Forum Energy Technologies Inc (FET) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Q3 2014 Forum Energy Technologies Inc. earnings conference call. My name is Ian and I will be your operator for today.

(Operator Instructions)

As a reminder, the call is being recorded. I would now like to hand the call over to Mr. Mark Traylor, Vice President of Investor Relations. Please proceed, sir.

Thank you, Ian. Good morning and welcome to Forum Energy Technologies' third-quarter 2014 earnings conference call. With us today to present formal remarks is Cris Gaut, Forum's Chairman and Chief Executive Officer; as well as Prady Iyyanki, Chief Operating Officer; and Jim Harris, our Chief Financial Officer. 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, may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Forward-looking statements involve risks 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 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 release. 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, our Chief Executive Officer. Cris?

Thanks, Mark. Good morning. I will provide an overview of our third-quarter performance and offer a few thoughts on the outlook for our business and then I will turn it over to Prady, who will talk about our business improvement and operational excellence initiatives. Jim will then provide more detail on our financial results.

We were very pleased with the quarter as we delivered record revenues and operating income. Growth, margin improvement and operational excellence remain primary focus areas for us and we are beginning to see the fruits of several initiatives we have put in place. We have continued to add strong new talent throughout the organization to augment these efforts and we expect to see additional benefits from these initiatives as we move through 2015.

Adjusted net income was $0.52 per diluted share and that's excluding $0.02 per share of non-operational items for foreign exchange gains and transaction expenses. Revenues for the third quarter were a record $469 million, a sequential increase of 10% from the second quarter of this year. Operating income excluding non-operational items was a record $78 million. Adjusted EBITDA was a record $95 million. That's a 14% increase over the second quarter. Total inbound orders during the third quarter were the highest ever for the Company at $489 million, an 11% increase over the second quarter. The third quarter book to bill ratio was 104% for the Company as a whole, 103% for Drilling and Subsea and 106% for the Production and Infrastructure segment.

Within our Drilling and Subsea segments, the Drilling product line experienced another strong quarter with record revenue and a book to bill ratio exceeding 100%, as it has for number of quarters now. We continue to see high demand for consumable and tubular handling products as well as drilling capital equipment. Driving this demand is the growing level of horizontal drilling in North America and the strength in orders of new build rigs. During the quarter we received orders for over 50 Pipe Wrangler Catwalks and over 50 Floorhand Iron Roughnecks. Sales for our Drilling product line are now about equally split between North America and international.

At our Subsea product line, although revenue decreased 2% sequentially from the record level the prior quarter, order levels were up 6% compared to last quarter. As previously announced, we received the contract to supply eight Perry Work Class ROVs with delivery dates throughout 2015. Our backlog in the Subsea business is at its highest level ever and will be strong going into 2015.

The Downhole Technologies product line realizes sequential order increase of 13%, primarily on improved demand in both North American and international markets for our Davis-Lynch cementing and casing products. We also saw strong demand for our ProDrill composite frac plugs as stage counts continue to increase for the fracturing of horizontal well completions.

Moving to our Production and Infrastructure segment, we had sequential revenue growth of 8% with increases in Flow Equipment's pressure pumping consumable products and in Valve Solutions. Inbound orders in this segment increased sequentially by 26% compared to Q2 with strength in each of the product lines.

Flow Equipment's third quarter revenue increased 24% sequentially while orders increased 45% in the third quarter due to the high levels of hydraulic fracturing activity in North America. The construction of our new, much larger manufacturing center in Corpus Christi is on schedule for completion later in the fourth quarter to serve our Flow Equipment product line.

Our Infrastructure businesses are beginning to see the improvements in the second half of the year that we have been anticipating. Valves revenue increased 10% sequentially and inbound orders were up 7%. In Production equipment, orders were up 32% sequentially and we are seeing larger tenders from customers seeking to lock up capacity for Production processing equipment.

Across Forum, much of our business is tied directly to the activity levels of the global oilfield service companies and of the North America land drilling contractors. We have experienced five consecutive quarters of record revenues and strong bookings. At this point, the demand outlook for our equipment and products is favorable. Our focus continues to be on growth, margin improvement and operational excellence.

I will now hand it over to Prady Iyyanki, our Chief Operating Officer to update you on our progress in these focus areas. Prady?

Thank you, Cris and good morning, everyone. Though we are in the early stages of our business improvement initiatives, I am pleased with the progress the team has made to date. Overall, operational execution is getting better across all product lines and we are seeing the results in our performance. We have added significant new talent at the product lines and at the corporate level to increase the impact of initiatives we have in place. I'll mention a few of these key individuals during my remarks.

We have improved our manufacturing and distribution on time delivery and we are also working on improvement of our inventory turns. We promoted Larry Maurer, previously the Vice President of Manufacturing for Drilling to Vice President of Global Manufacturing for Forum to drive further improvements in productivity, on-time delivery and inventory terms. We have added a Vice President of Procurement for Forum, Darin Harvey. Darin is a seasoned procurement professional who has joined us from Honeywell. We have realized savings in 2014 from a procurement initiative that was begun prior to his arrival and we expect further improvements in 2015 and beyond under his leadership.

The development of our quality management strategy is underway with key hires in most of our product lines. We have started lean projects to reduce costs and cycle time in Production Equipment and Flow equipment product lines. We are evaluating and prioritizing the product development opportunities which best serve our customer needs and expect approximately $30 million to $50 million of incremental revenue growth in 2015 from this initiative.

We are in the early stages to produce growth and operational excellence and we expect to build on these early results as the company matures. Now, our CFO, Jim Harris will discuss our financial results in great detail. Jim?

Thank you, Prady and good morning, everyone. Consolidated revenue of $469 million for the third quarter is up 10% sequentially and represents the fifth consecutive quarterly revenue record for the Company. Our Drilling and Subsea segment revenue of $307 million was 10% higher than the previous record primarily due to the high demand for drilling equipment. Our Production and Infrastructure segment also had record quarterly revenue of $162 million, an increase of 8% sequentially on higher sales of pressure pumping consumable products and valves.

Net income for the third quarter was $52 million including $4.5 million in foreign translation gains mostly attributable to the appreciation of the US dollar relative to the British pound during the third quarter, offset by $1.5 million of transaction expenses. As we have discussed in prior quarters, we treat these book foreign exchange gains and losses as non-operational since they relate primarily to the translation of US dollar denominated receivables into another currency for reporting purposes and have no economic impact in dollar terms.

Operating income, excluding the non-operational items, was $78 million, up $10 million or 16% from the second quarter.

Drilling and Subsea operating income of $58 million was up 15% sequentially; most of the increase coming in the Drilling product line. Production and Infrastructure operating income of $30 million, an 11% improvement sequentially, was due primarily to increased shipments of pressure pumping consumable products.

Adjusted EBITDA margins in the third quarter were 20.2%, in line with our expectations with both segments improving sequentially as we are beginning to see the benefit of the initiatives that Prady just addressed. As previously disclosed, we aim to consistently achieve EBITDA margins of 20% or better even as we invest in new product development and operational improvement initiatives.

Adjusted diluted earnings per share for the third quarter were $0.52. We expect diluted earnings per share for the fourth quarter of between $0.45 and $0.51. The slight decrease from the third quarter is due to the holiday season slowdown that we have come to expect from our customers. Our diluted share count for the third quarter was 96.2 million shares.

Net debt at the end of the third quarter was $347 million, down $57 million from the second quarter as we continue to pay down debt with free cash flow. We had $17 million outstanding on our $600 million revolver at the end of the quarter. We generated $56 million in free cash flow after capital expenditures during the third quarter, putting us at $140 million year to date.

Interest expense for the quarter was $7.7 million and is expected to be about the same in the fourth quarter. Corporate expenses were $10.2 million in the third quarter and we expect the run rate for corporate expenses to be around this level in the fourth quarter.

Capital expenditures were $12.5 million in the quarter and are now projected to come in at $55 million for the full year. Depreciation and amortization expense was $16.6 million for the quarter and is expected to be about the same in the fourth quarter. Our effective tax rate for the third quarter was 29% and we expect the same 29% for the full year. For more information about our financial results, please review the earnings release on our website. I will now turn the call back over to Cris for concluding remarks and to moderate Q&A.

Thanks, Jim. I am very pleased with our strong performance in the third quarter and believe Forum is on the right track as we finish 2014 and look forward to 2015. We will continue our focus on growth, operating excellence and margins. I want to recognize and thank our employees for their efforts and their good performance. We are coming together as a Company and are progressing well on our objectives. Thanks for your interest and at this point we will open the line for questions. Ian, let's take the first question.

(Operator Instructions)

Your first question comes from the line of Doug Becker of BofA Merrill Lynch.

I wanted to touch base on the guidance for the fourth quarter. I appreciate the holidays coming up. Can you give us any quantification of what type of normal seasonality your business sees as the holidays approach and you have fewer manufacturing days?

I think there are two things that impact the fourth quarter, Doug. One is just the number of holidays, and particularly in the second half of December, late December; and the other is just weather issues -- very hard to recover from any weather issues that would occur. They tend to happen late in the quarter and there's just not time to recover.

There is one other factor as well. Since very little of our business is on percentage of completion, but rather on actual completion and shipping in order to recognize revenue, we are dependent upon our customers to actually accept delivery of the goods at the end of the quarter. As we are focused on balance sheet measures and our CapEx spending, what we have seen the past couple of years is sometimes customers would prefer to defer taking delivery until right after the first of the year.

It's hard to quantify all those factors, but we've tried to take some of that into account in our guidance. We have seen no slowing in our orders or in our performance as of this point in time.

If you characterized the weather, are you trying to take a situation like last year, which I would characterize a little more severe than usual, and have you tried to take any oil price concerns into that guidance?

We have not factored oil price concerns into that guidance. I think we have taken into account more of a normalized weather environment. I think last year was more severe.

Okay. One for Prady -- you mentioned $30 million to $50 million of incremental revenue growth for next year. Can we get any color on where those gains might be coming from?

I would say in the drilling product line, there's a couple of products in development, in, valves, and also in the downhole sector. Those are the three or four product lines where we expect to see some of those gains.

The Well Intervention space as well; we have got some important products coming out as well.

One last one -- as we think about 2015 in drilling and subsea, any initial thoughts in which of your businesses you think grow the fastest in that segment?

Within Drilling and Dubsea?

Correct.

We've seen the strong orders in drilling reflecting the level of activity and the move to the next generation of land rigs. I think the downhole and completion product space is benefiting from the more complex completions and higher stage count that's happening there, and longer laterals. As we look ahead, I think those would be high on the list of companies that we would look to for growth.

Over on the Production and Infrastructure side, I recognize you didn't ask about that, but I think the valves business has turned the corner, as reflected in our comments, and is looking up and we are expecting growth there in 2015.

And our pressure pumping business continues to be strong going into 2015.

Great, thank you very much.

Thanks, Doug.

We have another question for you. This one's from the line of Jeff Tillery at Tudor, Pickering, Holt. Please go ahead.

Good morning.

I apologize if I missed this -- my line was breaking up when you were discussing the P&I orders. Could you give some color around, obviously huge improvement sequentially. You've talked about qualitatively, Valves and Production Equipment turning the corner. Could you give us some color -- is it new customers, is it new geographies, some color behind what drove that increase?

On the production infrastructure side, within Flow Equipment it is the activity levels; and it is mostly on the aftermarket service side -- repair and replacement. There is probably some new capital equipment involved in that, since we continue to get some level of manifold trailers, missile trailer orders. But it is driven by activity and the repair and replacement side.

The valves pickup I think is driven at this point by the upstream and midstream demand. We have not yet seen the larger project orders associated with the process industries. On the production equipment side, we have been looking for an improvement in that business in the second half of the year. Their order book has begun to increase, and as we mentioned, we are bidding, but not yet have been awarded some larger contracts there.

Thank you. And then the color you gave in the release and on the call around the 50-plus iron roughnecks and catwalks ordered -- can you put that in context? What has been a normal full year's worth of shipments for products like those?

Jeff, to give a feel for a normal quarter for us, looking back over the past couple of years, for both catwalks and for the roughnecks, a good quarter would be from anywhere from 20 to maybe high 30s. So that should put in context that to be over 50 is an excellent quarter for both of those products.

The last question I had was around the Subsea business. I'm not looking for customers who have changed behavior based on oil price, but given there has been a longer gestation period in terms of the IOCs flattening out their spin levels -- the discussions with your ROV customers changed at all over the last six months?

Most of the ROVs that have been ordered this year, many of them have been parts of large bid packages associated with additional vessels, new vessels that are being built and need to be outfitted with ROVs. Those vessels are going to be delivered and the ROVs shipped to our customers during 2015 and some probably into the early part of 2016.

So we are seeing a wave of new vessel construction here. Don't know that, that is going to continue at the very high rate it's been here recently. But we do think there will be an opportunity to be more active. And something we're focused on is the aftermarket business for the large fleet of Perry brand ROVs that we've supplied to our customers over the years. The aftermarket business, I think, can be an important one. It's not one that we have focused on as much as we could, given the activity on the newbuild side.

Great, thank you guys very much.

Thank you very much, Jeff.

We have another question for you. This one is from the line of Blake Hutchinson of Howard Weil. Please go ahead, Blake.

Good morning, guys.

Good morning, Blake.

My first question is around the downhole completion tools business and some of the numbers that you gave out. A very good quarter there.

Is what you are seeing there a culmination of expanding your manufacturing capacity to service both the US channels to market as well as international? And that having the first full quarter of servicing both of those markets at one time, having that capacity? Or is it more an indication of a catch-up in current demand, like the flow equipment side has seen?

It's on two fronts. The team has made great progress, Blake. They continue to build our presence internationally; and internationally, that business is growing very strong, but also they made great progress in North America. We have better commercial presence across all the basins and that team is gaining share in North America.

So not necessarily anything to warn us off that being a better baseline to work from at this point?

I think it is reflective of activity levels and I think we now have our production up where we want it to be, there. As Prady said, good improvement in that business.

Great, that's helpful.

A follow-up on the catwalks and iron roughneck orders -- should we assume qualitatively that those are spec to newbuild, or is this indicative of either a replacement or upgrade type of market evolving?

I would say most of the catwalks are for newbuild rigs, Blake. On the floorhand tools, it's probably a mix of both newbuild rigs but also some replacement floorhand iron roughnecks, as those have a frequent replacement cycle.

Okay thanks, that's helpful. I will turn it back. Appreciate it.

Thank you, Blake. We have another question for you.

This one is from the line of Jonathan Sisto from Credit Suisse. Please go ahead Jonathan.

Good morning, gentlemen.

Hey, Jonathan.

Cris, I want to follow back up on production infrastructure. Obviously the commentary around Flow Equipment was very good. Global Tubing is very additive. But if you exclude those, you mentioned Valves has turned the corner. I was wondering if you could give a little bit more color about Valves and Production and Infrastructure and how we should be thinking about that business, both as it was in Q3, but on a go forward basis?

Let's look back a bit. Both the Valves business and the Production Equipment business were growing quite nicely for us until the middle of last year. Then in the second half of 2013, both of those infrastructure businesses, as we refer to them, hit a soft spot for different reasons. We anticipated that there would be an upturn in the second half for them. The Valves business has begun to see that upturn and we were quite pleased with the performance in the Valves business.

On the Production Equipment side, although we saw the increase in orders, we did not see in the third quarter the increase in revenue for Production Equipment; and we are expecting that to begin in the fourth quarter. Different factors driving them: as I said, I think the Valves, the upstream, and particularly midstream areas, and we're anticipating these bigger projects in the process industries will kick in, in 2015 and give that valve business some good legs.

Very good. I might try and take a stab at 2015. You're more manufacturing by nature of the company as a whole, thus you have longer cycle businesses in several of your product lines. Should your visibility be better than onshore activity for 2015, and your top line growth be able to keep that 10% to 15% organic cadence in an $80 WTI-type environment?

Our customer base, Jonathan, as you know, is mostly the service companies and the drilling contractors. Our revenue will be driven by their CapEx and operating expenditures. As rigs keep working, as stages continue to be fracked, our OpEx products will continue to have a good market. I don't think we have the overstocked situation or anything close to it that we had back, say, in 2012.

On the CapEx side, we have the benefit of some backlog there associated with the new rigs and new ROVs that have been ordered and we continue to hear our customers talking about those because they can continue to get longer-term contracts. We are keeping an eye on that as well. It's harder to give more definite picture of 2015 at this point, but as our customers firm up their plans, that will give usa better picture..

It's a tough one to answer: tell me where the oil price is going to be and for how long.

Thanks, Cris. Have a good afternoon.

We have another question for you. This one is from the line of Brad Handler at Jefferies. Please go ahead, Brad.

Good morning. The questions just keep coming.

A similar sort of topic, maybe coming at the questions a slightly different way. Cris, you just mentioned, on the ROV side how much has been tied to new vessels. How deep into what visibility do you have on new vessels have awards been given for ROVs? That question is clear?

I think there are still some situations that we are aware of that we are in discussions for, but I don't know that we are going to see too many more of these kind of mega orders that we have seen for six, seven, eight ROVs at a time. Those have been quite remarkable in our experience. Sometimes you talk to a customer that they want to standardize on your equipment and they'll give you an order for two, and then two, and then two later on, but to get six, seven, and eight at a time, as we have done several times this year -- that's been pretty good, but I wouldn't expect that to continue.

Okay, that's helpful, and it sounds like there aren't that many vessels that you are aware of for which ROVs have not been granted. If you can put some percentages on that, if you can?

There are some, both in the work class area and in the larger trencher area. As I say, I think the very mega orders that we have seen associated with large building programs don't see as many of those at this point.

The after-life market which Cris addressed early on, from a business case standpoint, that becomes more attractive for customers; and that will be focused on, apart from the newbuild ROVs, is to build that business up from an afterlife standpoint.

Sure, thank you for that. I appreciate the color.

Could I ask the same sort of question for US land rigs? How deep into what has been ordered, or the visibility we all have on 2015 land rig orders, have you sold equipment into, or has equipment been sold into? Same sort of question -- of the 200 some odd land rigs that appear to be coming into the market based on announced cadences by the drilling contractors, how deep into that have you sold equipment? Conversely, how much more is there, just based on what that visibility lends us, is there for you to sell into?

Brad, you see the continuing announcements, as we do, for the land drilling contractors in North America and the number of new land rig announcements just keeps coming. That continues apace. I would also mention on the jack-up side there are a very large number of jack-up rigs on order over the next couple of years and we have not seen all the orders that we expect to receive coming out of that, either.

Got you, thank you very much. Appreciate that.

Thank you very much. We have another question for you. This one's from Rob Mackenzie at Iberia Capital.

Thanks, guys.

My question comes back to margins, and I apologize if this was asked earlier; I had to step out briefly. You obviously came back above 20% EBITDA margins this quarter. I know that's been a goal for you guys for some time, to be sustainably at or above that level. Your guidance seems to imply fourth quarter margins taking a dip here.

Can you give us some thoughts as to how you see margin progression, not just near-term, but also longer-term, particularly in the context of bringing in your new procurement executives and some of the other moves you're making, which seem to support better margins going forward. Thank you.

We have had as a goal that we talked about for the past few quarters of 20% EBITDA margins. We have achieved that in Q3 and we don't look to be retreating from that in Q4. I think the question on Q4 is just how much we can ship and deliver and recognize revenue on, given the holidays and the weather and customers' desire to put things on their balance sheet by the end of the year.

Okay, and then how much of those margin gains from your self-help initiatives do you think you can preserve going into next year? And frankly, what would your next target be if you're so bold on EBITDA margins? And if you wouldn't mind trying to roll into that thought process, how weaker (stet)

Sure, as we have mentioned on the earlier calls, our strategy for the next several quarters is still going to be at the 20% EBITDA margin. On one side we are going to take cost out from a procurement standpoint, from a manufacturing standpoint. On the other front we are going to invest in the product development and some of the systems and structure and commercial presence we've got to put into place, all to position us for growth. That's been a strategy for the last several quarters and that's a strategy at least for the next few quarters, going into 2015.

Great, thanks very much. Appreciate it.

Thanks, Rob.

We have another question for you. This one is from the line of Robin Shoemaker from KeyBanc Capital Markets.

Thank you, Cris, nice to see this all coming together.

I wanted to ask you about the manufacturing procurement/outsourcing initiatives that you have had underway, and which have already started to demonstrate progress. If the business does start to slow and orders start to fall, in terms of these initiatives, how would you expect them to perhaps benefit you in a business slowdown compared to where you might have been had you not undertaken these?

Let me start that and then I will turn it over to Prady. Clearly, on the procurement side, reducing our cost of material is a direct impact on our margins. Then, on the manufacturing efficiency side, I think we are going to be better positioned to manage our direct labor costs in the face of changing market conditions, up or down.

I'll say a couple things. One, our cash position is pretty good, as you know, so if there is a slowdown, obviously we will look at the M&A standpoint if prices get affected But independent from that, from an operational standpoint, we are managing the variable costs, which also includes the indirect cost, which is directly proportional to the amount of manufacturing we need to do.

From a procurement standpoint, obviously it gives us more leverage on supplies to take more cost out. I think there are angles on both sides, whether it is a growth standpoint or a slowdown. But I think the manufacturing and procurement should give us benefits on both sides, whether it is a growth or a slowdown.

Good, thank you.

One other follow-up question -- you did mention briefly M&A acquisitions, and we can see that this year has been a slightly less active year, especially compared to last year. How do you see the environment -- and I know, Cris, you have been through several cycles and you now have seen a big retreat in the equity market, equity valuations of public companies. How does that play into the valuations of private companies you may be looking at? And are we frozen in terms of valuations, buyer's perception versus seller's?

Right. I think the primary thing that drives our timing on acquisitions is that we took that pause in the second half of last year and the first half of this year as we focused on our internal improvement and consolidation and integration initiatives. Then we have really gotten cranked up again on acquisitions here from the middle of this year on, and it takes a while to move those forward to finality.

As regards your question about the market and pricing, my experience has been that, in the event of a down market on the private side, sometimes sellers' expectations are a bit sticky; whereas on the public side you get that feedback every day. On the private side, sellers can get a number in their mind and it's a little harder; they don't get the immediate feedback about how that market is changing. That makes it a little bit more difficult on the private side in a down situation, unless there are some external pressures on the seller.

Right. Certainly now, your financial situation -- I mean you are very well positioned to do some sizable acquisitions, even above the $50 million to $100 million sweet spot that you have identified in the past. It would seem to be a good time, but as you say, the buyers may not have translated all that's happened here lately into their expectations.

That's right and you're right, we do have the firepower.

Right, okay. Thank you, Cris.

Thanks, Robin.

Thank you, Robin.

We have another question for you. This one is from Brandon Dobell from William Blair.

Maybe, guys, if you could give us some expectations for how we should think about (stet) or levels and DSOs, as we finish out here in 2014 and move into 2015, as a way to gauge some of the operational or process improvements that you guys are making -- how that impacts some of the working capital dynamics?

Sure, Brandon.

We are very focused on our cash flow in the fourth quarter. As you rightly point out, the largest consumer of cash flow is working capital. Our DSOs have trended up a little bit this year, a matter of days, of a few days. We're very focused in the fourth quarter of getting that back down to our historical levels, which have been at the 60 days or better. You should plan on in the fourth quarter seeing that happen.

We have a challenge, generally at the end of the calendar quarter. Customers tend to pay less, and at the end of the year with the holiday season, that can be worse, but we're going to push for achieving as much of those collections as we can prior to that mid-December. We've also seen a good increase in our inventory turns this year, pushing to get back up above our targets of three turns, but we are starting to approach that with the initiatives that Prady described earlier.

Going back to DSOs for just a moment, Brandon, we also have a higher international mix of customers, which historically they have also extended DSOs; and that is part of what has driven us up the few days that we have had, but we do feel we have an opportunity to bring that back in.

Okay. Cris, you talked about the aftermarket or service business in ROVs. Any feel for at what point that starts to make a difference in revenue growth, and given it can be a pretty good margin business. And how should we think about the potential impact for you guys on the margins?

It will take some time. You are right, Brandon, to really ramp that up into a significant part. What would you think would be reasonable, Prady there?

The opportunity we are looking at is over 400 ROVs or Perry units installed fleet. I don't think every one of them would be a target, but I would say 60% to 70% would be a target for us over a period time. But by the time you build infrastructure and presence -- and the customers are expecting a regional presence in Brazil and Singapore and Houston -- so by the time you build that and build the business, we expect to see the returns over the next five years.

In terms of when you might begin to see it in the results and hear us talking about it, I don't think that will be before the second half of next year.

Final one for me: if you look at a couple of the major product categories -- downhole tools, consumables, maybe even ROVs -- how much improvement have you guys seen in manufacturing times or manufacturing process issues? I'm just trying to gauge how much more improvement you guys can get on the manufacturing throughput, now that you have got some of these systems and the capacity put in place.

We are in the early stages of making those improvements. If we look at our biggest business line, Drilling, we have made about 5 to 10 points of on-time delivery in important improvements over the last several months and there's still a lot more opportunity for us to make improvements in on-time delivery on the manufacturing and also on the distribution.

Okay.

We've seen that through the large new facility we opened in the drilling business the beginning of this year. We are going to do the opening of our new consolidated facility in our Flow Equipment business in December of this year and that'll bring some of those efficiencies. Then in our Downhole business we will look to be doing some of that next year.

We will take one more question, Ian.

We have a question from Darren Gacicia from Guggenheim Securities.

Good morning, guys. Thanks for fitting me in.

You talked about success in the Downhole business, can you give me a little sense of the product lines that are driving that? Is it frac plugs? If can you weave in there a little bit about how do you think lead times are for orders there? And where inventories may stand in those businesses for those product lines?

Within our Downhole products business, they need to be responsive business. They have to be able to respond quickly to orders. That is true in our composite frac plug, drillable frac plug business. It is true in our artificial lift related business, Cannon Services, and in our cementing and casing accessory business, Davis-Lynch.

All of those are seeing the benefit of a more intensive completions market, and in the case of Cannon, artificial lift and complex wells. And from a geographic standpoint, although the frac plugs is US, both Cannon and Davis-Lynch are benefiting from the North America market and international in our property base.

Where do you think inventories are for products across lines? And what are usually the lead times you see for order flow? It seems like you are fairly constructive on what the near-term outlook is. The equity market's suggesting a little bit more concern about (technical difficulty) what the visibility point is, in case something changes?

Darren, you broke up the last few points of your question. Could you repeat it please?

Can you hear me okay now?

Yes, thank you.

As I was saying, inventory levels within the market on your different lines of Downhole, and then a little bit more on lead times for order flow, because the market is definitely showing -- the stock market, anyway, is definitely showing that it gets concerned about what the trajectory of businesses are. I didn't know when you may have visibility to maybe change what seems to be a pretty positive viewpoint, if it were to happen.

I would say the businesses like the Downhole or the Flow Equipment pressure pumping, the consumable part of the business and the Drilling, on-time delivery, lead times -- that is the recipe for success in those businesses. As our on-time delivery and cycle time reduction initiatives continue to make progress, we will continue to do better in those businesses.

The execution both in the pressure pumping, the Flow Equipment business, and also in the downhole businesses have become better. As you know, we are building our, increasing our capacity of the Flow Equipment business by the end of the year in Alice and that will give us some more capacity and we're doing the same thing in downhole. In general, our cycle times are getting shorter and our on-time delivery is getting better.

That's right. Taking the Davis-Lynch product line, for instance -- we are getting the inventory on hand and in our distribution sites so we have the right inventory and can respond more quickly to our customers, and that's helping us gain share in the North America market. So that's what we're looking to do. I do not think that our customers have an oversupply of inventory of these kinds of parts on hand themselves. They're looking to us, and folks like us, to have those stocks that they can order from when they need it.

That's great.

If I could slip one more in on a slightly different topic. People ask a lot about supply chain benefits to margins and the rest. In one of the answers, you talked about, you countered with also talking about R&D. Is there an offset here, where some of the gains you may get from supply chain benefits, you're looking to plow into R&D? And that maybe mutes what could be a better trajectory for margins because we're reinvesting in product lines?

Darren, you are right. Our strategy is, on one side to focus on procurement and manufacturing efficiencies and cycle time and on-time delivery, and take cost out of the system and make the cycle times better. If that was the only activity involved, yes, the margins would go up, but at the same time we have to position the business for growth. We need to invest in product development and our commercial presence not only in North America, but also internationally. All those need investments, so we are taking some of the costs we are taking out of the system and putting it back in investments. As a result, what they are targeting is to be at the 20% EBITDA for the next several quarters, which is what we've done for the last four or five quarters.

Got you. Congratulations on a great quarter and thanks for taking my questions.

Great, Darren. Thank you.

We appreciate you all joining us and good discussion. Ian, I think that will conclude the call.

Ladies and gentlemen, that concludes your conference. Thank you very much for joining us today. Do enjoy the rest of your day.