Good morning, ladies and gentlemen, and welcome to the Forum Energy Technologies Third Quarter 2019 Earnings Conference Call. My name is Michelle, and I will be your coordinator for today's call. At this time all participants are in a listen-only mode. And all lines have been place on mute to prevent any background noise.

[Operator Instructions] I will now turn the conference over to Mark Conlon, Director of Investor Relations. Please proceed, sir..

Thank you, Michelle. Good morning and welcome to Forum Energy Technologies Third 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 statement 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 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?.

Thanks, Mark, and good morning, everyone. I believe Forum performed well in the third quarter despite a difficult market.

We have a dedicated team that is working very hard and achieving good results around our three strategic objectives, which are; generating strong free cash flow to reduce net debt, operating and cost efficiency, emphasizing our winning products to improve on our market position. I would like to report on our progress in each of these areas.

On the first objective, I'm pleased to report that we made significant strides in Q3 by reducing our net debt position by $70 million. This was achieved through a combination of free cash flow and the previously announced divestiture.

Our free cash flow in the third quarter was $32 million, that's up $14 million from the second quarter and was generated from operating cash flow and monetization of excess inventory.

This was our fourth consecutive quarter of strong free cash flow during which time we have generated $86 million, representing a best-in-class free cash flow yield of well north of 50%.

We also closed on our previously announced divestiture of our joint venture interest in Ashtead, which we sold for $39 million in cash and in $8.5 million seller note. These efforts allowed us to fully pay down our revolving credit facility by the end of the third quarter.

I expect further net debt reduction in the fourth quarter as we generate strong free cash flow for the fifth consecutive quarter. Year-to-date, we have reduced our net debt by $100 million, and we ended the quarter with $308 million of liquidity.

Regarding the second objective, operating efficiency, we increased our adjusted EBITDA by $4 million sequentially to $22 million despite a difficult market and lower revenue. This improvement was due to increased international sales, cost efficiencies and tariff mitigation. Lyle will talk more about our efficiency initiatives.

Finally, the third pillar of our 2019 strategy that we laid out at the beginning of the year was to drive growth with our winning products. We have seen continued success in growing these products despite a challenging market.

Some examples include our DURACOIL coiled tubing string, which has gained significant traction in the market; our coiled line pipe product where we are seeing increased coiling activity, onshore for gas injection lines and offshore for tiebacks; our EDGE desalter where we are seeing multiple opportunities in the refining space; and lastly our pipe handling equipment for the next generation of drilling rigs for the Middle East market.

I would like to highlight some commonalities in each of these products. They all have significant international or offshore opportunities in addition to U.S. presence. To provide clinical value to our customers and remain in high demand even in an environment where spending remains constrained.

And there are barriers to entry for all of these products, including, protected intellectual property. As we look at the market today, drilling and completion activity is being depressed by cash spending constraints of operators and lackluster oil and gas prices.

There is clearly budget exhaustion taking effect for the remainder of 2019 and as a result, the service companies have further reduced their spending on replacement capital items and consumable products. We expect fourth quarter U.S. land activity to be especially soft, more so than last year with extended frac holidays for example.

Also our service company customers will want to demonstrate their discipline in Q4 by showing more cash flow, less capital spending and lower inventories. All of this will have a direct impact on Forum that we are seeing through reduced orders and lower expected revenue for the fourth quarter.

A way to think about Forum's fourth quarter operating results is that we will have roughly the equivalent of about two months of revenue in many of our U.S. land businesses against three months of fixed costs. As a result, we are now expecting our fourth quarter revenue to be down significantly with EBITDA in the low double digits.

We strongly believe that the underspending on maintenance and replacement equipment is unsustainable and that our customers will need to resume spending on the types of products Forum provides.

Also we believe the announcements you are seeing from service companies about scrapping a portion of their fleets is an admission of the cannibalization that has already taken place. During this period of low demand, our focus will be on cash flow generation and developing and growing market share with our winning products.

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

Pablo?.

Thank you, Cris. Good morning. Our third quarter revenue was $239 million, down $6 million sequentially due to the continued slowdown in U.S. drilling and completions activity, partially offset by higher deliveries of drilling equipment for international markets.

Our adjusted EBITDA for the third quarter was $22 million or 9% of revenue, up $4 million from the second quarter. The improvement in profitability in the third quarter was primarily due to a more profitable sales mix and our continued cost reduction efforts.

I would note that our adjusted EBITDA does not add back the $4 million of non-cash equity-based compensation, but we do subtract out the $3 million of foreign-exchange gains. Net loss for the quarter was $533 million or $44.83 per diluted share.

The recent collapse in our stock price caused a large divergence between the book carrying value of our assets compared to the market value reflected in our stock price. As a result, we paid all of our goodwill and some intangible and other assets and we recorded a pretax non-cash charge of $535 million.

In addition, we had other special items of $3 million for restructuring and other charges and $3 million of foreign-exchange gains. We've provided a reconciliation table of these special items in our earnings release for your reference. Adjusted net income for the third quarter was $0.02 excluding special items.

I will now summarize our segment results on a sequential basis. In our Drilling & Downhole segment, orders were $80 million, a 2% increase. The book-to-bill ratio for the segment was 91%. Segment revenue was $88 million, an increase of $6 or 7% due to higher deliveries of capital equipment for international markets.

It is noteworthy that two-thirds of our drilling product lines' third quarter revenue was for markets outside of the U.S. Adjusted EBITDA for the segment was $11.8 million, or 13% of revenue. This was an improvement of over 430 basis points driven by better sales mix, cost efficiencies and operating leverage.

I would note that our segment EBITDA included the equity earnings of the Ashtead joint venture for only the two months that we owned the business in the quarter. In our Completions segment, orders decreased 9% to $65 million.

Segment revenue was $71 million, a decrease of $11 million due to lower demand for our stimulation products as pressure pumping companies continue to cannibalize their idle fleets and destock their consumables.

In contrast, our coiled tubing and intervention product sales were resilient as we continued to penetrate the market with new products and benefited from international sales. Adjusted EBITDA for the segment was $10.7 million, a $1 million decrease from the second quarter.

A higher mix of high margin coiled tubing and intervention products and cost containment and litigation actions helped us hold EBITDA margins approximately flat. Production segment orders were $55 million, a sequential decrease of 27%.

Orders for both well site production equipment and valves were lower as EMP operators slowed their Completions activity and valve distribution customers continued their destocking strategy, however, we have already received some good orders and letter of intent totaling almost $20 million of process equipment in the fourth quarter.

Segment revenue was $81 million, a 3% decrease due to lower sales of surplus production equipment. Adjusted EBITDA margins were 7% for the segment, essentially flat from the second quarter. I will now discuss details about our results and financial position at the Forum level.

Our free cash flow after net capital expenditures in the second quarter was $32 million, an improvement of $14 million from the second quarter. Our program to reduce excess inventory yielded meaningful results as we decreased our net inventory position by $26 million in the quarter.

We expect this inventory reduction to continue in the fourth quarter and beyond. Also in the third quarter, we closed our previously announced divestiture which generated an additional $39 million of cash proceeds.

As a result, and in combination with our free cash flow, we reduced net debt by $70 million and ended the quarter with cash on the balance sheet, a $300 million undrawn revolver and just our $400 million in unsecured notes due in the fourth quarter of 2021.

Our primary use of free cash flow will continue to be to reduce net debt and improve liquidity. Our net capital expenditures in the third quarter were $3 million. We expect our total capital expenditures for 2019 to be under $17 million. Our reported diluted share count for the third quarter was 110 million shares.

Interest expense in the third quarter was $8 million and we expect it to be slightly lower in the fourth quarter with the lower debt level. Depreciation and amortization was $16 million in the third quarter and we expect it to decrease by approximately $1 million in the fourth quarter as a result of the asset impairment.

Corporate expenses were $6.5 million in the third quarter and will remain at a similar level in the fourth quarter. Our corporate expenses are down about 15% in the first three quarters of 2019 compared to the prior year.

We will continue to have some tax expense despite an overall net loss as we are not recognizing tax benefits in lossmaking jurisdictions, but continue to recognize tax expense for some international jurisdictions with income.

Once we turn profitable in the lossmaking 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. Hello, everyone. Forum's employees continue to make good progress toward achieving our strategic objectives. In light of the challenging market, which Cris described, our teams are executing on the things we control. We are pleased with the $26 million inventory reduction this quarter.

Inventory came down in almost every product line as our reduction initiatives gained traction.

In particular, our Drilling & Downhole segment has made significant strides in reducing work in progress inventory in the past two quarters through further implementation of lean pull systems between the front office and the shop floor in each of our plants.

Despite the softness of the current market, we expect further reductions in inventory in the fourth quarter as we continue to increase efficiency in this area. In this quarter, we also saw our third consecutive sequential reduction in our adjusted SG&A costs. We continue to drive cost efficiency in every aspect of our operations.

As of this point, our SG&A reductions total nearly $25 million on an annualized basis when compared with the fourth quarter of 2018. Based on actions already taken, we expect SG&A to decline again in the fourth quarter. In addition to SG&A reductions, we are managing our direct and indirect costs in our manufacturing facilities.

For the fourth quarter, we have announced a number of facility closures during holiday weeks to better align our costs with temporarily lower activity levels. On the revenue growth front, we are also taking advantage of improving conditions in international and offshore markets.

Our Subsea product line recently won an order to sell a remotely operated vehicle to an Asian customer for non-oil and gas use. Prior orders for offshore defense and renewable market applications are keeping our Subsea operations busy and increasing profitability.

Our Completions segment is also seeing opportunity in Asia, specifically, our intervention products saw strong revenue in the third quarter with shipments of our intervention DOPs for an order received earlier this year. Opportunities continue to grow as this market demands Western technology for unconventional operations.

The Middle East market remains strong with increased inquiries for consumable products and capital equipment. We are seeing steady demand for coiled tubing products for the Middle East, which currently represents 15% of the product lines' revenues.

On the drilling products front, a number of contractors are tendering to build new rigs in the region and our offerings of handling tools and rig capital equipment are well suited to the applications. We have also leveraged our Saudi Arabian operation to capture increased revenue opportunities.

Recently our Downhole product line received Aramco approval for our well-regarded packer stage collar product. Our valves assembly operation received approval from Aramco, and we are establishing service and consumable sales capabilities in the kingdom for our intervention and drilling product lines.

Also on the international front, we are completing a significant order for offshore coiled line pipe, which we expect to ship near the end of this year for the North Sea. Overall, sales outside of North America represent around one quarter of our total revenue.

We expect our share gaining initiatives and the strengthening international market to benefit our results in 2020. Now let me turn the call back over to Cris for closing remarks..

Thanks, Lyle. We are pleased with our third quarter results, but expect the fourth quarter to be particularly challenging. We continue to believe that the underinvestment, deferred maintenance and cannibalization of equipment by our customers is not sustainable, but it is still difficult to determine how long this behavior can continue.

Having said that, Forum's balance portfolio in the international and offshore markets as well as our exposure to non-upstream markets will partially offset the current destocking weakness in the U.S. land market. Our operating efficiency and cost reductions are setting the company up for long-term success.

We will continue to focus on the things we can control to improve our cash flow, which are working capital management and managing our costs at both the cost of goods sold and SG&A levels. We will also continue to focus on our winning products which we can grow even in challenging markets.

Our international revenue as a percent of total revenue currently stands at about 25% compared to only 15% in the prior period. We expect this contribution to increase in the coming quarters as we see a greater percentage of future incremental growth coming from the international and offshore arenas versus the U.S. onshore market.

Thank you for your interest and at this point, we will open the line for questions. Michelle, please take the first question..

[Operator Instructions] Our first question comes from Sean Meakim of JP Morgan. Your line is open..

Hey good morning. Maybe just a start on the international opportunities that we think international spending might decelerate next year from a growth perspective, but you relatively underpenetrated most of your product line so I think you should be able to outkick whatever the market offers.

Can you give us a sense of how you think about topline growth next year? And I think importantly, does the mix shift towards international versus impact gross margins? Or how you think about – how that can impact your initiatives to streamline G&A?.

So some of the drivers of the international growth are our artificial lift portfolio as well as the Drilling & Downhole products that Lyle mentioned. Also some of our Completions products, particularly, in the coiled tubing and coiled line pipe arena.

Some of those are from a mixed standpoint quite favorable, including, the Completion products and the Downhole products and – so accretive from a margin standpoint. We feel like we have the infrastructure we preserve the infrastructure to address these international markets.

We are shifting some resources around to put more focus on the larger Middle East area for instance, but, Sean, no, I don't think that, that will cause us to have to invest in SG&A nor in inventory.

One thing we're also doing is leveraging our presence in Saudi Arabia across multiple product lines, where initially it had more of a focus in just one product line, the valve space. So we think that the Middle East market will be one of the stronger growth areas next year.

In general, when you look across where opportunities are for revenue growth and I think we're putting more chips on that marker..

Thanks for that feedback, Cris. That was very helpful. I was hoping we can also dig in a little more into the acceleration in inventory reductions.

It sounds like from Lyle that the lean initiatives are getting traction in Drilling & Downhole, I'm not sure if Completions are still more of a drag, maybe a little bit more about kind of within segment how things are going and does the pivot to more international opportunities have an impact on how you manage working capital needs? So is there any impact on how DSOs could shift over time? Any select inventory builds that could mitigate some of the progress you're making elsewhere?.

Sure, Sean. This is Lyle. The team is making really good progress overall in inventory reduction. We mentioned that each one of our product lines, almost each one of our product lines saw a reduction this quarter in their inventories and our initiatives are really across the board as far as making reduction.

Highlighted the Drilling & Downhole group as they have made specific emphasis in the recent quarter on leaning out operations to some of their shops and made some really nice progress on work in progress reduction. Don't take that to mean that the other product lines aren't also seeing big reductions.

I think when we look to the international mix, similar to Cris, we're already well-positioned to take advantage of the opportunity there and don't see a significant change in any kind of working capital requirement, probably to the contrary, the ability to continue leveraging the inventory we already have into those markets will be favorable..

And to the extent we have a large ticket capital equipment for international market, for example, in our EDGE desalters, in our refinery business or a large project in the Subsea space, where we will be building up work in process.

We try to match that with cash payments so that from a cash standpoint, although inventory will be going up, we're protected and not cash out of pocket on those big projects..

And in the event in terms of inventory since it's a work in progress, it's a percent of completion type of revenue recognition for those big projects. We do recognize that revenue over time..

Got it. That is very helpful. Thanks a lot..

Thanks..

Our next question comes from James West of Evercore ISI. Your line is open..

Hey, good morning, guys..

Hi, James..

Congratulations on another quarter of a strong free cash flow and more debt reduction here.

I guess the first thing from me, interesting comments from Lyle around the Subsea side of the business, recognizing it's a smaller part of your mix, but are we starting to turn the corner here, I mean, the Subsea equipment hardware manufacturers are selling good growth in orders, rigs are getting contracting and going back to work or do you think we're at a turning point here for your part of the Subsea business?.

We are seeing more bidding activity that has not yet turned into backlog for us. The increased bidding activity is for a combination of different projects, Lyle – James, and some of it for oil and gas and some of it is non-oil and gas.

There are still quite a few ROVs available out there but what we are seeing is for new long-term projects operators would prefer to have new equipment for a five-year project rather than taking on equipment that is already five or seven years old and would be 12 years old at the end of their project. So that is a factor in their mind..

Okay, that’s helpful. And then Cris on this continued cannibalization issue, certainly 4Q, I understand the market's going to be pretty tough, but some of the contract drillers, some of the Completions oriented companies have suggested a budget reset and some movement higher in activity as we pivot into 2020.

Are we at a point where their inventory destock is going to cause a quicker snapback in orders as we go into the early part of the year so they could get back to work if indeed there is some type of at least short-term bounce back..

Historically that is what we have seen. And if we just take pressure pumping as an example. In the past years, we've seen three ups and three downs and when it snaps back from a destocking, it's a very high percentage increase in revenue in the subsequent quarters.

We are not yet seeing that light in the tunnel, but our experience is that when it happens, it happens in a significant way.

And as I said in the prepared remarks, we think their retirement announcements that we're seeing are an admission that this equipment has been cannibalized, isn't competitive and is not economic to put back to work and so that I think will bode well for this transition point when it comes..

Got you. Definitely agree. Thanks Cris..

Thank you..

Our next question comes from George O'Leary of Tudor, Pickering, Holt & Company. Your line is open..

Good morning, Cris. Good morning, Lyle..

Good morning. Hi George..

On the artificial lift side of the equation, that Multilift portfolio, obviously, a lot of opportunity here in North America to continue gaining share, but can you talk up a little bit about the strategy for that business on the international front? And maybe where your attention is focused from a geomarkets perspective as we sit here today?.

Yes, hey George. It’s Pablo. Yes, that acquisition or kind of combination of businesses with a focus on artificial lift has been really good for us. As you pointed out, it has been a story about market penetration. So even in the down market we have continued to add customers on the U.S.

side and are really benefiting from offering a full package of solutions to EMP operators. Now as you pointed out, we do still have room to go in the U.S., the next leg of growth we think can come from international growth, particularly, in the Middle East. It's an area of focus for us.

As we mentioned, we're leveraging our footprint there that we have for other product lines such as Davis-Lynch, such as the local prices in Saudi to drive sales of these new products and we think that they will definitely be a solution that works for that market..

Okay, that’s helpful color, Pablo. And then the international revenues as a percentage of the mix, we are jumping to 25% quarter-on-quarter obviously, an impressive thing to see.

I think we've seen plenty of green shoots for the international and offshore markets in the recent quarters as you can kind of take out your crystal ball or just think strategically, Cris and Pablo and Lyle.

How big you think that international business could get through time over the next five years, could that be 50% of revenue? Is that a good goal? How do you guys think about that just strategically longer term?.

Yes, I don't know that it would get to 50% just given the size of the U.S. market, but a third in the near-term and potentially a bit above that but the U.S.

market is just so big and works the equipment so hard that in a normal environment where we are not under this destocking, that just is going to continue to be I think, a very big part of our business driven by consumable products..

Great, that’s very helpful. I'll sneak one more in. On the – you guys have historically been fairly acquisitive, clearly the focus now is really on delevering and continuing to generate free cash flow, cut cost and pay down debt, but you have sold a business recently.

There are incremental levers you have to pull on the asset or business sale side of the equation and then kind of what does that broader AMD market look like today?.

Yes, George, it's Pablo again.

I think that Subsea rental strong venture divestiture was a bit of a unique situation where we had a partner that really wanted to buy us out and we had just divergent interest in terms of how we wanted to manage the business given that our entire focus is on free cash flow generation and reducing net debt and wanted to run things for cash flow.

So in this kind of market, what we are focused on doing is driving the winning products, investing in those and really deemphasizing the other products, working down the inventory, shifting the SG&A resources, sales folks, engineering folks to those winning products and winning regions and monetizing the other products by turning the inventory into cash over time..

Great, thanks for the color, Pablo and Cris..

Good, thanks..

Our next question comes from J.B. Lowe of Citi. Your line is open..

Hey, good morning, guys..

Hey..

So you guys have done a great job – you hit your annualized $100 million free cash flow target this quarter. You paid down your revolver, continued to liquidate inventory and the stock price is still almost at $1. I guess the next step is debt repayment.

Are there any restrictions on buying your 2021 notes at a discount that are down here near 80?.

Yes, there are some restrictions, but there's some basket available for that, and it – of course, it's one of the options we are considering but really in the context of dealing with the hole maturity..

Okay. My other question was on – you guys are about a year into your – after the acquisition of GHT.

Has there been any progress there on expanding that – sales in that business outside of just the pressure pumping market and into other industries may be?.

Yes, they do serve the non-oil and gas market, but still oil and gas has been the bigger part of their business. It is more capital equipment oriented. It has very large market share, but obviously, there's very little in the way of cap equipment being ordered. I think that does give us great leverage to win.

There needs to be a reinvestment in equipment again, regardless of the type of prime mover, type of engine that's put on the new pressure pumping equipment. You want to make sure that those prime movers, weather turbines or diesel engines or whatever type are well protected and the JumboTron GHT product is the best way to do that.

So we've got a good project there, but it's kind of on the bench at the moment here ready to come into the game..

Understood. Last one for me is, Lyle, I think you mentioned that you guys received approval from Saudi on the valve facility out there, just wondering if you can update on potential customers out there..

Sure, we did in the quarter receive our approval as a manufacturing facility in Saudi from Saudi Aramco, which is a long-awaited approval that sets us up well not only to be able to make sales directly to Aramco, but also as an approved supplier.

Expect to see more pull through whether that's through SABIC, which is in the region and some of the smaller fabricators that build product for Aramco and for SABIC. So the activity level is there and strong and our facility is ready.

In addition to our Aramco approval, we also had passed our API 6D audit in the quarter, so we'll be an API-approved facility here in the near term and so between those two approvals, we feel really good about the position of our facility there and the opportunity to take advantage of the market..

Great, thanks. That’s all for me..

Thanks..

Our next question comes from John Watson of Simmons Energy. Your line is open..

Thank you. Good morning..

Hey, John..

Hey, on the free cash flow front for 4Q, I'm thinking through the puts and takes versus 2Q. EBITDA will be lower, CapEx will be lower and you're making good progress on inventories.

Is it fair to think that 4Q free cash flow could be similar to what we saw in 2Q?.

So let me give you some of the other puts and takes. I think you have those right. There is also the interest payment. It is a semiannual interest payment on the bonds that goes out right at the beginning of October it went out so that is the difference.

But on the working capital front, we – the $26 million inventory reduction in the third quarter I think will help us see that turning into cash in the fourth quarter..

Okay, okay, great. So a little better than 2Q. That's helpful, thank you, Pablo. And then just as a follow up to of one of J.B.'s questions, you're generating great free cash flow, your maturity date is still two years away, can you give us any further color on what type of conversations you're having regarding that maturity.

Just conceptually, I know we're a long way away..

Yes, so clearly we're very focused on that maturity. The good news is that the bonds don't mature until October of 2021, which is in about two years. And we're also fortunate that our capital structure has a lot of flexibility built into it.

As I mentioned before, with an undrawn revolver, we have a lot of liquidity and also with the bonds being unsecured, we've got a lot of secured debt capacity as well.

So we are evaluating all the financing options but the main point is, we've got a little bit of time and options and importantly we'll continue to generate cash and therefore it's unlikely that we'll need to refinance the full amount..

Okay, thank you, Pablo. Lastly, on the production business front, orders were down significantly quarter-over-quarter, but like how you said you've got some LOIs early in the quarter. I was wondering if you could help us put those two to think about Q4 revenues for that business, just a general trajectory..

Sure, John, we can definitely do that. First off, the orders were driven by really two things. First, was a delay in our surface production equipment orders.

E&P operators have exhausted their 2019 budgets and are working to firm up their 2020 plans and so given the uncertainty in the commodity prices deck, many have yet to firm up their plans for next year. What we saw early here in the fourth quarter was a decent amount of orders for the U.S.

market for that and as you recall, our orders in the production equipment space were pretty large and lumpy and so really a timing factor of when those orders came in, but coming into the fourth quarter. So a lot of that big slug of orders is really for 2020 revenue.

So our fourth quarter was set based on orders received in prior quarters and we feel pretty good about that.

The other part of the orders slowdown was in the Valves business, and we had seen some level of destocking of inventory by our distribution customers and we saw that in a much more pronounced way in the third quarter that the underlying activity in the business is primarily mid-stream and downstream is stable and steady and so we think that's a matter of time before the destocking there and inventory reductions run its course and we see order levels pop back to a more order – more consistent with underlying activity..

Okay, great. That’s helpful, Lyle. Thanks guys. I’ll turn it back..

Our next question comes from Daniel Pickering of Pickering Energy Partners. Your line is open..

Good morning, guys. Thanks for taking the question.

Pablo, you talked about an expectation that you wouldn't have to refinance your entire debt majority, trying to think about the next two years, the free cash generation, don't want to get – don't want to make you predict too specifically in the short-term, but that's a $400 million issue now, you've kind of got cash to offset a decent piece of it already.

I mean is your expectation that it will be a $200 million number to refi in 2021, $150 million, I'm just thinking about the next two years of free cash flow.

What do you think the model looks like?.

Dan, that's not too far off from our thinking. However, we wouldn't wait quite that long to address it, but yes, we've hit that $100 million run rate here in the back half of 2019 as was our objective, and we think we can continue to generate strong free cash flow..

So I guess what you're saying is, you think the inventory reductions, the cash generation from operations, et cetera that can continue. So it's $100 million a year on an ongoing basis.

So 2020 ought to be another $100 million given that you are at that run rate now?.

The working capital lever is still significant for us. We are trying to get to 2.5 or 3 inventory turns here over time. So a lot of the inventory is things that we built up for a recovery that didn't happen in 2018. So it's just a matter of moving that over time..

Sure. And I'll count that first one as one question and, Cris you talked about three up and down cycles in the last eight years and each time the – when the business snaps back, it snaps back notably.

What would be the longest in those three time periods on the downside, what would be the longest period of cannibalization and destocking and kind of where are we relative to that historically longest period?.

Yes, we're getting – we're at the long end of that now Dan, this is longer than the others have been..

Yes, so it sounds like it's not Q4, but first half is not a unreasonable expectation or hope?.

That’s right. That is right..

Okay, right. Thank you guys..

Thanks..

Our next question comes from Matt Dushkin of Bank of America. Your line is open..

Hey, guys. Good morning..

Good morning..

Just given the capital discipline you're seeing from your OFS customers, are they passing any pricing pressures down on to you? And if so, can you talk to how much pressure you may be seeing and how you manage that in a likely soft 2020 U.S.

market?.

Yes, I wouldn't say pricing is the biggest issue here. They're buying it when they need it and when they need it, they need it, right? So no, I don't think that we're expecting huge amount of additional pricing pressure.

There probably are some specific products across our offering that are seeing more pressure than others, but, no, it's more of a yes, or no thing, I would say, in terms of buying decisions. Yes, we need to be competitive, we need to be in the market, but no, we're not calling for a huge pricing pressure to impact our results..

That's simple enough. And I guess, shifting gears and looking at the Drilling & Downhole margin out performance this quarter.

Are you able to break out how much of that improvement was product mix versus may be just cost improvements and better absorption?.

Our Drilling & Downhole team has been working and restructuring for a while and so significant amount of cost realignment has been done there by the team. I'd say really, Matt, over the last year. So we've definitely seen uptick in margin from an operating perspective both from the volumes but also from that cost restructuring.

So probably a pretty good combination from both of them..

Okay, thanks guys. I’ll leave it there..

Okay. Well, thank you all very much. We appreciate the good questions. And we'll sign off at this point.

Michelle?.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect..