FMC Technologies, Inc. (NYSE:FTI)
Q2 2016 Results Earnings Conference Call
June 21, 2016, 09:00 AM ET
Matthew Seinsheimer - IR
John Gremp - Chief Executive Officer
Maryann Mannen - Chief Financial Officer
Doug Pferdehirt - President and Chief Operating Officer
Bill Herbert - Simmons
James Wicklund - Credit Suisse
Bill Sanchez - Howard Weil
Ole Slorer - Morgan Stanley
Robert MacKenzie - Iberia Capital Partners
David Anderson - Barclays Capital
Judson Bailey - Wells Fargo
Scott Gruber - Citigroup
Dan Boyd - BMO Capital Markets
Good morning. My name is Emily, and I will be your conference operator today. At this time, I would like to welcome everyone to the FMC Technologies' Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.
Matt Seinsheimer, you may begin your conference.
Good morning, and welcome to FMC Technologies' second quarter 2016 earnings conference call. Our news release and financial statements issued yesterday can be found on our website. I'd like to caution you with respect to any forward-looking statements made during this call. Although these forward-looking statements are based on our current expectations, beliefs and assumptions regarding future developments and business conditions, they are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in or implied by these statements.
Known material factors that could cause our actual results to differ from our projected results are described in our 10-K, 10-Q and other filings with the SEC. We wish to caution you not to place undue reliance on any forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any of our forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise.
I will now turn the call over to John Gremp, FMC Technologies' Chairman and CEO.
Good morning. Welcome to our second quarter 2016 earnings conference call. With me today are Maryann Mannen, our Chief Financial Officer and Doug Pferdehirt, our President and Chief Operating Officer.
I'll begin my remarks today with highlights from the quarter and then provide comments on the industry and outlook for our markets. I'll also speak to our strategy for dealing with the downturn and how we are better positioned for market recovery including comments on our pending merger with Technip.
Doug will then speak to the status of the Technip merger and more importantly, he will share our customers' reactions to the merger before providing an update on our Subsea business. Maryann will follow with specifics on our financial performance and an update to our financial outlook for 2016 and then we'll open up the call for questions.
Operating results in the quarter reflect both market conditions and our actions to address the cyclical downturn as the continued weakness experienced in our surface business was partially offset by another strong quarter in our subsea business. Subsea orders in the quarter were limited to subsea services inbound and small equipment orders as we continue to see the impact of reduced capital spending.
While orders were soft, our subsea technologies segment delivered margins of 14.1% when excluding charges. These solid results reflect our continued focus on execution as well as the realization of additional restructuring savings. We've increased confidence in our ability to deliver strong performance for the year.
Surface technologies reported a loss in the quarter as revenue declines continued to offset the savings from our significant restructuring actions. Segment results were most negatively impacted by North America with sequential decline in the U.S. rig count as well as the seasonal effects of the Canadian breakup posed further challenges in the period.
Our international surface business continues to outpace North America supported in large part by relative strength in the Middle East. We made further adjustments to our surface business in the second quarter and will continue to take additional actions. Today the business is operating on a much lower cost basis and that will help us navigate through the cycle, while maintaining the operational flexibility needed to respond in a market recovery.
Turning to the market outlook, the energy industry has experienced significant change over the last two years. The uncertainty around energy demand and supply has remained a constant theme throughout the period. Global events continue to challenge demand while OPEC uncertainty, shale production declines, and unexpected supply disruptions cast doubt on the stability of supply.
Although timing is always uncertain, we do know that the dramatic pullback in energy investment will impact global production. The implications are evident in the U.S. where crude production has now fallen nearly 8% from its peak. Despite this uncertainty, commodity prices have improved over the course of this year.
Oil and gas prices are now up more than 70% from the low levels reached in the first quarter. While they remain far below the prior peak, higher prices should improve operator cash flows. Confidence in the sustainability of those cash flows remains a key factor to moving capital spending higher. As confidence improves we anticipate spending will follow.
So far, this confidence is yet to materialize and customer spending in the quarter remained very depressed. Both North American and international rig counts experienced new cyclical lows and we've seen no pickup in domestic land activity beyond the seasonal effects of Canada. Long cycle businesses have also been impacted. Capital budgets though reset during recent commodity lows continue to drive near-term spending lower.
New order activity is moving at a very slow pace as sanctioning of deepwater projects continues to be delayed. But current activity only reflects the view of the current market. Long-term outlook is much different as the current pace of activity is just simply not sustainable. Even if global demand stays flat, the lack of investment will create a production shortfall that will ultimately reverse the spending cycle. Prices will respond. Cash flows will improve and this will boost operators' confidence. Capital spending will follow and in that environment shale will go back to work first.
Shale has the advantage of smaller upfront capital commitment and offers a faster payback to the operator. This activity increase will benefit our surface business in North America. We're also confident that deepwater investment will soon follow. Deepwater remains a critical component of global production and it is a necessary source of future hydrocarbon supply.
Many of our customers have repeatedly confirmed this view. And given the major role that deepwater plays in their reserve base, offshore production will continue to be a critical source of their future oil and gas production. But for deepwater to remain a viable resource, the industry recognizes that significant and sustainable cost reductions must be achieved.
The opportunity for such cost-reduction is very real in the offshore market. While the cost of the major deepwater project components have come down, there is significantly more savings that can be achieved. Our customers are not only lowering their operating costs, there are also changing their approach to developing deepwater, discovering new ways to lower development costs and to spread out over time the capital required to move these large projects forward.
These changes, along with the cost reductions in subsea production systems, surf components, drilling and completion services and topside facilities will further improve the economics of deepwater development.
At FMC Technologies we remain focused on what we can control. The aggressive actions we've taken to restructure our organization in response to the downturn lower activity levels continue to drive our service and manufacturing costs lower. But these actions go beyond the near-term savings.
Importantly, these efforts are intended to further strengthen our company, so that in the recovery, we will be in a position to provide alternative approaches that offer improved execution, product standardization, innovative technologies and integrated business models, with integration being the best opportunity to meaningfully impact the cost of development, both on and offshore.
The creation of Forsys Subsea provided tangible evidence of the benefits of integration. Through the joint venture we can deliver savings that go beyond those that either partner could deliver on their own. In the course of working with Technip we've also identified new ideas and new technologies that can create additional savings that are even more impactful than we originally imagined. Over time it became obvious to us that we could do even more working together as one company.
Let me conclude by saying the current downturn in our industry is one of the most severe we've experienced in decades. We acted quickly and took aggressive actions in response to the challenges of the down cycle. But unlike previous cycles the industry will emerge from this down cycle changed. This time things will be different and companies that survive this cycle will be fundamentally changed as well.
We are changing. Our actions have gone beyond the typical cycle response. We've significantly lowered our cost. We've embraced standardization. We've developed new technologies and most importantly, we've created an integrated business model that will be implemented and executed by a single merged company. I am confident that we not only survive the downturn, but that we will lead the industry in the changes that future demands.
I'll now turn it over to Doug and will come back later with some final remarks.
Thanks John. The last few months have certainly been exciting times for FMC Technologies. As John pointed out, we are making big changes and none will have a greater impact on the future of our company than the proposed merger with Technip.
Let me begin with an update on Forsys Subsea and more specifically some detail around the feed activity that is currently underway. I will then talk about the client response to the merger and finally conclude with an update on our subsea outlook.
Within seven months of establishing the alliance and joint venture with Technip, we announced that Forsys Subsea had been awarded three integrated feed studies. This was a remarkable achievement given the industry backdrop and it certainly exceeded our own expectations.
These first three feed studies demonstrate that operators are willing to consider a different approach to deepwater development, one that could provide them with savings of up to 30% on the combined SPS and SURF scope. Today, Forsys Subsea is actively working on more than 30 projects. This includes a combination of projects some of which are integrated and others that are more conventional in nature.
Integrated feed studies now represent over one third of the total demonstrating increased confidence in an integrated approach. Forsys Subsea is focusing on those opportunities that can provide meaningful savings to the operator and have the best chance of a direct integrated EPCI award.
We have increased confidence that an integrated feed study will result in a direct award later this year. Building on the success of Forsys Subsea, we announced a merger with Technip. Upon announcement, customer feedback was very positive as many customers expressed their full support of the merger.
In those conversations, there was a shared view that business as usual is no longer a viable option and that our business combination has the potential to provide a significant and sustainable improvement to deepwater project economics.
Looking at the merger progress over the first 60 days, we signed the official business combination agreement mid-June following the conclusion of the Works Council Consultation Process in Europe. In addition, we received a successful early conclusion of the U.S. Antitrust Review from regulators. We anticipate that we will close the transaction in early 2017.
Let me now turn back to our subsea operations and spend a few moments on our recent orders and current outlook. In the second quarter we reported total subsea orders of $334 million. Much like the prior quarter, orders were driven primarily by subsea services.
In the quarter, service orders were softer than anticipated being impacted by reduction in drilling related activities and in certain circumstances at the role of production enhancement activities due to budgetary reasons. We now expect subsea service orders to come in towards the lower end of our prior guidance of $1.2 billion to $1.4 billion in 2016.
Now looking to subsea projects, we continue to see industry potential for nearly 20 large projects to be awarded over the next 24 months. Of these, we continue to track a few that are likely to be awarded over the coming quarters.
Small equipment orders were soft in the quarter, but customer conversations are providing improved visibility that should drive smaller orders higher in the second half. These opportunities are typically focused on increasing production through tiebacks to existing host facilities.
In summary, we are tracking a few large projects that are likely to be awarded over the next 12 months. We anticipate an increase in small orders in the second half of the year driven by our alliance partners and we expect the conversion of an integrated feed to an integrated EPCI project later this year.
I will now turn the call over to Maryann.
Thanks Doug. Our second quarter diluted earnings per share were $0.22 when excluding certain after-tax charges of $47 million or $0.21 per diluted share. Included in our reported results are restructuring and other severance charges of $25 million, merger transaction costs of $18 million, impairment and other charges of $4 million, facility consolidation expenses of $6 million and currency devaluation losses of $13 million. We have provided a schedule in our press release issued last evening to show the quarterly impact to net income of all the costs incurred.
Last quarter, I shared with you our intention to take further restructuring costs in the balance of 2016. The majority of those restructuring charges anticipated were associated with our subsea business activity levels were expected to decline in the coming quarters. In the second quarter, we took a total of $28 million of impairment, restructuring and other severance charges or $0.09 per diluted share across all our business.
Our subsea technologies segment continues to deliver solid operating results in the quarter. Revenues were $854 million in the period. Quarter-over-quarter revenue comparisons were negatively impacted by lower project activity as well as $29 million of foreign currency translation.
Subsea technologies operating profit was $120 million in the quarter with a margin of 14.1% excluding charges of $23 million. Operating margins declined 120 basis points when excluding charges for both periods despite revenue being down approximately 31%.
Decremental margins were just 18% quarter-over-quarter when excluding charges as our restructuring initiatives and product cost reductions improved our performance. Segment backlog exiting the quarter was $2.9 billion which compares to prior year backlog of $4.7 billion.
Moving to our Surface Technologies results, Surface Technologies revenue for the quarter were $219 million down 40% from the prior year quarter. The revenue decline was driven by the steep contraction in our North American business somewhat mitigated by more moderate declines in our international business.
Geographic mix continues to provide some offset to the weak domestic markets as rig activity has been more resilient in some of the major international markets. Surface Technologies' operating loss for the second quarter were $17 million when excluding charges of $5 million. Segment backlog exiting the quarter stands at $357 million. This is predominantly related to our wellhead business outside of North America, which continues to outperform the domestic market.
Moving to our energy infrastructure results, revenue for the quarter was $85 million down 17% from the prior year quarter. Energy infrastructure operating profit for the quarter was $8 million. This segment continues to be negatively impacted by our measurement solutions business due to the decline in energy related infrastructure spending in North America.
Let's turn to the corporate items. Corporate expense in the quarter was $13.1 million. We continue to expect spending of approximately $14 million to $15 million per quarter through the remainder of 2016. Other revenue and expense net reflects expenses of $57.2 million dollars. There were several items in the quarter that drove this expense above our estimated spend.
These items included the following: business combination transaction cost of $18 million, foreign currency losses of $13 million including $17.5 million related to the Nigerian currency devaluation and $6 in transition costs related to facility consolidations.
For the remaining quarters of 2016, we now expect that other revenue and expense will be an expense of approximately $30 million per quarter which includes approximately $15 million per quarter of transaction and integration related spending for the merger. The quarterly estimate remains subject to foreign currency fluctuations.
Our tax provision in the quarter of $7.4 million does reflect a lower mix of U.S. income, but also was affected by certain expenses for merger activity that do not receive tax benefit. We continue to anticipate our 2016 tax rate to be between 21% and 23% for the full year given our mix of earnings. The full year estimated result assumes a portion of the expenses for the merger do not receive a tax benefit.
Capital spending this quarter was $32 million primarily directed towards subsea technologies. We now expect capital spending in 2016 to be approximately $130 million, down from our previous guidance of $150 million. At the end of the second quarter we had net debt of $251 million. It is comprised of $1.1 billion dollars of cash and $1.3 billion of debt.
We repurchased 782,000 shares of stock during the quarter at an average cost of $28.45 per share. In accordance with the business combination agreement we have suspended share repurchase activity until the completion of the merger. We averaged $228 million diluted shares outstanding in the quarter.
Looking forward, as Doug mentioned in his earlier remarks, we now expect full year subsea service revenue to approach the low end of our previously guided range of $1.2 billion to $1.4 billion.
Full year revenue for subsea technologies is expected to be between $3.3 billion to $3.4 billion which includes the year-to-date impact of $86 million of headwinds from the strength of the U.S. dollar. We now expect full year margins in a range of 12% to 13% excluding charges as we continue to execute well in our backlog and realize further benefit from our restructuring actions.
Surface Technologies revenue is now likely to be down approximately 30% to 35% versus 2015. North American activity has fallen more than was previously expected as rig count continued to slip beyond April levels. We do not expect much improved revenue activity in the balance of 2016.
As we shared last quarter we have made significant headcount reductions in this segment. However, we continue to balance further actions in response to activity levels in North America with the need to preserve our operational capabilities to respond to market recovery. We are however taking further steps in the operational footprint for the North America business.
We now expect operating margins in the low single digits for the full year excluding charges. Energy infrastructure guidance is unchanged. We continued to expect revenue to decline 5% to 10% year-over-year with operating margins that should approximate low to mid single digit excluding restructuring charges.
The second quarter reflects the operational improvements we have made in our Subsea business as well as the challenges our surface business faced adjusting to the rapid pace of activity declines in North America. As we indicated in our guidance, we are accelerating the pace of restructuring in our Subsea technologies segment. These are not only headcount reductions, but also structural changes to the global footprint and management of our Subsea operations.
These early actions have benefited the first half results. Additional actions will be required to offset the revenue declines we anticipate in 2017. We now expect to incur additional restructuring and facility rationalization of approximately $20 million to $25 million in the second half of the year.
So in summary, we remain confident in our ability to deliver low cost solutions across all our businesses. In Subsea technologies, our execution and cost improvements will position us well for lower activities in 2017. In surface technologies, our restructuring and integrated business model should allow us to perform well in the anticipated market recovery.
I will now turn the call back to John before we open up for your questions.
Thank you, Maryann. Earlier this year we announced that I will be retiring as Chief Executive Officer on September 1. While I will remain as Chairman until the closing of the merger, this will be my last earnings call.
As I reflect on my 41-year career, it has certainly been a privilege to lead this great organization and I recognize that all that we have accomplished is due in large part to the incredible support of so many stakeholders, my management team, our employees, customers, suppliers and shareholders.
I’m very proud of our organization and the team that will lead the company going forward. I’m confident that under Doug’s leadership they will successfully execute our strategy and the pending merger with Technip and I’m certain that the combined company will prove successful in the years ahead.
Emily, we are now ready to take questions.
[Operator Instructions] And your first question comes from the line of Bill Herbert from Simmons. Your line is open.
Thanks, good morning. So John in an attempt to get more transparency from my questions I'm going to soften you up with some praise at first and I just want to wish you all the best. You been a class act and you’ve served everybody and FTI shareholders exceedingly well. So, all the best, and very well done to you.
Thank you, Bill.
Yes. Hey Doug, so as I understand it we've gone from 3 studies to now 10 state studies which have been signed off, I mean is that what the message is?
That is correct, it’s actually north of 10, but yes, directionally you are correct.
Okay, well can you just describe what those projects encompass in terms of scope and also kind of conversion possible these into integrated projects as you work on those studies?
Okay, sure Bill. So, the – the scope of the projects is the entire Subsea production system if you will, so the entire water column. So including both the products and services are traditionally coming from an SPS company like FMC Technologies as well as the SURF components coming from Technip. In some cases it also includes some topside engineering which is also a capability that Technip has within their organization.
So, they are different in scope. They are different in size and they’re really quite diverse in terms of customer type, in terms of geography. Quite a few are Greenfield opportunities. There are some Brownfield opportunities as well that will include Subsea processing, but so in general there are actually quite broad.
Now what we're doing at the current time is we're prioritizing the projects that we're pursuing for the exact reason that you asked in your question which is those that are most likely to convert to an integrated EPCI project. In other words we're not doing studies for the sake of studies. We're doing these to generate value for our customers and to generate execution projects for ourselves. So that's that prioritization that we have underway at this time.
Okay. And you also alluded or you waxed optimistic about a looming integrated project award from a feed study that had been awarded some time ago. Can you characterize that project as well in terms of scope and size of what that project would encompass?
Yes Bill. So there are several that we're tracking and if you go back to the original timeline that we've discussed before in terms of kind of conversion from a feed award to an actual project, the feed study depending upon when we come in either concept pre-feed or feed is typically nine to 12 months, then there's a six-month evaluation process and sanctioning process. So it's anywhere from about 12 to 18 months.
So you could therefore conclude that the projects that are most likely to move forward in the near term are some of those early studies that we were engaged in. And so, these were really projects that were Greenfield opportunities, smaller opportunities, tiebacks to existing host facilities that would be a scope that would be all inclusive of the water column.
Okay, thanks very much guys.
Thank you, Bill.
And your next question comes from the line of Jim Wicklund from Credit Suisse. Your line is open.
Good morning guys. John…
Good morning, Jim.
John, I’ll echo Bill's comments, it is the passing of an era. I have known you guys, I mean you are my third CEO at FMC. You've done a fabulous job. You're a very credible, honest, I mean, you have done the company and all of your investors proud. And so, good luck on your golf game. I saw it recently. You need some work, but you've got time to do it now.
Thank you, Jim.
My question on, Maryann you mentioned the accelerated pace of restructuring in Subsea structural changes, et cetera. Why are we accelerating the pace now? I would think that with the decline in backlog over the last year or so that you had kind of seen this coming. Has there been a change in expectation for 2016 and 2017 in Subsea versus six, eight months ago? It's just the term accelerating the phase of restructuring caught me.
Sure, Jim. So, first the answer is no. As you know, we started with a pretty significant backlog at the end of last year and as I've been sharing with you on the last quarterly calls, we did surface first followed by Subsea because we had a rather healthy backlog to be able to execute.
So the acceleration now is we're coming down the end of that backlog and preparing for 2017 is really meant to say we are clearly trying to stay ahead of that curve. So we're also talking about headcount, but also we're talking about the structural footprint that we will be using on a go forward basis.
You may remember in the last quarter, I talked about really trying to change our operational footprint that we can have increased capacity on a smaller footprint. So we are getting ourselves prepared for the volumes that we've anticipated for 2017 and we're trying to ensure that we stay ahead of that curve so that we can continue to deliver the margin commitments both in 2016 and 2017 that we've shared with you previously.
Okay, that makes sense. Thank you for that. And you note that there's $32 million in CapEx mainly in Subsea. And I was wondering if we could get a handle on exactly what that Subsea CapEx is at this point in the cycle and if you could tell us if you got any tree or manifold or control system orders in the quarter?
So I'll take the capital expenditures, and then I'm sure Doug will share with you the second part of the question. So, we do have some activity in Subsea. We have capital spending for assets that are committed to in project work and completion of small activities and maintenance type work in Subsea. That's really what we're spending capital on. There's no obviously capacity expansion or any other investments at this juncture Jim.
Okay, that's what I figured, but I wanted to check. Okay. And Doug how is your order rate, did you get any tree manifolds or control systems in the quarter?
Yes, Jim. In terms of the equipment orders we had five trees this quarter.
Okay. Guys, thank you very much. Doug congratulations and John all the best.
Thank you, Jim.
And your next question comes from the line of Bill Sanchez from Howard Weil. Your line is open.
Thanks, good morning.
Good morning, Bill.
Doug, I just wanted to circle back I guess on an earlier question with regard to this direct award you’re expecting later this year. I'm just curious, was that timetable accelerated at all given the merger agreement that you signed here with Technip.
I know one of the things that I think had been a concern for some customers was just the sharing of the risk profile one of the JV I think feeling being, hey look the risk profile gets cleaned up certainly with everybody being kind of under one roof, just curious as your thoughts there?
Thanks, Bill. The particular project in question, not necessarily, although I would say that speaking to that customer as recently as three weeks ago, the customer made the comment that this certainly will enable the contracting in a much more streamlined fashion.
There are other examples not related to that particular project, but there are other examples to where after we announced our intention to merge the two companies together, that both Thierry Pilenko, John and myself received phone calls from customers, that very clearly articulated that where they in the past had struggled with the concept of placing such a large responsibility into a project specific commercial vehicle, be it an unincorporated JV, an alliance or a consortium that they now would be willing to move forward because they understood that they would have a much more simplified commercial vehicle in which to contract those projects.
So we think it most certainly will accelerate other projects, not necessarily this particular project that I mentioned earlier, which we’ve been tracking for some time. It was one of our original integrated feed awards.
Thanks for that. And I guess just as you’re tracking just your subsea projects here and I think there’s a belief 2017 certainly looks better than 2016. I’m just curious when you look at the project list and certainly FMC given your alliance and frame agreements you have a very good idea of potential customers who could award. Is the conversations right now still just around when you look at those projects in totality about still trying to get costs down across the board on those projects to Green Line, or is it is a more just an issue around, we want to see a higher oil price and then make the decisions to move forward on these projects?
Certainly both are characteristics of some of the discussions we’re having with our customers. But there’s actually a third and a third characteristic is our customers are now starting to look at their production profiles. And they are mapping out and scheduling out some of these projects to understand when first oil would actually be achieved. So in other words, we’re also talking about schedule now.
So, clearly cost, we continue to work very closely with our customers and we have a lot of innovation both within our traditional SPS equipment as well as what we'll be able to do as a combined company in terms of further lowering the cost for our customers. There is also indeed a focus on our customers in terms of their expectations of the commodity price, cash flows and their confidence to sanction a large project at this time.
But there’s a third element and that third element is around schedule. That third element is around production and it’s around delivery times. And that’s relatively new into the discussion and it’s become more prevalent in the discussions that we’re having with our customers now Bill.
Okay. Fair enough and John I just want to wish you the all the best as well and thanks for all your support over the years. We will miss you. Best of luck to you.
Thank you, Bill.
And your next question comes from the line of Ole Slorer from Morgan Stanley. Your line is open.
Thank you. And John, I'll just add to what is already said and you've done a fabulous job and congratulations.
Thank you, Ole.
We talked a little bit earlier on about the need for the industry to change. I presume that’s not only the service and distribute, ultimately also your customers and integrated projects are clearly capable of taking costs down a lot. But on the other hand they’re difficult to evaluate for oil companies that are set up along kind of the procurement model.
And recently we met with actually Statoil and a guys called Torgay Rood [ph] who seemed to be now heading up a new division there in charge of how to evaluate integrated projects. So my question is, are you seeing other oil companies, are you seeing any changes in your customer kind of middle management that makes you more confident that they will be able to embrace this contracting model?
Ole I think the severity of the downturn and the realization that deepwater projects are fundamental and almost existential to future production of most of our customers. And even in the recovery that the returns on those projects will not meet their or their investors expectations. The only way for that is we can't wait for recovery to make these projects economic. And therefore it just demands change. Every conversation that Doug and I have had with senior executives of the E&P companies, they almost always start out with how to change.
One of the nice things about the merger and many of the things that we've been investing in we've got a lot – it's a long discussion about the kinds of changes that can take place in the industry that in many cases we can deliver. The conversation then typically moves to how do we implement this? And we do have conversations about, well the old procurement contracting models probably don't work. And I've been especially impressed with the operator’s willingness and openness to change. I've never seen anything like it. And I think that's when Doug talks about almost dozens of integrated projects that we're working on it reflects that willingness to change by the operators.
And I think that they very clearly understand that some of the sacred cows on their organizations, some of the procurement philosophies that they've used for years are going to have to change. I think they absolutely recognize that. Now the pace at which they're willing to make those changes we have to see. It will vary by operators. Some are much more progressive, others are not. But they universally agree with the need to change and I think they understand that that means some of their past philosophies are going to have to change as well. Doug, you want to add for that?
Yes, when we first set out and first started actually talking about the joint venture and the alliance, one of the things that we really emphasized was that we were putting together was an integrated offering that was simple, that was easy to understand, that provided tangible and real benefits and that we would be able to demonstrate the value of that through integrated feed study.
Those three elements are really key because that's what's given our customers the confidence that this integrated offering is real, it can deliver the results, and that with the new, with our announced merger with Technip we've really removed some of the contracting challenges that existed in some of the early conversations by being able to have a very simple and straightforward contracting methodology as well.
You mentioned Statoil, I would agree, I think they've demonstrated willingness and an openness to look at new and different ideas, but many other customers as well are moving in this direction.
Okay, good to hear. I want to find, but you give us that Maryann you gave us a lot of numbers on – can you just kind of broadly highlight how your guidance has changed compared to last quarter you've taken up the margin range a little bit on Subsea, you've taken down the revenue a little bit from services. Can you kind of sum it up for us, some of the bridge from what you thought a quarter ago to how you see things now?
Sure, of course happy to do that all. So, on the Subsea side you're absolutely right. Given our continued first half of the year, solid execution as well as the benefits that we're seeing from product cost reduction as well as all the headcount restructuring, we have reduced the lower end of the range. So we've taken up the margin performance to a range of 12% to 13%.
From a top line perspective, as Doug mentioned, we're seeing a little bit of softness in Subsea services. So we're likely to be closer to the bottom end of that range in at about 1.3%, so that that softens the top line on Subsea just a bit. In Surface Technologies we've taken the higher end of the downside off of 2015 by better another 5%.
Last quarter, I think what I shared with you was down 25% to 30%. We could be down as much as 35% in surface margins in that single-digit range, low single-digits versus low to mid and really no change in energy infrastructure. Cost associated with the integration or really where our OID [ph] is changing. Otherwise, that’s – that’s already no change in corporate expense.
Thank you very much, I'll hand it back.
And your next question comes from the line of Rob MacKenzie from Iberia Capital Partners. Your line is open.
Thank you, thank you. And congrats again John, I'll add to that from some of my colleagues here.
A - John Gremp
Thank you, Rob.
I like to dig down in the surface segments a little bit here if I may. We're seeming to see that some of the cannibalization of pressure from the fleets may be nearing an end. Are you seeing the same thing yet in terms of that, in terms of your order flow control or is it still too early?
Hey, Rob this is Doug. Yes, still too early. Remember in the quarter we saw a further reduction of activity in the second quarter and with rate rig counts down 15% and that impacts pressure pumping capacity that leads to even for your cannibalization or idling of assets. So if you will that just defers for a period of time, when we start to see that recovery.
I will say though Rob, we’re getting some calls. Customers are talking. Our pressure pumping customers are calling and asking about some delivery schedules and things like that. So there are some short green shoots if you will, in that business. But we have not seen a show up in our inbound numbers yet. And we would expect to in the coming quarters. But it will require some stabilization and recovery in the rig count.
And it’s as you know, it’s not only rig count related, it’s also the intensity related in. I believe Halliburton recently talked about some of the increased intensity within air pressure pumping business and that will translate into an increased need for consumables on an accelerated schedule as well.
Great, that’s exactly what I thought. And then in terms of the guidance change, I guess for Maryann, for surface how much of the reduction in revenue guidance for the surface segment was driven by fluid control or how much of it was from the, certainly the North American surface wellhead business?
Yes, hey Rob. It's largely all the surface wellhead business in North America. No real change in fluid control as you just heard Doug explain, all wellhead North America.
And was some of that market share driven or just the depth of the downturn surprising you?
No Rob, we don't think we've got any issues with respect to market share. This is just really activity levels in the North American business. We feel pretty confident in our market share.
Great, thank you, that’s it from me.
And your next question comes from the line of David Anderson from Barclays. Your line is open.
Great, thanks. In terms of the next 12 to 24 months I think offshore development projects are to move ahead. I guess if I'm an IOC [ph] I think I have some two very different offerings in front of me. On the one hand we have Technip [indiscernible] which is the low of my upfront process and probably reduce execution risks with your [indiscernible]. On the other hand you have kind of one Subsea approach on kind of reservoir [indiscernible] in recent project returns. Doug, I guess you are kind of uniquely positioned to this question, but is that's kind of the choice I have mean, I mean obviously is that how you are kind of thinking about is that kind of the approach you are going to the – your customers then [ph]?
Hey Dave, you broke up a little bit there on the second part of the question, but I'm pretty sure I understood your intent. So, first of all, what we will be offering to our customers is a range of options, and we will be offering to them the greatest range of options. So they'll be able to continue to procure in a conventional way or if you will SPS separate from surf or in some cases with some of our customers who will buy the umbilical separate from the installation or they'll buy the manifold separate from the trees.
So we'll continue to maintain that flexibility in our commercial offering, but indeed where we can engage really, where we can drive toward standardization, where we can introduce new technology and where we can use our integrated model, we have demonstrated and will continue to demonstrate that we can save considerable money for our customers in their project and it is not only the upfront costs and the risk of the delivery as you pointed out, but it's also over the life of the field. And it our focus on serviceability and operability of our assets and our ability to be able to put the right intelligence into the entire subsea production system, that will allow us to ensure that our customers have the most optimal up time.
We will work with them and with their reservoir group and with their sub service, subsurface provider of choice, if they want to look at further integration including the subsurface. But we believe and we have demonstrated that the greatest value to our customers, tangible real is the integrated offering that we have put in place through the alliance and joint venture and we will solidify through the merger of between FMC Technologies and Technip.
That's great. Thank you. John, it is great working with you over the years. Good luck, see you next time. Thanks.
Great, thank you, Dave.
And your next question comes from the line of Jud Bailey from Wells Fargo. Your line is open.
Thanks, good morning. Maryann I think a couple of follow ups on the surface business. Could you maybe give a little more color on understanding your activity was lower than you had thought coming into the quarter, but decrementals were still pretty severe, maybe any more color on what drove some of that, was it pricing or mix?
And then the followup would be your guidance was for letting low single-digit margins for the year, how should we think about that stepping back up? It sounds like you feel comfortable that we can see a big swing back in high criminals with activities stabilizes, but maybe talk a little bit how you see the next couple of quarters and the margin progression for surface, that would be great?
Yes sure, I'd be happy to do that for you. So I think you know, but just for the goodness of caution here, the second quarter as you know is typically our weakest quarter and that's obviously because of the exposure that we have to Canadian break up and so this quarter was really no different than any other quarter I think you can expect our margins in this quarter always to be the softest margins in any time period, especially now.
As you know, we – my initial guidance to you last quarter we said we were basing that guidance on a flat rig count right? And as you know, that rig count continued to slip. Also in the second quarter, we announced in Q1 our intention to sell our Wireline business and so we were clearly closing up and completing that sale in the second quarter.
And then with respect to your questions around Q3 and Q4, yes, we certainly do expect margin improvement in three and four. Obviously we've gone through a lot of restructuring. I mentioned also that there's a little bit more work that we're doing there. And of course we still have good backlog in the international business, in the wellhead business. So yes, you should assume to see margin progression both in Q3 and in Q4.
All right, and it sounds like we can, it doesn’t seem unreasonable to think that margins would swing back positive by the fourth quarter just based on the guidance, am I thinking about it right?
Yes, you are thinking about it right of course.
Okay, and then my second question is, you raised guidance a little bit for subsea margins. You are executing very well it seems you are still restructuring that business. Any change in thought on how we should think about margins as we go into next year starting from a higher point of course, any early thoughts on how we think about next year in terms of margins given how well you are executing in that business at this point?
Yes, as you know, and as we've been sharing with you, it is clearly our intent to maintain double-digit margins as we go into 2017. All of the work that we've been doing trying to stay ahead i.e. accelerating our restructuring continues to support our ability to do that. We obviously have executed well and we expect to continue to execute well, all of the work that's been done on product development and product cost reduction as we're bidding new projects we expect to benefit us well in 2017. So again, it is our intent for 2017 to maintain double-digit margins and our historical execution should support that.
All right, thanks. I'll turn it back.
And your next question comes from the line of Scott Gruber from Citigroup. Your line is open.
Good morning John and also all the congrats on your success at FMC and really creating a world class organization. It has been great to watch.
Great, thank you Scott.
I want to circle back on subsea surface and the outlook into 2017. Maryann as we've chatted in the past you've offered guidance of a flattish forecast for subsea surface next year. There is a bit more softness this year than anticipated. How is your comfort level on a flattish subsea service trajectory into 2017 given the recent trends?
Yes, sure. So, yes, you are absolutely right. We've been talking about the fact that we see subsea service 2016 to 2017 in and about that same range. We continue to have good performance there and I don't think we see that any differently. I am going to let Doug give you a little bit more specifics as he shared on the quarter some of the changes that we're seeing, but in general 2017 looks pretty solid for us.
Yes, Scott thanks for clarifying. I think it is an important subject. So what we're talking about right now is that we are seeing some deferrals of certain activities around production enhancement. So let me explain what that means for our business.
So, often there are wellbore subsurface issues that occur in any producing well, onshore or offshore. That goes into a budgetary process. Once it receives approval depending on what the activity is, the required activity is, if it cannot be done by a vessel, if it requires mechanical intervention into the subsurface, then that typically means a rig comes out.
When the rig comes out they remove our tree, when they remove our tree and they go about doing the work over on the rig with the subsurface, that tree is typically returned to us. We then go through a process of inspection, maintenance repair on that tree and then we reinstall that tree. So we're involved in the process of removing the tree, inspecting and repairing the tree, and then putting the tree back in place.
There is a pretty healthy backlog of that activity and we have a very long cycle visibility into when that is going to occur. What we saw happen this quarter is there were in certain circumstances, there were some situations where that wellbore intervention or that wellbore work, this is again heavy intervention.
It may mean sidetracking a well or it may be removing some damaged equipment that is within the well, that our - that that has been postponed. And when that was postponed, that obviously affected our services business for the three areas that I described that we're involved in. That is a deferral. That is not a cancellation. That will reoccur. It is just, it was being deferred out and in some cases we could see that slipping out of the calendar year, which is why we gave the revised guidance.
The business is still very robust. It is still very solid and we continue to grow and expand and bring new offerings into subsea services. All that we're saying is we're seeing some of that activity shipped out. We're still within the range of our guidance. We were just pinpointing a little bit more within that range where we're likely to end up for the calendar year.
Got it, it is good color. So if oil stays ranged down around 50 you think there would be enough maintenance activity in general to come through for you to deliver on offsets what is likely to be some decline in the installation work?
Yes it would and just a little bit of color on the installation. Using the example that I just or referring to the example I just used, we also are involved in the, if you will, removal and reinstallation of existing equipment when there's work being done on the well. So yes, you'll see some decline as projects complete in the installation of new trees, but we also are increasing the installation of existing or trees that are currently going through our subsea services facilities and/or will be retrieved and reinstalled at a later date.
Got it, thank you.
And your last question will come from the line of Dan Boyd from BMO Capital Markets. Your line is open.
Hi, thanks. Great to see the customer acceptance on Forsys. As you look at the 30% in cost savings that you can deliver to the customers, how much of that would you estimate is related to just general deflation and cost cuts versus some of the design changes that you would say are unique to Forsys?
Hey Dan, thanks for the question. When we talk about up to a 30% savings, we are not counting deflation, because we have made it very clear from the beginning that the focus of our company is about driving change. John talked about structural sustainable change and that's what we're targeting with our integrated offering, with our integrated EPCI offering and our announced merger with Technip.
So, setting aside the deflationary, which yes there is, you are correct for pointing that out, but this is about structural sustainable change. It is about reengineering, redesigning, removing unnecessary hardware by bringing these two work scopes together and then giving our customers a more efficient subsea production system that they can have greater confidence in sanctioning projects knowing that they're going to be able to receive improved subsea project economics from our combined company.
Great, and an unrelated followup, just looking at the financials and Maryann may be this is a question for you. I noticed that D&A came down in the quarter. It looks like that may have boosted subsea margins a bit, but it's tough to really know from our end, so what is the expectation on D&A going forward and what drove the sequential decline?
Yes, so I think as you know over the last several quarters, first of all our CapEx has been coming down. So I think you can expect to see D&A coming down in the future years. Right? We again reduced in the quarter.
No, there was no depreciation reduction in subsea. Actually depreciation expense in the second quarter for subsea was slightly above depreciation expense in Q1 for subsea. So the implication of depreciation has nothing to do with the margins at all in subsea. That was clearly execution and the benefit of the cost reduction. But you should expect to see D&A come down in the future quarters given the lower CapEx spending that we've delivered in the last basically quarters.
Okay, great. Thanks for that clarification.
John, on behalf of Maryann, Matt, myself and the 15,500 employees of FMC Technologies, we thank you for you for your leadership and for demonstrating to us how to effectively lead by living our core values.
This concludes our second quarter conference call. A replay of our call will be available on our website beginning at approximately 02:00 PM eastern time today. We will conduct our third quarter 2016 conference call on October 20, at 09:00 AM Eastern Time. If you have any further questions, please feel free to contact me. Thank you for joining us. Emily, you may end the call.
And this concludes today's conference call. You may now disconnect.
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