Forum Energy Technologies Inc (FET) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Forum Energy Technologies First-Quarter 2015 Earnings conference call.

(Operator Instructions)

As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Mark Traylor, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Danielle. Good morning, and welcome to the Forum Energy Technologies first-quarter 2015 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, our Chief Operating Officer; and Jim Harris, 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 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, refer to our earnings release.

This call is being recorded, and 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.

Thanks, Mark, and good morning.

I will start with some highlights of our first-quarter performance, and offer a few thoughts on the outlook for our business. And then I'll turn it over to Prady, who will talk about our business improvement and operational excellence initiative. Jim will then provide more detail on our financial results.

The rate of decline in drilling and completions activity this year has been breathtaking, as we all know. Despite upstream activity and our revenue declining further and faster than we anticipated, I think our team at Forum did a commendable job of managing our costs down with activity. We were largely able to preserve our operating margins in the first quarter, demonstrating the scalability of our business. We earned $0.30 per share on an adjusted basis. And EBITDA for the first quarter, excluding non operational items, was $62 million. EBITDA margins in the first quarter were 17.7%. We generated free cash flow of $38 million net of capital expenditures, which represents 130% of our earnings in the quarter.

Of course, the decline in oil prices had a significant impact on spending by our customers. Total inbound orders during the first quarter were $288 million. That's a 32% decrease from the level in the fourth quarter.

The first-quarter book-to-bill ratio was 83% for the Company as a whole, 76% for the Drilling and Subsea segments, and 93% for the Production and Infrastructure segment. Within our Drilling and Subsea segment, the Drilling product line experienced a book-to-bill ratio of 69% in the first quarter on substantially lower orders for consumable products, due to significantly reduced number of active rigs in North America. We continued to see lower orders for Drilling capital equipment, due to a slow down in orders for new build rigs. At our Subsea product line, orders decreased 21% sequentially from the fourth quarter due to the general softness in the deepwater and offshore construction market. However, we have a significant backlog of work class ROVs to deliver during 2015. And during the first quarter, we received a large order from Heerema for equipment to be supplied for a project offshore Angola, as well as another order outside the oil and gas industry.

The downhole technologies product line had a sequential decrease in orders for our Davis-Lynch cementing and casing products, as fewer wells were drilled. But this was partially offset by increased orders for our composite frac plugs, as we gained some new customers for this product.

Moving to our Production and Infrastructure segment, inbound orders decreased sequentially by 33% compared to the fourth quarter, primarily due to the significant decline in completions activities, as oil and gas companies defer the completion of drilled wells in the United States. We don't expect a rebound in orders for our well production and separation equipment and our pressure pumping consumable products until operators begin to complete these inventoried wells. But when they do start completing wells, we expect a rapid recovery in these product lines.

Our Valves product line remains an island of stability, with a book-to-bill ratio of 114% in the first quarter as we receive orders for project work in the refining and petrochemical industries.

Looking ahead to the second quarter, not only did we start this quarter at a far lower level of activity than we had expected, the downward ride in rig count and well completions is continuing. We therefore expect the depressed activity, industry-wide pricing pressure, and lower orders to mean a further decline in our revenue in the second quarter. We will continue to manage our cost structure aggressively.

I expect our decremental margins to be greater than the 26% we were able to achieve in Q1, but we will still look to achieve EBITDA margins in the mid-teens for the second quarter. We expect our second quarter diluted earnings-per-share to be in the range of $0.15 to $0.20.

I will now hand over the call to Prady Iyyanki, Forum's Chief Operating Officer, to update you on our progress in these focused areas. Prady?

Thanks, Cris. Good morning, everyone.

The first-quarter market conditions were challenging, as the market deteriorated faster than we expected. The sharp decline in rig count, and in addition, operators not completing the wells. I'm proud of our team's execution in the first quarter. We were proactive and decisive on aggressively reducing our cost structure. We have made several tough decisions, and we're seeing the impact of our efforts in margins and in our results.

On pricing, we continue to work with our customers to help them reduce their costs. Our discussions have been corroborated, and have resulted in pricing discounts with the strategic customers, especially when we have secured [volume]. We expect to have continued discussions on pricing, and we will feel more of the impact of pricing on margins starting in the second quarter. However, our procurement efforts are gaining momentum, providing tangible savings and helping to preserve our margins in the mid teens.

On the opportunistic front, our customer and new product-focused areas has resulted in adding several new customers across our product lines. We also added and deployed several strategic customers where we are liberating our existing relationship to pull through other Forum products. And we are gaining momentum in this area. We will continue to align the cost structure in the areas of direct and indirect costs, procurement, and SG&A to respond to market conditions including restructuring, footprint consolidation, and manufacturing efficiency. Our decisive actions on cost structure, financial strength are offensive plays, and our ability to scale our operations will position us to compete well.

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

Thank you, Prady, and good morning.

I will summarize our quarterly results, comparing the first quarter 2015 sequentially with the fourth quarter 2014. Consolidated revenue of $348 million for the first quarter was down 21% sequentially, as the severe drop in oil prices has had a significant impact on the spending by our customers across our product lines. Our Drilling and Subsea segment revenue of $215 million was down 23% on lower volumes of Drilling and Subsea capital equipment and softer demand for activity-based consumable products across the segment. Our Production and Infrastructure segment had quarterly revenue of $133 million, a decrease of 17% compared to the fourth quarter 2014. The segment was negatively impacted by the decline in completions activity in the North American land market.

Net income for the first quarter was $29 million, including $6.6 million in foreign translation gains on the stronger US dollar, offset by $4.9 million of restructuring charges as we continue to take actions to reduce our costs in the face of declining market activity. In addition to our direct cost initiatives, we are on track to reduce our SG&A by at least $40 million on an annual basis from our 2014 second-half run rate. Operating income, excluding the non-operational items, was $45 million, down 35% from the fourth quarter, with decremental margins of 26% on the reduced revenue.

Drilling and Subsea operating income of $34 million was down 29% sequentially on the lower revenue across the segment. Production and Infrastructure operating income of $20 million was down 39% sequentially, primarily from the decreased shipments of our pressure pumping consumable products, and lower demand for surface production processing equipment.

Adjusted EBITDA margins in the first quarter were 17.7%, a decrease of only 140 basis points from the prior quarter on the even lower than expected volumes, as our cost savings initiatives limited decremental margins. Adjusted diluted earnings per share for the first quarter were $0.30, achieved on lower than expected revenue, but with good and timely cost containment measures throughout the Company.

While we entered 2015 with a good backlog of orders, predominantly for our capital equipment, only about 40% of those orders were scheduled for delivery in the first quarter. The significant decrease from fourth-quarter earnings is mostly attributable to the very fast reaction by our customers to lower oil prices. We experienced lower bookings starting in the latter part of the fourth quarter, as the exploration and production companies cut their capital spending budgets in response to the lower oil prices, and those declines have only accelerated in 2015. The result has been the precipitous drop in the rig count, especially in North America, and hence lower demand for our drilling and completions consumable products. As we have noted, we have taken and we continue to undertake the necessary actions to adjust our cost base in line with our outlook for revenue. And we expect to maintain EBITDA margins in the mid-teens.

Our weighted average diluted share count for the first quarter was 91.5 million shares. As of quarter end, we had $50 million remaining under our authorized $150 million share repurchase program.

Net debt at the end of the fourth quarter was $385 million, up $33 million from the fourth quarter, including the $65 million acquisition of J-Mac Tool during the quarter. We had $65 million outstanding on our $600 million revolver at the end of the quarter. Our leverage ratio at the end of the quarter on a net debt basis was 1.2 times trailing 12 months EBITDA. For the first quarter, we generated $38 million in free cash flow.

Interest expense was $7.6 million in the first quarter. Corporate expenses were $8.3 million, and we expect corporate expenses to be around $8 million per quarter in 2015, down about 25% from 2014 after implementing our cost reductions. Capital expenditures were $11.4 million in the quarter, as we completed several projects initiated in 2014. Our budget for 2015 capital expenditures is approximately $35 million. Depreciation and amortization expense was $16.3 million for the quarter, and excluding the impact of any additional acquisitions, should be approximately $65 million for the full year.

Our effective tax rate for the first quarter was 27%, just below our prior estimate of 28%. While we currently expect our full-year tax rate for 2015 will be approximately 27%, the higher declines in US activity, which is subject to higher statutory tax rates compared to more resilient international operations, could result in our effective tax rate coming down further as the year progresses.

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.

The North American rig count declined 44% during the first quarter of this year, and the decline has not stopped yet. At Forum, we have adjusted our costs and appropriately sized our operations for the downturn in our industry. We will continue to monitor drilling and completion activity levels and scale our operations accordingly. During this downturn, our focus is on generating free cash flow, reducing our costs, and preserving operating margins while improving our operational performance to better position Forum to support our customer needs when the cycle turns. Given our waiting to short-cycle consumable products, Forum will be among the first to see an increase in drilling and completion activity reflected in the financial results.

I want to thank our employees for their dedication and extraordinary effort, as this is not an easy time to work in our industry. Thank you for your interest, and at this point, we will open the line for questions. Danielle, can we take the first question, please?

(Operator Instructions)

Our first question comes from Jeff Tillery from Tudor, Pickering, Holt. Your line is now open, please go ahead.

Good morning.

Hey, Jeff.

Could you talk a little bit about the business mix within the segments that drove margins? I presume -- it makes sense that the P&I margins compressed a fair bit with the dramatic slowdown in the frac-related businesses. But within the Drilling and Subsea margins held up a lot better than I would have guessed. Could you just talk about the mix within that segment?

Yes, I'll start, and Jim, and Prady can add. I think our Drilling group did a real good job of managing, anticipating this downturn and managing their costs in a proactive fashion. On the Subsea side, we did have the backlog that we were working off.

Jim, can you add some color there?

Yes. Drilling, as you know, Jeff is our largest product line, and its margins were very resilient in the quarter. And so while they contributed more than one-third, about 37% of the revenue for the quarter is more than that in terms of operating income, so I would say that strong performance really drove the segment.

Although they did have a decline in revenue, it was really managing the cost side.

Yes.

Also both our Drilling and Subsea had a very strong backlog coming into the year. And to Cris' point, the Drilling team did a fantastic job on the cost side.

And then I guess staying on Subsea for a minute, I'm curious if you could talk about -- I think the perception is this is almost exclusively a new-build oriented business. Could you just talk about -- and on your last call, you talked a little bit about the after-market opportunities.

Can you give us some color on the mix as we step forward over the next 12 to 18 months? How that could evolve and how important or what the relative importance is of the more recurring revenue base?

Yes, within Subsea, the new-build component, the remotely operated vehicles that we've built tends to be around 50% of our revenue for that product line, Jeff. And the rest is operating expense spend by that same offshore construction customer base. And in first quarter, that OpEx spend was down a bit more with declining activity, with destocking, et cetera, and that's a common story, I think, across many of our businesses.

The last question I had is just qualitatively, as you think about the rest of the year, obviously we're in this destocking period where your business catches up to the lower activity. Do you think that the second and third quarter, middle parts of this year, effectively get through that destocking period. And from there, the underlying business is more reactive to whatever the in-market demand is?

Yes. Once I think the decline activity levels out, we'll work through that destocking. And then the first step for us is that our revenue will reflect that level of activity wherever it does level out.

But then, any incremental increase involving equipment going back to work would require that restocking of that equipment to be put back into the field. And that's what we are referring to when we say that our business is responsive to activity levels.

All right, thank you all very much.

Thanks, Jeff.

Thank you. And our next question comes from Jim Wicklund from Credit Suisse. Your line is now open, please go ahead.

Hey, guys, this is Jake Lindberg on for Jim. Good morning.

So you mentioned lower orders in the Drilling capital equipment. I was just curious to get your take on this. If we don't order any deep water rigs for the next couple of years, what does that Drilling segment look like?

Well, we focus our drilling capital equipment primarily on land rigs, and on the jackup rig side to a limited extent. So the new build spend on the ultra deepwater market is not a market that we participate in to a great extent. So we would not have a lot of exposure to that positively or negatively.

Cris, Jim here, if I could. But the jackup market is starting to roll over as well, and we have idled half of the land rig count. So that doesn't look like it's going to perk up anytime soon. So not just deepwater, but the overall outlook for the next two years for adding drilling capacity, how does that look, and what is that impact?

Yes, we do have backlog associated with the large number of jackup rigs that are still on order, as you know, Jim. And then the equipment that we manufacture on the capital side for the land rigs, the catwalks, [gun] and roughnecks and so on, there is a replacement cycle on that. It doesn't last as long as the draw works, or the mast, or the mud pumps, et cetera.

But of course in our Drilling business, about two-thirds of our revenue comes from OpEx spend. And that follows the cycles we were talking about on the prior questions.

And as we work this equipment harder, as there's more pad drilling, and this efficiency drive, all that means more footage drilled, more making and breaking connections. All of which means more wear and tear on the kinds of things that we make.

And then if I could ask a follow-up. You mentioned cutting $40 million from operating costs, adjusting the cost base. And so I would imagine that that can't all be just fat that was cut, so there's some implied element of expected duration of the weakness that we have seen so far. Is that fair?

Yes, Jake. So the $40 million that we referenced was specifically SG&A cost, and it's off of our run rate from the second half of last year. So those costs would include those corporate cost savings that we discussed, but also some sales and engineering personnel, and others that are in SG&A costs. So we are in line with our strategy adjusting our cost base for current activity levels.

We're taking initiatives, not just direct savings initiatives, but also general savings initiatives. So we can keep as many of the skilled positions as we can going through the downturn, and be prepared for the upturn. But there's no question that we have cut deep.

We're also seeing the opportunity to streamline our operations, which is difficult to do during an upturn. But during the downturn, it does give us the opportunity to streamline our operations. Just to give you some examples, a small fabrication shop in Caithness, Scotland, we have consolidated that with Moffat, which is a much bigger fabrication shop.

And we have a tooling consolidation; we had an Insch business in UK, which are consolidating with our Kirkbymoorside business in UK. BOP consolidation, we have a Vanoil brand business in Canada. We also have a BOP business in Broussard, Louisiana, where we manufacture.

And this was the right time to consolidate into the Broussard manufacturing facility, which was designed for scalability. And then there was a business in UKPS, which are service personnel, it was not a strategic fit and we decided to exit that part of the product line too. These are just examples where we are streamlining our operations.

Okay. Great, that's very helpful. Thanks for the color, guys.

Thanks, Jake.

Thank you. And your next question comes from Blake Hutchinson from Howard Weil. Your line is now open, please go ahead.

Good morning.

Hey, Blake.

Just wanted to make sure we're getting what we should out of your thoughts around order flow, Cris. I know that the $288 million for 1Q was representative of a fairly abrupt halt to customer spending. But I take it from the tenor of the conversation here that you might expect order flow to move down maybe in line once again here with quarter-to-quarter activity. Maybe even just quarter-to-quarter US activity? Or is that too punitive?

Right. Until activity bottoms out and the destocking has run its course, I think there is more downside on the orders. But the orders do obviously lead the revenue side. So the orders will bottom out before revenue does.

So watch this space. But we have had a couple quarters of dramatic decline in orders now, and I think that is a good indicator of when our revenue will bottom out.

And I guess, again, I'm just trying to -- again, the abrupt nature that we saw in 1Q would maybe lead us to believe that orders could bottom out. But would you caution us away from that and maybe we should be thinking of something more in the 15% to 20% decline in your type of range?

Yes, I think we will see a further decline in Q2 in the consumable side, because there were declines, continuing declines through the first quarter. But beyond Q2, we'll see.

Not calling that one yet. But it's just more of this destocking running its course on the consumable products.

Okay. And then I wanted to talk a little bit about the direct cost savings numbers. You've done a great job kind of educating us on the scalability of the business this year.

I take it from, again, this conversation today that most of the savings on the cost of goods sold on has been direct labor and overhead rather than the big bites we might expect from materials and the supply chain initiatives last year. And is that the correct read, and we probably still have multiple basis points of margin that can be gained through material savings as the year progresses here?

Yes, that savings has to work its way through the inventory balance. Prady, can you address the progress we're making on our procurement savings? And then that will flow through the income statement over time through the inventory.

Our biggest cost is direct cost. And as we have mentioned in the past, we are a scalable business, we're a low CapEx business. So direct cost is our biggest cost, which is primarily material and labor. Which we can scale it down quickly by downsizing the operations, also some of the consolidations we just talked about.

On the procurement side, apart from downsizing the material piece, is we're also getting tangible savings now that we are six months into the procurement effort. And there's a lot of still opportunity here from a procurement standpoint, and that's one of the reasons why we're able to hold our margins in 1Q. And also in 2Q, we expect to hold the margins in mid-teens.

Again, there's a lot of opportunity on the procurement front, consolidating the source base, getting dual sources in some cases where we have single sources. Logistics is another good area where we're focusing on, we're getting tangible savings.

And also further consolidations. A good example is a BOP in Canada had their own source space, and AOT plant in Broussard had their own source space. So as we consolidate into one shop, in Broussard you also consolidate the source space and you get more savings.

Thanks, Prady. And I would just add, there were probably two reasons that effect the timing and slow the timing at how that flows through our income statement. One is, as I said, procurement as an input to the inventory, and working through average costs. The other is just that with the lower activity, we have had to dramatically slow our rate of new purchases.

So it's not like we're buying one for one on what we're selling. Because we're obviously looking and will be working down our inventory. So that kind of slows the rate at which we add the newer, lower-cost items, as we're working through the inventory of older items that are already in inventory at a higher price, if that make sense.

Yes, it does. And I appreciate that, and the way you've opened up that conversation for us this year. I'll turn it back.

Great, thanks, Blake.

Thank you. And our next question comes from David Anderson from Barclays. Your line is now open, please go ahead.

Great, thanks. So, Cris, I was wondering if you could help me isolate your North American consumables. If I just figure out the drilling on one side and the flow equipment on the other. Could you help me understand how much roughly those businesses combined came down sequentially in terms of top line, and what you're expecting it for next year?

I'm just trying to gauge. We've got a pretty good idea where the services have ended up on that front. I'm just curious where your business is on that front.

The Drilling, our downhole products, we do some well construction and completion and then the flow equipment, pressure pumping consumables. Jim?

So, David, I think it's the best way to look at flow equipment because of the impact of the acquisition. J-Mac, that was acquired mid quarter, is more on a pro forma basis. And that business -- what was hit harder than our other product lines and is down about a third sequentially, so it's pretty much a book-and-ship business. And so not only were fewer rigs drilling, but fewer wells were being completed that had a significant impact on that business.

You're talking flow equipment.

Flow equipment. Flow equipment over all on a pro forma basis.

So that was more or less in line with what we're seeing in services, because you're saying it's kind of a one for one.

Yes.

Got you.

Drilling and downhole were not down that much. They held up better during the quarter.

Drilling partially because of its backlog, but also with the initiatives that they had going. They did not suffer as much of a decline in the quarter.

In the case of downhole, even though they did see the impact for the market, they have done a much better job of holding, primarily because they've also added some new customers to their portfolio.

When we're thinking about inventory collection, I know you guys have talked, you don't think it will be as steep as last cycle's because nobody -- they wouldn't order up as much. Just curious, is that where -- what part of your business of those two?

It sounds like flow, because you're not too worried. I don't know if that worries you a lot, but it sounds like you're not worried about the inventory correction on that side but it will more acute on the Drilling side. Is that fair?

I think there's destocking on both, as units continue to be parked. But it is also true, I think in both cases that there was not the overstocking by our customers that there has been in the past downturns like this. Because the market just wasn't as hot going into this.

Pressure pumping had barely really gotten back on its feet after the 2013 downturn. And on the Drilling side, there was not the overstocking there that we need to work through.

But yet, every incremental unit that is parked does create the opportunity for some cannibalization, and that's the destocking that's going on. It's not so much that there are large warehouses of spare equipment that need to be worked through at this time.

But it sounds like from your earlier comments that you're thinking of that inventory lag effect between activity in your business, it sounds like it's maybe a quarter or two. You sound like you were fairly optimistic that things could be improving in the fourth quarter?

Yes, if things stop going down, yes.

If things stop going down in the second quarter, you think by fourth quarter, you should start seeing improvement there in those businesses?

Yes.

Okay. Great; thanks, Cris.

Thank you. And our next question comes from James West from Evercore. Your line is now open, please go ahead.

Good morning, guys.

Morning.

So, Cris, just maybe to follow up on the last question on the consumable side, particularly the flow equipment well invention businesses. So if I'm hearing you correctly, even though activity has come down, there wasn't a major overstocking and activity's not going to zero here. So you should start to see some orders come back here in the next, call it, quarter or two.

Maybe not 2Q, obviously, because we're still going down, but 3Q and 4Q, and you should start to see the early signs of at least a stabilization in their business which would lead to an upturn in your business. Is that a fair characterization?

Yes, I think a stabilization would give us a minor upturn. But then as the completions activity began to increase and these drills and uncompleted wells begin to be taken advantage of by operators, that would be the upturn that would be more significant for us.

Okay. Got it. I wanted to make sure I had that correctly.

And another question for me, on the M&A side, you're obviously back in the M&A game now after getting the business back in order. How does the market look at this point or, bid ask spreads, coming in line or are they more favorable, or we still a couple quarters away from that?

We are seeing more things on the M&A side that are of interest to us. I would still say that the bid ask spreads are a challenge.

So we're trying to be creative in thinking about those. But we are seeing an increase in opportunities in our space, which is that less than a $100 million area.

Okay. All right. Great. Thanks, Cris.

Thank you. And our next question comes from Robin Shoemaker from KeyBanc Capital Markets. Your line is now open, please go ahead.

Yes, so, Cris, I wanted to ask if you could characterize for us what you see in your international markets. 40% of your sales, I guess would probably be a higher percentage this year, it sounds like. And Jim described these markets as resilient.

What we hear from some other companies that are big in the international is the Middle East market is holding up well, other markets are fading. Some are really in a major downturn, like Mexico or Colombia. So just for your product lines, when you say resilient international markets, what do you see over the balance of this year?

Right. So certainly, we would agree that the Middle East is the sole bright spot geographically. But if we drill down in our Drilling business, excuse that, even in our handling tools market we've got the legacy Forum business, which is more North America based. And then we have the Blohn + Voss, Hamburg, Germany based handling tools that serve more of the international market.

And clearly, the Blohn + Voss handling tools business is holding up significantly better as they serve more just international land rigs, generally, as well as international offshore rigs. And the offshore rig count hasn't come down that much.

Certainly, there's the supply issue, as we all know, but the activity levels are still decent there. And thus, we're still getting some good orders from Blohn + Voss, so that's a tangible example.

But I would agree that geographically, we can't point to many more bright spots other than the Middle East. But that is one where we are focused, and see some opportunities for Forum.

The two or three product lines which are not penetrated from a Forum standpoint in Middle East. A good example of that is downhole products and well intervention and valves.

And as discussed in the last analyst call, that has been a focus area for us this year, the Middle East, to penetrate that market. And we are seeing progress there, and we expect to get some volume from Middle East with those product lines in the second half of the year.

And, Robin, let me put my earlier comment into context. More resilient was meant to be a relative term, not indicating that international wouldn't be down.

But for our geographic mix, what we showed in the first quarter was the international business was down by less than half on a percentage base from the domestic. And in the context of the tax rate, my only point was if that mix continues, then we will see more opportunities for that rate to come down, that tax rate.

Yes. Understood. Okay. So let me just ask also about the other bright spot, which is valves.

So we have been hearing for years that there would be a resurgence of petrochemical construction based on the surge in natural gas liquids and so forth on the Gulf Coast. Is that in any way coming through? Yesterday, Cameron had very weak orders in valves, so your book to bill was 114%. Anyway, what can you add further in terms of explaining the performance of your valve business?

I think there's a different mix in the valve business that we have, and we are more weighted towards the process industries. And I think that is the reason for the different perspective that you're getting there, Robin.

But, yes, we are seeing the benefit of more orders and bidding opportunities associated with this project work for the petrochemical plants and the refinery expansions that are going on along the Gulf Coast. And that is the primary driver of the good orders that we're seeing, and the resiliency that we're seeing in our valves business.

Like some of the other businesses, too, we have seen the impact of upstream business, the valves going down. But the business has been able to hold, primarily because of what Cris mentioned, the petrochemical, the pipeline, and the midstream part of the business.

Right. Interesting. Thank you.

Thanks, Robin.

Thank you. And our next question comes from Brad Handler from Jefferies. Your line is now open, please go ahead.

Thanks, guys, good morning. I'm trying to -- I guess we always try to read tea leaves within the segments a little bit. And as you have described Drilling and Downhole being -- again, it's a relative comment, I know. But if it fell a little bit less sequentially, perhaps that suggests that Subsea revenues fell more than I might have guessed and maybe more than the Drilling and Subsea average.

Is that true? And does that reflect a lull in deliveries that then -- or how might you describe the path, given the backlog for 2015 deliveries?

Certainly the orders were down in Subsea, as one would expect. But from a revenue standpoint, no, I don't think that's right. I think that they're all about the same.

About the same. Okay. All right. Well, thanks for steering me.

And the Subsea side, again, driven by the OpEx side.

Okay. Unrelated follow-up then, and again, without necessarily trying to draw you in to a hole, bringing back everything you've said through the call. You mentioned mid-teens margins. I was just trying to understand whether that was a second quarter comment about it being sustainable, or if that's more something you feel comfortable talking about for all of 2015?

It's hard to --

Yes.

I think for every call it's hard to go too far into the future. Things are pretty murky out there. We're primarily talking about the second quarter here, Brad.

Sure.

During the call here today, we've speculated a bit on the direction and what it would take for things to flatten out or turn up. But, gosh, if things continue to go down, the reason our margins will be down a bit in Q2 is just the declining marginal returns as we eat away at the revenue and it declines. And the operating leverage works against us, and our pricing pressure.

So if the market continues to head down, yes, we'll do the best we can. But in the scenario that other questioners have been addressing of getting to what would it take for things to flatten out, then I think that our guidance would be more in this same mode.

Yes, that makes sense. I couldn't quite feel out whether the procurement conversation had that much more leverage within it so that it gave you extra confidence around that.

But I understand what you're saying. Okay, I'll turn it back. Thanks.

Thank you. And our next question comes from Chase Mulvehill from SunTrust. Your line is now open, please go ahead.

Hey, good morning, fellows.

Hey, Chase.

So I guess a few questions here. If we think about the levers or the drivers that could put you in the low end versus the high end of 2Q guidance, if you could just walk us through what would put you in the low end or the high end?

The biggest is revenue. Our biggest challenge in the first quarter was how sharp the decline was, and how much lower revenue was in Q1 than we expected going into the quarter. Or even when we talked to you all at the time of the fourth-quarter call.

Nonetheless, our team did a great job of anticipating that, getting ahead on the costs. And even though revenue was significantly lower because of activity than we expected, we were right in the heart of the range that we had indicated to you.

So as we look at a range for next year, again, revenue is the biggest driver. And if it comes in lower, then we've got to work harder on the cost side. And I know our folks are working very hard, but gosh, as I said, the operating leverage, as we get lower does work against us.

And as Prady mentioned, there's pricing pressure across the industry, especially for our customers, that I have not seen before in a downturn.

On the procurement front, as we buy less, the savings will also be impacted by that. So our rate of savings would go up, but the absolute dollar value is impacted.

So would you characterize pricing pressure as being worse than you would have thought this time last quarter?

Yes, I think just about everybody is feeling that the pricing pressure is more than was expected, or that they have experienced in other downturns. I haven't talked to anyone in the industry who doesn't feel that way. And those companies dealing directly with the operators I think feel that most.

Okay. So last quarter's conference call, you guys were talking about decrementals of 30% to 35%. Obviously, you outperformed this quarter.

But as we move forward, it seems that the pricing pressures are a little bit worse. Is the 30% to 35% still a good decremental number as we go forward?

I think what we're going to stick with is the guidance we have given in terms of the margins, and that's a mix affect there between the revenue and the costs. And so I think we'll stick with the mid teens as our guidance, and we'll get there. We'll have to work harder on the cost side if the revenue is lower, and that's our job. That's what we'll do.

So mid-teens for EBITDA margins, which implies higher decrementals than what we had in the first quarter, just to be clear.

Okay. One more. So if you're thinking about right-sizing your business, so how do you guys think about overall US service activity and the timing of a recovery?

So I think that the first bit of recovery that we will likely see in North America and the US will be on the completion side. This large inventory of wells, once the operators feel that they have gotten the service company costs down as low as they're going to get it, if they see some upturn in oil prices at all here, they'll -- I think we could see that upturn in completions activity.

And that will be early on in the cyclical recovery. And with those additional wells coming down, if there's resiliency in oil prices, then I think we can begin to see some higher drilling activity coming back gradually.

But I think that scenario is more of a gradual recovery. It's not a sharp V. I think that the industry has worked hard on costs throughout the supply chain, and I think that's going to make us all more efficient going forward. Which is a good thing, actually, for ability to preserve activity and see an upturn in activity with probably lower oil and gas product prices than we've had over the past four years or so.

Okay. Great color; thanks, Cris.

Okay.

Thank you. And our next question comes from Mike Urban from Deutsche Bank. Your line is now open, please go ahead.

Thanks, good morning.

Hello, Mike.

Cris, one of the primary [schematic] plays or verticals, if you will, that you're attacking whenever you put the Company together and since have been growing it has been the offshore and deepwater and Subsea markets. I think a lot of people, as we have gone through the downturn here, have started to question that as a long-term growth -- secular growth story, at least to the same extent that it was in the past.

How do you view that? Is that transitory, trendy, if you will? Something that will pass over time, or are you changing your view on that as well as you think about how you grow and invest in different sectors going forward?

Well, Mike, I would say a very important point about Forum as we've put it together and the strategy remains consistent in that we're not tying ourselves to just one macro trend. We're not tied just to deepwater or deepwater rigs. Rather, Forum is strategically looking to take advantage of increasing service intensity, the need that that service intensity drives for repetitive sale items across the Drilling, and the completions, the Subsea, and production markets.

And I'm often asked, in the context of M&A, where do we see our focus being? And I'd say both from an internal product development, although we have those across the Company, and from an M&A standpoint, the completions area is one that we're very focused on building.

But I think that the strength of Forum is that we see over time, and there are different cycles and different timing and, yes, deep water is out of favor right now. But having the ability to leverage, too, that service intensity across drilling completions, Subsea and production, I think is the key to what Forum is and will become.

Got you. And I totally get the diversification theme, and just trying to get a sense as you think maybe two, three, five years out, and I hear you on the completion side. Is deepwater Subsea more or less or same, similar level of focus for Forum or (technical difficulty) at? Frankly, I disagree with that consensus here that deepwater is dead. I think it's just more a timing issue, but I'd be interested --

I absolutely agree with that. I think that, yes, it's out of favor at the moment, but it will come back. There's just too much in the way of reserve potential.

I think that the majors still view, as evidenced by what Shell has recently spent in their acquisition, that it will come back. But, hey, we're not tying just to betting on one horse here.

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

Thanks, Mike.

And, Danielle, we have time for one more question.

Okay. Thank you. Your next question comes from Brandon Dobell from William Blair. Your line is now open, please go ahead.

Thanks, guys, snuck in. Barely snuck in, so appreciate it.

If you could maybe give us some color on how much of an order, an inbound order headwind, we're going to see from ROVs this year? And then maybe how to think about just a knock-on effect of a revenue headwind moving into, I guess, late this year, but especially into next year, given, I'm guessing, there's probably a pretty big push out on new ROV orders given deep water?

Yes, I don't think we're in a period here for the next 18 months that there will be a large amount of new orders for anything associated with deepwater vessels or rigs or things like that. However, we will get some orders. We have very strong relationships with many of the largest ROV fleets out there.

And we'll, I think, see some orders, but significantly down from what they have been. And that's probably the rest of this year and into next year, if I had to guess. But beyond that, yes, I think that there's a good chance of a recovery.

But I think, in the meantime, we will focus our Subsea business on some other things that will position us well for the future on helping our customers with after-market supports, and maintenance, and renewal of their existing fleet. Working on product development for our models that we offer on the vehicle side and the OpEx side in adding to our portfolio of things that we can do for our customers in that regard.

There are a few bright spots in our Subsea business, like our Moffat business secured a big order, as Cris talked about in the script, and also our Dynacon business is holding pretty well.

And it's worth mentioning too, that the ROV business is not exclusively oil and gas.

Right.

A lot of what our equipment does is associated with other industries. We sell ROVs, some big ones into Asia for cable laying, fiber optic laying. We sell a lot associated with renewable industry with the wind farm industry.

I think there have been some articles recently about the push of wind farms offshore, and of course all that cabling. And it needs to be buried, and that's great for our business there.

So we're not tied exclusively to oil and gas. And, in fact, one of the orders Prady is referencing was communications outside oil and gas.

Okay. And then a quick one. Relative exposure or size exposure to work over rigs and coil tubing, and I guess that would be both US as well as international. How do we size that exposure for you guys?

Yes, our well intervention product area is focused on exactly those kinds of things. And it's probably 10% of our revenue, a little more from an operation contribution, given the joint venture and all. But in the coil tubing string area.

But we've got exposure to that. And again, that is part of what we see as a business long-term, with the rest of what we are generally describing as completions that we want to have a significant focus in.

Got it. All right. Thanks a lot. Appreciate it.

Well, thank you all. Good questions. Enjoyed the discussion this morning, and we look forward to talking with you all again in three months' time.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.