Forum Energy Technologies Inc (FET) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2014 Forum Energy Technologies earnings conference call. My name is Jackie and I will be your coordinator for today. At this time all participants are in a listen-only mode and following the prepared remarks there will be a question-and-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Mark Traylor, Vice President, Investor Relations and Planning. Please proceed, sir.

Thank you, Jackie. Good morning, and welcome to Forum Energy Technologies quarterly earnings conference call for the first quarter 2014. 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 is Prady Iyyanki, Chief Operating Officer, and Wendell Brooks, President of our Production and Infrastructure Division.

We issued our earnings release last night and it is available on our website. The statements made during this conference call, including the answers to your 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 risk and uncertainties that may cause actual 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 that imposed by law to publicly update or revise any 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 at the date of the live call. Management's statements may include non-GAAP financial measures for a reconciliation of these measures. Please refer to our earnings news release available on our website. This call is being recorded. A replay of the call will be available on our website for 30 days following the call. I am now pleased to turn the call over to Cris Gaut.

Thanks, Mark. Good morning. I will start with some highlights from the first quarter and offer a few thoughts on the outlook for our business and then turn it over to Jim Harris, who will provide more detail on our financial performance. We are pleased with our first quarter results and our progress on improved efficiencies, integration of our operations, and operational performance. In addition, we had record revenue and record bookings.

Adjusted net income was $0.40 per diluted share and adjusted EBITDA was $78 million excluding $0.02 per share for losses on the sale of a small business and foreign exchange. EBITDA margins in the first quarter were 19.4%. We continue to realize operational efficiencies and margin improvement, but these were offset by some significant cost increases impacting 2014 results. Margin improvement remains a primary objective for us.

Total inbound orders during the first quarter were a very strong $486 million. That's a 26% increase over the orders in the fourth quarter. Bookings of new orders increased substantially for both of our segments. The first quarter book-to-bill ratio was 120% for the Company as a whole, 123% for Drilling and Subsea, and 114% for Production and Infrastructure.

During the first quarter the drilling product line experienced near record revenue, record operating income, and record orders. We are now seeing an increase in domestic orders for consumable and capital drilling equipment as well as a continuation of the strength in new international orders. On the international side, we received an award for pipe handling packages for seven new build land rigs in Latin America. That order includes Forum's hydraulic catwalks and the Blohm & Voss forehand FH-10 Iron Roughnecks, a testament to the integration of our sales team. We are also seeing an increase in orders of Forum drilling equipment for new jackup rigs that continue to be built.

As we previously announced, Mr. James Bement has joined Forum as our Senior Vice President, Drilling Technologies. We welcome James to this role where he will be responsible for leading and driving performance of Forum's global drilling business. James brings over 30 years of experience in our industry to Forum.

Our drilling business line is poised for domestic and international growth, especially since our acquisition last year of Blohm & Voss. James' global experience makes him well qualified to lead this product line.

At our Subsea product line, orders in the first quarter were up 35% sequentially, primarily on the previously announced contract with Subsea 7 to supply eight work class remotely operated vehicle systems and the more recent contract with Canyon Offshore to supply three Perry XLX Evo 200-horsepower work class ROVs, as well as two Dynacon launch and recovery systems.

The market outlook is strong for orders of our Subsea equipment to install and maintain the large amount of subsea trees and related equipment that has been ordered in recent years.

The Downhole Technologies product line realized relatively flat sequential revenue following record levels set in the fourth quarter. We continue to see growth opportunities in the international and North America markets for this product line. Strong demand continues for our ProDrill composite frac plugs. We believe there are pricing opportunities for some of our downhole products and we are planning to expand our manufacturing capacity.

Moving to our Production and Infrastructure segment, we had sequential revenue growth of 7% and inbound orders in this segment increased sequentially by 30% with increases at all three product lines, pressure pumping consumable products, valves, and production and processing systems.

Flow equipment's first quarter revenue increased 27% sequentially and orders increased very sharply from the low levels in Q4 on good demand for our pressure pumping consumable products. We believe most of the orders are for repair and replacement, although some may be to fully outfit pressure pumping equipment that had previously been stacked.

Our infrastructure businesses, production equipment, and valves saw modest increases in revenue for the fourth quarter 2013 to the first quarter of this year.

Our second quarter 2014 earnings per share guidance is $0.38 to $0.44.

Much of our business is tied directly to the activity levels of the global oil field service in North America land drilling companies. As North America and international markets are improving we have experienced two consecutive quarters of record revenues and bookings. The driver of our higher revenue in the first quarter was clearly North America activity. While our large increase in orders is balanced between North America and international. We think the global demand outlook for our equipment and products is favorable. Our focus continues to be on driving growth, improving operating performance, and increasing our margins.

Our CFO, Jim Harris, will now discuss our financial results in greater detail. Jim.

Thank you, Cris, and good morning. Consolidated revenues of $404 million for the first quarter are up approximately 3% sequentially and represent another record for the Company. Importantly, our orders are up 26% sequentially at $486 million, representing a book-to-bill ratio of 1.2 times. Our Drilling and Subsea segment revenue was just ahead of the fourth quarter previous record, while our Production and Infrastructure segment revenue increased approximately 7%.

Net income for the first quarter was $37 million, including $1.5 million in foreign translation losses and an $800,000 loss on the sale of our offshore joint services business. We treat these translation losses as non-operational since they primarily relate to the translation of US dollar denominated receivables for reporting purposes only and have no economic impact in dollar terms.

Operating income, excluding the non-operational items, was $62 million up $3 million or about 5% from the fourth quarter. Drilling and Subsea operating income was up $800,000, the increase coming in the drilling business as operating margins improved 90 basis points to 19%. These drilling results include shipments of the last of the committed large low-margin catwalks and also the disruption associated with the move of our US tubular handling manufacturing operations into a new 165,000 square foot state-of-the-art facility in Broussard, Louisiana.

Production and Infrastructure operating income improved almost $3 million with all three product lines contributing. The largest increase in operating income was in our flow equipment product line on substantially higher volumes. Corporate expenses were higher in the quarter by $800,000. Adjusted EBITDA margins in the first quarter at 19.4% came in as expected. We still aim to achieve EBITDA margins consistently of 20% and believe that even as we invest in new product development and operational improvement initiatives that we should achieve that level in the second half of the year.

As stated, our first quarter margins were burdened by the shipment of the last of the low-margin large catwalks and by higher compensation related to accruals for returning management incentive bonuses throughout the Company to target levels. Adjusted diluted earnings per share for the first quarter were $0.40. This amount, likewise, is burdened by $0.03 for the higher compensation accruals.

We expect diluted earnings per share of between $0.38 and $0.44 for the second quarter.

A good portion of the customer orders received in the first quarter are for Drilling and Subsea capital equipment scheduled to ship in the second half of 2014 and into 2015. While current booking levels indicate that our revenue should increase over time given promised delivery schedules, the increase should start in the second quarter, but be more fully realized in the second half of the year and in 2015. \ Our diluted share count for the first quarter was 95.2 million shares. We anticipate our diluted share count for the remainder of the 2014 year to be at about this level.

Net debt at the end of the first quarter was $411 million down $63 million from the fourth quarter as we continue to pay down revolver advances with strong free cash flow and with proceeds from the sale of the small business. We generated $52 million in free cash flow during the first quarter. Interest expense for the quarter was $7.8 million and is expected to be about the same in the second quarter. Corporate expenses were $8.7 million in the first quarter and we expect the run rate for corporate expenses to be around $10 million per quarter.

Our effective tax rate for the first quarter was 30%. We expect our effective tax rate for the remainder of 2014 will be approximately 29%.

For more information about our financial results please review the earnings release in our -- on our website. I'll now turn the call back over to Cris for concluding remarks and to moderate Q&A.

Thanks, Jim. I believe Forum is well positioned as we begin a new year. We have strengthened our management team and our organization. We have made progress on integrating our acquisitions and improving our processes. There is still much to do and plenty of opportunity for internal improvement remain. We will continue our internal focus in the first half of 2014 and I think you are beginning to see the benefits of these efforts.

I am pleased with the progress Forum has made and I want to recognize and thank our employees for their good work. I thank you all for your interest. And at this point, Jackie, we will open the line for questions.

Ladies and gentlemen, we are ready to open up the lines for your questions.

(Operator Instructions)

Your first question comes from the line of Jonathan Sisto with Credit Suisse.

Good morning, gentlemen.

Hi, John.

Cris, I wanted to ask you about the orders, which were very good. Could you maybe talk to us about how quickly some of those orders convert in some of your proper profitable business lines?

So we have had a strong increase in orders across the board here, including in our more capital equipment intensive businesses where the lead times are longer. So very good order growth in our Subsea business with some multi-vehicle orders there. In our drilling business strength both in the activity-based consumable products, but also in the capital equipment side. And on the capital equipment side it is also spread nicely with US land drilling contractors, but also internationally on the onshore and offshore markets.

We are also seeing a very strong increase in orders sequentially in our flow equipment business for the pressure pumping companies, as I mentioned. That's coming off a low level in Q4. A portion of that was deferral of purchases to Q1. But I also think it's fair to say that we are seeing higher rates of replacement repair activity commensurate with the high level of pressure pumping activity that's going on in North America.

Is it fair to assume that a lot of those latter are -- orders that you just spoke about came kind of in the March time frame versus January or February?

John, our experience is a bit different there. We did have a wave of orders right at the outset of the year that were clearly deferrals from Q4 to Q1 and then continued a good order level from there. So the order levels are at a good level, but we also saw that there was a lump of orders that were deferred from the prior period.

Okay. I guess just as one kind of follow-up here, Cris. You know, you mentioned in the release focused on growth and improving operating performance and increasing the margins. You're basically nearly there on the margins. I guess maybe this might be one for Prady. But what other kind of low-hanging fruit is there, or is the low-hanging fruit done? Are you now on to more high-end things like ERP systems for the business?

Yes, we have had a constant effort on the ERP systems, and that's going to continue this year. We have a number of things that we're doing to drive, I think, consistency across our operations as well as efficiency. Maybe, Prady, you can describe some of the priorities that we're working on.

John, I would say really on the focus operational excellence and initiatives. On the operational excellence side the focus is to improve our execution, which you have seen some of that in the first quarter. Reputting KPIs on every manufacturing shop. The three KPIs you are putting into every moving shop are on-time delivery, inventory tones and productivity so we can measure across the board. And we'll get some benefits throughout the year as part of that. As part of the initiatives procurement and cost of quality and labor is what we are focusing on. There are KPIs associated with that.

But, at the same time, the benefits we're going to get out of those initiatives, as we mentioned, we are not satisfied with our R and D investments. We will take some of that money and invest in our R and D and to support the growth, not only later part of this year but also for next year, we are going to improve our commercial presence. So we need that money to invest in the second half and also next year.

Great. Thanks, guys.

And your next question comes from the line of David Anderson with JPMorgan. Please proceed.

Cris, we have been talking about, on this consumable side, this inventory correction for, gosh, some time now. Can we definitely put a stake in this? Is the inventory correction done? And I guess I'm talking both sides. Maybe you could talk to both the drilling side and pressure pumping side, kind of flow iron. Are we done with that now? Because I think we first mentioned customers and then mentioned competitors. Are we all cleaned out? Are we on a baseline, more of a steady, normalized growth pattern now?

Yes, David. De-stocking has run its course and we are through that. And we are now seeing a level of revenue and, more importantly, orders that is commensurate with the activity levels that are out there. And I think Forum is a good reflection of those activity levels with the pressure pumpers and drillers in North America on the consumable side and internationally on the capital side.

You talked about -- you specifically called it the pressure running before and you were saying it's mostly for repair. Could you just elaborate on some of your comments? It sounded like you were suggesting that you weren't totally sure where this equipment was going towards. Some of it might be going towards equipment that's coming back? Could you add a little bit more in terms of what you are seeing there in terms of where that demand is coming from?

Yes. Among the mix of products that we're selling, David, are the normal replacement items for flow iron and fluid ends. But we're also beginning to see more than we have in some time for the manifold trailers, missile trailers, that indicate to us that some operators are re-outfitting a spread of equipment with the iron that they've maybe used somewhere else.

The cannibalization is over now. Now they need to kind of reload and bring that back to work?

I think there are some signs of that, but it's -- I don't know that it's yet clear that it is a sustainable trend. But there are some signs of that, David, yes.

Okay. How about the free cash flow this quarter? Pretty good this quarter. It looks on our model pretty good for the remainder of the year. I was wondering if you could just kind of address capital allocation a bit? Traditionally over -- since your IPO you have been pretty aggressive or pretty active at least in the acquisition market.

I am just wondering -- I would think maybe the North America acquisition prices have started to climb a bit. I was wondering maybe you could talk about that a little bit? Do you expect maybe you won't be quite as active now that the market is starting to catch up or -- and is there other plans for capital allocation and acquisitions right now?

So, Dave, after being so active in the acquisitions side for -- from 2012 and 2013, we've have been in the past couple of quarters in more of a consolidation and integration mode. We're wanting to continue that. We think that that is having -- beginning to show some good results for some of the initiatives that Prady was talking about.

We do expect to reinitiate action on the acquisitions that we continue to investigate later this year and we do think there remain good opportunities out there. And we do expect to be able to continue to devote our resources, our free cash flow to acquisition growth as well as organic growth later this year. And we're working hard to identify prospects that are good fits and complements to our offering. But we're not going to comment on price other than to say that it is Forum's strategy to acquire acquisitions at a lower multiple than our trading price, which is obviously accretive for us and not just relying on financing benefits.

And cash not being used for acquisitions, does that go towards just paying off debt, or do you start thinking about buybacks at that point?

Well, David, we think the acquisition pipeline is such that we will have good use for the cash. As you see, the revolver on a net basis, we're close to having that paid down. Expectation would be in the near term we would be able to deploy that for acquisitions.

Okay. Great. Thank you.

And your next question comes from the line of Jeff Tillery with Tudor Pickering Holt. Please proceed.

Good morning.

Good morning, Jeff.

Outside of some of the -- let's say the kind of lumpy bulk ROV orders are tough to forecast quarter to quarter. Outside of those items, anything that you saw in the order book in Q1 that you viewed as unlikely to repeat or lumpy to the positive side that we shouldn't think about as sustainable?

I think what we were heartened by in the order book is how the breadth of the increase, Jeff, you know, across the product lines and across geographies. We are pleased to see the progress that we're making in the offshore rig side, on the jackup side. And feel that that has some legs for us if we're successful in the execution there, as we certainly plan to be.

But in answer to your question, Jeff, no, I can't point to anything that was kind of a one-off kind of thing or really something that is exceptional that we couldn't do again.

Do you think the industry is going to go -- kind of swing the other way as opposed to destocking? Do you think we are going to see kind of in the first half of this year potentially overbuying, replacing parts that are being worn out plus restocking inventory that they kept previously that had gone away? Is that something you think we're seeing or could see?

I don't think we're seeing it yet, Jeff, because I think we've just reached the inflection point. Could we see a restocking going on just as we saw destocking of consumable products? Yes, I think we could see that. Particularly, as we were talking before, as stacked equipment needs to be resupplied in order to go back to work.

You think about that as -- if that occurs, that's really from here? It's not something we've seen already?

Hard to say. And the order book was really strong this quarter. So I'm not trying to signal that we expect it to go up a lot from here because it was really strong. If I look from a customer standpoint, do we get indications from customers that they're looking to rebuild substantial inventory? No, I can't say that. We have not seen that or heard that.

And you talked about adding capacity in the downhole tool business. Is that any -- is it equipment -- is it more broad based or just for particular product line or two like frac plugs?

It's for frac plugs --

Just talking about any manufacturing capacity?

No, it is others as well. I mean, it's for our artificial lift-related products. And we continue to try to add capacity and efficiency to our casing accessories as well.

All right. Well, thank you very much.

Thanks, Jeff.

And your next question comes from the line of Blake Hutchinson with Howard Weil. Please proceed.

Good morning.

Hi, Blake.

hris, I apologize first of all, if this has been covered. It's been a busy earnings morning. Thinking about your kind of guidance for 2Q. I understand Jim's commentary that the gestation period, some of the order flow is more towards the end of second quarter, maybe third quarter oriented and so we may have a bit of a maybe bridge period before we see that, the reaction from the revenue stream.

But specifically towards the lower end of your guidance range in the $0.38, I mean, it doesn't seem like there is anything from a cost structure standpoint or you have called out as a major setback. Is there something we should be paying attention to that's just a tough comparison to 1Q or are we kind of doing this on an keeping an air of conservatism to what you guys are seeing out there?

Blake, you saw us in the beginning, in our last conference call offer a little bit broader range than we had in the past on our guidance and working on our consistency and execution. And I think we've gained good progress this quarter but maintaining a little broader range, if you will. So I don't think you ought to read a whole lot into that more than what I just said.

But also I think the other message we're clearly wanting to send is don't draw a direct line between the increase in orders, the dramatic increase in orders that we've seen this quarter and that that is going to be reflected immediately, right, because that increase in orders is a mix of near-term sales but also some capital goods that we're going to deliver over time.

Right. But there is no specific kind of sub segment like, say, drilling that you just see, you know, backing off of what you cited are near record levels that is the concern? It's more that consecutive bent?

Right. And, Blake, you know our Subsea business in terms of deliveries is a little bit harder to forecast. We've said that in the past. But no.

Okay. Other than that, nothing to call out. Well, great. That's all I have this morning. Thanks, guys.

Very good, Blake.

And your next question comes from the line of Ole Storer with Morgan Stanley. Please proceed.

Hey, you have Ben Swamley] standing in for [Ole] right now. A question that we had was, was there anything in the backlog that was realized during the quarter that might have been entered in a lower pricing environment or a lower margin environment, and that as we move forward you would see that same type of business move into a more profitable?

Yes. As Jim mentioned, we had the final delivery on a group of catwalks that we had initially contracted, I think, back at the end of 2011 and the last of that group of seven was delivered in Q1. But in terms of the new backlog, we certainly didn't intend for anything to be an exceptionally low margin here, although there is that -- a mix within the different product areas and a range of margins as one would expect across the product area. Anything you can think of, Prady?

We do see some opportunity in the Subsea which we're working on in the operational standpoint. But we don't expect to see the benefits until next year.

Okay. Great. That's it for us.

Thank you.

And your next question comes from the line of Robin Shoemaker with Citi. Please proceed.

Thank you. Good morning, Cris.

Hi, Robin.

Thanks. I wanted to ask you, you have had kind of a 20% EBITDA margin target and you're really very close in striking distance of that. What would be required to get back to the EBITDA margins that you had for a while there in 2012 in the 21%, 22% range? Of course, you have made some acquisitions since that time. You saw EBITDA margins dip well below 20%. So is it pricing primarily from here, or some additional efficiency gains from which you've -- efficiency initiatives that you've had already?

The initiatives that we have are intended to improve the margins, Robin. Of course, we have as a maturing public company had to layer in some additional overhead and SG&A costs, particularly as we built out our international network, and we're absorbing those costs. It's also, I think, a bit of a mix effect, as some of our higher-margin businesses recover, like the flow equipment business.

But I think the main point is these initiatives that Prady was talking about of operational efficiency, working on our sourcing and our procurements and the operational excellence that we're driving for.

And have the acquisitions you've made since that time frame, say the last two years, do you calculate those as being accretive to that 20% EBITDA margin or in the same ballpark?

I think in general the acquisitions have been very attractive margins, Robin. And it's just the additional costs that we've incurred. And then, of course, as we all know, the slowing of the North America market in -- since 2012 through 2013 that affected some of our good margin activity there. It's nice to see that that business is starting to come back.

Yes. So just one final question on that then. Since you are seeing recovery in the demand for consumable products from your North American customers and some, I guess, beginnings of some refurbishment of older or perhaps idle frac spreads -- and we did hear one comment on a conference call yesterday about a company that is going to build and deploy a new frac spread. So do you see any possibilities or are you seeing any orders coming in for new frac spreads?

Yes, we hear that same talk, and I think there will be some additions to fleets this year. I think the rate of that will depend upon the pricing that our customers, the pressure pumping service companies, realize. And certain circumstances, I think they are thinking about additions to their fleet at this point to a modest extent.

Thanks a lot, Cris.

Thank you, Robin.

And your next question comes from the line of Brad Handler with Jefferies. Please proceed.

Thanks. Good morning, guys.

Hi, Brad.

Could you please offer some of your insights and perspective on a couple of segments that haven't gotten a lot of attention on the call, production equipment and valves. You obviously characterized those for us in the -- I guess I'll call them U shaped in their trajectory and some recovery. But three months forward what is happening with the outlook, the orders? Some of the long -- the long cycle stuff, in valves, the competitive landscape in production equipment, et cetera?

Thanks for that question, Brad. So as we talked before, if we look back at 2013, the second half of last year saw lower revenue for both those businesses than the first half. In the first quarter here, we saw an uptick in revenue in both businesses and a nice uptick in orders for both businesses. So our expectation remains, as we said before, that we will see some growth over the course of the year in the sales for both those businesses and some operating leverage. Hopefully, that will result from those higher sales.

I think on the competitive environment in production equipment, yes, I think it is the competitive pressures have increased from a number of competitors in certain geographic areas. But I think our folks have done a real good job of expanding our customer base, becoming, I think, better entrenched with our key customers, and better penetrating certain parts of the market. For example, the modularized well-pad well equipment for West Texas, for instance.

On the valve side, we're expecting an increase in orders to begin later this year related to the petrochemical projects that are being constructed and continue to see large quotes in association with those projects and those orders will begin to be awarded later this year, is our expectation.

Great. Thanks. Just maybe a quick follow-up on the valve side then. Can you characterize where you have seen some of the increase? You mentioned the nice pickup in orders. What segment of the business is that coming from?

It has been in the midstream side so far. With our ball valve business, that has done well. Anything else, Wendell?

Yes. We've seen a pick-up in the mining business also, both in the US and internationally, and a little bit in the upstream business. So, you know, every month seems to be a little bit stronger in the valve business. We still feel better about the second half as it continues.

Got it. All right. Thanks, guys. I'll turn it back.

Thanks, Brad.

And your next question comes from the line of Doug Becker with Bank of America Merrill Lynch.

Thanks.

Mr. Becker, how are you?

I am doing well. I'm doing well. I wanted to dig in a little bit more on the downhole technologies. Given the capacity expansion that you saw in those businesses last year, can we get a sense of how revenues were year over year just in that segment?

Yes. So in our downhole business we have seen good increase in revenues year over year. And I think that's across the board with the different products that we have there. Made great progress on the completion products. The greater capacity in artificial lift products and the progress that we've made in the cementing and casing accessories, too.

Would it be fair to say it's close to 20% growth year over year?

It's good growth. Good growth.

And that's still your highest margin business?

It is.

Okay. And you see pricing opportunities, it sounds like there. So we could be thinking about incremental margins, just once again homing in on this part of the business of 40% or so?

Maybe not quite that high, but yes. They are very accretive margins. Yes.

That's hopefully what I wanted to get at. Okay. Thank you very much.

Good, Doug, thanks.

And your next question comes from the line of Rob MacKenzie with IBERIA Capital Partners. Please proceed.

Good morning, guys.

Hi, Rob.

Question for you, Cris. I wonder if you could give us a little more color on the nice sequential in P and I revenue, how that might have split among the three sub segments there? You are up $10 million sequentially quarter-over-quarter and that was really most of the sequential advance. Wondering, you know, where most of that came from?

So, Rob, the biggest grower for us on the P and I side was in flow equipment. The increases in production equipment and valves was more modest, but small growth there sequentially. Most of it came in flow equipment.

And for the reasons we said, Rob, that we are seeing our activity base, consumable products business being driven by the -- have destocking run its course now and now we are reflecting the activity levels there.

Right. Understood. Thank you. And are you able to share with us in that segment who some of your top customers may be?

Our customers in flow equipment would be not so much the big three, but behind that we have, I think, a diverse and broad customer base there.

Okay. Thank you. And how would you characterize the potential now in the market for that equipment now versus, say, in 2010? Has it changed much in terms of what people are ordering? The type of manifolds and kit they're ordering over the past several years?

There is a change, Rob, and a constant effort among operators to try to find, say, fluid ends that give the best service life. Given the different applications in different areas, there is preferences for different stroke length, different coatings, different steel material, stainless, et cetera. The flow iron probably to a lesser degree.

Great. Thank you very much. My final question would be along the line of the pipe handling packages you were awarded in the quarter from Latin America. Can you give us a feel for kind of the rough ballpark for what one of those might contribute to the order total?

So each one is about $1 million. Yes. Seven of them. Yes.

Great. Thank you very much.

And your next question comes from the line of Martin Malloy with Johnson. Please proceed.

Could you give us an update on the manufacturing operation at Broussard, Louisiana, and how that's ramping up and if there are other consolidation opportunities on the manufacturing side out there for you?

Yes. I think we are pleased with the job our team did in managing the transition to the new manufacturing facility and the closing down of the legacy facilities. And although there is always a disruption when you start up a new plant, I think they did a really good job of planning and executing on that. And, yes, we have further such facility consolidations planned this year and next year.

This year for our flow equipment business. Next year for coming on, hopefully, in the downhole business. And we're also looking at some moves and consolidation in our Subsea business this year, too.

And then the strong orders that you saw in the first quarter, have those continued on into April?

So, yes, I don't want to get into the minutia of giving weekly or monthly updates. But I think the positive tone in orders is something we are confident is -- you know, reflective of the trends in the market. Let's just say that.

Great. Thank you.

Yes.

And your next question comes from the line of Mike Urban with Deutsche Bank. Please proceed.

Thanks. Good morning.

Hi, Mike.

So you've talked a bunch about the pickup in the pumping consumables business and how most of that, at least for now, is kind of on the replacement and maintenance and restocking side. You know,if you think a couple years back before we got into this overcapacity and destocking situation, if there is such thing as a normal market in pressure pumping, how much of your business was new equipment versus replacement or maintenance related? I guess just trying to get a sense of what the opportunity could be as that market comes back.

Yes. Keeping in mind, Mike, that we do not supply. We do not make, you know, the big capital equipment or --

Yes.

-- or pumping units or things of that nature. So what we do supply are the spread of flow iron that would be used. And, yes, back in 2012 and 2011 I think there was a fair amount of outfitting of new spreads -- new pumping spreads. And I think maybe even a bigger factor back in those days was this stocking up and having a safety stock of consumable items because the lead times had gotten long, right. And we don't have that now, of course, at all. The inventory is in the hands of the suppliers and in the more normalized market, there is not this shortage mentality by any stretch that there was back in 2012.

And then unrelated follow-up. You've talked a lot about the efficiency initiatives and self-help, if you will, that's hopefully driving the margins higher over the course of the year. How much of that is focused on -- again just kind of getting right what you have and integrating the acquisitions you have and is there -- that you have done already, or are you also kind of thinking ahead to scalability in terms of the organic opportunities that you have talked about as well as getting back into the M&A market the later this year, next year?

I would say the areas of focus and where the opportunities are is as we improve our execution there is some juice there. Procurement. We are a decent-sized company now this year and our buy is about a billion. There is an opportunity there from a procurement standpoint and cost authority and labor. As we focus on those particular areas, we expect to get some productivity. And we had our first supplier conference last month and we are still in the process of building the teams. So some of that benefit will be late later part of this year and also next year.

But at the same time, as we mentioned before, we are not happy with our R&D investments. We spent last than .5% of our total sales on R&D investments. We need to invest money there for future growth. 2015 and beyond. And also improve our sales presence regionally and globally. And that's what we're focused on. Productivity on one side. We need some of those savings to invest in R&D commercial business.

It's very much a scalability is the real focus for us, Mike.

I guess I wanted to make sure that -- or try to understand that as you do start to think about getting back into growth mode, especially acquisition, that you would think that anything that you would add on would -- again subject to business mix -- would be at those kind of higher or normalized margins that you are hoping to achieve rather than having to take a step back to integrate again.

That's our aim. But, Mike, we do intend to continue to do acquisitions. And so integration is an ongoing process for us.

Okay. That's all for me. Thank you.

Thanks, Mike.

And your next question comes from the line of Tom Curran with FBR Capital Markets. Please proceed.

FBR Capital Markets. Tom Curran. Good morning, guys.

Hi, Tom.

Cris or Prady, taking a step back, looking at the onshore international landscape for drilling equipment, could you speak to maybe -- and quantifying it however you prefer, to whatever degree you can, the nature of the opportunities you're seeing outside of Latin America? Specifically Russia and the Middle East?

Yes. Middle East is a good market. We continue to get some nice orders there associated with new equipment. And from a handling tools standpoint, good opportunities in Russia and good orders there. But more on the capital equipment side, the Middle East.

Okay. And for those opportunities in either market, how are you going to market with the drilling equipment products? You know, is it just discrete one-off relationships with the customer? Do you tend to find that your partnering or often having your products added alongside those of one or other companies? Is there any kind of alliances involved?

The land rig market, many companies building land rigs want to choose the components that -- of different pieces of equipment that they want to put together rather than buying a turnkey rig, and that is where we have good success. On the other hand, on the offshore side I think we are making progress on alliances with some of the shipyards that are building new offshore rigs.

Okay. And then turning to specifically the ROV business and then for flow control, you know, treating iron and fluid ends, where would you estimate your shares are at for those two businesses respectively at this point?

For flow equipment I think we're probably a number three provider in that space. And we are relatively small share behind some much larger companies. And then what was the other one, Tom?

ROVs.

ROVs. Clearly, we think we have a very good share there. A very well regarded offering and probably the leading reputation for reliability. And so we are very much in the very top tier there.

My impression is over the last few quarters you might have pulled at least slightly into the lead versus having been sort of neck in neck with Schilling?

Yes. I think we've done quite well here recently. I think a strength we have is the vertical integration and the breadth of components that we offer, not only on our completed units but those components that we can sell even if we don't win the whole vehicle.

Okay. Great. I don't want to keep you guys too much longer. Thanks for squeezing me in. I'll turn it back.

Sure, Tom. Thanks.

And your next question --

We'll take one more question.

Your next question comes from the line of Don Leben with Robert W. Baird. Please proceed.

Thanks for squeezing me in. Just first on flow equipment. Can you talk about, with the market coming back normalizing, as that market grows further how much rooms in terms of capacity do we have in the current cost space?

We do have capacity. Obviously, we are a much higher volume than a year and a half ago. But we feel that there is a lot of room for better efficiency and we do want to have more capacity in a consolidated way. And so we are currently investing in a large new manufacturing facility for our flow equipment business and we expect to have that online in the fourth quarter of this year. But working on the supply chain side is also important and we're doing that, too, and trying to address any constraints we see there, Dan.

Great. And then one follow up on the comment earlier about you needing to increase the level of R&D to support future growth. How do you view the long-term sustainable level of R&D that you need to undertake to support the growth of the business?

We are still trying to figure that out. I would say 2% is a good rule of thumb. But it will not get there in the next 12 months. It will be a journey.

Thanks, guys.

Thanks, Dan. So we appreciate your interest and your good questions and we look forward to another call with you next quarter and hopefully see you in the interim. Thanks.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect, and have a great day.