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Edited Transcript of HTG.L earnings conference call or presentation 29-Aug-19 9:00am GMT

Half Year 2019 Hunting PLC Earnings Presentation

London Oct 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Hunting PLC earnings conference call or presentation Thursday, August 29, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Arthur James Johnson

Hunting PLC - CEO & Director

* Peter Rose

Hunting PLC - Finance Director & Director

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Conference Call Participants

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* Amy Wong

UBS Investment Bank, Research Division - Head of European Oil Services, Executive Director & Analyst

* David Richard Edward Farrell

Crédit Suisse AG, Research Division - Research Analyst

* Kevin Roger

Kepler Cheuvreux, Research Division - Research Analyst

* Malcolm Graham-Wood

Hydrocarbon Capital - Founding Partner

* Mark Wilson

Jefferies LLC, Research Division - Oil and Gas Equity Analyst

* Michael Brennan Pickup

Barclays Bank PLC, Research Division - MD & Senior European Oilfield Services Analyst

* Sahar Islam

Goldman Sachs Group Inc., Research Division - Analyst

* Vladimir Maximovich Sergievskii

BofA Merrill Lynch, Research Division - Research Analyst

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Presentation

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Arthur James Johnson, Hunting PLC - CEO & Director [1]

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Good. Okay. Good morning, everybody. Thanks for taking time to be here today. Really looking forward to this next hour. Think we've got a lot of good things to talk about. Before I get started with the presentation, though, I just wanted to, first off, thank our -- I want to thank our customers for their continued support over the years.

In the last quarter, I had the luxury or the benefit of going to a couple of retirement parties and -- couple of retirement parties for people that I've worked with as clients for more than 20 years. And I think it's great to see the fact that relationships do still matter in this business, even a lot of times they've been discounted. But it's also a testimony to the fact that doing what you say you're going to do, being honest, providing a great product, providing value, providing trust to people, it can last for a long, long time. The sad part is I'm getting older and they're retiring, so I hate seeing all that happen. But I just wanted to comment about that.

And then the second thing is, I always like to take this time to thank the team at Hunting. I wake up every day extremely blessed with the workforce that I associate with every day, the people on the team. They are the ones that deliver these results, that come up with the new products, that take care of our clients. And they're just a -- it's a wonderful group of people, and I'm just proud to be associated with them.

So going into our presentation. I know there'll be lots of questions. And the hot -- the main point that I want to get across, and as you all know, I'm not one for reading PowerPoint presentations. So I'm going to try to go through this generally, and then give you lots of time for question and answers.

But the main theme that I want you to get out of today's visit is: one, Hunting Titan is performing very, very well. A strong business, doing well, delivering excellent results. I think providing world-class products, bringing new technology out and doing just an amazing job. The other important thing that I want to highlight is we have reached a critical inflection point in the company's performance based on the other 60% of the business. That has been downplayed, I think, the last 2 years for obvious reasons. Because offshore market was bad, there was just fundamentals in the capital equipment purchasing side that wasn't -- that had not been good. But those things have really made a turn to the upside.

And so as you -- as we go through this presentation, we're going to have lots of things to talk about. But at the end of the day, those -- that's the real story. That's what I want people leaving here understanding. We're not just sitting here like some of our peers, twiddling our thumbs or gnashing our teeth about what's going on in the Permian Basin or what's going on in Oklahoma. We're much broader than that and cover a lot of different geographic areas with a lot of different products and a lot of assets to deliver value to our customers.

So with that, again, you see the highlights on there. I'm going to have Peter go right into the financial side, and then I'll be back.

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Peter Rose, Hunting PLC - Finance Director & Director [2]

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Okay. Thanks, Jim. Good morning, everyone. The last point on here, IFRS 16, you're all very interested, and I can tell. But we've adopted that from 1 January 2019. There are 3 pages at the back of this presentation. I don't propose going over them, but they're there, if you want to chat about it, we can do so after the meeting.

But in essence, we've adopted it from 1st of January. The net impact on the profit before tax within the 6 months is a negative $0.5 million. So that's nothing to write home about. There are ups and downs at the EBITDA and the EBITA levels. I'll talk through those as we go through it. And similar in the balance sheet, the balance sheet now recognizes the assets and the liabilities, but we'll see that as we go through.

Looking at the group income statement, revenue is showing a 15% increase. That's largely our international operations, particularly non-Titan U.S., EMEA -- Europe, Middle East and Africa. And also in Asia Pacific regions, and we'll see that on the slides that come later.

Margins have taken a little bit of a dip, nothing to write home about. Our EBITDA is $77.4 million, take off $22-odd million of depreciation, which includes additional depreciation relating to the assets that we've brought on the balance sheet under IFRS 16. That gives us a $55.6 million profit from operations. And we've got a tax charge of $13-odd million, that's 24%. I'm guiding 25% as the underlying tax rate for the full year.

Diluted earnings per share of $0.236, and we're declaring a dividend $0.05 compared to $0.04 in the prior period. That will absorb about $8 million payable in October.

Titan. Titan revenues flat period-on-period, but underlying results from operations showing a decline, 27% in '18 versus 20% margin this year. If you look at the margin that we've generated in the second half of '18, that was $47.7 million at 24%. So the decline in Titan results started last year, impacted second half and has continued into '19 with the impact of us selling off excess conventional commodity guns. That's now stopped so I would expect the margin at a minimum to stabilize going forward.

You can see in the U.S., revenue is up 20%; EMEA, up 20%; and Asia Pacific, up nearly 50%. Again, reflecting that -- those OCTG contracts coming through and contributing, and also turning previous losses into profits apart from Canada, which remains in a loss situation. Included in the result for the period is about $0.5 million of a charge that relates to 27 employees being released, which reflects about 18% of the workforce.

Looking at revenues by product grouping, the OCTG and Premium Connections, that's the U.S., EMEA and Asia Pacific coming through and showing a near 50% increase. Perforating systems, that's essentially all Hunting Titan. And the rest of the business is showing a modest increase, apart from drilling tools, which is still hitting challenging competitive markets, particularly in the U.S. market. Advanced Manufacturing showing a healthy increase. That's our Dearborn and Electronics businesses, and they're sitting on a healthy order book as we speak of about $70 million, and we'll chat a bit more about that as the slides progress.

We don't have any exceptional items this year -- this period. We do have the usual amortization of acquired intangible assets, $14.5 million; full year, that will be $29 million in the full year, approximately.

Balance sheet, I think, is in very good health. It reflects the assets coming on under the IFRS 16 of $39.6 million. Those are mainly property -- long leasehold properties that we've got here within the group, mainly in the U.S.

Property, plant, equipment is broadly neutral. That reflects us -- reflects the depreciation of $22-odd million coming through, being offset by the capital expenditure of about the same figure, $22 million, and we'll look at the analysis of the CapEx later on.

Goodwill intangible assets. That continues to deplete with the amortization of the intangibles. But 80% of that figure relates to Hunting Titan. So that's underpinned, and we have no problems with the carrying value as we stand at the moment.

Working capital is showing a modest increase. That's driven by trade receivables and trade creditors. As we'll see in the slide to come, inventory is showing a little decline of $11 million, which is very good under the circumstances, particularly given the 15% increase in our revenues.

Tax, we're sitting on tax assets, which means we're still -- we've still got some tax losses to shelter us from future tax spends going forward. On the net cash side of things, we've got gross cash, if you like, of $80.5 million, less the lease liabilities coming on at $47 million, and obviously because we've adopted it from 1st of January, we're not amending the December '18 balance sheet. So we end up with net cash of $33 million, a very healthy position. And that's obviously before we've paid out the $12.5 million for the RTIES acquisition, which we'll come to in a minute.

Working capital, we've analyzed the inventories out, just to give a bit more detail, and that shows the net decline in inventories of $11 million. But more importantly, Hunting Titan, despite it maintaining its revenues, it's still showing a $22 million decline on the -- on its inventories, and that mainly reflects us pushing those excess perforating guns out the door.

Receivables going up by $33 million. No problems with recoverability. That's all come in. So the cash remains very strong. And pleasingly, we're seeing our inventory days continue to improve.

Capital investment, we've spent a bit of money on increasing our capacity, particularly within Titan. We've got some new product manufacturing lines. We've got our power charge and det cord facilities at Titan, that brings new products into our group and will incrementally add to our profits going forward. IT infrastructure spend, $2.6 million with -- we handbraked the spend on IT in 2015, '16, during the downturn. This is us catching up, improving our IT systems, making sure they're robust and fit for purpose going forward.

Group cash flow, we've probably covered most of the points here. Working capital showing a modest outgoing of $21 million, as I said, because of trade receivables and trade creditors. We've sold some assets, and we've got free cash flow of $60-odd million, which is a good strong position to be in. We're paying out dividends. Clearly, the $0.05 paid out in October, May -- May, beg your pardon, for the final of '18. We have bought some -- purchase of ordinary shares, $4.2 million. We bought some shares to satisfy our share award program. So those are not shares we're buying to cancel [around] things, they're just being held to satisfy the share award programs.

And that's about it. That brings me to the end of my bit, Jim.

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Arthur James Johnson, Hunting PLC - CEO & Director [3]

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Okay. Thanks, Peter. Okay. So again, basically, getting back, and we've got lots of things to talk about, new acquisition, new product lines we're going to show, but kind of following up on my first slide.

Our operations, again, they're again strong. We spent a lot of time this year -- we continue to spend a lot of time fine-tuning our operations. We work on the cost basis of what we're doing. Guys like Brad Gould leading our lean manufacturing team. We've done a great job this year. We've identified $2.7 million worth of annual cost we've taken out of the system, but that's something we did last year, and we did the year before, we'll do the next year. So it's one of the things in our DNA that we continue to do. But this slide here really talks about our strengths and why we're not a one-trick pony coming into the marketplace.

Next, overview on North America. The RTI acquisition was a very opportunistic purchase for us. It falls in our strategy of wanting to look at acquisitions that have a high level of technology to them, patented products. This was a business that was really orphaned from the Arconic people. And if you follow that story, Arconic was part of Alcoa and now Arconic is splitting into 2. It's basically an aerospace company. It had one asset that was an energy-related business and they'd wanted out of the business.

So we went through a process, Sid Harper, Dane Tipton, Scott George, on my side, did a great job of pushing this across the finish line. We welcome the team from RTI. They're a great bunch of people. We're excited to have them on board. And there's a lot of upside to this. And it's one of those things we're buying today, not for the results today. That we went back and looked at the historic performance in the past and we're still big believers in the offshore market and international. So that's why we made the investment.

U.S. manufacturing, we highlight some points there. That business unit is performing very, very well this year. It is benefiting from exports of completion equipment to places like Brazil, to Guyana and coming out of our operations in Texas and Louisiana, and also a recovery in the Gulf of Mexico. We've a rig count there that's up to 27, 28, which in most of my career would have been ridiculously low, but compared to 20, that's a big increase percentage-wise. So we're happy to have any of those come back that we can.

The AMG business, very, very strong right now. That's a product line in a business where it's really never been a pricing issue. There's very few people that can do what we do in those 2 businesses. It's based on the cycle in capital equipment spending. And fortunately, we're not playing in making frac pumps. We're not in the commodity side of the business in capital equipment that's being cut back. What we're making is the next-generation of smart downhole tools, that the Halliburtons and people like that need to have to be competitive in the marketplace, and so we're manufacturing those things.

And again, a big part of our North American footprint is Hunting Titan. New products coming out, we've set some new records in the Permian Basin on what we're doing. Very, very strong business, continues to be a strong business, and we're just very happy with the performance of all of these.

RTI. Slide here provide on RTI Energy Services. Again, I've talked about that already. I think we got a great transaction price on this versus the assets. There's no goodwill to be on the balance sheet with this transaction, and we're very excited about it.

Titanium stress joints are critical to anything in deepwater that's a floating application -- floating production application. There's a great market there. We think that, again, when you look at the '13 and '14 numbers, it's realistic to go back to those levels. And we think also there's synergies within our organization for our -- the rest of our facilities that can also bring some additional value to this product line. But the good news is, since the acquisition closed just a few weeks ago, we've met with the people with the Shells, the Exxons, the Chevrons, the LLOGs, core customers that we've had with us. They're happy with the transaction. And really, it gives this company a home now. They were in limbo and now they can go forward with more certainty in the business.

Again, a slide here, just gives you some more details on the titanium stress joints. These -- they have a lot of advantages over other products that would be used in place. One of them is just the time involved. Titanium has better corrosion capabilities. These products -- total cost of ownership is a massive deal with this. These products, for example, on one project was identified by using the titanium stress joint. The savings were over $13 million. Just for -- on the project. Just for the fact that these things can actually be parked on the ocean floor.

So when installation comes up, whether there's hurricanes, whether there's problems with the production unit, whatever it is, you're not beating -- you're not so locked into a time frame for installation. That flexibility can mean a lot for an oil company out there, trying to get the job done. The other important thing is these products are well regarded. They've been in the industry for a long time. They are written in for -- to a lot of the development that's going on. And like I keep saying, deepwater is not going to go away, especially where the cost points are today.

Internationally, I'm very, very pleased with what's been happening in our international business. 2 weeks ago, I was in New Delhi, India, first time I was ever there. It was a great trip. Daniel Tan, who runs our Asia Pacific business, has been working on this project for a long time. But we've signed a strategic alliance with Jindal SAW in Delhi. They are the largest seamless tube manufacturer in India. It is a very opportunistic deal for us. The Jindal people are fantastic. We look forward to a long relationship with them. But we will be the only Western premium connection company manufacturing in India for the Indian market. So we're excited with this relationship.

India to me is going to continue to expand. That's why people like Saudi Aramco were making a purchase into Reliance Energy. That's why BP is announcing a big investment in the downstream part. It's a country that has a lot of people and needs a lot of energy, and it's going to be hydrocarbons that are going to do this. It's not going to be windmills and battery-powered cars. The Well-sun thing in China, that's up, off and running. That's primarily some high-tech downhole tools as far as calipers go and things like that. A lot of that, we're also planning for sales in the Middle East so we're off to a good start with that.

The rest of the comments up there. Again, Asia Pacific, regardless of the Jindal thing, the order book is strong. Peter talked about how the numbers are up year-over-year, and the outlook is very positive for us there. Again, just another kind of a little bit, talks about the local content issues with the Indian -- in the Indian market.

U.S. onshore, one of the big question marks going forward is what's going to happen in the onshore market, the fourth quarter and the end of next year. And I'm sure I'm going to have lots of questions about that that I'll talk about later. But today, the business is good. We've had a very good year. Onshore is primarily, as everybody knows, is our Hunting Titan business, but it's also things like our premium connection business with the TEC-LOCK product line, that I'll talk a little bit more about later.

There still is a DUC inventory out there. They claim to be over 8,000. The more that I've researched this, that number is probably half that. But it doesn't really matter; it's still a strong, strong backlog. A lot of these DUC numbers, when you listen to calls over the past month or 2, you're finding out that, well, they really only drilled the top section of the hole when you're counting that. So many of these, there's a lot of work still to be accomplished. And so I'm just -- I'm a little bit leery on that number right now.

Going back to what we talked about with the RTI acquisition, why I'm very bullish on the company going forward or one of the elements I'm bullish on, is again the offshore -- the onshore cycle continues to be tighter and tighter as far as depletion goes. And regardless of what these companies are saying, and you're all reading that they're in the maintenance mode or going into the maintenance mode. That still is a lot of holes in the ground that these people have to put down just to keep production flat. So when you look at these huge depreciation rates that are going on, you're already seeing production rollover in a couple of basins right now, but just keeping the treadmill going means there's going to be a lot of oilfield services required to sustain that.

Let's see, next slide. Natural gas. We put a slide in there about that because a key part of our business or one segment that doesn't get a lot of press has been the natural gas market. If we look at our business by basin, especially for Hunting Titan -- the Hunting Titan business, a significant part of our work was in the Haynesville, a big part of it was in the northeast with the Appalachian Basin, Marcellus and Utica, and right now those markets are just getting shut down. The gas is -- we're swimming in natural gas in the States. We've got associated gas coming out of the Permian. So it's not a good environment for the natural gas segment of the business. And you're seeing the rig count fall with that. The good news is it's a massive resource, and these guys have figured out how to drill and produce it at a pretty low cost. So I view this as just a pause. But for today as we see and look at it for the rest of the year, there's going to be weakness in the natural gas market.

Onshore activity, you probably get this from a lot of people, but just kind of an overview. This is industry standard stuff that you've seen. You know where the drilling is at right now. For us, as a company, the one area that we've actually seen better than normal increases in activity has been in the Bakken and the Rocky Mountain region. I talked to you about the Marcellus. The Anadarko, which is Oklahoma, that business is down. Again, a lot of that is natural gas liquids. So it is that rig counts are falling there, and in the Haynesville. And in the Permian, you guys see the numbers every day. It's a huge part of the activity going on in the U.S.A., and it's going to continue to be very, very busy. Issues related to pipelines are going away. But now you've got issues with water handling and how do you do that volume, as well as the pricing and the whole spending thing. But that's just a good snapshot on the U.S. market today.

Onshore, we talked a little bit about one of the other successes that we've had. Many of you were at Ameriport when we did the tour into Houston. Our Premium Connection business, onshore, has surprised me. The work that Mike Mock, Travis Kelley and the team have done on this has been fantastic. We've actually -- you can see the full year and where we're at just through June. We're going to blow away those numbers. And I need to put this all into context. So for us, this is amazing. This is great volume. It's got to the point that we were turning down orders, and we've actually -- we're actually commissioning an additional threading line at our Ameriport facility that will start up in September. But in the whole scheme of things -- and this doesn't count anything going offshore. This is all just our on-land business.

But if you take those numbers and do a little back of the napkin calculation, that's about 17,000 or 18,000 tonnes of oil country tubular goods. That seems like a lot. But when you have a market in the U.S. that is 6 million to 7 million tonnes in total, and you look at the available market opportunity and the amount of independent mills you have out there, which is where we're marrying this, and by the way, not all of that tonnage is going to be premium. A lot of it's generic API product. But my message is, there's still a huge upside to this. We're working on some license agreements with people. It's been very successful. It's added a lot of good income and earnings to the company. And this is not slowing down this year. We're literally booked through the end of the year with this and taking orders for 2020.

Onshore, the perforating systems, H-1 and H-2, they're doing very, very well. Our H-1 sales continue to grow every month. And the adoption of plug-and-play premium guns continues to get bigger and bigger. I would love it if that's all that we sold, and we weren't in the conventional gun market, but that's not going to happen either. There are people that are going to buy conventional guns no matter what, but the trend is going in the right direction for people like ourselves that really started the whole process independently of the plug-and-play guns.

Just some comments there. We talk about factory assembled. We really feel our product already is factory assembled. And many of you were at our Investor show, you saw, as Rick Bradley, our Chief Operating Officer, said, "It only takes 3 minutes if you're just all thumbs. If you did this right, you could load these guns in 1 minute." So it's very quick. But regardless, if the customer wants a factory assembled and shipped, we're moving forward to do that. And because at the end of the day, we supply a solution and try to create value for our clients, and we're going to respond to their needs. So that just gives you kind of an update on that.

This is an actual run from a client in the Delaware Basin out in West Texas, that I won't say who the client is, except they're a huge independent oil and gas operator. This was a record of 45 H-2 guns running a job. The details are up there on the screen. We're very proud of that. I'm sure you're going to have questions about the H-2 going forward after this discussion. But at the end of the day, it's another tool in our kit to help our clients. Whether they use a lot of them or not, it's really going to come down to the economics of that completion. Because this allows a much more intense fracture per foot than what you're going to get in any of our other guns as far as the spacing goes, but there's still a debate whether they need that or not. Some do, some don't. But the size of that, it could be one of those things that as you go from -- we went from Series 1 to Series 5 completions, that the next Series 6 or Series 7, this becomes more of a factor. And if it doesn't, when it does, we're ready for it.

The ESUB has been a new product that we've had some great success with, really just launched in the second quarter. We looked at the marketplace, again talking to our customers. One of the things they wanted to do if they didn't go with an H-1 gun, they were looking for ways to have addressable technology in their guns in the well. This answers that. Guy by the name of Josh Howk and Rick Bradley worked well on this along with Jason and the engineering team. We're selling these now. It gives us a premium to add on conventional gun sales. So when we sell conventional guns, it goes with one of these. It's more value-added along the chain. The initial results have been very, very positive on this, and we're hoping this accelerates into the second half of the year.

Offshore markets, again, we kind of talked about that earlier, so I'm not going to spend a lot of time on that slide. The big number shows you the increases that we've had in Asia Pacific. We've even seen an uptick in activity in our North Sea operation. Our Dutch facility is actually booked through the end of the year as far as OCTG end finishing goes, a lot of it for destinations onshore Europe as well as in Norway. So very -- a much more positive outlook there.

Okay. Here we go. Deepwater Gulf of Mexico. This is a slide that talks about -- basically about the economics again. We're taking part in supplying some product to Chevron's anchor development in the Gulf of Mexico. And you look at the economics on some of these wells, you can see why offshore is getting a new look on life. When you have the treadmill of the Shell wells that goes on, the amount of capital that you have to continually put into these things. Gulf of Mexico, you can have a field producing 75,000 barrels a day with 6 to 8 wells, and that 75,000 barrels is going to last for 10 years. So I mean, the economics at today's prices are becoming more reasonable. The comfort -- I think the comfort is there that while we don't know what the price will be tomorrow, I don't think we're going back to $30 a barrel of oil anytime soon or $35. And so we're hoping as these projects get sanctioned, again the economics are becoming much more favorable in some of these areas.

Offshore exploration has picked up, just kind of, again, some bullet points. I'm not going to spend a lot of time on, because you know a bunch of this. But the steps are going in the right direction. You see new licenses coming out for peak places like -- Guyana has been a home run, now Suriname's picking up. You can see the Southern Mediterranean, the whole attitude on exploration in that, I think, is improving.

Product development overview, things that we've kind of talked about already, bullet points up there. We're continuing to expand the size range on the TEC-LOCK product line, chemical injection tools for our -- out of our electronic business. Advanced manufacturing, doing well. We continue to work on the backlogs there and developing our skills better for that.

Internal expansion. We've got a lot of projects that have just completed. The automation at our Pampa facility is complete. We've seen some great cost savings starting to roll in from that. So that's working for us well. The shaped charge automation is complete up in Milford, that many of you saw, again, done. Another cost reduction that we really haven't had the benefits of yet, but we will have going forward. Our power charge product line is up and running. We're selling those now. We're starting from a 0 base, but the progress has been very good, and it's going to continue to grow.

And then the one thing new that we've added that we haven't -- we had not announced is we're actually -- approved a CapEx that we're going to start making our own detonation cord. We have always bought it from a third party. It's been a pass-through. It's a big requirement for international sales to be able to supply the det cord along with the product. And again, due to the demand -- the high demand and the intensity in these Shell wells, it's been a very tight market for that. So we have the technology, we have the people. It's an energetic product. It's being done in Milford. This should come online the end of Q1 2020. But it'll be -- it'll add more margin to our company going forward. Just another thing that we don't have to go outside to get.

So with that summary of investment case, that being -- the company is doing well. I think our results today speak for that. We had excellent results. The team has performed and done a great job. Again, it's a focus on multiple product lines, multiple basins and geographic areas. We're not a one-trick pony. And we're looking forward to the future. We're very optimistic that we have the right people in the right place. We have a balance sheet that gives us a lot of strength to do things. We're still looking at more acquisitions. We're not done. RTI was small, but it's a perfect example what we're looking for, which is plug-in technology that gives us an opportunity to take to other markets around the world.

So with that, I guess we'll go to the question time, and thanks for listening to all this.

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Questions and Answers

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Vladimir Maximovich Sergievskii, BofA Merrill Lynch, Research Division - Research Analyst [1]

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Vlad Sergievskii, Bank of America. Three questions, and all of them on perf guns, if I may.

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Arthur James Johnson, Hunting PLC - CEO & Director [2]

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All of them on?

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Vladimir Maximovich Sergievskii, BofA Merrill Lynch, Research Division - Research Analyst [3]

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On perforating guns. The first one, Jim, would be, your biggest client, Halliburton, is currently certainly more actively talking about its proprietary integrated perf gun solution.

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Arthur James Johnson, Hunting PLC - CEO & Director [4]

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Correct.

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Vladimir Maximovich Sergievskii, BofA Merrill Lynch, Research Division - Research Analyst [5]

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What does that mean to your revenue opportunity with this client going forward?

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Arthur James Johnson, Hunting PLC - CEO & Director [6]

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Nothing. If you're talking about the velocity gun, and so they are using that gun for their own supplies. Our business with Halliburton has remained steady. It's not an issue.

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Vladimir Maximovich Sergievskii, BofA Merrill Lynch, Research Division - Research Analyst [7]

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Okay. That's very good. The other one, you obviously increased your perf charge capacity to, I think, 1 million units per month.

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Arthur James Johnson, Hunting PLC - CEO & Director [8]

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Well, actually, a little over that, yes.

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Vladimir Maximovich Sergievskii, BofA Merrill Lynch, Research Division - Research Analyst [9]

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A little over that. What -- will you be able to disclose your current run rate?

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Arthur James Johnson, Hunting PLC - CEO & Director [10]

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No. It's high. I'm not going to -- no, I'm not going to get into the numbers on how many guns or how many charges. We have not hit that CapEx ceiling. So we're not there, but our units today are similar to what they have been. So we had no fall out, we're just not seeing any growth right now. So it's just flatline. It will come -- it will grow again. And when it does, we have the capacity to respond.

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Vladimir Maximovich Sergievskii, BofA Merrill Lynch, Research Division - Research Analyst [11]

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And last one, Jim. How do you think about your market share in perf guns in the U.S. in first half compared to what it was? Obviously, revenue was down a little bit, while activity in completions was probably slightly up, depending whom you are looking at.

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Arthur James Johnson, Hunting PLC - CEO & Director [12]

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Well, I know based on my peers' numbers, that we were still the largest out there. So that's out there and documented. The other parts of it, you really -- it still is a guess on a big side, right, because you really don't know how many guns did Schlumberger put into the system from their own shop or Baker or Halliburton, for example, with their velocity gun. So I just don't know. We'll never know what those numbers are. But we're comfortable with where we're at in our market share. We've done a very -- the team has done a very good job. And as you saw, you saw sales are basically flat.

And just to kind of highlight that, we didn't go into those details. The fourth quarter last year, we saw a decline. We broadcasted that, we told everybody. The first quarter -- our second quarter was much better than our first quarter. In the month of May, the sales at Hunting Titan hit the $40 million mark, which was either the best or the second best month ever. July, we have still not seen a downturn, we didn't do $40 million, but it's a great, high number. So we haven't seen that impact on the sales side yet. Product mix is going to play a factor in everything as well but right now the business is performing fine.

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Vladimir Maximovich Sergievskii, BofA Merrill Lynch, Research Division - Research Analyst [13]

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Great. And if I can squeeze the last one on price for perf guns.

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Arthur James Johnson, Hunting PLC - CEO & Director [14]

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Sure.

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Vladimir Maximovich Sergievskii, BofA Merrill Lynch, Research Division - Research Analyst [15]

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What have you seen in the past like, say, from early Q2 onwards, stable pricing, any changes in pricing?

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Arthur James Johnson, Hunting PLC - CEO & Director [16]

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Early Q2 onward has been fairly stable. And I think some of this is going to be -- we talked about the $22 million worth of guns we basically got rid of in the second -- first half of this year. And a lot of those were guns made in China. A lot of those were bought. You probably all remember, I made the comment when the -- all the uncertainty was going on about duties and tariffs and all that stuff, we were aggressive in purchasing material. Because the last thing you want to do is, for you to say no, and let a competitor come in and take your job. So we had excess of material. So that was part of the work down.

We also saw basic pipe prices decline in the period because, again, just what's happened in the OCTG business. So we needed to work those out of the system. But I mean, I'm happy now with what we've done. Pricing, again, I don't know if anybody's going to be stupid in the second half of the year. We've seen on the plug-and-play side of the business, we're not seeing any change in pricing. But getting back to the conventionals, there were people bringing in guns from China, small companies, pick a price. And so I think with the duties, though, I'm hoping that that firms up, and there's not an issue on pricing.

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Amy Wong, UBS Investment Bank, Research Division - Head of European Oil Services, Executive Director & Analyst [17]

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It's Amy from UBS. Couple of questions from me. This one not on perforating guns, Vlad's covered quite a bit. Just thinking about your non-Titan businesses and as we move through this improvement in offshore and international, can you help us think about the margin profile as the top line starts to grow? Is there anything structurally different in this cycle that you think would impair your -- how the margin profile improves or mix issues there? How should we think about that?

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Peter Rose, Hunting PLC - Finance Director & Director [18]

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I think we have seen an improvement in the margin, particularly with the TEC-LOCK connections that are coming through the system destined for the U.S. onshore market. They are incrementally adding or increasing the OCTG margin. Historically, we used to say that OCTG sales were $150 million at 30%. They're probably now in the higher teens because of the pull-through of those 8,000, 9,000 tonnes of TEC-LOCK connections. So that's helping a great deal. And some of the -- even some of the offshore OCTG contracts that particularly Asia Pacific are getting, they're getting some good margins as well. So it's kind of...

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Arthur James Johnson, Hunting PLC - CEO & Director [19]

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And it's things -- like I mentioned, things like Electronics and the Dearborn operation, it's -- there are competitors out there, but it was never a margin erosion issue. It was never a price erosion, it was just a lack of demand, no matter what the price was. So those margins remain healthy. They'll improve. That's going to be a function also of absorption and the busier that we get with orders coming in. So...

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Peter Rose, Hunting PLC - Finance Director & Director [20]

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And we've seen that as well with the gross margin only dipping 2 percentage points in this period compared to the comparative period. Given the big decline we've seen in the Titan figures, that's more than compensated by the others.

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Amy Wong, UBS Investment Bank, Research Division - Head of European Oil Services, Executive Director & Analyst [21]

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And I just had one question on the H-2 gun. You mentioned in your prepared remarks that the uptake is good. Can you give us a bit more color in terms of how your customers make decisions, whether they buy H-2? Is it cannibalizing your H-1? Or as you -- are you taking share from other comparative products? Just give us some more color around it.

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Arthur James Johnson, Hunting PLC - CEO & Director [22]

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The segment of the H-2 gun right now is very small because the clients haven't figured out what to do. And when I say that, I went to a SPE show in Denver here a couple weeks ago. And there is so much in the production, the completion side of the business, that actually there's more -- still more questions than answers, right? It's spacing. It's frac -- do you use slick water, what are you using for a diverter? There's all these variables out there.

So some operators are looking and saying, "We need a better fracture. We need more fracture per foot. And what do we do?" Well, this does that. But there's some operators that say, "No, we don't need that. We don't want to waste the sand. We don't want to waste the water," H-1 works. I don't view H-1 as -- I don't view that as a cannibalization. I view it as it's specifically made for how this engineer designs his well and what they anticipate for that geology to get the production they want.

So we think we're ahead of the game. We think that the goal will be to -- it would make more sense to me -- you want -- that's why they do longer laterals, right? More production zone. How do you get more production into the wells. So I think it's early days for the actual need of the H-2 gun, even though we are generating sales, but nothing like what we're doing on H-1.

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Malcolm Graham-Wood, Hydrocarbon Capital - Founding Partner [23]

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Malcolm Graham-Wood from Hydrocarbon Capital. You said you released 18% of your workforce.

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Arthur James Johnson, Hunting PLC - CEO & Director [24]

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Just in Canada.

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Malcolm Graham-Wood, Hydrocarbon Capital - Founding Partner [25]

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Just in Canada. What workforce are you running on -- I mean, because in the rest of the business, you've been -- continue releasing, and you talked about operational opportunities.

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Peter Rose, Hunting PLC - Finance Director & Director [26]

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We're at about 2,800 at the end of June.

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Malcolm Graham-Wood, Hydrocarbon Capital - Founding Partner [27]

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And the -- how many did you bring -- not many with the business that you bought...

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Peter Rose, Hunting PLC - Finance Director & Director [28]

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21. RTI. 21 people.

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Malcolm Graham-Wood, Hydrocarbon Capital - Founding Partner [29]

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And would -- that will continue to shrink, I guess.

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Arthur James Johnson, Hunting PLC - CEO & Director [30]

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No.

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Malcolm Graham-Wood, Hydrocarbon Capital - Founding Partner [31]

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No? You reckon you've got to where you need to be?

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Arthur James Johnson, Hunting PLC - CEO & Director [32]

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Yes, I mean, Canada uptick -- Canada was -- 27, 28 people was the final number up there. That makes our head count in Canada about 100 people. It was one of those things that we've just taken some decisions on some product lines and all. And we have new management in place there, that is doing an excellent job. Randy Walliser is onboard, very experienced oilfield guy that we were fortunate enough to bring on into the company. He's making the right moves and we're adjusting for the activity level. And so that operation up there basically makes guns for the Canadian market as well as OCTG accessories and threads our Premium Connections. But we just needed -- we needed to take it down and we did.

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Peter Rose, Hunting PLC - Finance Director & Director [33]

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A lot of the new expansion projects we've brought on there are very much highly automated. And similarly, Ameriport was -- again somebody went to -- if you look down the shop floor, where are the people? There's nobody there, it's all automated.

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Sahar Islam, Goldman Sachs Group Inc., Research Division - Analyst [34]

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Sahar Islam from Goldman Sachs. Two questions, please. One on perf guns. So on the factory assembled guns, if the demand does pick up, do you need to add more people? Do you have to eventually invest? Just a basic on what you would actually have to do to move towards that?

And then secondly, on the international side, as we see the recovery, hopefully, increase and expand, is there either inorganic or organic investment you'd want to make over the medium to longer-term within the international business, specifically?

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Arthur James Johnson, Hunting PLC - CEO & Director [35]

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Okay. First, on the guns. The question was on factory. There's no free lunch. So at the end of the day, whether you're sending out parts, and they -- the wireline company has a shop that they want -- they have a gun shop, many of them do, somebody has got to do that work. And so we have the people that can do it. If we get more and more into it, there'll be a small investment, but it's more just lining out assembly at this point. The manufacturing we've automated, as people have seen in Milford and in Pampa. So it's really a case. It's not a big increase for us to have to go do that.

On the international side right now, we're happy with the assets that we have internationally. We're looking at some acquisitions that will add new products and some of those are in the international marketplace right now. We're going to need to spend some CapEx next year upgrading our facility in China. We know that, that's -- we're working on that right now. But there's not a lot of dollars to go out internationally as we sit right now.

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Kevin Roger, Kepler Cheuvreux, Research Division - Research Analyst [36]

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This is Kevin from Kepler Cheuvreux. One question on Titan, but on the international side. I think in the report you mentioned that for the H-2, you expect growth at Titan on the international side. What does it mean? Is there any particular commercial success on your side with new projects, things like that or it's just related to the recovery of the international market?

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Arthur James Johnson, Hunting PLC - CEO & Director [37]

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The international business is actually -- it's still a small number. I mean, if you look at -- I'll tell the story. If you look at our numbers today, I think through the first half, our international Titan sales were about $9 million or $10 million, they were in that ballpark. However, that's double what it was the previous half year. So we're making some inroads there. A lot of that's going to be based -- follow the rig count internationally, and you're going to follow our opportunity for sales as well as we are taking advantage of our facility in China to put guns into Thailand or Indonesia and places like that.

But that is really -- that has really been the home of the major service companies. That's where the bulk of their gun manufacturing goes. And in fairness to 2 of our competitors, they've been doing it a lot longer than we have internationally as well. And so when you get to those international markets, you have explosive license issues. In many countries, the military actually runs that part of the business or controls it. So it's not like moving -- going from Oklahoma to Montana. It's just a more difficult deal. We like difficult. But I mean, it's a slow-paced expansion for us right now.

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Kevin Roger, Kepler Cheuvreux, Research Division - Research Analyst [38]

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Okay. And the second one related to the acquisition of RTI. I think it's closed, as you just mentioned. Can you please give us some colors on the impact on your P&L for the H2, the impact from RTI?

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Arthur James Johnson, Hunting PLC - CEO & Director [39]

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Zero. There's not going to be any impact right now. That business right now has a small operating loss based on where they were at. They are working on -- we're basically working on the future. I'm thinking next year, the business will have positive results for us, and that's what we're planning. Laurie Markoe and the team there that we've just brought on board are very, very bright people. They know the business inside and out, along with Dane Tipton, I'm very comfortable we'll be delivering results on that.

A lot of it, again, is I think we're buying it -- we bought at the right time in the cycle because a lot of these things -- the lead time on these products can be easily 12 months. So this is not a order it today and get it in 60 days type of product. But I can tell you that our quote level, inquiry level at the time of the purchase is higher today than it's been in 4 years. So we're seeing, again, following up the plans people are making for development projects. It's going to go with that.

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Michael Brennan Pickup, Barclays Bank PLC, Research Division - MD & Senior European Oilfield Services Analyst [40]

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It's Mick from Barclays. Can I just go back to Titan, and I think Peter said, the margin has stabilized, at least, at this point into H2. Obviously, you said pricing is flat. You've obviously got rid of 10% of your sales in the first half as inventory selling off. So what you're thinking about volumes? If you think it's only just stabilized and not improving?

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Arthur James Johnson, Hunting PLC - CEO & Director [41]

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Well, I could take a guess on what the rig count is going to be in November 1. I don't know. Volumes, right, as I said, I'm ending July -- the day that I -- what I see -- saw in July, there's been no change. Everybody, and I've talked to many of you on the phone this morning, you all listen to the same calls I do. You read the same things that I do. It's pretty inevitable that the fourth quarter is going to see another slowdown like we saw last year. To what level, I don't have a clue, Mick. I wish I did. I don't know. It's just one of those big uncertainties in the whole domestic onshore marketplace that we can't get our hands on.

The advantage, what I'm trying to preach and tell everybody is, the other 60% of the business, I can tell you is not going to go down because of backlogs we already have, non-Shell related product lines. And that's the strength of the company. I -- we're going to balance this. There's going to be great years and not so great years, depending on what basin or where you're at. It's like the North Sea. They've had horrible years and there has been great years. So it all goes in a cycle. But I'd be crazy to try to guess what's going to happen in Q4 right now from a numbers point of view.

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Michael Brennan Pickup, Barclays Bank PLC, Research Division - MD & Senior European Oilfield Services Analyst [42]

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Okay. And then a couple of just follow ups. You were importing guns into the U.S. from China. Obviously. I don't think you're doing that now.

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Arthur James Johnson, Hunting PLC - CEO & Director [43]

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Correct.

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Michael Brennan Pickup, Barclays Bank PLC, Research Division - MD & Senior European Oilfield Services Analyst [44]

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Has the volumes in Asia Pacific pickup been enough to keep Wuxi busy and what sort of levels is going to...

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Arthur James Johnson, Hunting PLC - CEO & Director [45]

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It's not as busy as what we'd like. There's -- we need to get some more orders there. I mean, we're making guns there, but not near the volumes that we would like to do.

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Michael Brennan Pickup, Barclays Bank PLC, Research Division - MD & Senior European Oilfield Services Analyst [46]

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And then on RTI, you say it's making nothing at the moment. But if you look at FPSO orders globally, actually last year was quite a good year, and this year is going to be back to 2013, 2014 level. So is the story there that it was too domestically focused on that Gulf of Mexico, and you're going to internationalize it?

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Arthur James Johnson, Hunting PLC - CEO & Director [47]

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Well, there was a -- most of those decisions are still coming out of the U.S. It was a business that in -- no disrespect to the previous owners, but the business was really handicapped. They were basically told, you can't grow, you're in a hibernation mode. You can't travel, you can't hire salespeople. We want out of this business, and it is what it is. And so in my view that it was in hibernation for 2 years throughout the whole Arconic thing going on. And we just see it as a big upside. I mean, those products are written into -- like Shell uses these products. I think that there's great upside to it. I really do.

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Michael Brennan Pickup, Barclays Bank PLC, Research Division - MD & Senior European Oilfield Services Analyst [48]

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Okay. And just finally, on the fully assembled gun, as you say, you can piece them together as good as anybody else, if not better.

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Arthur James Johnson, Hunting PLC - CEO & Director [49]

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Right.

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Michael Brennan Pickup, Barclays Bank PLC, Research Division - MD & Senior European Oilfield Services Analyst [50]

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I thought one of the issues always was a safety concern that you'd be taking fully loaded guns (multiple speakers) distribute. How have you managed to accommodate that?

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Arthur James Johnson, Hunting PLC - CEO & Director [51]

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It's not a safety concern. With our ControlFire system, our guns are intrinsically safe, like everybody talks about. There's not an issue with that. What it more has been issue in is who takes responsibility and who has the explosive license. And the oil companies wanted to have factory delivered guns. Because they see it as a way to get their claws in through procurement, to micromanage the business and try to again, beat down costs from wireline companies and everybody else. The issue is, though, no oil company wants to have an explosive license. No oil company wants to take the risk of having a field shut down because an accident or something happen. That's the wireline companies' problem.

So in some cases, the oil companies are paying the wireline company a fee to be responsible for the delivery of the guns. So some of this is in early stages. There's some operators that have it down to a science, most of them it's still with the wireline companies. So it's an evolving thing. The message that we're telling the market is whatever our customers want, we're going to do it and figure out a way to work with them to solve the problem.

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David Richard Edward Farrell, Crédit Suisse AG, Research Division - Research Analyst [52]

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David Farrell, Crédit Suisse. Three questions. Peter, is there any consideration of doing a share buyback at this stage, looking out over the next couple of years, strong free cash flow generation.

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Arthur James Johnson, Hunting PLC - CEO & Director [53]

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No.

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Peter Rose, Hunting PLC - Finance Director & Director [54]

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Jim's just answered it. Our preference is to hold onto that cash and use it to spend on acquisitions. When you've heard Jim say, we've got a number in the pipeline that may or may not come to fruition. We have bought some shares to satisfy the share award programs, but we believe strongly, use the money to grow the group.

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Arthur James Johnson, Hunting PLC - CEO & Director [55]

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I can spend all the cash we have in the bank tomorrow just on acquisitions we're looking at, plus some. If you don't think debt kills, I got some phone numbers for some people at Weatherford, or a few other oilfield service companies that you can call and talk to about it. This is not a business to be at any time because it's cyclical to be overleveraged in. And especially with all the uncertainty, I really just don't want to take on debt. And I think there's better uses of the money than just buying back shares right now.

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David Richard Edward Farrell, Crédit Suisse AG, Research Division - Research Analyst [56]

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Okay. In terms of AMG's backlog, I think it's $70 million now. How does that compare to where it was on the 1st of January?

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Arthur James Johnson, Hunting PLC - CEO & Director [57]

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Higher.

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David Richard Edward Farrell, Crédit Suisse AG, Research Division - Research Analyst [58]

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And final question for Peter. If you look at what's been in-house at Titan and then the efficiency gains, can you give us a kind of absolute incremental EBITDA that comes from that in the second half of the year?

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Peter Rose, Hunting PLC - Finance Director & Director [59]

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In the second half? Again, it depends what we're going to do...

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Arthur James Johnson, Hunting PLC - CEO & Director [60]

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No.

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Peter Rose, Hunting PLC - Finance Director & Director [61]

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No? It depends where Q4 is going to go, and to the Mick's point, the volumes going through.

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David Richard Edward Farrell, Crédit Suisse AG, Research Division - Research Analyst [62]

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At current run rate?

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Peter Rose, Hunting PLC - Finance Director & Director [63]

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Hopefully, it will be incremental, no doubt about it. I mean, you've seen the robotic machines, efficient, reducing manpower, the energetic production, taking it up to an excess of 1 million. All those will be incremental provided that extra capacity is used, and we get the benefit of the investment. That's the key. But it will be incremental.

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Mark Wilson, Jefferies LLC, Research Division - Oil and Gas Equity Analyst [64]

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Mark Wilson from Jefferies. Just an interesting observation on the decision to make your own det cord. Given how long you've been in this business and using third-party det cord, and arguably how important it is in, let's say, I don't know, miss-run statistics. What is the risk to that move versus the margin gains that you hope to achieve?

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Arthur James Johnson, Hunting PLC - CEO & Director [65]

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We don't feel there's any risk. We are energetics people. We make things that blow up and that's what a det cord is. And so we have the people and the talent in-house to do this. There's a very specific -- there's very specific suppliers of the equipment, that that's what they do. They are supplying or actually -- they're actually being supplied out of Europe. There's the people who make this product. So we're very, very confident.

And on top of that, we're not going to sell anything until it's tested, proven. It's just not do it today, and let's go sell rolls of det cord. So I have confidence in the engineering team of our company, that it's not an issue. We could say the same thing about...

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Peter Rose, Hunting PLC - Finance Director & Director [66]

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Power charge.

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Arthur James Johnson, Hunting PLC - CEO & Director [67]

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Power charges. We went in the power charge business. Now we're selling a lot of power charges. So it's -- when it comes to energetics, we know what we're doing.

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Mark Wilson, Jefferies LLC, Research Division - Oil and Gas Equity Analyst [68]

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And the gains you hope to achieve from this move?

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Arthur James Johnson, Hunting PLC - CEO & Director [69]

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Yes, I mean, that's -- we did a CapEx, the payback was like 10 months on this. I mean, it was a quick payback on the CapEx forward. I remember that.

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Unidentified Company Representative [70]

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Any more questions?

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Peter Rose, Hunting PLC - Finance Director & Director [71]

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Someone's got a question on IFRS '16. Come on.

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Unidentified Analyst [72]

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My question then, Jim, is, what do you worry about? It seems everything is going extremely well. The business is improving. So what engages you -- what are the things you worry about?

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Arthur James Johnson, Hunting PLC - CEO & Director [73]

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Oil price? Yes. I mean, there's so many things that are outside of my control that -- I mean, those are the things you think about. Worrying about them, I find that worrying really doesn't help anything. We've -- I'm fortunate that the team that I work with -- I mean, Peter and I have worked together for -- we're into decades now, the same with the gang in Houston. There's not probably a rodeo we haven't seen in the last 20 years, 30 years. And so that gives me comfort that whatever comes up, we'll be fine.

The business has always been cyclical. It's going to continue to be that way. Hunting has a great name, a great brand. We have great people. At the end of the day, it's the people that do it, and I'm just -- that helps me sleep well at night. And it's, again, not having debt, not having bankers calling me with, "When are you going to pay this next note off?" I'm not really too worried right now.

All done? Okay.

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Peter Rose, Hunting PLC - Finance Director & Director [74]

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Thank you.

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Arthur James Johnson, Hunting PLC - CEO & Director [75]

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Thanks for your time.