers I'm just site, we've got religion, and what does that mean shareholders. Our had had significant underperformance from the industry as a whole now for a number of years and we're all committed to making this work at lower crude oil prices overall and I think we've demonstrated technical capability to do that but to answer your question, it's multifaceted, but number one.
We think of R&D investments much like Capex, meaning you need to budgeted precisely you need to know that target market and you need to assess it to see if it achieved the returns that you expected it to.
We don't want to stop investing in technology that has been our differentiator as a company or well before I was associated with it and so we will continue to do that but clearly we do look like looking for a payback.
On those investments I would say the other kind of characteristic you are hearing from everybody is.
We probably ought to be targeting capex for what I'll call mid cycle activity, we tend to always target capex towards the peak and on paper it looks like a great return, but when you have the extreme cycles that we've had to live with over the years. I think you have to question did you really get the returns that you thought you would but I challenge any business to lose 850% to 80% of the revenues as this industry has gone from 14 to 16 and now recovering off of that and say that you came out unscathed.
But we as a company have been constantly streamlining our cost structure facility rationalization for all of our segments quite frankly geared towards mid cycle returns.
We are investing in higher technology, when it helps our customers be more efficient make more better wells and therefore become more cash flow generating on their own they have to be kinda they have to be healthy for us to be healthy at the end of the day. So.
Again, I'd say the other macro shifts that we've been frustrated, whereas when you leave a real differentiated market that is deepwater highly technical highly challenging to some degree international and shift all the activity to land. It is more competitive and particularly you got 50% of the land rig count in one it's a big basin, but one basin in the United States is not the best profile, but we've responded to it and we're coming out of it and I think generating the sustained free cash flow that you would want us to do also think that some of the private equity participation. In this market is going to wane, which a frustration to us has always been having the technical capabilities the reputation of quality procedures and yet having customers briefly give money to what I'll call lower in PE backed startups in a given basin.
It's been frustrating so I think we'd like to see farmer.
Competitor characteristics in the market and I think our customers feel like they have plenty of.
Support out in the market and of course, they are taking advantage of it through price negotiations.
But I think they also recognize that the industry as a whole has to be healthy and generating a sustainable our ROI fee for anybody to do well.
So while it's been painful for many I clearly think that the trend line in terms of what you'd call sustainable improvement is underway.
But it's really thoughtful and expensive and answers Indiana.
Is this dynamics are definitely not not in terms of what you're facing but obviously what investors are facing as well. So I appreciate all that color and insight. Thank you.
Thank you card.
Thank you.
Our next question comes from Stephan.
Good girl from Stifel. Please go ahead your line is open.
Thanks, and good morning, everybody.
Two things if you don't mind, I guess I'll start with offshore.
And obviously you had a really good quarter and I'm I might have missed this earlier, but when you when you're looking out now for the next few quarters and I guess also the the bookings in the quarter, how does the pricing structure look like in that business and how should we be thinking about the potential.
Order flow Flash book to Bill as we go forward here for the next few quarters.
Well. This is obviously in contrast semi well site services segment there's.
A greater material content, obviously in my offshore manufactured products segment.
To some degree these are all spent specifically engineered projects, we do all the materials back well in advance lock in prices and I have been well I think we've been capable and successful in bringing cost down the operators is really not at the expense of margins. There are clearly times, though where we've done some internal reengineering of our products that bring down pricing for us and therefore for our customers as well we've had to do that obviously to be responsive to the market, but our margins hold in that scenario.
So I just haven't felt like we've had to go out and buy backlog if that is the genesis of the question.
You know I mean, it was it was more.
I wasn't.
And Brian that always sort of just thinking about your margins have advanced in offshore products you want a lot of work.
Obviously activity seems to be improving I was just curious how we think about the margin trajectory going forward.
Well again I you know our Incrementals were strong at 35% I think our overall margins for the segment came in at 16% earlier in the year, we guided exit right in the high teens and so it's kind of tells me we are a little bit ahead of the game in terms of achieving that was 16%.
Coming in in the second quarter, so pretty happy about that progression there. The other thing I would just generally say is topline matters.
When were below $100 million of revenue in a quarter cost absorption is not exactly where we would have it be but if we can continue to accelerate that top line.
We believe our margins will respond accordingly.
Great. Thank you and then.
As a follow up.
The what I heard in the in the field over the years was that the jury dynamics downhole bullish which were at the very high end of the spectrum.
And then.
And obviously the market is moving to the integrated.
Systems, but as you as you get there as you get a product rolled out I mean, it would seem that you'd start to see pretty good traction and I was just curious.
Is it really the delivery system, an integrated system that could that critical.
Even with what.
Yeah, I've always perceived to be kind of.
Our industry, leading or certainly the very high end of the spectrum as far as the downhole bolster juergen Sir.
Well, yeah, I mean first of all I would just generally say that we and others would agree that we do think that.
The shape charges.
Our very very important in terms of response that this downhaul than we do believe we are a leader with respect to our site charge technology. So I'm going to agree with that we do still sell those we sell downs individually charges individually and a lot of the other assassinated.
Perf riding equipment, but you heard it wholeheartedly from majors to.
Our more direct competitors, though that the field delivery system preference is more of an integrated gone by this but I'll tell you and Steve and I know you've done extensive research on that and understand it this hub.
There is a great variety and what the industry is characterizing as an integrated gun system and you know there are some commonalities in terms of what.
People are speaking, but there are differences as well and.
I think that's where we are we're trying to not only offer kind of the generic integrated gun system, but improve upon what the market is looking for and that's where we've had some technical challenges during the quarter that we're working on but if you just want to say.
What does the integrated gun mean, I mean, you're going to focus on the characteristics that are being.
Intrinsic site offering at the well site factory loaded with little to no borrowing on location, that's a pretty broad spectrum, though of capabilities and characteristics.
At the gone and there are many other things that go along with it.
But to summarize.
The market is generally I'm going to say use the word general telling you they want more of an integrated offering but.
In contrast, if you have a wireline company he's already invested in gun motors and gun loading facilities. They are making their product specification needs may differ from an operator that just one thing fully deliver its highly integrated system that perform the best in the market and so it may be that the market evolves around kind of versions of an integrated gun system and again with the research you've already done I think you appreciate and understand that.
Great No that's very helpful. Thank you.
Thank you.
Our next question comes from Sean Meakim from Jpmorgan. Please go ahead. Your line is open.
Thank you good morning.
Good morning, Sean.
So I appreciate the commentary on the topline for down hole that was probably my biggest question out of the release. So thank you for that feedback.
As we look to re queue and the guidance that you put out can you just talk about how you built that range and your comfort level given all the moving pieces in the persistent market as well as the drilling broader uncertainty in north American activity as we get through Threeq.
Are you speaking to a specific segment.
Yes, sorry, I was so the the downhole topline in the second quarter.
Well the biggest question I think out of the release. This morning, you gave a lot of feedback on that and I. Appreciate some of the moving pieces in the second quarter.
I was hoping to then maybe unpack how you built the range, where your top line guidance for down hole in the third quarter.
Given all those moving parts within the power systems business.
That that market as well as theres plenty of uncertainty just in terms of how activity is going to trend through the quarter in North America. So I was hoping to get yeah.
More detailed there please.
Okay, I will certainly do that and we gave you a range obviously on the low end of that ranges from kind of a non heroic I will call. It the upper end of the range would suggest pretty good movement from where we were in Q2 and I would really focused on.
Kind of thing that would impact both revenues and margins number one we continue to think we're growing market share in some of our non perforating product lines and so we've got some embedded growth and this is really you can find that that's not just so far what do we are right now is having customers come in and line up products early in the quarter now does that mean that sustains through the quarter no, but we believe that some of our non perforating revenues will grow.
Sequentially Q2 to Q3, even if the north American market.
Softened a bit and that's based on customer indications early in the quarter. That's number one number two I keep mentioning this technical solutions group that has been a significant unabsorbed costs throughout the first half of this year and this is more obviously, it's a little bit of topline, but it has more margin implications that if we can get a little better absorption at our cost associated with that technical solutions group, it'll obviously improve our margin profile, which again, we got into a better margin.
Clearly the Nonrecurrence of 1.4 million write off of product design changed inventory.
Benefits margins and then the last thing that.
I, probably should have mentioned in the course of doing the development of the integrated gun system, obviously part of that.
And then.
Integrated switch and so we do think we will bring that switch to market individually as a product with beginning in Q3. So those are kind of the three major elements that lead to.
Improved sequential margins for downhole.
Suffice it to say, we none of us were satisfied with the second quarter for the Downhole technologies segment, we are highly focused on.
Improving performance in that segment, but those are kind of the three major areas really in addition to some improved manufacturing.
Cost efficiencies as well.
Thank you for that that was very helpful. That's exactly what I was looking to understand.
In offshore manufactured products given all the efforts to improve the business through the downturn some of the shifts in mix have taken place you're now growing backlog pretty significantly you're at a three year high.
How does throughput cycle times look this time around compared to last cycle. Just curious how we should be thinking about that from a modeling perspective now that you've started to build backlog will continue to do so this year.
How does throughput cycle times look how should we think about that progression going forward.
Yeah right now the major product backlog that we're building is comparable to the lead times that we've had in the past because our key connector products and it's also our production infrastructure. So right now the trend lines are similar in terms of the forward 12 month.
Revenue generation short cycle and services, you're very familiar with they are not very backlog intensive. So you will model short cycle and services I would say somewhat flat sequentially.
Depending on ebbs and flows there.
We've talked in the past that we have some military work and there is a likelihood as we gain some incremental military backlog that tends to be more multiyear focus, but we can update you on that if and when that order is received.
Very helpful. Thank you for that feedback.
Thank you.
Thank you. Our next question comes from Connor Lynagh from Morgan Stanley . Please go ahead. Your line is open.
Thanks morning, everyone.
I was wondering if we could.
Cindy go back to your comments around the challenges and in earning returns in North America.
In particular I guess.
Could you discuss.
Are there any any areas of your product portfolio.
These businesses aren't earning their cost of capital.
Perhaps potential to step back or at least cut costs further.
So I assume this is pushed services, yes anything but.
Just thoughts on that.
No and again, we're really focused on every product line in every business line to return two things number one free cash flow generation and ROI see at the end of the die and to some degree our earnings before interest and taxes. Our EBIT is burdened by heavy capex from earlier years, you hard Lloyd talked about our.
The update to our 2019, capex being a little bit lower and I can just assure you I don't know how else to manage a business other than focused on return on invested capital, but I'll also tell you with the dramatic commodity price swings in activity declines it's been a challenge to rightsize the ship.
Responses to that.
There are a couple of areas that we're focused on but most particularly or continue to do a review of our drilling services as a small business line, but when we kind of have the gut check of 12% utilization in the first quarter, we did improve in the second quarter to 20.
But we're really trying to find ways that and that's a very very small piece of Wellsite services, but it is indicative of your question that just says can every business venture and be rightsized to achieve sustainable ROI see and we're doing everything we can you know we even had continual.
Severance then and cost reduction initiatives and this quarter. It was more weighted again for offshore products. This time, but in our well site services business, we rationalized even more cost late last year early this year, but I think thats why we had over 100% incremental in the business in Q1 and Q2. So I can only assure you. It is not for lack of effort in this office in terms of returning to sustainable ROI see I will also tell you that I think is any service company of our size can do it we can.
Yep Yep excess.
Maybe maybe just sticking with that theme. So you called out international is an area where.
The potential opportunity can you give us a feel for how big in completion services internationally is today, and where you see the opportunity to.
For that to be over the next couple of years here.
Yeah, we generally bucket that as non North America that will throw in the Gulf of Mexico.
With that.
The one that combine contribution of international and Gulf of Mexico that was 16% of completion services revenue in Q2, it was 18% and the battle that's kind of what it is today and obviously, we're focused on introducing incremental products. It is certainly true in our well site services segment, but I'll tell you. We are also in the early stages of introducing.
Our downhole technologies to gain more international traction as well that is a longer term process theyre not immediate but it is something we think is value creating.
Okay. Appreciate it thank you.
Our next question comes from Ian Macpherson from Simmons. Please go ahead. Your line is open.
Oh, Thanks for the follow up that was actually mine I wanted to get into.
What the third quarter outlook might until for lower 48 completion services compared to.
International slight slash Gulf of Mexico Slash.
Drilling services those numbers help.
And I guess the Colonel My question is does your does your.
Middle of your guidance range contemplates lower 48 completion services flat or down or.
Well you know I would say right now we want to see that continuing.
Mix, a little bit more weighted towards international and Gulf of Mexico, a wait to see at least the flattening is not a modest softening of the north American rig count our customers as you've heard our definitely focused on generating free cash flow and controlling their capital spending there's noise about it and but everything is not the same for every customer. So when we go out and give guidance. We're really we have weekly meetings, it's customer by customer who's adding rigs in various basins is dropping rigs and in various basins, but if I take all of that into context and I have to we all know the rig counts dropped about 21 rigs since quarter end and that's about a 2%. So I don't think we're talking about big numbers here, but it's hard to exit the quarter and not say that North America is going to be modestly softer in Q3 is leased as best as we see it today.
Makes sense, thanks again setting.
Thank you Wayne.
Thank you. Our next question comes from Stephan Kundera Geisel. Please go ahead. Your line is open.
Oh, thanks, Thanks for taking the follow up so maybe could you just remind us when we think about your your U.S. land exposure the businesses, which are exposed to where the percentage of completion intensity versus just sort of wells drilled in and what you're sort of seeing on the completion intensity front right now.
Well I think I mentioned on the call you know right now you everybody tends to focus on leading edge well then the horizontal footage theres kind of a catch up for other operators moving towards leading edge and so I think there's still some tailwinds there in terms of horizontal footage stage count and importantly for us I'll just call it clusters per stage and there's a lot of.
Oh technology assessment Trialing going on to try to mitigate parent child type communication interference that theres, just a lot going on but I do think the fundamental tailwind of higher intensity or the air Foreign Downhole technologies segment and even in Chris its business, Yes, a majority of the.
Personnel and equipment are more on the surface I will call it but nonetheless, there are leading edge equipment, such as the temporary tool that really does gain more significant market share as you get in the longer laterals, the more torture as tight downhole environments and so it becomes a differentiator for that we're investing obviously and various equipment to Mike the.
[laughter] customers well site, one safer into more efficient I call. It the cluttering, the well site around bridge manifold.
We're investing in some other technology that I, probably won't talk about because our IP that we plan to file behind some of it but.
While it's not a direct correlation the more complex wells I think did you speak to our higher end equipment and personnel offering which again, we believe we have.
Great. Thank you.
Thank you and our last question comes from Emily Bull Cry from.
Scotia Howard Weil. Please go ahead your line is open.
And while you may be on mute.
Scenario, you might want to move on it sounds like that might have dropped.
Thank you at this time I'm not showing any further questions.
All right scenario. Thank you for hosting our call today again, we're going to apologize for the technical interruption from the phone provider, but I. Appreciate you staying on so that we could kind of fully.
Discuss the results of our segments the results of the quarter before we close the call.
I do kind of asset you all just kind of step back and we've seen a lot of kind of emotional investing over the last couple of years towards North America, and almost emotional away from it towards more deepwater and international we believe that we have a great balanced offering with penetration in.
All of our segments that comes from these segments and.
While I know many of you view this as a challenging or spot modestly disappointing quarter for us I hope you will keep that in context.
Strengthening in offshore products I think we're doing absolutely what you want us to do in terms of backlog development topline growth and improved margins in our well site services segment. They too had very improved resilient revenues improved margins very very strong incrementals and our completion services product line and some differentiated offerings that we tried to more fully deploy.
Into the market Downhole technologies again was kind of the loan.
Disappointment this quarter, but the investments, we're making in R&D and product development I do believe pay off in the long run and I would.
Not like to lead the <unk>.
Strength of our company from a free cash flow generating standpoint, I think that is a differentiator.
For our company as well it has been for the last several years and.
I do feel confident that we will be able to turn towards.
Better ROI CGEN underwriting performance over time and that does complete our comments and again I. Thank you for joining us today and look forward to future conversations with you.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.