Patricia Gil - IR Cindy Taylor - President and CEO Lloyd Hajdik - EVP and CFO Chris Cragg - EVP of Operations.

Marshall Adkins - Raymond James Jim Wicklund - Credit Suisse Sean Meakim - JPMorgan Jud Bailey - Wells Fargo Securities Ian Macpherson - Simmons George O'Leary - Tudor, Pickering Holt Marc Bianchi - Cowen & Company Ken Sill - SunTrust Robinson Humphrey.

Welcome to the Oil States International Second Quarter 2018 Earnings Conference Call. My name is Paulette, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note this conference is being recorded.

I will now turn the call over to Patricia Gil, Director of Investor Relations. You may begin..

Thank you, Paula. Good morning and welcome to Oil States' second quarter 2018 earnings conference call.

Our call today will be led by Cindy Taylor, Oil States' President and Chief Executive Officer; Lloyd Hajdik, Oil States' Executive Vice President and Chief Financial Officer; and we are joined by Chris Cragg, Oil States' Executive Vice President of Operations. Before we begin, we would like to caution listeners regarding forward-looking statements.

To the extent that our remarks today contain information other than historical information, please note that we are relying on the Safe Harbor protections afforded by Federal Law.

Any such remarks should be weighed in the context of the many factors that affect our business, including those risks disclosed in our Form 10-K along with other SEC filings. This call is being webcast and can be accessed at Oil States' Web site. A replay of the conference call will be available one-and-a-half hours after the completion of the call.

I will now turn the call over to Cindy..

Thank you, Patricia. Good morning to all of you, and thank you for joining us today to participate in our second quarter 2018 earnings conference call. We delivered second quarter revenues of $286 million, up 67% year-over-year, and quarterly EBITDA of $40 million, up 288% year-over-year.

This vast improvement in our results was due to strong contribution from our two strategic acquisitions completed in the preceding quarter of this year coupled with improved land completions activity in the key shale play region.

We reported positive net income for the first time since the fourth quarter of 2015 with diluted earnings per share totaling $0.05. During the quarter, average WTI prices continued to increase, up 8% sequentially and 41% year-over-year, averaging $68.07 per barrel, which is the highest quarterly average obtained since 2014.

Improvements in commodity prices drove the increase in U.S. rig counts during the second quarter, which have led to robust levels of well completion. In our Well Site Services segment, revenues in our U.S.

land completion services business increased 40% sequentially as completions-related activity was more broad-based and benefited from a full quarter contribution from our recent Falcon Flowback acquisition. Our Downhole Technology segment, which represents the January acquisition of GEODynamics contributed significantly to our results in the quarter.

Results in this segment exceeded the upper-end of our guided range for both revenue and EBITDA margins. In our Offshore Manufactured Product segment, a bright spot was the booking of a significant major project award of boarding production facility content destined for South America.

Our second quarter book-to-bill ratio averaged 1.2 times, resulting in a sequential backlog increase of 6%. Lloyd will take you though more details of our consolidated results and also provide highlights of our financial position. I will follow with more details by segment and provide additional comments on our market outlook..

Thank you, Cindy, and good morning everyone. As Cindy mentioned, our second quarter results included full quarter contributions from our recent acquisitions of GEODynamics and Falcon Flowback. During the second quarter, we generated revenues of $286 million, while reporting net income of $2.7 million, or $0.05 per share.

Our second quarter EBITDA totaled $40.2 million, with an EBITDA margin percentage of 14.1%. During the second quarter, we generated $35 million of free cash flow, which is after CapEx, and used $30 million of our free cash flow to pay down a portion of the outstanding balance under our revolving credit facility.

As of June 30, our net debt leverage ratio was 2.3 times, and our senior secured leverage ratio was 1.2 times, well below the allowable maximum ratios of 4.0 times and 2.25 times respectively. Our total liquidity at the end of the second quarter was approximately $187 million, inclusive of cash on hand of $29 million.

We invested $24 million in capital expenditures during the second quarter, and $38 million in the first-half of 2018. Our current expectation is that full-year CapEx for 2018 should range between $80 million and $90 million. Regarding our common stock share repurchase program, our Board of Directors extended the program for one year, to July 29, 2019.

We have $120.5 million remaining under the repurchase authorization. In terms of our third quarter 2018 consolidated guidance, we expect depreciation and amortization expense to total approximately $31 million.

Regarding depreciation and amortization expense, our purchase price allocations for our acquisitions of GEODynamics and Falcon Flowback are still preliminary. So there could be some adjustment to our go-forward amortization expense for acquired and tangible assets.

Further, we expect net interest expense to total $4.1 million, and corporate expenses are projected to total $13.3 million. For the third quarter and the balance of this year, our estimated income tax expense will primarily be dependant upon the level of pretax income realized compared to the level of nondeductible items in our tax provision.

We expect to report a non-cash income tax provision in the second-half of 2018 of between $6.5 million and $7.5 million. Longer-term, we expect our effective tax rate to trend towards the U.S. corporate tax rate of 21% as our U.S. operations have returned to profitability.

And at this time, I'd like to turn the call back over to Cindy who will take you through the details for each of our business segments..

Thank you, Lloyd. I'll start with our Well Site Services segment. In this segment we generated sequentially improved results with revenues up 25% and EBITDA up 46% quarter-over-quarter. These results reflect a full quarter's revenue contribution from the acquisition of Falcon Flowback coupled with organic growth in our legacy service offerings.

These sequential improvements were driven by 30% increase in the number of completion services jobs performed. Our completion services business benefited from increased activity and well intensity across the active U.S. basins, particularly in the Rockies and Midcon, partially offset by sequentially lower Gulf of Mexico results.

Segment EBITDA margins averaged 15%, and were skewed lower by our land drilling rig results. Our sequential completion services incremental EBITDA margins were 22% after adjusting for a bad debt reserve reported in the first quarter.

Despite the market's focus on pipeline takeaway capacity constraints in the Permian basin, we continue to see consistent activity across the U.S. shale basins. Our broad geographic footprint within our completion services business helped mitigate the potential risk of a slowdown in one particular shale play.

Daily cash margins for our land drilling rigs averaged $1,000 per day in second quarter, compared to $1,900 per day in the first quarter due to temporary delays in our customers' drilling programs leading to gaps between jobs which created labor inefficiencies.

We estimate that third quarter revenues for our Well Site Services segment should increase, and range between $126 million and $135 million with segment EBITDA margins expected to continue to strengthen and average 16% to 17%.

In our Downhole Technologies segment, we have included GEODynamics results of operations from the date of acquisition on January 12, 2018. Results for this segment included a full quarter's contribution and exceeded the upper ends of our guided range with revenues totaling $59 million, segment EBITDA of $16 million, and segment EBITDA margins of 27%.

The majority of the sequential revenue growth was reported within completion products and technology driven by improved market penetration and increased production capacity. Our engineered perforating solutions revenues were tempered somewhat by the timing of our initial field trial for our integrated gun system offering.

Technology advancements and the adoption of modern completion technique are driving strong demand for our downhole technology consumable completion product. Longer lateral links, increased frac stages, and a greater number of perforation clusters are providing customers with improved unconventional well productivity.

For the third quarter, we estimate that revenues for our downhole technology segment will range between $57 million and $63 million with segment EBITDA margin averaging 25% to 27%. Since we closed the Geo transaction in January, we have provided historical EBITDA margin expectations of 25% to 26%.

We are modestly expanding the top end of the range given strong second quarter performance. In our offshore manufacture product segment, we generated revenues of $101 million, segment EBITDA of $18 million, and segment EBITDA margins of 18%.

Our second quarter segment EBITDA margin was benefited by $3.6 million insurance gain related to the settlement of a Hurricane Harvey facility climb partially offset by foreign exchange losses recorded in the segment. Excluding the gain and the foreign exchange losses, our segment EBITDA margin would have been 16% in line with our previous guidance.

The 6% sequential decrease in segment revenues was driven predominantly by lower sales of major project driven products coupled with reduced short cycle product sales likely due to stocking cycles. Order booked totaled a $116 million resulting in a book-to-bill ratio of 1.2 times for the quarter.

During the second quarter of 2018, we received one notable major project award for floating production facility content destined for South America. Backlog increased 6% sequentially and totaled $165 million at June 30.

Conversations with our customers remained constructive and visibility is improving regarding select project sanctions going in for 2019. Demand for our shorter cycle product is expected to remain steady as customers work through their inventories.

Major project revenues are expected to vary quarter-to-quarter and be driven by our standard connector products in the near-term.

Additional project, FIDs and order bookings growth will be needed before we see a noticeable recovery in sales of our major products used in field production infrastructure other than the significant award we received during the second quarter.

Revenues for this segment are expected to range between $90 million and a $100 million during the third quarter of 2018, while segment EBITDA margins are expected to average 15% to 16%. To conclude, the opportunity set for major deep water sanctions is improving after year [technical difficulty] activity.

Bidding and quoting activity for our floating product facility content remains positive. And we continue to expect our overall book-to-bill ratio for the year to exceed one-time. Despite the market's focus on pipeline takeaway capacity constrains in the Permian Basin, we continue to see consistent activity across the U.S.

shale basins with some strengthening expected in our international completion services operations. Our recent acquisitions have augmented our product and service offerings, are performing well and generating strong free cash flow, and position us well to capitalize on growth opportunities both in the U.S. and abroad.

That completes our prepared comments. Paula, would you open the call up for questions and answers at this time please..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Marshall Adkins from Raymond James. Please go ahead..

Good morning, Cindy. Nice job, particularly on the completions side. So I want to start there. Obviously a big improvement, a lot of that was due to Falcon coming onboard.

Can you give us some sense of what that would've been, kind of on a same-store sales basis if you didn't have Falcon? What I'm trying to understand is just how good structurally is the business doing outside of just Falcon in terms of pricing and throughput and stuff like that?.

Well, so I appreciate the question. A couple of comments there, of course, again for the benefit of everybody on the call, we only had one month of Falcon in Q1, we had the full three months there, so two comments there. Of course we're going to get both revenue growth and EBITDA contribution as we guided you to.

And if you'll recall, when we announced that we said that it would be accretive to current margins, but the incrementals are going to change just a bit because the mix will be weighted towards well testing-type margins. So again, all those things are true. We had a few questions hit this morning kind of about the incrementals.

That we have kind of skewed result given the Falcon content sequentially, again one-month versus three-month. But more direct to your question, about two-thirds of the year-over-year revenue increase was driven by the acquired Falcon operations. And so that should give you a more holistic view.

Of course, that tells you that we've have sequential revenue performance to the positive in our base operations as well..

Right. Was any of that pricing? And I know you guys were probably playing a little catch up because your higher-end services, was it that that drove it? Just help me understand what it was that -- sounds like on a same-store sales basis you were up nicely as well. What's driving that….

Yes, we're so broad-based both in our product offering and our geographic coverage that it's kind of hard to pinpoint that. Our revenue per ticket was flat sequentially, and I would just generally say that that's a mix of both activity and pricing.

But it's really hard to specifically quantify that when you have shifting kind of between basins, between customers on your product offering. But I would generally describe the pricing environment as being fairly firm, with a little bit of pricing power where we are today..

Perfect. Last question for me I've got to ask you, you hit a little bit of it in the commentary, but the Permian.

Are you seeing any tangible weakness there? What are your customers saying there? Just give us a sense of where -- what your sales guys are seeing in the market as it stands right now, just in the Permian?.

Right. We kind of spent a lot of time doing an internal analysis on this point simply because we anticipated these type of questions, obviously in light of pipeline takeaway capacity. But we looked also across our total business, all of our business segments from completion services, to drilling, to short-cycle products, and off-shore and GEO.

And I think it first important to kind of say, generally based on our kind of current level of activity and guidance. The Permian represents about 30% of our revenue. So it is very important to us, but we're not also a 100% Permian player, as you know, Marshall. But I think it's important to get that context out there.

I'll just generally say that all the individual customer conversations that I had tell me there's not going to be any type of slowdown in activity, and certainly not a material one at this stage. That is the specific feedback I've gotten from the customers that we are visiting with.

Now, obviously that's kind of today's environment and a point in time. But we're really just not seeing that type of fear in the Permian. And I realize there's a lot of issues out there, particularly around pressure pumpers, but I think, again, you've got two issues there.

One is just trying to anticipate what the customers are going to do, coupled with some expanding capacity. And so, as of today, I'm just going to say I don't think we see a negative impact to our business right now..

Perfect. Thank you..

Thank you, Marshall..

The next question comes from Jim Wicklund from Credit Suisse. Please go ahead..

Good morning, guys. Good quarter, good performance in the stock today regardless of the quarter, so that's what's important..

Thanks, Jim.

And I know on Marshall's question you answered, and it's kind of the elephant in the room, we don't know which companies are going to slow down. But as an industry we got to put the oil somewhere. And so there's this feeling of inevitability.

What can you do, let's say tomorrow three companies call up and say, "Okay, looks like we're cutting our activity by 10%, Cindy. Sorry about that.

We'll pick it up later." What can you do as a company to mitigate the impact of that, should it happen?.

I appreciate that question, but the first comment I would make is we've got fairly strong demand developing -- or improving demand; I better not get too excited here, in some of the other basins. Our equipment is more readily movable. And it's hard to put pen to paper, but my gut instincts tell us that we would mitigate that to a large degree.

Number one, there you would have materially reduced overtime in theory in that environment because so much effort is chasing activity in the Permian, with again about 48% to 50% of the rigs working in the that basin, so overtime goes down. The other thing we're struggling, as everybody is, to hire in-basin labor.

So we're actually hiring out of basins, which means we've got costs to move people in base an house them there. And so there will be some natural cost mitigation in that hypothetical environment that you explained. But I'd just generally say one beauty that we have is we are broad based.

And there is the thought process out there that if the Permian slows some of that capital allocation will go elsewhere. And that I think we're very well-positioned to move people and equipment, and potentially do so at a lower overall cost than having one basin so heavily focused on activity right now, Jim..

Amen.

On people, how many positions do you currently have open that you're trying to fill?.

An untold number, and I'll just give you a little bit of color, frustrating to me, and I won't get this right. I'm looking at Chris, he's in the room. But we hired over 200 personnel in completions services in the quarter, and we lost over 200 personnel either for job abandonment or going for the next higher bid in the basin.

But that kind of shows -- and that you know the basin employees that we have, so that's a fairly substantial number. But I can't put my finger on it, but I can look at the last quarter and just say, as an industry we are struggling mightily for experienced field workers, BOT certified truck drivers, et cetera.

I'm excited now, if you're a highly educated petroleum engineer those jobs are harder to find, but if you're a field worker it's pretty tough..

So that puts a great perspective on it, Cindy. Thanks a lot. Thanks, guys..

Thank you, Jim..

Our next question comes from Sean Meakim from JPMorgan. Please go ahead..

Thank you. Good morning..

Good morning, Sean..

So, Cindy, I was hoping to see if we could get a little bit more of our thoughts on major product awards over the next 12 months. And you highlighted visibility is getting better into next year.

Does this mean maybe you're not expecting much in the way of sizable awards in the back-half? Do we think -- is any of that necessary to hit that above-one times book-to-bill for the year?.

So, a couple of things there, number one, the projects award that we got was welcome because it's good content for us, as you know, when it's our high technology production infrastructure. That is the first major award that we've seen since, I believe, it was fourth quarter 2016, so almost two years. I'll just tell you that's very, very welcome.

There are kind of puts and takes, but overall bidding and quoting activity is definitely improved. A lot of the heightened level of interest, of course, to be honest, known to everybody and favorable, there's activity developing in Brazil, and a little bit in Southeast Asia from different types of activity.

I've heard a few people talk about Gulf of Mexico trending more positive, but that's going to be a 2019 or later event. We just don't see a lot on the production infrastructure side absent some smaller tieback opportunities that are in the market.

As it relates to, of course, the second-half, we expect, Q3 specifically, we expect our book-to-bill to be at least one. And that will be driven by our standard connector orders which we classify those in major projects because they're largely field development multiyear or type orientation. Our bookings were a little slow in Q2.

We see a pickup in Q3 there. In addition our short cycle products, down a little bit. Again, customer stocking, timing, we expect that to pick up. But again, Q3 is not predicated, that book-to-bill of one, which is think is your underlying question, is not predicated on a major project award similar to what we got this quarter.

It's more standard connectors and short cycle. But all of that again is trending a little bit better than what we've seen over the last couple of years..

Thank you for that. That's very helpful. And then on completion services, thinking about your guidance, how should we think about the mix in the back-half with respect to potential slowdown in the Permian. You've noted you haven't seen anything yet.

Does the guidance reflect any discounting of potentially lower activity, but also maybe some pickup in international? Just thinking about the mix, how it's helping formulate your guidance?.

Yes, I think it's a little bit of all the above. We've told you Gulf of Mexico tends to be a little more weighted towards intervention. That'll be -- pop up and down in a given quarter-by-quarter. Second quarter happened to be a little bit down. Third quarter in our forecast is forecast to be up modestly.

It's again within the context of the size of what is going on in the Gulf of Mexico. Middle East appears -- which is kind of the waiting of more of our international completion services activity is trending a bit more favorable at this point in time. And then we do the best we can with U.S. land just in light of customer discussions.

But in totality, of course, we're forecasting revenue growth and margin expansion..

Got it. Okay, great. Thank you..

Thank you, Sean..

Our next question comes from Jud Bailey from Wells Fargo. Please go ahead..

Thanks. Good morning..

Hi, Jud..

Hey, Cindy. A question on downhole technologies; the guidance for margins for next quarter are 25% to 27%. You did 27% this quarter.

I just wanted to get your thoughts on how do we think about kind of margin progression into the next quarter? What could kind of drive margin to step down if it did, is that just being conservative or was there anything this quarter that maybe helped the margins a little more than you had anticipated for the second quarter?.

Yes, I like the question, I will comment on that. I really honestly like to give longer-term guidance than quarter-by-quarter. And when we did the GEO transaction it was predicated on 25% to 26% margins. And I like to keep that for a longer period of time than a quarter.

I finally capitulated given the strength of the second quarter, and move that range -- the top end of the range upper percentage point to 27% because, obviously, we know we can do that. We have -- and I think I talked about it in our prepared comments.

We have certain product lines that are expanding nicely, and we've added some productive capacity to facilitate that. Our engineered perforating solutions have lagged just a little bit as we are field testing our integrated gun solution as well an addressable switch.

All those things are factoring very positively, and we plan to introduce that during the second-half of this year. So at the end of the day, yes, we can continue to expand margins as we increase the productive capacity.

I just never want to set a business up by failure by taking the last quarter's margin or the last month and saying we're going to experience that in perpetuity, but again it's viable the sequential of that performance exceeded top line expectation, margin expectations, I've expanded my range to accommodate for that.

I think you know the key drivers there. Again we have a small international content there, but it's largely weighted towards the U.S. and therefore it will be exposed to Permian activity. And so, that will kind of drive things.

Of course we're waiting through kind of a lot of things as it relates to care situations, but that's for the business continues to exactly what we thought it would when we made the acquisition..

Okay, I appreciate the color. My follow-up is just falling back up a little more on offshore manufactured products. If we kind of just step back and look your on path to be above one book-to-bill like you had anticipated earlier in the year.

Could you kind of give us a sense of how conversations have progressed so far this year? It feels like things are really start to move forward from a project-specific kind of standpoint.

How do you think about 2019? Are you getting more optimistic on '19 in terms of the opportunity for big project towards, maybe walk us through how the year has progressed and what it can mean for perhaps 2019 and thinking more on kind of the big project award side for that business?.

Yes, I would be happy to do that. And again, that's a great question, and if were to just kind of step back at 2018 and look at what we expected versus what we got, again we are in line with that one book-to-bill. If I'm being intellectually honest, I wanted to knock the ball out off the park, and do appreciably better than that.

The reality is the -- whether it's the cancellation or just the deferral was disappointing to ask and to others. And so, that's one factor that we've kind of taken out of our forecast until we can get more color and clarity.

The recent award was certainly in our forecast, and I actually think it might have come a quarter earlier than we thought, in our booking forecasts, and there's other things that I'll call it tweaking in and tweaking out on a timing basis, but it's shifting to the right, it doesn't appear to be materially so.

And again, our overall guidance to you is intact.

I hope to outperform that, but there's been some positive things and some -- specifically that weren't exactly what we wanted, but I go back to fundamental bidding and quoting activity is improving; you almost can't look at a headline these days and not at least get a sense that we are in fact coming off the bottom as a kind of offshore/deepwater industry.

I do want to remind everybody that from date of award to noticeable revenue is that generally about six months for these projects to allow for engineering and material ordering under a percentage of completion that felt like this quarter a few analysts kind of got ahead of us on revenue guidance.

So give us a little time to bill that backlog and convert that to revenues, but the macro trends are more favorable obviously than they had been over the last couple of years, if that addresses your question fully..

Yes, that helps.

And I guess it sounds like I'll add that up your -- it sounds you are more optimistic for '19, that as the year is going on you're getting many more visibility towards incremental opportunities developing despite kind of the fits and starts you kind of experienced this year?.

That is a very fair comment. And we all tried at this point in time really to solidify our outlook for 2019, and we're heavily focused on our major project backlog to do that, simply put, but I'm getting more and more comfortable on the achievability, if you will, of our 2019 estimate..

Okay. Thanks for the color, Cindy. I'll turn it back..

Thanks, Jud..

Our next question comes from Ian Macpherson from Simmons. Please go ahead..

Hey, thanks. Good morning.

I think most of my questions have been answered, but I was wondering on well side, the outlook for Q3, there was a bit of a setback for the drilling results in the second quarter, and just given your rig leads exposure to the Permian and the flattening that's been witnessed there in the broader rig count, can you speak to what your expectations are for the joint fleet margins and contribution as part of your well side guidance for Q3?.

Yes, you bet. We are looking for ground; I'd tell you as little bit disappointed. But what happened we are drilling well -- particularly in the Permian, we were doing generally saltwater disposal wells and support of horizontal type work as well as surface drilling setting kind of what I'll call the tophole before we do the horizontal leg.

And we do that so efficiently and so quickly that if we don't have that next job to move to, if there's any slowdown because of permitting or other issues switching between customers that really reduces our efficiency levels, but we're working obviously to improve that in the third quarter, and there's no reason that we anticipate that we won't be able to have a more solid footing there.

That was just a bit of a blip there, and again as it relates to the overall segment, more driven by the drilling side of the business..

Okay. Thanks, Cindy, that's helpful.

And then I guess I would ask you this is kind of been beaten to a pulp with regard to visibility for customer activity beyond this quarter I suppose, but just given the broader indications of flattening activity in the Permian, how would you compare your fourth quarter visibility today to say, how it looked a year ago, you said no slowdown, but would you factor in a flattening from Q3 to Q4 for broader activity from lower 48 as a reasonable guess at this point?.

Well, Ian, I wish I had long-term commitments in this business; I do not, and so I would say my visibility is about a good as quarter if that long because we are more a callout business. And so I'm going to have to punt that to somebody to get their equipment locked up for multi-quarters. It's not me.

And I would be speculating to answer it any different than I have..

Right, I shall have not taken debate anyway, but thanks for the answers here. I will pass it on..

Thanks, Ian..

Our next question comes from George O'Leary from Tudor, Pickering Holt. Please go ahead..

Good morning, guys..

Hi, George..

On the completion services side, in your prepared remarks I thought it was interesting that you noted an uptick in international activity. I wonder if you could provide just a little more -- I mean I think we all tend to think of that, and it is more U.S.

driven business, so the international growth that you highlighted for the third quarter I think is interesting.

Anymore color there and maybe what regions are driving the growth for the third quarter in that business specifically?.

Well, as I mentioned earlier, most of our international activity is a bit more weighted to the Middle East. And I would say sorry specifically, but I'm going to let Chris to elaborate for you since he runs that business..

Yes, good morning, George. Yes, we expect continued strengthening in international. International has always been a reasonable part of completion services. Second quarter, because of our concentration in Middle East, we got hit with some of the religious holidays. So we think that should continue to kind of stabilize and strengthen from here.

So again, it's been a key part of our business for a long time, and we think it will continue to be a contributor to us going forward..

And you might be add color for everybody on the phone just the revenue contribution from Gulf of Mexico international combined, I think….

Less than 20%….

It's about 20% or so, just for reference….

But it was higher in the past due to the decline on the onshore business, but that begins to recover and stabilize, it's falling back into -- kind of reverting back to what it historically has been, George..

Great, that's very helpful color. And then the downhole tool side, impressive revenue and margins for the quarter.

And I guess, as you guys currently are somewhat capacity-constrained and are outsourcing a portion of that, but looking to increase your own in-house manufacturing capacity, I guess, one, any color on the timing of when the increased capacity may potentially come online? And then, two, what is that due to? Should we assume once those come online, that improves the underlying profitability of the business, or how that all going to play out?.

Well, again, we have been able to -- we have got different product lines there in the segments as you know, and so we have been able to enhance our productive capacity for our kind of completion product side is the engineered perforation solutions where the capacity really won't come on until probably mid-year next year.

But again, we can't -- we have both internally produced product as well as third party produced products. So we tend to be able to flex the latter in the event that we need to. And I think that will sustain us until we get the new capacity on. But that new capacity of course comes on more next year.

And this is the type of business in all of our product line were volume really matters. Meaning our growth margins lend themselves to high incremental. So volume will help us in my view expand our overall margin profile longer term..

Great. Thanks very much Cindy and team..

Thanks..

Our next question comes from Marc Bianchi from Cowen. Please go ahead..

Hi, thank you.

Just following up on George's latter question there; the CapEx has increased -- was the CapEx increase associated with the -- with some expansion here for downhole or is that for something else?.

It's really more for our Chris' business. We came off of -- remember, 2014 with much higher CapEx. Some of that bled into 2015. But we have been at very low levels of maintenance CapEx for that business which of course is growing and performing well. We see -- I would view the large majority of this as expansionary opportunities kind of in two buckets.

Number one, we are constantly trying to advance our own technology and capabilities responsive to what our customers need at the well site both from an efficiency standpoint and a safety standpoint. So they are certain I will call it tweaks to our equipments there and modification that we want to make.

We have also got some inquiries for incremental work. It's not a massive increase in CapEx. But I hope you would take that as a positive in the sense that it is responding to anticipated customer demand. Obviously, the sky falls out everybody worries and we had some slowdown in activity. We can modify those plans rather quickly.

But again it's fairly small increase CapEx. It is completion services focused for the most part if not entirely..

Okay. That's good to hear. I think the recent conversation we had it sounded like you were going to make a more substantial investment in downhole and certainly capacity constrain there. But I think it kind of revolves around some planning for 2019 and what happens at the port meeting.

Could you kind of walk us through perhaps timing of that decision? What sort of magnitude we could be looking at? What are some of the factors you are considering towards making that….

I am not sure if I am understanding your question; there were two parts there, number one, we do have capital expansion plans for our downhole technologies both in the -- on the campus and Millsap, but also in the middle of Nebraska region that is encompassed in our CapEx guidance. And that part is unchanged.

And so, I thought you were addressing the modest increase in our CapEx guidance. And again that's more in completion services not downhole technologies. But you are also correct in saying, yes, we have expansionary capital planned for the downhole technology segment. We just haven't modified that at this stage..

Okay, okay, thanks for that. I was under the impression there was maybe a bigger slot to come maybe over the next 12 months in terms of expansionary capital, but it sounds like maybe that's not the case..

No, it's in our guidance..

Okay, okay. Just a last one from me on well side, the guidance implies a nice pickup in incrementals in the kind of 40% range. Curious what are the puts and takes you are seeing right now that would drive margins here over the next couple of quarters? We are hearing about cost inflation. I know labor is a meaningful component there.

Can you just kind of talk us through what price cost looks like as you see it?.

Well, I had independently calculated the incremental margin. So I am not going to comment on the 40% that you put out there. But there are puts and takes. And I would say the major one is what basin is going to capture the activity and is our labor in basin or are they going to be commuting in and out of basin.

Obviously, product mix is significant, and again, historically kind of flow back in wall testing. It's a bit lower -- good margin but lower margin than our proprietary isolation tools, our extended reach technology. So mix will always play a factor.

And when we give you a quarter's guidance, it is predicated on kind of what's in the books and what we are anticipating that both that regional mix and that product service mix to be. But they can vary widely depending upon that.

And it not be a bad thing just depending on which product line is growing relative to the other, but kind of tagging off my comments to Jim earlier -- Jim Wicklund earlier, basin movement if we could have just broad-based activity, I think our margins would be far more than they are when it's all in a very competitive basin competing for the work that's there..

Okay, great. Thanks Cindy. I'll turn it back..

Thank you..

Our next question comes from Ken Sill from SunTrust Robinson. Please go ahead..

Thank you. I think we have asked enough questions on the Permian. So, I was wondering -- two questions. One you said there was about a six month lag between getting an order in your book and starting to see revenue. And one of my concerns is the optimism for internationals getting better.

But my experience suggests that international takes time to really start accelerating. While 2019 is going to be a better year, do you really expect to see a huge acceleration revenues in 2019 or more backend weighted or is it really more 2020, or do you….

I think for us it's 2019, and realized right now a lot of drivers behind our business are shorter cycle products and what we term our standard connector product content within major products.

But in the near term what we can see a near term accelerates in shorter than the six months I guided you to are on the service side which there is an expectation of improvement there. And our short cycle product as it relates to what we term major product work. I just want to make everybody we sure there is a little more lead time.

Those are typically big projects that have to have -- you have some revenue recognition associated with the engineering. But the larger revenue contribution comes when you receive material and therefore start the manufacture and work on those.

So again, yes, I can see a near term acceleration but it's going to be weighted for the kind of service other products, military and short cycle. But what I am really looking for is that leg up that can come with expanded backlog of major project work..

Okay. And then you guys have obviously done a great job on M&A.

What's the outlook for -- what does your opportunity set look like for further M&A?.

Well, the right thing is we have never been dependent on acquisitions. But we like to do them particularly when they are as good as our Falcon and GEODynamics acquisitions have been. I would say people know we are active. And so a lot of times we get to see the opportunity set that is in the marketplace.

And I would just generally say that it remains robust in terms of things that we get to assess and look at. But we don't have to do anything from here, but we certainly like to look at opportunities that we think can lever us to better results for shareholders long-term, and I would still say there's lots of things to process these days..

Okay, great. Thank you..

Thank you..

[Operator Instructions] And we are showing no further questions at this time. I will now turn the call back to the company for closing remarks..

Okay, thank you Paula. Thanks to all of you for joining us today. I know it's been a very crowded earnings week and we had a lot of people on the call. We appreciate that.

I will just kind of will conclude and say our business is never dull, just when you think the Permian is great, we worry suddenly about takeaway capacity, but we will work through all these things. We really look forward to being with you in the ensuing weeks in our kind of back-half of the year earnings report.

So, good luck with the rest of the calls, and have a great week, great summer, great August..

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