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Oil States International Inc (OIS) Q2 2019 Earnings Call Transcript

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Oil States International Inc (NYSE: OIS)
Q2 2019 Earnings Call
Jul 29, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Oil States International Second Quarter 2019 Earnings Conference Call. My name is Cynthia, and I'll be the operator for today's call. [Operator Instructions]

I will now turn the call over to Ms. Patricia Gil, Investor Relations. Patricia, you may begin.

Patricia Gil -- Director of Investor Relations

Thank you, Danera, and good morning and welcome to Oil States' Second Quarter 2019 Earnings Conference Call. Our call today will be led by Cindy Taylor, Oil States' President and Chief Executive Officer; Lloyd Hajdik, Oil States' Executive Vice President and Chief Financial Officer; and we are joined by Chris Cragg, Oil States' Executive Vice President, Operations.

Before we begin, we'd like to caution listeners regarding forward-looking statements to the extent that our remarks today contain information other than historical information. Please note that we are relying on the safe harbor protections afforded by federal law.

Any such remarks should be weighed in the context of the many factors that affect our business, including those risks disclosed in our Form 10-K along with other SEC filings. This call is being webcast and can be accessed at Oil States' website and a replay of the conference call will be available one and a half hours after the completion of the call and will be available for one month.

I will now turn the call over to Cindy.

Cindy B. Taylor -- President and Chief Executive Officer

Thank you, Patricia. Good morning to all of you and thank you for joining us today to participate in our second quarter of 2019 earnings conference call. Our reported results for the second quarter showed sequential improvements in two of our three business segments with consolidated revenues and EBITDA up 6% and 24% respectively. In particular, our Offshore/Manufactured Products segment was a stand-out in the quarter, exceeding the upper end of our previously provided revenue and EBITDA margin guidance ranges. In addition, we received two notable project awards during the second quarter, leading to a 21% sequential increase in backlog, which totaled $283 million at June 30, resulting in a 1.6 times book-to-bill ratio for the quarter.

Our June 30, 2019 backlog level is the highest it's been in three years. And our Well Site Services segment, revenues increased 7% sequentially due to stronger international activity levels in our completion services business, coupled with some recovery in our land drilling operations. In our Downhole Technology segment, results for the quarter were negatively impacted by the ongoing development of our integrated perforating gun system, the costs of trials and $1.4 million of inventory write-offs due to product design changes. Our cash flow from operations in the quarter was strong at $32 million, a portion of that cash flow was used to repay $21 million of our revolving credit facility debt outstanding. Lloyd will take you through additional details of our consolidated results and also provide highlights regarding our financial position.

I will follow with more details by segment and provide additional comments on our guidance and market outlook.

Lloyd A. Hajdik -- Chief Financial Officer, Executive Vice President and Treasurer

Thanks, Cindy. Good morning, everyone. During the second quarter, we generated revenues of $265 million while reporting a net loss of $10 million or $0.16 per share. Our second quarter EBITDA totaled $26 million with an EBITDA margin percentage of 10%. Reported EBITDA was negatively impacted by $1.3 million of severance and facility closure charges as we continue to adjust our cost structure and rightsize our global operations to better align with the industry outlook.

We also reported $1.4 million of inventory write-offs due to product design changes associated with the continued development of our integrated perforating gun system. During the second quarter, we generated $32 million in cash flow from operations and invested $14 million in capital expenditures. On a year-to-date June 30 basis, we have generated $34 million of free cash flow, and a paid down $37 million in outstanding borrowings under our revolving credit facility. At June 30, our net debt-to-book capitalization ratio was 17% and our available liquidity position at the end of the second quarter was approximately $108 million inclusive of cash on hand totaling $12 million.

Regarding our common stock share repurchase program, our Board of Directors extended the program for one year to July 29, 2020. We have $120 million remaining available under the repurchase authorization. In terms of our third quarter 2019 consolidated guidance, we expect depreciation and amortization expense to total $32 million. Further, we expect net interest expense to total $4.8 million and corporate expenses are projected to total $12 million. We are lowering our total capital expenditures for the full year 2019 to range between $60 million and $65 million compared to prior guidance of $65 million to $70 million.

At this time, I'd like to turn the call back over to Cindy, who will take you through the details for each of our business segments.

Cindy B. Taylor -- President and Chief Executive Officer

Thank you, Lloyd. Leading off with our Offshore/Manufactured Products segment, we generated revenues of $102 million, EBITDA of $16 million and a Segment EBITDA margin of 16% during the second quarter. This represented a 16% sequential increase in segment revenues and a 45% sequential increase in segment EBITDA.

Our improved results were driven by an increase in project driven revenue and short cycle product sales, coupled with improved facility cost absorption at the higher revenue levels. Our incremental EBITDA margins were strong at 35% as a result. As I mentioned in my introductory comments, we received two notable project awards during the second quarter of 2019, which included production facility equipment destined for Southeast Asia and connector products destined for the Middle East.

Our orders booked in the quarter totaled $163 million resulting in a 21% sequential increase in backlog and a book-to-bill ratio of 1.6 times. At June 30, our backlog totaled $283 million, which is our highest reported backlog since June 30, 2016. Customer conversations remain constructive and visibility for additional project awards is developing favorably as we progress into the second half of 2019 and into 2020.

In our Well Site Services segment, we generated $116 million of revenues, $18 million of EBITDA and our segment EBITDA margin averaged 16% in the second quarter 2019 compared to 12% reported in the preceding quarter. These results benefited both from higher international activity and improved margins in our U.S. operations. Utilization of our land drilling rigs averaged 20% in the second quarter of 2019, compared to 12% in the earlier quarter.

In our Completion Services business, our revenues grew 3% sequentially, which was driven primarily by international activity. Our incremental completion services EBITDA margins were 119% sequentially reflecting our cost reduction initiatives, and an improved mix of international and Gulf of Mexico work. Over time, we believe that completions relating activity and international markets will continue to grow and we are proactively expanding our completion services offerings abroad. In addition to growing internationally, we are focused on research and development efforts within the completion services business and are currently developing step-out technology offerings response to customers need. By continuing to invest in our product lines that are tied to well completions and longer lateral lengths and U.S. unconventional, we are able to maintain a leadership role in the equipment and services that we offer to the industry.

One such product line that is pushing the limits of completions technology is our Tempress, HydroPull tool and Bottom Hole Assembly, which helped the record in West Texas where it milled out 94 frac plugs and a single coiled tubing run. Our 94 plugs where milled out in 66 hours without tripping out of the hole and without short trips resulting in significant well cost savings for our customers.

In our Downhole Technology segment, we generated revenues of $47 million and EBITDA of $4 million with an EBITDA margin of 8% reported in the second quarter. In addition to the impact of the sequential decline in revenues during the quarter, segment results were negatively impacted by ongoing unabsorbed cost associated with field trials for our integrated gun system coupled with $1.4 million of inventory write-offs due to product design changes.

These design changes are considered one-off items and part of the field trialing, testing and development of new products. As trialed products are brought to market, our technical solutions group will become more billable and should generate revenue sufficient to offset their cost. We expect to recover market share and sales in our engineered perforating solutions business, once our proprietary integrated gun system is fully commercialized.

Field testing and early commercialization efforts continue on our integrated gun system, addressable switches, and other associated Downhole Tools. The light are inherent in bringing new technologically advanced products to market. We continue to incorporate key field trial learnings to improve the ultimate integrate [Technical Issues] gun system which we plan to commercialize in the fourth quarter. This is a one quarter delay due to product design changes. I would now like to share thoughts on our outlook for the third quarter. We expect to continue to show sequential growth in the third quarter, despite a North American land market that is expected to be slightly down. The majority of our revenue and EBITDA growth in the third quarter is expected to be generated by our offshore manufactured products and Downhole Technologies segments.

In our Offshore/Manufactured Product segment, we are forecasting that third quarter revenues for the segment will range between $100 million and $110 million buoyed by a higher starting backlog level, which will begin to convert into greater major project revenues along with improved demand for our short cycle products. Segment EBITDA margins are expected to average 15% to 17% depending on product and service mix.

We estimate that third quarter 2019 revenues for our Well Site Services segment should range between $114 million and $121 million with segment EBITDA margins expected to average 15% to 17%. For our Downhole Technology segment, we currently estimate that our revenues will range between $46 million and $52 million with segment EBITDA margins averaging 14% to 17%.

To conclude, we continue to invest in research and development efforts across all of our business segments in an effort to bring efficiencies to the industry and to our customers. While modestly increasing expectations for the third quarter compared to the second quarter, carefully controlling our cost and continuing to generate positive free cash flow, we strive to generate sustained returns for our stockholders and a challenging market environment.

Before we close, I would like to highlight what I see as the near-term drivers of improvement for Oil States. First, expanding backlog in our Offshore/Manufactured Product segment provides revenue visibility into the future. Also, by generating a higher baseline of revenues in this segment, we are better able to absorb our cost and deliver improved margins. Second, international contributions will become increasingly important to each of our segments in the months and years to come. We are positioning our operations to capture incremental revenue outside of the United States.

Third, we need to recover market share in our Downhole Technologies perforating business and we are focused on doing so. Lastly, we have been a technology leader within our industry for years and continue to invest in research, development and new product initiatives. These initiatives span multiple product lines and should bear rewards over the longer term.

That completes our prepared comments. Denera, would you open up the call for questions-and-answers at this time.

Questions and Answers:

Operator

Yes, absolutely. Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Marshall Adkins from Raymond James. Please go ahead. Your line is open.

Marshall Adkins -- Raymond James -- Analyst

Good morning, Cindy and guys. So, it seems like on this offshore theme, we have -- we're setting up for kind of a sustained ability to grow in relatively flat commodity price environment [Phonetic]. We've heard from the bigger guys that they're looking offshore International and continue to grow for the next couple of years. Is that what's feeding the improvement in this business? Number one. Number two, could you talk about the margin improvement via pricing versus absorption?

Cindy B. Taylor -- President and Chief Executive Officer

Yeah, good morning, Marshall, and thanks for your questions. I think they are absolutely great one. I think you know if you just kind of track the industry right now, we spent three to four years of customers kind of de-risking their CapEx investment dollars and that created a shift away from deepwater activities that customers really try to high grade their project, rebid projects and lower their overall completed cost of the product -- project in order to respond to lower commodity prices, which most people believe will sustain themselves at some level over the course of time.

I think what's really happening right now is customers have landed on key projects that they think are very economic at lower commodity prices and those are now beginning to come to market and we've always enjoyed high technology positioning some proprietary products that we've always felt, if we could just get a little bit of tailwinds from improving activity that we'd be pretty well. And I think that is clearly reflected in our backlog, which is up to a three year high at least we're not forecasting we go back to peak levels we attained in 2014, but over the course of that three to fours years, we've also had to be responsive in terms of repositioning manufacturing capacity to capture near-term demand we've brought some newer products to market that are a little more land sensitive. The good thing is we have those in our suite now and we're enjoying improvements in backlog more than or toward our major project work, which again gives us visibility at least for about 12 months in terms of revenue generation and important for us, cost absorption.

Like many companies, we haven't sat around and waited for the market to return. We've done a lot of cost rationalization, facility streamlining such that we feel like as the market does recover, our margins should be resilient and respond to that. And I think we already seeing that with the 35% sequential incrementals that we had in offshore products even though, this is fairly early days in terms of backlog build and revenue generation, so, I clearly feel like we do have a runway for improve sustained higher revenues, better cost absorption, better margins as we continue to build out that backlog, but again, we do hope that we retain that base load of short cycle work and service work as well.

Marshall Adkins -- Raymond James -- Analyst

So you're making it sounds like a lot of the improvement is in margins is through better absorption, but you have some of these new products, are you getting any pricing traction at all there? Or is it just all absorption -- improvement?

Cindy B. Taylor -- President and Chief Executive Officer

Well, to be honest with you, we're continuing and we had every year to invest in research and development efforts, we've had many kind of customer [Phonetic] and I'm speaking specifically to Offshore Products --

Marshall Adkins -- Raymond James -- Analyst

Right.

Cindy B. Taylor -- President and Chief Executive Officer

Permeates every segment and every business, really. But as it relates to Offshore Products, we've had brought new product introductions that most of our backlog development to date has been existing technology, even though, we may have a upgraded that existing technology, I would say, any kind of new product deliveries that we've been working on is yet to bear fruit.

Marshall Adkins -- Raymond James -- Analyst

Okay. Thank you.

Cindy B. Taylor -- President and Chief Executive Officer

Thanks, Marshall.

Operator

Thank you. Our next question comes from Ian Macpherson from Simmons. Please go ahead. Your line is open.

Ian Macpherson -- Simmons -- Analyst

Yeah. Thanks. Cindy, I think you were looking for 1.3 to 1.5 book-to-bill for products coming end of the year and you're well ahead of that. And you mentioned that you have positive visibility for orders in the second half as well. Would you be willing to share an updated target based on the visibility for the second half? Or is it too early?

Cindy B. Taylor -- President and Chief Executive Officer

Yes, it's always worrisome to know what quarter of backlog awards hit. But I would just generally say we would probably take out the low end of that range and up, it's just a little bit. I don't want to go to one point fix at this time so might be 1.4 to 1.5 that clearly back to the upside based on the first half. I would say book-to-bill is a factor of two things, which are, bookings and billings and if I keep growing my revenue, the target obviously moves up as well.

Ian Macpherson -- Simmons -- Analyst

Yeah, sure. On Downhole, that was the one thing that was kind of well outside of expectations at the low end in the second quarter. I know that you sees a pathway toward normalization, but besides, I mean you talked about the under-absorption in the writedown issues on the margin side that, with revenues down 25% sequentially in the second quarter. What else was it play besides this slow role with the commercialization of integrated gun? Is there a pricing pressure that is showing up or do you think of the system market share within the quarter that you think you can recapture?

Cindy B. Taylor -- President and Chief Executive Officer

Yeah, I mean that's the tough thing. There is a number of things and the Downhole part of the market is changing rapidly in response to what customers are looking for at the well side. I'm pretty sure you've heard that from all the competitors in this space throughout the first half of this year, but maybe more particularly on second quarter conference calls, with that, as an example we've all moved from long guns to short guns and so the short guns everybody is talking about most of the key third-party competitors are offering that including Oil States. So with that means you have to lighten up on the long gun inventory you have at reduced pricing.

So there -- part of that is, yes, that's all about pricing at the end of the day. It's also responding and staying ahead of market technology changes that -- even my mix of customers has changed and so there are some good things and that sounds that we have high-quality technology, we've been a market leader on technology along the space and I clearly think that we can keep up or stay ahead of those changes in the market that's all those things you mentioned have a factor, but I still probably point to a couple of things, which is number one, the market changes around perforating systems moving more from individual product sales to more system sales, and the fact that we're still -- we're working on what we think will be one of the best solutions by the market, but that doesn't always work perfectly as that communicated to investors before, but the good thing is our field trials are progressively improving. We did make some design changes along the way it did lead to a large write-up of inventory that we had built up in order to conduct an appropriate level of field trials, but again I'll be that is kind of a one-off item. The other thing is just kind of the customer base and you've got E&Ps contracting directly sometimes we work with wireline companies, there is certain amounts of vertical integration billing on in the market. So we have to pivot just a little bit around that shift in customer mix and they all kind of on the margin have some impact. But I guess I would just like to leave that all of you with the thought, number one, is key technology that our customers want, we are very committed to delivering top end technology to our customers right now.

The whole segment is 18% of my revenue base and so, while I am very focused on bringing a top quality integrated gun to market, it is certainly not all about what this company is built upon and even the segment has many product lines, not just obviously -- integrated gun.

Ian Macpherson -- Simmons -- Analyst

That's helpful. Thanks. And then I hear you say before that the commercial ramp is now Q4 not Q3 for the integrated system --

Cindy B. Taylor -- President and Chief Executive Officer

We believe so -- in addition to, we've had multiple customer contacts and feedbacks about our systems and we are just cautious that we want it to be a very high performing system before we bring it to commercial sales obviously. I do think that the process we went through delight it's about a quarter.

Ian Macpherson -- Simmons -- Analyst

Okay. Thank you.

Cindy B. Taylor -- President and Chief Executive Officer

And maybe I'll just add a point that emphasis on that. We don't have any revenue in our third quarter guidance that is predicated on and integrated gun sale [Phonetic].

Ian Macpherson -- Simmons -- Analyst

Got t.

Operator

Thank you. Our next question comes from Cole Sullivan from Wells Fargo. Please go ahead. Your line is open.

Cole Sullivan -- Wells Fargo -- Analyst

Hi, good morning.

Cindy B. Taylor -- President and Chief Executive Officer

Hi, Cole.

Cole Sullivan -- Wells Fargo -- Analyst

You guys mentioned growing more internationally in completion services. How much investment do you see is needed to achieve that? And then does that impact or bias higher any 2020 CapEx levels to get that versus '19?

Cindy B. Taylor -- President and Chief Executive Officer

What we're really doing is not that CapEx intensive, we're working with some partners and various regions that opposed to spending a lot of CapEx for on the ground facilities. We've been in many of these markets really working on a confined equipment and rotating personnel basis. We are finding improved go-to-market strategies and we're also beginning to leverage some of our tools that have not really been deeply penetrated in international markets. So if Lloyd mentioned we're actually modestly reducing our CapEx guidance range as opposed to increasing it. And if I commented in my notes part of Well Sites significant success and terms of incremental margins with largely associated with a better mix of international and Gulf of Mexico work relative to our very key base North American activity.

Cole Sullivan -- Wells Fargo -- Analyst

Okay. And you guys have had good strong free cash flow this year with the movements in Downhole tools over the back half and North American headwinds. How do you kind of see working capital trending over the second half? And then also any kind of initial peak into how you guys are thinking about 2020 CapEx versus '19?

Cindy B. Taylor -- President and Chief Executive Officer

Yeah, I'm going to let Lloyd give you the specific comments there, I would just generally say that, if we have ebbs and flows it's generally around mix of segmental contribution toward working capital. What does that mean? Well, I have a 1.6 times book-to-bill ratio. So I fully expect that Offshore Products begins to increased top-line revenues, you'll have some working capital needs with that. But I'll also leave you with the thought that makes me as happy as I can be, because that segment happens to be my highest free cash flow generating business that I have and so if I have a little working capital over time as we expand that business, I'm fine with that. But I'm going to leave Lloyd to really answer your question.

Lloyd A. Hajdik -- Chief Financial Officer, Executive Vice President and Treasurer

Yeah, I think she did answer the question, exactly. Now I'm forecasting a slight working capital build in third and fourth quarter. But certainly expect to be free cash flow positive for the second half of the year and we'll target the free cash flow, like we did in the first half of the year, largely designated to further debt reductions.

Cole Sullivan -- Wells Fargo -- Analyst

Okay. And then any initial kind of peak on 2020, CapEx levels of '19?

Lloyd A. Hajdik -- Chief Financial Officer, Executive Vice President and Treasurer

Not yet.

Cole Sullivan -- Wells Fargo -- Analyst

Okay. Thanks. I'll turn it back.

Lloyd A. Hajdik -- Chief Financial Officer, Executive Vice President and Treasurer

Okay.

Operator

Thank you. Our next question comes from George O'Leary from Tudor, Pickering, Holt. Please go ahead. Your line is open.

George O'Leary -- Tudor Pickering Holt -- Analyst

Good morning, Cindy, Lloyd and Chris.

Cindy B. Taylor -- President and Chief Executive Officer

Hi, George.

Lloyd A. Hajdik -- Chief Financial Officer, Executive Vice President and Treasurer

Good morning.

George O'Leary -- Tudor Pickering Holt -- Analyst

First question, just curious it seems like overall completion activity in the U.S. for the second quarter was up modestly albeit tailing off at the end of the quarter, but just what we've seen from other folks who have perforations businesses and are selling similar tools to what you guys sell. Generally it seemed like volumes were lower in the quarter, Lloyd I'm just thinking about someone taking share, but just volumes for perforations, for guns and energetics and all that stuff seem to have been a little bit lower. So I'm just curious, do you guys typically see customers if they're going to slow activity and destock their own internal inventory? Is that part of what was playing out this quarter? Or is it really just share gains by one player and other someone of kind of pushing more aggressively into the market. Just curious how customer behave as they -- as completions activity, it looks like it may have lower in that business?

Cindy B. Taylor -- President and Chief Executive Officer

Yeah, I'm going to just quantify, we had a mixed result there with some share gains in non-perforating product lines, because I think you've really focused solely on perforating. But if I look at some of our other product lines, whether it's Downhole plugs, as an example, Toe Valve, decommissioning products, there actually were some increases there. So I wouldn't just isolate on perforating. So I wouldn't just isolate on perforating. And I really don't think that customers sold a lot of inventory perforating, it could be that all of us have some out into distribution channels or some add on the field. But I don't think that inventory stocking or destocking is really an item there. I'd have to say if there is some kind of modest industry kind of delay is probably one customer specific [Technical Issues]

Operator

[Technical Issues] This is the conference operator, please standby. [Technical Issues] This is the conference operator, we are having some technical difficulties, please standby. Thank you for your patience. [Technical Issues]

Lloyd A. Hajdik -- Chief Financial Officer, Executive Vice President and Treasurer

Hi, George.

Cindy B. Taylor -- President and Chief Executive Officer

[Indecipherable]

Operator

Would you like me to go on to the next question?

Cindy B. Taylor -- President and Chief Executive Officer

That would be great. We apologize to everybody on the phone call, every some line apparently has gone down. So --

Operator

Not a problem. Our next question comes from Kurt Hallead from RBC. Please go ahead. Your line is open.

Kurt Hallead -- RBC Capital Markets -- Analyst

Hi, good morning.

Cindy B. Taylor -- President and Chief Executive Officer

Hi, Kurt.

Kurt Hallead -- RBC Capital Markets -- Analyst

Hi, thank you for all the color you've provided so far. Cindy, and -- I guess the follow-up question I have would be a long lines of the North American market, it's pretty clear that the offshore business has some pretty good momentum as those international and clearly, a lot of question marks around the dynamic -- shifting dynamics in the North American market. As we move beyond that this data is the third quarter Cindy, and we started thinking kind of through cycle dynamics, do you see some really structural changes in place and how you guys are going to have to run your business and the overall cost structure of the business? And so when you have any conversations about bringing on new technology like you're already mentioned, is these discussion with the client base is going to have to be a little bit different to make sure that you actually get compensated for the technology you bringing? Any insight on that would be really helpful.

Cindy B. Taylor -- President and Chief Executive Officer

Kurt, those are just fantastic questions and we're not alone obviously and we went everything that we can to respond. So what I'll just characterize as a fairly challenging market environment and we've all probably both benefited and also been guilty here and when crude prices are really high customers spend fairly at will trying to grow production it's always -- it's one of the greatest success stories in the United States in terms of crude oil production. But the reality is, I think we as an industry have been so successful to some degree that we've gotten ahead of ourselves just in terms of productivity and you know, I know you know, you followed the industry as long as I've been in it, what's really happened is growth in the U.S. production has exceeded global demand and it's created an out of balanced situation and fairly small movements in terms of that supply demand balance obviously have a significant impact on price. Whether it's us or our customers, I'll just say we got religion and what does that mean shareholders are have had significant underperformance from the industry as a whole now for a number of years and we all committed to making this work at lower crude oil prices overall and I think we've demonstrated technical capability to do that.

But to answer your question there, it's multifaceted, but number one, we think of R&D investments much like CapEx, meaning you need to budget it precisely, you need to know that target market and you need to assess it to see if it achieves the returns that you expected it to. We don't want to stop investing in technology that has been our differentiator as a company for well before I was associated with it.

And so we will continue to do that, but clearly we do look like -- look for a payback on those investments, satisfy the other kind of characteristic you're hearing from everybody is -- we probably out to be targeting CapEx for -- well I'll call mid cycle activity. We tend to always target CapEx toward the peak and on paper, it looks like a great return. But when you have the extreme cycles that we've had to live with over the years, I think you have the question, did you really get the returns that you thought you would, but our challenge any business to lose 50% to 80% of the revenues that this industry has gone from '14 to '16 and now recovering half of that and say that you came out of this game. But we as a company have been constantly streamlining our cost structure, facility rationalization and for all of our segments quite frankly, geared toward mid cycle returns.

We are investing in higher technology when it helps our customers be more efficient, make more better wells and therefore, become more cash flow generating on their own they have to be healthy for us to be healthy at the end of the day. So again, I'd say the other macro shift that we've been frustrated with, when you leave a real differentiated market that is deepwater highly technical, highly challenging to some degree International and shift all the activity the land, it is more competitive and particularly you got 50% of the land rig count in one, it's a big base that one basin in the United States it's not the best profile, but we've responded to it and we're coming out of it and I think generating the sustained free cash flow that you would want us to. I do also think that some of the private equity participation in this market is going to wane which a frustration to us, it's always been having the technical capabilities, the reputation, the quality procedures and yet having customers frequently get money to what I'll call lower NPE backed start-ups in a given basin has been frustrating.

So I think we'd like to see farmer, competitor characteristics in the market and I think our customers still like -- they have plenty support out in the market and of course, they are taking advantage of it sort of price negotiations, but I think they also recognize that the industry as a whole, has to be healthy and generating sustainable ROIC for anybody to do well. So while it's been painful for many, I clearly think that the trend line in terms of what you call sustainable improvement is under way.

Kurt Hallead -- RBC Capital Markets -- Analyst

That's really thoughtful and extensive answer, Cindy. I know business dynamics are challenging, not in terms of what you're facing, but obviously what investors are facing as well. So, appreciate all that color and insight. Thank you.

Cindy B. Taylor -- President and Chief Executive Officer

Thank you, Kurt.

Operator

Thank you. Our next question comes from Stephen Gengaro from Stifel. Please go ahead. Your line is open.

Stephen Gengaro -- Stifel -- Analyst

Thanks, and good morning, everybody. Two things, if you don't mind, I guess I'll start with offshore and obviously you had a really good quarter. And I might have missed this earlier, but when you -- when you're looking out now for the next few quarters and I guess also the bookings in the quarter, how does the pricing structure look like in that business and how should we be thinking about the potential order flows/book-to-bill as we go forward here for the next few quarters?

Cindy B. Taylor -- President and Chief Executive Officer

Well, this is obviously in contrast in our Well Site Services segment there is a greater material content obviously in my Offshore/Manufactured Product segment. To some degree these are all specifically engineered projects, we do all of the materials facts well and advance block in prices, and I have been -- well, I think we've been capable and successful in bringing costs down to operators is really not at the expense of margins. There are clear lead times, though, when we done some internal reengineering of our products that bring down pricing for us and therefore for our customers as well. We've had to do that obviously to be responsive to the markets that our margins hold in that scenario. So I just haven't felt like we had to go out and buy backlog if that is the genesis of the question.

Stephen Gengaro -- Stifel -- Analyst

I mean, it was more -- I wasn't implying that all, sort of just thinking about your margins have advanced in offshore products. You want a lot of work, obviously activity seems to be improving. I was just curious how we think about the margin trajectory going forward?

Cindy B. Taylor -- President and Chief Executive Officer

Well, again, our incrementals were strong at 35%. I think our overall margins for the segment came in at 16% earlier in the year, we have guided exit rate in the high teens and so it just kind of tells me we are a little bit ahead of the game in terms of achieving that with 16% coming in, in the second quarter. So pretty happy about the progression there. The other thing I'll just generally say is top-line matters, when we're below $100 million of revenue in the quarter cost absorption is not exactly where we would have it be. But if we can continue to accelerate that top-line, we believe our margins will respond accordingly.

Stephen Gengaro -- Stifel -- Analyst

Great. Thank you. And then as a follow-up, we -- what I heard in the field over the years was that the GEODynamics Downhole ballistics were at the very high end of the spectrum. And then -- obviously, the market is moving to the integrated systems. But as you get there, as you get a product rolled out, I mean it would seem that you'd start to see pretty good traction. And I was just curious, is it really the delivery system and the integrated system that critical even with what I've always perceived to be kind of industry leading or certainly the very high end of the spectrum as far as the downhole ballistics are concerned?

Cindy B. Taylor -- President and Chief Executive Officer

Well, yeah, I mean first of all, I would just generally say that we and others would agree that we do think that the shaped charges are very, very important in terms of response to this Downhole and we do believe we are a leader with respect to our shaped charge technology, someone agree with that. We do still sell those. We sell guns into the [Indecipherable] charges individually and a lot of the other associated perforating equipment. You heard it wholeheartedly from majors to our more direct competitors though that the field delivery system preference it's more of an integrated gun basis, but I will tell you -- and Stephen, I know you've done extensive research on this and understand -- there is a great variety and what the industry is characterizing as an integrated gun system. And there are some commonalities in terms of what people are speaking, but there are differences as well and I think that's where we are -- we're trying to not only offer kind of the generic integrated gun system, but improve upon what the market is looking for and that's where we had some technical challenges during the quarter that we're working on. But if you just want to say, what does the integrated gun, mean, I mean you're going focus on the characteristics that being intrinsic on-the-site offering at the Well Site factory loaded with little to no barring on location. That's a pretty broad spectrum though of capabilities and characteristics at the gun, and there are many other things that go along with it.

But to summarize, market is generally -- I don't want to say use the word generally and telling you they want more of an integrated offerings, but in contrast if you have a wireline company, it is already invested in gun loaders and gun loading facilities, their product specification may differ from an operator that just want -- they fully delivered highly integrated system that perform the best in the market and so it may be that the market evolves around kind of versions of an integrated gun system and again with the research you've already done, I think you appreciate and understand that.

Stephen Gengaro -- Stifel -- Analyst

Great. Now that's very helpful. Thank you.

Cindy B. Taylor -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Sean Meakim from JPMorgan. Please go ahead. Your line is open.

Sean Meakim -- JPMorgan -- Analyst

Thank you. Good morning.

Cindy B. Taylor -- President and Chief Executive Officer

Good morning, Sean.

Sean Meakim -- JPMorgan -- Analyst

So I appreciate the commentary on the top line for Downhole that was probably my biggest question out of the release. So thank you for that feedback. As we look to 3Q and the guidance that you put out, can you just talk about how you built that range in your comfort level, given all the moving pieces in the purchase the market as well as the generally broader uncertainty in North American activity as we get through 3Q?

Cindy B. Taylor -- President and Chief Executive Officer

Are you taking to a specific segment?

Sean Meakim -- JPMorgan -- Analyst

Yes, sorry. So the Downhole top line in the second quarter was the biggest question I think out of the release this morning. You gave a lot of feedback on that and I appreciate for the moving pieces in the second quarter. I was hoping to then maybe unpack how you built the range for your top-line guidance for Downhole in the third quarter? Given all those moving parts within the first systems business that market as well as there is plenty of uncertainty just in terms of our activities going to trend through the quarter in North America. So I was hoping to get more detail there, please.

Cindy B. Taylor -- President and Chief Executive Officer

Okay. I will certainly do that and we gave you a range obviously in the low end of that range is kind of non-heroic, I will call it. The upper end of the range would suggest pretty good movement from where we were in Q2 and I would really focused on kind of two things that impact both revenues and margins.

Number one, they continue to think we're growing market share in some of our non-perforating product lines and so we've got some embedded growth. And this is really you can say that that's not just hoped for. Whether we are right now is having customers come in and line our products early in the quarter now, does that mean that sustained through the quarter. No. But we believe that some of our non-perforating revenues will grow sequentially Q2 to Q3, even if the North American markets softens a bit and [Technical Issues] and that's based on customer indications early in the quarter. That's number one.

Number two, I keep mentioning this technical solutions group that has been a significant unabsorbed cost throughout the first half of this year and this is more, obviously it's a little bit of top-line, but it has more margin implications that if we can get a little better absorption costs associated with that technical solutions group, it'll obviously improve our margins profile, which again we got into better margins. Clearly, the non-recurrence of $1.4 million write-off of product design changed inventory benefit margins. And then the last thing that I probably should have mentioned [Technical Issues] doing the development of the integrated gun system obviously part of that [Technical Issues] is the development of integrated switch. And so, we do think we will bring that switch to market individually as a product with beginning [Technical Issues] revenue in Q3. So those are kind of the three major elements that lead to improved sequential margins for Downhole.

And suffice it to say, none of us were satisfied with the second quarter for the downhole technology segment. We are highly focused on improving performance in that segment, those are kind of the three major for areas really in addition to some improved manufacturing cost efficiencies as well.

Sean Meakim -- JPMorgan -- Analyst

Thank you for that. Those are very helpful. That's exactly what I was looking to understand. In offshore manufactured products -- given all the efforts to improve the business through the downturn, some of the shifts in mix that are taking place. You're now growing backlog pretty significantly. You're at a three year high. How does throughput cycle times look this time around compared to last cycle. I have -- just curious how we should thinking about that from a modeling perspective, now that you've started to build backlog, you continue to do so this year, how does throughput cycle times look? How should we think about that progression going forward?

Cindy B. Taylor -- President and Chief Executive Officer

Right now, the major product backlog that we're building is comparable to the lead times that we've had in the past, because our key connector products, and it's also our production infrastructure. So right now, the trend lines are similar in terms of the forward 12-month revenue generation short cycle and services you're very familiar with, they are not very backlog intensive. So you will model short cycle and services, I would say somewhat flat sequentially depending on ebbs and flows there. We've talked in the past that we have some military work and there is a likelihood we gained some incremental military backlog that tends to be more multi-year focus. But we can update you on that if and when that orders received.

Sean Meakim -- JPMorgan -- Analyst

Very helpful. Thank you for your feedback.

Cindy B. Taylor -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Connor Lynagh from Morgan Stanley. Please go ahead. Your line is open.

Connor Lynagh -- Morgan Stanley -- Analyst

Thanks. Good morning, everyone. It's wondering if we could then you go back to your comments around the challenges in earning returns in North America, in U.S. in particular. I guess could you discuss are there any areas of your product portfolio where you feel that these businesses aren't earning their cost of capital and you have some potential to step back or at least cut cost further. I mean, obviously, I assume this is more on the completion services more than anything, but just thoughts on that.

Cindy B. Taylor -- President and Chief Executive Officer

Yeah. And again, we're really focused on every product line and every business line to return two things; number one, free cash flow generation and ROIC at the end of the day. And to some degree, our earnings before interest and taxes, our EBIT is burdened by heavy CapEx from earlier years. You heard Lloyd talk about an update to our 2019 CapEx being a little bit lower and I can just assure you I don't know how else to manage the business other than focused on return on invested capital, but I'll also tell you with the dramatic commodity price flames and activity decline it's been a challenge to right size the ship responsive to that.

There are a couple of areas that we're focused on, but most particularly we're continue to do our review, our drilling services as a small business line. So when we kind of have the gut check at 12% utilization in the first quarter, we did improve a bit in the second quarter to '20, but we're really trying to trying to find ways, and that is a very, very small piece of well site services. But it is indicative of your question that, just that can every business you're in be rightsized to achieve sustainable ROIC. And we're doing everything we can. We even had continual severance and cost reduction initiatives in this quarter, it was more weighted again toward Offshore Products this time. But in our Well Site Services business, we rationalized even more cost light last year, early this year. But I think that's why we had over 100% incremental in the business in Q1 and Q2. So I can only assure you it is not for lack of effort in this office in terms of returning to sustainable ROIC. I will also tell you that I think if any service company of our size can do it, we can.

Connor Lynagh -- Morgan Stanley -- Analyst

Yes, yes, makes sense. Maybe just sticking with that theme. So you called out international as an area where you potential opportunity. Can you give us a feel for how big in completion Services International? Is today and where you see the opportunity to -- for that to be over the next couple of years here?

Cindy B. Taylor -- President and Chief Executive Officer

Yes, we generally bucket that as non-North America. So we'll throw in the Gulf of Mexico, with that in Q1 that combined contribution of international and Gulf of Mexico with 16% of completion services revenue in Q2, it was 18% and that's kind of what it is today. Obviously, we're focused on introducing incremental products, it is certainly true in our Well Site Services segment, but I will tell you we are also in the early stages of introducing our downhole technologies to gain more international traction as well. That is a longer-term process, they're not immediate, but it is something we think is value creating.

Connor Lynagh -- Morgan Stanley -- Analyst

Okay. I appreciate it. Thank you.

Operator

Our next question comes from Ian Macpherson from Simmons. Please go ahead. Your line is open.

Ian Macpherson -- Simmons -- Analyst

Thanks for the follow-up. That was actually mine, I wanted to get into what the third quarter outlook might entail for Lower 48 completion services compared to internationals/Gulf of Mexico/drilling services. Those numbers help, but I guess, the Colonel of my question is does your middle of your guidance range contemplate to Lower 48 completion services flat or down or what?

Cindy B. Taylor -- President and Chief Executive Officer

I would say right now, we want to see that continuing makes a little bit more weighted toward international and Gulf of Mexico. We too see at least the flattening is not a modest softening of the North American rig count our customers have incurred are definitely focused on generating free cash flow and controlling their capital spending. There's no ways about it. But everything is not the same for every customer. So when we go out and give guidance, we're really -- we have weekly meetings with customer by customer who's adding rigs in various basins, who's dropping rigs and various sites, but if I take all of that in the context and I have to -- we all know the rig counts dropped about 21 rigs since quarter end, and that's about a 2%. So, I don't think we're talking about numbers here. But it's hard to exit the quarter and not say that North America is going to be modestly soft during Q3, at least as fast as we see it today.

Ian Macpherson -- Simmons -- Analyst

Makes sense. Thanks again, Cindy.

Cindy B. Taylor -- President and Chief Executive Officer

Thank you, Ian.

Operator

Thank you. Our next question comes from Stephen Gengaro from Stifel. Please go ahead. Your line is open.

Stephen Gengaro -- Stifel -- Analyst

Thanks. And thanks for taking a follow-up. Cindy, can you just remind us when we think about your U.S. land exposure, the businesses which are exposed to for sure [Phonetic] the percentage of completion intensity versus just sort of wells drilled and what you're sort of seeing on the completion intensity front right now?

Cindy B. Taylor -- President and Chief Executive Officer

Well, I think I mentioned on the call, right now, everybody tends to focus on leading edge well, then the horizontal footage, there is kind of a catch up for other operators moving toward leading edge. And so I think there is still some tailwinds there in terms of horizontal footage, stage count and importantly, for us, I'll just call it clusters per stage. And there's a lot of technology assessment trialing going on to try to mitigate parent-child tight communication interference. There's just a lot going on, but I just think the fundamental tailwinds of higher intensity are there for our Downhole Technologies segment. And even in [Indecipherable] business, the majority of the personnel and equipment are more on the surface, I will call it. But nonetheless, there are a leading edge equipment such as the Tempress tool that really does gain market -- significant market share as you get in the longer laterals, the more torturous type Downhole environments.

And so it becomes a differentiator for that. We're investing obviously and various equipment to make the customers well site, one, cipher and two, more efficient I call it decluttering the well site around bridge manifold. We're investing in some other technology that I'm probably won't talk about because they're happy that we plan to file behind some of it, but while it's not a direct correlation. The more complex wells I think do speak to our higher-end equipment and personnel offering, which again we believe we have.

Stephen Gengaro -- Stifel -- Analyst

Great. Thank you.

Operator

Thank you. And our last question comes from Emily Boltryk from Scotia Howard Weil. Please go ahead. Your line is open. Emily, you may be on mute.

Cindy B. Taylor -- President and Chief Executive Officer

Daneria, you might want to move on, it sounds like might have dropped.

Operator

Thank you. At this time, I'm not showing any further questions.

Cindy B. Taylor -- President and Chief Executive Officer

Alright. Daneria, thank you for hosting our call today. Again, we're going to apologize for the tactical interruption from the phone provider. But I appreciate you staying on, so that we could kind of fully discuss the results of our segments. The results of the quarter before we close the call. I do kind of ask that you all just kind of step back and we've seen a lot of kind of emotional investing over the last couple of years toward North America and almost emotional way from it toward more deepwater and international.

We believe that we have a great balanced offering with penetration and all of our segments that comes from these documents and while I know many of you view this as a challenging or modestly disappointing quarter for us. I hope you will keep it in contact, strengthening in offshore products. I think we're doing absolutely what you want us to do in terms of backlog development, top-line growth and improved margins and our Well Site Services segment, they too had very improved resilient revenues, improved margins, very, very strong incrementals and our completion services, product line and some differentiated offerings that we try to more fully deploy into the market. Downhole Technologies again was kind of the loan disappointment this quarter, but the investments we're making in R&D and product development.

I do believe pay off in the long run and I would not like to leave strength of our Company from a free cash flow generating standpoint. I think that is a differentiator for our Company as well, it has been for the last several years. And I do feel confident that we'll be able to turn this toward a better ROIC generating performance over time. That does complete our comments, and again, I thank you for joining us today and look forward to future conversations with you.

Operator

[Operator Closing Remarks]

Duration: 65 minutes

Call participants:

Patricia Gil -- Director of Investor Relations

Cindy B. Taylor -- President and Chief Executive Officer

Lloyd A. Hajdik -- Chief Financial Officer, Executive Vice President and Treasurer

Marshall Adkins -- Raymond James -- Analyst

Ian Macpherson -- Simmons -- Analyst

Cole Sullivan -- Wells Fargo -- Analyst

George O'Leary -- Tudor Pickering Holt -- Analyst

Kurt Hallead -- RBC Capital Markets -- Analyst

Stephen Gengaro -- Stifel -- Analyst

Sean Meakim -- JPMorgan -- Analyst

Connor Lynagh -- Morgan Stanley -- Analyst

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