Forum Energy Technologies Inc (FET) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2015 Forum Energy Technologies earning conference call. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Mark Traylor, Vice President of Investor Relations. Sir, you may begin.

Thank you, Eric. Good morning, and welcome to Forum Energy Technologies' fourth-quarter and full-year 2015 earnings conference call. With us today to present formal remarks are Cris Gaut, Forum's Chairman and Chief Executive Officer; as well as Prady Iyyanki, Chief Operating Officer; and Jim Harris, our Chief Financial Officer. We issued our earnings release last night and it is available on our website.

The statements made during this conference call, including the answers to your questions, may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Forward-looking statements involve risks and uncertainties that may cause actual results or events to differ materially from those expressed or implied in such statements.

Those risks include, among other things, matters that we have described in our earnings release and in our filings with the Securities and Exchange Commission. We do not undertake any ongoing obligation, other than that imposed by law, to publicly update or revise any forward-looking statements to reflect future events, information, or circumstances that arise after this call.

In addition, this conference call contains time-sensitive information that reflects management's best judgment only as of the date of the live call.

Management's statements may include non-GAAP financial measures. For a reconciliation of these measures, refer to our earnings release.

This call is being recorded. The 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 begin with a summary of our fourth-quarter and full-year performance, make some observations about the current market conditions and outlook, and talk about our plan for Forum going forward. Afterwards, I will turn it over to Jim, who will discuss our strong liquidity position, financial results, and cost reduction progress. And, finally, Prady will address our business improvement and operational excellence initiatives.

As we know, average oil prices decreased during 2015 by approximately 45%, and the North America rig count declined over 60%, resulting in a significant reduction in drilling and completion activity, which negatively impacted our fourth-quarter and full-year results. However, Forum is among the select group of companies that has staying power throughout this downturn due to our available liquidity, cash flow, and strong balance sheet.

Our revenue in 2015 was down 38% from our record year in 2014. Our net income for 2015, excluding charges and special items, was $37 million or $0.40 per share. We generated full-year 2015 free cash flow, after capital expenditures, of $125 million, and ended the year with $109 million of cash on hand, with no bank debt outstanding.

We proactively reduced our cost structure in line with declining activity levels, and improved our operational efficiency. Our ability to scale our operations allowed us to achieve full-year operating income decremental margins of 30%, roughly consistent with our full-year gross margins.

The fourth quarter of 2015 concluded the year much as we indicated in our early December update, with continued declines in the rig counts and oil service activity levels, and further weakness in customer spending. As a result, our fourth-quarter revenue was $196 million, a decrease of 20% sequentially. And we lost $0.12 per share, excluding special and non-operational items. Our operating margins declined in the fourth quarter, as it is now more difficult to further reduce costs in line with declining revenue.

Over the prior four quarters, we were able to significantly scale down our costs roughly in proportion with revenue. But operating leverage and fixed costs are now working against us, causing more under absorption of manufacturing costs.

We do believe it is important to preserve our operational capability, as Forum should be an early beneficiary of an improved market, once activity levels stabilize and begin to improve. Therefore, we are now striking a balance between further cost reductions and consolidations on the one hand, and preserving our production capability on the other.

Forum generated free cash flow, after capital expenditures, of $34 million during the fourth quarter of 2015.

Looking ahead, we believe we can continue to generate free cash flow of roughly $25 million per quarter throughout this downturn. Our strong balance sheet and liquidity not only gives Forum staying power, but provides us with flexibility that is a differentiator at this point in the cycle.

With the continued decline in commodity prices, the E&P operators are now stopping spending anywhere they can. As a result, the rig count is in free-fall, and our service company customers are completely focused on their balance sheets and are extremely reluctant to spend, even if that means not maintaining their equipment and not maintaining their stock of consumable items. We expect this destocking and cannibalization behavior by our customers to continue as long as drilling and completion activity is declining.

Forum's total inbound orders during the fourth quarter were $171 million, a 20% decrease from the level in the third quarter. We expect this slow trend in order levels to continue into 2016. The fourth quarter book-to-bill ratio was 87% for the Company as a whole, 77% for the drilling and subsea segment, and 98% for the production and infrastructure segment. Orders were down sequentially for our upstream products businesses.

The only product line showing stability in orders and a higher book-to-bill ratio was our valves product line, which continues to benefit from its large exposure to the downstream and process industries. And we expect a sequential increase in valves revenue in the first quarter.

We are keeping a close eye on the credit quality of our customers and undoubtedly we will have some issues, as others will, as well. But it is worth noting that Forum's top 20 customers are comprised of the large service companies and drillers, as well as the large offshore construction contractors and valve distribution companies.

Our days sales outstanding was stable from the third to the fourth quarter 2015.

As we look to the first half of 2016, with oil prices hovering around $30, there are tight constraints on money flows at every stage of the process, from the operators on down. As a result, we expect to see our first-quarter revenues drop 10% to 15% from the fourth quarter to the first quarter, and decremental margins in the mid-30s range. However, our free cash flow generation will be strong.

This year will be another challenge for all industry participants. And that is why it is especially important to note that Forum is among the select group of companies that has staying power throughout this downturn due to our available liquidity, cash flow, and strong balance sheet.

And we are unique among the equipment manufacturing companies with our leading exposure to the early-cycle, activity-driven product sales, so we will be among the first to benefit from the upturn. We are managing the Company to preserve this upside exposure while working to improve our cost structure in the meantime.

Now let me ask Jim to take you through our results and financial position. Jim?

Thank you, Cris, and good morning, everyone. There is a lot going on in our earnings release for the fourth quarter. I will provide more color on the operating results and the other charges.

We expected the quarter to be challenging, with orders continuing to decline and our customers slowing operations further through the end-of-the-year holiday period. Based on our current view that this challenging environment may linger for longer, we took another hard look at the carrying value of our assets during the quarter.

Forum's total revenue for the full-year 2015 was $1.1 billion, down 38% from 2014. We reported a net loss of $119 million or $1.33 per diluted share for the year. Excluding $1.73 per share of special items, adjusted diluted earnings per share were $0.40 for the full-year 2015.

Free cash flow for the year, after capital expenditures but excluding acquisitions, was $125 million. Adjusted EBITDA for the year was $143 million or 13.3% of revenue.

I will now summarize our results for the quarter, comparing the fourth quarter of 2015 with the third quarter of 2015. Consolidated revenue of $196 million for the fourth quarter was down 20% sequentially, as activity levels continued to decline. Our drilling and subsea segment revenue of $104 million was down 25% on lower sales of drilling and subsea capital equipment, and softer demand for activity-based consumable products throughout the segment. Our production and infrastructure segment revenue of $92 million was down 13% on lower year-end sales.

The net loss for the fourth quarter was $165 million or $1.81 per diluted share. The quarter included special items totaling $181 million on a pre-tax basis, only $3 million of which represent cash costs incurred. The adjusted net loss, excluding these items and the associated income taxes, was $0.12 per diluted share.

The special items were comprised of pre-tax charges of $125 million for goodwill and intangible asset impairments, $43 million for inventory write-downs across our product lines, $4 million in foreign currency translation gains, and $13 million of restructuring charges incurred to consolidate facilities to further reduce our cost structure.

During the quarter, we evaluated the carrying value of goodwill in all of our product lines, in light of the expected longer duration of this severe industry downturn. While we determined that five of our six product lines had not suffered impairment to goodwill carrying values, our subsea product line -- which is generally a later-cycle business -- was deemed to have impaired goodwill.

We also performed a thorough assessment of inventory in all of our product lines, considering historical carrying values relative to current market conditions. We concluded that the net book value of inventories across our product line was higher than we could justify in this market, so we have written these values down accordingly.

For 2016 and 2017, the sale of these finished goods off-the-shelf should be a major contributor to the free cash flow that we expect to generate. The remaining charges were principally associated with six strategic plant consolidations completed during the quarter. As we complete our facility consolidations currently underway, we will incur more of these charges this year.

For most of 2015, our focus has been on reducing our cost structure ahead of declining orders and revenue each quarter. We have reached the point where we want to strike the right balance between reducing costs further while preserving our capabilities, and sufficient capacity to be prepared for when the industry dynamics improve.

By design, we have a conservative and strong balance sheet, with only our unsecured bonds outstanding, with maturity in late 2021. Our business is not capital-intensive. And at these lower activity levels, we have the proven ability to reduce investments in working capital and to generate good free cash flow for an extended period of time.

We are taking steps now to build our cash balances, with $109 million in the bank as of the end of the year. We expect to add another $100 million in 2016, despite the difficult market conditions and low volumes. We believe these available resources will give us the ability to make selective acquisitions as we encounter good, strategic opportunities.

While our bank revolver is currently undrawn, we anticipate amending the facility to provide greater flexibility and reduce ongoing commitment costs. On a run rate basis, we have reduced our SG&A by $94 million from our 2014 annualized second-half levels, even while we have made, and we are continuing to make, select investments in new product development and in continuing to integrate our business systems.

Our fourth-quarter operating loss, including $16 million of depreciation and amortization, but excluding the special items, was $8 million, down $22 million from the third quarter. Our decremental operating margins of 46% for the quarter, on the reduced revenue, were higher than earlier quarters due to increased under absorption of labor and overhead at our manufacturing facilities, and our willingness to accept lower margins on volume orders of our older and slower-moving inventory.

Drilling and subsea recorded an operating loss of $8 million, down $16 million sequentially. And production and infrastructure's operating income of $5 million was down $6 million sequentially, each for the reasons already cited. On these extremely low plant volumes, we are continuing to fight against pervasive labor and overhead absorption issues.

Our weighted average diluted share count for the fourth quarter was 90.2 million shares. This lower fully diluted share count results because of the net loss requiring use of the basic shares outstanding for purposes of the fully diluted earnings per share calculation. The $6.2 million showing as year-to-date stock repurchases related to the first quarter, as has previously been disclosed in the 10-Qs.

Net debt at the end of the fourth quarter was $287 million, down $40 million from the third quarter; as free cash flow, after capital expenditures, was $34 million in the quarter. We expect good free cash flow to continue to 2016 as we achieve further reductions in inventory.

As stated, we have no balance outstanding on our bank facility at year-end, leaving only our unsecured bonds outstanding, which mature in about six years. Our leverage ratio at the end of the quarter, on a net debt basis, was 2 times trailing 12-months adjusted EBITDA.

A high priority for us remains selective acquisitions, although with the uncertainty around the duration of this downturn, we expect closing transactions could be challenging. We are, however, beginning to see more distressed opportunities as the downturn continues.

Interest expense is expected to be about $7.5 million in the first quarter. Corporate expenses were $5.7 million during the quarter. And we expect corporate expenses to continue around this level, now down 40% from 2014 levels after implementing our cost reductions.

Capital expenditures were $3.2 million in the quarter, and were $31 million for the full year. We have reduced our capital -- our budget for 2016 capital expenditures further to approximately $20 million, which is sufficient for maintenance and select investments.

Depreciation and amortization expense was $16.4 million for the quarter and $66 million for the full year, and should be similar for 2016. Excluding the special items and the associated tax effects, since most of the goodwill impaired was not tax deductible goodwill, our effective tax rate on the fourth quarter loss was 26.7%, bringing the full-year effective tax rate, on a like basis, to 21.5%. Although it is extremely difficult to forecast an effective tax rate at these lower activity levels, we expect our tax rate for 2016 will be around 28%.

We provided the full-year 2015 revenue for each product line in a supplemental schedule in the earnings release. For more information about our financial results, please review the earnings release on our website.

I will now turn the call over to Prady to update you on several of our initiatives.

Thanks, Jim. Good morning, everyone. Our team performed well in an extremely challenging market environment. Let me describe several of our accomplishments during the year. We aggressively and proactively downsized the cost structure with declining activity. We lowered our labor and overhead costs by approximately 38%, in addition to the SG&A savings which Jim has mentioned earlier.

I'm pleased with our efforts to streamline our operations. We have consolidated our global manufacturing operations by 20%, and closed down several facilities without sacrificing manufacturing capacity.

We have also consolidated about 50% of service centers in the flow equipment product line while maintaining presence in all key basins. We have implemented widespread [of use] of lean manufacturing techniques that will produce more efficient operations and better cycle times. Our procurement team continues to collaborate with the suppliers and consolidate our source base. We estimate a 2016 year-end savings rate of approximately 15% to 18% compared to the 2014 procurement pricing levels.

We see further opportunities for savings here, which will partly offset the decline in prices to our customers. Our product lines have commercialized more than 20 new products in 2015, the majority of which will help our customers save operating costs.

Some examples of new products are the Edge II desalter, compact frac plugs, 3,000 horsepower frac pump, drilling mud pump packages, and coiled pipeline. We have also broadened our customer base by adding several new customers, and expanded our existing customer relationships across all the product lines.

Our efforts in 2015 have yielded Forum the benefit of maintaining full-year decremental margins consistent with the gross profit margins, and position Forum for higher incremental margins in the eventual recovery.

Let me now focus on 2016. We will continue to generate cash while preserving our operational capability and positioning Forum for the upturn. Although we have reduced the cost structure significantly, we will continue to focus on streamlining our operations for further efficiencies. We have centralized our stimulation and intervention product offering to provide focus and efficiencies to the completion business. Our production equipment and valves product line are now under the same leadership to exploit synergies with customers.

We will also expand our product offering in the midstream and downstream sector, as this has been an area of relative strength. We expect to have all manufacturing employees trained in Lean manufacturing principles by the middle of the year, resulting in tangible cost savings and improving manufacturing cycle times. Our procurement team will generate fu savings, while ensuring our suppliers' ability to provide sufficient capacity and competitive lead times when the market recovers.

Our engineering team is implementing value engineering techniques to lower product costs and enhance product designs for our customers. We will commercialize several new products again in 2016.

We recently transferred one of our senior operating leaders to Dubai, with the responsibility to expand our Middle East operations and gain market share in the region. We have the ability to weather this severe downturn due to our financial position. As a result, our team is focused on three fronts: first, operational excellence by driving a lean and efficient culture while reducing our permanent cost structure.

Second, broadening our product offering for internal product development and selective acquisitions; third, gaining profitable market share through commercial excellence with existing and new customers. I'm confident that with the focus areas, we will be able to differentiate and improve our market presence significantly when the market eventually recovers.

I will now turn the call back to Cris for concluding remarks, and moderating Q&A. Cris?

Thanks, Prady. From an overview perspective, what is driving down our profitability is a lack of demand, as the money flows in our sector are drying up. But we know this is not sustainable if wells are going to be constructed and completed. Forum has the staying power to not only wait out this slow period, but to play on offense through our self-help efficiency initiatives and our ability to make selective acquisitions and additions to our product offering. We are well positioned to be an early beneficiary of the recovery in completions and drilling activity.

I want to thank our employees for keeping Forum in this good position. We are not there yet, but we are all ready for an upturn.

Thank you for your interest. And at this point, we will open the line for questions.

Eric?

(Operator Instructions). Jim Wicklund, Credit Suisse.

Cris, we are all ready for an upturn. (laughter) A question: how much of your business is directly with E&P companies, and how much is with service companies and offshore construction companies? What's the breakdown?

So, the vast majority is with service companies and drilling contractors and offshore contractors. So direct with operators is probably on the order of not more than 20%.

Okay, so the guys who are getting hit worst by the slowdown are your customers. That hurts.

Well, I think a lot of E&Ps feel like they are getting hit pretty hard, too.

Well, good point, good point, good point, good point (multiple speakers).

Yes, but it's the cost (multiple speakers).

Agreed, agreed. When you say that you can last -- and, clearly, your cash flow shows that you can, how long -- BP is saying, everybody is saying, this is lower for longer. How long can you last? I know that's a broad question, but how long can you last?

We can last as long as it takes, Jim. As we said, we can generate that $25 million a quarter, $100 million a year, of free cash flow another 4 to 8 quarters at that level, we think. And given the lack of capital intensity in our business, we can continue to operate at cash breakeven levels if we need to. But, gosh, we have built up a lot of cash, not only end of 2015 but 2016 and 2017. So we've got great staying power, Jim.

Yes, your CapEx [needs] are a saving grace, no question. Last question, you talked about underabsorption, how it's continuing to be a problem. I know you are fighting it with lean manufacturing. Prady, you went into very good detail about that. But you want to maintain your operational capability through the upturn. Have you guys estimated how much of the cost of carry, if you would, is to maintaining that excellence and not cutting any further, being ready for the upturn?

Jim, I can take that. Even though we have reduced our cost structure significantly in 2015, we will continue to focus on streamlining our operations. But at these reduced levels, Jim, there are operational inefficiencies, primarily showing up in the absorption rates. Now, if I had to quantify the absorption, I would say the range is somewhere between $15 million to $20 million. But we are still continuing to downsize our operations and focus on the Lean efforts which will help to mitigate that.

Yes, that's key. The efficiency is key. Okay, gentlemen. Thank you much. All the best.

David Anderson, Barclays.

Cris, I was just wondering on the drilling consumables side, I was wondering if you could help me understand some of the dynamics that are going on there with the different classes of rigs. How has that mix shifted over the last year? I'm just curious about, say, Tier 1 rigs versus older rigs.

I guess what I'm getting at is we keep hearing about lower-end rigs being cannibalized. I'm wondering if that's also happening among the Tier 1 rigs. Or if, assuming there is a recovery happening, how does that play out, in terms of that particular part of your business?

Yes, so a lot of the consumable products we sell to the drilling contractors are items that they would typically inventory, not only centrally, but some amount after -- on the working rigs for handling tools, but also for pump consumables, which are two primary areas for us.

So first step is to work down those inventories at the rig level. And also, as rigs are stacked, that you take whatever working inventory you have and send it to the central warehouse, and then it gets worked down from there.

So that's all happening, and it's all underway. Now, with Tier 1 rigs, those tend to be 7,500 PSI mud systems, not the older 5,000 PSI. So it's a different set of consumables, so it's not all completely substitutable --different size drill pipe or handling tools, and so on. So, it's not 100% substitutable. And then, of course, when you get into the offshore side, it's very different as well.

And then if I think about maybe the other side, you had talked about the pumping side, I'm just curious about potential attrition in the pressure pumping market. So the overall fleet is around 50% utilization. I'm just wondering if you can help characterize how that equipment looks, from your point of view, that's been idled. We've heard so many people talk about as much as 4 million to 6 million horsepower going away. Do you buy that? I'm just wondering how you are viewing that idle capacity right now.

Earlier, when I was talking about pumps, I was talking about drilling; mud pumps.

Okay.

So here, if you're talking about the pressure pumping business --.

Yes.

There, I think that it is actually further along in the destocking. I think the cash pressures have been on the pressure pumping companies longer. And they are more in the hand-to-mouth mode now, having worked down a lot of their inventory. So, yes, I think that significant amount of pressure pumping equipment will probably not come back to the market. Because like everything in this space, the favorite type of equipment, and layout, and so forth, changes over time.

So, I'm no longer close enough to it as I once was, on running the equipment, to have real good feeling for that. But, yes; I think a significant percentage of the pressure pumping equipment is not going to come back, David.

And one last question, if you don't mind. You talked about some weakness in the valve business. That's been one of the more stable product lines during the downturn. And if I recall, this is much more has a -- more of a midstream driver. So is the weakness that you are starting to see now, is it those companies are now going through the same cash flow issues that your other service companies are obviously already going through? Is that what's happening there on that part of the business?

So, let's be clear: on the revenue side, we did see a down-tick in our valves revenue in Q4 versus Q3, but I think that was more seasonal and year-end. Orders were stable. The book-to-bill ratio was quite good for the valves business. And as I said in my prepared remarks, we expect Q1 for our valves business to show an increase in revenue. So, the project work in the process industries and refining is good.

Clearly, a portion of the valves business, for us and for others, that's associated with the upstream business or with heavy oil in Canada -- that part's not real good right now. But, fortunately, the weighting of our valves business is more towards the further downstream, and that's resulting in the good order flow that we're seeing there.

I'd had in addition, David, to the orders holding up that business, the margins have been very resilient as well for us, for valves.

Thanks, Jim.

Chase Mulvehill, SunTrust.

So, first, I just wanted to talk to your free cash flow and your 1Q guidance. So just to confirm on 1Q guidance, revenues were down 10% to 15% and mid-30s decrementals, and that was quarter-over-quarter, right?

Q4 to Q1, that is our guidance. Yes.

Okay, okay. So, all right. So, back of the envelope, you are basically breakeven EBITDA. Am I doing the math right?

That is the ballpark.

Okay, all right. So, if we take that number, and now we've got breakeven EBITDA, and trying to bridge the gap between that and your $25 million per quarter of free cash flow, we can look at breakeven EBITDA and then add back $5 million or $6 million of non-cash comp, and then you've got interest expense and CapEx you gave us. Then that implies, call it, ballpark-ish, $30 million per quarter of cash from working capital. I just want to confirm all that math. So is that what you are assuming for working capital?

Yes, so there would be a lot of cash coming out of working capital. And I think for the year 2016, we will generate positive working -- positive EBITDA. But for starting off here, starting off -- and I think we all see this -- that spending is pretty slow at the moment.

Right. But for the year, for working capital, it seems like you might be able to get over $100 million of cash from working capital. Is that a fair modeling assumption?

I think it's better to think in terms of that being our total free cash flow; a lot of that coming from working capital, coming off the balance sheet. But as Cris said, we also do expect, for the full year, to generate some positive EBITDA after the first quarter.

Right.

So good contributions from working capital, but not exclusively.

Got it, got it, okay. And then I'll try to squeeze one more in. Now that it seems like your leverage metrics -- your ratios are probably a little bit higher than we appreciated, what it might could be six months ago, how do you now view acquisitions?

Well, with $109 million of cash already on the balance sheet, and that growing $100 million during the year, that gives us, alone, good firepower. And as Jim mentioned, we're in the process of amending the credit facility to give us good additional availability. So, we're going to be selective, highly selective, in acquisitions. And we're not going to do anything that works against the strength we have on our balance sheet. But I think we've got good flexibility to do selectively some acquisitions.

Okay. And are sellers wanting cash? Or do you think that you're going to have to offer some equity, too, for upside?

Well, an entrepreneur who's got a business that's performing relatively well, gosh, there's probably no reason why he wants to, or she wants to sell that business at this point in the cycle. But as was mentioned earlier, we are seeing more distressed opportunities. And those would involve probably paying off some debt on the businesses with cash. It could potentially involve willingness to give some stock to the current equity holder as a way for them to potentially see some recovery the future.

Okay, all right. That's helpful. All right, I'll turn it back over. Thanks.

George O'Leary, Tudor, Pickering, Holt and Company.

I think if revenue were down in the first quarter 10% to 15%, given what we're seeing from an activity bleed down standpoint in North America, that would be considered a win. So I'm just curious what you're seeing from your customers in the fourth quarter, and if maybe some of the Q4 budget exhaustion that maybe some of your customers had is unwinding a little bit in the first quarter, and maybe helping you guys outperform the rig count expectations.

Well, it's a slow start for the year, which is what we expected. If I had to go across the product lines, I would say the production infrastructure business is performing the way we are expecting it to perform. The valve business is still stable compared to the last year. The offshore business, which is primarily our subsea business, we expected a slow start, and that's what we're seeing in the orders and bookings.

On the drilling front, the CapEx part of the business, we expected that to be a slow start, and that's what we are seeing. The operational -- OpEx part of the business is consistent with what we saw in the fourth quarter. But it's a slow start for the year.

And, George, I'd also say that we do still have some backlog that we'll be delivering in the first quarter, which will give us some support, and as part of our revenue estimate from the first quarter.

All right. Great, thanks, guys. That was helpful color. That's it for me, given the other questions that were asked.

Blake Hutchinson, Howard Weil.

I just want to clarify from what's been covered so far, that, even though you qualified 4Q order flow as being low levels, I think if you strip out the desalter order for 3Q, it's just in line with activity. Now, going into current year, a lot of the commentary that you made so far might suggest that instead of just flowing with activity from here, order intake may start the year with more of a step function change.

Should we be wary of that? Just maybe trying to take some of the shock off of what we might see, in terms of the first-quarter order flow. Do we see that step function before we get back in line with activity? Just thoughts around that.

Yes. And I don't want to talk up expectations here, that's for sure, because there's nothing positive going on out there. But, Blake, I think one thing to keep in mind is that our customers are service companies with drilling contractors. They know the equipment is going to be coming off some time in advance -- two weeks, 30 days in advance. They know that a contract is going to be running out, and they are going to slow down their procurement for that. And certainly the year-end was slow.

We have been seeing -- and that's why we said what we did in the update during the course of the fourth quarter -- that we would see a step down here. And, in fact, that is what's happened. But things are slow, as Prady said, and as I said earlier. Gosh, the money flows are not there.

But in certain areas, the stocking has gotten to the point where there does need to be some purchasing, just to keep the things going. And we're motivated, at this point, to move inventory. We've got a lot of inventory, and if there are opportunities, we'll move it.

Okay, and I guess to that point, I was actually -- I think if 35% decrementals were more natural at this level, I think that would actually be kind of pleasing. Was the 4Q decremental really just totally skewed by the movement of that older inventory? Or on the flip side, Jim, last quarter you gave us $12 million in restructuring to get you $5 million in savings. Do we have a larger number around that now (multiple speakers) that's driving the 35% decrement? Yes.

So, yes, from Q3 to Q4, the movement of inventory was a factor, as well as more plants getting to the point where they're more at a minimal level. And there's just not as much cost that we can take out, once the plants get down to a minimal operating level. But having achieved that in Q4, then the move from Q4 to Q1 is not as great.

And, Blake, just to clarify, so as Cris just said, we will get the full benefit of the plants we closed in the fourth quarter in the first quarter, and that's helpful to margins. But when we're quoting decrementals in the mid-30s, that's exclusive of charges that we would incur for other plant consolidations that are underway, just to be clear.

Okay, but that number has grown. I guess the way it was qualified last quarter was it might be -- the $12 million might be over a couple of quarters. And it's simply grown from that. Okay.

Yes. We found more opportunities, and so that number is larger. But as I said in my remarks, it's almost all non-cash charges. What we're incurring in terms of cash costs is quite modest.

Great. Thanks. I appreciate the time, guys. I'll turn it back.

Rob MacKenzie, IBERIA Capital.

Guys, I wanted to come back to the acquisition topic. I think you mentioned, Cris, in your earlier comments that you're starting to see some distressed opportunities. But, strategically, are distressed opportunities really what you are looking for? Or are you looking more for to get some good businesses at trough valuations?

We are looking to get good businesses. We're looking to get complementary products that we feel we can push through our distribution system and grow the volumes; grow geographically, open those products up to customers that they are not currently taking advantage of that we can move the production into our facilities and gain some efficiencies on the cost side, gain some efficiencies on the supply chain and procurement side. Those are the kinds of things that we're looking for -- but good products, well accepted in the marketplace, that we think complement our offering.

Okay. And how would you describe the inventory of businesses along those lines right now that are being shopped?

I think it's improving. I think it's improving.

Okay. Separate question on the cost side: I totally understand your guys' desire to your preserve your capacity. But what would have to change? How bad would things have to get for you guys to reassess that stance, and make further facility reductions?

Yes, I think if there were a feeling that we were going into a recession scenario, and that changed the macro outlook for when there might be a recovery, that would be something that we would keep an eye on.

Prady?

We'd also look at our ability to generate free cash flow, but we do expect to generate $100 million of free cash flow. If we don't see us able to generate the free cash flow, then we will look at the cost structure again.

Okay, fair enough. And then do you guys have available the subsegment revenue breakdowns that you disclosed in the 10-K?

We actually put it in a schedule in the back of the earnings release. If you look at that last page, we put that in there because we knew some folks would like to see it in advance of the K filing.

Didn't get there. Thank you very much.

Sean Meakim, JPMorgan.

Just wanted to touch a little bit more on the working capital release. Previously you had put out that target of $200 million. Is that still the target? We're just curious how sensitive that guidance was to activity levels and the outlook is changed. And secondarily, do you think about target levels for DSOs and DSIs? Just looking to think a little bit more about how you guys are approaching it.

Yes, Sean. So when we gave that $200 million target, at these activity levels, it will take a while to work that down, so that won't all come in 2016. It's over a -- I'd say [a two], and it could even go into 2018 for some of those inventories. But we do have targets. We'd like to get -- our DSOs did rise a little bit over the course of the year, to 67 days, up about a week from 60 days.

We put a lot of time and effort in trying to contain that and make sure we stay current with our customers. In terms of collections, I credit us with doing a good job. I don't see a lot of deterioration from here.

The inventory is the real opportunity. We've seen inventory turns go from about 2.7 times, when we were at our peak in the third quarter of 2014, to now about 1.4 turns. We'd like to target -- and this is going to take a while to get there -- but more like 3 turns. And that would be what we would be aiming for, farther down the road.

Yes, and we were there in the middle of 2014.

Yes.

Probably 2013 it was 2.5 times. But, gosh, to get from where we are now to 3 turns, boy, that --.

That's a big (multiple speakers).

That's a lot of inventory that needs to move.

Right, understood. Okay, that's very helpful. And then just thinking about the procurement savings, Prady highlighted all the efforts in 2015, and he's mentioned that you're looking for more in 2016. Could you give us a little more detail there, just what the opportunity set looks like? We imagine the supply chains getting squeezed, as well. So just curious how your supply chain is reacting as you are trying to draw more out this year.

Yes. This is our second full year, at least in 2015, of focus on the procurement side. So it's still early on capturing all the savings on the procurement front. But, however, if we look at what happened in late 2014 and 2015 is the commodity prices, like steel prices, they all collapsed, which also helped us in delivering the procurement savings. So as those commodity prices goes up, it does put us -- some pressure on the procurement savings.

However, as I said, we are just second year into the procurement savings. And we've got another three, four good years to focus on the supply chain front. So, I'm confident that we can maintain the savings rate for the next few years as we focus on supply chain. And again, this is just second year into our effort, and we see another three or four good years on the procurement side.

And probably on the other front is we are seeing the raw materials on the supply chain with our suppliers being dried up. And we are putting contracts in place to ensure our cycle times are competitive when the market turns. And the longest lead times, as you would imagine on the supply chain, is the castings, the forgings, the steel. And we are ensuring that those lead times don't get out of that competitive range, so when the market turns, we have the competitive advantage to take the market share from our competitors.

Once activity does turn here a bit, our customers are going to look to us, given our weighting to North America, given our weighting to high-use activity, repetitive sell items -- they'll look to us to be a first responder. And so we need to be ready for that. And that's why we are wanting to preserve our capability on the supply chain, on the manufacturing side, so that we can be that first responder as they began to complete wells again, and then, eventually, new well construction takes off. We need to be there.

Thanks for the detail. I appreciate it.

Robin Shoemaker, KeyBanc Capital Markets.

Cris, I was wondering if you could comment generally about your international markets. I know you mentioned customers are cutting back anywhere and everywhere. But international markets should be a much bigger portion of your revenues now, given what's happened in the US. And just general -- wanted to ask you what's happening there.

Yes, that's true. I think that the non-North America portion of our revenues going from about 30% to 40%. So it is more important for us. And as part of that, as Prady mentioned, although we have already, of course, sales and distribution capability in all of the major procurement centers, we are now also putting one of our very senior executives located in the Middle East to take advantage and drive market share gains in the Eastern Hemisphere and Middle East in particular.

And Middle East in particular in the second half of 2016. There are some discussions on the capital equipment side of the business which we want to take full advantage of.

Okay. Good. So, let me then just -- my other question -- turn to this North America market. We have heard that there are auctions of hydraulic fracking equipment going on, where the buyers basically strip the parts from the equipment that they bought. Is this insignificant? Or is this something that maybe prolongs the ability of the smaller pressure pumping companies to satisfy their consumable products inventories with this type of cannibalization, along with the other things they're doing -- cannibalizing their own equipment?

Yes, you might go to the auction and by a power end, or a pump or an engine, transmission, so forth, or blenders and so forth. But the consumables, they still wear. And not knowing where your treating iron has been, or what the wear is and so on, I don't think that's a long-term strategy. And I think that -- what I'm saying is, I think the auctions are more geared towards capital components than they are towards truly repetitive sale consumable items.

Right, okay. All right. Thanks, Cris.

James West, Evercore.

It's actually Samantha Hoh filling in for James. I just had a question about your new product introductions. You've highlighted that there's been 20 new products this year -- or in past year, for a while. And I was just wondering what the uptake was. Do you have a good inventory buildup of that, that you expect to be shipped out this year? Just some sort of commentary along customer uptake and things like that.

Yes, well, a great question. Most of the products we have commercialized in 2015 were focused on saving operating costs for our customers or making them more efficient. I'll just give you a couple of examples. There's the Edge II desalter, which primarily plays in the refinery space. And we've talked about this on the previous calls, as we secured a $20 million plus contract in Egypt. And that particular part of the space, the refinery space, is pretty active. And we continue to see momentum for that particular product. And we also commercialized Edge III, which makes it more efficient for our customers.

And in the case of completions, we have commercialized [our solo] products. The compact frac block is a good example. The way I would describe that product is it's a de-featured product using significant less material, which reduces the product cost; again, in this particular case, saves the operating cost for our customers.

And there's a 3,000 horsepower frac pump, and it was looking more into the future, as Cris was talking about. And as the destocking takes it course, and the cannibalization ends at some point of time, what the customers would be looking for is much more efficiency from a pump standpoint.

And that's what the 3,000 horsepower frac pump does, is -- do a side-by-side comparison versus some of the other pumps. The material weight is less about 10,000 pounds compared to our competitors.

And in the case of the coiled line pipe, which has been commercialized by our Global Tubing joint venture, [and not only] it's a new market we are penetrating, but it reduces the operating cost for our customers anywhere from 10% to 20%, versus the traditional way, which is the steel pipes being welded for the joints. And this is the coiled pipe lines.

So I would say we will continue to commercialize several products in 2016. Most of them will be focused on saving operating costs and making our customers efficient.

And one thing we have not cut in 2015 was our product development. And in 2016, we will take a little haircut; but, at the same time, we will commercialize a lot of products.

So it sounds like it's all basically short-cycle consumable products that you've been focusing on introducing. How many new products are you targeting for this year? Obviously not along the 20% -- or 20 number; but, like, 10, or --? What percentage of revenue do you think is going to be made up of new products, like 20%?

Yes, before Prady gets into the percentage of revenue -- but as regards this cycle, the 3,000 horsepower frac pump, that is not a short-cycle product. That would be longer. And the real benefit there is the longer operating time of that pump versus others. I think in prior quarters, we have talked about another new product introduction, our new generation of ROVs. So we have both short-cycle and capital items that we're working on. And each business has several new products that they're working on. Some are short cycle, some are long cycle.

But I think here in the near term, as we look to be the first responder, maybe as North America completions would be the first area that begins to pick up, the shorter-cycle things are probably more relevant in the near term.

Just to give you some numbers. We commercialized, what, 20 plus new products in 2015. And I would expect that same number of new products being commercialized across all the product lines. We don't track the percentage revenue coming out of the new products. But if I had to take a guess, I would say probably it's below 10% of our total revenue in 2016 coming out of the new products. But I expect that number to go higher every year, as we focus on the product development.

Okay. Wonderful. Thank you so much.

Brandon Dobell, William Blair.

As you think about how the US onshore market has changed, just in terms of product structures and scopes and speed of implementation, those kinds of things. As you look across me product categories, are their particular areas where you think you are now better positioned, given how service companies and drillers are going to have to do things -- or there's certain categories where you think, we made a bet on this based on the trends from 2010 through 2014, and now we think that structure is going to be different, so we need to deemphasize those products. Recognizing that subsea obviously there's a lot of changes there, but more focused on drilling in the US.

Yes, I think our focus on the completion space is important, and that will continue. So, a number of the new products that we have for downhole, as well as surface completions products and equipment, are new. And so we are expanding our product offering there. A number of our recent acquisitions have been in that space, so that's clearly a focus area for us, and will continue to be. And we think more of the spending is migrating towards that completion space as well.

On the drilling side it's -- what's been successful for us have been products that are geared towards the newer generation of rigs. We talked 7,500 PSI mud systems, as well as catwalks with greater capability for the higher drill floors.

And our upgraded -- our Roughneck system. So, we are in tune, I think, with the migration towards the newer generation of equipment and how that's changing, both for the use in the North American conventional plays, but increasingly the need for new drilling equipment that we're seeing to improve efficiencies in other parts of the world, particularly in the Middle East right now.

Okay. Jim, maybe any color on how big of a headwind either from an order -- inbound order perspective, or I guess, more relevantly, from a revenue point of view -- ROV equipment-related consumables, those kinds of things, is going to be, 2016 versus 2015?

Well, from ROVs, we have had fewer orders, obviously, than we enjoyed in 2014. But other parts of the subsea business, like our Moffat product line, with the hot stabs and the pipeline inspection gauges, those systems, we've had good orders for that. In fact, they put out a record quarter for us in the third quarter and a record year in 2015. So, parts of the subsea business are holding up well. The more capital equipment, ROV-related orders, we expect that to be a little later cycle.

Okay. And then any -- as you think about the Tier 1 rigs, how do you guys look at the consumables versus capital equipment trajectory of recovery? I know consumables are going to be earlier. But how much earlier do you think you'll benefit there from driller spending, as opposed to capital equipment?

Yes, that will be the majority of what we sell. And I think that's the important thing about Forum is that's really where we're geared. We don't sell complete drilling systems. We sell the repetitive-use consumable maintenance items, stuff that our customers tend to include in their operating expense. And then even our capital equipment for those types of rigs tend to be pieces of equipment that are replaced on a 3- to 5-year cycle.

Got it. Okay, good. Thanks.

Thanks. One more question, I think.

Darren Gacicia, KLR Group.

A couple things -- consumables mix. We talked about things that maybe -- coiled springs or kind of into any kind of recovery, which timing of that is up for grabs. But what percentage of your business would you consider consumable? What's that been historically, just so I can understand if there's anything that's really changed in mix.

And to lump one more in, when I think about a lot of the capacity questions here, given the cost-cutting and everything that's happened, do we still have the capacity to get those peak levels again on some order of time?

Yes. So, in 2014, I think our consumables were about 55% of our total. I think it will be higher when we provide that information for 2015. So let's say, roundabout, it's 60%. But on top of that, there's probably another 10% to 15% of what our customers include in their capital spending, but it is very much activity-related. Our production equipment, for instance, that every new well that comes on, every new well that's completed, needs a set of separators and conditioners for the well site process and production equipment.

And so, I think that part of our revenue also ought to be included in the activity-driven portion of our revenue. So that would take us up into the 70s.

Got it. And then per the ability to ramp up to prior levels, I'm assuming you haven't really changed [group one]. It's only really headcount. Is it just a function of hiring and training, and that sort of thing, that should ramp back up? Or how do we want to think about that.

I think, from a cost-cutting standpoint, the way we think about it is in two buckets. One is downsizing the operations, which is pretty much downsizing the manufacturing plant to the revenue levels. And the second part of cost-cutting is the consolidation, which is pretty much the efficiency piece.

On the downsizing piece, I think which is what you are asking about, is we don't see any issue of ramping it up. Because, primarily, the footprint we have today, even though it's 20% less than what we had in 2014, we have not sacrificed the manufacturing capacity.

So we have the rooftop, we have the equipment; all we need is the labor, which is a very easy to get in this market.

Got you (multiple speakers).

I'm sorry, Darren. We have a little bit of help also -- it won't spring us all the way back, but we've had our plants working on less than a full-time -- we have eliminated overtime. So there is a little bit of spring that we have just with our existing workforce. And then to get to those higher levels, we're going to have to go out and hire.

And then the supply chain constraints, which I talked earlier, could be a constraint. And that's what we are working now to mitigate.

Got you.

Just [through the suppliers].

A little different direction on this question. You've heard throughout the year, and then you've had people on trying to quantify where pressure pumping capacity is and the rest. And direction seems to be with some level of cannibalization and stacking. And however people want to factor that, the capacity is down in the system.

Now, you guys have visibility across a handful of different product chains that gets sold by services into the E&Ps and into the upstream players. Leaving aside the pressure pumping question, where do you think capacities are across other product lines that you sell into, or sell product into?

CapEx has been below depreciation, I think, for everybody. If you think about some of the other product lines that you service, where do you think capacities have gone over the last 12 to 18 months in those businesses? In the event that the demand were to pick up, what's the supply destruction that's happened maybe across other lines, per your view?

Yes, I think one trend is that getting the service companies and drillers, in particular, are getting more productivity out of their capital equipment. But I think they are also working that equipment harder. And that's the trend that's important for Forum, is when a drilling rig, Tier 1 rig, is drilling that much more feet, making that many more connections, much more uptime on the pumps because it is on a pad site, and not having to move from job to job. Or the same with pressure pumping equipment that is on a pad site and doing 30, 40, 50 stages, or on a pad site doing hundreds of stages without moving.

That's great from our standpoint. Because that is just a lot of uptime on the equipment that increases the wear, the service intensity, and the need for the kinds of things that we provide. Yes, rig count is important; but probably footage drilled is more relevant, from our standpoint, than stage count.

Got it. In terms of wear and tear in that argument, does that extend into coiled tubing and different things, as well, where maybe the capacity has actually shrunk there?

It has shrunk. But in coiled tubing, you are moving towards a higher diameter coil, which is more expensive. And it's not necessarily lasting longer, but it's a more expensive product, and wanting to get longer reaches. So that, again, is good from our standpoint.

Well, thanks. I appreciate the help.

Very good, Darren. And that concludes our call for this quarter. Thank you all for your attention. We appreciate it. Bye.

Ladies and gentlemen, this does conclude the call. You may all disconnect. And, everyone, have a great day.