Forum Energy Technologies Inc (FET) 2017 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Forum Energy Technologies earnings release conference call for the fourth quarter and full year 2017. My name is Brian, and I will be your coordinator for today's call. (Operator Instructions) As a reminder, this conference call is being recorded for replay purposes. (Operator Instructions)

I will now turn the conference over to Mr. Mark Traylor, Vice President of Investor Relations. Please proceed, sir.

Thank you, Brian. Good morning, and welcome to Forum Energy Technologies' Fourth Quarter and Full Year 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. Pablo Mercado, our Senior Vice President of Finance, will also be available for Q&A.

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. These statements involve risks and uncertainties that may cause actual results or events to may differ materially from those expressed or implied in such statements.

Those risks include, among other things, the 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 call contains time-sensitive information that reflects management's best judgment only as of the date of the live call. Management statements may include non-GAAP financial measures. For a reconciliation of these measures, please refer to the earnings release. This call is being recorded. A replay of the call will be available on our website for 2 weeks following the call.

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

Thanks, Mark. Good morning, everyone. Thank you for your interest in Forum. I'm going to start my comments by reviewing Forum's 2017 achievements and I will discuss the strategic objectives and focus areas for 2018. Then I'll turn the call over to Jim Harris to provide details on our financial performance and strong liquidity position.

2017 was a transitional year for Forum. We've successfully emerged from the downturn with a strong balance sheet, and we are well positioned for growth, both organically and through acquisitions. We continue to ramp up our operations in Completions and Production & Infrastructure segment while streamlining Drilling & Subsea segment. We delivered strong revenue growth of approximately 40% and improved our adjusted EBITDA margins by almost 800 basis points. The recovery in exploration and production activity in North America shale basins is in the early innings, and activity is expected to increase further.

Drilling rig count ended the year on an upswing. And importantly, well completion activity increased materially in the second half of 2017 as service companies put existing equipment to work and commissioned new fleets. Operators continue to push into the Permian, requiring increased levels of fracking and higher service intensity. Wells are being drilled and completed with greater lateral lengths, more compressed spacing of frac stages. In addition, the zipper frac techniques are being adopted. This increase in service intensity has led to greater demand for pressure pumping products that can last longer, and the high utilization requires more frequent replacement of consumable components.

Many of our completion products are designed specifically for these increasing service demands, including the highly durable and reliable power ends and our long-lasting and easily serviceable ICBM manifold trailers, among several others. We also offer a broad suite of consumable components. Our recent acquisitions of Global Tubing and Multilift aligned our Completions segment even more closely with the needs and demands of our customers and we've introduced several new products to capture additional market share and margin.

During the downturn, we successfully aligned the company to this new paradigm of high onshore North America Completions spending. Completions is now our largest and fastest-growing segment, and we expect strong demand for our North America Completions products to drive growth for Forum in 2018 and beyond.

In the Production & Infrastructure segment, in addition to benefiting from the higher Completions activity, we have two other market drivers. The first is the petrochemical development in the Middle East, where our Saudi Arabia valves facility provides a local content advantage. The second is the buildout of the midstream and downstream infrastructure in North America. In 2017, we strengthened our Production & Infrastructure segment to take advantage of these drivers and provide earnings stability throughout the cycles. Our strengthened management team grew our market share, expanded our product portfolio by adding Cooper Valves and completed our Saudi Arabia facility.

In the Drilling & Subsea segment, we ran the business well while in a challenging environment. We adjusted our cost structure, protected the franchise and worked on developing new products, positioning the segment for the eventual recovery. With that said, the recent increases in oil prices and greater demand for more capable rigs are driving customer discussions regarding upgrading existing rigs through higher spec capability and/or building new rigs. We are in conversations with customers in North America and the Middle East regarding these opportunities.

On the subsea front, we entered non-oil and gas markets during the severe downturn for our traditional customer base. And now we see that this market provides an additional revenue stream going forward. In the oil and gas market, we are seeing early signs of offshore activity recovery as evidenced by the recent sanctioning of several projects. We are fully prepared to ramp up our Drilling & Subsea operations as soon as demand materializes.

On our last call, we highlighted our focus on manufacturing and supply chain execution, market share and improved profitability. Since then, we made good progress in these 3 areas. We improved our manufacturing and supply chain execution in the Completions and P&I segments with meaningful increases in output of our stimulation and valve products. We have added leadership talent in those areas and expect continued improvement.

Regarding our market share focus, we increased our share in the valves market and customers are showing greater trust in our new Completions products. We have received an increasing number of orders for these products, including our wireline BOP, hydraulic quick latch, Velocity frac plug, Duracoil coiled tubing and Multilift SandGuard to name a few. We continue to build a new product pipeline across the company.

In terms of profitability, Forum delivered strong fourth quarter incremental margins, particularly in the Completions segment. The team executed its pricing strategy in the growth segments and reduced cost in the Drilling & Subsea segment. We should have additional opportunities to increase pricing on select products in the Completions segment. In the Production Equipment product line, we intend to increase margins by focusing on more complex products and on customers who value quality.

The fourth quarter was the strongest quarter of the year. Despite our customers managing their budgets and expenses late in the quarter, revenue was $248 million and adjusted EBITDA was $21 million, which resulted in margins of 8%. Incremental EBITDA margins pro forma for Global Tubing were 52% for the company and 68% for Completions, our fastest-growing segment.

We are excited about 2018. Although the energy and stock markets have been volatile recently, oil prices have strengthened significantly for the past several months. Completions activity is increasing. Customers are signaling price improvement. And the indication of international recovery later in the year could be a tailwind for our Drilling & Subsea segment. In addition to the market fundamentals, the action we took -- the actions we took in 2017 have further improved our confidence that Forum will have a strong year.

As we look ahead, we expect our first quarter revenue to be between $240 million and $255 million and EBITDA to be in the range of $18 million to $23 million, which implies the EPS range of negative $0.06 to negative $0.03. Despite the industry's slow start in January, we expect demand for Completions and Production & Infrastructure segments to accelerate throughout the year. And we anticipate full year EBITDA incremental margins of 35% to 40%.

Let me have Jim to take you through our results and financial position. Jim?

Thank you, Prady, and good morning, everyone. In 2017, the North America land drilling and Completions activity remained strong as Forum generated almost 80% of our revenues in this market. Our total revenue for the full year 2017 was $819 million, up 39% from 2016. Orders for the year were $870 million, a 46% increase from 2016, resulting in a book-to-bill ratio of 106%. Our reported net loss for the year was $57 million or $0.58 per diluted share. Excluding $0.20 per share of special items, adjusted net loss was $0.38 per diluted share for the full year 2017.

In the fourth quarter, our total orders were $232 million, a 1% increase from the third quarter. The fourth quarter book-to-bill ratio was 93% for the company as a whole. Our Completions segment orders increased to $101 million sequentially due to the addition of Global Tubing and customer spending on pressure pumping and artificial lift equipment, resulting in a book-to-bill ratio of 98%. We expect the demand for our Completions segment to remain steady in the first quarter and then accelerate as operators ramp their well completion programs in 2018.

In our Production & Infrastructure segment, orders declined 26%, and our book-to-bill ratio was 88%. Our well site Production Equipment and our downstream EDGE II desalter equipment sales were down 37% sequentially after the exceptionally high level in the third quarter. New business in this segment has historically been lumpy and uneven from quarter-to-quarter due to the nature of customer projects and buying patterns.

Our Drilling & Subsea segment orders were $50 million, consistent with the third quarter resulting in a book-to-bill ratio of 92% in the quarter. We continue to believe that our Drilling & Subsea segment has reached the bottom and expect modest growth coming into 2018. Our drilling equipment sales track with domestic and international rig activity and the upgrading of rigs, while subsea equipment sales will likely remain low and weighted towards non-oil and gas customers.

Our fourth quarter revenue was $248 million, an increase of $49 million sequentially. The net income for the fourth quarter was $51 million or $0.47 per share. The quarter included a credit for net special items on a pretax basis of $91 million and several income tax special items netting to a $35 million charge. The pretax special items were comprised of $120 million gain for the mark-to-market of our interest in Global Tubing resulting from our acquisition of the remaining 52% interest partially offset by pretax charges of $13 million for inventory reserves on discontinued products, $8 million for restructuring charges and transaction expenses, $6 million for Global Tubing acquisition-related equity-based compensation and $1 million of foreign exchange losses. The income tax items include $23 million of income tax expense associated with the pretax special items, $8 million for the impact of U.S. tax reform and a $5 million charge to establish a valuation allowance against our U.K. net operating loss carryforward. Our adjusted EBITDA was $21 million, and our adjusted net loss per share was $0.04, excluding special items.

I will summarize our segment results on a sequential basis for the quarter and provide additional details on the fourth quarter results. Our Completions segment revenue of $103 million increased 72% sequentially primarily due to the consolidation of Global Tubing and on higher well construction and completions activity in North America. Our Production & Infrastructure segment revenue of $92 million was up 8% due to improved sales of well site Production Equipment and midstream and downstream valves in the U.S. The Drilling & Subsea segment revenue was $54 million, flat with the third quarter, primarily due to a relatively stable rig count and lower subsea activity.

On October 2, Forum acquired the remaining 52% interest of Global Tubing and began consolidating 100% of Global Tubing's financial results in its completion segment. Global Tubing revenue was $36 million in the fourth quarter. Adjusting our third quarter 2017 results pro forma for the consolidation of Global Tubing, our fourth quarter revenue growth for the company and the Completions segment was 7% and 12%, respectively. And EBITDA incremental margins were 52% and 68%, respectively. We provided a reconciliation table in our earnings release for your reference.

Our free cash flow after net capital expenditures in the fourth quarter was negative $30 million. We expect to continue to build working capital to meet higher 2018 revenue expectations and, as a result, while our free cash flow will improve sequentially, it will remain negative for the first half of the year. The extension of supplier lead times on key components is necessitating further inventory builds to meet this expected demand growth. Improving working capital efficiency is a key focus area for us in 2018 and is an important part of our management incentive plans.

Our net capital expenditures in the fourth quarter were $7 million. Our budget for 2018 capital expenditures is $40 million to expand and upgrade machinery to support our expected growth in the Completions and Production & Infrastructure segments. Our balance sheet and financial position remained strong. We ended the quarter with $115 million of cash on hand. And with our new asset-based revolving credit facility, our year-end liquidity position was approximately $300 million.

Our weighted average diluted share count for the fourth quarter was 108.6 million shares. Net debt at the end of the fourth quarter was $393 million, up $150 million, bringing our net debt to total capitalization ratio to 21.8%. Interest expense was $8 million in the fourth quarter, and we expect it to be $8 million in the first quarter 2018.

Corporate expenses were $8 million, and we expect them to be $8 million in the first quarter. Depreciation and amortization expense was $20 million for the quarter, including the purchase accounting adjustments for Global Tubing, and we expect it to be $20 million in the first quarter. Our effective tax rate on the fourth quarter adjusted operating loss was 36%, and we estimate that our effective tax rate for the full year 2018, taking into account the U.S. tax reform, will be approximately 25%. 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, 2017 was a challenging but transformational year for Forum. We achieved our many successes, and I want to thank our loyal employees for the hard work in getting us through the downturn and ramping up operations for 2018. The macro involvement for North America drilling completions and infrastructure activity, which is 80% of our revenue base, is favorable as we enter 2018.

Our near-term focus is on executing the following: growth in Completions and Production & Infrastructure segments; margin improvement through operating leverage and pricing; working capital efficiency and free cash flow generation; and last, balance sheet discipline and accretive acquisitions. We at Forum are excited about our 2018 prospects. We thank you for your interest.

At this point, we will open the line for questions. Operator, please take the first question.

(Operator Instructions) And our first question will come from the line of Jacob Lundberg with Crédit Suisse.

Just to -- I guess, first on the -- in the press release, you mentioned first quarter 2018 off to a bit of a slower start because of slow customer spending. I guess, could you quantify the magnitude of what you've seen so far, what you think that might be in the first quarter? And do you expect it to bleed at all into the second quarter?

Well, what we expect, Jacob, is I think February will be stronger than January and March will be much stronger than January. But what you're seeing in January is slow mobilization of crews, primarily because of the weather and the seasonal. And the second thing we are also seeing is the capital equipment, which is a -- probably has to go through the budget process. And we'll start seeing that probably in the late February and the March time period, right? But however, what we are seeing on the completions side is we are negotiating some big deals especially in the frac side, which could materialize probably late in the quarter or early part of the year, early part of April. So we do expect our bookings to be higher than our fourth quarter for sure. And there's a pretty good chance that all 3 segments could be higher than the fourth quarter.

Okay. And could you provide any more color on the potential bookings in the completions side that you're talking about? When would you expect that to actually flow through the P&L?

Yes. I mean, what you're seeing now is the consumables part of the activity we are seeing it, we saw it in January. I think we expect a sequential increase going into February and March. I think what we expect to see probably starting in February but more in March is the capital part of equipment. But in the case of completions, Jacob, I think our revenue will be higher than the fourth quarter. And I think our book-to-bill ratio will be pretty close to 1. And the other point probably is that -- if we look at it from a completions standpoint, what we expect is as the rig count goes up and as the well count goes up and more importantly as the horsepower goes up, there will be a sequential increase month-over-month on the Completions segment on all the product lines we have. But apart from that, in the second half, we have about 4 good levers, which are incremental, I would say, to the first half. The first being on the Completions segment. In specific, we have about 3 or 4 products, which are in the different stages of commercialization and acceptance with the customers. And we expect the revenue on those 4 products to be materially higher in the second half. Then if we go to our P&I, we have 2 levers. One is the Saudi operation. It comes in the second half, which is meaningful for the valve guys. And also, there are some natural gas infrastructure projects, which are at a negotiation stage, one in Northeast and a few in the Gulf Coast, where I think you'll start seeing the revenue in the second half. And the last one being the D&S, the Drilling & Subsea segment, we are expecting from capital orders as early as first quarter, where the revenue will start materializing in second half, right? So from a completions standpoint, sequential increase every quarter every month. In the second half, we got 4 more products coming, which will materially increase the run rate.

Got it. And then, I guess, as a follow-up on the -- just trying to bridge some of that to the 1Q guide. So it sounds like you feel pretty comfortable with completions revenues increasing in the first quarter. If we look at the low end of the guide versus the high end of the guidance, it implies revenue is going down versus going up. I guess, what happens -- how does the quarter play out where you end up at the low end? How does the quarter play out where you end up at the high end? I guess, where -- if you feel good about growth in completions, where do you think you might see some revenue contraction?

Yes. As we look at the total portfolio, and I'll answer your question specifically, Jacob. What we expect is Completions will be higher than fourth quarter, Drilling & Subsea will be either flat or a little down, and Production & Infrastructure will be down versus fourth quarter just because of the bookings we got in the fourth quarter. But overall, from a booking standpoint, higher; and from a revenue standpoint, if we look at the midpoint, it's flattish. So the rate can play out. The reason why we've given the range is January was a slow start. We expect February to be stronger than January and March to be much stronger than February and January. So if March is very strong and it can offset January, then it could be on the higher end of the range. And if the slowness continues, which we don't expect to, then we could be in the low end of the range.

So Jacob, just some color I would give there also on Completions specifically. I just want to highlight that it is our most book-and-ship business. So the timing of the revenue is very reliant on the orders. And so to your specific question of when that revenue might come through, if we see the orders early enough in the quarter, it's helpful to revenue. Otherwise, we'll see the revenue come into the fourth -- into second quarter. So it is -- that sort of variability you're seeing in our guidance, it is for each of the product lines and that book-and-ship business is the timing of when we see those orders start to pick up.

Got it. And just to sneak one last one in. Is there any way you can kind of quantify the magnitude of those orders that you're looking at?

Well, that -- I'd say, Jacob, that's what's built into the range. The reason there is a range is if they come later in the quarter, obviously, it would push us more towards the lower end. If we do get them early enough, then there's upside from there.

And if we get a big chunky order, let's say, in the second week of March, Jake, it depends how much of a product we can get out and depending on what the product is. If it's a capital equipment, we may not be able to get all the product out. But if it's consumable, most probably it's in the inventory and all the product (inaudible)

And our next question will come from the line of George O'Leary with TPH Company.

So the first question I have, I guess, is digging in on the slowness in January. Just which segment that's most acutely affecting? I guess, I would imagine that, that is the Completions segment given the heavy -- just the book-and-ship nature of that business. But is there any of that that's impacting the other components of your businesses? Maybe if you can just break down which segment is being impacted most and which is being impacted least, that would be helpful.

Yes. And I would say Completions for sure because of the seasonal and the weather and the crew mobilization where our customers are not ready to take the equipment for surcharge. And let me give another example. Just in the month of January, 25% of our revenue in Production Equipment, where the product is ready to be shipped, but the customers are not ready to take the unit because the sites are not ready, right? So just to give an example. And then in the case of our valves, probably another good example is -- which is a seasonal thing in the fourth quarter, typically, the refineries and whatnot are shut down for the -- after the MRO activity. And now the refineries are back, so the bookings are coming strong but the revenue follows some of the bookings we have in the fourth quarter. So a slow start. But as the quarter progresses, we expect the revenue to go higher.

Great, that's very helpful. And then -- and you guys mentioned on the free cash flow side, I think (inaudible) a quarter ago, the hope would be getting to breakeven by Q1. Maybe if you can just break down, is this all just the change in expectations around EBITDA? Is it issues on the working capital side? Increased CapEx? What maybe changed the tune there into delaying that free cash flow neutrality or free cash flow generation to the back half?

So George, it is as you surmised, a combination of things. First, it is a slower start to the year than we had anticipated. But maybe more importantly, it is the -- our bullish outlook on the second half in the year. So the negative cash flow is derived from our actually starting to buy long lead items now we're actually seeing in our supply chain because of just demand in the marketplace even on normal supplies, longer lead times. And so in order to make sure we can deliver to our customers on time, we have increased on purpose our inventory build, but it is with a view that we would ship that product in the second half and we would see inventory turns pick up as we go into the end of the year. I would also highlight, we gave guidance that we've improved sequentially with each quarter. I'd also like to highlight that we do expect not only a positive free cash flow in the second half, but positive free cash flow for the full year. So it's not an anticipation that we're going to invest in these inventories in the first half and then be negative for the year. We do expect to recoup that as earnings improve, as we go into the second half of the year and as I said, be positive for the full year.

George, probably a couple more points there. As Jim said, we are expecting a very strong second half and we want to stay ahead of the supply chain constraints. But also a lot of things we look at is how well you're managing the working capital. And in the fourth quarter alone, our inventory turns improved from 1.5 to 1.6. And then we will continue to make significant progress in that throughout 2018.

Great. And then maybe just one more follow-up. On the supply chain side, is there any of the 3 businesses in particular where you're seeing the most tightness? We've heard some other vendors to pressure pumpers in particular note that we're seeing lead times extend, but just curious where you guys are seeing the tightness.

I would say Completions is probably the dominant segment, George. We saw that last year because of a little bit of slowdown in the -- after the Thanksgiving and early part of January. I think the lead times have shortened. But what we do see is with a strong second half and more importantly, with some of the initiatives we've got with more products coming onboard in the Saudi and whatnot, what we expect is our demand on our supplies is going up and we do anticipate some supply chain constraints mostly in the Completions segment. And we just want to get ahead of it. And we did the same thing last year. We took some material that's -- and we used all of it and more. So we're using the same strategy coming into 2018.

Our next question will come from the line of Sean Meakim with JPMorgan.

So Prady, you talked about kind of you reaching a bottom in the Drilling & Subsea business. Could you maybe talk about the composition of the orders in that segment at this point in the cycle? And maybe how we should think about the cadence of improvement in terms of orders that you could see across the business within that units of drilling versus Davis-Lynch and (inaudible)?

Yes, sure. I think if we look at the Drilling & Subsea segment, the consumable part of the product portfolio, I would say on the drilling side and also on the subsea side, is pretty flattish with the exception of in the case of our drill rigs go up, that's good for us. We expect the consumables to go high, right? So that's the base part of the business. What we are seeing now, Sean, is our pipeline on the capital projects on the drilling side is pretty robust and we expect as early as first quarter for sure going to the second quarter where some of those things will start materializing, which could lead to a second half -- a stronger second half for the drilling segment. And in the case of subsea, we are anticipating some big non-oil and gas orders in the first quarter or probably early part of the second quarter, which also positions the subsea business to have like a breakeven EBITDA for the rest of the year. But on the drilling front, I would say we are seeing a bridge, but consumable activity picking up as the rig count goes up. But more importantly, the capital equipment pipeline is pretty strong for second half.

And Sean, I would just add some color there that in the first half of 2017, we saw good orders and deliveries on rig upgrades, these mud pump fluid and packages. So we did really well on those. They fell off in the second half of the year. We do expect, and with some of the announcements from our customers on both the new rigs and rig upgrades, to see that pick up again here in the early part of the year. So there's upside there. We've also not seen as big a recovery. It has started, but -- with our handling tools. This -- the cannibalization of idled rigs has taken much longer than anticipated. And certainly, the offshore activity have not seen the sales that we had historically. I'd say that could be a good mover for us as handling tools start to pick up during the year. That used to be the bread-and-butter product for drilling. We'd like to see that happen again. And then as a Prady listed very well, in the Middle East, we -- there's a lot of rig building activity that's being bid right now, expected to be awarded shortly. We're working with many of those drilling contractors that are expected to win and have our equipments spec-ed into those orders if these drilling contractors are successful. We wouldn't expect to deliver that capital equipment until the second half of the year. And if the orders came too late, of course, the deliveries could fall into 2019. But I'd say that would be a good upside for us if those orders come early enough in the year.

One last point, Sean, is the early part of the discussions in North America with some of our customers is the day rate today is about 20,000. At 25,000, our customers are contemplating about building new rigs. But it's a very early stage of discussions with some customers in North America.

Got it. It was very helpful. Maybe just a similar question, just thinking about the Production & Infrastructure segment. Book-to-bill is a little bit stronger there. Maybe if you think about the composition of how things are coming in today versus what that could look like as we get through exiting '18.

Yes. In the fourth quarter, the bookings in Production & Infrastructure were low, and let me explain that. Part of that is valves are seasonal. We anticipated that the refineries usually close for the maintenance work and whatnot, but those refineries are coming back to work. As a result, we have already seen an uptick in bookings in January and we expect that to continue. In the case of Production Equipment, we had a very strong quarter in the third quarter of last year where in this particular case, in the case of Production Equipment, either third quarter or fourth quarter historically is when customers put the orders for 2018 or the following year. So in this case, in third quarter, we had a very big quarter on the bookings. Our expectation of Production Equipment is I think the demand continues to be strong. We will be very picky and choosy of what projects we play because our play there is just not revenue, but also make sure our margins are higher. But in general, I would say Production & Infrastructure is growth segment. Completions is our biggest growth segment and the second segment of reasonable growth is Production & Infrastructure. And then in the second half, which is important, is the run rate will be higher because our Saudi plant is coming into operation, and that's a meaningful contribution for the valves guys. And as I mentioned earlier, they are natural gas infrastructure projects, which we are in the midst of discussions with customers in Northeast and in Gulf Coast. And as those projects materialize, we expect our revenue stream in the second half. So our second half will be stronger on P&I than the first half. But the market fundamentals for both product lines and for the segment is pretty good.

And our next question will come from the line of Igor Levi with Morgan Stanley.

I just want to ask a question on pricing. You've mentioned that you would have the opportunity to push pricing higher in select products. Could you elaborate a bit on which products are seeing the most pricing upside and where you're still struggling to push prices higher?

Yes, yes. I mean, fourth quarter is a good example, Igor, where our incrementals were high. And a big part of that was the pricing, which got realized in our Completions segment predominantly and a little bit of pricing in the case of Production Equipment, but mostly driven by the Completions segment. And on a move-forward basis, that is what we would expect to see as there's more pinch between demand and supply, which most likely will happen in the Completions segment. More particularly in the pressure pumping products, we expect to see pricing opportunity. The second lever we've got on pricing is the new products. So we are coming up with products like a hydraulic latch, which improves the efficiency on the -- with the zipper fracs. It improves in the efficiency for the customers. We are coming up with a downhole frac plug, which reduces the mill time and also some of the materials which gets stocks come up to the surface. So the customers are willing to pay more price for a premium product and we expect to get pricing value there. And not pricing, but independent from that is a lot of things we've done on the Drilling & Subsea is manage the cost, which has just improved the margins. And we expect the margins in the Drilling & Subsea segment to be better than 2017, not because of price, but because of the way we managed cost.

And just a follow-up. On the topic of cost, you previously talked about needing to add shifts to your facilities and increasing labor cost. So would you give us an update on the labor situation?

Great question. And I would say in 2017, just not us, I think the whole industry struggled with getting people onboard. We have successfully across all the manufacturing plants recruited a significant number of people, so we think we have got a very good critical mass. We also expect to recruit another significant chunk of people in 2018. The difference is we can buy some time with higher over time with the kind of people we have and -- which gives us time for us to recruit people, unlike 2017 where in a shop, 4 of the 5 people were new and they were going through the training process and whatnot. So we will go through some inefficiencies in 2018, but not as close as we had gone through in 2017. Probably the other point worth mentioning is there could be some supply chain inflation risk, which we are managing with our suppliers proactively. And that's one of the reasons why we have decided to build inventory to avoid, not only the lead time constraints, but also to get ahead of some inflation, which could potentially happen.

Would you be able to clarify where are you seeing the supply chain the tightest?

Also same -- on the same areas where the pressure pumping market for sure. And the second area, I would say, is where we have increased our revenue significantly in the valves business, where we have gone past the historic highs and we are putting more demands on our suppliers. There could be some potential inflation there, which we will manage off -- through productivity and passing some of that to our customers, but mostly in Completions.

And our next question will come from the line of Martin Malloy with Johnson Rice.

Last several quarters, you've talked about the strength that you're seeing in the end markets and in particular, on the completions side and given the direction of the pressure pumping horsepower and the expected incremental builds this year, and yet your book-to-bill was less than 1 for the fourth quarter. I think I heard you say you expected to be about 1 for the first quarter. Can you talk about kind of market share and if you're maintaining your market share? Or do you feel like you're possibly losing some?

Yes, Marty. I think the right way to look at book-to-bill certainly for our Completions segment is it is -- as we said earlier, our book-and-ship business is not a backlog business. So in a backlog business, you expect to have a high book-to-bill ratio, build backlog and that portends well for revenue. In the case of our Completions business, it's more of a focus on the sequential revenue. Looking at that increased bookings should track with that, and then the delivery comes relatively quickly after the booking is received. So it's not as high a backlog business as we see in the others. And I would say a book-to-bill ratio that hangs around that 1.0, as long as we're growing, is actually healthy for that business. And if it gets much more than that, that means that our -- having supply chain issues and I would call it bad backlog and we're having trouble meeting the delivery schedules of our customers because they demand quick deliveries on that equipment.

And our market share, Marty, what I would say is if you go back to the 2014 and the horsepower and the market share and where it is today, I would say probably either the first quarter or second quarter of 2018, we'll go past the historic highs of 2014. And our pressure pumping business will have the highest growth in 2018. So we'll gain significant market share starting second quarter. I haven't mentioned, there are a few products we are commercializing in the second half of 2017. The intent of that and those 2 new products are incremental to what we have today.

Okay, great. And then I guess, just on the subject of the acquisition outlook here in -- could you maybe remind us about what you're comfortable with from a net debt-to-EBITDA standpoint? And given the negative free cash flow expected first half of the year and what the outlook is for potential acquisitions?

Yes, I would say -- listen, Marty, the environment for acquisitions in 2018 is very positive, but I'll let Pablo give you some color here.

Okay. Hey, Marty. Look, in terms of acquisitions, I agree with Prady that the market is very good for deals in 2018. The businesses that we're looking at are seeing really good performance and so those sellers are willing to come to the table. In terms of liquidity, we do have very strong liquidity at this point as was mentioned on the call $300 million or so with the new credit facility, so we are well positioned for acquisitions. In terms of your specific question, I mean, look, we are coming out of a negative EBITDA environment, so I think our leverage is still high and we will look to work that down below 3x through 2018 more from a growth and EBITDA. When we look at acquisitions, if you look at our past history, the average size of our deals has been small, right? So for the small tuck-ins, I think we can continue to do those with cash and without increasing levers significantly. Those acquisitions these days are now coming in with EBITDA, so they actually can be deleveraging as well. And then for larger deals, I think we can take a more balanced approach like we did with Global Tubing. In that case, there was equity as part of the consideration. Very important there is the focus on accretion, right? So we don't like our stock price at this point and are protective of it. But for -- to get any deal done that deliver significant accretion, that makes sense to us.

And our next question will come from the line of Chase Mulvehill with Wolfe Research.

I guess, a few questions. I guess, the first, I want to start with incrementals. 4Q EBITDA incrementals adjusted for Global Tubing were a nice 52%. If I look at guidance and kind of eyeballing things, it looks like 1Q guidance assumes about 40% to 50% incrementals. So I don't know if you maybe want to comment on incrementals going forward into 2Q and into the back half of the year. Do you think that 40% to 50% is sustainable as we kind of go throughout the year? Do you think they accelerate? Maybe just some color on incrementals once we get past first quarter.

Yes, another great question. I would say, well, first, we are very happy with our incrementals in the fourth quarter. And without the Global Tubing, our incrementals are very strong. And as we have mentioned, we were expecting our incrementals to be higher coming into the fourth quarter over the pricing and some of the other things we've been talking about all year last year. Now going into 2018, I think our guidance for the year is 35% to 40%. And what you can expect from us is there could be some quarters which could be lower and there could be some quarters which could be higher of what you've seen in the fourth quarter. But the average of that will be the 35% to 40% for the entire year. The reason for that is at this point of time, we just don't know when the pricing is entering the next leg of pricing we're going to get on the pressure pumping. And when that materializes, obviously, the incrementals will be much higher. And the combination was also mixed depending on with capital projects coming into fruition in the second half of the year, depending on what those projects are in the margins will also determine the incrementals for that particular quarter, right? So going into 2018, rather than giving quarter-to-quarter guidance, I think our guidance on incrementals is more 35% to 40% for the entire year. And you can expect some quarters to be higher and some quarters to be lower.

Okay, great. That's very helpful as we can track the margin progression here. And so kind of maybe a follow-up question on the margin side. What do we need to see to get back to kind of the teens -- low teens margins from an EBITDA standpoint? How much of that is really pricing? How much of that is absorption? So I don't know if maybe you could split that into kind of pricing and absorption to kind of get back to those low teens EBITDA margins.

Well, I would say the activity is probably the biggest driver of the margins going up. If we look at our margin progression in 2017, there's almost 800 basis points of margin progression, right? So they're almost at 8.3% of margins. So as revenue continues to go up, the operating leverage we're going to get out of that will drive the margins higher, pricing on the top. And like in the case of D&S, the way we have managed the cost structure and whatnot to resize the business has also helped us to improve the margins. And the other thing they've done this quarter, Chase, if we look at my script is we have evaluated some of the products, which are nonperforming, low margins, which we don't see where we need to invest on a move-forward basis and we have exited those products, and that helps also the margin. But I would say mostly fee operating leverage and second being pricing.

Okay. all right. I appreciate that. One quick follow-up, and I apologize if this was asked earlier. But did you talk about lead times on power ends and fluid ends?

Yes -- no. Great question. I would say in the last 2 months, in the month of December, there was -- just because of seasonal and customers managing their budgets and whatnot, we have not stopped our ramp-up process. We are still ramping up our capacity. As a result, the lead times may have come down by 1 or 2 months. So I think part of the lead times right now for the power end could be 3 to 4 months. But the 1 Zs and 2 Zs or even 5 power ends, we usually have it in inventory, right? But if someone wants 20 power ends and if it's not in the manufacturing cycle, then it takes about 3 to 4 months. But we do anticipate the lead times to go higher and more supply chain constraints as the year progresses. And that's what we want to get ahead of. And in the case of fluid ends, the lead times have become shorter and, as you know, it's more of an inventory item.

If you think about kind of quotes on power ends, not orders, but quotes, kind of where you are today versus 6 months ago, are they higher or lower?

It starts in the month of January, which is typical because they need to go through the budget process for the power ends. So I would say second and third quarter of last year was the strongest from a booking standpoint. But the revenue in the fourth quarter was the strongest for power ends just leaving the door -- the amount of power ends. And what we expect is probably the same trend is later part of first quarter, and second and third quarter is where we will get the bookings. And right now, the quotation activity is up significantly. We are dealing with several of the customers talking about big chunk of power ends and, in some cases, new fleets being built. And in some cases, it's a replacement of the existing fleets. But I would say end of the quarter, second and third quarter and then probably a little bit of slowdown in the fourth, which is what we saw in '17.

And our next question will come from the line of Marc Bianchi with Cowen.

From the commentary you guys have offered, it sounds like sort of later in the year, there's an expectation for things to ramp pretty significantly. I think most investors believe that E&Ps, as they get through the year, provided commodity prices are still supportive, they're going to ramp their activity and ramp the budgets. Commodity prices have come off here in the last few weeks. I guess, my question is how dependent is your view of the ramp in the second half on overall activity versus just sort of pent-up demand? So if I think of a flattish rig count or modestly increasing rig count, is that enough to -- for you to have this ramp in the back half?

I will make 2 points. If you look at our 3 strong legs or our 2 segments for growth, they are Completions and Production & Infrastructure. Drilling & Subsea is 20% of our portfolio, right? So the capital projects don't come through in the second half, possible if the commodity prices continue to go down, Middle East customers decide to move things to the right, possible, certainly possible. But on the Completions side and the Production & Infrastructure side, we expect that kind of activity to continue to ramp up. Based on our conversations with our customers, we expect 2 million to 3 million horsepower incremental versus 2017, and half of that will come from replacement and half of that will come from new fleets. And every time -- every month the horsepower goes up, it needs consumables, right? So when you get from 11 million horsepower to 13 million horsepower, you need more consumables. So on the completions side, we don't expect a slowdown, but we see accelerated growth going into the second half magnified by products -- incremental products, which we don't have in the portfolio today we're commercializing second half, which is a meaningful revenue for the Completions segment, which adds another leg up. And then in the case of Production & Infrastructure, as we said in second half, we had 2 strong legs. Then the market activity, which is the Saudi plant coming into operation is meaningful in the second half. And the gas infrastructure projects, which we are negotiating with customers on the northeastern Gulf Coast, that will come into fruition the second half. So Completions and P&I, we feel very strong. BMS is a tailwind. How strong a tailwind will be based on commodity prices, international recovery and the appetite of E&P spend.

Okay, that's helpful, Prady. I guess, if I just focus on the completions side, and appreciate that some of the stuff might not -- it's certainly not necessarily in backlog yet. But what sort of commitment do you have at this point for your fair share of that 2 million to 3 million horsepower? What are those commitments or kind of agreements look like with the customers?

Also I think we will get more than our fair share, not because -- one, because the market is up; second, because our products are better. So if you look at our power ends, we're the only ones who give 2-year warranty and we have a track record in the marketplace where we did not have any cracks yet even at 10,000 hours. As a result of last year, we started off thinking we will do x and we did 2x of power ends. And this year, we're going to go up by another significant chunk on the power ends, right? We've got a pretty good strong backlog in the truck manifold, which is gaining pretty good traction, and we expect that to gain more traction in the second half. So market is strong, and we have got very good products. As a result, we are very confident that we're going to accelerate faster but more importantly gain market share. And the fact that we are also taking inventory bet and building the inventory at the market puts us in an advantageous position too.

And our last question will come from the line of John Watson with Simmons & Company.

One quick one for me. Prady, the 35% to 40% EBITDA incremental guidance for 2018, is that pro forma for Global Tubing?

Yes. So John, what we're saying is sequentially on the basis of what we have today, the 35% to 40%, so not looking back over -- counting on the acquisition for the -- those incrementals. So that's what the guidance means.

Yes. Global Tubing is part of the family now, I think the last 2 quarters, we had talked about pro forma and whatnot, but they are part of the family now. So on a move-forward basis, anything we get on incrementals will include Global Tubing.

Well, thank you for interest in Forum, and we'll be -- we look forward to give our progress update through the next earnings call.

Great. Thank you, everyone. Have a good weekend. Goodbye.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program and we may all disconnect. Everybody, have a wonderful day.