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Forum Energy Technologies Inc (FET) Q1 2019 Earnings Call Transcript

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Forum Energy Technologies Inc  (NYSE: FET)
Q1 2019 Earnings Call
April 26, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Forum Energy Technologies First Quarter 2019 Earnings Conference Call. My name is Michelle, and I will be your coordinator for today's call. At this time, all participants are in a listen-only mode. And all lines have been placed on mute to prevent any background noise. We will be facilitating a question-and-answer session after the speakers' remarks. As a reminder, this conference call is being recorded for replay purposes. After the speakers' remarks today, I will instruct you on the procedure for asking questions.

I will now turn the conference over to Mr. Mark Traylor, Vice President of Investor Relations. Please proceed, sir.

Mark Traylor -- Vice President of Investor Relations

Thank you, Michelle. Good morning and welcome to Forum Energy Technologies First quarter 2019 Earnings Conference Call. With us today to present formal remarks are Cris Gaut, Forum's Chairman and Chief Executive Officer, as well as Pablo Mercado, our Chief Financial Officer; and Lyle Williams, Senior Vice President of Operations.

We issued our earnings release last night and it is available on our website. The statements made during this conference call including the answers to your questions may include forward-looking statements. These statements involve risks and uncertainties that may cause actual results or events to differ materially from those expressed or implied in such statements. Those risks include among other things matters that we have described in our earnings release and in our filings with the Securities and Exchange Commission. We do not undertake any ongoing obligation other than that imposed by law to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after this call.

In addition, this conference call contains time-sensitive information that reflects management's best judgment only as of the date of the live call. Management statements may include non-GAAP financial measures. For a reconciliation of these measures, refer to our earnings release. This call is being recorded. A replay of the call will be available on our website for two weeks following the call.

I'm now pleased to turn the call over to Cris Gaut, our Chief Executive Officer. Cris?

C. Christopher Gaut -- Chief Executive Officer

Well, thanks, Mark, and good morning everyone. I'm pleased to report on our results this quarter. Our employees are doing a great job of managing the business for the current market environment and working toward achieving our key objectives. And those are, operating efficiently with consistent execution, emphasizing our winning products and brands with market share opportunities and consistently generating strong free cash flow. I would like to report on how we are doing on each of these three objectives.

Our operating efficiency and cost control measures are working well as evidenced by improving profitability in each of our three segments. We achieved higher EBITDA across the board resulting in EBITDA of $22 million on flat revenue in the first quarter. As stated in our earnings press release, we have realigned our three business segments to reflect how we are now running the business. Managing the downhole and drilling product lines together, which share a common business driver of well construction activity, provides field level sales synergies in North America. In addition, this combines two of our stronger international product lines with a history of global brand recognition. The combination will leverage the global operating infrastructure of the drilling product line to accelerate market penetration for our downhole products.

Our drilling and downhole product lines together are well positioned to benefit from the recovery in international drilling activity. I would note our international revenue increased sequentially by about 20% in the first quarter. We are also seeing early signs of a recovery in offshore and subsea activity as evidenced by some recent good orders in our subsea product line. In addition to these orders, inquiries for subsea equipment are higher than we have seen in quite some time. Our first quarter revenue was $272 million, essentially flat with the prior quarter. Our orders were $242 million resulting in a book-to-bill ratio of 89%. Although customer order activity began the year at a slow pace, it accelerated in the month of March and we have received several sizable orders so far in the second quarter.

With continued high levels of US land activity, our greater constraints -- but the greater constraints on customer spending for new capital equipment, we are seeing a shift in demand from capital equipment to our consumable and replacement products. These products allow our customers to keep their active equipment working efficiently. Given from strength in the consumable products area, we believe we are advantaged relative to some other equipment manufacturers in this environment. This trend from capital equipment to consumable products is particularly strong for our pressure pumping customers, where we are seeing lower orders for power and for new fleets, but increasing demand for our higher margin flow iron and consumable products. Other products within our completion segment that are seeing strong domestic demand are coiled tubing and coiled wireline cable and pressure control equipment. And in addition, we are seeing international demand for our coiled tubing products, as well as, our pressure control equipment.

We are delivering on our commitment to generate free cash flow on a consistent basis, as we generated free cash flow of $14 million in the first quarter and this was after paying approximately $5 million in cash severance costs. Our plan to generate $100 million on an annualized basis is on track. Our inventory reduction program is under way with progress in each of the last two quarters and we expect accelerating results throughout the year. There is also the usual receivables lag in this inventory reduction turning into cash. So, we expect to see greater cash generation from this program later in the year.

Now, looking ahead, we expect our second quarter operating results to be little changed from the first quarter, as we work down the backlog of capital equipment while demand for consumable products and international activity increases. Based on current market conditions and our good start in the first quarter, our objective to increase EBITDA on a year-over-year basis remains achievable.

Before I turn it over to Pablo, I want to recognize Mark Traylor for his great work as our VP of Investor Relations. Mark is transitioning to a different role within Forum, and he's going to be handing off the IR duties to Mark Conlon, who has been with Forum for the past two years and is someone we think very highly of.

Now let me hand the call over to Pablo to take you through our results and financial position. Pablo?

Pablo G. Mercado -- Senior Vice President and Chief Financial Officer

Thank you, Cris. Good morning. Our first quarter revenue was $272 million, down only $1 million sequentially despite the slowdown in US drilling and completions activity. Our adjusted EBITDA for the first quarter was $22 million or 8% of revenue, a sequential improvement of 30 basis points. Net loss for the quarter was $8 million or $0.07 per diluted share. Results for the quarter included pre-tax charges of $5 million for restructuring costs and $2 million of foreign exchange losses, partially offset by a $5 million gain due to a reduction in contingent consideration. We provided a reconciliation table of these special items in our earnings release for your reference. Adjusted net loss for the first quarter was $0.04 per diluted share excluding special items.

As Cris mentioned, we changed our reporting segment effective January 1, 2019. Forum now operates in the following three reporting segments: Drilling and Downhole, Completions and Production. Historically, we operated in three business segments: Drilling and Subsea, Completions and Production and Infrastructure. We have moved the downhole product line from completions to drilling and subsea to form the new drilling and downhole segment.

The completion segment retains the stimulation and intervention and coiled tubing product lines. Finally, we renamed the production and infrastructure segment as production. We have provided supplemental schedules for the 2018 quarterly results of the new reporting segments in the earnings release. In addition, after the filing of our 10-Q, we will issue an 8-K that will include recasted historical financial information.

I will now summarize our segment results on a sequential basis. In our drilling and downhole segment, orders were $82 million, an 8% increase due to the decline in the North America rig count and timing of ROV orders. The book-to-bill ratio for the segment was 95%. Segment revenue was $86 million, a decrease of $3 million or 3%. This was due to the lower rig count in North America and lower revenue recognition subsea projects, partially offset by improved sales of artificial lift products. Adjusted EBITDA for the segment was $6 million or 7% of revenue, an improvement of 90 basis points driven in part by cost reductions.

In our completion segment, orders decreased 24% to $80 million. The decrease was primarily due to the large fourth quarter order for 25 coiled tubing BOP packages and lower orders for pressure pumping capital equipment for new fleets. This was partially offset by higher orders for coiled tubing products.

Segment revenue was $95 million, an increase of $1 million. This was primarily due to the delivery of significant coiled tubing line pipe project to a customer in the Middle East partially offset by lower sales of stimulation and intervention equipment. Adjusted EBITDA margins were 17%, an increase of 60 basis points due primarily to better volumes of high margin pressure pumping consumables and coiled tubing products. Production segment orders were $80 million, an increase of 6%. Segment revenue was $92 million, a 1% decrease -- increase, excuse me. Adjusted EBITDA margins were 7% for the segment, an increase of approximately 130 basis points. The improvement in each of these areas was due to higher demand for our higher margin upstream and midstream valves.

I will now discuss some additional details about our results and financial position at the Forum level. Our free cash flow after net capital expenditures in the first quarter was $14 million, in line with our expectations. Our program to aggressively reduce excess inventory is under way and will result in higher free cash flow generation in the second half of the year. We repaid $30 million of debt in the first quarter and our primary use of free cash flow in the near term will be to further reduce debt and improve liquidity. Our net capital expenditures in the first quarter were $4 million. We expect our total capital expenditures for 2019 to be approximately $20 million.

Our balance sheet and financial position remained strong. Our liquidity position at the end of the first quarter improved to approximately $224 million. Net debt was $458 million and our net debt to total capitalization ratio was 31%. As a result of the new accounting standard, all leases are now on the balance sheet. So, you will see a new operating lease asset of $55 million and a corresponding increase in other long term liabilities. Our reported diluted share count for the first quarter was 109.6 million shares. Interest and depreciation and amortization were $8 million and $16 million respectively in the first quarter. We expect these expenses to remain at similar levels in the second quarter.

Adjusted corporate expenses were $7.3 million in the first quarter and we expect corporate expenses to be approximately $7.5 million in the second quarter. We expect to continue to see volatility in our quarterly tax rate as we're very close to breakeven in various jurisdictions with different tax rates and continue to have unrecognized tax benefits in loss making jurisdictions. During this time period, we will continue to have some tax expense for the jurisdictions with income even if we have overall losses. Once we turn profitable in the loss making jurisdictions, we will have a relatively low tax rate as we begin to use our net operating losses. For more information about our financial results, please review the earnings release on our website.

Now let me turn the call over to Lyle to discuss some key operating initiatives.

D. Lyle Williams -- Senior Vice President, Operations

Thank you, Pablo. Good morning, everyone. Our operating team continues to make good progress toward our inventory reduction objectives through enhanced planning programs, partnerships with key vendors and sales of older inventories. As a result, net inventories decreased by over $7 million in the first quarter which followed a reduction in the fourth quarter. This year, inventory reductions should contribute meaningfully to our cash flow generation goals as we build on these recent successes. We are pleased with the progress the organization is making in our cost reduction efforts as we drive to further reduce SG&A as a percentage of revenue.

During the quarter, we adjusted our cost structure to meet current market conditions which contributed to the improvement of EBITDA in every segment. These changes included -- include streamlining our organizational structure and moving functional authority and accountability back into our product lines to eliminate redundant costs. Also, as part of our overhead spending reduction, we have exited our Houston distribution facility, relocating finished goods to customer based -- to US based manufacturing plants. This relocation will reduce rent and personnel expenses and facilitate improved customer service while reducing inventory. This month we will complete the combination of our Houston corporate office and the sales office into our operating headquarters. The corporate office is already sublet to a third-party for the remainder of our lease term enhancing the planned savings from this move.

In addition to cash and cost focus, our operating teams are driving growth by matching up our winning products with our high quality customer base. Through the last few years, our team focused on deepening relationships with top-tier players in our industry. Our Top 10 customers representing roughly 30% of our revenue, include the three leading oilfield service companies, a major IOC, several leading independent pressure pumping companies, a large land drilling contractor and the large pipe valve and fitting distribution firms. The financial and market strength of these customers and their global reach across multiple phases of the value chain provide Forum with opportunities to grow and penetrate new markets.

We're also growing through the development and introduction of new technology. In the first quarter, we continued our trend of launching new products, focused on improving customer efficiency. Products launched this quarter include our 15,000 psi Hydraulic Latch Assembly, which significantly increases safety and efficiency of hydraulic fracturing operations on high pressure, zipper frac wells. Hydraulic coil of 130 grade coiled tubing that improves the longevity of coil for high pressure horizontal wells and an abrasion-resistant overcoat for our coiled line pipe, which is typically used on traditional midstream line pipe applications and we'll open additional markets for this product.

Finally, as Cris mentioned, we continue to see growth outside of North America. In the first quarter, international revenues increased by $10 million. This growth came in part from delivery of a significant order for subsea coiled line pipe into the Middle East and shipments of casing hardware products to Asia and Latin America. We're seeing new international inquiries for our differentiated artificial lift products, subsea ROVs, and drill pipe handling tools and capital equipment for land rigs. Our strong customer partnerships, winning products and good exposure to a growing international market, provide confidence for continued revenue growth.

Let me turn the call back over to Cris for concluding remarks.

C. Christopher Gaut -- Chief Executive Officer

Thanks, Lyle. We are off to a strong start in 2019. And we are demonstrating once again the cash flow generating ability inherent in Forum's business model. And you can expect our free cash flow to grow as the year progresses. Our focus on consumable, short-cycle products is the right place to be in the current market as our customers are wanting to keep their existing equipment working, longer and harder. Our operating efficiency and cost reductions are resulting in all of our businesses having improved profitability.

Thank you for your interest. And at this point, Michelle, we will open up the line for questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from the line of J.B. Lowe with Citi. Your line is open. Please go ahead.

J.B. Lowe -- Citi -- Analyst

Hey, good morning guys. Thanks for taking my question. First, I just wanted to clarify your comments on 2Q results, you expect to be flattish with the international up. I guess, how much would you expect domestic top-line to be down in Q1 -- Q2?

C. Christopher Gaut -- Chief Executive Officer

Yes. I think we're getting granular there. I think the trend that we're seeing is up in international, up in consumables, offset as we work off the backlog we have in capital equipment. And I think probably best at this point is to leave it at that from a qualitative standpoint. I think the 20% growth in international I don't assure that we'll continue quite at that rate as the numbers get bigger. But the directions -- the directional increase is one we're confident in.

J.B. Lowe -- Citi -- Analyst

Okay, fair enough. And how much of your completions segment when you say as capital equipment versus consumable revenue at this point?

C. Christopher Gaut -- Chief Executive Officer

It's very highly rated toward consumable and sustaining spending with the coiled tubing streams, the wireline cable and the consumable sustaining spending in completions at this point a very high percentage to sustaining spending OpEx kinds of things. We are selling power ends but they would be more replacement units for ones that are wearing out.

J.B. Lowe -- Citi -- Analyst

Okay, perfect. And then last one for me just on free cash flow, great start for the year with $14 million. What do you think you guys can get to on an annualized run rate in the back half of the year as the free cash flow kind of improves from here?

C. Christopher Gaut -- Chief Executive Officer

Yes, I think we'll get at an annualized run rate to that $100 million run rate. And I think we're on track to show very strong cash flow which we began using to, reduced our net debt and strengthen our balance sheet.

J.B. Lowe -- Citi -- Analyst

All right. Great. Thanks so much guys.

C. Christopher Gaut -- Chief Executive Officer

Thanks.

Operator

Thank you. And our next question comes from the line of Sean Meakim with JPMorgan. Your line is open. Please go ahead.

Sean Meakim -- JPMorgan -- Analyst

Thank you. Hey, good morning.

C. Christopher Gaut -- Chief Executive Officer

Hi, Sean.

Sean Meakim -- JPMorgan -- Analyst

So, Cris, congrats on a great start here in terms of some of the numbers, we see in the turnaround. As you're working toward that improvement in free cash flow number sequentially, could you maybe just help us understand a bit, the components that drive that progression? So in other words, how much would you characterize, comes from activity change, backlog throughput versus working capital release, DSOs versus inventory liquidation? Just trying to get a better sense of how much would you characterize is within your control versus other factors that are outside of your control that factor into that expectation?

C. Christopher Gaut -- Chief Executive Officer

Sure, Sean. The biggest contributor is going to be cash flow from operations. But we've got the advantage still here of being able to -- and I think for quite some time, released cash from our working capital. We have excess inventory that we can work down and I think we've got the programs in place to do that. And so, I think those are going to be the two big drivers: cash flow from operations, converting EBITDA to cash. And then working down the inventory balance and I think that's not just a one-time thing, but that's going to be a continuing source of cash for quite a few quarters here.

Pablo G. Mercado -- Senior Vice President and Chief Financial Officer

Yes, Sean, you asked about the progression kind of throughout the year. Q1 was a little bit slower versus the run rate with the cash severance costs that Cris mentioned and also the momentum that takes some time to build on the inventory reductions. Second quarter, we expect similar results on free cash flow. We do have our interest payment there, that's $12.5 million semi-annual payment on the bonds. But then, we expect to continue to be able to reduce the inventory and turn into cash. So, building more toward the second half of the year.

C. Christopher Gaut -- Chief Executive Officer

We'll have a bit more contribution I think from the inventory turning to cash in the second quarter than we did in Q1 and of course not have the severance payments.

Sean Meakim -- JPMorgan -- Analyst

Right. Okay. Thank you for that feedback. That makes a lot of sense. You mentioned the PVF distributors, the other large valves manufacturer highlighted that they had really strong results in the first quarter in advance of that typically strong construction season in 2Q, 3Q. Could you give us maybe a sense of your outlook for valves beyond the first quarter, can we sustain that type of level of sales or how we think about the International piece, Middle East being a key component there. Just a little more granularity on the valves outlook I think would be appreciated, this is another -- it maybe a smaller piece but it's a nice part of the portfolio.

D. Lyle Williams -- Senior Vice President, Operations

Sure, Sean. This is Lyle. Let me try to speak to that a bit. We did see -- in the fourth quarter we mentioned and also even into the first quarter some slowdown from our PVF distributors who are also working to drive down their working capital and doing that by either deferring receipt of some product that they've already ordered or deferring placing some new orders. I think that is little more aimed at MRO and kind of a normal flow through product, they'll work those inventories down in a quarter or two and will be back to a normalized level. I think what drives the valves business for us is continued spending on midstream and downstream infrastructure buildout which is both a North American phenomenon and outside of North America in the Middle East. So those projects continue to move forward and we feel very good about prospects to win market share with those projects specifically and continue to grow that over the next few quarters.

Sean Meakim -- JPMorgan -- Analyst

That's very helpful. I appreciate that. Thanks a lot.

C. Christopher Gaut -- Chief Executive Officer

Sure.

Operator

Thank you. And our next question comes from the line of George O'Leary (sic) with Tudor Pickering. Your line is open. Please go ahead.

George O'Leary -- Tudor, Pickering, Holt & Co. -- Analyst

Swing and a miss on the name but how are you all doing?

C. Christopher Gaut -- Chief Executive Officer

Hey, George.

George O'Leary -- Tudor, Pickering, Holt & Co. -- Analyst

Good morning, guys. I guess with the consumables ticking up and capital equipment maybe dragging a little bit. Could you just remind us and I realize you don't disclose it, but just kind of qualitatively or however you can quantitatively talk about the delta in margins between consumable type products versus capital equipment? And I realize that will depend on the individual product but just generally I think historically we've thought of consumables as carrying higher margins than capital equipment. But how would you guys frame that today given that the changed mix of business versus say in 2013 or 2014 timeframe?

Pablo G. Mercado -- Senior Vice President and Chief Financial Officer

George, it's Pablo. Yes, I think you're correct. Generally, our consumable products carry a bit better margins, really sort of into the details by product line. But in general I think you can assume that.

C. Christopher Gaut -- Chief Executive Officer

I think there's another feature there as well as when you're bidding for a capital equipment for a big newbuild program or a new fleet, and it's a package that's going out to bid to several potential suppliers. There's obviously going to be a competitive nature to that. On the sustaining and maintenance spend, often it's a situation. Okay I need it now. Who's got it. And it's more about who has the right stuff at the right time. And pricing is not the key consideration. So, I think there is that element as well, George, which helps the margins on the consumable and sustaining part, where availability and responsiveness are high priority items.

George O'Leary -- Tudor, Pickering, Holt & Co. -- Analyst

Okay, great. That's super helpful color. And then on the Multilift side of the equation and the artificial lift businesses you guys have the cannon protectors and the phase regulator and all that stuff. Can you just speak to the growth rate you've seen there? I think that's probably one of the better acquisitions alongside with mine in the rest of Global Tubing that you guys have done in the last few years. And just keeping our ear to the ground, it seems like those products have continued to see a strong growth rate. But we obviously don't get that data from you. So can you just talk about that business and then the outlook for artificial lift oriented products for the remainder of the year or maybe just Q2 to the extent you have any visibility there?

D. Lyle Williams -- Senior Vice President, Operations

So, George, it's Lyle. The -- you're right, we're really excited about our artificial lift portfolio with protection equipment that we have, centers around ESP completions. Those have done really well for us, taking market share in North America, in the Permian Basin and have grown dramatically over the last year. We expect to see continued growth as we branch out into other geographies as well both in the US and also outside of the US, in the international markets. So we've got some very differentiated technology there, that's up taking well with customers and making traction with some of the bigger customers as well. So we're seeing some good progress with that product line and look forward to that continued growth.

C. Christopher Gaut -- Chief Executive Officer

An example of why we're making the headway we are from a share standpoint. As you know, ESPs are being put in the wells often right from the start of production. When there's still quite a bit of sand in the well right from the stimulation, from the frac job. And our equipment, our SandGuard, as the name implies, protects the ESP from the sand and the well particularly when the pump turns on and off. And sand and ESPs don't get along well. So it's a valuable addition to the operators that this power equipment be added to the string there. And then we have other ancillary products that go along with the ESPs where we can put together a nice package for our ESP supply partners for the benefit of the operators. And as Lyle said, as a result, we're gaining some good share there with -- and we've got some I think proprietary nature to our technology which is helpful from a margin standpoint as well.

Pablo G. Mercado -- Senior Vice President and Chief Financial Officer

George, just to answer your question on trends, we did see a little pause in the fourth quarter just as completions activity kind of took a pause, but we saw a rebound in demand for those artificial lift products in the first quarter and have good continued momentum as Lyle said from market penetration really adding customers.

George O'Leary -- Tudor, Pickering, Holt & Co. -- Analyst

Okay, great. That's very helpful color. Thanks for that, all three of you guys. And then just one more if I could. The Global tubing business is obviously a leading franchise but the coiled line pipe is an intriguing opportunity. It sounds like the market opportunity there is maybe growing versus how it was initially envisioned the Middle East order certainly very nice, nice to see. I wonder if you could just talk about as you guys look at that market what the longer term market opportunity is on the coiled line pipe size and maybe relative to the legacy downhole business, just how you guys would say that?

C. Christopher Gaut -- Chief Executive Officer

Yes. George, on the US land side using coiled tubing as line pipe is particularly effective for the growing amount of gas lifts that's going on in a number of basins. So that's a good application for a really alternative application for our coiled tubing and with the additional coating technology that our team has developed, puts us in good stead for that business. Now in addition what we've developed more recently too is offshore applications for line pipe or flow lines. And that's what we're seeing more on the international side. So really it's a play that's helping us international and offshore as well as the growing share that the gas lift is getting in US land market.

George O'Leary -- Tudor, Pickering, Holt & Co. -- Analyst

All right. Thanks for the color, Cris, Lyle and Pablo.

C. Christopher Gaut -- Chief Executive Officer

Sure. Very good.

Operator

Thank you. And our next question comes from the line of John Watson with Simmons. Your line is open. Please go ahead.

John Watson -- Simmons Energy -- Analyst

Hi, good morning.

C. Christopher Gaut -- Chief Executive Officer

Hi, John.

John Watson -- Simmons Energy -- Analyst

On the international offshore coil project that was announced in the release, where all of the revenues from that project realized in the first quarter or should we expect a benefit in Q2 as well?

Pablo G. Mercado -- Senior Vice President and Chief Financial Officer

John, this is Pablo. So we had announced a project for an international market that we delivered in the first quarter. All of that was delivered and recognized in the first quarter. But we do have another project behind that for again a different international market. So I think we are starting to see some traction with that product as Cris was discussing.

John Watson -- Simmons Energy -- Analyst

Okay, great. So the -- that subsegment, we could see continue to grow from Q1 levels?

Pablo G. Mercado -- Senior Vice President and Chief Financial Officer

The project in the first quarter was pretty sizable. So I think it is growing. Is it going to grow Q1 to Q2? Hard to say. But it is growing over the next few quarters.

C. Christopher Gaut -- Chief Executive Officer

Yes. We're seeing more applications for that technology, and that we've got three of them now.

Pablo G. Mercado -- Senior Vice President and Chief Financial Officer

And the new project is for Q3 delivery as well, the one that was in the press release.

John Watson -- Simmons Energy -- Analyst

Okay, perfect. That's very helpful. Thanks, Pablo. And in terms of the expected international growth into Q2 and moving ahead, can you give us some color which segments you think we should be factoring in most heavily for international growth?

D. Lyle Williams -- Senior Vice President, Operations

Sure. We've got obviously very good exposure to international in the subsea business where we are starting to see some ROV demand. In drilling and downhole, I would say we have good international exposure, a very good global brand recognition there, particularly the casing and cementing hardware, we're seeing a bit more traction there in the international markets.

C. Christopher Gaut -- Chief Executive Officer

Yes. As Lyle mentioned, we've got each of the three large service companies, Top 10 customer lists. And as you've heard, their international revenues are growing and I can tell you from my experience, in order to do that they need to gear up, right? And so we're seeing some good sales internationally to the big service companies and our downhole business in particular is a beneficiary there as well as our coiled tubing business.

John Watson -- Simmons Energy -- Analyst

Okay, great. Thank you. And then lastly, Lyle mentioned the latch system and I completely agree. I think growth for that type of technology is coming and more market share for this type of systems. Can you give us some color on what separates Forum system from some of the competing solutions out in the market today?

D. Lyle Williams -- Senior Vice President, Operations

Sure, can. There's really a few market -- few systems that are out in the market and just for a broader color, this is the tool that's used with zipper frac operations, have big safety benefits to keep people out of the line of fire and away in order to be able to use those tools remotely for intervening in the well during hydraulic fracturing operations. I think some of the key things that differentiate our tool or size, so smaller footprint and easier, used by our customers, very low maintenance on our products and what maintenance there is, is very field repairable. So for redressing the tool when that's necessary can be done in the field. And then finally added some interesting features from a remote operability and connectivity for our customers from a technology side as well. So making good penetration. Last year had good penetration with a 10,000 psi version. And then recently started rolling out our 15,000 psi version to customers for higher pressure wells.

John Watson -- Simmons Energy -- Analyst

Okay, perfect. Thanks for that, Lyle. Thanks, guys. I'll turn it back.

D. Lyle Williams -- Senior Vice President, Operations

Thanks.

Operator

Thank you. And our next question comes from the line of Chase Mulvehill with Bank of America. Your line is open. Please go ahead.

Chase Mulvehill -- Bank of America Merrill Lynch -- Analyst

Hey, good morning. I guess first thing I just wanted to hit on -- good morning Cris. Just real quickly on inventory. If we think about kind of working inventories down, could you maybe talk about which segments or maybe which businesses you feel like you have too much inventory and you kind of need to think about working that down?

D. Lyle Williams -- Senior Vice President, Operations

Sure, Chase, it's Lyle. When we look at our overall inventory, right, our long term goal is to get above 3 turns on inventory. We're still hovering around 1.7 turns. So it gives an order of magnitude that the amount of inventory that we could pull out of our system. And I'd say that some of the bigger opportunities that we have are for that reduction. We could see that coming out of our drilling and downhole segment primarily on the drilling side where that business was much larger in the past. And while it's recovered some, it hasn't recovered to that level. And I think we could also see some similar product of that coming out of both our valves business and our stimulation business.

But I think the general comment is that it's more of a general field that we'd see it come out on all of our businesses. No one place that's really out of line, with what we're working on there.

C. Christopher Gaut -- Chief Executive Officer

Yes, I think that's the important point, one shouldn't think that it's all one type of product or in one product area. When we went through this last quarter, with the sharp change in direction that occurred during 2018 from an expected big recovery to not really happening, we at Forum had ended up with inventory in anticipation of that recovery continuing in a number of businesses that as we now are managing for the current business environment. We feel that we can work down and operate the business much more efficiently from a working capital standpoint. So it's a focus on working capital management across the Company. That's going to allow us to enhance our cash flow in the near term, as we see the recovery in EBITDA, and EBITDA over time becoming an even bigger contributor to our cash generation.

Chase Mulvehill -- Bank of America Merrill Lynch -- Analyst

Right. So what's changing about, and I know you've got to liquidate some inventories, but when we think about the medium to longer term, and how you manage inventory. What's going to be done different to better manage inventory as we go forward?

D. Lyle Williams -- Senior Vice President, Operations

Great question. Our team is working and has been working a lot, Chase, on our planning programs. And that is really bearing fruit for us. And by planning, what I'm talking about is really forward looking at what we can see from a customer demand perspective, planning on how we work with our vendors on placing the right inventory in the right place and planning on how we execute in our shops. So it's a broad based comment when we say planning. But what that's allowing us to do is focusing on making sure we have the availability of product where we need it. So in some cases we're increasing inventories where our inventories are maybe lighter than they need to be for the current environment, but generally been able to pull those down. And I think that's the big change from a planning perspective.

And as Cris mentioned, is the drive for us to working for the current market environment. So we're not looking ahead and saying hey we're going to grow this business a lot and therefore take big inventory, that's what we did last year. But driving more toward the current environment look like and ensuring that our supply chain can respond quickly, so that if there is an uptick or a downturn, we can adjust.

C. Christopher Gaut -- Chief Executive Officer

Maybe two other tangible examples. First, shortening our logistics chain and removing some distribution centers that we had. So we're not double handling our material as much and having inventory in a couple of different places. And then secondly, really working with our suppliers, so that more of our raw material they hold for us until we need it and less goes on our books, until we need it.

Chase Mulvehill -- Bank of America Merrill Lynch -- Analyst

Okay, all right, that's helpful. And just thinking about the frac pump market, there seems to be a kind of backlog potentially of kind of replacement pumps that need to be ordered. What's your outlook for frac pump orders in 2019 and maybe have you sold -- how many 3000 horsepower pumps have you actually sold so far?

C. Christopher Gaut -- Chief Executive Officer

Well I think what we're seeing and hearing from the pressure pumping customers, our customers is that the sustaining spend is high for operating more of this equipment at 24/7 and zipper fracs and a lot more uptime on the pumps per day, per week, per month. And more sustaining spending, right? And so that is the overall trend that we're talking about. A lot of the equipment that's out there really wasn't originally built or expected to be run as hard and as much as it's expected to be run now. So yes there is a movement in general to the newer generation of equipment, the more robust and the longer lasting and newer generation of power ends, both 2500 and 3000 horsepower. And our monoline on our frac trailers and some of our other equipment. Other parts of the question, Lyle?

D. Lyle Williams -- Senior Vice President, Operations

So on the 3000 horsepower, I think we're not seeing a lot of new fleet deployments, but as people at this point in time as we were before, we sold quite a few, quite a few 3000 horsepower power ends over the past few years, for competitive reasons I don't want to get into exact number. And I think we will in the future, as folks convert over and I think there's the potential for even larger power ends as well as we look to different prime movers on the equipment et cetera . But I think where we are at the moment where we're sustaining the existing fleet, we would be replacing 2510 with a 2510 for instance.

Chase Mulvehill -- Bank of America Merrill Lynch -- Analyst

What's the limiting factor to how much brake horsepower that we can get on a pump?

C. Christopher Gaut -- Chief Executive Officer

Well it's the overall weight and configuration of the trailer, right? So you've got the engine, you've got the transmission. There's a certain amount on the trailer that is left for the pump. And maybe you're talking about a rebuild of the system if you want to go with a bigger heavier pump that has a different footprint. So that's why I say as we think about converting over to a new fleet with a different configuration you would have a different footprint for your pump and how the whole system works together. Does that makes sense?

Chase Mulvehill -- Bank of America Merrill Lynch -- Analyst

Yes, makes sense. All right. I'll turn it back over. Appreciate all the color.

Operator

Thank you. And our next question comes from the line of Connor Lynagh with Morgan Stanley. Your line is open. Please go ahead.

Connor Lynagh -- Morgan Stanley -- Analyst

That's dead on by the way. Good morning, guys.

C. Christopher Gaut -- Chief Executive Officer

All right, Michelle. Hi, Connor.

Connor Lynagh -- Morgan Stanley -- Analyst

Yes. Good morning. So I just wanted to ask, obviously you guys are making some pretty big strides in the organizational streamlining. Can you help us think through, just how the EBITDA benefits, phases in through the year just how long that the overall process is going to take here?

C. Christopher Gaut -- Chief Executive Officer

As everyone, I think is saying this quarter, visibility is not great, particularly as we're in an environment where it's more consumable products and shorter lead times, not building out a backlog. But our expectations for the quarter and the guidance that we've given you for the year, that will be up year-over-year is based on what we believe we can achieve with the market share gains, with our cost efficiencies and with the international growth coming in that gives us better confidence, our ability to achieve that objective.

Connor Lynagh -- Morgan Stanley -- Analyst

Understood. So I take that to mean you're basically not assuming much market improvement in your guidance. And I guess if I could tone in on the cost efficiency side of it, if you're doing better year-over-year obviously you're accelerating to your end, so how much of that is related to the cost efficiency side of things?

C. Christopher Gaut -- Chief Executive Officer

Yes, go ahead, Pablo.

Pablo G. Mercado -- Senior Vice President and Chief Financial Officer

Yes. Hey, Connor. So, we have taken several steps early in the year. I think a lot of that you saw reflected in the improved margins in every segment in the first quarter and overall for the Company certainly. More will come kind of throughout the year like for example the corporate facility closure that we've mentioned in the past. So, as Cris said, that is built in to our guidance and that help us in a more flat market get to higher levels of EBITDA. I'd say, on the SG&A side, we've taken out a significant amount and kind of the heavy lifting is done. It's hard to see it on an apples-to-apples basis, but if we were to put the fourth quarter on apples-to-apples basis. So adding back the accrual releases that we have for management incentive plan and other accrual reductions in the fourth quarter, when you annualize the impact, it's about $20 million of SG&A reduction relative to the first quarter and that's almost 10% reduction. We're also highlighting that a bit more with the slide that we have in our investor deck that's posted on our website that shows SG&A excluding D&A being about 19% in 2018 and we've got some near-term targets of 17.5% and mid-term at 15%.

Connor Lynagh -- Morgan Stanley -- Analyst

Got it. That's helpful. And so would it be fair to say that the remaining cost side of things is more on the cost of goods on the manufacturing side or is there still more to come on the G&A side?

C. Christopher Gaut -- Chief Executive Officer

Yes, we're continuing to work on our efficiency. One of the big costs that we're dealing with, of course, is tariffs and they're significant for us as a manufacturing company. And it's -- it is what it is at the current time.

Connor Lynagh -- Morgan Stanley -- Analyst

All right. Thank you. Thanks for the color.

C. Christopher Gaut -- Chief Executive Officer

Very good.

Operator

Thank you. And our next question comes from the line of Martin Malloy with Johnson Rice. Your line is open. Please go ahead.

C. Christopher Gaut -- Chief Executive Officer

Hi, Marty. Okay. Anybody else, Michelle?

Operator

Mr. Malloy, go ahead and try to speak now.

Martin Malloy -- Johnson Rice -- Analyst

Can you hear me now?

C. Christopher Gaut -- Chief Executive Officer

Yes. Go ahead.

Martin Malloy -- Johnson Rice -- Analyst

Okay. Sorry about that. In terms of your guidance with the 2Q being roughly similar to 1Q, was that just with respect to the top line or were you referring to EBITDA as well?

Pablo G. Mercado -- Senior Vice President and Chief Financial Officer

Yes, I think -- Marty, this is Pablo. That is overall comment of revenue, EBITDA and free cash flow.

Martin Malloy -- Johnson Rice -- Analyst

Okay, great. And then on the subsea side, in terms of your outlook, and -- seeing some potential orders out there is that more on the -- is that on the oil and gas side or the non-oil and gas side?

C. Christopher Gaut -- Chief Executive Officer

It's the both actually.

Martin Malloy -- Johnson Rice -- Analyst

Okay.

C. Christopher Gaut -- Chief Executive Officer

We are seeing increasing orders for oil and gas finally. But we're also seeing some nice orders away from that.

Pablo G. Mercado -- Senior Vice President and Chief Financial Officer

So, Marty, we had nicer, I guess, backlog going into 2019 about 3 times what we had going into last year. That was a bit more weighted toward non-oil and gas with a big submarine order that has ultimate delivery in 2020. But as Cris mentioned, now we're seeing a good combination of non-oil and gas with oil and gas demand coming back. We announced a couple of ROVs in the fourth quarter and got an additional ROV in the first quarter, all three for our traditional oil and gas season.

Martin Malloy -- Johnson Rice -- Analyst

Great. Thank you.

C. Christopher Gaut -- Chief Executive Officer

Very good. Well we thank you all for your interest and we look forward to talking in the next conference call in July, if not before. Take care.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. And you may all disconnect. Everyone, have a great day.

Duration: 56 minutes

Call participants:

Mark Traylor -- Vice President of Investor Relations

C. Christopher Gaut -- Chief Executive Officer

Pablo G. Mercado -- Senior Vice President and Chief Financial Officer

D. Lyle Williams -- Senior Vice President, Operations

J.B. Lowe -- Citi -- Analyst

Sean Meakim -- JPMorgan -- Analyst

George O'Leary -- Tudor, Pickering, Holt & Co. -- Analyst

John Watson -- Simmons Energy -- Analyst

Chase Mulvehill -- Bank of America Merrill Lynch -- Analyst

Connor Lynagh -- Morgan Stanley -- Analyst

Martin Malloy -- Johnson Rice -- Analyst

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