Good morning, ladies and gentlemen, and welcome to the Forum Energy Technologies First Quarter 2019 Earnings Conference Call. My name is Michelle, and I’ll be your coordinator for today’s call. At this time, all participants are in a listen-only mode.

[Operator Instructions] We will be facilitating a question-and-answer session after the speaker’s remarks. 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, Michelle. Good morning, and welcome to Forum Energy Technologies first quarter 2019 earnings conference call. With us today to present formal remarks are Cris Gaut, Forum’s Chairman and Chief Executive Officer; as well as Pablo Mercado, our Chief Financial Officer; and Lyle Williams, Senior Vice President of Operations.

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 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’m now pleased to turn the call over to Cris Gaut, our Chief Executive Officer.

Cris?.

Well, thanks, Mark and good morning, everyone. I’m pleased to report on our results this quarter. Our employees are doing a great job of managing the business for the current market environment and working towards achieving our key objectives.

And those are operating efficiently with consistent execution, emphasizing our winning products and brands with market share opportunities, and consistently generating strong free cash flow. I would like to report on how we’re doing on each of these three objectives.

Our operating efficiency and cost control measures are working well, as evidenced by improving profitability in each of our three segments. We achieved higher EBITDA across the board resulting in EBITDA of $22 million on flat revenue in the first quarter.

As stated in our earnings press release, we have realigned our three business segments to reflect how we are now running the business. Managing the Downhole & Drilling product lines together, which share a common business driver of well construction activity, provides field level sales synergies in North America.

In addition, this combines two of our stronger international product lines with a history of global brand recognition. The combination will leverage the global operating infrastructure of the Drilling product line to accelerate market penetration for our Downhole products.

Our Drilling & Downhole product lines together are well positioned to benefit from the recovery in international drilling activity. I would note our international revenue increase sequentially by about 20% in the first quarter.

We are also seeing early signs of recovering in offshore and subsea activity, as evidenced by some recent good orders in our subsea product line. In additional to these orders, enquiries for subsea equipment are higher than we had seen in quite some time. Our first quarter revenue was $272 million, essentially flat with the prior quarter.

Our orders were $242 million, resulting in a book-to-bill ratio of 89%. Although, customer order activity began the year at a slow pace. It accelerated in the month of March and we have received several sizable orders so far in the second quarter. With continued high levels of U.S.

land activity, our greater constraints – but the greater constraints on customer spending for new capital equipment, we are seeing a shift in demand from capital equipment to our consumable and replacement products. These products allow our customers to keep their active equipment working efficiently.

Given Forum strength in the consumable products area, we believe we are advantaged relative to some other equipment manufacturers in this environment.

This trend from capital equipment to consumable products is particularly strong for our pressure pumping customers, where we are seeing lower orders for power ends for new fleets, but increasing demand for our higher-margin flow iron and consumable products.

Other products within completion segment that are seeing strong domestic demand, our coil tubing and coiled line pipe, wireline cable and pressure control equipment. And in addition, we are seeing international demand for our coiled tubing products as well as our pressure control equipment.

We are delivering on our commitment to generate free cash flow on a consistent basis, as we generated free cash flow of $14 million in the first quarter, and this was after paying approximately $5 million in cash severance costs. Our plan to generate $100 million on an annualized basis is on track.

Our inventory reduction program is underway with progress in each of the last two quarters and we expect accelerating results throughout the year. The results of the usual receivables lag in this inventory reduction turning into cash, so we expect to see greater cash generation from this program later in the year.

Now looking ahead, we expect our second quarter operating results to be little changed from the first quarter as we worked down the backlog of capital equipment, while demand for consumable products and international activity increases.

Based on current market conditions and are good start in the first quarter, our objective to increase EBITDA on a year-over-year basis remains achievable. Before I turn it over to Pablo, I want to recognize Mark Traylor for his great work as our VP of Investor Relations.

Mark is transitioning to a different role within Forum, and he’s going to be handing off the IR duties to Mark Conlon, who has been with Forum for the past two years and is someone we think very highly of. Now let me hand the call over to Pablo to take you through our results and financial position.

Pablo?.

Drilling & Subsea, Completions, and Production & Infrastructure. We have moved the Downhole product line from completions to Drilling & Subsea to form the new Drilling & Downhole segment. The Completion segment retains the Stimulation & Intervention and Coiled Tubing product lines. Finally, we renamed Production & Infrastructure as Production.

We have provided supplemental schedules for the 2018 quarterly results of the new reporting segments in the earnings release. In addition, after the filing of our 10-Q, we will issue an 8-K that will include recasted historical financial information. I will now summarize our segment results on a sequential basis.

In our Drilling & Downhole segment, orders were $82 million, an 8% increase due to the decline in the North America rig count and timing of ROV orders. The book-to-bill ratio for the segment was 95%. Segment revenue was $86 million, a decrease of $3 million, or 3%.

This was due to the lower rig count in North America and lower revenue recognition of subsea projects. Partially, offset by improved sales of artificial lift products. Adjusted EBITDA for the segment was $6 million, or 7% of revenue, an improvement of 90 basis points driven in part by cost reductions.

In our Completion segment, orders decreased 24% to $80 million. The decrease was primarily due to the large fourth quarter order for 25 coil tubing BOP packages and lower orders for pressure pumping capital equipment for new fleets. This was partially offset by higher orders for Coiled Tubing products.

Segment revenue was $95 million, an increase of $1 million. This was primarily due to the delivery of significant Coiled Tubing line pipe project to a customer in the Middle East, partially offset by lower sales of stimulation and intervention equipment.

Adjusted EBITDA margins were 17%, an increase of 60 basis points, due primarily to better volumes of high margin pressure pumping consumables and Coiled Tubing products. Production segment orders were $80 million, an increase of 6%. Segment revenue was $92 million, a 1% decrease – increase, excuse me.

Adjusted EBITDA margins were 7% for the segment, an increase of approximately 130 basis points. The improvement in each of these areas would due the higher demand for our higher margin upstream and midstream valves. I will now discuss some additional details about our result and financial position at the Forum level.

Our free cash flow after net capital expenditures in the first quarter was $14 million in line with our expectations. Our program to aggressively reduce excess inventory is underway and will result in higher free cash flow generation in the second half of the year.

We repaid $30 million of debt in the first quarter and our primary use of free cash flow in the near-term will be to further reduce debt and improve liquidity. Our net capital expenditures in the first quarter were $4 million. We expect our total capital expenditures for 2019 to be approximately $20 million.

Our balance sheet and financial position remain strong. Our liquidity position at the end of the first quarter improved to approximately $224 million. Net debt was $458 million and our net debt to total capitalization ratio was 31%.

As a result of the new accounting standard, all leases are now on the balance sheet, so you will see a new operating lease asset of $55 million and a corresponding increase in other long-term liabilities. Our reported diluted share count for the first quarter was 109.6 million shares.

Interest and depreciation and amortization were $8 million and $16 million respectively in the first quarter. We expect these expenses to remain at similar levels in the second quarter. Adjusted corporate expenses was $7.3 million in the first quarter and we expect corporate expenses to be approximately $7.5 million in the second quarter.

We expect to continue to see volatility in our quarterly tax rate as we are very close to breakeven in various jurisdictions with different tax rates and continue to have unrecognized tax benefits in loss making jurisdictions.

During this time period, we will continue to have some tax expense for the jurisdictions with income even if we have overall losses. Once we turn profitable in the loss making jurisdictions, we will have a relatively low tax rate as we begin to use our net operating losses.

For more information about our financial results, please review the earnings release on our website. Now, let me turn the call over to Lyle to discuss some key operating initiatives..

Thank you, Pablo. Good morning, everyone. Our operating team continues to make good progress toward our inventory reduction objectives through enhanced planning programs, partnerships with key vendors and sales of older inventories.

As a result, net inventory decreased by over $7 million in the first quarter, which follows a reduction in the fourth quarter. This year, inventory reductions should contribute meaningfully to our cash flow generation goals, as we build on these recent successes.

We are pleased with the progress the organization is making in our cost reduction efforts as we drive to further reduce SG&A as a percentage of revenue. During the quarter, we adjusted our cost structure to meet current market conditions, which contributed to the improvement of EBITDA in every segment.

These changes includes streamlining our organizational structure and moving functional authority and accountability back into our product lines to eliminate redundant costs. Also, as part of our overhead spending reduction, we have exited our Houston distribution facility, relocating finished goods to customer base – to U.S.

based manufacturing plants. This relocation will reduce rent and personal expenses and facilitate improved customer service while reducing inventory. This month, we will complete the combination of our Houston corporate office and a sales office into our operating headquarters.

The corporate office is already sublet to a third-party for the remainder of our lease term, enhancing the plant savings from this move. In addition to cash and cost focus, our operating teams are driving growth by matching up our winning products with our high quality customer base.

Through the last few years, our team focused on deepening relationships with top tier players in our industry.

Our top 10 customers representing roughly 30% of our revenue includes the three leading oil field service companies, a major IOC, several leading independent pressure pumping companies, a large land drilling contractor and a large pipe valve and fitting distribution firms.

The financial and market strength of these customers and their global reach across multiple phases of the value chain provide Forum with opportunities to grow and penetrate new markets. We are also growing through the development and introduction of new technology.

In the first quarter, we continued our trend of launching new products focused on improving customer efficiency. Products launched this quarter include our 15000 PSI hydraulic latch assembly, which significantly increases safety and efficiency of hydraulic fracturing operations on high pressure zipper frac wells.

Our DURACOIL and 130-grade coil tubing then improves the longevity of coil for high pressure horizontal wells and an abrasion resistant overcoat for our coils line pipe which is typically used on traditional midstream line pipe applications and we’ll open additional markets for this product.

Finally, as Cris mentioned, we continue to see growth outside of North America. In the first quarter, international revenues increased by $10 million. This growth came in part from delivery of a significant order for subsea cold line pipe into the Middle East and shipments of casing hardware products to Asia and Latin America.

We’re seeing new international inquiries for differentiated artificial lift products, subsea ROVs and drill pipe handling tools and capital equipment for land rigs. Our strong customer partnerships, winning products and good exposure to a growing international market provides confidence for continued revenue growth.

Let me turn the call back over to Cris for concluding remarks..

Thanks, Lyle. We are off to a strong start in 2019 and we are demonstrating once again the cash flow generating ability inherent in Forum’s business model. And you can expect our free cash flow to grow as the year progresses. Our focus on consumable short cycle products is the right place to be in the current market.

As our customers are wanting to keep their existing equipment working longer and harder. Our operating efficiency and cost reductions are resulting in all of our businesses having improved profitability. Thank you for your interest. And at this point, Michelle, we will open up the line for questions..

Thank you. [Operator Instructions] Our first question comes from the line of J.B. Lowe with Citi. Your line is open. Please go ahead..

Hey, good morning, guys. Thanks for taking my question. First, just wanted to clarify your comments on 2Q results that you expect to be flattish with international up.

I guess, how much would you expect domestic top line to be down in Q1 and Q2?.

Yes. I think we’re getting granular there. I think the trend that we’re seeing is up in international, up in consumables, offset as we work off the backlog we have in capital equipment.

And I think probably best at this point to leave it at that from a qualitative standpoint, I think the 20% growth in international, I’m sure that we’ll continue quite at that rate as the numbers get bigger, but the directions – the directional increase is one we’re confident in..

Okay, fair enough.

And how much of your completion segment, when you say as capital equipment versus consumable revenue at this point?.

It’s very highly rated towards consumable and sustaining spending with the coil tubing streams, the wireline cable and the consumable sustaining spending in completions at this point very high percentage to sustaining spending OpEx kinds of things. We are selling power ends, but they would be more replacement units for ones that are wearing out..

Okay, perfect. And then last one for me just on free cash flow. Great start to the year with $14 million.

What do you think you guys can get to on an annualized run rate in the back half of the year as your free cash flow kind of improves from here?.

Yes. I think we’ll get at an annualized run rate to that $100 million run rate. And I think we’re on track to show very strong cash flow, which we’re going to be using to reduce our net debt and strengthen our balance sheet..

All right, great. Thanks so much guys..

Thanks..

Thank you. And our next question comes from the line of Sean Meakim with JPMorgan. Your line is open. Please go ahead..

Thank you. Hey, good morning..

Hi, Sean..

So Cris, congrats on a great start here in terms of some of the numbers we see in the turnaround. As you’re towards that improve in free cash flow number sequentially, can you maybe just help us understand a bit the components that drive that progression.

So in other words, how much would you characterize comes from activity change, backlog throughput versus working capital release, DSOs versus inventory liquidation. Just trying to get a better sense of how much would you characterize within your control versus other factors that are outside your control that factor into that expectation..

Sure, Sean. The biggest contributor is going to be cash flow from operations. But we’ve got the advantage to here of being able to – and I think for quite some time release cash from working capital. We have excess inventory that we can work down and I think we’ve got the programs in place to do that.

And so I think those are going to be the two big drivers, cash flow from operations, converting EBITDA to cash, and then working down the inventory balance. And I think that’s not just a onetime thing, but that’s going to be a continuing source of cash for quite a few quarters here.

Pablo?.

Yes. Sean, you asked about progression throughout the year. Q1 was a little bit slower versus our run rate with the cash severance cost that Cris mentioned. And also, the momentum that takes some time to build on the inventory reductions. Second quarter, we expect similar results on free cash flow.

We do have our interest payment there, that’s $12.5 million semi-annual payment on the bonds. But then, we expect to continue to be able to reduce the inventory and turn it into cash. So building more towards the second half of the year..

We’ll have a bit more contribution, I think from the inventory turning the cash in the second quarter than we did in Q1 and of course not have the severance payments..

Okay. Thank you for all that feedback, that makes a lot of sense. You mentioned the PVF Distributors, another large valves manufacturer highlighted that they had really strong results in the first quarter in advance of that typically strong construction season in 2Q, 3Q.

Could you give us maybe a sense of your outlook for valves, beyond the first quarter? Can we sustain that type of level of sales and how we think about the international piece, Middle East being a key component there. A little more granularity on the valves outlook, I think would be appreciated.

It’s maybe a smaller piece, but it’s a nice part of the portfolio..

Sure, Sean. This is Lyle. Let me try to speak to that a bit.

We did see – in the fourth quarter we mentioned, and also even into the first quarter, some slowdown from our PVF Distributors who are also working to drive down their working capital and doing that by either differing receipt of some product that they’ve already ordered or before in placing some new orders.

I think that is a little more aim that MRO and kind of the normal flow through product, they’ll work those inventories down in a quarter or two. And we’ll be back to a normal normalized level.

I think what drives the valves business for us is continued spending on midstream and downstream infrastructure build out, which is both a North American phenomenon and outside of North America in the Middle East.

So those projects continue to move forward and we feel very good about prospects to win market share with those projects specifically and continue to grow that over the next few quarters..

That’s really helpful, Lyle. I appreciate that. Thanks a lot..

Sure..

Thank you. And our next question comes from the line of Greg Leary with Tudor, Pickering. Your line is open. Please go ahead..

Swing and a miss on the name. Good morning, guys. I guess with the consumables picking up in capital equipment, it may be dragging a little bit.

Could you just remind us, and I realize you don’t disclose it, but just kind of qualitatively or however you can quantitatively talk about the delta and margins between consumable type products versus capital equipment. And I realized that will depend on the individual product.

But just generally, I think historically we’ve thought consumables is carrying higher margins than capital equipment.

But how would you guys frame that today given the changed mix of business versus say, 2013 or 2014 timeframe?.

George, it’s Pablo. Yes, I think you’re correct. Generally our consumable products carry a bit better margins, really it’s sort of into the details by product line. But in general, I think you can assume that..

I think there’s another feature there as well. When you’re bidding for – capital equipment for a big new build program or a new fleet, and it’s a package that’s going out to bid to several potential suppliers, there’s obviously going to be a competitive nature to that.

On the sustaining and maintenance spend often if the situation, okay, I need it now, who’s got it? And it’s more about who has the right stuff at the right time and pricing is not the key consideration.

So I think there is that element as well George, which helps the margins on the consumable and sustaining part where availability and responsiveness are high priority items..

Okay, great. That’s super helpful color. And then on the multi-lift side of the equation, artificial lift businesses, the Cannon Protectors and the Phase Regulator and all that stuff, can just speak to the growth rate you’ve seen there.

I think that’s probably one of the better acquisitions alongside with mine and the rest of global tubing that you guys have done in the last few years. And just keeping our ear to the ground. It seems like those products have continued to see a strong growth rate, but we obviously don’t get that data from you all.

So can you just talk about that business and then the outlook for artificial lift oriented products for the remainder of the year or maybe just Q2 to the extent you have any visibility there..

Sure, George, it’s Lyle. You’re right, we’re really excited about our artificial lift portfolio with protection equipment that we have centered around ESP completions. Those have done really well for us. Taking market share in North America and the Permian basin and have grown dramatically over the last year.

We expect to see continued growth as we branch out into other geographies as well, both in the U.S. and also outside of the U.S. and international markets. So we’ve got some very differentiated technology there that’s uptaking well with customers and making traction with some of the bigger customers as well.

So we’re seeing some good progress with that product line and look forward to that continued growth..

An example of why we’re making the headway we are from a share standpoint, as you know, ESPs are being put in the wells often right from the start of production when there’s still quite a bit thinner than the well, right from the – from a stimulation from the frac job.

And our equipment, our SandGuard as the name implies, protects the ESP from the sand in the well, particularly when the pump turns on and off. And sand an ESP don’t get along well. So it’s a valuable addition to the operators that this – our equipment be added to the stream there.

And then we have other ancillary products that go along with the ESP where we can put together a nice package for our ESP supply partners for the benefit of the operators.

And as Lyle said, as a result, we’re gaining some good share there and we’ve got some – I think, proprietary nature to our technology, which is helpful from a margin standpoint as well..

George, just to answer your question on trends. We did see a little pause in the fourth quarter, just as completions activity count took a pause, but we saw a rebound and demand for those hard to artificial lift products in the first quarter and have good continued momentum as Lyle said from market penetration, really adding customers..

Okay, great. That’s very helpful color. Thanks for that all three of you guys. And then just one more if I could. The global tubing business, obviously a leading franchise, but the core line pipe is an intriguing opportunity. It sounds like the market opportunity there is, maybe growing versus how it was initially envisioned.

The Middle East order is certainly very nice to see.

I wonder if you could just talk about, as you guys look at that market, what the longer-term market opportunity is on the core line pipe size and maybe relative to the legacy downhole business just how you guys would size that?.

Yes. George, on the U.S. land side, using coil tubing as line pipe is particularly effective for the growing amount of gas lift that’s going on and in a number of basins.

So that’s a good application for – really an alternative application for our coil tubing and with the additional coding technology that our team has developed, puts us in a good stead for that business. Now in addition, what we’ve developed more recently too is, offshore applications for line pipe per flow lines.

And that’s what we’re seeing more in the international side. So, really it’s a play that’s helping up international and offshore as well as the growing share that the gas lift is getting in U.S. landmark..

Thanks for the color Cris, Lyle and Pablo..

Sure. Very good..

Thank you. And our next question comes from the line of John Watson with Simmons. Your line is open. Please go ahead..

Hi. Good morning..

Hi John..

On the international offshore coil project that was announced in the release, were all of the revenues from that project realized in the first quarter or should we expect a benefit in Q2 as well?.

John, it’s Pablo. So we had announced a project for an international market that we delivered in the first quarter, all of that was delivered and recognized in the first quarter. But we do have another project behind that for – again, the different international market.

So I think we are starting to see some traction with that product as Cris was discussing..

Okay. Okay, great. So that sub segment we could see continue to grow from Q1 levels..

The project in the first quarter was pretty sizable. So I think it is growing, if it going to grow Q1 to Q2, hard to say. But, I think it’s growing over the next few quarters..

Yes. We’re seeing more applications for that technology. We’ve got three of them now..

And the new project is for Q3 delivery as well. The one that was in the press release..

Okay, perfect. That’s very helpful. Thanks, Pablo.

And in terms of the expected international growth into Q2 and moving ahead, can you give us some color which segments you think we should be factoring in most heavily for international growth?.

Sure. We’ve got obviously very good exposure to international in the subsea business where we are starting to see some ROV demand. In drilling and downhole, I would say we have good international exposure, very good global brand recognition there.

Particularly casing, it’s a mining hardware, we’re seeing a bit more traction there in international markets..

Yes, as Lyle mentioned. We’ve got each of the three large service companies, top 10 customer list. And, as you’ve heard their international revenues are growing and I can tell you from my experience in order to do that, they need to gear up, right.

And so, we’re seeing some good sales internationally to the big service companies and our downhole business in particular is a beneficiary there as well as our coil tubing business..

Okay, great. Thank you. And then lastly, Lyle mentioned the latch system and I completely agree, I think growth for that type of technology is coming and more market share for this type of systems.

Can you give us some color on what separates Forum system from some of the competing solutions out in the market today?.

Sure. There’s really a few market – few systems that are out in the market and just for broader color, this is the tool that’s used with zipper frac operations, have big safety benefits to keep people out of the line of fire and a way in order to be able to use those tools remotely for intervening in the well during hydraulic fracturing operations.

I think some of the key things that differentiate our tool or size, so smaller footprint and easier to use by our customers, very low maintenance on our product and what maintenance there is very beautiful parable. So for redressing the tool when that’s necessary, it can be done in the field.

And then finally added some interesting features from a remote operability and connectivity for our customers from a technology side as well. So making good penetration, last year had good penetration with a 10000 PSI version and then recently started rolling out or 15000 PSI version to customers for higher pressure wells..

Okay, perfect. Thanks for that Lyle. Thanks guys. I’ll turn it back..

Thanks..

Thank you. And our next question comes from the line of Chase Mulvehill with Bank of America. Your line is open. Please go ahead..

Hey, good Morning..

Hi, Chase..

I guess the first thing I just wanted to hit on – good morning, Cris. Just real quickly on inventory. If we think about kind of working inventories down, could you maybe talk about, which segments or maybe which businesses you feel like you have too much inventory and you kind of need to think about working that down..

Sure, Chase, Lyle here. When we look at our overall inventory, right, our long term goal is to get above three turns on inventory. We’re still hovering around 1.7 turns. So it gives an order of magnitude of the amount of inventory that we could pull out of our system.

And I’d say that some of the bigger opportunities that we have are – for that reduction, we could see that coming out of our Drilling & Downhole segment, primarily on the drilling side, where that business was much larger in the past. And while it’s recovered some, it hasn’t recovered to that level.

And I think we could also see some more products to that coming out of both our valves business and our stimulation business. But I think the general comment is that, it’s more of a general field that we’d see it come on all of our businesses. No one place that’s really out of line with what we’re working on there..

Yes, I think that’s the important point. One shouldn’t thinks that it’s all one type of product or one product area. When we went through this last quarter with the sharp change in direction that occurred during 2018 from an expected big recovery to – again, not really happening.

We at Forum had ended up with inventory in anticipation of that recovery continuing in a number of businesses that as we now are managing for the current business environment. We feel that we can work down and operate the business much more efficiently from a working capital standpoint. So it’s a focus on working capital management across the company.

That’s going to allow us to enhance our cash flow in the near term as we see the recovery in EBITDA and EBITDA over time becoming an even bigger contributor to our cash generation..

Right.

So what’s changing about, I know you’ve got to liquidate some inventories, but when we think about the medium to longer term and how you manage inventory? What’s going to be done different to better manage inventory as we go forward?.

Great question. Our teams working and has been working a lot, Chase, on our planning programs. And that is really bearing fruit for us.

And by planning, what I’m talking about is really forward-looking at what we can see from a customer demand perspective, planning on how we work with our vendors on placing the right inventory in the right place, and planning on how we execute in our shops. So it’s a broad-based comment when we say planning.

So what that’s allowing us to do is focusing on making sure we have the availability of product where we needed. So in some cases we’re increasing inventories, where our inventories are maybe lighter than they need to be for the current environment. But generally, we’ve been able to pull those down.

And I think that’s the big change from a planning perspective. And as Cris mentioned, is the drive for us working for the current market environment.

So we’re not looking ahead and saying, hey, we’re going to grow this business a lot and therefore take big inventory bets, like we did last year, but driving more towards the current environment looked like and ensuring that our supply chain can respond quickly, so that if there is an uptake or a downturn, we can adjust..

Maybe few other tangible examples, first, shortening our logistics chain and removing some distribution centers that we had. So we’re not double handling with our tier was much and having inventory in couple of different places.

And then secondly, really working with our suppliers so that more of our raw material, they hold for us until we need it, and last, it goes on our books until we need it..

Okay. All right. That’s helpful. And just thinking about the frac pump market, there seems to be a kind of backlog, potentially of kind of replaced pumps that need to be ordered.

What’s your outlook for frac pump orders in 2019 and maybe have you – how many 3,000 horsepower pumps have you actually sold so far?.

Well, I think what we’re seeing and hearing from the pressure pumping customers, our customers is that the sustaining spend is high for operating more of this equipment at 24/7, and zipper fracs and lot more up time on the pumps per day, per week, per month, and more sustaining spending, right.

And so that is the overall trends that we’re talking about. A lot of this equipment is out there really wasn’t originally build or expected to be run as hard and as much as it’s expected to be run now.

So yes, there is a movement in general to the newer generation of equipment, the more robust and longer last thing, a newer generation of power ends both 2,500 and 3,000 horsepower and our monoline on our frac trailers and some of our other equipment. Other parts of the question, Lyle..

So on the 3,000 horsepower, I think – we’re not seeing a lot of new fleet deployments, but as people at this point in time, as we were before, we’ve sold quite a few 3,000 horsepower power ends over the past few years. For competitive reasons, I don’t want to get into exact number.

And I think we will in the future as folks convert over, and I think there’s the potential for even larger power ends as well as we look to different prime movers on the equipment, et cetera. But I think where we are at the moment, where we’re sustaining the existing fleet, we would be replacing 2510 with a 2510 for instance..

What’s the limiting factor to how much brake horsepower that we can get on a pump?.

Well, it’s the overall weight and configuration of the trailer, right? So you’ve got the engine, you’ve got the transmission, there’s a certain amount on the trailer that is left for the pump and mainly, you’re talking about a rebuild of the system. If you want to go with a bigger, heavier pump that has a different footprint.

So that’s why, I say, as we think about converting over to a new fleet with a different configuration, you would have a different footprint for your pump and how the whole system works together.

Does that make sense?.

Yes, yes, make sense. All right, I’ll turn it back over. Appreciate all the color..

Thank you. And our next question comes from the line of Connor Lynagh with Morgan Stanley. Your line is open. Please go ahead..

That’s dead on by the way. Good morning, guys..

All right, Michelle, Hi, Connor..

Yes, good morning. So I just wanted to ask, obviously you guys are making some pretty big strides in the organizational streamlining.

Can you help us think through just how the EBITDA benefit phases in through the year? Just how long did the overall processes going to take care?.

It’s Lyle. As everyone I think is saying this quarter visibility is not great. Particularly, as we’re in an environment where it’s more consumable products and shorter lead times not building out a backlog.

But our expectations for the quarter and the guidance that we’ve given you for the year that will be up year-over-year is based on what we believe we can achieve with the market share gains, with our cost efficiencies and with international growth coming in that gives us a better confidence of our ability to achieve that objective..

Understood. So I take that you mean, you’re basically not assuming much market improvement in your guidance. And I guess if I could hone in on the cost efficiency side of it. If you’re doing better year-over-year, obviously, you’re accelerating to your end.

So how much of that is related to the cost efficiency side of things?.

Yes, go ahead, Pablo..

Yes. Hey, Connor. So we have taken several steps early in the year. I think a lot of that you saw reflected in the improved margins in every segment in the first quarter and overall for the company, certainly. More will come kind of throughout the year, like for example, the corporate facility closure that we’ve mentioned in the past.

So as Cris said that is built into our guidance and does help us in a bit more flat market, get through higher levels of EBITDA. I’d say, on the SG&A side, we’ve taken out a significant amount in that – and kind of that heavy lifting was done. It’s hard to see it on an apples-to-apples basis.

But if we were to put the fourth quarter on apples-to-apples basis, so adding back the accrual releases that we have for management incentive plan and other accrual reductions in the fourth quarter, when you annualize the impact, it’s about $20 million of SG&A reduction relative to the first quarter. And that’s almost 10% reduction.

We’re also highlighting that a bit more with a slide that we have in our investor deck that’s posted on our website that shows SG&A excluding D&A being about 19% in 2018 and we’ve got some near term targets of 17.5% and midterm at 15%..

Got it. That’s helpful.

And so would it be fair to say that the remaining cost side of things is more on the cost of goods in the manufacturing side? Or is there still more to come on the G&A side?.

Yes. We’re continuing to work on our efficiency. One of the big costs that we’re dealing with, of course, is tariffs, and they’re significant for us as a manufacturing company. And it is what it is at the current time..

All right. Thank you. Thanks for the color..

Very good..

Thank you. And our next question comes from the line of Martin Malloy with Johnson Rice. Your line is open. Please go ahead..

Marty? Okay.

Anybody else, Michelle?.

Mr. Malloy, go ahead and try to speak now..

Can you hear me now?.

Yes, sorry..

Okay, sorry about that.

In terms of your guidance with the 2Q being roughly similar to 1Q, was that just with respect to the top line? Or are you referring to EBITDA as well?.

Yes. I think – Marty, this is Pablo. That is overall comment on revenue, EBITDA and free cash flow..

Okay, great.

And then on the subsea side, in terms of your outlook, and you’ve been seeing some potential orders out there, is that more on the – you said on the oil and gas side or the non oil and gas side?.

It’s both actually..

Okay..

We are seeing increasing order for oil and gas finally, but we’re also seeing some nice orders away from that..

So Marty, we had nice – nicer, I guess, backlog going into 2019 about three times what we had going into last year. That was a bit more weighted towards non oil and gas, with the big submarine order that has ultimate delivery in 2020.

But as Cris mentioned, now we’re seeing a good combination of non-oil and gas with oil and gas demand coming back, we announced a couple of ROVs in the fourth quarter and got an additional ROV in the first quarter awfully for our traditional oil and gas season..

Great. Thank you..

Very good. Well, we thank you all for your interest and we look forward to talking in the next conference call in July, if not before. Take care..

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