Forum Energy Technologies Inc (FET) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2013 Forum Energy Technologies Inc earnings conference call. My name is Ian. I will be your operator for today. At this time all participants are in a listen only mode. We will conduct a question and answer session towards the end.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes. I will turn the call over to Mark Traylor, Vice President Investor Relations and Planning.

Thank you, Ian. Good morning and welcome to Forum Energy Technologies quarterly earnings conference call for the second-quarter 2013. With us today to present formal remarks is Cris Gaut, Forum's Chairman and Chief Executive Officer; as well as Jim Harris, Senior Vice President and Chief Financial Officer. Also with us today are Forum's two division Presidents, Charlie Jones, President of the Drilling and Subsea Division; and Wendell Brooks, President of our Production and Infrastructure Division. We issued our earnings release last night and it's available on our website.

The statements made during this conference call, including the answers to questions, include information that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Forward-looking statements involve risks and uncertainties that may cause results or events to differ materially from those expressed or implied in such statements. Those risks include, among other things, matters that we have described in our earnings release and in our filings with the Securities and Exchange Commission. We do not undertake any ongoing obligation, other than imposed by law, to publicly update or revise our forward-looking statements to reflect future events, information or circumstances that arise after this call.

In addition, this conference call contains time sensitive information that reflects Management's best judgment only as of the date of the live call. Management statements may include non-GAAP financial measures. For reconciliation of these measures, please refer to our earnings news release available on our website. This call is being recorded and a replay of the call will be available on our website for 30 days following the call. I'm now pleased to turn the call over to Cris Gaut, our CEO.

Thanks, Mark. Good morning. I will start with an overview of the quarter and offer a few thoughts on the outlook for our business and then turn it over to Jim who will provide greater detail on our financial performance. In the second-quarter 2013 we generated $60 million of EBITDA on $368 million of revenue, producing EBITDA margins of 16.4%. Diluted earnings per share were $0.34, excluding $0.02 related to transaction expenses and foreign exchange losses. Our second-quarter revenue, operating income and margin were roughly flat with our first-quarter results.

We are disappointed that we did not generate the revenue growth and margin improvement in the first half of the year that we had expected. The revenue growth did not materialize due to the flat North America rig count and the depressed pressure pumping market. We carry costs in expectation of additional revenue growth, thus negatively impacting our margins. We are now addressing the cost overhang and we will see improvement in margins in the second half of this year.

Total orders during the second quarter were $356 million. We had an 8% decrease in orders from the first quarter, primarily due to a more normalized level of orders for our Subsea product line after the exceptionally high volume of orders received in this product line during the first quarter. Bookings increased sequentially in Drilling, Downhole, Production Equipment and Flow Equipment. The second quarter book to bill ratio was 97% for the Company as a whole, 101% for Drilling and Subsea, and 91% for the Production and Infrastructure division.

The Drilling Technologies product line experienced another strong increase in orders for both consumable product and capital equipment. We were pleased to receive several significant orders for specialized handling tools from international markets as a result of our strategy to expand outside of North America. International orders are typically associated with longer delivery times and later revenue recognition. We should see the delivery of some of those products beginning later in the third quarter. Order levels for the North America market remain consistent with our first-quarter levels.

The acquisition of Blohm + Voss Oil Tools significantly strengthens the tubular handling offering within our Drilling Technologies product line. The Blohm + Voss brand is well recognized in the industry and has a strong reputation for delivering high quality products to a global customer base. And its strength in international and offshore markets complements Forum's strength in the North America land market. In addition, we see an opportunity to expand the market for our combined product offering by utilizing the combined global sales distribution and service channels. We welcome all of the employees of Blohm and Voss Oil Tools to the Forum family.

Our Subsea product line orders fall sequentially from the record levels experienced in the first quarter of the year as customers continued to match most vehicle orders with contract awards. Based on discussions with our customers, the long-term outlook for the sector remains strong. As part of the strategy to broaden our Subsea product portfolio, we are pleased with the recent acquisition of Moffat, a leading manufacturer of Subsea pipeline inspection launching and receiving systems and Subsea connectors. Activities related to pipeline installation, maintenance and inspection drive demand for Moffat products, which remain on the sea floor after use. We see an opportunity to increase Moffat's revenues by leveraging Forum's global sales and distribution network.

In the Downhole Technologies product line, we are experiencing increased international sales of our cementing encasing products and strong demand for our Cannon protectors and ProDrill composite hydraulic fracturing plugs. We have opened our new 82,000 square foot distribution center which has freed up space at our manufacturing facility, and contributed to the improved manufacturing efficiency and capacity we are now seeing at Davis-Lynch. I want to thank our Downhole Technologies employees for their hard work and effort on the system implementation and manufacturing process improvement.

Moving to our Production and Infrastructure segment, our Production Equipment product line continued its impressive growth trend and generated record quarterly revenue and operating income in the second quarter. Orders for Production Equipment were up from the first quarter and tender activity remains at high levels from new and existing customers. We remain positive about the outlook for this product line. Our Valve Solutions and Flow Equipment product lines each have reduced margins due to a shift in mix to less profitable products and, in the case of Flow Equipment, continued pricing pressure.

In partnership with a private equity firm, we recently acquired Global Tubing which gives Forum additional exposure to the key industry trends of increasing well complexity and horizontal well completion activity. Global Tubing's high-quality coil tubing strings are critical consumable components of coil tubing units that perform an increasing number of well completions and intervention activities.

Looking ahead to 2013, we are not planning for any increase in the US land rig count during the second half of this year and we are adjusting our cost structure to match this outlook. We do expect to incur some one-time restructuring costs in the third quarter. Our CFO, Jim Harris, will now discuss our financial results in greater detail. Jim?

Thank you, Cris, and good morning, everyone. Consolidated revenues of $368 million for the second-quarter are down approximately 1% sequentially. Our Drilling and Subsea segment revenue declined 6% sequentially, while our Production and Infrastructure segment revenue increased 5%. Net income for the second quarter was $30 million, down $2 million from the first quarter. Operating margins were flat sequentially with the first-quarter, excluding transaction expenses. We did not achieve the expected margin improvement for the second quarter as revenue was lower than we estimated, principally in Drilling Technologies and Flow Equipment. Our cost structure was in line with the higher revenue expectations depressing margins. We are addressing our cost structure to adjust appropriately to the current market.

Recent order levels for Drilling Technologies have been encouraging, with sequential increases of nearly 20% for two quarters in a row, following three quarters with declining orders. These incremental orders have been for international destinations with significantly longer lead times and with deliveries starting later in the third quarter. As a result, while order levels have been in line with our estimates, the associated revenue recognition has lagged. We should see modest improvement in Drilling Technologies revenue in the third quarter, with further increases in the fourth quarter as we deliver on these international orders. As we take actions to reduce our cost structure and as our revenues increase, margins should improve over the balance of the year.

While our Flow Equipment customers have seen improved activity levels, the current pricing environment is challenging with ample inventories and capacity availability, which is putting pressure on our margins for certain products. We expect modest improvements in revenue in the second half of the year for Flow Equipment with better prospects in 2014. I will now review our segment results comparing the second quarter of 2013 sequentially with the first-quarter of 2013.

Our Drilling and Subsea segment revenue of $209 million was down $13 million sequentially, or 6%. Drilling Technologies was down 8% as the increase in international orders has not yet begun delivering substantial revenue, while Subsea Technologies was down following a strong first quarter. Downhole Technologies revenue was up as we are beginning to see the early returns on our efforts to increase manufacturing throughput, especially in our Davis-Lynch facility in Pearland, Texas. Operating income for Drilling and Subsea of $33 million decreased $2 million in the quarter, or 7%, with operating margins down nearly 20 basis points. Drilling Technologies and Subsea Technologies were each down but offset by an increase in Downhole Technologies.

Our Production and Infrastructure segment revenue of $159 million in the second quarter was up $8 million, or 5% compared to the first quarter. Production Equipment delivered another record quarter with revenue up 16% sequentially as we picked up additional new customers. Valve Solutions revenue was basically flat, although at historically very high levels. Flow Equipment revenue was down as a result of customer change orders on completed products otherwise ready for delivery, as well as pricing pressure.

Operating income for Production and Infrastructure of $23 million increased $2 million, or 7% sequentially, as operating margins improved 20 basis points. Production Equipment achieved significant improvement in operating margins on higher revenue and efficiencies gained through production automation initiatives. Valve Solutions margins were down attributable to a higher proportion of sales of lower margin valves. Flow Equipment margins also declined on lower revenue and continued pricing pressure on certain products.

I will now summarize our expectations for the third quarter and update our diluted earnings per share guidance for the full-year results, including an explanation of the change in our guidance from last quarter and the impact of the three acquisitions closed effective July 1, 2013. We are no longer expecting a second half increase in North American drilling activity from current levels and we have removed those growth assumptions from our current estimates, amounting to approximately $0.10 per share in the second half of 2013.

Our guidance for the full year has also been reduced to reflect the lower second-quarter earnings per share actually achieved, approximately $0.05 lower than the mid-point of our guidance range for the quarter. We further reduced our guidance by $0.10 to reflect the time required to realize the revenue improvements and achieve all of the cost rationalization necessary to return our margins to historical levels, the benefits of which will not be fully realized until the fourth quarter. These reductions are partially offset by a $0.10 contribution from the three acquisitions for the second half of the year. On this basis, we expect second quarter diluted earnings per share to be between $0.40 and $0.45 and for the year between $1.55 and $1.65.

I will now explain the economics of the acquisitions. On a combined basis, we invested $232 million for the three transactions, two that are part of our Drilling and Subsea segment -- Blohm + Voss Oil Tools and Moffat, and the non-controlling interest in Global Tubing that is included in Production and Infrastructure segment. We will report our 48% share of Global Tubing's earnings on one line as equity earnings included in operating income. The total purchase price for these three acquisitions was in line with our historical current year EBITDA multiple range for acquisitions. As previously disclosed, after all purchase accounting adjustments, we expect these acquisitions will contribute approximately $32 million in operating income on an annualized basis.

Net debt at the end of the second quarter was $331 million and interest expense for the quarter was $3.1 million. Net debt decreased $31 million sequentially from the first quarter due to continued good cash flows in the second quarter. Interest expense for the year 2013, excluding any additional debt incurred for acquisitions other than the three we have now closed, should be approximately $15 million. The substantial cash balance of approximately $200 million on our balance sheet as of June 30, 2013 is from amounts drawn on our revolving credit facility in anticipation of closing the three transactions effective July 1. After closing these acquisitions, our net debt on July 1 increased to $563 million and our leverage ratio pro forma for the acquisitions was approximately 2 times.

Cash flow from operations was $89 million in the six months ended June 30, 2013 and was $61 million for the second quarter. Free cash flow after CAPEX but excluding acquisitions for the first six months of 2013 was approximately $60 million, which compares favorably to full-year free cash flow for 2012 of $100 million. We expect to continue to achieve strong free cash flow with incentives and measures in place to focus on more efficiently managing working capital. Capital expenditures were $30 million for the first six months and we expect full-year 2013 capital expenditures to be approximately $60 million. Corporate expenses were $6.9 million in the second quarter and are expected to be approximately $28 million for the full year.

Our effective tax rate for the second quarter was 30.4% and we estimate that the full year rate will be approximately 31.5%. The lower rate is attributable to a higher proportion of our earnings coming in jurisdictions outside the US with lower statutory rates. Our diluted share count for the second quarter was 94.6 million shares. We anticipate our diluted share count for the third quarter and for the remainder of the year will be at about this level. For more information about our financial results please review the earnings release on our website. I'll now turn the call back over to Cris for concluding remarks and to moderate Q&A.

Thanks, Jim. And thank you for your interest. At this point, we will open the line for questions. Ian, let's take the first question.

(Operator Instructions)

Doug Becker, Bank of America Merrill Lynch.

I want to touch base on third quarter margins in Drilling and Subsea. It seems like the Downhole expansion is proceeding as expected. That carries higher margins than some of the other businesses. What type of jump can we see in margins in the third quarter in D&S?

Doug, I think there will be two drivers for the increase in margins that we are expecting, or three actually in the third quarter. As you point out, the Downhole business as it improves and increases in volume, we will have a positive mixed effect on our business. Also in Drilling, as we begin to see some of these increased orders that we have been realizing since the beginning of 2013, those will begin to flow through and from both an operating leverage standpoint and from a mixed standpoint, those contributions will be accretive. The third element will be the contribution from our cost realignment program. We would look for an increase in our margins in the third quarter in D&S, at least several percentage points.

That makes sense. As we start thinking about 2014, if we could touch base on some of the larger moving pieces here, offhand it would seem like Downhole, the expansion, should have a significant positive year-over-year impact. Subsea, the growth outlook still looks very good there. I would think about those as 20% businesses growth from the growth standpoint year-over-year. Would you agree with that and maybe some of the other business lines? We're thinking about revenue growth in 2014.

Our Downhole business, we think we have very good prospects and we are very pleased with our market position and potential there. The Subsea business, the fundamentals are excellent, as you point out. It is a lumpy business, as I mentioned in my remarks. It does depend a bit on when our offshore construction company customers land new contracts and their order rate. At this point, our expectation for planning purposes is that the orders going into 2014, our expectation there is strong.

On the Drilling side, I think we have potential with these increased orders that we are seeing. The compliment and benefit of having Blohm + Voss as part of our Drilling operations and the combined offering we have there and the opportunity to drive out some costs, the revenue growth probably not as strong as you outlined but I think the potential for margin expansion in our Drilling business from where we are now is excellent.

If we pull those together, would we see Drilling and Subsea or Production and Infrastructure growth -- revenue growth, which one would be higher?

My guess at 2014 is that D&S would have higher revenue growth for the reasons just described but if we see a recovery in the pressure pumping business, that could be a real good contributor there. Production Equipment continues to rock along at very high growth rates for us. I would agree that D&S probably has the higher growth prospects for 2014 at this point, unless we see a turn in the pressure pumping market.

Thank you.

Jeffrey Tillery, Tudor, Pickering, Holt.

When we are thinking about the Drilling products business with the orders being skewed more internationally now, for the consumables what should we think about as the right cycle time for that turning into revenue? And the same question for capital equipment and is that capital equipment cycle time much different than what you see domestically?

It's a good question and we've seen a change there, Jeff, which has affected our ability to forecast the business. The fact is that the rate of turning orders into revenue has lengthened. When the market was hot for consumables, that was very much a book and ship and our customers wanted that in short order. We are now seeing customers placing orders for consumables that are putting these products into their warehouse now rather than sending direct to the rig, so that part has lengthened.

Certainly, the international side of our capital equipment, which is the growing portion of our capital Drilling equipment side, definitely longer. Typically we don't recognize revenue until that equipment is received internationally including the shipping time. In combination there, I think we could see a full quarters worth of increase in the rate at which our bookings are turning into revenue in the Drilling business.

The Drilling and Subsea margins, this quarter on a percentage basis able to hold flat despite the -- pretty close to flat -- despite the revenue decline. Is that just all mix? We have got Subsea down a little bit and Downhole up, so that explains the full -- is a more complete explanation for what happened to margins? Is that fair?

You are right, Jeff, yes.

Given the pretty hefty M&A integration you're going to be undertaking in the second half of the year, do you feel full on that front over the next four to six months or do you feel like you have capacity to do some more?

I think we need to be clear about this. Our priority at this point is internal and improving our efficiency, improving our execution and improving our internal ability to deliver on results, that is where our focus is. We have done, I think, some very good acquisitions. We continue to actively be active in the acquisitions market but our first priority is on making sure our internal house is in order at this point.

I think that's what most folks wanted to hear. The last question for Jim, with the acquisitions in the fold for the full quarter, how much D&A did that add?

The D&A that we should see is just under $7 million related to Blohm + Voss and Moffat. Global Tubing is reported on an equity basis. We don't do any add back for EBITDA there, Jeff, so just under $7 million. That is annual.

Thank you.

Jonathan Sisto, Credit Suisse.

Good morning. Charlie, maybe one for you. Over the course of earnings season we've heard a lot about Drilling efficiencies but yet wells are getting longer, service intensity is going up. Have you all, or your division, looked at a way of quantifying the maybe increased demand for consumables as we go forward?

Thank you for your question. Are you talking about Drilling equipment because our Downhole equipment is also affected by that, and trying to quantify used on normal rig count metrics is getting more difficult for all of us in the industry.

Is the consumable demand increasing per rig or per well or do you see it staying flat as we move forward?

What we are seeing is it is really a function of the activity on the rig. With the footage being drilled and the difficulty, and also the higher weight of equipment that we are running, it is consuming, we think, on a per rig basis a slightly higher percentage of consumables. If you look at the US rig count, for example, year-over-year look at prior quarter year ago versus today, I think it is down around 11% in North America. And if you look at our consumables revenue on that basis, it is not down as much.

One last one if I can, Cris, Subsea, good orders in the first quarter took a natural pause here in the second and all systems go there I presume as we look into 2014 to some extent, is that true?

We believe so and we are very pleased with the contribution that we are getting from the Dynacon LARS business. Our capacity expansion should be coming on there during the -- will be coming on there during the third quarter which is timely for us. We've got potential with Moffat. On the ROV -- our base ROV business, yes, fundamentally strong. We have seen an increase here in interest and orders for our big trenchers and more are being talked about there. That is another increment to the business here over the past year.

I'll turn it back. Wendell, keep up the good work.

Robin Shoemaker, Citigroup.

Thank you. I wanted to ask a broader question, so many companies here now are talking about large upstream projects moving to the right, in fact even Dresser-Rand this morning talked about 13 upstream projects, mostly offshore, that have moved out of 2013 into 2014. In your interactions with customers, what insights do you have about that and how generally is it impacting you?

There is an impact there, Robin, for the Subsea business in particular. As we mentioned, other than for the replacement element of our ROV orders for our customers, when they are replacing one they lost or is no longer efficient. The new additions to their fleet, they do match with projects and that is part of the difficulty we have in forecasting exactly when those orders are going to be placed. These projects have been slipping to the right. Where we fall in the timeline of a project, the trees are ordered well in advance of when our orders would take place. It does give us some advanced indication of what could be happening in our business. Charlie, any additions?

I agree, it doesn't affect the Downhole or the Drilling as much, for sure.

One question on the consumable products side, do you continue to see customers working down their own inventories and do you still expect at some point a snap back in that arena? I think we touched briefly on this last quarter but I wonder if the destocking at the customer level continues?

This is Charlie, from the Drilling consumables perspective, we think we are at an in-and-out rate. We're not really seeing a draw down. The fact that it is flat, Robin, looking forward is causing some pricing competition that probably wouldn't be there if people were speculating that it was either going to go further up or further down.

We do expect a snap back, the question is when. As Jim told you earlier, we are not expecting a snap back this year because we're not expecting a rig count in the US which drives the predominance of our consumables business to occur this year. As soon as opinions change and people believe -- they start to believe there is going to be an increase, then it does trigger that snap back and we do have a lot of data that shows us that is the case.

That snapback would be associated with putting rigs currently not working back to work or new rigs that aren't completely outfitted.

Since we don't see that, it is a steady-state market for consumables. All right, thanks a lot.

Brandon Dobell, William Blair.

Maybe focusing on the acquisitions for a second, you mentioned a $0.10 accretion assumption for those. Two questions there. Assuming that is an annualized number or maybe it was just a back half of the year number, and what revenue and, or cost synergy assumptions have gone into that $0.10 accretion number?

Brandon, first, that is a back half number. The $0.10 is for the second half of the year. The revenue number should be north of $100 million. We generally don't experience cost synergies on an acquisition. In fact, with the acquisitions that we do, generally bringing those to -- with the systems and the personnel up to the level to work with a public company. There are costs that we incur and that is built into the estimates that we give. On that revenue number, keep in mind that there's no revenue associated with Global Tubing as that is reported on one line, so that is just for the other two.

Okay. To touch on your Valve comment there for a second, it sounds like there is a mix issue, probably some push out on timing as well. Is there anything you can do to change the trajectory of the margins in that business or is it more about timing on projects and those kinds of things? What else can you do to put that business back in the right spot?

That is one of the areas where we are looking at looking at some cost realignment to recover some of the margin. Wendell, also, as we look out to later parts of the year, we are seeing talk and more inquiries for bigger orders, right?

We've had some projects that have moved to the right that are now in the bid stage and we expect those projects to materialize in the latter part of this year. So we do see an increase in activity. We had some activity in the heavy oil area in the second quarter which was a little bit larger than expected and that is not as profitable as some of the upstream activity in the US, which impacted the second quarter. But projects that move to the right look like they're coming into the frame for activity and action later in the year and, combined with the cost reductions that Cris mentioned, we feel better about the third and fourth quarters.

Final one for me, you guys have talked the last couple of calls about system investments in particular to drive a little more manufacturing efficiencies. How much room do you think you have in inventory turns and DSOs as you look out between now and the end of '14? Should we expect improvements across those metrics to drive better free cash or do you think you have captured a lot of that opportunity?

Brandon, let me take the DSOs first. We have implemented a system there and we did come inside of 60 days as of June 30. We do think there is opportunity there to get down into the mid-50s. So continue to see more opportunities to improve and we have been there at selective times, just not at the end of the quarter. On inventory turns, with the systems implementations and other changes in manufacturing, we do see opportunities to continue to increase turns there. So there should be opportunities to seek good free cash flow coming related to inventories.

Thanks, I appreciate it.

Brad Handler, Jefferies.

Thanks, good morning guys. Maybe just get into some specifics, that'll help a little bit. I wonder if you can quantify for us maybe the capacity or the throughput expansion on the Downhole side and maybe to help us calibrate the growth potential is as a result of that in Downhole products?

We feel that we have a scalable business there. We can take on significant growth, particularly from large international orders and that is our target. We are on our way there. I think that opening up the facility for more throughput and some of the things we are doing on our supply chain contribute to that. Do we have the ability to put more than say a 25% increase into the business? I think we do.

I think an advantage of a business like ours here is with fairly modest investments. We continue to scale up our capacity. I think also as we made some of these changes, our ability to react to customers' needs for quick return, quick order, customer needs has been enhanced and those are higher margin contracts. We can both take on larger volume international contracts and the higher margin short-term domestic orders. And that is where we want to get to, being able to serve both of those markets and that will help us both on the volume side and on the margin side, Brad.

That is helpful color actually, I appreciate that amplification. Let me do an unrelated one. I don't think we've heard that much color from you on the call on the Flow Equipment side. You mentioned the pricing pressure that sounded consistent with what you were anticipating, more or less, in prior public commentary. But could you give us a sense of -- maybe keying off of Robin's question on other consumables -- can you comment on the destocking process by your competitors it sounds like in Flow Equipment? Any sense you have as to whether there is some signs of bottoming there. And then, again, any updated color on the potential for a snap back if in light of your more subdued rig count outlook?

It's a very competitive market now for these pressure pumping consumables, flow iron and fluid ends. It is competitive for all of us there and there is ample supply and capacity. We all know that the number of stages being fracked is at a pretty decent level and the trend there is positive, as the big pressure pumping companies have indicated. That, I think, will help absorb, eventually, some of this capacity but we continue to think this is going to be a bit of a continued dog fight for awhile. Right, Wendell?

I think there's plenty of inventory available but when our competitors -- and it is still very price competitive in certain products. It is a book and ship business right now so it's all a matter of execution. That said, it feels to us like our customers are busy and they are at peace. They feel like they know what their pricing is going to be, they can plan their business better. So we feel that is a change that our customers are at peace with their business models and it is going to take a while for this competitive overhang to work its way through, but it will.

In the meanwhile, we are working hard on our cost structure, both from a manufacturing standpoint and making sure we execute and don't miss an order, but it is a very competitive environment and we think it will be for a while.

Our focus on the service side as a lead-in hook for customers has proven successful up in the Northeast. We are now in the process of building that up in the Bakken. We feel that will be a helpful factor. Another one is that we have increased our emphasis on the flowback side of the business, as we continue to broaden our offering.

Those are interesting points but maybe I will explore those with you off-line. Thanks, guys.

Mike Urban, Deutsche Bank.

Good morning. Cris, you talked a little bit about some of the adjustments, primarily on the cost side based on the business environment that you see right now. This is a little bit broader or longer-term question as it pertains to what you see structurally out there. Specifically what I'm talking about is the efficiency of the drilling rigs out there, at least the US onshore rigs has surprised just about everybody positively. Does that change your long-term view of your market position, especially as it would pertain to rig capital equipment? You have grown the business outside the US and I would expect you would be able to continue to do that but do you view these changes that you're having to make as more cyclical and we will see a recovery at some point or are you thinking about the longer term structural implications of rig efficiency?

This trends of more drilling efficiency and higher completion and well counts but not so much on the rig site, obviously helping our Production Equipment, our Downhole tools business, things like that. But on the Drilling side, strategically it does cause us on our capital equipment for both our legacy Drilling business and, of course, for Blohm and Voss, more emphasis international and offshore. We're not going after big integrated Drilling packages but we are addressing certain niche capital products for jack-up rigs, both upgrade and new build. That is more engineering content but I think on a combined basis now, we have the capability to better address that market. Charlie, any additions?

I agree.

As that shift takes place toward more international and offshore, is that something that you can address the way you are currently configured, especially from a manufacturing or facility standpoint? Or do you have to make some changes to that, perhaps some investments in other markets outside the US or different markets within the US? I'm just trying to understand how that might affect the investment profile or [the profit line].

We just did the announcement of the investment in Blohm + Voss, and that clearly is in perfect alignment with that strategy and it will be complimentary to us as we go forward and reshape the business to better address the international market. That's why we are so excited about this acquisition.

I don't think there is going to be a fundamental shift in the business. We feel that with our combined facilities and manpower, we will be able to address these opportunities and if we need to gear up in a certain area we will do that. We're not looking to build a new facility in Malaysia or anything like that if that is your question.

That's all for me. Thank you.

Blake Hutchinson, Howard Weil.

Good morning. Just a couple of quick ones for me. First of all, I apologize if I missed this, but did you give an overall order flow number or have we abandoned that as a useful metric for you at this point?

We did give an overall order number. Our orders for inbound orders for the second quarter were $356 million, that compares to the prior quarter of $385 million. I think I mentioned that four of our six product lines had increases in orders during the period, as did D&S overall. The Subsea business orders, that is one area where the orders were down significantly. That is just because they were so exceptionally high in Q1.

Okay, nothing to worry on the trend line adjusting for that?

Even those out, they are well over 100%.

Great. As I take the sum total, you have given a lot of good information on the inputs by the sub segments on the call. To be perfectly clear as we leave the call, it sounds like the margin goal here by fourth quarter is somewhere in the 20% range on the EBITDA line, would that be the right take away for us to have? And as you think about the business, without an inflection in the US, is that about what the current activity backdrop offers you in terms of margin or would you hope to expand on that as we head into '14?

Taking 2013 first, we have historically achieved EBITDA margins north of that 20% and based on the order levels, the Drilling, the Subsea and that we expect to deliver in the back half of the year, we do see that as achievable by the fourth quarter. Not in the third quarter. We should move towards it in the third quarter but achieve by the fourth. And then we would expect in 2014 to consistently be above that and I would say in line with the historical EBITDA margins that we posted.

Great. So that hasn't been ruled out as the target or adjusted here, it is just a bit of a timing effect?

That's right.

That's all I had. I appreciate it.

William Thompson, JP Morgan.

Good morning. Obviously you have revised your internal top line forecast on a weaker US rig count. Your story really isn't a backlog story. Just trying to get a sense on how confident you are on the second-half revenue now that you are obviously seeing strong Subsea and Drilling orders earlier this year, when can we expect those to pull through as revenue? Is that more later this year or more of a 2014 event?

Obviously we have brought down our revenue and earnings guidance due to this flat rig count that was not expected by us or others, I don't think, going into the year. That has been the primary driver of that. Nonetheless, we are seeing an increase, strong increase in orders for our Drilling business now. As we pointed out, the rate at which those orders turn to revenue has lengthened due to changes in the market. More international, the more measured pace and discipline in the domestic market. Having those orders in hand, it does give us confidence in the increase in revenues in our Drilling business. We are seeing the benefits of our strategy in the Downhole product line and we feel that there are growth opportunities there that we feel good about for the second half of the year.

The Production Equipment revenue growth, that has been a very strong and excellent story for us and based on the inquiries and orders and backlog, we feel good about that. Wendell talked about the Valve business has flattened out here recently, that we are seeing some bigger projects needing valves late in the year. Flow Equipment, it's too early to call the turn there. That is where we are and that is what gives us the confidence in the guidance we are now giving, but clearly we have reset our guidance for the rest of the year.

As a follow-up -- and excuse me if I missed this in the prepared remarks, but did you quantify what the impact is on the week Canadian break-up season and if we could expect a little bit of a snap back in the second half of this year on the well directed business?

It has been weak and it has impacted some of our businesses. We haven't quantified the benefit of that and we haven't included any snap back in Canada in our thinking. It is seasonal. I think a lot of that ordering for this part of this season is now underway. We are not forecasting a significant impact in our business from there.

That's it for me.

We thank you all for your participation in our second-quarter earnings call, and good questions. We look forward to talking with you soon and speaking with you on our third quarter call. Thanks again.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.