Forum Energy Technologies Inc (FET) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2014 Forum Energy Technologies Inc. earnings conference call. My name is Tia, and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference.

(Operator Instructions)

I would now like to turn the call over to your host for today, Mark Traylor, Vice President of Investor Relations. Please proceed, sir.

Thank you, Tia. Good morning. Welcome to Forum Energy Technologies fourth-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. 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 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 as of 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 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 Chairman and Chief Executive Officer.

Thanks, Mark, and good morning. I will provide some highlights of our fourth-quarter and full-year 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 cost-reduction initiatives. Jim will then provide more detail on our financial results.

We had an excellent year in 2014. We delivered record revenue, net income, and free cash flow. We strengthened our Management team and improved operational performance. In the fourth quarter, we earned $0.48 per share on an adjusted basis as our business began to soften late in the quarter with the collapse in oil price. I think an important point to understand about Forum is our Company is scalable as activity levels move up and down. And, throughout the ups and downs of the business cycle, Forum will generate significant free cash flow.

Late in the fourth quarter of 2014, we began to feel the impact of lower oil prices on our operations in terms of volume. Some customers deferred taking delivery of drilling and other capital equipment we had completed and had ready to go. We also saw a decline in orders for our short-cycle, book-and-ship consumable items. Total inbound orders during the fourth quarter were $420 million, a 15% decrease from the level in the third quarter. The fourth-quarter book-to-bill ratio was 96% for the Company as a whole, 85% for the Drilling and Subsea segments, and 114% for the Production and Infrastructure segment.

Within our Drilling and Subsea segment, the Drilling product line had a book-to-bill ratio of 85% in the fourth quarter on substantially lower orders for Drilling capital equipment due to a slowdown in orders for new build rigs. We have also begun to see lower orders for consumable Drilling products with the reduced level of drilling activity in North America.

At our Subsea product line, orders decreased 40% sequentially from the record level set in the third quarter when we received significant bookings for work class ROVs. Although orders for ROVs tend to be quite lumpy from one quarter to the next, we continue to have a large backlog of ROVs to deliver in 2015. During the fourth quarter, we received an order for custom designed Subsea equipment from Akastor Offshore, and that is the third such system we have built. The Subsea Orientation Equipment System will be operated from a Subsea equipment support vessel eliminating the need for a deepwater rig to install Subsea wellhead equipment. With our equipment installed, the vessel will also do well intervention and wellhead recovery.

The Downhole Technologies product line had a sequential decrease in orders primarily on lower demand in North American for frac plugs and timing of international sales of our Davis-Lynch cementing and casing products. However, in the fourth quarter, orders for our Davis-Lynch products in the United States were the highest this year as we continued to improve market share. Forum recently received the number one ratings for downhole drilling and cementing equipment in a leading customer satisfaction survey.

Moving to our Production and Infrastructure segment, inbound orders in this segment increased sequentially by 7% compared to the third quarter, primarily due to a large gain in orders for our Production equipment product line where orders were up 32% sequentially. This follows a large increase we experienced in Production equipment in the third quarter, as we continue to see large tenders from customers and to gain market share.

Flow Equipment's fourth-quarter revenue increased 10% sequentially while orders decreased slightly in the fourth quarter. We are expecting a slowing from the previous high levels of hydraulic fracturing activity in North America. During the first quarter of 2015, we acquired J-Mac Tool for approximately $65 million. We have been following J-Mac for a long time and are pleased the conditions were now ripe for a deal.

J-Mac is a manufacturer of high-quality, hydraulic fracturing pumps, power ends, fluid ends, and other accessories. J-Mac also provides repair and refurbishment services for power ends and fluid ends at its main Fort Worth facility and at service centers located in the Eagle Ford and Permian basins. With the acquisition of J-Mac we will able to be provide our customers the full suite of pumps, replacement power and fluid ends, manifolds, valves, and treating iron. We welcome the employees of J-Mac to the Forum family.

As 2015 unfolds, the drop in oil prices and the declining rig count is more severe than anticipated just a few months ago. At Forum, we have begun to reduce our costs and appropriately size our operations in anticipation of a significant reduction in activity. Our relatively short sales cycle means our revenue volume will reflect declining activity levels fairly quickly. But, the converse is also true. Forum will be one of the first to reflect improving activity levels when that does occur.

Forum excelled in generating free cash flow in 2014. $219 million after capital expenditures. I expect our cash flow to be very strong in 2015 as well, as this is a core strength of our Company. We are confident that with our balanced and diverse portfolio, cash-flow generation capability, strong financial position, experienced employee base, and operational scale, we at Forum are well prepared to manage successfully through this downturn.

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

Thanks, Cris. Good morning, everyone. First, let me briefly talk about 2014.

I am pleased with the progress the team has made thus far on our execution and building this strong operating culture. We have made good strides in 2014 on several fronts. Including execution, procurement, manufacturing processes, and product development. We have also made significant talent upgrades at all levels in the organization to strengthen our product lines and corporate team. With the current leadership of our operating team and positive momentum gained in 2014, I am confident we are well positioned to weather the current market conditions.

For 2015, we have developed a realistic but a dynamic plan and will adapt it as the market evolves. On one front, we are focused on aligning our cost structure to the market conditions, and on the other front, we are focused on opportunistic plays including moves to gain market share. Regarding the weak market conditions, we are entering 2015 with a strong backlog. In addition, some of the product lines will feel the downturn less than others showing the benefit of our strategic portfolio. As Cris mentioned, however, we felt the impact of the downturn starting in the fourth quarter with customer delays and contract discussions.

We have already taken several actions to start aligning our cost structure to the new market conditions. We are looking for cost reductions across-the-board. We will manage volume decline by downsizing operations, improving our operational efficiency, and restructuring our operations to strengthen our competitive cost position. We initiated a Company-wide procurement initiative in 2014. We are getting good cooperation from our suppliers, and this is already producing significant savings. This will be a tough year, but we believe that with these efforts, our margins should decline no more than a few hundred points.

On the offensive front, we are focusing on low-cost regions where we believe we can gain more volume and fast commercialization of new products. We are focused also on our aftermarket solutions across several product lines to improve our customer service and be better positioned to meet our customer needs. I am confident that with our financial strength, our focused actions to reduce our cost structure, and emphasis on few, selective offensive plays, we will position us to compete and outperform in the long-term.

CFO, Jim Harris, will now discuss our financial results in greater detail and our focus on cash flow for 2015. Jim?

Thank you, Prady, and good morning.

We delivered record financial results on several fronts for the full-year 2014. Total revenue for 2014 was $1.7 billion, an increase of 14% from 2013. Net income was $174 million, 35% higher than 2013 results. Excluding $0.02 per share of net non-operational items, adjusted diluted earnings per share were $1.85 for the full-year. Free cash flow for 2014, excluding acquisitions, was $219 million. Adjusted EBITDA was $340 million, or 19.5% of revenue. I will summarize our quarterly results comparing the fourth quarter of 2014 sequentially with the third quarter. Consolidated revenue of $439 million for the fourth quarter was down 6% sequentially.

Our Drilling and Subsea segment revenue of $278 million was 10% lower, primarily due to customers delaying acceptance of completed Drilling equipment, lower volumes of Subsea products, and softer demand for consumable products across the segment. Our Production and Infrastructure segment had quarterly revenue of $161 million. A decrease of $1 million compared to the third quarter. Flow Equipment achieved a 10% sequential top-line increase for a new record for that product line, offset by slightly lower volumes for both Production equipment and valves.

Net income for the fourth quarter was $46 million, including $3.9 million in foreign translation gains on the stronger US dollar, offset by $3.1 million of restructuring charges as we began at year-end to reduce our cost in the face of declining market activity. Operating income, excluding the non-operational items, was $68 million. Down $10 million, or 12% from the third quarter which was a record.

Drilling and Subsea operating income of $47 million was down 18% sequentially due to the lower revenue in the segment and some under-absorption in manufacturing due to the holidays. Production and Infrastructure operating income of $32 million was up 9% sequentially, primarily due to the increased shipments of our Pressure Pumping consumable products and high demand for coiled tubing strings in our Global Tubing joint venture.

Adjusted EBITDA margins in the fourth quarter were 19.1%, a decrease of 110 basis points from the prior quarter due to lower overall sales volume before the benefits of the cost structure reduction could be realized. Adjusted diluted earnings per share for the fourth quarter were $0.48. With the sharp decline in demand for our book-and-ship consumable products, we expect diluted earnings per share for the first-quarter 2015 of between $0.27 and $0.33.

While we enter 2015 with a good backlog of orders, predominantly for our capital equipment, only about 40% of those orders are expected to ship in the first quarter. The significant decrease from fourth-quarter earnings is attributable to the fast reaction by our customers to lower oil prices. As Cris mentioned, we experienced lower bookings in the latter part of the fourth quarter, and we've continued to see a rapid decline in the rig count as the exploration and production companies have cut their capital spending budgets for 2015. We have taken steps to adjust our cost base in line with our outlook for revenue.

Our weighted average diluted share count for the fourth quarter was 94.7 million shares. We repurchased 4.4 million shares of common stock in the fourth quarter for $100 million out of free cash flow. As of year-end, we had $50 million remaining under our authorized share repurchase program. Giving effect for the shares purchased, fully diluted shares outstanding at the beginning of 2015 were 91.8 million shares. Net debt at the end of the fourth quarter was $352 million, up $5 million from the third quarter including the repurchase of $100 million of our common stock. We had $25 million outstanding on our fully available $600 million revolver at the end of the quarter. Our leverage ratio at the end of the year was just over 1 times and after the J-Mac acquisition is approximately 1.2 times trailing EBITDA.

For the fourth quarter, we generated $77 million in free cash flow. Interest expense is expected to be about $8 million in the first quarter. Corporate expenses were $10.8 million, excluding restructuring charges, and we expect the run rate for corporate expenses to be around $9 million per quarter in 2015 after implementing our cost reductions. Capital expenditures were $12.4 million in the quarter and were $54 million for the full-year. We reduced our budget for 2015 capital expenditures to approximately $35 million.

Depreciation and amortization expense was $16.3 million for the quarter and was $65 million for the full year and will be the same in 2015. Our effective tax rate for the fourth quarter was 25.5% bringing the full-year effective tax rate to 28%. We expect our full-year tax rate for 2015 will be approximately 28%. 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.

Forum began 2014 with three key objectives. Driving growth, improving operational performance, and increasing our operating margins. I am pleased to report we made significant progress on these objectives, and I want to recognize and thank our employees for their efforts and performance in 2014. 2015 will be an uncertain and challenging business environment. As we start this year, we will focus on generating free cash flow, protecting margins, and improving operational performance. We have a strong financial position, which provides stability and allows us to take advantage of acquisition opportunities.

Thanks for your interest, and at this point, we will open the line for questions. Tia, let's please take the first question.

(Operator Instructions) Jeff Tillery, Tudor Pickering Holt.

Hi. Good morning.

Hey Jeff.

One of the questions I had looking at the strong free cash flow in the fourth quarter, you don't have quite the full breakout of the balance sheet. Jim, could you help us think about the amount of working capital pulled out in Q4 as well as some sort of a relationship you're thinking about for 2015 in terms of -- relative to revenue decline how much working capital should we expect to recover?

Sure. Jeff, we at the end of the year had about 30% of our annual revenue invested in working capital. With revenue coming down and then the environment that we are in, we're expecting customers could stretch us on receivables a bit in 2015. So, we'd expect to see DSOs, which were at about 60 days at the end of the year, probably go somewhere in the mid-60s. And also, inventory turns, which were just over 2.5 times, those could slow a little bit. We will bring inventory down, but terms could slow a little bit. I'd expect to see as a percentage of revenue this year, working capital probably move up more towards the mid-30% as a percentage of revenue.

But, still a significant reduction in working capital dollars. The benefit in dollar terms -- the benefit of the lower CapEx and a very attractive and relatively high, relative to others I think, yield in terms of free cash flow.

So, Jeff, we do expect to generate very good free cash flow, as Cris mentioned in 2015. We will reduce working capital in absolute dollar terms, and that will show up in our free cash flow.

Thank you, that's really helpful. And then, Cris, as you think about the allocation of that free cash, the balance sheet is relatively lightly leveraged. You were very active in the fourth quarter buying back your own stock. We've seen J-Mac announced this year. How do you balance the targets for the free cash flow this year, and how we should think about the potential M&A capacity for Forum this year?

Right. Acquisitions remain a top priority for us, Jeff, as you can tell from the J-Mac deal which we think will be a good one for us. So, we are actively developing opportunities, following opportunities. Not everyone is in as strong a financial position as we. And so, we do expect that will lead to some opportunities. But, we, as Jim mentioned, also have remaining availability for stock repurchases, too, and we are in a strong financial position that it's not an either/or situation. So, I think we will be active in acquisitions, be able to opportunistically look at stock repurchases. And, not only have a lot of availability in terms of liquidity available under our credit line, but we'll be generating very significant cash flow during the year.

The last question I had -- just in Prady's prepared remarks, he talked about targeting -- limiting margin reduction to just a few hundred basis points. Could you help us out in terms of thinking about which margin you were referring to? Is that gross margin, EBITDA, EBIT? Just trying to put some context around that.

That is EBITDA and EBIT.

Okay, thank you very much.

Blake Hutchinson, Howard Weil.

Good morning.

Wow. Howard Weil. Howard Weil.

I think it's officially Scotia Howard Weil now. That hasn't quite filtered down to us yet. Thanks a lot for the detail, first of all. And, trying to get our arms around the interplay within the Company between some of the backlog as well as the shorter cycle nature of most of the businesses. As we think about what the business may look like in the back half of the year, and I want to keep this in very broad terms. Your first quarter guidance probably entails something of the nature of 10%, perhaps even 15% revenue decline sequentially. If I threw a book-to-bill number out there of 0.5, would you argue me up or down from that type of level? Again, an attempt to try to calibrate where we might be going in the back half of the year.

Yes, Jim?

Sure. So, Blake, we do have some benefit in the first half of the year from the backlog. What we also experience in a down cycle when you see rig count coming down like it is, there is an effect in the first quarter where orders would decline more as customers are able to take equipment off of idled rigs, but that generally will work itself out in the first half of the year. So, we would expect some support in the back half of the year as activity levels, while they will be lower, there will be activity, and we should see a stabilization of that demand in the second half. I expect through the course of the year, we will be fine in terms of orders.

Through the course of the year. But, I guess getting back to the original up or down question, it wouldn't surprise you to see the biggest retrenchment in the first period or first half of the year?

First half of the year, we will have the biggest reduction in book-to-bill. I think that is right.

Okay. I will let it go there. I won't press it too much. I know putting anything in writing is tough in this environment. And then, I wanted to -- as we start to look down into some of the sub-segments, just gauge the health of each. Some of your comments around subsea, Cris. I know last quarter you commented that it's not going to be an every year thing where you are just getting large orders incoming, but the sequential decline in order flow, is there something in between? I guess the mind can wander to thinking that that is a market that becomes extremely tough in terms of order flow through this year. But, I'm trying to get a gauge of ongoing book of business there that we might not see orders for sevens or eights. Is that still more business as usual than some of the US land-based cycle business? And, that international is -- and deepwater business is a little more resilient within your earnings stream?

Subsea will be resilient in 2015 due to their significant backlog that they have going into the year. We do expect it will be a substantially down year in new orders though for new ROVs. They are getting some other equipment orders as we mentioned for custom subsea equipment and for some of the orders for our Moffat operation over in the UK, which is doing quite well.

But, overall, expect orders to be down in the subsea business significantly this year. What we are doing in our subsea business is putting a lot more emphasis on developing our after-market service. There is a large amount -- a large installed base of Forum ROVs out there, and we have been beginning to work with our customers about that after-market. Maybe, Prady, you can comment on that?

If you recall, we started talking about this second half of last year, and we are gaining pretty good momentum. On the after-market for the ROVs, we got a huge installed fleet in the marketplace, and we are building the -- we are ready built most of the infrastructure needed to start gaining momentum on the after-market for the ROVs. Which is a big focus area for us in 2015. Which will partly offset some of the revenue decline in the subsea.

Another business, Blake, that will show, I think, good resiliency in 2015 is our valves business. Our valve product line, which has a much higher weighting to the downstream and petrochemical side. And, domestically and internationally, their order flow is pretty darn good, actually.

What they are feeling in the valve business, to Cris's point, is seeing some pressure on the upstream part of the business but on the downstream, in fact, we are expecting to see orders. And, at least if you see the last three weeks that part of the business, the orders have been pretty strong.

I will turn it back. Thanks.

Thanks, Blake.

Robin Shoemaker, KeyBanc.

Thank you. So, Cris, wanted to ask in the context of all that you have described what is happening, or if you can characterize what is happening in terms of pricing? We know that lowering pricing on drilling equipment or flow control equipment is not going to stimulate demand. But, you must be getting pressure from your customers on new orders. And, I wonder if you could just describe that dynamic today?

Robin, I think the biggest impact will be on volume. But, in this downturn, one thing that has become very popular are these form letters coming out requesting reductions in price. And, they are ubiquitous. And, it does lead to discussions about pricing. So, we, our peers, everyone in this space is having those kinds of discussions.

And, it turns into discussions about what other things can be associated with that. Whether it is some kind of other contractual matters or exclusives or volumes or those kinds of things. Yes, there is a lot of requests out there for pricing, a lot of discussions going on. But, I don't think that pricing is anywhere near as big an issue for the product and equipment Companies as it is the pressure that the service Companies are under.

Yes, right, understood. And, for you, it's a volume decline that really affects your margins. I just wanted to ask you then on -- in terms of consumable or products or after-market or anything that moves through distribution or distributors. What is -- we hear occasionally things about distributors in a liquidity pinch or whatever. How could you characterize that today?

Most of what we go through distributors is on the valves side. And, as we said, that's a little different dynamics. Prady, you had a comment there?

In the past, we did have distribution model of some of the product lines, but over the last few years, we have transitioned that to a direct model. But, in the case of valves, we do have a distributor model, but that's a business which we expect to be pretty stable during the downturn.

Right. Okay. Thanks a lot.

Thanks, Robin.

Jonathan Sisto, Credit Suisse.

Good morning, gentlemen.

Hey Jonathan.

Prady, this might be a question for you. The cost reductions and actions you've taken, are they more structural or more discretionary? And, that you will be able to accommodate up or down for a quick return in activity if there was one in the back half of the year?

It's all of the above. We're looking for cost reductions across-the-board. And, we will take the opportunity to also improve our operational efficiency. Also, restructure our operations. We'll take the opportunity to get a comparative cost position as part of the downturn.

You might mention on the procurement side.

And, as you recall, second half of last year, one of the big initiatives we had was in procurement. That initiative has gained a lot of momentum. We are expecting significant savings for procurement in 2015. And, as our customers are asking or we are having discussions on contracts and pricing, we are having similar discussions with our suppliers. And, that's gaining a lot of momentum.

So, I think we're fortunate that we made the move -- earlier in 2014 began to make the move on the procurement and developing a more centralized procurement system that is going to yield some benefits for us rather than trying to scramble here after the fact. Up to -- we've got, I think, some good expectations coming out of that to help us in our cost-restructuring moves, Jonathan.

You definitely -- you weren't caught flat-footed, as they say, so that's probably a play to your favor. Cris, wanted to circle back on J-Mac. Kind of a smaller acquisition, $60 million-type zip code. Are you all foreseeing something in that market that is different than what we are seeing that you want to get further entrenched in the pressure pumping consumables and after-market space?

First, I think that the price is reflective of our market expectations, right. But, I think most of what J-Mac brings to us is the ability to really round out our product offering within our flow equipment product line. So, that we can not only provide the treating iron but move into the pump side as well. And, very importantly, even in this kind of a market, is make a bigger more comprehensive effort in the after-market side. So, the rebuilding of pumps, servicing the power ends, replacing fluid ends, doing the recertification work can really provide a more fulsome service to our customers.

I will turn it back there. Thanks, Cris.

Thanks, Jonathan.

Rob MacKenzie, Iberia Capital.

Thanks. I wanted to ask, if I may, if you could give us a little more sub-segment detail on your first-quarter guidance? You give some very broad guidance earlier that looks to be more insulated. But, specifically for the first quarter, can you share with us some of your assumptions on the sub-product lines?

Rob, this is a very challenging time to give guidance and many Companies haven't given much at all so we've tried to give guidance in a conservative way because our view is that the market is coming down pretty sharply. We think that the -- that sharp reduction in activity and then the initial destocking, as Jim referred to, will affect certainly our drilling customers. And, it could well affect our completions customers and the flow equipment as well. So, those are some businesses that have particularly short-cycle turns and will be directly impacted by North America activity levels. As we've mentioned, we've got, I think, some backlog resiliency in our subsea business. We've got a high backlog in our drilling capital side as well. And, we said that the valves business is actually doing just fine.

And, we've got a good backlog in production equipment product line, too.

Thank you.

Okay. And, on that front, the obligatory question, have you seen any cancellations out of the backlog?

We are having contract discussions with some of the customers, and we do expect to keep most of the backlog we have.

So, Rob, our experience in 2009 was that there was some cancellations on the margin but very small, and I would expect the same thing here in this downturn here that customers may ask us to deliver some of the backlog later than we might have otherwise have done. But, wouldn't expect significant cancellations.

Okay, thanks. That makes sense. And then, on your margin guidance earlier, a few hundred basis points. I presume that would be -- that would vary based on those that are more resilient versus more acutely impacted by the downturn, correct?

Correct.

Thank you. That's it for me.

Darren Gacicia, Guggenheim.

Hey gentlemen. Good morning. It sounds like you're gaining some share in downhole, and it sounds like it's maybe Davis-Lynch ramping up. Is that something because of different geographic exposures?

And, how is that going to play out as activity seems to be -- as activity is coming in? Is that something that some market share gains will stave off some of the declines? Or, is that something that may have just been a fourth-quarter issue? How are you looking at that business?

Over the course of 2014 that was definitely the case as we put more resources, more sales resources, distribution in some of the key basins. And, getting out to the rigs and that attention to the customers really helped pay off for us. So, as you look ahead to 2015, that is certainly not going to offset the decline in activity, but it's going to put us in a better position than we otherwise would have been.

And, one of the successes the team had in 2014 was the global presence. Downhole -- they did business in what -- 60 countries last year. And, there is still some opportunities in regions where we don't play where we are going to explore in 2015. The Middle East is a good example.

Got you. The growth in 2014 came more in North America. The 2015 focus will be international is what I gather with that answer.

In 2014, too, we have gained a lot of momentum internationally, and we will continue to keep the focus on international side in 2015.

Made some progress internationally in 2014, but we're looking for more so in 2015. That's right.

Got you. When I think about the North American -- the various product lines that fit under the North American consumables umbrella, if you will. I was curious if you think about your customer mix, I think if I understand correctly there is some of the service players that you may be providing to may be a little on the smaller side in terms of market share. Does that -- how does that weigh on what is happening right now? It strikes me that usually in tougher times activity consolidates towards larger players. But, maybe I am not looking at that the right way. How do you think this plays out? And, how does mix play out in terms of customer mix play out in terms of what is happening in your business?

Some of our faster growing customers are the big service Companies, and they would all be in our top ten customer list. So, the big service companies are very important for us and increasingly so, but we sell to many service companies. That is our customer base, the service Companies, the drilling contractors, and the offshore contractors. That is who we sell to.

Got you. Just one point of clarification. I think you mentioned that the burn in backlog would be what -- 40% in the first quarter? I'm just try to understand how quickly backlog rolls off?

So, what we factored in, Darren, was that based on our expectations for the quarter what we will disclose as our year-end backlog, 40% of that should be delivered in the first quarter. And, the rest would roll out mostly over the balance of the year. Some of it actually goes into 2016, but most of it will come out in the back half. Most of the rest.

Thanks. That super helpful, I appreciate it.

Chase Mulvehill, SunTrust.

Thanks, good morning. Quick question on 1Q decrementals. Implicit in your guidance, what are you assuming for decrementals?

Chase, if we took no -- I will say we were relatively conservative for that first quarter. But, for year-over-year, we are expecting decrementals to be in that 30% to 35% range on an operating income basis. A little but higher than that in the first quarter because as we put these cost-saving measures in that we've described, it takes time for the benefit to start flowing through. So, maybe slightly higher decrementals in that first quarter then we will have year-over-year.

Okay. That decrease is in Q2 is cost cutting -- is implemented and stuff, right?

That's correct.

And, the benefit of some of the procurement flows through on an average cost basis, and that helps more and more as the year goes on.

We will stop seeing the benefit of procurement starting in 1Q, but the majority of that will be in the back half.

Okay. All right. And then, a follow-up on Blake's questioning around subsea. So, just trying to understand how much visibility you have in the subsea business right now? And, is it one quarter, two quarter? Does it go into the second half? And then, you did about $320 million of subsea revenues last year. If we look at that on the full-year, would we expect that to be down? And, if so, how much?

I would expect the subsea business to be down. We had a very good year in 2014. We have a good backlog going into 2015. But, clearly, our customers there are the offshore contractors, it is -- it is not -- they are not seeing as many new awards. There are not as many new vessels being built as there were. So, we do expect it to be a down year in terms of orders and revenue for the full-year.

Okay, just so I am trying not to be surprised maybe when we roll to the second half. Does this fall off materially in the second half? Or, how much visibility do you have in the second half?

The orders go through the second half, but I don't think we will have as many deliveries in the second half of the year as we will in the first half. So, it will ramp down over the course of 2015. Based on the backlog we have now, we will look to be ramping up the after-market business, but I don't know that that's going to fully offset the backlog that we will be working through.

Okay, that's all I have. Thank you.

Martin Malloy, Johnson Rice.

Good morning.

Good morning.

Could you maybe give us a little bit of commentary in terms of what you're seeing in the international onshore market as you look out through 2015? And, are you expecting to be relatively flattish?

I would say the one area that we would characterize as flat on the international land side would be the Middle East for obvious reasons, and that should be a good market and we see some good opportunities there for several of our product lines. Away from that, a different story. It is going to be down in most other land markets. Russia, for obvious reasons. Latin America, tough. Australia, I don't think will be as big a market. So, I think Middle East is the bright spot.

Okay. And then, just going back on the acquisition -- the potential for acquisitions here. Can you talk a little bit about the pipeline? Is the bid-ask spread narrowing between buyers and sellers and size of potential deals that you might look at?

Not yet. I think that will depend upon -- that take some time. And, it depends on how motivated sellers become. But, I think it's natural in a market that is changing as rapidly as this one does, sellers' expectations just don't move as quickly as buyers think they should. But, there are situations where just the reality of debt situations and other motivations come into play there.

Thank you.

Sure, Marty.

Mike Urban, Deutsche Bank.

Thanks, good morning.

We will make you the last and best question, Mike.

I'll have to make it a good one then. Don't know if you have a sense for this, but what do you think your customers' inventory levels are especially with respect to your consumables businesses? The reason I ask is that you saw a pretty significant decline -- probably more than you or I would have expected -- in your flow businesses in second half of 2012 and 2013 as Pressure Pumping activity came down. But, you also had this pretty significant destocking impact. Do you expect something like that again? Or, are the customers running leaner? Are we coming from a lower level and shorter lead times so maybe it isn't quite as bad relative to a given level of activity decline?

It's a good question, and I'm glad you raised it, Mike, so we could comment on it. We expect this to be very different from the downturn in 2012 and 2013 when the gas market collapsed. If you think about what was going on in 2012, it was blowing and going, and there was, in fact, over-buying if not hoarding going on among operators, among Pressure Pumping Companies, and maybe even on the drilling side a bit because no one wanted to run short of consumable items and replacement items.

And, at that time the manufacturers were having a great difficulty keeping up with that. We had a large backlog in the consumable business which means we were late on getting orders delivered because we couldn't keep up with the demand. Hadn't -- never gotten to that point here in 2014. So, there will be some destocking as spreads, as rigs are stacked and parts can be and components can be taken off that stacked equipment. But, the difference -- the important difference is there are not full warehouses of this stuff that need to be emptied out.

Great, very helpful. That is all for me. Thank you.

Great, thank you. And, we appreciate your interest and participation in our call. Thank you very much. Tia?

Ladies and gentlemen, that concludes the presentation. Thank you for your participation, and you may now disconnect. Have a great day.