Welcome to the Oil States International Fourth Quarter Earnings Conference Call. My name is Vanessa, and I will 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 that this conference is being recorded. And I will now turn the call over to Patricia Gil, Investor Relations.

Thank you, Vanessa. And good morning and welcome to Oil States' fourth 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, 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 Form 10-K along with other SEC filings. This call is being webcast and can be accessed at Oil States' website. A replay of the conference call will be available 1.5 hours after the completion of the call and will be available from one month. 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 fourth quarter 2018 earnings conference call. For the fourth quarter, we reported operating results, largely in line with prior guidance provided in connection with our third quarter earnings conference call. In our Well Site Services segment, we exceeded the upper end of our guidance in terms of revenue and we are near the high end of our guided range for reported EBITDA. Further, our Offshore Manufactured Product segment results improved sequentially and exceeded the high end of our guided range led by greater service activity and military product sales. Backlog in our Offshore Manufactured Product segment totaled $179 million at December 31st 2018 and our book-to-bill ratio for both the fourth quarter and full year 2018 was 1.1 times. Partially offsetting these positive results, our Downhole Technology segment was negatively impacted by lower customer demand for our perforating products along with reduced downhole composite product sales. Our fourth quarter results were achieved in spite of the extreme volatility that we witnessed in the fourth quarter with respect to crude oil prices. The WTI spot price peaked at $76.40 per barrel, early in the quarter only to subsequently fall to below $50 per barrel by year-end. While our fourth quarter activity held up reasonably well, the energy industry volatility has created uncertainty early this year, as our customers reassess their 2019 budgets and plans. However, crude oil prices have improved 16% since year-end 2018 indicating a more constructive commodity price environment. Lloyd will take you through additional details of our consolidated results and also provide you with highlights of our financial position. I will follow with more details by segment and provide additional comments on our guidance and market outlook.

Thanks, Cindy. Good morning everyone. During the fourth quarter, we generated revenues of $274 million while reporting a net loss of $14 million or $0.24 per share. Our fourth quarter EBITDA totaled $24 million with an EBITDA margin percentage of 9%. Reported EBITDA was negatively impacted by litigation costs incurred for patent defense totaling $2.4 million, transaction related costs of $0.7 million and $0.8 million of severance and other downsizing charges. As we communicated on the third quarter call, our guidance for the fourth quarter excluded these patent defense litigation costs. We recognized an effective tax rate provision of 5.1% in the fourth quarter bringing the overall annual effective tax rate benefit to 12.1% for the full year. During the fourth quarter, we generated $23 million in cash flow from operations. Our capital expenditures totaled $17 million bringing the full year total to $88 million. Since March 31, 2018 we reduced our outstanding borrowings under our revolving credit facility by $52 million. And as of December 31 our net debt leverage ratio was 2.4 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. Beginning in 2019 our allowable maximum ratio for net debt leverage declined to 3.75 times for the duration of the credit agreement. At December 31, our net debt-to-book capitalization ratio was 18% and our available liquidity position at the end of the fourth quarter was approximately $176 million inclusive of cash on hand, totaling $19 million. In terms of our first quarter 2019 consolidated guidance, we expect depreciation and amortization expense to total approximately $32 million. Further, we expect net interest expense to total $4.8 million and corporate expenses are projected to total $12.7 million. Total Company CapEx for the full year 2019 is expected to decline year-over-year and range between $65 million and $70 million. For the first quarter our estimated income taxes will primarily be dependent upon the level of pre-tax results realized compared to the level of nondeductible items in our tax provision. We expect to report an income tax benefit in the first quarter of 2019 of approximately $1 million. Longer term, we expect our effective tax rate to trend toward the US corporate tax rate of 21% as our US operations return 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.

Thanks, Lloyd. Leading off with our Well Site Services segment, we generated $126 million of revenues, while EBITDA totaled $19 million in the fourth quarter. Activity declines led to a 7% quarter-over-quarter decrease in the number of completion services jobs performed, partially offset by a 4% increase in revenue per completion services job as a result of improved job mix. The revenue decline was concentrated in the Permian Basin and was likely driven by the significant decline in crude oil prices in the fourth quarter along with holiday downtime, partially offset by increased revenues from US Gulf of Mexico projects. Segment EBITDA margins averaged 15% in the fourth quarter compared to 12% reported in the third quarter of 2018. Excluding a prior year charge for FLSA claim settlements in the third quarter, segment EBITDA increased 5% quarter-over-quarter. Utilization in the land drilling business was flat sequentially, averaging 30% in the fourth quarter, while day rates and cash margins improved 10% and 17% sequentially, respectively. In our Downhole Technology segment, we generated revenues of $52 million and EBITDA of $6 million, resulting in an EBITDA margin of 12% reported in the fourth quarter. Segment results were negatively impacted during the quarter by reduced demand for perforating and downhole composite products, increased manufacturing facility cost under absorption due to the lower levels of throughput experienced late in the quarter and the incurrence of $2.4 million of patent defense cost. These legal actions were settled during the fourth quarter and we do not expect these patent defense costs to recur in 2019. We attribute weaker sales in our engineered perforating solutions business to competitors introducing their integrated gun systems to the market ahead of us as we discussed on our third quarter call along with holiday downtime and customer budget uncertainty. We expect…

Yes, of course. We will now begin our question-and-answer session. [Operator instructions] And we have our first question from Marshall Adkins with Raymond James.

Good morning all. Cindy, let me jump right in on the downhole side. Obviously that was the one area where our model missed. You mentioned kind of two issues there. One is that others came to market before you did with the integrated gun and then obviously we had the slowdown in the industry in Q4 that's carrying through to Q1. So could you parse out for us kind of which of those issues is probably more important or at least the bigger driver in Q4 and then kind of give us a little more color on the, I guess, you mentioned Q2 is when do you expect to roll out yours and how you see that playing out?

Hi, Marshall. It's good to hear from you. So, there are a few things going on in the quarter, without a doubt. First and foremost, when we gave guidance in Q3, we excluded legal costs. We just didn't know what that was. I think you got a good picture of what that was. Our fourth quarter was actually kind of progressing pretty normally and I used the comment late in the quarter. And then we just had what I would characterize as kind of a December fall-off. And the problem with that is when your customer activity slows that quickly, you don't really have an ability to respond from an absorption perspective, particularly around the holiday. And so that had a little more negative impact than we would have thought. And I don't want to kind of overblow the integrated gun although it's critical to our success. We're still selling perforating solution products that we think our customers are migrating to a more integrated solution which we are, we had under development. We are beginning field trials. As you do that you're going to find things that you need to tweak a bit and we are in that process and probably will be throughout the first quarter leading into what we, there is no reason for us to expect that we're not going to be successful and get that to market in the second quarter. But it's kind of hard to say one versus the other, but I would really say the falloff in activity, particularly suddenly and kind of late in the quarter, partially holiday, you've got Thanksgiving and Christmas, but I think it's also this overwhelming crude oil prices dropped 40%. And I tell you, it's really a lot of timing because many of our customers had already really finished their budgets and plans and I can say they were, I talked to all of them and it, you can say they are redoing and they're really doing some areal planning end of January just trying to say we don't know what crude prices look like. Don't really know what that late quarter fourth quarter falloff even meant. And I really sense that we're stabilizing, people are beginning to kind of get back to work, but, by the way happy Valentine's Day, everybody, it's mid quarter already and we've lost some traction in January and we're not alone. This is an industry comment, not an Oil States comment. But I'll also tell you all of these things are controllable and we'll be able to kind of recover activity and stabilize our cost structure accordingly now that we've had some time to digest the fairly drastic changes we saw late in the quarter fourth quarter.

Let me, just one quick follow-up on that. I think most of us are looking for a pretty weak first half of this year due to the issues you've already highlighted, and you gave very good guidance on Q1 on that Downhole Technology side. Historically, kind of mid 20% margin, EBITDA margin business. Assuming that we will see a rebound in the back half of the year and everything plays out with your integrated gun, can we get back to the mid 20% by the end of the year or is that a little too aggressive?

Well, I've been very careful in our modeling and you're right and I did make the comment, we've kind of looked at where First Call is, particularly the analysts that are already updating. We're pretty comfortable with the total, the progression through the quarters is a little different. What you always worry about is that, it's all on a hope and a prayer and it's so back-end loaded. That's not really the case for us. In my Completion Services business, we've got a bit of a ramp, obviously from first half to second. I would generally kind of say that's more market-driven, particularly given the slow first quarter that we have. When I look at Offshore Manufactured Product, maybe a little more ramp, but that should be backlog driven in our view. And then in downhole, it's a combination of both market-driven, but also things we need to do internally, particularly product driven. When I'm looking at my progression through the quarters, I'm looking at low 20%s EBITDA margin exit rate, not mid 20%s. I would say, hopefully we could do better than that, but in my internal planning, it's more exit rate of about 21%, 22% EBITDA margin, not 25%.

Very useful. Thank you very much.

Thanks , Marshall.

And we have our next call. And our next question from Stephen Gengaro with Stifel.

Thanks. Good morning.

Good morning, Stephen.

So I guess two things please. If we start with on the other completion services side, how has pricing been within those product lines? Can you give us sort of a sense for kind of where you stand now versus maybe two quarters ago on how you think it plays out?

Well, I mean it's no surprise when you have the volatility we experienced in the fourth quarter we've got customers coming with either standard letters requesting price decreases or direct conversations and we're processing through those. At this point in time, our pricing has been competitive, that really hadn't changed and it's not going to change. I just believe that you have to be a great supplier to your customers, quality people, quality results and be the low cost provider. And I kind of envision fairly stable pricing at this point. We're not collapsing any of the individual product lines, but it is without a doubt, a process that we have to go through and it's a value proposition to the customers that we really work on, I'd say, almost every single day. The trends, the macro trends [indiscernible] And so I'm always want and same part of the stability is driven by the fact that these highly complex completions that we're doing on these multi-well pads does favor our equipment, it favors our higher-end more proprietary equipment. Again just an industry activity slowdown we've seen in the last six weeks, yeah, we experienced some of that. The other thing I would say is the fourth quarter benefited a bit from modestly better Gulf of Mexico contributions that can leverage our margins a little higher and international which feels like it's firming just a little bit will also help lever our overall margins. So when you put all of that in the context, we're not really expecting significant average price degradation or margin degradation in that business with, again, some recovery both in terms of revenue and margin in the back half.

Great, that's great color. And my other question was around Offshore Manufactured Product. What would be your guess on '19 book-to-bill? I mean it sounds like you're pretty optimistic, but…

Well, and a lot of that kind of, we just, we talk every week and the bidding, quoting activity and even more follow up toward what we believe to be are letters of intent or contracts are just more favorable than they have been. And I was prepared, I actually very much appreciate the question, Stephen, but we're prepared to kind of give guidance. This is for a year, the quarter-by-quarter varies a lot. But our guidance is for a book-to-bill of 1.3 to 1.5 times for the full year 2019, which on the backup, roughly 1 to 1.1 for the last two years. Obviously feels better. This is not directly up into the right, but these projects alone will help us improve our margins.

Very good. Thank you.

Thanks, Stephen.

And we have our next question from Sean Meakim with JP Morgan.

Thanks. Morning.

Good morning, Sean.

Cindy, so, I know the move to higher well pads supports the use of that wellhead isolation tool, but just curious how demand is there year-to-date relative to prior expectations. So in other words as budgets, get a little bit tighter and that budget dollars may go as far, the risk of any negative mix shift toward cheaper alternatives, just curious how you are seeing that in that product line?

I will answer that in the best way that I can and I would not characterize it as a mix shift to cheaper alternatives. I think what we've seen is while everybody is kind of reassessing budgets and plans, they are just kind of slow flying some of the completions. And Chris has kind of told me that to some degree we've seen some of the easier type completions rather than more of the complex, i.e. the smaller pad type activity and I think that's just a reaction to, gee, I don't have a budget and a plan yet. I need to kind of, I don't want to call it slow playing my spending, but to some degree I think that's what we've seen in the last six weeks or so. And so that's not really a mix shift. That's just more, gee, I got to control my spending till I get better visibility of what my leadership team and my management team and boards are approving in terms of spending. And the other thing, I've heard from customers is they've gotten the message from the street that they have to generate free cash flow and the other thing, I mean every quarter becomes a higher ramp in terms of producing incremental production growth and to some degree they're trying to take out some of the lumpiness and plan more of a stable program that leads to more of a steady ramp in production than the ups and down that some of the companies have seen because of the timing of these large pads coming on production. So there is kind of multitude of things, but I don't think it's a shift away from higher technology products and services.

That's very helpful. I appreciate that feedback, it makes lot of sense. On the offshore side, could you maybe give us a little more detail on how you see things specifically in Brazil? We've gotten some somewhat conflicting data points between the drillers and some of the ETC folks. Just want to hear your take on how you see Brazil in 2019?

Well, we believe long-term that's going to be one of the greatest areas and investment. We all know it's been slow. I will tell you and our guided book to bill ratio, it is not heavily weighted to Brazil, although we're seeing a slow increase and ramp in activity. And so I guess what I'm going to say if Brazil accelerates and that should probably be upside for us. So we're planning on more of a, I'll call it a service support, small repair type ramp in activity, inspection, repair, service out of our Macae facility as opposed to a lot of large project FIDs around subsea Products. I'd love the think, I guess some upside from there. But it's really not embedded in our backlog and bookings guidance

Makes sense. Thanks, Cindy.

Thank you, Sean.

We have our next question from George O'Leary with Tudor, Pickering, Holt.

Good morning, George.

Hi, George. Perhaps you are muted.

Sorry about that, guys. I was muted. Quick question just on the CapEx, good to see CapEx down year-over-year and your commentary around continued free cash flow generation, which ultimately have done well over the last five years plus. Could you break down world the spending and kind of where you guys are spending? I know there is, you guys are expanding a facility [indiscernible] on a perforating business. But just kind of break down that CapEx would be really helpful.

Yes. I'm letting Lloyd kind of find that and I'll just generalize that as it relates to well site services, we're really thinking more about maintenance CapEx, but of course that is predicated on the consensus outlook that suggests spending might be down in kind of the 5% to 7% range. And so, again, think about maintenance CapEx in that business. As it relates to geodynamics just recall that we had some one-time acquisitions of property and facilities embedded in our acquisition economics that we completed in 2018 that does not need to repeat in 2019. We do still have some carryover expansionary spending associated with our new charge manufacturing building and related facilities. And so there'll be both maintenance CapEx but also expansionary CapEx in our Downhole Technology segment and then in our offshore product these are oftentimes customer-specific projects, they are certainly a little bit of maintenance and a little bit of expansionary, but that's the general overview of what to expect and I'll let Lloyd, give you a little more color on the detailed breakdown by business.

Yeah, absolutely. George we're guiding to $65 million to $70 million for 2019. Probably it breaks down to about two-thirds, one-third maintenance versus growth and the Offshore Manufactured Product is around $17 million, $18 million and that's largely maintenance, same can be said on geo. There are some carryover CapEx there. We are guiding to about $15 million. And in Completion Services it's about two-thirds, one-third maintenance versus growth of around $30 million, maybe a little bit drilling and a slight amount in our corporate group. So that's how you get to the $65 million to $70 million. But let's say two-thirds, one-third maintenance versus growth.

Okay. That's super helpful. Okay. And then Cindy following of your commentary around the book to bill on Offshore Manufactured Product, obviously a notable uptick versus the last two years. Do you think geographically it seems like this activity will be up year-on-year then a [indiscernible] in Mexico even in terms of getting some contracts, Australia as well. What geographies do you think drive the orders that gets you to that 1.3, 1.5 times in 2018?

Yeah, I love that fact that you name all those potential geographies because that's not in my guidance. But for us, we have a mix between kind of subsea, production, infrastructure, production products and also military as it relates to the offshore production products, we're really looking at South China Sea and Guiana

Great. That's very helpful guys. I'll turn it back over. Thanks, Cindy.

Thank you.

And thank you. We have our next question from Ian Macpherson with Simmons.

Thanks. Good morning everyone.

Hi, Ian

Hi. Cindy, I wanted to follow up on the field trials for your integrated gun. If you could maybe talk a little bit more about where you are technically with that? What remains to be accomplished before you are fully commercially deployed in Q2 and sort of how you risk the completion time frame for that from here forward?

Well, I will be happy to do that. And again, I want to point out that the integrated gun system is more about well site delivery system. We are already selling the components and field trialing the components that will go into the integrated guns. So what we are really trying to do is make sure that all the components work in unison with each other successfully and so it's just going to take us doing repeated field trials to ensure, a high degree of accuracy in those field trials before we want to conclusively go ahead and assemble all the pieces together and put it out on the wealth site. So I view this more as a process and timing, and I think we are on schedule. We also just have to work with our customers' drilling and completion plans, because if they're a little bit slower in the first six weeks we might have had a delay of a week or two on some of the field trials. But there's nothing productive that suggests me that I could be. should be concerned about.

Thank you. His line has dropped from queue. We will move forward to our next question from Marc Bianchi with Cowen.

Hi, thanks. I didn't catch Cindy as you were talking through the expectation for '19 kind of to be in line with consensus. How you see Offshore Manufactured progressing from the first quarter?

Yes, I can't comment on any individual analysts, but when I look at how I kind of rolled up, I would just kind of generally say that we're in the ballpark on the total and are generally focusing on EBITDA and expect revenues are pretty close too. I think if I were to color it a little more, I would say I was probably a little more optimistic on Offshore Manufactured Product and have cushioned downhole just a little bit because part of this is reliant on two things. Number one is new product introduction that kind of our customers are looking for. And also just a bit of a shipping mix of some of our plug sales from service companies, the E&P direct sales and we are just kind of working to get that manufacturing process sufficient some of the shifting there. And so that's maybe the added color, I would give you. The total in that is pretty much, as I said in the ballpark that maybe a little allocation differences in the business.

Okay. That's helpful. Kind of where I'm trying to get to is, if we're talking about a book-to-bill number for the offshore business it would be helpful to really to get a better handle on what the total revenue would be for the year. I mean, is it fair to think that something close to flat or not down dramatically from '18 is how you're seeing it shape up, just try to do the math on what that could mean for orders?

Are you talking about total company, are you talking about offshore?

I'm talking about within offshore, yes, within offshore. Because if you give us book to bill ratio, I need to know what the revenue number is to figure out what the quarter's number is.

Yes, we will be flat to up.

Okay.

I should never say we will. We think we will be flat to up in offshore. And again it's predicated on continuity of our short cycle products. We think we'll see a little bit of upside in service work that we've seen before. And then again if I'm guiding to a higher book to bill, part of it is depending on when I get the project in backlog, but that will increase my major project revenue and it will also help me with absorption.

Certainly. Great. Well, that's a great order number that you guys are looking at. So look forward to it. Thank you.

Right. Thank you.

And we have our next question from Connor Lynagh with Morgan Stanley.

Yes, thanks. Just wanted to continue on the Offshore Manufactured Product, given that, you've obviously had some mix shift away from the project driven revenues and now potentially coming back toward it. Could you comment on the relative profitability of those different revenue pies that disclosed there?

Well, I mean there is a huge variation obviously. These are, when you go subsea production infrastructure it is our higher margin more proprietary products. So that's always a plus, but I would also focus on the fact that if we can just get stabilized above roughly $100 million of revenue per quarter in that business, it really does help us with absorption. So you tend to have decent incremental assuming that all else remains flat in terms of, particularly in terms our short cycle products.

Okay. And so we've seen that business kind of hold in the low to mid-teen EBITDA margin wise. And so I guess would it be fair to say that you'd expect that to be trending higher as you put more revenue backlog here?

Yes, Connor absolutely. Our planning is exiting the year more in line with high teen EBITDA margins, which are up. We guided to 10% to 13%. Again, revenue guidance is kind of below that $100 million range and not much in the way of major project contribution in Q1. But if our bookings play out as we are projecting, we should end up or exit the year with EBITDA margins about 15%.

Got it. Great. And maybe just one more for me here. We obviously spend a lot of time on the energy side of things, but the government side here seems to have taken on a more important piece. So could you just talk about sort of where in the cycle are we? Are you guys gaining share, what sort of the trend we should expect over the next couple of years here?

Well, it's interesting that you ask that. We've always had military contributions in the past. That's what's different here. And this is some of our high-end legacy very specifically designed elastomer products that are used by the military. What may be different about this is that we are getting more multi-year type orders that give us longer-term visibility and it helps us from a manufacturing standpoint and an absorption standpoint to have a bit more come into backlog at one point in time. And I can't even remember when the last large military order came into our backlog. But it get lengthen out, it used to be about 85% of our backlog would turn into revenues in the forward 12 months. It lengthened out a bit and that was largely because it was more of a multi-year type military order and we are kind of expecting a resumption of some of that activity that's factored in that stronger book to bill ratio this year.

Got it. Appreciate the color.

Thank you.

And thank you. We are standing by for further questions. [Operator Instructions] And I see that we have no further questions at this time. I will now turn the call over to the Company for closing remarks.

Okay, great. Vanessa, thank you so much for coordinating all this morning and I appreciate all of you who have dialed in again kind of a lengthy and busy quarter time frame. So we'll be in touch after the call and look forward to the next one which will be here shortly. So thanks so much.

And thank you. Ladies and gentlemen, this concludes today's conference. We thank you for participating. You may disconnect.