Forum Energy Technologies, Inc. (FET) Q3 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to Q3 2018 Forum Energy Technologies Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today’s conference, Mark Traylor, Vice President of Investor Relations. Please go ahead.

Thank you, Sarah. Good morning and welcome to Forum Energy Technologies third quarter 2018 earnings conference call. With us today to present formal remarks are Prady Iyyanki, our Chief Executive Officer; 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 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 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 Prady Iyyanki, our Chief Executive Officer.

Thanks, Mark. Good morning, everyone. I’m going to start my comments this morning with an overview of our third quarter results and provide our assessment of current and long-term market conditions. Pablo will then share details on the financial performance and liquidity position, and Lyle will discuss a few of our operating initiatives. Forum was in a strong growth trajectory until the third quarter when we were negatively impacted by the slowdown in U.S. completions activity and tariffs. Despite the challenges, our revenue was down just slightly and adjusted EBITDA was up. To summarize our third quarter financial results, orders were $275 million, approximately flat sequentially, excluding the large submarine rescue package order received in the second quarter. Adjusted EBITDA was $29 million, up $2 million sequentially despite a 3% decline in revenue. Our book-to-bill ratio was 103%. Some of the highlights for the third quarter are as follows. We grew our artificial lift product orders – revenue in the quarter. We have created a full artificial lift protection solution including a Multilift SandGuard, Cannon cable protectors and ESP CT products, which are attracting new customers and generating several cross-selling opportunities. These products are also gaining momentum outside North America. Orders in the Production Equipment product line were up 39% as operators begin placing orders for 2019 deliveries, including a sizable order for the Marseilles operator. As the international recovery continues to unfold, our drilling product line bookings were up 11% as we continue to bring orders from the Middle East for land rig equipment. Consistent with a strategy, we expand the completions segment; we acquired Global Heat Transfer subsequent to the quarter. We are really excited about the strategic fit of this acquisition. GHT’s flagship product, the Jumbotron, is an innovative cube-style radiator that substantially reduces customer maintenance expense. And GHT’s radiator is a differentiated product solution due to its smart monitoring, innovative heat exchange filter, and cube configuration which results in an expedited maintenance process. This product is complementary to our existing portfolio of hydraulic fracturing equipment and has a maintenance schedule that is similar to our province. The ability to obtain simultaneous maintenance on these products at one facility should reduce downtime significantly for customers and expand our aftermarket revenue. Being part of Forum will also allow the GHT team to expand its sales beyond the pressure pumping market, as we see significant opportunities with our drilling customers and in other industries. Now with respect to our long-term outlook, Forum’s balanced portfolio of consumables and capital equipments serving global markets across the well cycle positions us nicely to benefit from the long-term industry recovery. Looking ahead, we are making progress with each of our growth drivers and will have impact in 2019. These growth drivers are the international and offshore recovery; completions service intensity; the global midstream and downstream build-out; new product development and market share gains. Although our favorable growth drivers remain intact, we are experiencing near-term headwinds from the slowdown in U.S. completions activity and the impact of tariffs. We are taking actions to minimize the impact of the transitory slowdown in U.S. completions activity. Furthermore, we are maintaining the operating capability to respond to the U.S. recovery as 2019 E&P budgets are established and completions activity rebounds. Lyle will address our response to reduce the impact of these near-term headwinds in his remarks. Now let me Pablo to take you through our results and financial position. Pablo?

Thank you, Prady, good morning. Total orders for the company were $275 million, down $36 million or 11% from the second quarter. The decrease was primarily due to the large subsea capital equipment order received last quarter and to a lesser extent a slowdown in U.S. completions activity. The book-to-bill ratio was 103%. Our third quarter revenue was $267 million, down only $7 million or 3% sequentially despite the slowdown in completions activity. Net loss for the quarter was $3 million or $0.03 per diluted share. Results for the quarter included restructuring and other charges totaling $8 million on a pre-tax basis, offset by $1 million of foreign exchange gains. We provided a reconciliation table of these special items in our earnings release for your reference. Our adjusted EBITDA was $29 million or 10.9% of revenue, a sequential improvement of 90 basis points. Our adjusted net income was $0.03 per diluted share, excluding special items. I will now summarize our segment results on a sequential basis. In our Completions segment, orders decreased 5% to $115 million. Segment revenue was $119 million, a decrease of $8 million or 6%. This was due to a slowdown in completions activity partially offset by higher market penetration of our artificial lift products. Adjusted EBITDA margins were 23%, consistent with the prior quarter as the impact of tariffs was offset by higher mix, of high margin downhole products. Production and infrastructure segment orders were $100 million, an increase of 1% on strong orders of well site production equipment, as operators prepare for 2019 development plans. This was partially offset by decline in orders for valves after the product line delivered two consecutive quarters of record orders. Demand for valves in the quarter was somewhat negatively impacted by the recently imposed tariffs. Segment revenue was $95 million, a 8% increase resulting primarily from higher sales of valves as well as surface production equipment. Adjusted EBITDA margins were 8% for segment, an improvement of approximately 80 basis points. In our drilling and subsea segment, orders were $60 million, a 33% decrease due to the large rescue submarine award received last quarter. Orders in our drilling product line increased by 11% as we continue to win international award. The book-to-bill ratio for the segment was a 110%. Segment revenue was $55 million, a decrease of $5 million, or 9%. This was due to the timing of drilling equipment deliveries and lower revenue recognition on subsea projects. Adjusted EBITDA for the segment improved to $1.5 million with positive contribution from both product lines. In October, subsequent to the quarter, we acquired GHT for $52 million in cash and an earn-out under which additional cash consideration will be paid if certain conditions are met in 2019 and 2020. We expect GHT to generate approximately $12 million of EBITDA in 2018. Consistent with U.S. hydraulic fracturing activity, GHT 2018 results will be weighted more towards the first half of the year. I will now discuss some additional details about our results and financial position at the Forum level. Our free cash flow after net capital expenditures in the third quarter was negative $4 million, an improvement of $8 million over the second quarter. Despite the inventory investments made in anticipation of strong U.S. completions activity in the second of this year, we are on track to be free cash flow positive in the fourth quarter and for the second half of the year. Our net capital expenditures in the third quarter were $5 million. We expect our net capital expenditures for the year to be under $25 million. Our balance sheet and financial position remains strong. Our liquidity position at the end of the third quarter before the acquisition of GHT was approximately $246 million, net debt was $440 million and our net-debt-to-total-capitalization ratio was 24%. Our reported diluted share count for the third quarter was a 109 million shares. Since our adjusted net income was positive, our adjusted diluted share count, including the impact of options was a 111 million shares. Interest in depreciation and amortization were $8 million and $19 million respectively in the third quarter. We expect this to remain at similar levels in the fourth quarter. Adjusted corporate expenses were $7 million in the third quarter, a sequential decrease of $2 million due to a reduction of variable compensation expenses. We expect corporate expenses to return to the second quarter level of approximately $9 million in the fourth quarter. We estimate that our effective tax rate in the fourth quarter will be over 25%, since we continue to have unrecognized international tax benefits. 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. Has Prady mentioned, completions, activity reductions and tariffs or headwinds impacting our near term results. We are focused on executing our mitigation plans in these areas and improving on our overall operational execution. First, regarding steel costs, we’re seeing inflation generally including the impact of tariffs. We’re reducing this impact by passing along a portion of the cost to our customers and through ongoing strategic sourcing initiatives. Tariff expenses were approximately $2.5 million in the third quarter, impacting both the completions and P&I segments. Despite this fact, strong execution by our team allowed us to maintain overall gross margins flat with the second quarter. We expect tariff expense to increase by approximately $2 million in the fourth quarter. As a result, we’re expanding our mitigation efforts are working to source some of the impacted materials from nontariff countries. Second, we are reacting prudently to the slowdown and well completion activity. Our supply chain partners are cooperating with us to reduce inbound material and to defer inventory receipts to next year. We are managing our variable costs, are reducing production hours at a few of our manufacturing facilities while maintaining the capability to support our growth in 2019. In addition, we are continuing to optimize our cost structure, which I discussed last quarter. For example, in the third quarter, we completed the consolidation of facilities in the Aberdeen area and will complete other cost reductions this year. We remain committed to achieving our long-term goal of improving EBITDA margins to pre-downturn levels. Finally, we continue to focus on working capital efficiency. Our team actively managed inventory and quickly throttled back incoming material as activity float in the third quarter. As a result, our inventory increased only modestly. We are confident that the continuation of these efforts will yield higher free cash flow this quarter and moving forward. Let me turn the call back over to Prady for closing comments.

Thanks, Lyle. Despite the short-term headwinds we are facing, Forum is well positioned to benefit from the strong long-term energy macro environment, including the international and offshore recovery. Looking past the U.S. completions softness, we expect incremental contribution from the following. First, our completion segment rebounding and exceeding its previous levels. Second, the GHT acquisition. Third, the drilling and subsea segments contribution. Fourth, our tariff mitigation strategy which Lyle has discussed. And finally, the market penetration of new products. For the fourth quarter, we expect EBITDA to be in the range of $21 million to $25 million and to generate positive free cash flow in the fourth quarter and also for the second half of 2018. I’m also confident that we will generate strong free cash flow in 2019. Our team remains focused on the areas that we can control. Operational execution, including tariff mitigation, free cash flow generation, maintaining balance sheet discipline and finally driving our long-term growth. We thank you for your interest. At this point, we’ll open the line for questions. Operator, please take the first question.

Thank you. [Operator Instructions] Our first question comes from the line of George OíLeary with Tudor, Pickering, Holt & Company. Your line is now open. George OíLeary: Good morning, guys.

Good morning, George. George OíLeary: I thought the free cash flow commentary was interesting. I wonder if you guys could just dig in on that a little bit further. As we look out to the fourth quarter, any incremental color you could provide on what bridges the gap and gets us to free cash flow positive for overall back half of 2018 would be helpful. And maybe the magnitude of free cash flow that you think you might be able to generate in the fourth quarter would be helpful.

Yes, sure, George. If you look at all of 2018, George, we have been making sequential improvement quarter after quarter. And in the fourth quarter, I think it was a sequential improvement of $8 million. Again, just to remind that we – the completions business grew 70% last year and 20% in the first half of this year. So we were building working capital not only to support that growth but also we were anticipating a strong second half of 2018. And despite all of those challenges of managing the inventory and pushing out into the next year, in some case cancelling it, we have sequentially made improvement in the third quarter. And more importantly, we will make sequential improvement going into the fourth quarter. And that’s why we’re pretty confident that we will generate free cash flow positive not only in the fourth quarter but also positive – free cash flow positive for second half of 2018. And more importantly, we will generate strong free cash flow going into 2019. And George, I think in the first quarter call we can give some more guidance on the magnitude of that. George OíLeary: Great, that’s helpful. And then maybe as a second question, you have very healthy level of power end orders during the quarter in your completions business. I wonder, any color you could provide on whether that’s going to replacement or new equipment, and what the cycle times are there. So when might we expect the revenues to flow through from those power end orders?

Yes, which I think we continue to do very well on the power ends and continue to gain market share on the power ends. We think we have the absolute best power end in the market. In the third quarter specifically, George, I’d say the split between maintenance and the new fleets was pretty much the same as the third quarter. We did see latter parts of the quarter are more biased towards the maintenance, which is what we would expect in the fourth quarter, but we’ll give you more guidance. There are some customers talking about some new fleets going into next year. We’ll see that materializes or not, but I would expect the split be more biased towards maintenance.

Yes, George, in terms – just to add to that, in terms of when the revenue would come through, generally for the whole segment it’s about one quarter. So most of these orders are relatively short in nature. Book-to-bill ratio for that segment anywhere from 90% to 110% is perfectly normal and healthy as it’s mostly book and ship. George OíLeary: Got it. And then I’ll sneak in one more if I could. On the drilling side, the color on Middle East driving the bookings up 11% quarter-over-quarter is helpful. What are you seeing on the U.S. side for drilling? Is it still just continued upgrades or any rig new builds U.S. onshore yet?

Well, if you look at North America, George, the activity is pretty stable on the North America, more biased towards the consumables in North America. However, we are excited about the international recovery unfolding. If you look at the drilling orders, they were up 11%. And a big part of that was some of the capital equipment orders materializing from Middle East. And also going into the fourth quarter and 2019, we have a pretty robust pipeline of projects in Middle East and Asia, slow to materialize. We’ve been talking about the Kuwait project for some time. But when they do materialize, they come in big chunks. And I think that’s what we should expect going into 2019 is there could be one quarter where we have some big bookings in drilling and also in subsea and another quarter in and out. So it will be chunky up nature. And I think as the international and the offshore continues to recover, we will start seeing a continuous flow of the big projects, but there’ll be chunky of nature.

I’ll just add to Prady’s comments that in the U.S. market, the rig count continues to be pretty healthy and we would expect it to continue to tick up. There are a couple of drilling contractors that have opportunities to upgrade their drilling rigs and add them to the active rig count. And those opportunities would be larger for us than they have been in the past. We haven’t seen a lot of those quite yet, but I think as the market continues to unfold we would see some of those.

Yes. I think last year, George, we saw a big slew of mud pump upgrades and they are pretty much stabilized early part of this year. So what we are seeing now on the upgrade front in North America, if the scope is larger, the content would be up to $2 million or even more in some cases, but the number of rigs being upgraded are smaller, right, compared to what we saw in 2017. But the drilling activity is stable and even in the fourth quarter we expect it to be stable. George OíLeary: Thanks very much for the color, Prady and Pablo.

Thanks, George.

Thank you. Our next question comes from the line of John Watson with Simmons Energy. Your line is now open.

Good morning, guys.

Good morning.

Good morning, John.

I wanted to ask you another question on completions. I agree that we should see a pickup in activity at some point next year. Do you have any view on the timing of that recovery? Are you seeing indications of potential orders for Q1? Are you expecting more of a revenue uptick in Q2 or Q3?

Well, that’s a great question, John. We would expect the recovery to happen probably in two phases. The first phase would be just the 2019 E&P budgets being replenished and the seasonal issues, so the fourth quarter going away, so that’ll create – activity levels are going up. And then the second phase would be the transportation issue in Permian and also in Marseilles, the gas pipelines, and that will drive the second phase of activities are going up in completions. The visibility where that’s going to happen, which month in the year, I don’t think we have that kind of visibility. But for sure once the E&P budgets are established, we would expect to see activity increase in completions.

Understood. Thanks for that, Prady. Speaking to Q4 specifically, the orders in 3Q were solid. Should we expect – could revenues be flat in 4Q or with a holiday slowdown preclude revenues from staying flattish?

It’s also a good question, John. We held back in revenue guidance this quarter primarily due to lack of visibility into the completion slowdown, right. I mean, we just don’t know after the Thanksgiving break how is this going to play out. The anecdotes we are hearing from our customers, which is consistent with what you might have heard from the big service companies is some are talking about extended breaks during the Thanksgiving and December, the budget exhaustion and all that. So the visibility on the completion side for us is not clear once you start going into the mid November on a time period. We do have visibility on the drilling and subsea and the P&I segment. And what we would expect is the drilling activity remains stable and we expect our P&I segment impact to be higher sequentially in Q4 than Q3. But the revenue guidance on completions is difficult to – what could help you guys is just probably we do expect some margin degradation, not sure of the extent. I think there are probably some transitional issues; one is the high margin completions slowdown and the mix which comes with it; and also the tariffs which Lyle talked to you about which are also transitional of nature because we’ve had mitigation strategy on that which Lyle talked to you about. And then the last piece being the corporate costs, which Pablo talked about, which comes back to normal in 4Q. So I hope that helps, John.

That’s super helpful, thank you. And one last one on Global Heat Transfer. Can you help us think about what revenues were in 2018 just for modeling purposes? Or what revenues could be in the realm of?

I’ll let Pablo answer that. Yes, go ahead, Pablo.

Hey, John, just some more color on the acquisition. At this point, we just gave the EBITDA piece which is $12 million. They are significant EBITDA margin. So I would say accretive to Forum’s overall margins today with the $52 million of purchase price, at least the upfront consideration, that’s obviously a pretty attractive multiple. And we’re very excited about the prospects for this acquisition on a go forward basis.

John, just to give you some more color on GHT, what our excitement here is there were 85,000 radiators, which is our legacy product, the horizontal radiators. And they’ll go through an upgrade program, where the cubical radiators will take its place, so the opportunity to retrofit the large installed fleet is ahead of us and that’s one big opportunity for the GHT. The second is I think going into the next year, the new frac fleets that will also contribute. And that has pretty good maintenance cycle of three years and six years and nine years, which will also drive revenue. And that’s all in the frac side. And the second area we’re going to focus as being part of the Forum is with our blooming customers’ visit, another segment where we’re going to penetrate and also on the midstream side and few more industries. So we’re really excited about this acquisition. And the team is dynamic and they’re very energetic and they did a nice job of building good business and we’re going to scale it up.

Well, congrats on the acquisition. I’ll turn it back.

Thank you. Our next question comes from the line of Jacob Lundberg with Credit Suisse. Your line is now open.

Hey, good morning guys. I guess, first question just on the valves factory in our facility in Saudi. What was the contribution in 3Q, and then if we could get just an update on sort of timing, magnitude of the ramp there. And can you remind of the revenue target?

Yes. Jacob, as you know, the operation was active early part of this year. The shop was built and they were open to do business. So starting fourth quarter orders are trickling in, so we had a pretty good order intake mostly on the tactical side and the transactional side, but we did get orders in the third quarter. The approvals are coming through slow, but they’re coming through which we anticipated. So we did get one big approval from one of the petro chemical companies in the third quarter, the Saudi Aramco Approval we have not received yet, but we do expect to get that in the next few months. So we’re going to next year, we also expecting orders in the fourth quarter. So our outlook has not changed. I think what we’ve told the investment community is 50 million of bookings in the third year and this is the first year. So we’re – outlook of impact and we’re making good progress with the approvals and also orders coming through and we were pretty confident we could be offering.

So just to add to Prady, more specifically in the quarter. I think he gave you enough color to conclude there was not a significant contribution yet from Saudi, so that is still ahead of us.

Got it. Thank you. And then if we go back to the acquisition. I was just wondering if we could give a little more color on what – what sort of the product service mix looks like there, if there’s anything you can tell us about kind of unit economics whereas kind of market share and then I know it’s a lot of questions all together, but then what sort of revenue or cost synergies do you think you can squeeze out there?

From the synergies in this case, with this particular acquisition would be to great markets with Forum’s customer base, which is the drilling the customer base and the midstream customers. And I think, so top line synergies are pretty significant for the acquisition. The second is the aftermarket. If I look at the maintenance cycle of a radiator and the maintenance cycle of a power and that pretty much the same. So the opportunity of doing both in the same location, at the same time is a significant downtime and maintenance savings for our customers. And then from an economic standpoint, listen, we don’t give price levels for radiators, but what I could say is – when we do an upgrade of replacing even a horizontal radiator with the GHT radiator, they replace it with a brand new radiator and that’s the upgrade process as the savings for our customers are pretty significant. The price range is little greater than the fluid end and the maintenance cycle is close to a power. Hopefully that helps us publically I didn’t color here.

Yes. So just to add what Prady said, I think this business has had a great success on the new equipment side. So in terms of market share, very high market share of new radiator sales these days. But he mentioned it is a great opportunity to retrofit the installed base of 85,000 radiators that are out there. So the revenue today is more product related, but GHT and Forum overall we have a great opportunity to expand the aftermarket service revenue. And then as Prady mentioned the cost somewhat similar to a fluid end. I think that’s a key and I thing to think about because it is a relatively low cost product, but it is a critical component to protect your engine, which is a very large investment. And then in addition to that, if you’ve got one of these radiators that are cute style, that are easier to clean and easier to service, you’re going to be reducing your maintenance cost. So the value proposition is just fabulous for our customers.

Well, and probably last, I can add some color on the aftermarket too.

Yes. Thanks, Prady. Jacob, when we think about our frac products and space, we’ve got really great products in terms of power ends in terms of our – in terms of our manifold products and we’ve had great success in the market with those. We were building our aftermarket capability there. We have some obviously and we’re able to service our products to fit the GHT and with our team really magnifies our ability to service our customers and it will give us some strong legs from aftermarket perspective going forward. Finally, when you pair up, Prady mentioned the smart radiator and smart diagnostic technology there. That’s another fit with what we’ve been doing on the digital technology side in order to make ourselves in with our customers, help them understand the nature and maintenance requirements of their products and to drive incremental aftermarket revenues for Forum.

Got it. That’s helpful. And if I could sync one more in, you talked about an incremental $2 million cost impacts from the tariffs in 4Q. How would that be kind of allocated between P&I in completions?

Jacob, this is Lyle again. So, I think the key point in thinking about tariffs for us is that we’re not really – we’re not disproportionately disadvantaged versus any of our competitors. So we’re right in the mix there and we’ve got good strategies with a dedicated team working to mitigate those over time. What we’re seeing now is we’re seeing the full effect of the tariffs flowing through the balance sheet into the P&L, and probably and even waiting between those two segments of what we’d see in terms of that incremental impact in the fourth quarter. So seeing that longer term – how that’s exactly going to play out, it’s going to depend on how our mitigation strategies work and how much we’re able to push back and share with our customers and supply chain partners. So far we’ve been able to share about half of the tariff impact between our customers and our vendors. So looking to mitigate that other half of the tariff impact is what we’re working on.

I think mitigation strategy, that includes nonstrategic sourcing which will also help us even if the tariff goes away because we’re going to create some competition for our surface.

Just to address your question more specifically in terms of what segment is being impacted, both segments are impacted, as I mentioned, probably a little more weighted towards the completion side at this time.

Okay. Understood. Super and helpful guys. Appreciate the color. Thank you very much.

Thanks, Jacob.

[Operator Instructions] Our next question comes from the line of Martin Malloy with Johnson Rice. Your line is now open.

Good morning. Could you maybe talk about the tone of the customer conversations that you’re having regarding offshore and in subsea, maybe the outlook for the non oil and gas component of that?

Yes. Great question, Martin as you know, if you look at the last six quarters, Forum is a three cylinder engine completions of P&I and building in subsea. And the contribution from drilling and subsea segment have not been meaningful. And as the international recovery unfolds including the offshore, the Drilling and subsea segment has significant earnings potential ahead of us. And to answer your question now Marty, outside, we are tendering significant projects in Middle East and in Asia, capital projects, on the drilling side and the pipeline for offshore projects, including the jack-up rigs on the drilling side, which can be the first one to recover on the drilling front and on the nonoil and gas is pretty robust. So as mentioned in the last call, we will announce some orders of also in the offshore front in the next three to four months, and some of them are at a matured stage. But we’re very confident that the contribution from Drilling and subsea segment will be meaningful going into 2019. But if I can give you a broader picture than that, Marty, what I would say is a path to Completions’ softness in North America we have five big levers, right? The first one is what you just talked about is the international and offshore recovery will be meaningful for the Drilling & Subsea contribution, but will also contribute in the completion side, because our Global tubing product lines were 30% international, it will help that product line and also to go back to our downhole product line it was about 40% international in 2014. Right? So the international and offshore recovery is important not only for the Drilling & Subsea segment but also for Completions, that’s the first one. The second one is the GHT acquisition, which we just talked about and the incremental contribution from that and we expect GHT to be much stronger in the second half then the first half of 2019. And we expect the completions segment to rebound and exceed his previous levels which will be the third level. And the fourth one is the tariff mitigation strategy, I mean, the best thing could happen is the tariffs move away, even if they don’t we have a pretty solid strategy to mitigate a big part of the 50% which would be not able to pass on to our customers. And then finally, the market penetration of new parts. But there are several new parts in the pipeline and they will contribute meaningfully for us going into 2019.

Okay, great. And then on the subsea side, the non oil and gas opportunities that are out there?

Yes. Marty let me give some color there is. One, of our teams have done a nice job with the downtown to penetrate the nonoil and gas part of the market, I mean just to give you some color. If you look at 2018, I would say, more than 60% of activity is coming from nonoil and gas and will not be in a different going into 2019. And I can safely say, that the subsea business will grow to what extent will be more color in the first quarter going into 2019, but more than 60% of revenue will come from nonoil and gas. And what’s driving that is primarily if you look at the defense budgets are going up in North America with sort of defense customers. And also the defense spend – for East with this China a highway being built is creating some opportunity is one of the big submarine order was an opportunity coming out of that, which we announced in the second quarter. So going into 2019, we will have a pretty good baseline for the nonoil and gas which will now go away. And as the oil and gas comes on top of it, which we do expect to get some orders, both you’re the top of it, So really think good about the subsea business and the offshore recovery, which could be slow, but the nonoil and gas and the slope, tripling up the oil and gas will help the subsea business to contribute meaningfully for us.

Great. Thank you.

Thank you. We have no further questions at this time. I would now like to turn the call back Mark Traylor for any further remarks.

Thank you for joining us this morning. We look forward to speaking with you guys again in the New Year. Sarah, you may end the call. Thank you.