Forum Energy's CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.25.14 | About: Forum Energy (FET)

Forum Energy Technologies (NYSE:FET)

Q1 2014 Earnings Conference Call

April 25, 2014, 10:00 AM ET

Executives

Mark Traylor - Vice President, Investor Relations and Planning

Christopher Gaut - Chairman and Chief Executive Officer

James Harris - Senior Vice President and Chief Financial Officer

Prady Iyyanki - Executive Vice President and Chief Operating Officer

Wendell Brooks - President, Production and Infrastructure Segment

Analysts

Jonathan Sisto - Credit Suisse

David Anderson - JPMorgan

Jeff Tillery - Tudor, Pickering, Holt

Blake Hutchinson - Howard Weil

Ole Slorer - Morgan Stanley

Robin Shoemaker - Citi

Brad Handler - Jefferies

Doug Becker - Bank of America Merrill Lynch

Robert MacKenzie - Iberia Capital Partners

Martin Malloy - Johnson

Mike Urban - Deutsche Bank

Tom Curran - FBR Capital markets

Dan Leben - Robert W. Baird

Operator

Good day, ladies and gentleman, and welcome to the first quarter 2014 Forum Energy Technologies earnings conference call. My name is Jackie, and I will be your coordinator for today. (Operator Instructions) I would now like to turn the presentation over to Mr. Mark Traylor, Vice President, Investor Relations and Planning. Please proceed, sir.

Mark Traylor

Thank you, Jackie. Good morning and welcome to Forum Energy Technologies' quarterly earnings conference call for the first quarter 2014. With us today to present formal remarks is Chris Gaut, Forum's Chairman and Chief Executive Officer; as well as Jim Harris, Senior Vice President and Chief Financial Officer. Also with us is Prady Iyyanki, Chief Operating Officer; and Wendell Brooks, President of our Production and Infrastructure Division.

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, include information that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act.

Forward looking statements involve risks and uncertainties that may cause actual results or events to differ materially from those expressed or implied in such statements. Those risks include among other things matters that we have described in our earnings release and in our filings with the Securities and Exchange Commission.

We do not undertake any ongoing obligation other than that imposed by law to publicly update or revise any forward looking 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 the date of the live call.

Management's statements may include non-GAAP financial measures. For a reconciliation of these measures, please refer to our earnings news release available on our website.

This call is being recorded. A replay of the call will be available on our website for 30 days following the call.

I am now pleased to turn the call over to Chris Gaut.

Christopher Gaut

Thanks, Mark. Good morning. I will start with some highlights from the first quarter and offer a few thoughts on the outlook for our business, and then turn it over to Jim Harris, who will provide more detail on our financial performance.

We are pleased with our first quarter results and our progress on improved efficiencies, integration of our operations and operational performance. In addition, we had record revenue and record bookings. Adjusted net income was $0.40 per diluted share and adjusted EBITDA was $78 million, excluding $0.02 per share for losses on the sale of a small business and foreign exchange.

EBITDA margins in the first quarter were 19.4%. We continue to realize operational efficiencies and margin improvement, but these were offset by some significant cost increases impacting 2014 results. Margin improvement remains a primary objective for us. Total inbound orders during the first quarter were a very strong $486 million, that's 26% increase over the orders in the fourth quarter.

Bookings of new orders increased substantially for both of our segments. The first quarter book-to-bill ratio was 120% for the company as a whole, 123% for Drilling and Subsea and 114% for Production and Infrastructure.

During the first quarter, the drilling product line experienced near-record revenue, record operating income and record orders. We are now seeing an increase in domestic orders for consumable and capital drilling equipment as well as a continuation of the strengths in new international orders.

On the international side, we received an award for pipe handling packages for seven new build land rigs in Latin America. That order includes Forum's Wrangler hydraulic catwalks and the Blohm & Voss FloorHand FH-100 iron roughnecks, a testament to the integration of our sales team. We are also seeing an increase in orders of Forum drilling equipment for new jack-up rigs that continue to be built.

As we previously announced, Mr. James Bement has joined Forum as our Senior Vice President, Drilling Technologies. We welcome James to this role, where he will be responsible for leading and driving performance of Forum's Global Drilling Business.

James brings over 30 years of experience in our industry to Forum. Our drilling business line is poised for domestic and international growth, especially since our acquisition last year of Blohm & Voss. James' global experience makes him well-qualified to lead this product line.

At our subsea product line, orders in the first quarter were up 35% sequentially, primarily on the previously announced contract with Subsea 7 to supply eight work-class remotely operated vehicle systems and the more recent contract with Canyon Offshore to supply three Perry XLX Evo 200 horsepower work-class ROVs, as well as two Dynacon Launch and Recovery Systems.

The market outlook is strong for orders of our subsea equipment to install and maintain the large amount of subsea trees and related equipment that has been ordered in recent years.

The Downhole Technologies product line realized relatively flat sequential revenue following record levels set in the fourth quarter. We continue to see growth opportunities in the international and North America markets for this product line.

Strong demand continues for our ProDrill composite frac plugs. We believe there are pricing opportunities for some of our downhole products and we are planning to expand our manufacturing capacity.

Moving to our Production and Infrastructure segment, we had sequential revenue growth of 7% and in-bound orders in this segment increased sequentially by 30% with increases at all three product lines, pressure pumping consumable products, valves and production and processing systems.

Flow equipment's first quarter revenue increased 27% sequentially and orders increased very sharply from the low levels in Q4 on good demand for our pressure pumping consumable products. We believe most of the orders are for repair and replacement, although some maybe to fully outfit pressure pumping equipment that have previously been stacked.

Our infrastructure businesses, production equipment and valves saw modest increases in revenue for the fourth quarter of 2013 to the first quarter of this year. Our second quarter 2014 earnings per share guidance is $0.38 to $0.44. Much of our business is tied directly to the activity levels of the global oilfield service in North America land drilling companies.

As North America and international markets are improving, we have experienced two consecutive quarters of record revenues and bookings. The driver of our higher revenue in the first quarter was clearly North America activity while our large increase in orders is balanced between North America and international. We think the global demand outlook for our equipment and products is favorable. Our focus continues to be on driving growth, improving operating performance and increasing our margins.

Our CFO, Jim Harris, will now discuss our financial results in greater detail. Jim?

James Harris

Thank you, Chris, and good morning. Consolidated revenues of $404 million for the first quarter are up approximately 3% sequentially, and represent another record for the company.

Importantly, our orders are up 26% sequentially at $486 million, representing a book-to-bill ratio of 1.2x. Our Drilling and Subsea segment revenue was just ahead of the fourth quarter previous record, while our Production and Infrastructure segment revenue increased approximately 7%.

Net income for the first quarter was $37 million, including $1.5 million in foreign translation losses and an $800,000 loss on the sale of our offshore joint services business. We treat these translation losses as non-operational, since they primarily relate to the translation of U.S. dollar denominator receivables for reporting purposes only and have no economic impact in dollar terms.

Operating income, excluding the non-operational items was $62 million, up $3 million or about 5% from the fourth quarter. Drilling and Subsea operating income was up $800,000. The increase coming in the drilling business, as operating margins improved 90 basis points to 19%.

These drilling results include shipment of the last of the committed large low-margin catwalks and also the disruption associated with the move of our U.S. Tubular Handling manufacturing operations into a new 165,000 square foot state-of-the-art facility in Broussard, Louisiana.

Production and Infrastructure operating income improved almost $3 million with all three product lines contributing. The largest increase in operating income was in our flow equipment product line on substantially higher volumes. Corporate expenses were higher in the quarter by $800,000.

Adjusted EBITDA margins in the first quarter at 19.4% came in as expected. We still aim to achieve EBITDA margins consistently of 20% and believe that even as we invest in new product developments and operational improvement initiatives that we should achieve that level in the second half of the year.

As stated, our first quarter margins were burdened by the shipment of the last of the low-margin large catwalks and by higher compensation related to accruals for returning management incentive bonuses throughout the company to target levels.

Adjusted diluted earnings per share for the first quarter were $0.40. This amount likewise is burdened by $0.03 for the higher compensation accruals. We expect diluted earnings per share of between $0.38 and $0.44 for the second quarter.

A good portion of the customer orders received in the first quarter are for Drilling and Subsea capital equipments scheduled to ship in the second half of 2014 and into 2015. Our current booking levels indicated that our revenue should increase over time, given promised delivery schedules, the increase should start in the second quarter, but be more fully realized in the second half of the year and in 2015.

Our diluted share count for the first quarter was 95.2 million shares. We anticipate our diluted share count for the remainder of the 2014 year to be at about this level.

Net debt at the end of the first quarter was $411 million, down $63 million from the fourth quarter, as we continue to paydown revolver advances with strong free cash flow and with proceeds from the sale of the small business. We generated $52 million in free cash flow during the first quarter.

Interest expense for the quarter was $7.8 million and is expected to be about the same in the second quarter. Corporate expenses were $8.7 million in the first quarter and we expect the run rate for corporate expenses to be around $10 million per quarter.

Our effective tax rates for the first quarter was 30%, we expect our effective tax rate for the remainder of 2014 will be approximately 29%. For more information about our financial results, please review the earnings release on our website.

I'll now turn the call back over to Chris for concluding remarks and to moderate Q&A.

Christopher Gaut

Thanks, Jim. I believe Forum is well-positioned, as we begin a new year. We have strengthened our management team and our organization. We have made progress on integrating our acquisitions and improving our processes. There is still much to do and plenty of opportunity for internal improvement remainders.

We will continue our internal focus in the first half of 2014. And I think you are beginning to see the benefits of these efforts. I am pleased with the progress Forum has made and I want to recognized and thank our employees for their good work. Thank you all for your interest.

And at this point, Jackie, we will open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Jonathan Sisto with Credit Suisse.

Jonathan Sisto - Credit Suisse

Chris, I wanted to ask you about the orders, which are very good. Could you maybe talk to us about how quickly some of those orders convert in some of your more profitable business lines?

Christopher Gaut

So we have had a strong increase in orders across the board here and including in our more capital equipment intensive businesses where the lead times are longer. So very good order growth in our subsea business with some multi-vehicle orders there.

In our drilling business, strength both in the activity-based consumable products, but also in the capital equipment side. And on the capital equipment side, it is also spread nicely with U.S. land drilling contractors, but also internationally on the onshore and offshore market.

We are also seeing a very strong increase in order sequentially in our flow equipment business for the pressure pumping companies, as I mentioned, that's coming off a low level in Q4. A portion of that was deferral of purchases to Q1. But I also think it's fair to say that we are seeing higher rates of replacement repair activity commensurate with the high level of pressure pumping activity that's going on in North America.

Jonathan Sisto - Credit Suisse

Is it fair to assume that a lot of those latter orders that you just spoke about came kind of in the March timeframe versus January, February?

Christopher Gaut

John, our experience is a bit different there. We did have a wave of orders right at the outset of the year that were clearly deferrals from Q4 to Q1, and then continued good order level from there. So the order levels are at a good level, but we also saw that there was a lump of orders that were deferred from that prior period.

Jonathan Sisto - Credit Suisse

I guess just as one kind of follow-up here, Chris. You mentioned in the release, focused on growth, improving operating performance and increasing the margins. You're basically nearly there on the margins. I guess maybe this might be one for Prady, but what other kind of low-hanging fruit is there or is the low-hanging fruit done and you're now on to more high-end things like ERP systems for the business?

Christopher Gaut

We've had a constant effort on the ERP systems and that's going to continue this year. We have a number of things that we're doing to drive I think consistency across our operations as well as efficiency. Maybe Prady, you could describe some of it, the priorities that we're working on.

Prady Iyyanki

John, I would say two areas of focus, operational excellence and initiatives. On the operational excellence side, the focus is to improve our execution, which you have seen some of that in the first quarter. Reputting KPIs on every manufacturing shop. The three KPIs you're putting in every manufacturing shop are on-time delivery, inventory turns and productivity, so they can measure across the board. And we'll get some benefits throughout the year as part of that as part of the initiatives.

Procurement and cost of quality and labor is what we are focusing on. There are KPIs associated with that. But at the same time, the benefits we're going to get out of those initiatives, as we mentioned, we are not satisfied with R&D investments. And we'll take some of that money and invest in our R&D. And to support the growth, not only later part of this year, but also for next year, we're going to improve our commercial presence. So we need some of that money to invest in the second half and also for next year.

Operator

Your next question comes from the line of David Anderson with JPMorgan.

David Anderson - JPMorgan

Chris, we've been talking about on the consumable side of inventory correction for, gosh, some time now. Can we definitively put a stake in this? I mean, is the inventory correction done and I guess I'm talking both sides, maybe you could talk to both the drilling side and the pressure pumping side kind of the flow iron. Are we done with that now? So I think we, first, as your customer, and then as your competitor, so just wondering are we all cleaned out or are we now kind of gone from a baseline more to kind of a steady normalize growth pattern now?

Christopher Gaut

David, with destocking has run its course and we are through that and we are now seeing a level of revenue and more importantly orders that is commensurate with the activity levels that are out there. And I think Forum is a good reflection of those activity levels with the pressure pumpers and drillers in North America on the consumable side and internationally on that the capital side.

David Anderson - JPMorgan

You talked about, you specifically called that the pressure running before, and you were saying, it's mostly for repair. Can you just elaborate on some of your comments, it sounded like you were suggesting that you weren't totally sure where these equipment was going towards, that some of it might be going towards idle equipment that's coming back. Could you maybe kind of add a little bit more in terms of what you're seeing there, in terms of where that demand is coming from?

Christopher Gaut

Among the mix of products that we're selling, David, are the normal replacement items for flow iron and fluid. But we're also beginning to see more than we haven in some time for the manifold trailers, missile trailers that indicate to us that some operators are re-outfitting a spread of equipment with the iron that they've maybe used somewhere else.

David Anderson - JPMorgan

So kind of the cannibalization is over now, and now they need to kind of reload and bring that back to work?

Christopher Gaut

I think there are some signs of that, but I don't know that it's yet clear that this is sustainable trend, but there are some signs of that, David, yes.

David Anderson - JPMorgan

You have free cash flow this quarter, pretty good this quarter, it looks on our model pretty good for remainder of the year. I was wondering if you could just kind of address capital allocation a bit, traditionally over -- since your IPO, you've been pretty aggressive or pretty active at least in the acquisition market. I'm just wondering, I would think maybe the North America acquisition prices have started to climb a bit. I was just wondering maybe you could about that a little bit? Do you expect, maybe you won't be quite as active now, the market is starting to catch up or is there other plans for this capital allocation sort of acquisitions right now?

Christopher Gaut

So, Dave, after being so active in the acquisitions side from 2012 and '13, we've been in the past couple of quarters in more of a consolidation and integration mode, and we're willing to continue that. We think that that is having beginning to show some good results for some initiatives that Prady was talking about. We do expect to reinitiate action on the acquisitions that we continue to investigate later this year and we do think there remain good opportunities out there.

And we do expect to be able to continue to devote our resources, our free cash flow to acquisition growth as well as organic growth later this year. And we're working hard to identify prospects that are good fits and complements to our offering. But we're not going to comment on price, other than to say that it is Forum's strategy to acquire acquisitions at a lower multiple than our trading price, which is obviously accretive for us and not just relying on financing benefits.

David Anderson - JPMorgan

And cash not being used for acquisitions, does that go towards just paying off debt or do you start thinking about buybacks at this point?

James Harris

David, we think the acquisition pipeline is such that we have good use for the cash. I mean you could see, the revolver on a net basis we're close to having a paydown. Expectation would be, in the near term we would be able to deploy that for acquisitions.

Operator

And your next question comes from the line of Jeff Tillery with Tudor, Pickering, Holt.

Jeff Tillery - Tudor, Pickering, Holt

Outside of some of the, obviously, the kind of lumpy bulk ROV order are tough to forecast quarter-to-quarter. Outside of those items, anything that you saw in the order book in Q1 that you viewed as unlikely to repeat or lumpy to the positive side, that we shouldn't think about as sustainable?

Christopher Gaut

I think what we were heartened by in the order book is how the breadth of the increase, Jeff, across the product lines and across geographies. We are pleased to see the progress that we're making in the offshore rig side and the jack-up side, and feel that that has some legs for us if we're successful in the execution there and we certainly plan to be. But to answer your question, Jeff, no, I can't point to anything that was kind of one-off kind of thing or really something that's exceptional that we couldn't do again.

Jeff Tillery - Tudor, Pickering, Holt

Do you the industry is going to go kind of swing the other way as opposed to destocking? Do you think we're going to see kind of in the first half of this year, potentially even overbuying, replacing the parts that were being run out, plus restocking inventory that they kept previously that it had gone away. Is that something you think we're seeing or could see?

Christopher Gaut

I don't think we're seeing it yet, Jeff, because I think we just reached the inflection point. But could we see a restocking going on just as we saw destocking of consumable products, yes, I think we could see that. Particularly, as we were talking before, as stacked equipment needs to be resupplied in order to go back to work.

Jeff Tillery - Tudor, Pickering, Holt

You think about that as, if that occurs, that's really from here, it's not something we've seen already.

Christopher Gaut

Hard to say. In the order book, it was really strong this quarter. So I'm not trying to signal that we expect it to go up a lot from here, because it was really strong. But if I look at from a customer standpoint, do we get indications from customers that they're looking to rebuild substantial inventory, no, I can't say that. I've not seen that or heard that.

Jeff Tillery - Tudor, Pickering, Holt

And then, you talked about adding capacity in the downhole tool business. Is that any more broad-based or just for particular product line or two like frac plugs?

Christopher Gaut

What's for frac plugs, it's for --

Jeff Tillery - Tudor, Pickering, Holt

About adding manufacturing capacity?

Christopher Gaut

If notice others as well. I mean, its for our artificial list related products, and we continue to try to add capacity and efficiency to our casing accessories as well.

Operator

And your next question comes from the line of Blake Hutchinson with Howard Weil.

Blake Hutchinson - Howard Weil

Just thinking about your kind of guidance for 2Q, I understand Jim's commentary that the gestation period, some of the order flow is more towards the end of the second quarter maybe third quarter oriented. And so when they have a bit of maybe bridge period before we see the reaction from the revenue stream. But specifically toward the lower end of your guidance range, it's been $0.38. I mean, it doesn't seem like there is anything from a cost structure standpoint or you've called out, but you've called out as kind of a major setback. Is there something we should be paying attention to that's just a tough comparison to 1Q or we just are kind of doing this on a keeping on air of conservatives to what you guys are seeing out there?

Christopher Gaut

Well, Blake, I think you saw in the beginning, in our last conference call offer a little bit broader range than we had in the past on our guidance and working on our consistency and execution. And I think we've made a good progress here this quarter by maintaining a little broader range, if you will. So I don't think you have to read a whole lot into that more than what I just said.

But also I think the other message we're clearly wanting to send is don't draw a direct line between the dramatic increase in orders that we've seen this quarter and that that is going to be reflected immediately, right, because that increase in orders is a mix of our near-term sales, but also some capital goods that we're going to deliver over time.

Blake Hutchinson - Howard Weil

But there is no specific kind of sub-segment like, say, drilling that you just see backing off of which you cited are kind of near record levels that is the concern, it's more that conservative band?

Christopher Gaut

And Blake, our subsea business in terms of deliveries is a little bit harder to forecast, and we've said that in the past that, no.

Operator

And your next question comes from the line of Ole Slorer with Morgan Stanley.

Ole Slorer -Morgan Stanley

Question that we have was, was there anything in the backlog that was realized during the quarter that might have been entered at a lower pricing environment or a lower margin environment and that as we move forward you would see that same type of business move into more profitable.

Christopher Gaut

Yes, as Jim mentioned, we had the final delivery on a group of catwalks that we had initially contracted I think back at the end of 2011. And the last of that group of seven was delivered in Q1. But in terms of new backlog, we certainly didn't intent for anything to be an exceptionally low margin here. Although, there is a mix within the different product areas in a range of margins as one would expect across the product area. Anything you can think of, Prady.

Prady Iyyanki

We do see some opportunity in the subsea, which we're looking on from operational standpoint, but we don't expect to see the benefits till next year.

Operator

And your next question comes from the line of Robin Shoemaker with Citi.

Robin Shoemaker - Citi

So I wanted to ask you, you've had kind of 20% EBITDA margin target and you're really very close in striking distance of that. What would be required to get back the EBITDA margins that you had for while there in 2012 in 20%, 21%, 22% range. Of course, you've made some acquisitions since that time and you saw EBITDA margins dip well below 20%. So is it pricing primarily from here or some additional efficiency gains from what you've -- efficiency initiatives that you've had already?

Christopher Gaut

The initiatives that we have are intended to improve the margins. Robin, of course, we have, as a maturing public company, had to layer in some additional overhead and SG&A costs, particularly as we built out our international network, and we're absorbing those costs.

It's also I think a bit of a mix of effect as some of our higher margin businesses recover, like the flow equipment business. But I think the main point is these initiatives that that Prady was talking about of operational efficiency, working on our sourcing and our procurement and the operational excellence that we are driving for.

Robin Shoemaker - Citi

And have the acquisitions you've made since that timeframe, say, the last two years. Do you calculate those as being accretive to that 20% EBITDA margin or in the same ballpark?

Christopher Gaut

I think in general the acquisitions have been very attractive margins, Robin. And it's just the additional costs that we've incurred, and then of course as we all know, the slowing of the North America market since 2012 through 2013 that affected some of our good margin activity there. It's nice to see that that business is starting to comeback.

Robin Shoemaker - Citi

Just one final question on that, since you are seeing a recovery and demand for consumable products from your North American customers. And some I guess beginnings of some refurbishment of older or perhaps idle fracs spreads. And we did hear one comment on a conference call yesterday about a company that is going to build and deploy a new frac spread. So do you see any possibilities or are you seeing any orders coming in for new frac spreads?

Christopher Gaut

Yes, we hear that same talk. And I think there will be some additions to fleets this year. I think the rate of that will depend upon the pricing that our customers, the pressure pumping service companies realize. But in certain circumstances, I think they are thinking about additions to their fleet at this point to a modest extent.

Operator

Your next question comes from the line of Brad Handler with Jefferies.

Brad Handler - Jefferies

Could you please offer some of your insights and perspective on a couple of segments that haven't gotten a lot of attention on the call, production equipment and valves? You've obviously characterized those for us in the past, as being I guess, I'll call them U-shaped in their trajectory and some recovery, but just three months forward what's happening with the outlook, the orders, some of the long cycle stuff in valves, the competitive landscape in production equipment et cetera?

Christopher Gaut

Brad, as we talked before, we look back at 2013, the second half of last year saw lower revenue for both those businesses than the first half. In the first quarter here, we saw an uptick in revenue in both businesses, and a nice uptick in the orders for both businesses. So our expectation remains as we said before, that we will see some growth over the course of the year in the sales for both those businesses. And some operating leverage hopefully that will result for those higher sales.

I think on the competitive environment in production equipment, yes, I think the competitive pressures have increased from a number of competitors in certain geographic areas. But I think our folks have done a real good job of expanding our customer base, becoming I think better entrenched with our key customers and better penetrating certain parts of the market for example, the modularized multi-well pad equipment for West Texas, for instance.

And on the valve side, we are expecting an increase in orders to begin later this year related to the petrochemical projects that are being constructed and continue to see large quotes and association with those projects and those orders will begin to be awarded later this year is our expectation.

Brad Handler - Jefferies

Just maybe a quick follow-up on the valves side then. Can you characterize where you've seen some of the increase. You mentioned the nice pickup in orders, what segment of the business is that coming from?

Christopher Gaut

It has been in midstream side so far. With our ball valve business that has done well. Anything else, Wendell?

Wendell Brooks

Yes, we've seen the pickup in the line of business also both in the U.S. and internationally and a little bit in the upstream business. So every month seems to be a little bit stronger in the valve business and we still feel better about the second half as that continues.

Operator

And your next question comes from the line of Doug Becker with Bank of America Merrill Lynch.

Doug Becker - Bank of America Merrill Lynch

I want to dig in a little bit more on the Downhole Technologies. Given the capacity expansion that you saw in those businesses last year, can we get a sense for how revenues were year-over-year, just in that segment?

Christopher Gaut

So in our Downhole business we have seen good increase in revenues year-over-year and I think that's across the board with the different products that we have there, made progress on the completion products, the greater capacity in artificial lift products and the progress that we've made in the cementing and casing accessories, too.

Doug Becker - Bank of America Merrill Lynch

Would it be fair to say, it's close to 20% growth year-over-year?

Christopher Gaut

It's good growth. Good growth.

Doug Becker - Bank of America Merrill Lynch

And that's still your highest margin business?

Christopher Gaut

It is.

Doug Becker - Bank of America Merrill Lynch

And you see pricing opportunities it sounds like there, so we could be thinking about incremental margins, just once again, just kind of honing on this part of the business of 40% or so?

Christopher Gaut

Maybe not quite that high, but, yes, they're accretive margins.

Operator

And your next question comes from the line of Robert MacKenzie with Iberia Capital Partners.

Robert MacKenzie - Iberia Capital Partners

Question for you Chris, I was wondering if you could give us a little more color on the nice sequential increase in P&I revenue, kind of how that may have stood among the three sub-segments there? You are up $10 million sequentially quarter-over-quarter, and that was really most of it sequentially advance, wondering where most of that came from?

James Harris

Rob, the biggest grower for us on the P&I side was in flow equipment. The increase in the production equipment and valves, it was more modest, but small growth there sequentially. Most of it came in flow equipment.

Christopher Gaut

And for the reasons we said, Rob, that we are seeing our activity base consumable products business being driven by the destocking, having run its course now, now reflecting the activity levels there.

Robert MacKenzie - Iberia Capital Partners

And are you able to share with us in that segment, who are some of your top customers maybe?

Christopher Gaut

Our customers in the flow equipment would be not so much the big three, but behind that we have I think a diverse and broad customer base there.

Robert MacKenzie - Iberia Capital Partners

And how would you characterize the potential now and the market for that equipment now versus say in 2010? Has it changed much in terms of what people are ordering, the type of manifolds and the kit they're ordering over the past several years?

Christopher Gaut

There is a change, Rob, and a constant effort among operators to try to find, say fluid ends that gives the best service life. And given the different applications in different areas, there is preferences for different stroke length, different coatings, different steel material, stainless, et cetera. The flow iron probably to a lesser degree.

Robert MacKenzie - Iberia Capital Partners

And my final question would be along the line of the pipe handling packages you were awarded in the quarter from Latin America. Can you give us a feel for kind of the rough ballparks or what one of those might contribute to the order total?

Christopher Gaut

So each one about a $1 million.

Operator

Your next question comes from the line of Martin Malloy with Johnson.

Martin Malloy - Johnson

Could you give us an update on the manufacturing operation at Broussard, Louisiana, and how that's ramping up and if there are other consolidation opportunities on the manufacturing side out there for you?

Christopher Gaut

We I think are pleased with the job that our team did in managing the transition to that new manufacturing facility and the closing down of the legacy facilities. And although there is always a disruption, when you startup a new plant, I think they did a really good job of planning and executing on that.

And, yes, we have further such facility consolidations planned this year and in next year. This year for our flow equipment business. Next year for coming on hopefully in the Downhole business. And we're also looking at some move and consolidation in our subsea business this year too.

Martin Malloy - Johnson

And then, the strong orders that you saw in first quarter, have those continued on to April?

Christopher Gaut

I don't want to get into the minutiae of giving weekly or monthly updates. But I think the positive tone in orders is something we are confident is reflective of the trends in the market. Let's just say that.

Operator

And your next question comes from the line of Mike Urban with Deutsche Bank.

Mike Urban - Deutsche Bank

So you talked a bunch about the pickup in the pumping consumables business, most of that at least for now is kind of under replacement and maintenance and restocking side. If you take a couple of years back, before we got into the several capacity and destocking situation, if there is such a thing as a normal market in pressure pumping, how much of your business was kind of new equipment versus replacement or maintenance CapEx or maintenance related? I guess, I'm just trying to get a sense of what the opportunity could be as that market comes back?

Christopher Gaut

Keeping in mind, Mike, that we do not supply, we do not make the big capital equipment or pumping units or things of that nature. So what we do supply are the spread of flow iron that would be used. And yes, back in 2012 and 2011 I think there was a fair amount of outfitting of new pumping spreads.

And I think maybe even a bigger factor back in those days was this stocking up and having a safety stock of consumable items, because the lead times had gotten along, right. And we don't have that now, of course, at all. The inventory is in the hands of the suppliers and the more normalized market, there is not this shortage mentality by any stretch that there was back in 2012.

Mike Urban - Deutsche Bank

And then unrelated follow-up, that you've talked a lot about the efficiency initiatives and self-help, if you will, that's hopefully driving the margins higher over the course of the year. How much of that is focused on and just kind of getting right what you have and integrating the acquisitions that you have, and is there that you've done already or are you also kind of thinking ahead to scalability in terms of the organic opportunities that you've talked about as well as getting back into the M&A market later this year next year?

Prady Iyyanki

I would say the areas of focus and where the opportunities are is as we improve our execution there is some juice there, procurement. We are a decent-sized company now this year and our buy is about $1 billion. There is an opportunity there from a procurement standpoint and there are cost of quality and labor. So as we focus on those particular areas, we expect to get some productivity. And we had our first supplier conference last month, and we are still in the process of building the teams. So some of that benefit will be later part of this year and also next year.

But at the same time, as we mentioned before, we are not happy with our R&D investments. We spent less than 0.5% of our total sales on R&D investments. We need to invest money there for future growth, '15 and beyond. And also improve our sales presence regionally and globally. And that's why we're focused on productivity on one side and we need some of those savings to invest in R&D and commercial presence.

Christopher Gaut

Scalability is a real focus for us, Mike.

Mike Urban - Deutsche Bank

I guess, I just wanted to make sure that or try to understand, as you do start to think about getting back into growth mode, especially by acquisition, that you would think that anything you would add on would, again subject to business mix, would be at those kind of higher or normalized margins that you're hoping to achieve rather than kind of having to take a step back to integrate again?

Christopher Gaut

That's our aim. But, Mike, you know, we do intend to continue to do acquisitions. And so integration is an ongoing process for us.

Operator

Your next question comes from the line of Tom Curran with FBR Capital markets.

Tom Curran - FBR Capital markets

Chris or Prady, taking a step back, looking at the onshore international landscape for drilling equipment, could you speak to maybe and quantifying however you prefer to whatever degree you can, the nature of the opportunities you're seeing outside of Latin America, specifically Russia and the Middle East?

Christopher Gaut

Middle East is a good market. We continue to get some nice orders there associated with new equipment. And from a handling tool standpoint, good opportunities in Russia and good orders there. But more on the capital equipment side, Middle-East.

Tom Curran - FBR Capital markets

And for those opportunities in either market, how are you going to market with the growing equipment products? Is it just discrete one-off relationships with the customer or do you tend to find that you're partnering or often having your products added along side those of one or other companies. Is there any kind of alliances involved?

Christopher Gaut

So the land rig market, you know, many companies building land rigs want to choose the components, that a different pieces of equipments that they are going to put together rather than buying a turnkey rig. And that is where we have good success. On the other hands on the offshore side, I think we are making progress on alliances with some of the shipyards that are building new offshore rigs.

Tom Curran - FBR Capital markets

And then, turning to specifically the ROV business and then for flow control, treating iron and fluid ends, where would you estimate your shares are at for those two businesses respectively at this point?

Christopher Gaut

For flow equipment, I think we're probably a number three provider in that space. And we had a relatively small share behind some of much larger companies. And then what was the other one, Tom?

Tom Curran - FBR Capital markets

ROVs?

Christopher Gaut

ROVs, clearly, we think we have a very good share there. A very well regarded offering and probably the leading reputation for reliability and so we're in a very much, and in the very top tier there.

Tom Curran - FBR Capital markets

My impression is over the last few quarters you might have pulled at least slightly into the lead versus having been sort of neck-and-neck with Schilling?

Christopher Gaut

I think we've done quite well here recently. And I think the strength we have is the vertical integration and the breadth of components that we offer not only on our completed units but those components that we can sell, even if we don't win the whole vehicle.

Operator

Your next question comes from the line of Dan Leben with Robert W. Baird.

Dan Leben - Robert W. Baird

Just first on a flow equipment, can you talk about with the market coming back and normalizing, as that market starts to grow further, how much room in terms of capacity do we have with the current cost space?

Christopher Gaut

We do have capacity. We obviously were a much higher volumes, a year-and-a-half ago. But we feel that there is a lot of room for better efficiency and we do want to have more capacity in a consolidated way. And so we are currently investing in a large and new manufacturing facility for our flow equipment business and we expect to have that on line in the fourth quarter of this year. Working on the supply chain side is also important and we're doing that too. And trying to address any constrains we see there.

Dan Leben - Robert W. Baird

And then one follow-up on a comment earlier about, you're needing to increase the level of R&D to support future growth, how do you view the kind of long-term sustainable level of R&D that you need to undertake to support the growth of the business?

Prady Iyyanki

We are still tying to figure that out, I would say 2% is a good rule of thumb, but we will not get there in the next 12 months, it will be a journey.

Christopher Gaut

So we appreciate your interest and your good questions. And we look forward to another call with you next quarter. And hopefully see you in the interim. Thanks.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. And have a great day.

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