Forum Energy Technologies Inc (FET) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Forum Energy Technologies, Inc., third-quarter 2015 earnings conference call. (Operator Instructions)

As a reminder, this conference call may be recorded. I would now like to turn the conference over to Mark Traylor, Vice President, Investor Relations. You may begin.

Thank you, Nicole. Good morning and welcome to Forum Energy Technologies's third-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, 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 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. 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. Good morning. I will start with some highlights of our third-quarter performance, but I then would like to talk about our strategy going forward. Afterwards, I will turn it over to Prady, who will discuss our business improvement and operational excellence initiatives; and then Jim will provide more detail on our financial results.

The unexpected 20% sequential decline in oil prices and lower US land rig count in the third quarter continued to put downward pressure on drilling and completion activity. We have delivered much of our backlog that we had going into the downturn. Most of our businesses are an early-cycle play on oilfield activity. So given the severe decline in rig count and completions activity, Forum's third-quarter revenue of $245 million decreased 14% sequentially. We earned $0.07 per share, and EBITDA for the third quarter was $31 million or 12.8% of revenue.

Forum generated free cash flow after capital expenditures of $54 million during the third quarter. And once again, our decremental margins were less than our gross margins, demonstrating the benefits of our cost reduction and operational excellence initiatives. With oil prices returning to levels below $50, we have seen a much greater reluctance by our customers to spend money.

Although total inbound orders during the quarter were $213 million, a 7% increase from the level in the second quarter, we expect a slowing trend as we near year-end. The third quarter book-to-bill ratio was 87% for the Company as a whole, 76% for the drilling and subsea segment, and 101% for the production and infrastructure segment.

Within our drilling and subsea segment, our subsea product line performed well, delivering on the backlog from the record orders we received last year. Third-quarter revenue and orders increased over the second quarter, including an order we received for two new build ROVs during the quarter.

Moving to our production and infrastructure segment, inbound orders increased by 22% compared to the second quarter, as higher orders for our downstream-related product in production equipment and valves were partially offset by lower orders for our upstream products. During the quarter, we were pleased to announce that we were awarded a contract to engineer, design, and build eight Edge II desalters for Egypt. Our valve product line continues to perform well in this market, as revenue and orders improved in the third quarter due to strong demand in the downstream process sector.

As we look to the fourth quarter, the U.S. rig count continues to drop each week. E&P budgets have been exhausted. Customer spending momentum is slowing, and we expect more year-end delivery deferrals by our customers. As a result, we could see our fourth-quarter revenues drop to as low as $200 million, which would be below our earnings breakeven point of about $220 million in revenue.

Clearly, the bottom of the rig count has been pushed out in time and will be at a lower level. But we think that will occur over the next few quarters. For us at Forum, we expect orders will improve soon after the rig count bottoms and the destocking runs its course.

It has been Forum's strategy to be an early-cycle, activity-driven, and scalable company with a strong balance sheet and low capital intensity. We have also said we will not sacrifice our ability to benefit in the upturn. Therefore, we are shifting gears.

So far during this down cycle, we have been scaling down operations and cutting costs in line with activity and protecting operating margins in a short term. Going forward, we will focus on ensuring that we are prepared to benefit from the recovery. We intend to be a leading-edge beneficiary of the upturn and gain from our early-cycle exposure.

Our emphasis will shift to competitiveness in the upturn while maintaining our strong financial position and generating cash for future flexibility. We will retain our core capabilities, expand our product portfolio through new product development, broaden our customer base, and improve customer responsiveness. We will also streamline our operations and expect to deliver $100 million improvement in our cost structure, which will increase our margins in a recovery scenario by 500 basis points.

Now let me ask Prady to update you on several of these initiatives. Prady?

Thanks, Cris. Good morning, everyone. Let me talk more about streamlining our operations to provide operational efficiencies and update you on our initiatives regarding new product development and expanding our customer base.

In terms of operational efficiencies, we are streamlining into fewer manufacturing facilities, and the widespread use of lean techniques will provide more efficient processes and better cycle times. For example, as a result of our lean initiatives in production equipment, we are able to consolidate our Gainesville production equipment location into other facilities.

We are well on our way to a 20% reduction of our global manufacturing footprint without sacrificing capacity and with greater efficiency. We will have manufacturing centers of excellence of products and processes like machining, fabrication, and assembly -- in fewer facilities. We are also exploring opportunities in the areas of distribution, logistics, and field service, and we expect to gain operational efficiencies.

We also see potential benefits of further integrating our product lines, and we will share more details on our fourth-quarter call. Our procurement efforts are yielding high single-digit percentage savings across our operations and reducing cycle times of our suppliers. We expect all these initiatives will result in at least $100 million of permanent cost savings, as Cris mentioned in his earlier script.

We have commercialized several new products this year, and we continue to gain momentum in our product development efforts. One example is a new, enhanced Edge II desalter technology, which was instrumental for Forum winning the recently announced contract to provide eight units for Egypt.

This technology is used for treating feedstock at higher throughput rates in downstream refinery applications. This is one of the few products that will provide us the opportunity to capitalize on the reinvestment in the refining industry. We will also look to grow our product portfolio through acquisitions.

We have expanded our customer base by adding more than 30 new customers this year. In addition, we have leveraged existing relationships with strategic customers to pull through other product offerings in the Forum portfolio. We expect to continue to broaden our customer base through our operational initiatives, new products, and customer focus.

Our team has responded decisively during this downturn by scaling down operations, reducing costs, and maintaining margins. I am confident that focusing on our efficiency initiatives, expanding our product offerings, growing our customer base, and leveraging our balance sheet to pursue acquisitions will improve Forum's ability to successfully compete in a consolidated market during the recovery.

Jim Harris, our CFO, will now discuss the financial results. Jim?

Thank you, Prady, and good morning. I will summarize our quarterly results, comparing the third-quarter 2015 sequentially with the second-quarter 2015.

Consolidated revenue of $245 million for the third quarter was down 14% sequentially, as a severe drop in oil prices from mid-2014 has continued to have a significant impact on spending by our customers across our product lines. Our Drilling and Subsea segment revenue of $139 million was down 18% on softer demand for drilling capital equipment and activity-based consumable products as the drilling activity, especially in the U.S., continued to decline throughout the quarter.

Our Subsea business had a modest increase in revenue as we continued to deliver ROVs ordered in 2014 and as we successfully delivered on recent significant project orders for our Moffat subsea pipeline inspection systems and ROV hot stabs. Our Production and Infrastructure segment generated revenue of $106 million, declining 8% on reduced completions activity in the US land market, which drove lower sales of our surface production equipment and pressure-pumping consumable products, partially offset by increased valves sales to the midstream and processing industries.

Net income for the third quarter was $7 million, including $2.8 million in foreign translation gains on the stronger US dollar relative to the British pound and Euro and $2.2 million of restructuring charges associated with actions we took in the quarter to further reduce our cost structure in the face of declining market activity. In addition to our direct cost initiatives preserving our gross margins, we are on track to reduce our SG&A by over $90 million on annualized basis from our 2014 second-half run rate to rightsize the organization through the downturn, even while continuing to make select investments in product development and systems integration.

Operating income, excluding the nonoperational items, was $15 million, down $10 million or 40% from the second quarter, with decremental margins of 25% on the reduced revenue. Drilling and Subsea operating income of $9 million was down 52% sequentially on the lower drilling and downhole product revenue. Production and Infrastructure operating income of $11 million was down 23% 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 third quarter were 12.8%, a decrease of 170 basis points from the prior quarter. We came in at the bottom of our EBITDA margin guidance range of low to mid-teens as oil prices dipped precipitously in August, driving further activity decline through the quarter. We have taken the necessary actions to adjust our cost base in line with our outlook for revenue, which has continued to come down with the declining activity levels.

With many customers expecting to shut down nonessential operations through the entire holiday season, on these extremely low plant volumes we are fighting against pervasive labor and overhead absorption issues. Due to these additional headwinds, in the fourth quarter we are now expecting EBITDA margins around 10% for the quarter.

As we continue to implement facility consolidations, we expect to incur restructuring charges of about $12 million over the next two quarters, three-fourths of which will be non-cash charges. These expenses will yield recurring annual P&L benefits going forward of over $5 million. We will also continue to evaluate the carrying value of goodwill and other intangibles related to prior acquisitions and inventories in light of the expected longer duration of these lower activity levels.

Adjusted diluted earnings per share for the third quarter were $0.07, achieved on the lower-than-expected revenue with additional cost containment measures throughout the Company and the lower effective tax rate. Our weighted average diluted share count for the third quarter was 91.7 million shares.

Net debt at the end of the third quarter was $327 million, down $53 million from the second quarter, as free cash flow after capital expenditures was $54 million in the quarter. We expect good free cash flow again in the fourth quarter and in 2016 as we achieve further reductions in inventory. We paid off the balance on our $600 million revolver during the quarter, leaving only our unsecured bonds outstanding, which mature in six years. Our leverage ratio at the end of the quarter on a net debt basis was 1.5 times trailing 12 months EBITDA.

A top priority for us remains acquisitions -- although with the uncertainty around the duration of this downturn, we expect closing transactions will be challenging. We also have $50 million remaining on the authorization for share repurchases.

Interest expense was $7.4 million in the third quarter. Corporate expenses were $5 million. We expect corporate expenses to be around $6 million in the fourth quarter, now down 40% from 2014 levels after implementing our cost reductions. Capital expenditures were $8 million in the quarter and $28 million year-to-date. We have held our budget for full-year 2015 capital expenditures at approximately $35 million.

Depreciation and amortization expense was $16.6 million for the quarter and should be approximately $65 million for the full-year. We lowered our estimated annual effective tax rate to 23% from the prior estimate of 25%, as we have continue to see a greater decline in US profits relative to our international operations -- in line with the steeper decline in US activity levels.

As a result, a higher proportion of our earnings are subject to the lower statutory tax rate in jurisdictions outside the US. The 12% effective tax rate reported for the third quarter is attributable to catch-up of the two percentage point drop in the rate of applied to year-to-date earnings.

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 primary driver of Forum's results is drilling and completion activity. The downturn in this activity has been reflected in our revenue directly and in real-time. I believe our team has done an excellent job of managing costs down, in line with falling activity, and has limited the negative impact of declining revenue on our margins.

As we look ahead to 2016, we believe the decline in drilling and completion activity will be bottoming out and then stabilizing, which will lead to an upturn in our orders. We are turning our focus to preparing for a recovery in our business, and we believe we will be well positioned for this recovery due to our strong balance sheet and liquidity, our free cash flow generation, and the progress we have made in improving our operational efficiencies.

Given our weighting to short-cycle consumable products, we believe Forum will be among the first to see financial results benefit from an increase in drilling and completion activity. Thanks for your interest. And at this point we will open the line for questions. Nicole?

(Operator Instructions) Blake Hutchinson, Howard Weil.

First question, just to kind of understand where we are baseline-wise with the drilling technology subsegment, given your commentary on the subsea subsegment, would it be correct to assume that drilling technologies on a sequential basis was off something on the top line, perhaps greater than 30%? And was that representative primarily of the capital equipment running off? Or would you suggest that that is just kind of what the market is bearing right now?

So, no, we were not down 30%. It was down significantly in the quarter, but not to that level. And we did deliver on a lot of the capital equipment in the first half of the year, so we have had fewer deliveries there. And we are subject more to the lower activity levels.

So as we saw the rig count coming down, of course that had an impact on the consumable products that we sold in the quarter. And that is reflected in drilling results.

Yes, and then, of course, the well construction downhole products were down as well during the quarter, with just fewer consumable products being sold as our customers really are trying to preserve their cash and not spend when they don't have to, particularly on items that need to be expensed.

And maybe just sticking with this, so we can kind of tuck this away for the recovery scenario, over the initial part of the quarter were there portions of the order flow in your short-cycle businesses that were showing particular promise or responsiveness to what were higher-priced decks at the time?

I think the main point is this, Blake: that with the additional decline in oil prices since the end of the second quarter -- that was driven by concern about demand for oil -- that 20%, 25% additional decline in oil prices did change the mindset of operators, service companies, and drilling contractors across the board. And it changed that mindset to really protecting balance sheet and cash through the downturn and not wanting to spend money where they did not have to.

So I think that that trend gathered force as the oil price fell. And we saw that reflected in declining rig activity that is still going on as rigs roll off their contracts. And we are going to see that through year-end.

Okay. And then if I could sneak one more in there for Jim: you called out the fact that the restructuring -- or excuse me, just adjusting the cost base and the absorption of labor and overhead, especially as we see declines in the fourth quarter, are going to be tough to deal with from a margin perspective. Would you call out certain businesses that we were really hitting that kind of biting, can't-cut-any-more decremental as we saw them in 3Q?

Yes, I would say -- I guess the one that I will call out as not having this impact is valves. With the activity levels staying up, those margins have held, been very resilient. But probably the most pervasive would be in the drilling and the downhole side. As activity levels really are reaching that level where we have taken out a significant amount of the variable cost, and in order to achieve greater savings, we are going to have to turn more towards these consolidations to take out that base layer of cost.

Also, the pressure-pumping part of the business, which has the same dynamics -- in fact more acute than some of the other product lines -- will have also the same issues.

Thanks, that's very helpful. I will turn it back.

And our point, Blake, is that there are some things we can do on the cost side. But we are not going to do things that hurt our capacity capability going forward.

On the flipside, Blake, also, if you look at the pressure-pumping, the downhole, and the consumable products on the drilling side, those product lines will be the first beneficiary when the market stabilizes and we will see the orders in our portfolio.

Great, thank you.

Sean Meakim, JPMorgan.

I would like to talk a little bit more about the valves and, just really more broadly, on the midstream and downstream. It would be great to hear a little bit more about how those end markets are holding up for your product lines. And it sounds like downstream has been a nice partial offset for upstream. Do you think you are seeing it -- do you have any better visibility for those end markets, obviously, relative to what is a pretty foggy upstream outlook?

The downstream part of the portfolio, Sean, in the markets are pretty stable. And we expect that stability on a move-forward basis, too. The upstream part of the portfolio has seen a lot of softness. And we expect to see that softness on a move-forward basis, too.

Now, the refinery part of the market has reached a saturation. And at some point they need to upgrade the refineries in Canada, North America, also across the globe. We just don't know when that uptick is going to happen. But we are seeing some signs, very spotty at this point of time.

Yes, (multiple speakers)

We are seeing more downstream investment in the Middle East. That's evidenced by this one contract we have. But there are others there as well. And producers in those regions want to be able to sell more products, not just crude.

Right, yes, it seems that we've been waiting for that downstream pick-up forever, but hopefully at some point it will come through. The other thing I wanted to determine was SG&A. You mentioned the $90 million reduction. At some point, we do get into a recovery.

How do we think about growth of SG&A? How much of that would you characterize as structural or efficiency gains as you are improving through the down cycle? And how much is cyclical that you think would need to come back to support the business?

Clearly, a large part of our SG&A reductions are cyclical and would come back in a recovery scenario. But we will have, in a recovery scenario, other costs that will generate better savings. For instance, on the procurement side, obviously we are not buying so much in goods coming in at this point in the cycle. So although we are negotiating good percentage savings on our purchasing side, the dollar savings are not so much now. But they would be greater then.

So that is why we are saying $100 million in -- at least $100 million in cost savings in a recovery scenario, in a strong recovery scenario. And as we add back SG&A costs as the Company grows, we will be able to offset that cost increase with more savings on the operational side. Right, Prady?

Yes, Cris.

One last quick one in a similar vein. Just thinking about working capital, how do you think about the drawdown possibilities in the year-end? And if we stay at current activity levels, what are the additional opportunities through 2016 in terms of what we would expect from a cash basis?

So -- two comments. First, we do have a fair amount of non-cash charges in our earnings. So even as earnings approach breakeven, we have the opportunity to generate good free cash flow even in that scenario, without pulling down working capital.

We feel like our biggest opportunity going into 2016 is in the inventory area. Our turns have come down from around 2.7 times to -- this last quarter we're at about 1.4 times on the much lower activity.

We did see in the quarter our first reduction of about $15 million of inventory, which was a good move. It is hard to get that engine going from growing to shrinking, but we have turned that corner. We'd expect to see that accelerate into 2016.

And it is fair to say, at these activity levels, we believe that over the next -- I am going to call it a two-year period, because it takes a while to move the inventory. It is slower when activity is slower. There is probably $200 million of opportunity to take inventory or working capital off of our books over the next two years.

I would just add, Sean, that we've been averaging so far this year $30 million per quarter in free cash flow after capital spending. We think that we can maintain that average rate of free cash flow per quarter -- clearly through 2015 and through 2016.

The free cash flow generation has definitely been impressive, yes. Thank you for all the detail. I appreciate it.

George O'Leary, TPH and Company.

Just wanted to drill down a little bit into the drilling and subsea segment a little bit further, if I could; and then I had a pressure pumping question in there. So I guess if you compare and contrast the drilling with downhole, the two reporting units that were down sequentially, which was down more materially on the quarter? I am not looking for quantitative guidance, but just qualitatively, which was --?

They were down pretty close, and both being tied to drilling and completion activity.

And was flow equipment essentially in line with those in terms of the magnitude quarter on quarter?

Flow equipment -- the pressure pumping -- obviously, what's going on in the pressure-pumping market out there for the service companies, and as we all know, really struggling on the pricing standpoint. I think those companies are doing whatever they can not to spend money, and particularly on maintenance items that need to be expensed.

So that business is a struggle for our customers, and as a result they're not wanting to spend any money they don't have to. So we are seeing demand down there more sharply.

Okay.

But that is short term. At some point you need to start maintaining that equipment if it is going to continue to work.

Great. That is helpful color. And then you guys have done a great job on the free cash flow generation, and it looks like there is still a good bit more for you guys to do from an inventory standpoint. How much running room do you see is left there to blow down inventories as we move forward?

A lot.

Yes, so we have about $500 million in inventory. And by our best assessments, we can bring it down to around $300 million. So it is a lot of room.

And maybe one more, just kind of a qualitative question. There are a lot of customers in some of your end markets that we would consider sort of distressed or at EBITDA breakeven levels. How are just customer conversations going now versus three months ago? And how are customers behaving today?

Yes, so as I said, there has been a real paradigm shift in customer attitudes, and it is across the board. And the emphasis is on preserving cash and balance sheets. The biggest customers are wanting to protect their dividend. And then they want to protect their credit rating.

Or, as we move down, they want to stay within their debt covenants. Or they expressed it in terms of staying within their cash flow, or not outspending their resources. They all express it, depending on their particular position, differently. But the result is the same: a great reluctance to spend money at these oil price levels.

And so that is accelerating the destocking. It is deferring maintenance and consumable items, deferring whatever one can. But that, as we say, that can't go on for long. And once we get to a sustainable level of activity, then the spending would need to increase also to a sustainable level.

Great. Thanks for the color, guys.

Rob MacKenzie, IBERIA Capital Partners.

Jim, question's probably for you, but anyone else feel free to jump in. From a standpoint of M&A, with you guys kind of hovering at or below breakeven levels of revenue, does that change how you think about potentially buying companies in order to consolidate facilities and put more volume through your existing plants?

Acquisitions are a key part of our strategy. We have a strong financial position, so we continue to view ourselves as acquirers and consolidators. And I think we have a stronger financial position than many other companies of our size.

So we think we are entering a phase in the cycle where more opportunities for acquisition are developing. But our experience has been that in order to actually reach agreements on valuation and get things done, that has more often happened as the recovery begins to kick in and as folks have better visibility on the end of a downturn.

Okay, thanks. In terms of your revenue guidance for the fourth quarter, would we expect to see kind of the distribution of where the fall comes from to be similar to what we saw from 2Q to 3Q?

You know, I think the important thing about Q4 is a lot of it is driven by this paradigm of not wanting to spend money, budgets being exhausted, let's wait until next year, things slowing down. In a way, it's going to be a two-month quarter. We are going to get to mid Thanksgiving -- mid-November, and there's going to be a lot more discussion, we think, with our customers and their customers about the two Hs: hunting and holidays.

And I think that is going to cause -- be associated with not much going on from a business standpoint and a lot more discussion of the two Hs, and low activity as we go into the year, and just waiting until next year, coupled with not wanting to take delivery of a lot and put it on your balance sheet at year-end, and just help your working capital, as everybody's trying to show the best cash flow they can.

Right. But I guess my question is more along the lines of which -- are the same product lines we saw weakness in likely to stay being weak? And, for example, would valves remain fairly defensive on a go-forward basis?

We expect the valves business to be still stable in the fourth quarter. The product lines which are exposed on the completion side, which is the pressure pumping, the downhole part of the portfolio, will see a decline. And, also, the drilling consumables side -- the customers are trying to preserve cash. I think we expect to see some decline. Also our backlog is also depleting over the year. And we will see some backlog depleting, too, in the fourth quarter.

Is most of the backlog still in subsea?

Subsea and drilling.

Okay. Thank you. I will turn it back.

David Anderson, Barclays.

I guess, first, kind of a little bit bigger-picture question. Obviously, we've been hearing about the Thanksgiving slowdown happen from a lot of people here, so I don't think that's a huge surprise. But in your experience, on the other side of this, somebody earlier today said they were expecting a huge first-quarter pick-up -- hearing about so-called budgets being reloaded and people going right back to work. Others are talking about a delay.

As budgets kind of do come out, people kind of look at balance sheets -- you kind of hinted about that a little bit a few minutes ago. How are you kind of thinking about how 2016 could progress? Let's just take oil prices out of this. But right now, the way budgets get set, when do you think people actually do start getting back in activity? Would that be kind of later first quarter, from what you can tell for right now?

Yes, David, I think it is going to be a slow start to the year. I think we end the year with low momentum, and that carries over to the first quarter. Budgets are going to be low. People are going to kind of be waiting to see what happens with oil prices. So start out slow, and we are hopeful that we kind of reach the bottom here, things level out, and then gather momentum as the year goes on.

And then if we think about your drilling technologies business and sort of the consumables in there, obviously we're going to have a lot less rigs being active probably structurally going forward. How does your business kind of reposition itself going forward?

I guess I would just assume there is going to be -- obviously will be a lot more Tier 1 rigs. Can you talk about maybe the opportunity in the consumables side on that Tier 1 side? I think a lot of people are just kind of wondering how this -- with the mix shifting of the rigs in the market, how does that kind of impact your business as we think about kind of a recovery here?

For our products, Tier 1 rigs use the same kind of handling tools, pump consumables, pump packages as other type of rigs -- maybe at higher pressures. But the key point is these newer, more capable Tier 1 rigs drill faster. So they are handling more pipe. They are pumping more fluids.

So it is all about how many feet are drilled. As we are drilling longer laterals, as we are doing more pad site drilling and less moving of rigs, more uptime on the pumps and more turning to the right. So that intensity is probably a good thing for us and provides some offset to the fact that there will be fewer rigs working.

But the important thing for us is the trend -- the rate of change. So when the rate of change is rapidly down, as it is now, there is not a need for consumables, because they can be used off rigs that are being stacked. But once that flattens out -- and then particularly when it inflects and begins to go up, and you need to resupply a rig that has been stripped, that is very good for our business.

I guess one last question on the consumables side. Maybe this is a little bit more on kind of flow equipment I am wondering about. Weatherford was talking about artificial lift sort of hitting that, getting close to that inflection point on customer inventory levels and their own inventory levels. This has been a bit of a subject we've talked about over the years with you guys.

Can you help us understand a little bit of kind of -- I guess this is more of a flow equipment question: where customer inventory is versus your inventory and the rest of the market, and where we are in that cycle.

Well, I think we as manufacturers, we and others, probably have plenty of inventory. That is not an issue. But as we have been saying, I think the customers are doing whatever they can to avoid or defer purchasing. And so they are definitely working down their inventories.

Still more, okay. Okay, great, thank you.

Martin Malloy, Johnson Rice.

Just along the lines of shifting focus to prepare for an upturn, can you talk to us about any new products that you are introducing that you would like to highlight that we should pay attention to?

Sure, Marty. I think the products which will see the first benefit of the market stabilization would be the area of pressure pumping, downhole, and the drilling consumable products. And they also commercialized several new products this year -- for example, in the case of downhole, we are just launching our third body centralizer and also a shorty frac plug, which reduces the operational costs for our customers.

In the case of pressure pumping, our objective is to reduce the maintenance cost of our customers. And we are going to launch a couple of new products in that space in the next few quarters. And as you know, during the OTC we commercialized our 3,000 horsepower pump, which -- we are going to take the benefit of that during the upscale.

Also the power ends of J-Mac -- the J-Mac acquisition, which we did early part of the year, is gaining momentum on the power ends. Even during the downturn, we have sold several power ends, which improves the life of the power end which is available in the marketplace. So our play during the up cycle is not only to take the benefit of the market stabilization but also commercializing these products, which improves the efficiency and the operating costs for our customers.

On the drilling side, our complete pump packages now for the replacement fluid and to the liners, and our P-Quip system for making a liner replacement more efficient -- and selling that as a complete system now, I think we are doing a better job of supplying packages for our customers. And they're beginning to realize that as well. And across each of these businesses, there are new products and packages that we are introducing. And I think that will go over well.

Just this year alone, Marty, we have commercialized about 20 new products across all product lines. Most of them are focused on improving the operational efficiency and the operating cost for the customers.

Okay. And if I could ask a question on the subsea side: I think in the past you have said for 2014 that aftermarket or non-new ROV orders or revenues were about $160 million, about 50%. Can you talk about maybe how we should think about the trends there in a downturn, when you don't have and a lot of new ROVs being ordered for the aftermarket side?

We have some, but not a lot, of new ROVs being ordered. And so a greater part of our subsea revenue will be more the operating expense spend by our customers, whether that is on tooling, or positioning equipment, or on spares and refurbishment for our ROVs.

Relative to $160 million run rate during 2014, would you expect that to still trend down some? Or do you potentially --?

Yes, I think that will trend down some, because utilization of ROVs is declining. But it is not declining as fast as the ROV capital side. So the ROV part of our business is our probably latest cycle of our businesses and tends to follow by year the downturn in other parts.

Probably the other thing I will add to that, Marty, is -- as you know, our subsea business the CapEx and OpEx part; the OpEx part of the business seemed to have stabilized over the last several months. But also one of the product lines in subsea which we expect to be stable going into 2016 is the Moffat. The Moffat product line had a record year in 2015, and we expect them to be stable going into 2016, too.

Thank you.

James Wicklund, Credit Suisse.

Cris, you talk about strategy, and you made a point of you're shifting your strategy -- and you made it sound serious, and important, and comprehensive. I'm just wondering if you could just talk a little bit more about that.

I know you are going to lean manufacturing; and you are consolidating, and closing facilities, and putting things together, and the integration and efficiency. But it sounded like more than that. And you made a point of it being a change and shift in strategy going forward. (multiple speakers)

So let me be clear, Jim, that Forum's strategy is that we are a capital-light, high cash flow generating, consumable-oriented company with strong brands serving the drilling/subsea/completions markets. The emphasis change in our strategy is a change from managing for the downturn to instead managing for a recovery. I think that how one manages for those two things is a bit different.

So streamlining our costs, but with an emphasis on how we are going to get ongoing benefits from those cuts, while preserving and hopefully enhancing our capabilities from a technical product development standpoint and ability to respond to our customers' shorter cycle process. So that is, I think, the main point, Jim: is a shift from managing for a downturn to managing and positioning for an upturn.

Okay, thank you. That is very hopeful. Also, if I could, you talked about how M&A is the core -- one of the core competencies of your business, and it has been in the past. And you also noticed that it is awful hard to get deals closed in the current market. When do you think M&A really will start to occur?

Yes, I think that the active period for M&A will be as recovery -- the early stages of a recovery. And the reason for that is the seller does not feel like they are at the -- selling at the bottom. As a buyer we have visibility that -- of how long the downturn is going to last and can bake in some more positive aspects into our valuation.

And at that point, valuations are more likely to come into line. And also, from the seller's standpoint, having made it through Death Valley there, an opportunity to sell without having to go through that again is attractive. (laughter)

Okay. Gentlemen, thanks very much, appreciate it.

Robin Shoemaker, KeyBanc Capital Markets.

So, Cris, going back to your statement about how you have delivered most of your backlog that you had going into the downturn -- and now you are, I guess, going forward delivering more recently booked backlog. So wanted to ask the question about what you have seen during this downturn in terms of pricing weakness or pricing discounts. I think of your products as not having meaningful pricing deterioration in the downturn, but I wanted to see if you would comment on it.

Yes, that's right -- far less than the service companies or certainly nothing like drilling contractors. And that is just true of the manufacturing business in general. Prady, you can comment what we are seeing from a pricing standpoint.

I think if you look across these product lines, depending on what the product line is, the impact of pricing we are seeing is in single digits to double digits in some product lines. If I had to give you the extremes of it, I would say valves, where we have not seen any impact on pricing -- or even if we have seen, it has been a minimal impact on pricing.

And then on the extreme end, probably the pressure pumping and the downhole products, again, the products where we will see them which are forced are the ones where we are seeing the impact of pricing. However, we have been able to offset part of the pricing pressure with some of the initiatives we have on the operational front, which is the procurement savings. And our procurement savings are in the high single digits across the operations.

And that's one of the things that we have done -- on the operational side -- of consolidation of plants, and using lean, and some of the other initiatives we've been talking about. All that is helping to offset the pricing pressure. And that is one of the reasons why we've been able to hold -- our margins are still in double digits.

Yes, right, and just to put a pin in it, probably the average price reduction across the Company is upper single digits.

Correct.

Okay, good. So, then, in terms of this recovery that we are kind of preparing for -- basically, with all that you are doing now, if we assume that you went back to something like the $400 million to $500 million revenue per quarter run rate, where you were in 2014 -- are you saying that 500 basis points that you're getting now, is that what we would expect in a revenue run rate versus those kind of high teens margins?

Robin, that is what we are saying: that in a recovery scenario, where the revenue does recover, that we feel with this streamlined cost structure that we are now working towards, we will be able to save in that scenario 500 basis points.

With no impact of -- positive impact of any pricing clawback. So as the market turns and when we start pulling back the pricing, that is on the top.

Okay, all right. That answered question, thank you.

That is what we are managing for. Thanks for the question, Robin.

Yes. Thank you.

Mike Urban, Deutsche Bank.

Wanted to come back to your comments around the change in focus and how you are managing the Company here going forward. So certainly seems like a shift from playing defense a little bit to maybe a more offensive kind of approach.

You have gone through some of what that entails. Kind of interested in why and what's the -- you know, what gives you the confidence that now is the time to do that? I would actually tend to agree with you. You kind of want to zig when others are zagging. But it seems like everyone else is still zagging, and playing defense, and kind of settling in for a potentially protracted downturn here. So I am just wondering why you are taking a bit of a different course.

Well, I think one important point is we have the advantage of a strong balance sheet, strong cash flow, and don't have to worry about the existential question. So that gives us the luxury of looking ahead and planning for what we should be doing rather than what we have to be doing. That is an important element of it.

Secondly, we view ourselves right at the forefront, right at the leading edge of our business being tied to what is happening in activity levels or even the trends in activity levels in real-time. So unlike, say, some of our big capital equipment brethren, who have very long lead times for their equipment and long cycle backlogs, we are -- we work in a very real-time shorter responsiveness basis. So we will be able to, through our products, see the benefit much more quickly.

But we need position the Company to realize those benefits and to have a better cost structure going forward. We've given up price through this downturn as an industry, as a service and equipment industry, unlike any other that I can recall. We can't count on getting that back anytime soon. So having a better cost structure is an important element for competitiveness.

Forum, for better or worse, has the position, as a young Company, of having many levers we can pull of the things that Prady has been talking about -- of implementing better procurement, lean systems that we really haven't had before and have a real impact for us. But we've got to get those things in place now if they are going to give us that leverage as the market turns. And we don't know exactly when that is, but we do know it is getting closer. And we expect, as we said, that the bottom, the inflection point, is in 2016.

Think of it from an operational standpoint: if we can have three things accomplished going into the stabilization mode and the uptick -- is better cost position and all the operational initiatives we have that position us to go have that stronger cost position that what we had in 2014, broader customer portfolio, and broader product portfolio.

And if it is turns out that you are wrong in that view, and we are settling in for an extended downturn here, perhaps lasting well into, if not all of, the next year, do you have to shift gears again? Is there an incremental level of retrenchment? Or do you feel like with what you've already done plus the initiatives you announced today, that you have got a sustainable cost structure anyway. And you are still okay -- again, given some of the things you highlight: you have a good balance sheet, and you are pretty comfortably free cash flow positive?

We are definitely free cash flow positive and we have a strong balance sheet. We are -- and I think as we said, just getting to a point of stability, even if it's at a low activity level, that would be better than this constant deceleration that we've been in here for a long time. So at some point it does need to bottom out, and we think that we are getting closer to that. I would be very surprised if we continued to see the rig count decline the way it is for another year. I think it might be at zero by that point.

(laughter) That is the good news. It can only go to zero. That is all for me, thanks.

Chase Mulvehill, SunTrust.

So, let's see, just one last question. Most everything else has been answered. You hit on this on the working capital. I think -- did I hear the number that your inventories -- you thought you could get them down by $200 million? Was that right?

Yes, Chase, over a two-year period. With activity as low as it is, I don't want to imply that that's easy. Obviously, customers have to demand it. But we do believe that we have that much in terms of inventory that we can bring down and, at these activity levels, where we should be. So it is a $200 million opportunity.

So I guess if we kind of look at that over the next couple of quarters, how should we be thinking about inventories and total cash from working capital?

I think that probably the best way to think in terms of cash flow, Chase, is -- as Cris said earlier -- that $30 million run rate on free cash flow after CapEx, there may be some quarters it will be a little better and some a little less. But it will average around that $30 million number.

Okay, all right. That is all I have. Thank you.

One more question.

Brandon Dobell, William Blair.

Two quick ones: did you guys think about the performance in North America versus international markets? How do you expect that to look as you work through Q4/Q1? And is there a concern that there is going to be a longer duration on how long it takes the international market to find a bottom or some stability?

I think we are closer on the North America market, particularly US market here. I think that will reach bottom first. International, there are a lot more forces in play, including national oil companies that have bigger, countrywide issues to deal with, particularly in areas outside the Middle East -- big economic issues that could impact their spending plans for longer. So yes, I think there is that difference.

In the costs of international, they are still stable. The Middle East is still pretty stable. West Africa, North Africa, still seem to be stable. The deal we have -- the Egypt deal which we received in the third quarter is another good sign. So they're spotty markets in international, which are still pretty stable.

I'm showing no further questions at this time. I'll turn the call back over to Cris Gaut for any closing remarks.

We appreciate your interest and your good questions. And we will talk to you next quarter. Thank you very much. Thanks, Nicole.

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