Forum Energy Technologies Inc (FET) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Forum Energy Technologies third-quarter 2017 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference, Mr. Mark Traylor, Vice President of Investor Relations. Please proceed.

Thank you, Terrence. Good morning and welcome to the Forum Energy Technologies third-quarter 2017 earnings conference call. With us today to present formal remarks are Prady Iyyanki, our Chief Executive Officer, and Jim Harris, our Chief Financial Officer. Cris Gaut, our Chairman, will also be available for Q&A.

We issued an 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 two weeks following the call.

I am now pleased to turn the call over to Prady Iyyanki, our Chief Executive Officer. Prady?

Thanks, Mark. Good morning, everyone. We will discuss our strategy in focus areas and provide some operational highlights. Then I will turn the call over to Jim Harris to provide details on the third-quarter financial performance.

Our third-quarter results were in line with the second quarter due to the impact of Hurricane Harvey and customer and logistical delays. In terms of strategy, since our last call, we had several significant achievements that repositioned our portfolio and strengthened our balance sheet.

We expanded our completions portfolio with the acquisition of Multilift and Global Tubing, making completions our largest segment and increasing our exposure to the North America land recovery.

We refinanced our credit facility to increase our liquidity and enhance our ability to take advantage of M&A opportunities.

We continue to generate sequential increased bookings in our completions and P&I segments.

Looking forward, we are well positioned to take advantage of a strong growth in North America completions activity in the fourth quarter and into 2018. Our completions and production and infrastructure segment revenues are now about 80% of our revenue after the Global Tubing acquisition. Our onshore exposure is 85% of revenue. Our North America presence is 80% of revenue.

We are now focused on executing three levers to deliver on the opportunities we see in the core markets.

We are going to ramp up our manufacturing and supply chain in the completions and P&I segments to capture the market growth.

Second, gain market share in North America land and the Middle East markets.

And finally, improve profitability by driving selective price increases in completions and P&I and further streamlining the cost structure of the drilling and subsea segment.

Let me give more details on these levers. The completions segment revenue has grown over 70% from last year and we expect demand to continue at a torrid pace. As a result, we have experienced inefficiencies in supply chain manufacturing and new employee hiring, and we have not yet fully capitalized on the market opportunity.

In response, we are strengthening the supply chain leadership in the completions and P&I segments and leveraging underutilized drilling and subsea manufacturing facilities to address these issues. These moves will support further growth and improve profitability in these segments.

We are going to gain market share with new products and through geographical market expansion. We have had great success with the new products developed internally, such as our J-Mac power ends, ICBM manifold trailer, Racetrac suction manifold, quick connect pressure control, and those we obtained through acquisition, such as coiled line pipe, Dura Coil, and the SandGuard and Cyclone artificial lift products.

Many of these have been developed in collaboration with existing customers and have attracted several new customers. These products will gain a further momentum going into 2018. And we also had a robust pipeline of additional new products.

We had a good start in globalizing our Valves business and will gain further momentum with contribution from Forum Arabia, our new manufacturing facility being built in Saudi Arabia, which will be fully operational after 2018. We also see opportunities to expand our market share in the Middle East across our product portfolio.

In terms of profitability, our operating margins will continue to improve as we see the benefit of better manufacturing cost absorption and operational efficiencies, including procurement savings. In addition, we are beginning to see some pricing improvement in orders for pressure pumping parts, some of which was realized in the third quarter.

We continue to focus on our cost structure, in particular rightsizing our drilling and subsea segment to improve the margins. These three levers combined with a strong North America market positions Forum for incremental profitable growth.

As we look ahead to the fourth quarter of 2017,

we expect demand for completions and production and infrastructure segments to increase as activity continues in the US land market.,

our revenues to improve to around $245 million to $260 million, including the consolidation of Global Tubing,

and EBITDA to be in the range of $20 million to $24 million, which implies an EPS range of negative $0.04 to negative $0.02.

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

Thank you, Prady, and good morning, everyone. The North America land drilling and completions activity remained strong, as Forum generated 80% of our third-quarter revenues in this market.

For the fifth consecutive quarter, we saw an increase in our inbound orders, which is a good indicator of our near-term business prospects. Forum's total orders during the third quarter were $230 million, an 8% increase from the level in the second quarter. The third-quarter book-to-bill ratio was 116% for the Company as a whole.

Orders in our completions segment increased to $72 million sequentially, resulting in a book-to-bill ratio of 121% due to customer spending on pressure pumping and artificial lift equipment. We expect the demand for our completions segment to remain strong in the fourth quarter and into 2018.

In our production and infrastructure segment, orders improved 16% and our book-to-bill ratio was 128%. Orders for our well site production equipment and our downstream EDGE II desalter equipment were up 50% sequentially as customers are planning for 2018 activity. Valves achieved a strong level of orders during the third quarter, which were just under the record level of orders received in the second quarter.

Orders in our drilling and subsea segment were down 8%, resulting in a book-to-bill ratio of 90% in the quarter. Orders for drilling equipment were relatively flat with the prior quarter. And even though the offshore recovery continues to lag, we feel orders for our drilling and subsea segment have reached a bottom.

Orders for our drilling equipment will more closely follow the domestic and international rig count activity and the upgrading of lower specification rigs. Orders for subsea equipment will be at a low level for an extended period and weighted towards chunky non-oil and gas activity.

Our third-quarter revenue was $199 million, a decrease of $2 million sequentially. Our adjusted EBITDA was $6 million and our adjusted net loss per share was $0.10, excluding special items.

Third-quarter results were adversely affected by Hurricane Harvey, which impacted all of our segments. Eleven manufacturing and operations facilities, representing over 40% of our total employee base, were directly impacted by the storm. This resulted in foregone revenue, an under-absorption of manufacturing cost, and reduced operating income by approximately $4 million. The Company also experienced the indirect effect of customer, supplier, and logistical delays.

I will summarize our segment results on a sequential basis for the quarter and provide additional details on the third-quarter results.

Our completions segment revenue of $60 million increased 10% sequentially as customer spending improved on higher well construction and completions activity in North America.

Our production and infrastructure segment revenue of $85 million was up 2% due to improved sales of valve products in Canada, while well site production equipment revenue was flat with the prior quarter. The drilling and subsea segment revenue of $55 million was down 15%, primarily due to lower sales of drilling products associated with rig upgrades.

The net loss for the third quarter was $15 million or $0.15 per share. The quarter included special items on a pre-tax basis of $4 million for restructuring charges and transaction expenses, $2.5 million of foreign exchange losses, and $1 million for intangible asset impairment. The adjusted net loss, excluding these items and the associated income taxes, was $0.10 per share.

Our free cash flow after net capital expenditures in the third quarter was negative $28 million. With our continued build in working capital, due to increased revenue expectations in the fourth quarter, our free cash flow will be negative for one more quarter. We continue to expect to be free cash flow positive in the first quarter of 2018 as earnings continue to improve.

Our net capital expenditures in the third quarter were $7 million. Our 2017 capital expenditures, which include the investment in our new production facility in Saudi Arabia, should come in below our $30 million budget.

Our balance sheet and financial position remain strong. We ended the quarter with $156 million of cash on hand and with no bank debt outstanding. We closed the Multilift acquisition in early July for approximately $40 million using available cash.

On October 2, 2017, we acquired the remaining 52% interest of Global Tubing for approximately 11.5 million shares of Forum common stock and $120 million in cash. Global Tubing is a leading provider of coiled tubing strings and coiled line pipe. With the consolidation of Global Tubing and the following our recent acquisition of Multilift, Forum's completions segment will be our largest business and core to our future growth plans.

Subsequent to the end of the third quarter, effective October 30, 2017, we refinanced our existing $140 million revolving credit facility that was set to expire in 2018 with a new $300 million asset-based revolving credit facility with an extended maturity. This leaves us with over $285 million of liquidity as of the end of the third quarter, pro forma for the new revolver and the Global Tubing acquisition.

Up through the third quarter, we have included in our results our 48% equity interest in Global Tubing's pre-tax results in our completions segment. Beginning in the fourth quarter, however, we will consolidate 100% of Global Tubing's full results in our completions segment.

Pro forma, for the consolidation of Global Tubing, our third-quarter revenue and EBITDA would have been $231 million and $12.6 million, respectively. On this basis, the incremental EBITDA included in our guidance at the midpoint is over 40%.

Our weighted average diluted share count for the third quarter was 96.3 million shares and will be approximately 108 million shares in the fourth quarter after considering the Global Tubing acquisition. When we turn profitable on a net income basis, the diluted share count will increase to approximately 111 million shares at the current share price to once again include the impact of options.

Net debt at the end of the third quarter was $243 million, up $64 million, bringing our net debt to total capitalization ratio to 17.1%. Interest expense was $6 million in the third quarter and we expect interest expense of $8 million in the fourth quarter 2017.

Corporate expenses were $8 million and we expect them to be in line in the fourth quarter 2017. Depreciation and amortization expense was $15 million for the quarter, and including the purchase accounting adjustments for Global Tubing, we expect depreciation and amortization to be $19 million in the fourth quarter.

Our effective tax rate on the third-quarter adjusted operating loss was 35%. We estimate our effective tax rate for the fourth quarter will be approximately 35%. For more information about our financial results, please review the earnings release on our website.

Let me turn the call back over to Prady for closing comments. Prady?

Thanks, Jim. In summary, the macro environment for our completions and production and infrastructure segments, which are now 80% of our revenue base, is robust entering into 2018. Our near-term focus is on executing the following: accelerating our ramp-up in the completions segment; streamlining our cost structure in the drilling and subsea segment; free cash flow positive in the first quarter of 2018.

We thank you for your interest. At this point, we will open the line for questions. Operator, please take the first question.

(Operator Instructions) George O'Leary, the TPH Company.

Good morning, guys. Just a quick one for me on the completions side. Given you guys have rolled in the Global Tubing acquisition and Multilift into your results, just curious if you could provide any incremental color on the expected revenue impact for the fourth quarter? Kind of point us in a direction there, given Global Tubing in particular is a pretty big needle mover.

And Jim, your comments were helpful. Just trying to dial in the sequential increase in that completions business.

Sure. So George, we have probably given more detailed guidance this quarter than we have ever given in terms of revenue, EBITDA, and earnings per share. And we tried in our remarks to give guidance on the other incremental changes coming through with the depreciation and amortization.

So I think the information should be there and we can talk about that as we go through. But obviously, consolidating Global Tubing, having the 100% of the revenue coming in, that's accounting for a piece of what we are seeing in the fourth quarter.

And it's, I'd say, a major contributor to the EBITDA for what we have in the fourth quarter on the incremental basis. But I think we've given sufficient details for you to be able to back into how much is coming in from those acquisitions.

Okay, perfect. Just trying to push you a little bit more there, but I do appreciate the incremental color. It was definitely very helpful. And then as we progress into the fourth quarter, and it makes it a little bit challenging because traditionally folks key off of what rig activity is doing. I think completions activity and well count is a little bit more important of a metric today and the headline rig count is moving lower.

I was just curious if you could frame, as we are a month into the quarter, just how orders seem to be progressing thus far as we move into the fourth quarter. Are orders still moving up sequentially? Or are we slowing with the rig count slowing just a bit?

George, this is Prady. What we saw in third quarter were, in spite of Harvey, we saw the orders up across the segments, particularly in completions and also in the production and infrastructure. Going to the fourth quarter, at least based on what we know in October, that momentum continues in completions and also the production and infrastructure segments.

Okay, great. That's very helpful. Then maybe if I could just sneak in one more. You guys have been active on the M&A front thus far. Are you guys progressing into a digestion mode at this point? Or is the pipeline still robust enough that you guys are still involved in actively looking at acquisitions?

And then see both downhole tools-oriented acquisitions, although I realize there is the coiled line pipe side of the Global Tubing business as well. Is the focus still on completions from here, and in particular downhole? Or are there some other opportunities that are attractive to you guys on the radar?

George, one of the reasons obviously we have refinanced our credit facility to have more dry powder. We got $285 million of available cash if needed for M&A acquisitions.

I would say our strategy in the M&A still is intact. Our first area of priority is completions and I would say our pipeline is still robust on the completions front. And then the second area of priority is more from a stability standpoint is any good assets we could get from a midstream/downstream standpoint on the production and infrastructure. I think we would be open for that, too. But our first area of priority is still completions, and the pipeline is pretty robust.

And George, this is Cris. I would just add that we do see a very strong market for consumable and replacement items and further growth for the pressure pumping companies. I know you have done some work on this; a very good report you all did. And we agree with your conclusions that that's a very robust market. And so we will be working hard to address the potential there that we see.

Thanks very much for the color, guys.

Rob MacKenzie, IBERIA Capital.

Thanks, guys. I wanted to dig into drilling and subsea here a little bit. Because that clearly seems to be a drag on what are otherwise some pretty nice growth in your other two main segments.

Can you give us a feel for what you expect to achieve in terms of the rightsizing you talked about earlier, Prady? And the timing at which we might consider those businesses will stop bleeding money every quarter?

Primarily, Rob, I think it's the upgrades. The mud pump upgrades were very strong in the first half. And as you have telecasted in the last call, we did expect the upgrades to be softened up in the second half, which is what happened.

However, looking to the future, even if we look at the fourth quarter, what we expect is flattish to better on the revenue front. But for sure the margins will improve in 4Q and going to 2018 because of the cost structure and streamlining the operations we are focused on.

So Rob, and I would add to that. You'll recall, the drilling and subsea segment was our largest back in 2014. Very complex equipment with very broad geographic reach.

So they are complicated businesses, but we are taking actions in the fourth quarter to reduce our cost. So we don't expect those to be a drag going into 2018. We are confident with the strength of those franchises, we are going to be able to turn those into a contributor.

The other point I will make, Rob, is I think the upside to what we just mentioned is there is a strong pipeline in Middle East. And one of the customers is already in the RFQ stage. If any of those materialize early enough, we could see the revenue in 2018.

And the second point is we are expecting some chunky orders from subsea either this quarter or the next quarter, all outside oil and gas, which will position us for 2018. But again, our strategy in the case of subsea in 2017 was to keep it at breakeven EBITDA. With a cost structure reduction, we are looking for positive EBITDA going to 2018.

Great, thank you. That's very helpful. And then if you wouldn't mind perhaps sharing, has the mix of revenue from drilling and subsea -- I guess it's become much more drilling-focused as the year has gone on. I guess the subsea has been kind of flattish throughout the year. Is that correct?

Yes, that's correct. Flattish on the revenue on subsea, yes.

Okay, thank you. Then going forward with future M&A activity, obviously following Global Tubing, would you guys say you are done? Or are you still looking to continue to grow completions and P&I here at this stage?

Well, listen, our DNA -- M&A is our DNA at Forum. For the next two, three months, we want to focus on execution. On the completions side, capitalize the strong market which is in front of us. And also execution on the P&I side with the Saudi Arabia manufacturing plant coming online.

But we have a very strong robust pipeline of M&A opportunities. And as we discussed, Rob, I think our first priority is completions and our secondary priority is anything in the midstream/downstream side for this [activity] on a Company portfolio standpoint.

Great. I will turn it back for now. Thank you.

David Anderson, Barclays.

Hi, good morning. I was wondering if you could expand a bit on the Global Tubing DNOW agreement you announced this morning as well. Can maybe could you describe how the distribution channels are set up currently? And how this kind of agreement changes that in terms of maybe like what this does for volumes and how it could potentially increase as a result?

Yes, absolutely, David. The coiled line pipe product is a product which we commercialized about 18 months or 24 months ago. And now we need to scale that product up because it has been well received by our customers.

As a result, we need partnerships to scale that product up. And DNOW, with their reach or from a distribution standpoint and their connections with the MP customers, we found that partnership. It's a preferred supplier relationship with Robert and the DNOW team. And we are going to scale that product lineup significantly not only in 2018, but on a move-forward basis.

Just to give you a little more color, in 2014, we had one product line, which was the downhole product line. And now we have two product lines within the Global Tubing. One is the legacy downhole product line and the second is the coiled line pipe product. And the market segment is as big as the downhole segment. So we got a lot of room here with early stage of capitalizing of that market and we needed a partnership to scale it up much faster.

Now, Prady, this was called a preferred partner in the release, and as you just mentioned. But is it exclusive, though? I mean, obviously, there's another big player out there I think supplies a lot or has also a distribution agreement with DNOW. I am just wondering how does that all work?

I think in this case, it's a preferred partnership with DNOW. But again, with their scale and with their distribution channels, we are going to scale that product line up significantly.

It's not exclusive, David.

Not exclusive. Okay, thanks, Cris. And just one last question on the completions side. I was just wondering if you've seen -- doesn't sound like it. But I was wondering are you seeing any signs of customers curtailing new orders or refurbishment as we head into end of the year?

I think of the drilling side, we're seeing some of those -- some kind of a fall-off a bit or at least on the upgrades. I'm just wondering if you are seeing any kind of capital budgets or capital being deployed slowing down on the completions side as we are heading into the end of the year here?

No. What I would say on the completions side, that especially on the frac side of the business, the market is much stronger than the supply chain. So we are still trying to get every person we could get onboard and trying to ramp-up our supply chain. But the market opportunity is very strong in fourth quarter and going into 2018.

In the case of drilling, I think you are right. I think we did see some slowdown on upgrades, primarily the mud pump. However, we had a pipeline, I would say, of second phase of upgrades, which is taking like a 1,000-horsepower drill rig and getting it as close as we can get to 1,500-horsepower state-of-the-art drill rig.

We've seen some of those upgrades. The pipeline is pretty strong, but we do see some slowdown on that. But going into 2018, we do have a pipeline of those upgrades.

Great. Thanks, Prady.

Marc Bianchi, Cowen.

Thank you for taking my question. I guess starting with a broader question, and we've discussed it a little bit so far, but just want to hear kind of a holistic discussion of it.

If you look at all the businesses that you have between completions, P&I, and drilling, if the rig count is going to be flat, what's a reasonable expectation for growth for those businesses over, call it, 2018, 2019? It sounds like drilling might be at the bottom of the list. But can you give us some flavor as to how much each of those could grow if the rig count is flat?

Yes. I mean, listen, with a little bit lower than 900 drill rigs, if we look at on the completions side, for example, if we take the frac side, probably we will end the year, depending on what reports you read, somewhere between 13 million to 14 million horsepower of frac. And then going to next year, the range looks like anywhere from 15 million to 17 million horsepower.

That's a lot of horsepower and it needs a lot of consumable items. And in fact, it's getting back to the historic highs of 2014 from a horsepower standpoint, which is going to drive a lot of consumables.

If we look at our portfolio, from a Forum portfolio standpoint, 80% of our revenue is going to come from completions and production and infrastructure. And in the production and infrastructure, we have the production equipment, which is also biased towards the well count and the completions activity.

So that's why we are confident that our macro environment going into 2018, our portfolio is well positioned. And we expect the market activity to continue to be strong on the completions front.

Okay, thanks for that, Prady. And I guess related to that and the investments you are making to try to get some more market share and improve the supply chain, how should we think about the cost for those investments as it relates to your margin leverage here in the fourth quarter and into 2018? Is there a headwind there that goes away?

I would say the positive side of that, Marc, is we are seeing some pricing realizing into the P&L. And we saw some of that in the third quarter and we expect to see more in 4Q. We had like three revisions of pricing, let's say, on the pressure equipment side. And in the third quarter, we saw some second version of pricing and some still old pricing.

But going to the fourth quarter, we are going to see the second revision and third revision of pricing. So pricing is a tailwind. The margins have improved on completions. If we look at it over the last 12 months, the margins have nicely improved. Yes, there will be a little bit of cost coming in, but it will be offset by the price increases and more importantly the revenue increase and the margins coming with it.

And also, the mix has changed with the profitable part of the acquisitions, which we added with Global Tubing and Multilift.

Okay, thanks for that, Prady. So fair to think about what you are guiding to putting up here in the fourth quarter as a good reflection of what the leverage is in the business?

That is correct. I think that's what we are seeing in the fourth quarter. The combination of margins improving in completions and also in production and infrastructure, but also the cumulative impact of the acquisitions, which are fully baked in.

So Marc, that trend towards longer laterals, more stages. And that trend continuing and becoming more intense in terms of the service company requirements is the key driver for us going into 2018. Much more so than the purely just looking at what the rig count is.

Sure, thanks, Cris. Could I just ask one more? On free cash flow for fourth quarter, you mentioned that it still be negative. Is there an expectation that it improves so from where it was in the third?

Yes, Marc. So what happened to us in the third quarter was not only were we building inventories, and hard to know how much of this is just attributable to normal operations versus disruption from maybe the flooding. But our customers were slower to pay us. In fact, our DSOs increased five days and our inventory turns slowed by 0.2 turns.

So we experienced that in the third quarter. Don't know how much of that is transitory and will be able to reverse in the fourth quarter, but that is what we are focused on. So while we are still building inventories in anticipation of continuing growth into next year, we are working to arrest that growth so that we can certainly turn cash flow positive, as we have said, in the first quarter of next year.

Right. Well, thanks very much. I will turn it back.

Chase Mulvehill, Wolfe Research.

I guess firstly, on the 600,000 horsepower of power ends that you noted in the press release, how much of that has been shipped through the end of 3Q? And I guess maybe the timing of the remaining horsepower that will be shipped in 4Q and thereafter?

I would say most of the 600 horsepower has already been shipped, Chase. But our backlog for power ends is pretty strong, not only for the fourth quarter, but also going into 2018.

Okay. And what would you say are the lead times for power ends?

Great question. Listen, I would say on the frac side, the lead times are increasing. And that's one of the reasons why we need to make the working capital investment in the fourth quarter. I would say the lead times right now for a power end block is anywhere from five to six months. And for the fluid ends, it's about three or four months.

Okay, that's helpful. And then of the 600,000 that's been ordered so far, do you have a sense of how much of that is for newbuild fleets versus re-activations versus kind of the normal replacement of the active fleet?

Listen, if we use power end as a data point -- that's the capital equipment -- the lower you go, probably the mix is more towards refurbishment versus new. But if we look at the power end at least through second quarter, what we saw was it was half and half: 50% was newbuilds and about 50% were refurbished. But in our case, whether it's refurbished or newbuild, it's still a new power end.

Now, if you go below that, if you go to fluid ends in our ends, I think it is more biased towards refurbished versus newbuild.

All right, that makes sense. Last one and then I will turn it back over. On Global Tubing margins, if I did the math correctly, that implies about 21% EBITDA margins. If I did it right, that's down from 30% in 2Q.

So I guess maybe talk to what happened in 2Q. Are these just restructuring charges or things like that? And possibly the opportunity to take cost out in the near term from this business and taking margins back up to 30%?

Yes. So Chase, Global Tubing's margins will be better than what you are calculating. In fact, you are hitting close to what completions would look like for the fourth quarter. So Global Tubing is definitely accretive to the margins, a little bit better than what you are calculating.

Okay. I guess I will run back through the transcript and get those numbers out. All right, I will turn it back over. Thanks.

Jim Wicklund, Credit Suisse.

Good morning, guys. So you are setting up for a pretty good 2018 from the sound of it. You are going to be cost-cutting in D&S; I trust you are going to improve your supply chain 80% from North America.

Are you willing to give us an idea of what your incremental margin should be overall for 2018? I know they kind of never hit the expectation of a year or two ago. But now it seems that you are much closer to operating on all eight cylinders. And so I'm just -- go ahead.

Jim, I would say our last guidance on the incrementals, which we're not backing off, were 35% to 40% incrementals. And that's what we would expect to see on a move-forward basis. And obviously in fourth quarter, it's a little higher because you are coming from a little inefficient quarter in 3Q.

Right. And can you talk a little bit about supply chain? We look at you guys, and we don't look at the supply chains behind you and the other companies. Can you talk about how stressed it has been and how much pricing improvement you are having to give up? And what inflation may look like in Q4 and through 2018 on your supply chain?

Absolutely, Jim. If I look at our completions segment, it has grown by about 70% year over year. Our frac side of the business by the end of the year will grow by another -- probably year over year by about 100%.

And we have gone through inefficiencies in supply chain and getting people onboard. And some of the operations -- out of the five people, four of them are new. So we are going through the inefficiencies of the ramp-up.

Now, going into 2018, we have a pretty good critical mass of labor, which we have recruited. So on a move-forward basis, that combination could be two out of the five people would be new, but not what we saw in 2017.

What we see as a constraint, which we are addressing proactively, is on the supply chain front. Is with the growth expectations and the horsepower increasing significantly into 2018, supply chain is what we need to address. As a result, we made some moves.

We have taken our -- some of the folks who are in the corporate leading all of the procurement effects, we put them in completions to address the supply chain issues and whatnot so that we can capitalize on the market. I mean, today for sure the market is stronger than the supply chain, and that's going to get more tighter going to 2018.

And we are already seeing, Jim, some customers -- it's not across the board, but some customers are already having inventory, one or two months of inventory on their balance sheet going into 2018.

We need to find out who your biggest suppliers are and recommend buying them, too. That's a great idea. Last one, if I could. Your big push in Saudi over the last couple years has obviously been successful. Is it where you expected it to be?

And can you talk about what -- that is everybody's best market for the last couple of years. Can you talk about what's going to happen in Saudi with you guys over the next year or two relative to what you put into it in the last two years?

Yes. No, absolutely, Jim. I think our plan was in the fourth quarter to get it operational and we are on track for that. We are going to get some first articles and get some customers qualified in the fourth quarter. And all of 2018, we will be fully operational.

Now, going to 2018, this will be the first year. In fact, we have pretty good interest from some big customers in the region, including the three or four big customers we have in Saudi. So we are going to start off slow in 2018 and I think we are going to ramp it up pretty fast.

But I would say if we just look at it from a valves product line, which is where we are initially focused on, it's going to be a significant meaningful revenue increase for these guys in the next two years. And as we become the valve -- as we make the valves product line successful, we are looking at other product lines which we could put in Saudi and take the advantage of the local work content and the price premium which we get with it. But so far, the interest from customers has been pretty positive.

That would be a pretty good leverage. Okay, gentlemen, thank you very much.

Blake Hutchinson, Howard Weil.

Good morning, guys. Just trying to get some kind of qualitative thoughts around where we are starting from and some Harvey impacts on 3Q that might or may not pertain to 4Q.

If we look at your printed order flow for 3Q, would you say that the order flow itself was similarly impacted in terms of delays or absentee of orders for the full period? Was there catch-up? Were there areas divisionally where there is more centralized decision-making that needs to take place? Or is it more those orders are kind of a what we see is what we get?

No, I would say there was some impact on orders, but obviously a lot more impact on revenue and the productivity loss from it. Some of the orders, I would say, on the completions segment, probably also on the valves front, primarily because if we look at the valves, the Gulf Coast with some of the refineries shut down and unable to get it back fast enough, there was some impact on the bookings. And also on the completions side, where the well sites were not ready and whatnot.

But I would say more impact on the revenue and absorption than bookings. But I'm sure the bookings would have been a little higher than what we saw in the third quarter.

Thanks, that's great. And then as you alluded to, a little more detail in terms of 4Q guidance. And I guess historically, the issue that we have run into with Forum for 4Q is kind of the last couple weeks of the year having some delivery shifts.

Because of the delays and deferrals caused by Harvey, are we starting -- are we maybe a little more front-end loaded on a 4Q for a change that might give us a little more confidence in the 4Q guide?

You know, we have taken the holiday season into account for sure, Blake. And we have taken, I would say, very little probably pushouts, primarily probably in the case of production equipment, in the fourth quarter. I would say I wish I could tell you that it was front-end loaded. It's not. It's, I would say, evenly loaded.

So I think there are a lot of pushouts in the fourth quarter. It could impact us, but we don't expect that. I think probably in the production equipment we will see some. But in the case of completions on the frac side, I think the product will be shipped.

Okay. And then one more quick one. I want to make sure we are taking the right approach in terms of your streamlining of drilling and subsea or your continued streamlining.

Are you trying to tell us essentially that by pushing some spillover of other businesses into that cost structure that that is going to help address the majority of the underabsorption issue? Or are we just in grade two or three of a streamlining process? And thanks, and I will hang up and listen.

Yes, I would say what you just said of leveraging D&S manufacturing plants for the completions and P&I, that impact for us is minimal. Most of the costout is coming from taking the structure out and reducing the cost. And sizing it to what our expectations are for drilling and subsea business on a move-forward basis.

And Blake, I would just add some color to that, that frankly what we are trying to do is simplify those organizations. When they were much larger, they required a more complex structure. We are looking to simplify the organizations.

And our aim is to come out of this not only with lower cost base, but a stronger business, more customer responsive, which we think will benefit us going down the road. So it's not just about cost-cutting in drilling and subsea, although we are actually reducing and simplifying the structure.

Appreciate the help, guys. Thanks.

Martin Malloy, Johnson Rice.

Good morning. My first question is on the margin side. In the previous upcycle, you talked about EBITDA margins having a goal of 20%. And I was hoping maybe you could comment on the goal now with the impact of Global Tubing? And also, do you need D&S to come back to reach that kind of level?

Great question, Marty. If you look at our midpoint guidance of the fourth quarter and the midpoint guidance we have given you for the revenue, we are about 9% EBITDA in fourth quarter with a fraction of revenue of what we saw in 2014.

So first, we don't need the drilling and subsea product line to get back to the historic highs. With the acquisitions we have done and the way we positioned our completions segment and the production and infrastructure segment being 80% of the revenue, we can get back to the 19% to 20% EBITDA margins and the revenue level being a little lower than the historic highs.

In fact, I would say we will exit 2018 with a pretty decent run rate on EBITDA margins, which will give you guidance as we go through 2018.

Great, thank you very much.

Sean Meakim, JPMorgan.

Thanks. Could you maybe give us a little more detail in terms of orders that you are seeing in the lower 48 across the different streams for the valves business? And how maybe you see that looking into next year?

Our valves business is about a third and a third and a third: third upstream, third midstream, third downstream. If I had to give a little more color, I would say the upstream piece is growing nicely with the growth we are seeing in North America.

And then if I had to go outside North America, apart from the lower 48, I would say the downstream part of the international market is pretty strong. There are a lot of investments being made on the downstream and we are going to capitalize on that front.

One of the things we have done in our valve business early part of this year where we are seeing the results is going to Middle East and also going to Far East from Southeast Asia. And our bookings have improved nicely from Southeast Asia. I think what we quoted in third quarter was about 15% of bookings in third quarter came from Southeast Asia.

So I think we are on one front, we are globalizing our valves business, which is pretty much all market share in Southeast Asia and in the Middle East. Because of the upstream growth in North America, we're taking the full advantage of growing the valve business on the upstream.

Can you maybe give us a little sense of in the lower 48 across mid- and downstream, kind of mix of larger projects versus smaller book-and-turn type of things? How to think about the mix there?

I would say probably, if I could guess -- I just don't have the data in front of me -- I would say it's probably 60% to 70% is consumable-activity-driven kind of business. And about 20%, 30% is project-driven in lower 48.

Sure. And then I guess last question then, just to be -- what does the international split look like in terms of -- you talk about (multiple speakers)?

The international split, I would say, is probably about 50/50: 50% project-driven, large projects, investments being made in downstream. And then the other 50% being probably the book-and-ship business.

And does the stream business look terribly different? Or the streams internationally?

I'm sorry, I couldn't hear the last question. Can you repeat?

Just the split by streams internationally. Does it look terribly different from the lower 48?

Yes, it does. I think more downstream and midstream biased versus upstream in international market.

Perfect.

So what we see in Saudi Arabia is process industry driven. Huge investments there in the process industry, and that's indicative of what we see internationally in general.

Correct. And there is a huge petrochemical industry in Saudi. And as Cris said, the process industry. So more downstream and more on the process side in Middle East.

That's right. Understood. Okay, great. Thanks, guys.

Brad Handler, Jefferies.

Thanks. Good morning, guys. Could -- I suspect this is hard to do, which is probably why you and others haven't really given it. But can you calibrate the revenue impact of Harvey?

So, Brad, we've given the operating income effect. There is no question there was revenue that was pushed out of the quarter. Hard to put a pin exactly in how much that is, but it's in that probably $10 million to $12 million kind of range is the suspicion.

Now, there is also some indirect impact that we really can't quantify or have not, where we have anecdotally customers telling us that they've delayed deliveries. We clearly had situations where vendors or suppliers to us, due to the transportation difficulties that followed the hurricane, we were unable to get supplies. All of that had an impact on revenue, but very difficult to come down to exactly how much that is.

Understand. Yes, I can see, and obviously there is a question of timing of when you realize it as well. But okay, I appreciate that. Thanks, Jim. Couple more unrelated ones from me, please.

Prady, I want to make sure I understand your comments early on in your prepared remarks around sort of inefficiencies in your manufacturing. And maybe just one way for me to try to understand it is I know you have made investments along the way in consolidating footprint. And I know you felt fairly confident from a roof-line perspective you didn't need to add.

But if something -- or in the Middle East; that's my placeholder of an answer. Has something changed? Has the demand profile shifted in such a way that you actually think there is capital investment coming? So that part of your manufacturing requirements to satisfy some of the completions side will require additional investment?

Brad, what I would say is listen, we have rooftop. So that is not a constraint. In fact, we can get back to the historic highs and even beyond that with the kind of rooftop we have.

I think the inefficiencies we have had, and I would say not just us, I would say probably the industry is going through the same inefficiencies, is the supply chain disruptions and from a labor standpoint. If we look at, for example, where we build some of the frac products and some of the operations, just to give you the context: out of five people we have in the plant, four of them are new.

So that causes inefficiencies. It takes for you to go through the training process and make sure from a safety, quality, and performance, it doesn't impact the product. And the same thing probably our suppliers are going through is coming from a severe downturn into a significant upturn. And they are struggling to get people as fast as they can.

Now, if I look at, for example, on the P&I business, by the end of the year we will double the business. It will be 100% growth. But the market is stronger than the supply chain. Not only for us, but I would say for the rest of the industry.

And we just want to capitalize that. Because our products have been well received and there is pretty strong momentum going to 2018. And there is more revenue to be had. And that's why we are focused on supply chain and improving the efficiencies so that we can get significantly more revenue going into 2018 and also margins, which comes with it.

Sure. So the emphasis is on continued training, presumably, and probably working with suppliers?

Continued training, correct. Good point. And with suppliers. And we need to plan ahead and lock in some of those material. As we go into 2018, I think the supply chain will be pretty tight. And so will the industry be and the frac crews and whatnot. So I think we will all go through the tightening process here. We just want to get ahead of it.

Sure, sure. Okay. Then last one, as I mentioned. On the drilling side, so we've seen the falling off of the heavy mud pump upgrade cycle, which obviously it helped you guys in the first half of the year, as you warned us about. And that's great. Or not great for the business, but I appreciated the color.

The question is we seem to be morphing to more significant upgrades, but fewer of them. And I guess I'm curious how you are able to capitalize on those. If the upgrade starts to look like an $8 million to $10 million one taking rigs and trying to drag them to a 1,500-horsepower super spec model, how should we think about that opportunity for you? How are you thinking about it for 4Q and maybe into early 2018 as how much impact that may have on your drilling revenue?

The first point I would make on the drilling front, Brad, is the number of drill rigs operational at an average in 2018 is higher than 2017, which is good for our consumable part of the business just because the average rig count is higher.

The mud pumps have slowed down, to your point. The rig upgrades you are talking about, the ticket item for our customers, could be anywhere from $4 million to $7 million kind of range. Our content could be up to $2 million in that upgrade, which includes moving catwalks, some handling tools, roughnecks, and whatnot, including the control systems.

So that is how we will participate, and some of that has already materialized. We have seen that in the third quarter. We are going to see some more in the fourth quarter, but that will be the opportunity for us on the upgrades.

But I can the bigger opportunity for us apart from the rig upgrades which you are talking about is the pipeline in Middle East is pretty darn strong. It's almost 180 drill rigs is what they are talking about.

New.

New capital-built drill rigs in Middle East, including Kuwait, Oman, Saudi, and whatnot. And the only one which is already at the RFQ stage, which is public information, is on the Kuwait. But I think if the oil price stays where it is today, a little bit of momentum, we do expect some of those capital-built programs to materialize. And if it's early enough in the year, we will see the impact of revenue going into 2018.

Helpful to focus us. Thank you.

But regardless of the upgrades and the Middle East opportunity, our margins of drilling and subsea will be better going into 2018 because of our streamlining the operations.

Yes, understood. Okay, thanks, guys.

Joe Gibney, Capital One.

Thanks, good morning. Just a couple quick ones on my end. Just want to ask Harvey impacts in a different way. So, Jim, embedded in your guidance for the fourth quarter, so $4 million op income impact in 3Q. So what percentage of that are you recouping here in the fourth quarter? Does this spill out into the first half of 2018?

I know it's a whole host of things that play from a revenue deferral standpoint, all the supply chain issues you alluded to. But what is sort of the ballpark percentage of recoupment you are getting here in the immediate quarter coming off of Harvey?

Yes, [normal]. On Harvey, I would say there is a direct impact and there is an indirect impact. The direct impact, I think what Jim has quantified, which we are comfortable with is about $10 million, which is a direct impact. And then there is the indirect impact, where we have supply chain disruptions, the logistical delays, and some of our customers delaying the finished product.

But we can't quantify for sure how much of that is Harvey and how much of that is because the well sites are not ready or whatnot. So that is the direct and the indirect impact of Harvey.

I would say some of the revenue is lost just because it's a book-and-ship kind of business. And some of the revenue we will see in the future quarters and some of that is baked in into the fourth quarter of 2017.

Okay. So it sprinkles out a little bit at sort of the bottom line, no?

Yes.

From a recovery standpoint. But no damage to our facilities, no lasting negative impact, Joe.

Sure. Understood. Okay, and last one from me. I know this is a smaller piece of the business now, given certainly what you are doing on the completions side. But trying to understand the production equipment revenue realization. Still sort of a moving piece; I know it can be lumpy.

Your 2Q order flow in P&I, a little bit more about valve focus this quarter, a little bit more PE focus. But inherently you have got the same drivers here on the completions side well count. But you had flat PE revenue quarter over quarter.

So help me a little bit in understanding flow-throughs on the PE side? As I think about 4Q, is this a one- to two-quarter kind of realization here on revenue? Just I know it is lumpy, but just trying to get a better sense for that.

Yes. Listen, our bookings in third quarter were very strong on the PE front. In fact, I would say all year long, they have been pretty strong. I would say specific to the third quarter, we did see some customer delays in production equipment. And we expect to see some of that in the fourth quarter, too, where the well sites were not ready for the production equipment.

As a result, it was kind of flattish kind of revenue. But the bookings continue to be strong and we are taking bookings into 2018. In fact, we are taking bookings now into the second quarter of 2018.

So just not able to get these wells completed, fracked, to their original schedule. That, plus Harvey, had an impact on third-quarter deliveries. But it gets back to the really tightness in the frac market today.

Okay, helpful. I appreciate it, guys. I will turn it back.

John Watson, Simmons & Company.

Thanks for squeezing me in. As a follow-up to David's question, is there anything else to think about in terms of the power end orders decelerating supply chain?

Listen, I think we are happy where we are on the power ends for 2017. And we expect 2018 to be much stronger than 2017 and we are significantly ramping up our supply chain to meet the demands of the market.

But our power ends have done very well in the marketplace. We have a track record of not having any cracks even at 10,000 hours. As a result, we are not only gaining market share, but gaining a lot of credibility from a customer standpoint. And we see strong demand in 4Q -- well, very strong backlog in 4Q, but strong demand going into 2018.

John, I think it would be wrong to assume that there is a decline in demand for frac equipment.

Okay, yes. And I just made that comment based on looking at the annual run rate. But that's nice to know that it is more of a blip on the radar screen. Then maybe as a quick follow-up to one of Jim's questions.

In the past, you have talked about a $75 million annual revenue run rate in the Middle East. How close do you think we could get to that in 2018, now that Forum Arabia will be up and running?

Well, great question, John. I think what our guidance was is once it is fully operational, it's going to take about 3-plus years to get to that $75 million mark. So we are still three years out, but we will start 2018 with meaningful revenue for the valves guys and then quickly ramp it up two years after.

But as mentioned, there's very good interest from our customers. And they like the local content, and there are very few players who can say they have the local content. So we will take the advantage and scale it up. But we are going to scale it up slowly with the right quality and the right products and whatnot.

Great. Thanks for the time, guys.

Thanks, John. Thank you for your interest and we look forward to give you an update early part of the year.

Great. Thank you. Goodbye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone have a great day.