Expro Group Holdings N.V. (XPRO) Q4 2015 Earnings Report, Transcript and Summary

Welcome to the Q4 2015 and Full Year Frank’s International Earnings Conference Call. My name is Adrienne and I’ll be your operator for today’s call. [Operator Instructions] Later, we’ll conduct a question-and-answer session. Please note this conference is being recorded. At this time, I’d like to turn the call over to Blake Holcomb, Director of Investor Relations. You may begin.

Thank you, Adrienne. Good morning, everyone, and welcome to the Frank’s International conference call to discuss the fourth quarter and full year 2015 earnings. I am Blake Holcomb, Director of Investor Relations. Joining me on the call today are Gary Luquette, President and Chief Executive Officer; Jeff Bird, Executive Vice President and Chief Financial Officer; and John Walker, Executive Vice President of Operations. We have posted a presentation on our website that we will refer to throughout this call. If you would like to view this presentation, please go to the Investors section of our website at franksinternational.com. Gary will begin today’s call with operational highlights and an overview of 2015. Jeff will then provide a more detailed overview of our operations and financial results for the fourth quarter and full year. Gary will then conclude with his closing remarks. Everyone will be available for questions after prepared comments. In the interest of time, we ask that you limit yourself to one question and one follow-up question during the Q&A session. Before we begin commenting on our 2015 results, there are a few legal items that we would like to cover, beginning on page three. First, remarks and answers to questions by Company representatives on today’s call may refer to or contain forward-looking statements. Such remarks or answers are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Such statements speak only as of today’s date, or if different, as of the date specified. The Company assumes no responsibility to update any forward-looking statements as of any future date. The Company has included in its SEC filings cautionary language identifying important factors that could cause actual results to be materially different from those set forth in any forward-looking statements. A more complete discussion of these risks is included in the Company’s SEC filings which may be accessed on the SEC’s website, or on Frank’s website, at www.franksinternational.com. There you may also access both the fourth quarter and full year earnings press release and a replay of this call. Please note that any non-GAAP financial measures discussed during this call are defined and reconciled to the most directly comparable GAAP financial measures in the fourth quarter and full year 2015 earnings release which was issued by the Company earlier today. I’ll now turn the call over to Gary for his comments.

Thank you, Blake, and good morning to everyone on the call. After six consecutive years of record revenues, it’s no understatement to say that 2015 was a challenging year for our industry and Frank’s. Energy prices continue to search for a bottom and E&P companies continue to reduce their budgets to conserve cash, shore up their balance sheet to meet the financial obligations. Simply stated, the conditions in which we find ourselves as a Company and as an industry are decidedly unfavorable. However, having a strong balance sheet, industry leading margins and a market position like Frank’s, provides us with a solid footing in this market. While much has changed from the commodity peak in 2014, what remains the same is our ability to effectively manage through these industry cycles, as our Company has for over 77 years. As a 37-year industry veteran, I have endured a few of these cycles myself. In those experiences, I have come to appreciate the great opportunities these downturns represent to get introspective and pivot operationally in order to emerge as a stronger company with the more favorable position in the marketplace. Turning to page five, we will begin by providing an overview of the fourth quarter and full year 2015. Full year 2015 revenues and adjusted EBITDA gradually fell during the year and ultimately settled at 15% and 29% below 2014 levels. During the same period, global capital spending from our customers fell 23% and worldwide rig count 44%. However, we maintained Company-adjusted EBITDA margins above 30% every quarter. While 2015 represented a change from a high growth story of the past several years, I am pleased with our team’s response towards taking appropriate actions to focus on things we can control and to mitigate the impacts of this cycle. Although the decrease in spending by our customers was out of our control, the Frank’s team achieved several key internal milestones. First, 2015 was a record safety year. I want to thank and congratulate all of our employees around the globe for their efforts in this important focus area. Clearly, down markets like this usually create distractions. And it was only due to an acute focus on staying safe and injury free that we were able to achieve the record year. Operating safely is an essential part of the value proposition for our customers, as it translates to more reliable and higher quality service and therefore, the lower cost of ownership to our customers. While our objective will always be zero incidents, our total recordable incident rate was down 40% versus the previous year, showing tremendous progress in this important area. Second, with an understanding that 2015 would be a year of depressed prices, we knew that we would have to lower cost, improve our efficiency, and become a better supplier to our customers. In other words, we wanted to take advantage of the lower activity levels and take the necessary steps in regard to workforce planning, business optimization, and working capital improvements. On top of this call, recall that we were only in our second full-year as a public Company, so our journey to become an admired and respected public Company, continues. For example, we took the necessary steps to rightsize the organization and adjust our footprint to ensure we remain competitive in this challenging market. We reduced our workforce by 20%, we closed 12 bases in the U.S. onshore business and two manufacturing facilities internationally. We are confident that we have put the right structure in place and adjusted our capability to respond appropriately to changes in market conditions. Last quarter’s call, we announced the initiation of Frank’s Business System to drive lean concepts across the Company including areas like asset and workforce utilization, supply chain management, and new business development to name a few. Since the creation of the program in June 2015, the Company has held more than 15 kaizen events, involving over 200 employees from Louisiana to Norway and from human resources to operations, and an additional dozen, or so events are already planned for 2016. The positive impacts of Frank’s Business Systems are evident in more than $25 million of cost savings delivered in 2015 and a cumulative expected benefit in excess of $60 million in 2016 of which the majority of these improvements and associated savings are sustainable. We also took the opportunity to reorganize our technology and engineering functions to better incubate future innovation as well as respond to real-time engineering and technical support, 24 hours a day, 7 days a week. Technological innovation has been a differentiator for Frank’s. It will continue to play an important role in delivering value to our customers in an evolving industry, moving rapidly towards increased automation and cost efficiency. Our new stage gate process is designed to accelerate new ideas from concept to prototype to eventual deployment. Moving to page six, we take a look at our share of the global offshore rig market and trends in our operating regions from Q3 to Q4. With spending on offshore activities in decline, the competition for market share has intensified and price reductions are now a reality of doing business. In the fourth quarter, we saw a market share growth all remaining flat in every operating market except for Asia-Pacific where several projects were canceled or deferred and one contracted rig was put under maintenance. In fact, I want to congratulate our sales teams for securing a substantial multi-rig contract in the Gulf of Mexico and multi-year offshore development in Canada with major IOC customers. These new contracts demonstrate the confidence customers have in Frank’s to deliver value and our ability to meet the current challenges, presented by this market. Overall, quarterly revenues were down and down the most in Asia-Pacific and the Gulf of Mexico where efforts to grow or maintain market share were met with stiff competition, resulting in lower rates for our equipment and services. Due to the inherent risk and capital intensity of the offshore segment, we expect activity and pricing pressures to persist and little to no investment increases until our customers have confidence that prices will remain at levels that push projects above their economic threshold. The Middle East was one region in Q4 that saw an increase in revenue from securing several new onshore contracts with the national oil company in the region. We are encouraged by this response. And this area will continue to be a focus for growth, going forward, as we have historically been underrepresented in this substantial market. For the full year, we saw market share contraction in West Africa and the Gulf of Mexico due to project cancellations or deferrals and rigs being stacked, but we still hold greater than a 50% share in each of these regions. Market share gains for 2015 were greatest in Latin America, primarily due to new business in Trinidad and Tobago, and Guyana. As we have discussed throughout the year, the balance between price and activity declines fluctuated quarter-by-quarter and region-by-region. For the full year 2015, declines in volume had a greater impact in pricing discounts by ratio of 3 to 1. Page seven takes a closer look at one of the four pillars of our strategic plan, Developing New Markets. Opportunities for our equipment and services in the deep and ultra deepwater were down in 2015 and are expected to contract further in 2016, as our customers have indicated budget reductions ranging from 10% to 25%, depending on the region. As projects are either cancelled or deferred, our plan is to focus our efforts on replacing that business in markets where new opportunities exist, primarily the offshore shelf involving jack-up rig work and the expansion of our international onshore business where the market has remained more resilient and margins are better than our U.S. onshore. The shelf jack-up market represents about 55% of the global offshore rig market. On average, Frank’s has only provided services on a little more than 10% of these rigs. Historically, wells in this sector involved less complexity and therefore less need for Frank’s superior technology. This fact along with the robust deepwater market we recently experienced, drove our attention and resources to more technologically challenging and profitable opportunities. However, despite offshore shelf and international onshore wells not offering the same per rig revenues as in the deeper waters and with higher complexity requirements, they do offer competitive returns. Capturing new opportunities here will enable us to keep our well-trained crews active and our equipment utilized, as we work through the bottom of the cycle. However, the deeper, more complex wells will always be the foundation of Frank’s. And we will continue to compete for that business at every opportunity. Another area where we see opportunities to improve profitably is through reexamination of our U.S. onshore business where margins are nearly non-existent. We now hold nearly 30% of this market and are looking at new and innovative ways of operating and improving returns during the cycle. Beyond the previously mentioned workforce reduction and base closures, we’re also testing new operating models that involve more centralized support of back office functions, equipment and inventory, as well as technical and operational support into regional hub and then supplying this support to smaller, leaner field locations closer to the customer. This hub-and-spoke concept will provide us the opportunity to bring the full services of Frank’s to customers in new or remote areas, both domestically and abroad without having to make extensive infrastructure investments. The improvement made in our U.S. onshore business will eventually benefit our targeted international onshore operations. We still believe that the U.S. onshore market will be early to recover, as commodity prices improve. Although the current financial outlook is challenging, we aim to hold market share and be in position to enjoy early mover advantage, once the market recovers. I will now turn the call over to Jeff for his comments on the year and fourth quarter. Jeff?

Thank you, Gary. Looking at page nine, we see a summary of the financial highlights from the full year 2015. Revenue for the full year was $975 million, down 15% year-over-year. Adjusted EBITDA declined 30% to $317 million. As Gary mentioned, the majority of the decline was related to reduced activity, as global rig counts fell 44%. However, in our two largest markets, West Africa and Gulf of Mexico, revenues were only down 30% and 22% respectively. Also even in the midst of the industry challenges, we were still able to deliver Company-adjusted EBITDA margins of 33% in 2015. In 2015, our CapEx spend was $100 million. We spent roughly $60 million on equipment and $40 million on new facility related assets and other PP&E. As previously mentioned in the Q3 call, we expect 2016 CapEx spending to be $75 million, down 25% year-over-year. Capital spend could continue to trend lower, based on the slower pace of activity and the completion of planned facilities. For the year, the Company generated $427 million in cash flow from operations and ended the year with the cash balance of over $600 million, up from $490 million in 2014 and essentially no debt. Now, turning to page 10, for a look at our results for the quarter. Fourth quarter revenue was $203 million, a 15% decrease sequentially. Adjusted EBITDA for the quarter was $64 million or 31% of revenue. The quarterly results were supported by Tubular Sales, coming in above expectations to soften the impact of further activity and price deterioration in our Services segment. 19:38: Adjusted EBITDA for International Services in the fourth quarter was $36 million or 39% of external sales, down 9% sequentially and down 46% year-over-year. The uptick in margin was attributed to cost improvements and some market share gains. Moving to U.S. Services on page 12, the fourth quarter revenues from external sales decreased 14% sequentially and 46% year-over-year to $64 million. Adjusted EBITDA for U.S. Services in the fourth quarter was $14 million or 22% of external sales, down 22% sequentially and down 71% year-over-year. U.S. offshore fourth quarter revenue was 13% lower sequentially and down 35% year-over-year to $46 million. Revenue fell from stacking of a rig and an increase in lower-priced completion work. Pricing was not materially impacted in the quarter but increased competition on price and day rate requests can be expected in the future. Overall, market share rose slightly, as two additional rates were picked up, margin held up from our improved cost structure. U.S. onshore adjusted EBITDA decreased 16% sequentially and 61% year-over-year to $18 million. As stated previously, we look at the U.S. onshore business on a full commodity cycle basis. We’re exploring various ways to improve service delivery to customers in this segment, in an effort to resume profitability. At this point, we believe the prices for our U.S. onshore services have found a bottom and have stabilized from the free fall seen in 2015. We now represent more than 30% of our addressable market in U.S. onshore as cash impaired competitors exit. However, declining well count is expected to continue to outpace market share gains, causing U.S. onshore to operate at yearly breakeven levels. We view this negative operating margin environment as temporary and expect meaningful contribution from this strategic business area, as investment capital returns to low cost basins at times of commodity price stabilization. Page 13 shows our Tubular Sales performance. Revenue from external sales in the fourth quarter was $47 million, down 25% sequentially and down 15% year-over-year. Adjusted EBITDA for Tubular Sales in the fourth quarter was $14 million or 30% of external sales, down 13% sequentially, but up 35% year-over-year. As previously mentioned in the Q3 earnings call, we expected revenue and adjusted to come in lower in Q4 which they did. However, we exceeded adjusted EBITDA expectations due to favorable mix, cancellation fees, and lower cost from improved processes. Despite the strong margins delivered in the fourth quarter, we expect adjusted EBITDA contribution from Tubular Sales to return to the mid single digits in the first quarter of 2016 as visibility on new orders and expected deliveries is significantly lower than what we saw this time last year. However, we continue to believe this business segment is poised to grow longer term with opportunities for gaining market share from our competitors and expanding to new markets internationally. Taking a look at page 14, as Gary briefly mentioned, 2015 was the year we deployed Frank’s business system, and the results we saw during the year were very encouraging. We’ve been regularly updating you on our progress and managing our working capital, both in terms of reducing inventories and accelerating receivables by improved invoicing and collection processes. Working capital excluding cash balances declined nearly 44% from 2014 levels with inventories coming down about 21% and accounts receivable lower 37%. In fact, on average, our day sales outstanding fell below 100 days from a previous average of almost 120 days. Process improvement kaizens held during the year were a leading contributor to achieve these results and we think other areas of the business are right for similar results. The improvements in working capital, particularly from lower accounts receivable and a decrease in capital project spending, has had a positive impact on our free cash flow generation. In the fourth quarter alone, we generated $121 million of free cash flow, an outstanding conversion rate of almost 60% of revenue. Free cash flow in excess of 300% of net income in 2015 gives us the confidence that we have the available funds to continue to pay a competitive dividend, be opportunistic with strategic acquisitions, and have the ability to ramp up and respond when conditions warrant. Another sign of the effectiveness of our efforts can be seen on page 15, where we show our cost deleveraging for 2015. Prior to implementing our cost reduction initiatives, we were losing $0.88 of adjusted EBITDA for every dollar of decline in revenue. This ratio steadily improved throughout the year, culminating in an impressive 27%, decremental margin from Q3 to Q4. Well, we expect decremental margins to be closer the Q3 levels going forward, we remain confident that further cost reductions will be realized. Upholding industry leading margins are a priority for Frank’s, even in the trough of the cycle. We are extremely proud of the efforts made by Frank’s employees to contribute and learn from the process improvement workshops we held during the year. We are only seeing the beginning phases of what these laser focus events can do for the Company’s performance and have high expectations for what they can deliver in the coming years. Lastly, a few comments on Q1, as we’re almost two months into the quarter. We would expect sequential revenue declines in our U.S. and International Services businesses to be similar to those experienced in Q4 of 2015, roughly low double digits. These incremental declines are a result of project delays and cancellations, specifically in Europe and Latin America. We expect U.S. offshore to experience continued competition and price concessions, as we look to maintain market share. As previously mentioned, regarding our tubular business, we would expect adjusted EBITDA contribution to return to the mid single digits, as we see sequential revenue declines, similar to if not worse than, those seen in Q4. In summary, we see continued activity and pricing headwinds in Q1. However, as we have demonstrated during this downturn, we will continue to make the right business decisions to manage our cost structure. I’m confident the lean journey we started through Frank’s Business System and as shown in real results, will continue to help us manage our business in 2016. I will now turn the call back over to Gary for some final comments, before we open up the call for Q&A.

Thanks, Jeff. Before taking your questions, I’d like to leave you with what we will be focusing on from a strategic standpoint in 2016, while we wait for the macro conditions to improve. Our first priority will be to aggressively protect and grow market share in the face of pricing headwinds in a shrinking addressable market. However, we will be thoughtful in the manner in which we pursue this strategy, bearing in mind the cost benefit tradeoff between share and margins. Again, we are not new to industry cycles, and have a proven track record of our ability to respond appropriately. Second, we realize that maintaining our premium margins as a company, will also depend on our continued efforts to control what we can control and build on the success of our cost savings and efficiency improvement initiatives. We are still in the early innings of this multi-year process, but we are certainly pleased with what we are seeing so far. Finally, over the last several months, we have taken advantage of the down market and secured outstanding new talent to augment the long standing skills and capabilities, inherent in the Frank’s organization. We will continue to look for opportunities to strengthen our organization, but we feel we now have the team in place to not only navigate this difficult market, but also one that will enable Frank’s to profitably grow well into the future. The net effect of these efforts will lead to a stronger Frank’s that delivers its equipment and services reliably and at a lower cost, one that utilizes downturn wisely to improve its market position and the Company that has increased organizational capability with the aim to ultimately become the premium player in our market segment. We are also in a unique position amongst our peer group, both in terms of our balance sheet strength and our ability to deliver positive free cash flow from operations. We intend to use these strengths to our advantage by returning cash in the form of dividends to our shareholders, pursue organic investments that have the appropriate risk reward profile and be opportunistic as it relates to acquisition. With that, I would like to thank you for your time and interest in Frank’s. We will now open up the call for questions.

Thank you. We’ll now begin the question-and-answer session. [Operator Instructions] Our first question comes from Jim Wicklund from Credit Suisse. Please go ahead.

Obviously the market likes your report this morning, so congratulations on that. You guys talk about the jack-up market and this was something that was discussed about a year ago that you guys didn’t have much market share in the jack-up market. How difficult is it? I understand the revenue won’t be as great but you made the comment that returns will be similar. How difficult is it to penetrate the jack-up market when you’ve got the market share that you do in deepewater market?

Jim, good morning. This is John Walker. So, it’s not difficult to penetrate the market, as we identified, the jack-up market is more than 50% of the overall total global rigs. The advantage that we have is we’ve been in the Middle East, in the areas of the Middle East and APAC and Europe for a significant amount of time, in fact for more than two decades. So, the relationships are there, the facilities are there, but what we got to do is reposition some of the assets from the deepwater part of the business into the Middle East and then wait for some cycles for tendering to come through. But what we’ve been doing is assertively engaging the clients, identifying how we can reduce the well cost, total cost of ownership, and we had great success with that in the Middle East, recently where we secured some new contracts.

That’s got to be an underappreciated opportunity, I think by many investors. My unrelated follow-up, if I could. I know you guys have looked at acquisitions in the past and of course with your balance sheet, you’re in great position to do so. And we’ve talked about how you want to protect margins and valuations. When you look at things in general, and I’m not looking for who you might buy but are you more likely to buy manufacturing that adds capability to existing business or more umbrella type acquisitions that allow an expansion of the business? I mean, are you looking up and ahead, are you looking down at adding to what you have, just in general?

So, Jim, let me take a cut at that and see if that addresses your question. I would characterize our focus right now in the M&A space, two-pronged. One would be are there like businesses that are either in financial distress or in markets where we have a lower share than we feel would be desirable. And so, those would be very much like services that we would add to essentially drive market share up in underrepresented markets. The second area of focus for us is around diversifying our service offering, without getting too far away from the things that we are very good at. And so, I mentioned in last quarter’s call there a lot of things that are associated with the tubular running services, the cementing process, the connections that are made to allow cementing of the well bore, a lot of the completion equipment and devices that are clamped onto the pipe that are essentially being run concurrent with our services So, all these things represent potential for increased rig time without getting us too far from the things that we know a lot about and that our organization is very good at. So, those are two areas that I would say really encompass most of our target reviews. Now, some of those may in fact involve incremental or additional manufacturing capabilities, but that’s not a driver. The real driver is trying to get somewhere in that well construction phase and staying pretty close to our sweet spot.

And our next question comes from Chase Mulvehill from SunTrust. Please go ahead.

I guess a real quick on the international contracting side; what are the typical durations of these contracts?

Good morning, Chase. This is John Walker. It varies at from region to region. If you look at West Africa, you would have a project that would last one year to 18 months, two years. You go to the APAC side of the business, it would be multi-year, traditionally. The European sector, it’s much shorter term, would be less than one year. And then you look into Middle East, we’ve seen a trend more recently to longer term contracts. So, from region to region, it totally depends. And then in the Latin America, Latin America, the land side of the business is more traditional like the U.S. side of the business callout but the Brazilian market would be a cycle of two to three years. Does that answer your question?

Yes. And are there termination clauses in these contracts?

Like every contract, there is a termination clause and it does have a financial support around it. We don’t actually -- your question is probably tailored more like the drilling rigs and to the point so, we don’t actually have backlog built into the contract. So, it’s effectively terminated within a certain term notice and then we work in the transition.

And our next question comes from Kurt Hallead from RBC. Please go ahead.

You guys struck a chord with me among all the conference calls, the first to, I’d say be pretty, I think adamant about there being price stabilization in the marketplace. I wonder if you might be able to provide a little bit color as to the conviction in that commentary.

Sure. Kurt, it’s John Walker, again. What I would say from a price stabilization perspective, if you know, in the more recent term, we’re definitely seeing price concessions in the marketplace. If you look the U.S. Gulf of Mexico, Jeff’s points were more tailored to the year-over-year and we see in the Q basis, we’ve had a lot more price concessions given in the U.S. side. The international side, to a lesser degree that’s more been driven by activity declines. But, we are seeing customers continuing to ask us for price concessions. We’re working through the cycle with total cost of ownership around the technology, but there is definitely price concessions being asked in the near-term.

And just to build on John’s comments, our reference was to U.S. land or U.S. onshore prices. We feel those prices hit the bottom. I think John’s comments were more offshore, international.

And your next question comes from Brad Handler from Jefferies. Please go ahead.

Couple of questions on the Tubular Sales side of it, please. First, just to be clear on the guidance that you’ve given. Were you expressing that in millions of dollars terms; were you expressing it in percentage margin terms…

We were expressing that in millions of dollars terms.

Second, and maybe there’s a little bit of background associated with this, but certainly sensed within your mix of sales in Tubular Sales, perhaps holding less inventory, perhaps a conscious effort to do so, which has helped your margins and certainly helped your asset turns. Is that a fair characterization? And in which case, can you put some more color around, perhaps what percentage of jobs are you buying and then reselling the pipe for, and is that -- am I right that that’s a declining percentage of the work?

Yes. So, just to put that in perspective, there’s really two elements. I think you asked a question about working capital turns and then you asked a question about margins. From a margin standpoint, it doesn’t really help or hurt us as to selling pipe out of inventory. It definitely helps us from a working capital standpoint and that’s where our focus has been in 2015; it’s really a tighter process to drive that inventory down in a systematic, thoughtful way, while still servicing our customers.

And our next question comes from Darren Gacicia from KLR Group. Please go ahead.

Hi. Thank you. So, as we -- you gave some guidance in terms of how much we’ll be downs this year, how do you think about in terms of what your visibility or how would you mark that against maybe what it usually is historically against this time of year?

So. I’ll separate that into a couple of buckets. Right now, we gave some guidance or some thoughts on Q1, we’re not giving full year guidance at this time. But as far as visibility is concerned, obviously in our services businesses, I’d say we have the same level of visibility that we would have had in Q3 and Q4, still a pretty challenging environment. On the Tubular, that’s where we have far less visibility than we would have this time last year. Specifically we look at our customer funnels and our customer orders and they’re down substantially from where they would have been in January, February last year.

If I could just add to that around the market, we’re still seeing unscheduled cancellations of projects. I think you saw in the market just last week in Angola, there was a cancellation of a project and we’re also seeing up in other parts of North Africa where there’s contracted work and then the announcement just comes through that there is either a delay or a suspension or a cancellation.

Do you have any recourse on those when you’re involved?

Say, it again.

I said, do you have any resource on those when you’re involved?

It depends; it’s case-by-case scenario. So, there is no one limited answer.

Yes. That’s very limited recourse. Typically these contracts are set up with the cancellation clause. And the most you are going to get out of those typically is demob recovery, that’s about it.

[Operator Instructions] And we have Blake Hutchinson from Howard Weil on line. Please go ahead.

I just wanted to go back to one of Jeff’s comments, just to make sure we’re hearing this correctly. In terms of the deleveraging expected going forward, I think the comment was that you would expect something closer to the 46% from Q2 to Q3 versus what we saw Q3 to Q4. I want to make sure we get this right, since it’s important piece of the model here.

Yes. That is correct, something closer to that 46%, as opposed to 27% that we saw Q3 to Q4.

Okay. That’s helpful. And then in terms of -- I think Gary, you made a comment around success on a substantial multi-year, multi-rig contract in the Gulf of Mexico. At this point, in the Gulf of Mexico when you’re entering multi-year contracts, is there sort of a flexed pricing mechanism in there over that multi-year period, so that as we think about the model, it’s not necessarily going to take away whatever aftermarket pricing movement?

Blake, good morning. It’s John Walker here. To answer your question, there the price concession or the price commitments that we’ve made, don’t a multi-year factor in them, that would be for a certain term and then thereafter it would be subject to renegotiation and/or price escalation based on commodity price.

And the next question comes from Chase Mulvehill from SunTrust. Please go ahead.

Thanks for letting me back in. So, I just wanted to clarify, you’re talking about decrementals being about 45% to 46%, is that right.

That’s correct.

Okay. So, if I kind of back into the pieces, that implies flattish international margins and U.S. margins correct?

That’s correct, yes.

And so on the Gulf of Mexico, could you talk to Gulf of Mexico margins and kind of where they stand versus international margins, and then what drives the difference if there is a difference?

Yes. So, as far as the difference, when you look internationally, obviously more complex, a couple of elements. One, the pricing has not gone into the international segment the way that it has in the U.S. onshore -- or offshore, pardon me. And then second, the complexity of the wells, there obviously is more complex wells internationally that allow us to command a higher margin. And John, I’ll let you talk a little bit more about.

Sure. I’d just say that there is less competition internationally, broadly speaking. If you look at the Gulf of Mexico, we have a substantial amount of competition in the offshore side of it; and region by region where we just have lesser competition. And to the point of once the contract is committed, it’s more of a partnership type approach opposed to constantly having to recalibrate on pricing on a frequent basis, as it happened throughout 2015.

And the next question comes from Daniel Burke from Johnson Rice. Please go ahead.

Maybe just one more on the international side, because it seems like by region there were some different trends last year. I heard West Africa off 30% year-over-year and that’s pretty consistent with some things you all said earlier in the year. But you had LATAM and Europe up double digits year-over-year. I guess the question would be, could you all build big enough book of business in Latin America and Europe such that you’d be able to hold those top line in those regions closer to flat this year?

So, it was a mix shift of business. If we notice that in Trinidad and Guyana we are very successful and continue to be successful with new work there but that was offset by some of their land style of business in Latin America, just fallen off completely. Brazil has been obviously headwind for us. So, when we look at our output together, that gives us a flat. But then looking to Q1, probably declining q-over-q. As far as the other areas, you are right in point there with West Africa; APAC, the project cancellations that were unforeseen, so there is going to be decline there; and then we see flat style or flat approach there in Europe.

That’s helpful, John. And then, maybe just another one, back on the working capital side is on the DSOs, any new target that you can share with us on where all think you can take that figure looking towards middle or later this year?

So, we closed 2015 just low 100-day DSO. There is probably another 10 days or so to give this year, conservatively speaking.

And the next question comes from Robin Shoemaker from KeyBanc Capital Markets. Please go ahead.

So, I just wanted to ask, when many of these deepwater rigs that you’ve been working on are being idled and stacked in, does your equipment, your casing, running and handling tools typically stay on the rig with the anticipation that the rig might get a job or if it’s a cold stack situation, is basically everything removed?

Good morning, Robin; John Walker here. The equipment is actually all removed. So, it allows us obviously to be flexible from redeployment to other regions. But it’s not sticky to the point of about cementation type application.

And then, my other question was, is there any change in the competitive behavior, either of your largest competitor or some smaller competitors in the market? And I’m referring here really to the offshore piece?

No more change in behavior, I mean it’s always competitive. And it’s contract-by-contract. It just depends on the specific region to the competitive environment and the behavior of the competitor.

And next question comes from the Darren Gacicia from KLR Group. Please go ahead.

Thanks for letting me requeue. One of the things you guys mentioned up front in the comments was kind of continued work on restructuring and kaizens. What’s the process there? Obviously there’s a brainstorming aspect to it and then there’s execution. How is that going and kind of where are we in some of the process there, if you could expand?

Sure. So, we sat down -- and I’ll go a little bit through that process. We sat down late last year and identified three key areas of focus for 2016 that we’d like to process improve really. And we’re pretty well based on that now, have the action plans in detail, lined out for 2016, probably have doesn’t or more kaizens that have already been outline for the balance of the year. So, we’re pretty far into that. I talked on earlier calls the first quarter, two or more Western Hemisphere based. We’re now getting into more Eastern Hemisphere based. So, a lot of the improvements that you saw in terms of costs, in terms of working capital, tended to be more process based on the U.S. services and tubular size and a little bit more brute for us on the international side. I think you see those process improvements, as we’ve just run kaizens in both Mumbai, India and Norway, you’ll start to start that process improvement spread to the Eastern Hemisphere in 2016.

I am really encouraged by not just early results but the momentum, the inertia that we’re starting to achieve with this process. It’s now at a point where we have to govern how many of these projects we do at any point in time because demand is really outstripping our ability to be able to manage these projects from an organizational capability. And that’s a great place to be with demand outstripping capability. This is something that I believe is going to be a transformative sort of process in Frank’s. We’re now building infrastructure to be able to support it internally without the help of external resources. So, I think as we go through quarters in 2016 and beyond, we’ll be talking about a lot of very positive outcomes from not just balance sheet things but also reliability, improvements and lower cost of delivering our goods and services. So, this is something I’ve been very pleased about. And as we said earlier, we’re in the early innings of this. So, more to come.

When you look at it in terms of -- I think you guys gave, what $75 million in CapEx, what is -- is there a proportion that’s associated with these programs?

So, when you look at it, you said on the CapEx, just to clarify, that CapEx is a $75 million spend number for 2016; that’s not a cut number. And candidly, I’d associate it with really two things, the working capital improvement that we’ve seen and then the cost reductions of $60 million, cumulative cost reductions. And I’d say probably, 75% of those cost reductions and CapEx or working capital improvements are coming on the heels of the kaizen events that we’re holding?

Right. But it’s touching all phases of our business. For instance, we talked about technology and engineering. And the Frank’s business system approach and the lean approach associated with that we believe are going to be able to drive our ability to go from concept identification to market deployment in a much shorter period of time, by eliminating a lot of waste in that process and improving the collaboration between the different elements in our organization that are required to get there. So, it’s really going to touch and is touching all phases of our business.

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

I just have a quick follow-up, when you talk about pricing pressure, is this primarily -- to follow up on Robin’s question, is it really pricing pressure from the customers that you’re having to accede or is it pricing pressure from your competitors?

It depends, Jim. So, in the case where you have complex wells, then the pressure is coming mostly from the customer. When you’re having a more competitive segment where other players can play in that, then there is more competition or more pricing pressure from the competition. So, fewer players that have the capability, then you have to just meet the customers’ requirements to be able to secure that contract. When you have more players and it’s a more commoditized sort of service and equipment configuration, then you’re starting to see more pressure coming from the competitors.

And that concludes our question-and-answer session. I will now turn the call over to Gary Luquette for final remarks.

Let me just thank everyone again for joining us today and for your interest in Frank’s. We really do appreciate the opportunity to share with you some of the things going on, and to be responsive to your questions. I think that will wrap up today’s call. We’ll now conclude. Thanks again.

Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. And you may now disconnect.