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Apergy Corp (APY) Q4 2018 Earnings Conference Call Transcript

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Apergy Corp (NYSE: APY)
Q4 2018 Earnings Conference Call
Feb. 19, 2019 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. Welcome to Apergy Corporation's fourth-quarter 2018 conference call. Your host for this morning's call is David Skipper, vice president and treasurer at Apergy. I will now turn the call over to Mr.

Skipper. You may begin.

David Skipper -- Vice President and Treasurer

Thank you. Good morning, everyone. With me today are Soma Somasundaram, president and CEO of Apergy; and Jay Nutt, senior vice president and CFO of Apergy. During today's call, Soma will discuss Apergy's fourth-quarter highlights and market outlook.

Jay will then discuss our fourth-quarter results and be referring to the slides posted on our website. Before turning the call back to Soma to discuss the progress on our growth initiatives, and then we will open the call for Q&A, I would like to remind our participants that some of the statements we will be making today are forward-looking. These matters involve risks and uncertainties that could cause our results to differ materially from those projected in these statements. Information concerning risk factors that could affect the company's performance and uncertainties that could cause actual results to differ materially from those in the forward-looking statements can be found in the company's press release as well as in Apergy's registration statement on Form 10 and those set forth from time to time in Apergy's filings with the Securities and Exchange Commission, which are currently available at www.apergy.com.

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Except as required by law, the company expressly disclaims any intention or obligation to revise or update any forward-looking statements. Our comments today may also include non-GAAP financial measures. Additional details on reconciliations to the most directly comparable GAAP financial measure can be found in our fourth-quarter press release, which is on our website. I will now turn the call over to Soma to discuss Apergy's fourth-quarter results.

Soma Somasundaram -- President and Chief Executive Officer

Thank you, David. Good morning, everyone. I would like to welcome our shareholders, our analysts and our employees to our fourth-quarter 2018 earnings call. We delivered another solid quarter of financial performance and wrapped up our first year as a stand-alone-publicly traded company on a strong note.

Our strong execution in the quarter allowed us to exceed the top end of our fourth-quarter EBITDA guidance range by approximately $3 million. 2018 was a transformational year for Apergy. We established Apergy as a strong stand-alone-publicly traded company and delivered solid financial results. In addition, we positioned Apergy for continued success through good progress on our growth initiatives and further strengthening our competitive mode.

Finally, we have exited all transition services agreements with the Dover. Turning now to our financial results from the fourth quarter, revenues increased by $46 million or 17% year over year. Our revenue growth was driven by solid results in both of our operating segments. Consolidated adjusted EBITDA increased by 37% year over year, reflecting strong execution and operating performance in both of our segments.

As a result, consolidated adjusted EBITDA margin increased by 370 basis points to 25% from 21% in the fourth quarter of 2017. In the quarter, we generated strong cash from operating activities of $71 million and repaid $25 million of debt. Our continued focus on strong cash flow generation, combined with our disciplined capital management, allowed us to repay $45 million of debt during the last two quarters of 2018. In our Production & Automation Technologies segment, we posted strong year-over-year growth, both in artificial lift product line and our digital portfolio.

Our sequential revenue decline in this segment was primarily due to expected lower seasonal non-ESP artificial lift revenues and lower spending by customers in the quarter. From a geographic perspective, both the Permian and Bakken continue to show strong growth in the U.S. As the only provider of all six forms of artificial lift, we continue to benefit from our full suite of artificial lift products, which enables us to provide the right technology to our customers to efficiently produce at every stage of the well's life cycle. This capability helps us to generate revenue throughout the life of the well.

Digital products recorded significant revenue growth at 56% year over year, driven by strong market activity and increasing adoption of our new products. Growth in our digital portfolio was broad based in Q4 and was led by downhole monitoring products. In the fourth quarter, drilling technologies revenue increased 24% year over year, a rate of just over 2.5 times the worldwide rig count growth. This outperformance was driven by continued customer demand for our technologically advanced polycrystalline diamond cutters and ongoing adoption of our diamond bearings technology.

Turning to our international portfolio, we continued to execute well across our geographic markets. For full-year 2018, we achieved high single-digit revenue growth internationally with particular strength in Latin America and Australia. Rod lift activity continues to improve in the Middle East. However, the pricing environment remains challenging.

Before I turn the call over to Jay to take you through the details of the consolidated and segment financial results, let me take a few minutes to share our view of the current market for our products. At Apergy, we have built a high-quality portfolio of production-related artificial lift products, a differentiated polycrystalline diamond cutter business and a suite of fit-for-purpose digital solutions. Our portfolio was constructed with the intent to deliver strong performance through the oil and gas industry cycle, including outperformance during the periods of market expansion while remaining resilient during periods of market volatility. We believe that it is during the periods of market volatility that differentiation of our portfolio can be the most apparent.

As we look into 2019, we believe the traction on our growth initiatives and solid cash generation will help us to achieve differentiated performance in the market. We expect our growth will moderate in the first-quarter 2019, driven by slower market activity in the beginning of the quarter. Accordingly, our outlook for the first quarter of 2019 is consolidated adjusted EBITDA between $69 million and $73 million, which at the midpoint is an increase of 11% from the first quarter of 2018. The first quarter of 2018 did not include incremental stand-alone corporate costs.

We expect market activity to progressively improve through 2019, resulting in another year of strong results. We remain focused on the factors under our control, including superior customer satisfaction, traction on our growth, and productivity initiatives and our demonstrated capital discipline. A recent proof point of our customer focus is that we earned the top overall ranking for total customer satisfaction and was ranked first in five additional categories in the 2018, 2019 Oilfield Products & Services Customer Satisfaction Survey conducted by EnergyPoint Research. This independent annual survey is the industry benchmark for measuring customer satisfaction across the global oilfield and is comprised of thousands of in-depth evaluations.

Apergy rated first in total satisfaction, artificial lift, engineering and design, performance and reliability, horizontal and directional wells, and onshore applications in the oilfield products segment of the EnergyPoint survey. We believe these awards are validation of the success of our strong cultural foundation as well as our operating philosophy, including advocating for our customers, delivering technology with impact, and driving continuous improvement across our organization. Now, let me turn the call over to Jay.

Jay Nutt -- Senior Vice President and Chief Financial Officer

Thanks, Soma. As David mentioned, I'll be referring to the slides posted on our website. Beginning with Slide 4, Apergy finished 2018 on a solid note, and as Soma shared, we exceeded the top end of our fourth-quarter adjusted EBITDA guidance range by approximately $3 million. Revenue was $311 million for the fourth quarter, an increase of $46 million or 17%, compared to fourth-quarter 2017 performance and a decrease of $5 million or 2% sequentially.

The sequential decline was primarily due to expected seasonally lower non-ESP artificial lift volume and lower customer spending in the quarter. Year-over-year revenue growth in the U.S. was very healthy at $41 million or 20%, and non-U.S. revenue growth was $5 million or 8%.

Adjusted diluted EPS was up $0.12 or 50% year over year to $0.36 as both of our segments performed well in the quarter. We generated strong cash flow from operating activities of $71 million in the fourth quarter, up from approximately $35 million in both the year-ago period and prior quarter. During the quarter, our teams worked hard to recover the working capital build that we experienced during the quarter and we had good success from our efforts. Turning to Slide 5.

From a macro viewpoint, we believe the long-term industry fundamentals continue to be good for our businesses and that our growth accelerators are aligned with the progression of the industry. In the fourth quarter, oil and gas prices did experience significant volatility, and there's increasing evidence that we're in the midst of a U.S. completions growth slowdown as we move into the first quarter. Industry consensus points to U.S.

E&P spending being flat to down, high-single digits in 2019. Moving to Slide 6 and looking at consolidated fourth quarter performance, net income in the quarter was $23 million and diluted earnings per share were $0.29. After adjusting for the impact of spinoff and restructuring-related items in the quarter, adjusted net income was $28 million or $0.36 per diluted share in the quarter. We generated adjusted EBITDA of $78 million during the fourth quarter, compared to $57 million in the fourth quarter of 2017.

Sequentially, adjusted EBITDA decreased $1 million on the $5 million revenue decrease. The sequential decline was primarily due to expected seasonally lower non-ESP artificial lift product volumes and lower customer spending in the quarter. In the fourth quarter, net interest expense was approximately $11 million, which was flat sequentially from the third quarter. Our effective tax rate in the fourth quarter was 17%.

As anticipated, in the quarter we recognized a discrete $2 million tax benefit from the foreign jurisdiction, bringing our tax rate down from the previous quarter run rate. Capital expenditures in the fourth quarter of 2018 were $15 million, compared to $14 million in the third quarter of 2018. For the full-year 2018, capital expenditures of $58 million were just below our guidance of 3% of revenue plus investments in our fleet and leased ESP assets. As a result of the higher cash flow from operating activities noted earlier, combined with good capital discipline on capital expenditures, our free cash flow was quite good and our adjusted EBITDA conversion was a robust 76% in the quarter.

Turning to Slide 7. Production & Automation Technologies revenue finished at $235 million in the fourth quarter, an increase of $31 million or 15% from $204 million in the fourth quarter of 2017 but down $6 million or 2% compared to third-quarter 2018 performance. The year-over-year improvement was due to continued growth from our artificial lift and digital product offerings. In particular, we continue to drive significant growth in our electrical submersible pump product line, and our digital product revenues were up 56% year over year.

The sequential decline from Q3 mirrored the slower industry activity levels. Adjusted segment EBITDA rose 36% to $50 million in the fourth quarter from $37 million in the year-ago period, driven by substantial revenue growth and improved operational performance. Adjusted segment EBITDA declined slightly from $52 million in the third quarter this year. The sequential decline in adjusted segment EBITDA was primarily due to lower volume.

Adjusted segment EBITDA margin was 21% in the current quarter compared to 18% in the fourth quarter of 2017 and 21% in the third quarter of 2018. Our year-over-year margin improvement reflects the benefits of continued cost discipline and solid operational leverage on the increased volume. In spite of the slower industry activity during the quarter, our Production & Automation Technologies businesses continue to have a healthy book-to-bill ratio at 0.99 times, compared to 0.96 ties in the fourth quarter of last year and 1.0 times during the third quarter of this year. Moving to Slide 8.

Drilling technologies posted revenue of $76 million in the fourth quarter, representing an increase of $15 million or 24% from the fourth quarter of last year. The robust revenue growth year over year was supported by higher worldwide rig count levels compared to the prior year combined with strong growth in diamond bearings for drilling tools. Revenue from diamond bearings was up 67% compared to the year-ago period. Compared to the third quarter of 2018, drilling technologies revenue was resilient, increasing 1% from $75 million.

Adjusted segment EBITDA increased 33% to $30 million in the current quarter from the fourth quarter of 2017, primarily driven by higher volume, better operating efficiency and the benefits of strong cost discipline. Sequentially, adjusted segment EBITDA increased 2% from $29 million in the third quarter due to continued productivity initiatives. Adjusted segment EBITDA margin was 39% in the fourth quarter of 2018 compared to 37% in the fourth quarter of 2017 and 38% in the third quarter of 2018. We maintained good cost discipline in the quarter and our productivity initiatives allowed us to increase the segment margin to almost 40%.

In the quarter, our drilling technologies business continue to have a good book-to-bill ratio at 1.03 times. The quarter-end ratio compares to 1.02 times in the fourth quarter of 2018 and 1.01 times during the third quarter of this year. Moving to Slide 9. On the balance sheet, fourth quarter ending debt, net of debt discounts and deferred financing cost was $666 million.

Cash at the end of the quarter was $42 million. During the quarter, we used cash of approximately $8 million to satisfy pre-spin tax liabilities. We do not expect any further material tax payments pertaining to our pre-spin tax labilities. In addition, as noted in our earnings release and Soma's prepared remarks, we repaid another $25 million of debt on our term loan, consistent with our commitment to our capital allocation priorities, which include funding our organic CAPEX needs as well as reducing leverage through earnings growth and debt reduction.

For the year, we repaid $45 million in term loan debt since the spin in the second quarter. At December 31, 2018, Apergy's total leverage ratio was 2.2 times and our available liquidity was $288 million, up from $263 million at the end of September. In the fourth quarter, adjusted working capital, which is composed of accounts receivable plus inventory less accounts payable, decreased $33 million. Our teams did an outstanding job of increasing our cash generation by recovering the working capital build from the third quarter.

Turning to Slide 10. For the first quarter of 2019, we expect consolidated revenue to be between $295 million and $305 million, and adjusted EBITDA of $69 million to $73 million. We anticipate that interest expense will be approximately $10 million and that our depreciation and amortization expense will be approximately $30 million. Our effective tax rate is expected to be approximately 24% in the first quarter.

Our full-year 2019 capital spending forecast is approximately 2.5% of revenue for infrastructure-related growth and maintenance plus an additional $20 million to $25 million for capital investment directed at expanding our portfolio of ESP-leased assets. We may increase our capital investment plans later in the year should our growth initiatives support additional investments. I will now turn the call back over to Soma for some closing comments before we open the lines for Q&A.

Soma Somasundaram -- President and Chief Executive Officer

Thank you, Jay. Before we open the call to questions, I would like to update you on our progress on the key growth initiatives. Our first growth initiative is in our ESP product line, where we continue to drive significant growth and share gains in the U.S. onshore unconventional market.

For the second year in a row, we achieved industry-leading revenue growth in this key product line. In 2018, our Permian basin monthly install rates was 2.5 times our 2016 monthly install rate. Our strong product offering, combined with our digital monitoring solution, and the industry-leading service is winning in the market and we intend to continue our momentum in this business. Our second growth initiative is focused on existing well conversions to rod lift as production declines.

As production from previously completed wells continues to decline, the pool of available rod lift candidate wells continues to grow, particularly in the Permian basin. This sets up a multi-year growth opportunity for our rod lift product line. Our key brands of [Inaudible] and Harbison-Fischer are among the most trusted brands in the rod lift industry and are well-positioned to capture this market growth. For full-year 2018, in the U.S., our rod lift revenues increased in the high-single digits.

Our third growth initiative involves driving significant growth of our digital product revenues. We are focused on developing fit-for-purpose solutions designed to improve customer productivity and operational economics. Customers are increasingly interested in this fit-for-purpose digital solutions that give them higher visibility of downhole conditions, asset performance, failure prediction, and analysis and optimization opportunities. To that end, in the fourth quarter, we introduced our spotlight remote monitoring system for engines, expanding our industry-leading spotlight for natural gas compressor product line to the adjacent Indian market and providing enhanced value to our customers.

Adoption of our technology combined with strong market activity resulted in a 56% increase in year-over-year digital product revenue in the fourth quarter. We expect continued healthy growth rate in our digital business. Our fourth growth initiative is the continued innovation and advancement of our diamond sciences technology, including our polycrystalline diamond cutters. In 2018, our drilling technologies segment had 55 new patents issued, bringing the total issued patents since the beginning of 2008 to 728.

Customer adoption continued to remain strong for new technology, and this resulted in 47% of our revenues in the segment in the fourth quarter coming from new products. This continued innovation helped us achieve 25% year-over-year growth in 2018, more than 2 times the worldwide rig count growth. Our innovation efforts will continue to help us outperform the market and also to leverage this proprietary technology to other applications. Our final growth initiative is focused on driving continued adoption of our diamond bearings in downhole applications, including rotary steerables, mud motors, and power generators.

On a year-over-year basis, revenue from our diamond bearings was up 67% in the fourth quarter. Sequentially, revenue from diamond bearings was up 22%. In the fourth quarter, revenues from our diamond bearings business represented about 15% of our Drilling Technologies revenue. Compared to traditional bearings, diamond bearings decreased the total cost of ownership through higher load carrying capability, significantly longer life, and lower repair cost.

Demand for our bearings continues to be a robust, and we are investing to expand our capacity to meet the strong demand. We expect our diamond bearings business to continue its strong growth in the coming years, driven by continued adoption in the downhole application and also from other applications where this technology can be applied. We finished 2018 on a strong note from flawlessly completing our spinoff from Dover to driving strong revenue growth in earnings and positioning Apergy for continued future success, our teams executed well during the year. Finally, I want to thank all of our employees for their, continued efforts and passion in improving the lives of our customers, our employees, our shareholders and our communities.

I'm particularly proud of their accomplishments in 2018, and it is a privilege for me to lead such a great team. With that, I would like to open the call for questions.

Questions and Answers:

Operator

Thank you. [Operator instructions] We have a question from David Anderson from Barclays.

David Anderson -- Barclays -- Analyst

Great. Thanks. Good morning, Soma. A couple of questions on the left side.

Obviously, we saw a big slow -- or not a slowdown but a slowdown in the back part of the year in the U.S. land markets. On the ESP demand side, can you just kind of walk through how you see that? It doesn't look like your numbers are really showing much of a slowdown there. But as you think about going into next year, I mean, can you just talk about kind of the lag effect between completions, ESP demand? And also, if you would't mind also, just touching on the conversion to rod left of whether or not that timing has been pushed out a little bit.

Thank you.

Soma Somasundaram -- President and Chief Executive Officer

Yes. Thanks, David. From an ESP-demand perspective, as we mentioned in the prepared remarks, we executed well through Q4. We saw sequential -- our ESP product line achieved sequential growth Q3 to Q4 strongly due to execution.

As we move into 2019, given the commodity price decline in the early -- in the latter part of the Q4 of 2018, we see a slower start to the quarter and we see activity continuously improving, and we have already seen that from January. We -- the way we started January and how we exited January. And now into February, our activity of installs are starting to continuously pick up and increase. So we see that trend continuing through the year and we expect another strong year for ESB product line.

With respect to that conversion, we saw the the activity of rod left conversion, the pool of candidates are continuously increasing, and customers are continuing to convert based on the capital availability, and so we see that trend continuing. We are going to talk about this more in our Investor Day. As I mentioned in my prepared remarks, in 2018, we saw our rod lift revenue increase high-single digits from 2017. And our 2017, growth was -- it was better than the 2017 growth in rod lift.

So, we see this multi-year growth where the growth rate progressively continues to improve every year as this pool continues to expand.

David Anderson -- Barclays -- Analyst

So, I'm sure you're going to hit on this at your Analyst Day in a couple of weeks, so as we kind of think about the different kind of growth areas for Apergy, one of the areas you would touch on was international rod lift. I was wondering if you could just kind of touch on that a little bit more. You had mentioned that rod lift is improving but pricing is challenging. How much of an opportunity is that over there? You mentioned rod lift, but I would also imagine ESPs are also starting to get a little bit bigger.

Could you just touch on that part of the world for us a little bit?

Soma Somasundaram -- President and Chief Executive Officer

Yes, so we grew our international revenues in 2018. We said high-single digits, we grew the international revenues and we are anticipating 2008 -- '19 growth to be even stronger than that. We expect Q4 to Q1, our international revenue also to improve. We are already seeing that.

So with respect to rod lift, the pricing challenges right now is more isolated to Middle East. We expect the Middle East activity to be stronger this year, and that can help with the pricing. So we see the rod lift activity in Middle East, Latin America to be -- continued to be strong in 2019. The ESP opportunity is wide open for us because we have not focused on the international onshore market, primarily because of the opportunities we have in the U.S.

market. In the -- over the next couple of years, we will start focusing on the international market and you should expect us to gain more share in the international markets in the coming years.

David Anderson -- Barclays -- Analyst

OK. Thank you, Soma.

Operator

The next question comes from Scott Gruber from Citigroup.

Scott Gruber -- Citi -- Analyst

Yes. Good morning.

Soma Somasundaram -- President and Chief Executive Officer

Good morning, Scott.

Scott Gruber -- Citi -- Analyst

So just following on Dave's question. Just on the first quarter, based on your guidance for $70 million of adjusted EBITDA and given the solid bookings in drilling, is the decrease all P&A that how we should think about on a segment basis?

Soma Somasundaram -- President and Chief Executive Officer

Yes, I think it's mostly driven by the first part of, what I would call it, the first month of the quarter, which is mostly January. If you -- typically, look at our years, and you will see even in 2018, the first quarter tends to be somewhat lower and then the activity progressively gets stronger as the year goes on. So the -- to your point, the activity is very much slower in January in the short cycle part of our business in artificial lift, and we expect that to -- as I mentioned before, we -- that we've already seen that activity pick up, and February activity so far is higher than what we saw in January. So we expect that progressively getting better as the quarter goes on and as the year goes on.

Scott Gruber -- Citi -- Analyst

Got it. And then just a question on drilling. I realize that your point of sales in drilling may not completely align with where the beaps are ultimately used. What's your sense today on how the sales split between the U.S.

and the rest of the world for your products in drilling based upon ultimate use?

Soma Somasundaram -- President and Chief Executive Officer

Yes. So, based on just where we ship -- so let me the comments -- two comments on that. Based on where we ship, if you look at in Q4, our Drilling Technologies is 22% international. That is based on where we actually ship the product.

But as we have mentioned to you before, most of the drill bit customers have their new bit plans in the United States. And so as we ship to them, from there they ship internationally, and those international shipments are not captured in ours. So what we do, Scott, is we use the rig count as a proxy for our international split for tooling technology. That's the other way to think about it.

But just based on our shipments alone, it's about 22% non-U.S.

Scott Gruber -- Citi -- Analyst

Got it. Thanks. I'll get back in the queue.

Soma Somasundaram -- President and Chief Executive Officer

OK. Thank you.

Operator

The next question comes from Byron Pope from Tudor, Pickering.

Byron Pope -- Tudor, Pickering, Holt and Company -- Analyst

Morning, guys.

Soma Somasundaram -- President and Chief Executive Officer

Morning, Byron.

Hey, Soma. You guys handled the tariffs issue fairly well last year as it relates to your ESP business and some of your other product lines that have steel exposure. Could you just frame how you think about that dynamic impacting the cost side of equation as we step through this year?

Soma Somasundaram -- President and Chief Executive Officer

Yes. No -- thanks, Byron. I'll tell you, I was really pleased with the way our teams executed mitigation efforts on tariff, including significant productivity initiatives, pricing initiatives and so on and so forth. So as we step through 2019, I -- we do not -- compared to Q4, we do not anticipate any major impact -- incremental impact from the tariffs because the Q4 included the major part of our tariff impact.

So, we don't see 2019, compared to the Q4 of 2018, any meaningful impact due to tariffs.

Byron Pope -- Tudor, Pickering, Holt and Company -- Analyst

OK. And then second quick question from me, I realize starting from a small base but the growth in the diamond bearings business is fairly impressive and if I think about the demand drivers there, is it fair to think of the Q4 growth both year over year and sequentially has been driven more by the rotary steerables market and mud motors market?

Soma Somasundaram -- President and Chief Executive Officer

Correct. And I would say that, Byron, that it is a rebuild cycle and -- but I would also say almost 45% to 50% of the revenues in the bearings business today is still -- is actually aftermarket, recurring revenue. As you know, that these bearings get built in. So that is a very healthy recurring revenue stream as well as the new build.

So that's why we feel as we -- this is a multi-year growth opportunity for us, this bearings, and we are excited about this business.

Byron Pope -- Tudor, Pickering, Holt and Company -- Analyst

Great. Thanks, guys. We'll see you guys at the Investor Day.

Soma Somasundaram -- President and Chief Executive Officer

Sure. Thank you.

Operator

The next question comes from Marc Bianchi from Cowen.

Marc Bianchi -- Cowen and Company -- Analyst

Thank you. My first question has to do with the guidance for the first quarter, and it sounded like to an earlier question, the decline in revenue is largely driven by production automation. If I look at the profitability, at the midpoint, revenue is going down by $11 million and EBITDA down by $7 million, so that implies some pretty heavy operating leverage for the business. Can you kind of talk to what's driving that, perhaps it's mix, perhaps it's pricing, and how you see that operating leverage progressing over the course of the year as revenues improve?

Jay Nutt -- Senior Vice President and Chief Financial Officer

Sure, Marc. This is Jay. So, thanks for the question. As you point out, first, we continue to make investments in support of some of our growth accelerators, particularly in -- behind digital applications and bearings growth.

And even though there's a little bit of softness and lower customer spending coming out of Q4, we want to continue to advance those opportunities so that we can continue to provide good servicing capability to our customers. The other items that are affecting us in Q1 is really lower absorption, so the activity coming into Q1 was a little bit lower. As Soma pointed out, we've seen progressively better activity as we exited January and coming to February, but there is some lower absorption due to lower volume at the beginning of the quarter. But the incrementals should continue to improve throughout the quarter and throughout the year as we've seen in prior quarters going back to 2017 and 2018 that Q1 tends to be the lowest quarter.

Marc Bianchi -- Cowen and Company -- Analyst

OK. Is it fair to say, Jay, that there -- that you're not really seeing any pricing pressure toward the downside in any of the businesses at this point?

Jay Nutt -- Senior Vice President and Chief Financial Officer

Well, we continue to see pricing pressure, Marc. As you can imagine, E&P companies are trying to make sure they maximize their spend, and that puts pressure on oilfield service companies like Apergy and the technology that we provide. So, we expect to see the same type of pressure in 2019 that we experienced in 2018 and try to get a good value for the products and technology that we deliver to our customers, but that type of pressure also makes it very important that we continue to keep up our productivity initiatives to offset the pricing headwinds that we see in the market.

Soma Somasundaram -- President and Chief Executive Officer

Yes, just a follow up to that, if you're not going -- it's not going to be anything meaningful in 2019 as compared to 2018 for us. That's always up -- movements between product lines but I think that we what we have we have a strong productivity funnel that helps us mitigate some of those.

Marc Bianchi -- Cowen and Company -- Analyst

OK. And one more if, I may. The CAPEX up to 2.5% of revenue is incredible relative to some other oil service companies. I'm curious if you could share sort of -- we've got the ESP CAPEX, which is on top of that, but within that 2.5%.

What are the major areas of spending, how much of that is maintenance? It sounds like there's some investment in the diamond bearings but just curious if you could bucket that for us.

Jay Nutt -- Senior Vice President and Chief Financial Officer

Sure, Marc. So similar to prior year, we would estimate that about 65% of our CAPEX is directed at growth and about 35% at maintenance. We are continuing to look at the overall CAPEX requirements of the business, in particular, in support of the growth initiatives that Soma has shared in his prepared remarks. If the year starts to look better and business activity continue to improve, we may need to increase our CAPEX spend.

But at 2.5% right now, we think we want to continue to maintain good capital discipline and support the growth accelerators in front of us.

Soma Somasundaram -- President and Chief Executive Officer

And I think the big part of the CAPEX cwould be to expect capacity for diamond bearings in product line. And also, we are continuing to build some more technology capabilities in our ESP.

Marc Bianchi -- Cowen and Company -- Analyst

Great. Well, thank you. I'll turn it back.

Operator

Thank you. The next question comes from Chase Mulvehill from Bank of America.

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

OK. Good morning.

Soma Somasundaram -- President and Chief Executive Officer

Good morning.

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

I guess, first question, I'll kind of come back -- hey, Soma. I guess, I'll come back to diamond bearings. If I heard you correctly, I think you said -- if I annualize that number for 4Q, it's about $45 million of annualized revenue in the fourth quarter. What does the total addressable market look like for diamond bearings? And maybe just kind of walk through how you see conversions happening and given that you got to have a new product out there to convert from steel to diamond bearings?

Soma Somasundaram -- President and Chief Executive Officer

Right. So as you know, currently, we are focused on three downhole applications. And those three downhole applications, which are the rotatory steerables, mud motors, and the power -- downhole power generation, we feel the addressable market is somewhere in the $100 million to $130 million. So as you can -- and you correctly pointed out, we are exiting Q4 2018 with an annualized run rate of about $45 million, and we are the only provider of this disruptive technology, the diamond bearings.

So, we see that adoption continue to grow just in the three downhole applications. The way the adoption happens, as you pointed out, is that every time the tools come for redesigns and rebuild, we start working pretty early with our customers, so they can design the tool around the diamond bearings. So, the way to think about it is every time q large oilfield service companies launching new tools, those are the opportunities we work with them. Once your bearings is on the tool, then you get that continued recurring revenue associated with it.

Now as we work through the coming years, we see a significant opportunity for this business as we expand into other applications. So currently, we are focused on the three downhole applications. So if you think of other applications, even outside of oil and gas and more in the industrial downstream -- you can think of critical machineries, critical pumps. Today, we do get requests to design bearings for those, and we are prioritizing those requests given our strong demand of the downhole applications.

But in the coming years, we will continue to expand into other applications. That's why, we feel we have really a multi-year growth opportunity, where this business can really be a strong growth business for years to come.

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

OK. That's very helpful. Appreciate the color. I guess, going over to ESPs -- I'm sorry if I missed this, but did you give a revenue growth rate for ESPs for 2018?

Soma Somasundaram -- President and Chief Executive Officer

We did not. But as we have made in the prepared comments, we definitely -- based on the data points we could see, if -- we rank on the top of the pile when it comes to revenue growth rate and it is a pretty strong.

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

OK. And then what kind of share do you have today in ESPs?

Soma Somasundaram -- President and Chief Operating Officer

Yes, we think we are exiting 2018 -- this is on the U.S. onshore market, as you know, that's our focus. We are exiting with close to 15% share in the U.S. onshore market.

And if you recall, in 2014, we had less than 5% share in the market.

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

Yes. OK. And then last one on the ESPs, and I'll turn it back over. You've seen a couple of new entrants come into ESPs recently.

Are you seeing any kind of headwinds or kind of negative impacts from new entrants or potentially may be from people using gas lift as opposed to ESPs?

Soma Somasundaram -- President and Chief Executive Officer

Yes. So with respect to the gas lift, we are going to be talking about that in detail in the upcoming Investor Day because it's an important topic, but let me make a couple of summary comments. As you know, the use of -- the gas lift and ESP, they both are growing in basins -- particularly in basins like Permian, and the use of ESP and gas lift is very specific to well conditions. As we all know, wherever the gas to oil ratio is high, customers tend to use gas lift.

And where the liquids are high, customers tend to use ESP. And customer also tend to use ESP when they want to maximize initial production rates. So, we will go through in detail, these elements in our Investor Day but the important point I want to convey is both technologies are growing nicely. With respect to the new entrants, yes, we -- there has been couple of new entrants.

I think as we have mentioned to you before, we are not seeing any particular impact to our business and our growth rates. But the key here is to stay on top of your game as customer -- to keep up your industry-leading service and make sure that we are able to provide reliable long-run life equipment along with a superior service, and we are focused on doing that.

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

All right. Appreciate the color, Soma. Look forward to Investor Day.

Soma Somasundaram -- President and Chief Executive Officer

Great. Thank you.

Operator

The next question comes from Blake Gendron from Wolfe Research.

Blake Gendron -- Wolfe Research -- Analyst

Hey, thanks for taking my questions. But first, just digging into the ESPs again, don't mean to beat a dead horse here, but it was my understanding that the IOCs were relatively new customer bucket for you just in terms of the qualification in U.S. land? And in terms of appreciating the fact that they're going to drive the majority of the spending growth, particularly in the Permian, can you just give us an update on maybe your exposure to the IOCs? And then secondarily, their appetite of things like production automation, if you were to compare the IOC customer bucket to, say, the larger public E&Ps?

Soma Somasundaram -- President and Chief Executive Officer

Yes. So the -- we always segment our customer base and target the very specific solutions for each of those segmented customer base. So, you are correct that ESP for IOCs is a major opportunity for us and -- as we continue to get through the qualification process and that is progressing well. So, we see that to be a continued opportunity for us into 2019.

And with respect to the automation, as we have said before, the key to success in digital and automation is about fit-for-purpose solutions and it is important to understand where the customers are in their digital journey, whether they are planning to digitize their entire enterprise or they are selectively trying to digitize particular applications. So, where they are in their digital journey and understanding that is important. And No. 2 is, the economic value of the well.

So 2,000 barrels-a-day well will require a full automation. Customers would like to have real-time visibility, whereas a 20-day-a-barrel well will have a different type of automation requirements. So understanding these are critical for us to continue to provide that fit-for-purpose modular solution. And we are seeing that in -- with the different segments of our customers, different levels of uptake.

So -- and that, to us, is the key to success.

Blake Gendron -- Wolfe Research -- Analyst

OK. That's helpful and then just the housekeeping. So you talked about some of the working capital recapture in the fourth quarter, are there continued levers for improvement there on the balance sheet or is this kind of a steady state level of DSO and DSIs for you?

Jay Nutt -- Senior Vice President and Chief Financial Officer

Blake, this is Jay. So, we believe that some of the actions that we put in place in Q4 are going to be sustainable for us and that we should be able to manage working capital efficiency in a good way in 2019. So, we think that we've gotten ourselves to a pretty good position in terms of DSO and probably still an opportunity on the DPO. And we continue to work on the supply base to make a little more progress on the DPO side.

Blake Gendron -- Wolfe Research -- Analyst

OK. Thanks. I'll turn back.

Operator

Thank you. And our last question comes from Saurabh Pant from Jefferies.

Saurabh Pant -- Jefferies -- Analyst

Hi. Good morning, guys. Soma and Jay, good morning.

Jay Nutt -- Senior Vice President and Chief Financial Officer

Good morning.

Soma Somasundaram -- President and Chief Executive Officer

Good morning.

Saurabh Pant -- Jefferies -- Analyst

Hi. So, again, getting back to ESP and trying to look forward versus backward, so from a 2019 perspective, Soma, I think at one point we did in late November at our conference, you were talking about what can the ESP market do in 2019 in a, let's say, $50 to $55 per barrel WTI environment, right? And I think you said that you feel confident that you can grow the ESP business by double digits in 2019, right, on a year-over-year basis. And we were talking to one of your competitors, roughly your size, and they are also thinking that they can grow double digit in 2019. So, just to get an update on that, what's your sense on that, is that achievable? And again, from a competition standpoint, is competition -- would you say it's more aggressive or would you say it's more or less what it was six months back?

Soma Somasundaram -- President and Chief Executive Officer

Yes -- no, I think I've -- to answer your question, in the $50 to $55 environment, I feel double-digit growth in our ESP business is achievable and -- because as customers continue to focus on maximizing their initial production, ESPs tend to have a pretty strong preference from our customers. Now with respect to competition, clearly, the competition are very credible companies in ESP, and we continue to focus on our strength around that and making sure that we stay on top of our speed of service, quality of service as well as our reliability and extending the run life of our ESP. So, we feel good about our teams and our capability to achieve that double-digit growth in a $50 to $55 oil environment.

Saurabh Pant -- Jefferies -- Analyst

OK. OK. OK. No, that's encouraging.

And if I were to think about -- OK. How should I think about CAPEX? So the company as a whole but for ESPs more specifically, right, because you did say that you expect to spend $20 million to $25 million on the ESP rental model. And if the market is a little better than that obviously you can spend a little more, right? But if I were to just think about, OK, what does $20 to $25 million in CAPEX on the ESP leasing side get me, right, I mean, should I think that, let's say, 10%, 15% revenue growth, that can come within that $20 million to $25 million ESP rental CAPEX or we should think CAPEX should be higher in that scenario?

Jay Nutt -- Senior Vice President and Chief Financial Officer

Saurabh, this is Jay. So, the $20 million to $25 million would be in support of being able to achieve double-digit revenue growth in a $50 to $55 oil price scenario. So, as you saw in 2018, we invested for significant growth in ESP because of better oil prices and then we wanted to make sure we didn't get ahead of ourselves in terms of how much ESP capacity we had available. And so we're closely monitoring that situation today, but $20 million to $25 million would support the double-digit ESP growth that Soma just talked about.

Saurabh Pant -- Jefferies -- Analyst

OK. OK. OK. No, that's perfect.

And then on the drilling technology side, I don't know if you called out a number as to what the CAPEX number is for the diamond bearing growth that you are pursuing in 2019. Is that a substantial number that we should care about or is it something that that's pretty de minimis?

Jay Nutt -- Senior Vice President and Chief Financial Officer

No, it's built into our guidance. We made investments in bearing capacity in 2018 and the continued growth requires that we add more capacity in 2019, but it's built into our guidance. It is not a significant outlay for us but it's necessary to support the growth accelerator.

Soma Somasundaram -- President and Chief Executive Officer

Yes. Just to add to that, Saurabh, it's not a big number. The typical incremental capacity expansion for us on that would be mostly machinery, and that would be -- comes in buckets of $2 million to $2.5 million.

Saurabh Pant -- Jefferies -- Analyst

OK. OK. OK. So, that's still pretty small, right, obviously.

It's a growing business, right. So hopefully that more opportunities to actually go ahead and spend that money, right, but still it's not a big number. OK. And the last one for me, if I were to just think about the progression from the first quarter to the second quarter, right, as you said market demand is actually already looking up from January to February, right? There are a lot of moving pieces, it's seems like the rig count -- the U.S.

land rig count would trough in the second quarter on an average quarterly basis, right? And then there's the Canadian seasonality. I know kind of that's not that big for you, but again, on the drilling technologies side that can matter. Should we think that, on a consolidated basis with all the puts and takes, your EBITDA expectation, right? I mean, should we think EBITDA should at least be the same as the first quarter?

Soma Somasundaram -- President and Chief Executive Officer

It should progressively get better, as we mentioned in our prepared remarks, Saurabh, because I think -- like you said, there are a lot of moving pieces but as the activity continues to improve on our production automation technologies segment, and Canada is a smaller piece -- increasingly smaller piece for us, right?

Saurabh Pant -- Jefferies -- Analyst

Right.

Soma Somasundaram -- President and Chief Executive Officer

So I think it should sequentially get better.

Saurabh Pant -- Jefferies -- Analyst

OK. OK. OK. I think I was thinking more on the drilling technology side.

Does it get a little worse before it starts to get better just because of that seasonality and just because of the timing of the U.S. rig count bottoming, but it sounds like that's not a given, right. You can still continue to improve on a month-over-month basis.

Soma Somasundaram -- President and Chief Executive Officer

Yes.

Jay Nutt -- Senior Vice President and Chief Financial Officer

Well, yes. As you pointed out -- and last quarter -- or last year, the Q2 drop in Canadian rig count was much more significant. We don't anticipate the same level of degradation this year because of the lower current rig count. There could be a little bit of seasonality, but it's -- we would expect quarter-over-quarter progression out of Q1 into Q2.

Saurabh Pant -- Jefferies -- Analyst

Yes, yes, yes. No, OK. That makes sense. OK, guys.

I should turn it back. Thank you.

Jay Nutt -- Senior Vice President and Chief Financial Officer

Thank you.

Operator

And with no further questions, I would like to turn the call back to Soma for final remarks.

Soma Somasundaram -- President and Chief Executive Officer

Thank you. We thank you all for joining the call today and for your interest in Apergy. We look forward to seeing you all in New York at our Investor Conference on March 6th. Thank you.

Operator

[Operator signoff]

Duration: 57 minutes

Call Participants:

David Skipper -- Vice President and Treasurer

Soma Somasundaram -- President and Chief Executive Officer

Jay Nutt -- Senior Vice President and Chief Financial Officer

David Anderson -- Barclays -- Analyst

Scott Gruber -- Citi -- Analyst

Byron Pope -- Tudor, Pickering, Holt and Company -- Analyst

Marc Bianchi -- Cowen and Company -- Analyst

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

Blake Gendron -- Wolfe Research -- Analyst

Saurabh Pant -- Jefferies -- Analyst

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