Franks International's (FI) CEO Gary Luquette on Q1 2016 Results - Earnings Call Transcript

| About: Frank's International (FI)

Franks International NV (NYSE:FI)

Q1 2016 Earnings Conference Call

April 27, 2016 11:00 AM ET

Executives

Blake Holcomb - IR

Gary Luquette - President and CEO

Jeff Bird - EVP and CFO

John Walker - EVP, Operations

Analysts

Robin Shoemaker - KeyBanc

Kurt Hallead - RBC Capital Markets

Jim Wicklund - Credit Suisse

Darren Gacicia - KLR Group

Georg Venturatos - Johnson Rice

Waqar Syed - Goldman Sachs

Ian Macpherson - Simmons & Company

Joe Gibney - Capital One

Brad Handler - Jefferies

Operator

Welcome to the Q1 2016 Frank's International N.V. Earnings Conference Call. My name is Vanessa and I will be your operator for today's call. [Operator Instructions]. Please note that this conference is being recorded.

And I will now turn the call over to Mr. Blake Holcomb. Sir, you may begin.

Blake Holcomb

Thanks, Vanessa. Good morning, everyone, and welcome to Frank's International conference call to discuss the first quarter of 2016 earnings. I'm like Holcomb, Director of Investor Relations. Joining me today on the call 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 an operational highlights and overview of the quarter. Jeff will then provide additional detail on our operations and financial results. Gary will then conclude with his closing remarks. Everyone will be available for questions after the 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 first quarter results, there are few legal items we would like to cover, beginning on page 3. 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 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 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 our website at franksinternational.com. There you may also access both the first quarter 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 measure in the first quarter of 2016 earnings release, which was issued by the Company earlier today.

I will now turn the call over to Gary for his comments.

Gary Luquette

Thank you, Blake, and good morning to everyone on the call. First quarter 2016 results for Frank's are further evidence of how challenging market conditions in our industry have gotten over the past 18 to 24 months. The headwinds we face and the pace at which the activity can deteriorate over the course of only a few months has been extraordinary. In just the past quarter, we have seen well count in the U.S. onshore market drop more than 40%. During the same time period, we have seen an additional 14% decrease in the number of rigs operating in the Gulf of Mexico. From the peak in 2014 through the end of the first quarter 2016, we have seen the offshore rig count decline as much as 40%, depending upon the region.

When you examine floating rig count that more often employs our advanced technology, during that same time period the impact has even been more severe, ranging anywhere from 30% to 60% with our two most prolific operating areas, the Gulf of Mexico and West Africa, down 37% and 50%, respectively.

In many previous cycles, the industry was typically able to weather short to medium term commodity price declines by adjusting capital spending, managing cash, and applying pricing pressure to the service sector for a period of time until prices recovered. However, in this most recent cycle, due to the extended downturn in prices and the lack of transparency as to when we will see a recovery, customers have drastically reduced budgets and they are deferring as much work as possible. This has created a supply-driven scenario where there is no predictable end to activity reductions or pricing pressures. Consequently, this has resulted in a steeper and more prolonged downturn where service and E&P companies alike are reporting negative earnings and cash flow, laying off thousands of employees and slashing spending, suspending projects, or in some cases borrowing money to pay dividends and meet financial obligations.

As evident from our first quarter results, the sharp declines in activity and the accompanying pricing concessions have clearly impacted our revenue and profitability. But while some companies are forced into conversations with creditors or lenders regarding liquidity, Frank's strong balance sheet provides the flexibility to continue to press forward with becoming a leaner and more efficient organization. In short, we believe we are poised to carry out our strategy to maintain share in our current markets, compete to develop new markets, and be opportunistic in regards to expanding our service offering and customer base through acquisitions.

Turning to Page 5, you'll see some of the key themes that drove the results of the first quarter. First, despite a decrease in revenues and adjusted EBITDA in our international and U.S. services segments, adjusted EBITDA of our offshore operating areas remain north of 30%. And overall market share was relatively unchanged from the previous quarter. This is a testament to the demand for our superior technology and the ability of our teams to communicate our value proposition to our customers, even in the face of lower actually and difficult market conditions.

Second, even during the most difficult quarter financially for Frank's since becoming a public company, we were able to once again generate positive free cash flow. In an environment where cash is key, the nearly $38 million free cash flow generated in the quarter resulted in growing our cash balance and further solidifying the stability of the Company's dividend.

Third, we took further actions to reduce our global workforce by roughly 10% to better align the organization with the anticipated activity levels for the next several quarters in our operating regions. We continue to control what we can by investing time and resources and processes to better optimize the utilization of our assets and find more cost-effective ways of transporting our people and equipment to drive value for Frank's.

And finally, the most telling story of the first quarter was the negative EBITDA margins experienced in both the tubular sales segment and the U.S. onshore business unit during the quarter. In the quarter, the tubular sales segment experienced a loss of nearly $500,000. As you may recall, the Company's manufacturing costs are included in this segment; and for Q1, exceeded our ability to grow sales in a market that has seen backlog reduced by almost 75% from the previous year.

Weighing on the U.S. services segment was an EBITDA loss in excess of 3 million in the U.S. onshore business, and corporate expense that Jeff will provide more detail on in his remarks. Simply stated, these two operational areas overshadowed a comparatively resilient international segment that experienced adjusted EBITDA margins around 38% and held market share on a global basis.

Moving on to Page 6, I will discuss in further detail some of the changes in the global offshore market we saw during the quarter. As previously mentioned, the global offshore market held up in the first quarter as gains in West Africa and Asia-Pac offset some share declines in other markets. Even with the decline in rig count and activity, we continue to hold a market-leading position in both the Gulf of Mexico and West Africa, with greater than a 50% share in each region.

Moving to other parts of the business, Latin America and the Middle East accounted for roughly 60% of the sequential revenue decline in the offshore segment. Expected revenues associated with new opportunities in the Middle East were pushed out into the second quarter, and Latin America saw revenue shortfalls across nearly all countries from work suspensions and cancellations. We expect the trend in the Middle East to reverse in the coming quarters as opportunities mature and serve to offset revenue shortfalls in other areas. But Latin America is expected to remain under significant pressure, and likely will trend lower for the balance of the year.

In the Asia-Pacific and West Africa regions, we achieved market share gains, but the decline in the overall addressable market exceeded the benefit from the share gains. In Asia, delayed entry into new markets and lower uplifts in the current revenue streams did not materialize as expected. In West Africa, we achieved share growth with slower declines in revenues, but we believe that the outlook for the region will be dramatically lower for the balance of the year.

And in Europe, market share moved slightly lower as the commencement of work on two rigs was pushed out into the second and third quarters, respectively. As mentioned in the last quarter's call, our strategy in this difficult market is to remain focused on controlling what we can, holding or gaining market share, and continuing to stress to our customers the value of our superior technology offering and capability.

I will now turn the call over to Jeff to provide a bit more color on the financial and operational results during the quarter. Jeff?

Jeff Bird

Thanks, Gary. Beginning on Page 8 are the financial results for the first-quarter 2016 and the comparison to the previous quarter. Revenues from the international and U.S. services segments, combined, fell roughly 16% from the fourth quarter of 2015 to 132 million, slightly below our expectations. Tubular sales segment fell 53%, meaningfully below our guidance. The tubular sales reflected the impact of a 75% reduction in the backlog of orders from a year ago, translating to less-than-expected international and Deepwater fabrication projects. Tubular sales, which had served as a tailwind in 2015, reversed course in the first quarter of 2016, leading to a greater than anticipated decline in the overall company sequential revenues of 24%. Adjusted EBITDA for the quarter saw a decrease of more than 50% sequentially to $32 million or nearly 21% of revenue. The decline was largely due to a slowdown in the U.S. offshore business, a net loss in tubular sales, inclusive of manufacturing costs, and higher corporate expenses. This led to an adjusted EBITDA contribution of $270,000 between the U.S. services and tubular sales segments combined, leaving the international segment's $31 million as the main driver of adjusted EBITDA for the quarter. Additionally, the international segment also represented over 50% of the company's revenue for the quarter, further demonstrating that the decline seen in North America and tubular sales in the Gulf have been more significantly impacted by the decreases in volume and pricing than the international regions. Even in the midst of these lower revenues and adjusted EBITDA margins, Frank's was able to again generate positive free cash flow for the quarter. The roughly $38 million of free cash flow, or 25% of revenue, was boosted by lower than-budgeted capital expenditures of $8 million. This led to a further increase in cash on the balance sheet. We expect that capital expenditures for the remaining quarters of 2016 to be higher, as we still plan to spend approximately $75 million this year on facilities, equipment, and other PP&E.

Turning to page 9, we see a more detailed look at the international segment. The declines in the segment were mostly in line with our guidance, finishing down approximately 10%. Adjusted EBITDA fell roughly 12% sequentially to $31 million, or just below the 38% of revenue we have seen in the segment the past few quarters. Latin America, Canada and the Middle East drove the majority of the revenue declines, while higher than forecasted revenues in West Africa helped to somewhat soften the impact. The Middle East is expected to see better results in future quarters, but Latin America and West Africa appear to be headed lower for the remainder of the year.

Moving to the U.S. services segment on page 10, we saw a 24% decline in revenues to roughly $49 million in the segment. The decline was primarily driven by two factors: a more than 40% reduction in the onshore segment from lower activity related to rig count; and a more modest 17% decline in the offshore business, driven by lower volumes and continued pricing pressures. Adjusted EBITDA for the segment was materially lower for the quarter, at just under $1 million or 2% of revenue. With that said, our U.S. offshore business continued to see adjusted EBITDA margins above 40%. As we have previously mentioned, the U.S. service segment includes corporate costs that were roughly $13 million for the quarter. Additionally, the U.S. onshore business experienced a net loss in excess of $3 million, leading to a lower margin than we have historically experienced in this segment. The U.S. services segment is expected to show modest improvement as the year progresses. The losses in the onshore segment appear to be narrowing due to the further cost reductions taken in the quarter. Additionally, broad SG&A reductions in corporate spending, initiated in Q1, should start to show benefit in late Q2.

Closing out the business segment with tubular sales on page 11, we see the strong contribution seen in the second half of 2015 has completely evaporated to $22 million in revenue. This represents a 53% sequential decline and was the sharpest decline of any segment reported this quarter. In fact, the tubular sales adjusted EBITDA generated did not cover the company's manufacturing costs reported in this segment. This resulted in a net adjusted EBITDA loss of almost $500,000 or negative 2% of revenue. While we did plan for a meaningful decline in this segment's contribution to the company's adjusted EBITDA in the first quarter, we did not anticipate a negative margin. Despite some slight pickup in quotes in the marketplace, there does not appear to be any new major awards on the horizon. This segment will likely not contribute significantly to earnings in 2016 until market conditions improve.

Before turning the call back over to Gary, I would like to make a couple of comments on our cost reduction program. As previously announced, we had expected to realize in excess of $60 million in savings annualized for 2016. After recent actions taken in the first quarter, we now expect annualized savings to exceed $75 million. While these actions lagged our revenue decline seen in Q1, resulting in higher than projected detrimental margins, we are confident that after careful analysis these cost reductions are the right decisions for Frank's, given the current market. The actions are all part of the process to become a leaner and more effective organization. These savings are broad reaching and include not only workforce reductions, but significant benefits from Frank's recent negotiations with its entire vendor base. The positive effects of these actions should begin to show up in our earnings, beginning in the second quarter.

Lastly, it is expected that our Board of Directors will declare a dividend on May 20, 2016 of $0.15 per common share, subject to applicable Dutch dividend withholding taxes, for the record date of June 10 with payment on June 24. This is unchanged from previous quarter. And considering the Company's strong cash position, we do not expect any change in the dividend in the coming quarters.

The Board also approved a $150 million share repurchase program that will allow the Company to make open market or privately negotiated repurchases of common stock, subject to market conditions, public share flow, and legal requirements. We view having this as a framework for share repurchases is sound practice for public companies and comparable to existing programs within our industry. As we think about our capital allocation policy going forward, we continue to prioritize the Company dividends, followed by the funding of our internal capital program, inorganic opportunities in the form of M&A, and share repurchases under the new program.

With that, I will now turn the call back over to Gary for some final comments before we open up the call for Q&A.

Gary Luquette

Thanks, Jeff. Before we open up the lines, let me wrap up on Page 12 with a high-level overview of our outlook and key themes for the remainder of the year. As mentioned earlier, we continue to see downside risk to the international services segment, primarily in Latin America and West Africa. The challenges facing Latin America in regards to the ability of customers to meet financial obligations have been well-documented, as has the challenge to the economics of some of our Deepwater plays.

In the West Africa region, current trends suggest that it will suffer the most severe declines as a dramatic reduction in rigs of approximately 30% by the end of Q2 appears to be likely. Even growing or holding market share and taking further cost reduction actions is not expected to offset this decline in activity. Longer-term opportunities in the region exist but are not expected in the near-term, and are significantly outweighed by the poor outlook we have for 2016.

In an attempt to mitigate some of the impact from lower activity levels expected for the balance of the year, we are continuing our efforts to increase sales in active areas as well as in underrepresented markets. In addition, we are taking further actions to reduce costs. While some of these actions will likely bear fruit in the near-term, all actions we take consider the inevitable recovery. And we will ensure that we have the people, the equipment, and overall capability to adequately respond when that time comes.

Taking into consideration the downside pressures to our key international market for the remainder of the year, it is important that we align on expectations. Though it is difficult to predict, even as we continue to make changes to improve our underlying cost base, Q2 results and likely the remainder of 2016 may look no better than Q1 unless conditions materially improve in the market.

In closing, we remain committed to controlling the things we can control, and are taking the steps necessary to improve the efficiency and cost effectiveness of our business while maintaining or growing our market share as profitably as possible. We can ill afford to waste this down cycle waiting on macro conditions to improve. Frank's is well positioned to take advantage of our strong balance sheet, market-leading position, and talented workforce to become a Company that emerges leaner, more efficient, stronger, and more respected than before.

To achieve this end, we will continue to compete for market share; deliver safe, reliable and cost-effective services to our customers; while potentially broadening our service offerings through an acquisition, if the right opportunity presents itself.

With that, I would like to thank you for your time and interest in Frank's. And we will now open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We also ask that you please limit yourself to one question and one follow question. [Operator Instructions] And it looks like we have our first question from Robin Shoemaker with KeyBanc.

Robin Shoemaker

So I wanted to ask, on the share buyback decision, does it in any way communicate something about the M&A opportunities? Of course, you have stressed, since the downturn began, that M&A opportunities would be significant for Frank's and that you expected the bid-ask spread to narrow somewhat as we went through the downturn. Do you see any evidence of that? Or has it been somewhat disappointing?

Jeff Bird

Yes. Just to answer your question, it really doesn't change -- this is Jeff Bird -- it really doesn't change our outlook on M&A. We continue to actively review the market and be close to the market, as I think we've discussed on a number of calls. We reviewed over 50 deals last year, and continue to do that. We do see the bid ask starting to narrow, so we're optimistic about that. But the share buyback itself, we just view that as good capital allocation, good corporate process.

Robin Shoemaker

Okay. My other question just has to do with the Middle East market, where you have indicated a pickup in activity. Since that's a jack up market, I wonder how the growth of that market will what's driving it, and the size of the opportunity relative to the decline you are describing that lies ahead for West Africa.

John Walker

This is John Walker. So actually on Q-over-Q basis, the Middle East we had a contraction in market share on the offshore side of the business, but we did secure a significant opportunity in the onshore side of the business. So we have a good franchise in the Middle East and we are working toward executing on several opportunities onshore. We actually do have some offshore opportunities that will roll into the tail end of Q2, and then it's a multiyear contract for the second half of this year. That does not actually offset the decline from our two major markets, which would be the Gulf of Mexico and West Africa. So this is why we are certainly messaging that, from a full year perspective, we do see a decline in the tubular services.

Operator

Thank you. Our next question comes from Kurt Hallead with RBC Capital Markets. Go ahead, Kurt.

Kurt Hallead

I was wondering if you might give a little bit more color and perspective on your expectations on international pricing pressures, and what that impact could potentially be on detrimental margins as we move forward.

John Walker

So from a pricing pressure perspective, internationally, we've seen an approximate 20% reduction in pricing in West Africa. But the major concession really is around the activity. There has been a significant reduction in activity in West Africa, orientated around the poor exploration results; obviously, the lower commodity price right now. We've seen in the quarter deferrals and actually, in some cases, cancellation of appraisal and development projects. So we are holding market share, but the overall market is contracting. Now, from an APAC perspective, we have endured some recent pricing pressure there and managing to hold market share and, in fact, gaining on it. So it's a mixed the Latin American market, that's not price pressure driven, it's really addressable market contraction. Europe is a small part, single digits, of pricing pressure; but, again activity reductions.

Kurt Hallead

Great. And I think, if I can recall correctly, in your first quarter you indicated that you thought that pricing had stabilized in the U.S. market. Given the significant drops in activity that we continue to see, and are expected to see the second quarter, is that still the perspective?

John Walker

Sure. So I'll take that one on the offshore side. We saw increased competition in the offshore side of the business, Gulf of Mexico. But the addressable market has a material contraction. The U.S. onshore side of the business continues to drive irrational behavior around pricing, but it's not sustainable. And with our balance sheet, we are in for a strategic long haul. We are seeing competition fall off. And I would say that we are definitely seeing the results because we are maintaining a market share in the 30s.

Jeff Bird

I think, if you look at the Q-on-Q change in U.S. services, about 80% of that revenue change is related to volume, with 20% related to price. And the bulk of that price ended up being more offshore than onshore.

Operator

Thank you. Our next question comes from Jim Wicklund with Credit Suisse.

Jim Wicklund

In terms of the U.S. onshore market, is your best growth from here doing what you did last time, which is making an acquisition of one of the existing companies? Or, considering you had mentioned some of them are going out of business possibly several of them could. Do you expand organically, since you were talking in the past about a little overcapacity of equipment in those markets, anyway?

Gary Luquette

Right now this is Gary. I would say our market share continues to inch up as the service sector around us continues to collapse because of poor rates and pricing pressures in that segment. At the present time, I would say we are pretty satisfied with our market position. And if the market continues to collapse around us, I think our opportunity really is to start pushing back on some of these low rates that we are having to work at now, and hopefully start seeing some rate recovery in the second half of the year to try to start clawing back to a neutral position. But I think right now, if you step back, when we were thinking about our acquisition some 14, 16 months ago of Timco, we were hoping to get ourselves to a point where we had a 25%ish sort of market share. Now we are there, and then some. So I really like the position we have now. And likely our market share will go up, just because of the collapsing market around us.

Jim Wicklund

Okay, makes sense. And my follow-up, if I could, the Gulf of Mexico, you talked about how much it's down, and how bad it is. How much worse does it get? And you had said that there was increasing competitive pressures. New entrants? Existing entrants? Can you talk to us a little bit about -- more about more about the Gulf of Mexico and the outlook?

Gary Luquette

Yes. It's more existing players; there's not a new entrant. And I will say we expect this thing to get close to a market bottom. But that's not to say that you won't have, in a prolonged period of prices and contraction in activity, somebody come in and try to undercut because they see a strategic reason to do so with a specific operator, and all that. But we mentioned in our previous quarter's call that we thought the U.S. offshore business was starting to reach a market bottom. Despite the fact we've had a few blips in that, I still think we are getting very close to that. The projects that are fungible or deferrable have been deferred. But eventually, lease obligations are going to require people to either put up or be willing to drop it. And so we're optimistic here that if we are not close a bottom at the end of Q1 that we will see it sometime in Q2.

John Walker

And Jim. If I could just add to that we are maintaining market share in the Gulf of Mexico, which is an important factor. In the actual product mix, the well complexity is changing. So these extreme deep wells are just not being executed upon. So the impact on an EBITDA basis has obviously taken effect.

Operator

Thank you. Our next question comes from Darren Gacicia with KLR Group.

Darren Gacicia

When you talked a little bit about pricing in the last answer, when you think about how much equipment is probably kind of gone to the sidelines for you guys, is there an element of pricing that's required maybe to refurb or bring it back to be operable that you need to think about maybe getting pricing for that, in order to justify the returns and the expenditure to do that? What does that look like across your business lines, from that thought process?

Gary Luquette

In our product and service line, I don't think it is going to be as big of an issue as it's going to be for some of the more capital-intensive businesses, like the drilling units themselves. You are seeing a lot of coal stocking, a lot of stuff that's going to scrap. And then onshore, there's a lot of pressure pumping capacity that has been idled. And there's a real question as to how much of that will be brought back, and at what price they feel like they can bring it back. So there are certain things in the supply chain that I think are going to be a bit sticky, and are going to require some sustained higher prices to see those. But in our case, with the type of assets that we maintain, we are ready to go as soon as the market pops, both onshore as well as offshore in some of our more highly technical sort of assets.

Darren Gacicia

Now, does that change and look different when you think about people, and maybe adding back headcount? How does that work? I'm assuming that's its own level of overhead, if you will, as well. Does that require -- in terms of the hiring, if the thing starts to pick up, whether it's the U.S. land, U.S. Gulf of Mexico or international? How do you think about that relative to rehiring?

Gary Luquette

Well, in some cases, in certain sectors, I think it will be even more sticky to get personnel back. In our case -- and I tried to address this in some of my closing comments as I was summarizing our cost actions -- one of the things we are trying to do in Frank's is to make sure that when we do right size our organization, we think about the skills, the competencies and the capabilities we're going to need for the ramp-up; and we either protect those or we figure out a way to keep those on a line so that they are available for ramp-up when that occurs. But like I said, I think in your more capital-intensive industries, pressure pumping in particular, and I think the drilling units themselves -- there has been a significant washout of human resources in those sectors. And it will be interesting to see how fast they can safely and reliably ramp up.

Operator

Thank you. Our next question comes from Georg Venturatos with Johnson Rice.

Georg Venturatos

I was hoping maybe we could just get an update on where we stand in the jack-up market and how you see that market share growth evolving through '16. And then, additionally, I know last quarter you mentioned the opportunity to eventually reposition some assets and move some of those into the Middle East. Just wanted to get an update on where we stood there, and any other markets that may be apt to receive some assets from declining markets.

John Walker

This is John Walker. So following up to the earlier question, the franchise and distribution network that we have in the Middle East is mature. We've been there for two decades. As far as the jack up market, we have a small market share in that market. We have a contract that will increase our market share significantly from a small base in Q3, going in for the remainder of the year. It's a multiservice contract. In the longer term, the value proposition and total cost of ownership about moving the assets from the Deepwater markets into more complex, challenging, jack up market is ongoing. Getting the opportunity is going to be several quarters before we penetrate, because we've got to wait for tendering cycles. We obviously have some contracts in place; the activity levels are slightly increasing, but it's not material enough that it's going to move the needle, as we say. So in the short term, our market penetration is around the onshore side of the business. But we do recognize that the jack up is much more long term for the franchise.

Gary Luquette

Yes; we've mentioned in previous quarters that when you think about the global jack up market, Frank's position there is about 10%. And when you think about our position in the Deepwater market, I think you can see that there's real opportunity there. And that market share was by design. When the Deepwater complex well market was popping, we wanted to put our resources and attention in serving that market. Clearly, that's our premium market. And so, by design, we had our focus there. And I think now we've got an opportunity to diversify our portfolio a little bit. There's tremendous potential there with holding a 10% market share. And it's going to take time, as John mentioned, in order to really grow that market share. But we're confident we can. And that's where we got our start as a company is in the offshore shelf business, so we know it quite well.

Georg Venturatos

Great. And then a follow up here really on the M&A side. Just wanted to check with you guys, given the environment and certainly net cash balances growing. But I know previously, you had talked about a willingness to take that debt to EBITDA level to 2 times, implying a certain level of target opportunities on the M&A front. Has that changed at all? Is that still where you are sticking in terms of your willingness to lever the balance sheet?

Gary Luquette

Nothing has really changed in that respect. We continue to evaluate opportunities. And with the fact that, as Jeff mentioned, we have padded a little bit of cash to our balance sheet, we are in pretty good shape. We've got essentially no debt, and capacity to go out and finance an acquisition, if needed. That's all still intact.

Operator

Thank you. Our next question comes from Waqar Syed with Goldman Sachs.

Waqar Syed

In your international business, you mentioned that you had about 20% reduction in pricing in West Africa. Does the first quarter results already reflect fully that pricing reduction, or is there more to come in the subsequent quarters?

John Walker

It's baked into the first quarter results. But the signaling of what's happening is activity driven in the second half of this year. There's going to be a material contraction in the West Africa market for the second half of the year, and that's driven by simple activity.

Waqar Syed

And then for in the first quarter, would you say maybe 80% of the revenues in international were offshore? Could you give some kind of breakdown?

John Walker

Those numbers are generally right, but we don't actually give a breakdown of the off and onshore business.

Operator

Thank you. Our next question comes from Ian Macpherson with Simmons & Company.

Ian Macpherson

Jeff, you called out the $13 million in overhead burden in the Gulf of Mexico margins in Q1. It just seems very outsized. Can you compare that to the historical, normal overhead burden that's in that number, and what you expect going forward as we try to think about normalized margins?

Jeff Bird

Sure. So just to clarify, the $13 million is really the corporate overhead for the whole company. So we put that in the U.S. services business. You should expect the number to be around $8 million to $10 million, going forward. That will trail down throughout the year. We've taken some SG&A actions in the first quarter. Those will start to bear results in late Q2, Q3.

Ian Macpherson

Okay. That's helpful, thanks. I'm trying to get a little bit more help thinking about the decline in international, as West Africa gets down in the second half. If we were to think about sequentially H2 versus H1, could the revenues in international overall be down as much is 15% to 20%, do you think?

Jeff Bird

I don't know about probably closer to 15% than 20%.

Ian Macpherson

Okay.

Operator

Thank you. Our next question comes from Joe Gibney with Capital One.

Joe Gibney

Just one quick modeling question, Jeff; just was curious if you could update us on the working capital side, DSO initiatives, where things stand here, coming out of 1Q.

Jeff Bird

Sure. It obviously gets more challenging if you look. We had some low-hanging fruit last year. You will probably recall that we probably generated around $80 million between inventory and accounts receivable and what we call incremental working capital, other than just the balance sheet being unwound as the volumes go down. We will continue to target a DSO reduction of probably around 10 days this year, coming out of Q4. And then, in addition to that, we are also starting to target some things around DPO as well. So we are rolling out some new initiatives on DPO, as well, that we think will be helpful. Inventory gets more challenging as we talk about the tubular sales falling off; the inventory number is going to be more challenging. So I think if you look at the areas where we will have improvement this year, you'll see the improvement in DSO probably around 10 days. And you will see an improvement in DPO as we roll out some new programs there.

Operator

Thank you. Our next question comes from Brad Handler with Jefferies.

Brad Handler

Could I ask you please just to speak to the manufacturing overhang you mentioned in tubular? Perhaps I'm just not quite piecing some things together. But if there are some specific steps you wind up planning or taking relative to lowering that burden -- assuming you all continue to have to operate at a pretty low level in tubular for the foreseeable future -- are there some specific things on the manufacturing side that you can do?

Jeff Bird

Sure. I think the one thing that might be a little confusing that most folks might not recall is that this is not manufacturing actually related to tubular; this is manufacturing that actually supplies equipment to the whole Company. So just because the tubular volume goes down doesn't necessarily mean the manufacturing volume goes down. The manufacturing volume is a direct result of the entire franchise, if you will. And there's a certain amount that's just inherent in there to maintain a certain level of capacity to supply the entire franchise. So that's what we see in there, and that number runs anywhere from $3 million to $4 million, somewhere in that range. So as we see the tubular revenues down right now, that's going to make it challenging for us, the balance of the year, to really contribute meaningfully from that segment. If I peel out manufacturing and just look at tubular margins by themselves, they are around 15% to 20% margins, just tubular margins by themselves.

John Walker

If I can just add to that around the manufacturing standpoint, from a service quality perspective, something that the Company has been known for decades around is the ability to develop bespoke, unique type products for unscheduled activity. And that's something that Jeff and I continue to talk about in making sure that we have a certain structure in manufacturing to allow us to continue with that service quality.

Brad Handler

Fair enough. And maybe an unrelated follow-up, but just following up on Ian's question of a couple of questions ago, I'm just not sure I quite caught it. You mentioned international revenues, and then you mentioned something down 15%. And I just wasn't quite sure I heard the reference points. But that wasn't annual, was it? Perhaps it was second half/first half.

Jeff Bird

It was first-half/second half, was the question. And so I believe his question was 15% to 20%. So that's probably a fair number, in that range.

Operator

Thank you. We have no further questions at this time. I will now turn the call over to Gary Luquette for closing remarks.

Gary Luquette

Okay. Just thanks for the great questions. Thanks for your time and interest in Frank's. And with that, we will end today's call.

Operator

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

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