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Dril-Quip Inc (NYSE:DRQ)
Q4 2020 Earnings Call
Feb 26, 2021, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to Dril-Quip's Year-End 2020 Conference Call. I'd like to turn the event over to Mr. Blake Holcomb, Director of Investor Relations. Please go ahead.

Blake Holcomb -- Director of Investor Relations.

Welcome to Dril-Quip's Full year 2020 Conference Call. [Operator Instructions] An updated investor deck was posted under the Investors tab on the company's website yesterday along with the earnings release and will be referenced during today's call. This call is being recorded, and a replay will be made available on the company's website following the call. Before we begin, I would like to remind you that Dril-Quip's comments may include forward-looking statements and discuss non-GAAP financial measures.

It should be noted that a variety of factors could cause Dril-Quip's actual results to differ materially from the anticipated results or expectations expressed in these forward-looking statements. Please refer to the fourth quarter 2020 financial and operational results announcement released yesterday for full disclosure on forward-looking statements and reconciliations of non-GAAP measures. Speaking on the call today from Dril-Quip, we have, Blake DeBerry Chief Executive Officer; and Raj Kumar, Chief Financial Officer. We also have Jeff Bird, President and Chief Operating Officer, on the call for the Q&A portion following the prepared remarks.

I would like to turn the call over now to Blake DeBerry.

Blake T. DeBerry -- Chief Executive Officer

Thank you. On behalf of the management team, I would like to welcome all of you to today's year-end conference call. I'll begin with a high-level review of our 2020 results and highlight the many accomplishments that we were able to deliver during the year. These accomplishments were achieved despite the tremendous challenges presented by the global pandemic. I will then turn the call over to Raj to review the financial results and give general thoughts on our 2021 financial outlook. I will then provide some closing comments and open the call to questions.

I would like to begin with thanking Dril-Quip's employees globally for their resilience, dedication and remaining focused on performing their jobs with excellence. The pandemic brought immense challenges to our industry customers and our employees and their family. Whether their jobs were performed in our manufacturing facilities, on a rig servicing our customers, or working remotely, all of our employees adjusted their lives for the good of the organization and in service to our customers. I am grateful for all their contributions.

Although our 2020 results were challenged by the pandemic and associated oil and gas demand destruction, it was not a year without significant progress and accomplishments for Dril-Quip. The transformation and productivity journey we started in 2019 positioned us well for this challenging environment. We were able to conclude 2020 with $365 million of revenue and $32 million of adjusted EBITDA. Although a decrease from our 2019 results, we successfully responded to the challenging environment by mitigating the impact of the pandemic as seen in our operating and financial results and continued delivering products and services to our customers. We also celebrated many accomplishments in our research and development efforts during 2020.

In May, we were presented with our fifth spotlight on new technology award by the Offshore Technology Conference for our VXTe Subsea Tree System. The VXTe system is a disruptive technology in the subsea production system space. VXTe provides significant cost and time savings for our customers, which improves their IRR by reducing capital and time to first oil, with the added benefit of reducing their carbon footprint. The VXTe offers the operator the ability to drill the well to completion and land the tubing hanger in the wellhead as part of their normal drilling operations without regard to its orientation. This eliminates the traditional development well scenario, whereby the operator will cease drilling operations, pull the BOP stack and run the horizontal tree or tubing spool and then rerun the BOP stack to drill the well to completion.

We estimate that this, combined with our other e-Series technology products, will save operators approximately $5 million per well and five days of rig time. We have seen incredibly positive response from our customers about the potential to improve their operations with this technology. Our R&D and manufacturing teams worked hard through the pandemic to complete all qualification tests and maintain the production schedule of the first VXTe tree. With the tree now in final assembly, we expect to make delivery in the first quarter and hopefully, installing the first VXTe this year. While we are aware that consolidation is needed in our sector, we also know the difficulties in quickly executing that strategy.

Accordingly, we embarked on a strategy of consolidation through collaboration. In 2020, we entered into a strategic collaboration agreement with Proserv for the manufacture and supply of subsea control systems. This nonexclusive collaboration achieved two main priorities. First, it allowed us to offer our customers the latest subsea controls technology without having to make the significant research and development investment of $8 million to $10 million per year over the next three years, as well as eliminated the associated operating costs of maintaining that product line. Second, this win-win scenario allows us to bundle our award-winning subsea trees with Proserv's state-of-the-art control systems and offer our customers significant value. The collaboration with Proserv was part of a larger strategy to continue down our transformation path to align our business with market activity.

Allowing us to refocus our engineering and manufacturing resources toward solutions that set us apart from our peers and offer the highest return on invested capital. This strategy led us to the difficult decision to transition and consolidate our subsea tree manufacturing from Aberdeen to Houston as we saw the subsea tree market decline from close to 300 subsea trees to a little over 100 tree awards in 2020. Aberdeen is a critical location for our operations, and therefore, we still have a significant presence there. This includes sales, project management, fabrication, final assembly and aftermarket operations serving our customers. In total, the productivity initiatives executed in 2020 reduced our costs by approximately $20 million on an annualized basis and helps us to continue on maintaining profitability and a strong balance sheet.

As we view the market today, it seems probable that a longer, more gradual post-pandemic recovery is likely. This means it could take several years to return to 2019 activity levels. The recovery is also likely to vary by geography and customer profile. Low-cost areas of offshore development, like the Caribbean, or with the support from subsidies and parts of the North Sea, are expected to see activity levels remain steady. The same can be said for national oil companies that typically drill for domestic energy consumption. In contrast, the most recent developments in the U.S. regulatory environment through executive order has created uncertainty around future projects in the U.S. Gulf of Mexico.

Overall, our outlook on the market takes into account multiple factors, including demand recovery, supply control from OPEC, and increased emphasis by government regulators on transitioning toward less consumption of fossil fuels in favor of alternative energy sources. The energy transition is a process we believe should be guided by market forces and approached rationally with regulatory consistency. We recognize the transition is under way, but will take time and resources to accomplish. Furthermore, we believe hydrocarbons will continue to play an important role in this transition, continuing to provide affordable, reliable and often cleaner energy to help lift developing nations out of poverty, while developed nations move more toward alternative energy sources. Dril-Quip has a role to play in both parts of the transition solution.

As part of our commitment to this transition, we have always prioritized helping our customers efficiently produce hydrocarbons and our latest e-Series suite of products continues that legacy. Many of our customers have made pledges to reduce emissions or become carbon neutral in the coming years. A large part of these commitments, in some cases, as high as 70% reduction in carbon emissions, will come from the vendors who supply these companies. Dril-Quip's innovative line of products are green by design, offering significant reductions in material or equipment that must be installed. This design methodology, which has always been part of Dril-Quip's DNA, eliminated the carbon associated with manufacturing equipment as well as reducing the offshore installation days.

These products are thoroughly tested to improve reliability, which leads to better well integrity and fewer workovers. For example, the combination of our e-Series technologies can help reduce roughly 40 tons of steel from traditional operations. The elimination of this component alone reduces carbon emissions by approximately 70 tons as the process needed to produce the steel is no longer required. We look forward to continuing to lead in the technologies and products that help our customers achieve their operational objectives. However, as we make the energy transition together, we do not lose sight of the very important role the industry currently plays today in providing reliable, affordable energy, and we take great pride in being part of that solution as well.

With that, I will turn the call over to Raj to review the financials and provide more details on our cost-cutting initiatives and 2021 outlook.

Raj Kumar -- Vice President and Chief Financial Officer

Thank you, Blake, and good morning, everyone. I'm going to walk through Q4 performance and also provide a review for the full year of 2020. We executed well, given the challenges we saw in the overall market. Revenue for the fourth quarter fell slightly from the prior quarter to $87 million. This decline was mainly due to lower manufacturing production hours related to increasing levels of quarantines from rising COVID-19 cases, seen mainly in the U.S. Adjusted EBITDA for the fourth quarter was $9 million, a decrease of $1 million from the prior quarter. The same factors impacting our revenue fell through to the bottom line.

We also saw regional government subsidies implemented as a result of the pandemic being reduced during the quarter. For the full year 2020, our revenues were $365 million, a decrease of $50 million versus 2019. This was driven by the impacts of the pandemic on overall oil and gas demand. Adjusted EBITDA for the full year 2020 was $32 million, a decrease of $22 million from the previous year. We were successful in addressing this market decline by swiftly taking steps to reduce costs and optimize our global footprint. As a result of this execution, we saw our margin profile improve significantly in the second half of 2020 as we realize the benefit of these cost actions. We met our $20 million cost reduction target in 2020. These are always difficult decisions, but were necessary in this environment. We expect these cost reductions to be sustainable going forward. While most of our regions saw headwinds to product and leasing revenues during the year, our service revenue saw an increase year-over-year.

This was primarily due to an increase in installations from orders booked in previous years, coupled with the growth in our downhole tools business. Our downhole tools business was able to outpace the market by gaining share in key markets in the Middle East and Latin America as a result of service quality and execution. I'll now move on to margins. Gross margins were under pressure. But given the environment, it held up falling by only 3%. Our decision to take actions early in the year helped to support margins as the year progressed. We saw EBITDA margins improve 3% from the first half to the second half 2020 after normalizing for mix and the impact of disruptions related to COVID-19. Moving to SG&A expenses. For the fourth quarter of 2020, SG&A was $26 million, an increase of $5 million compared to the third quarter. This increase was mainly due to short-term legal expenses.

We expect these legal expenses to continue into the first half of 2021, mostly in connection with the trial currently scheduled for April. For the full year 2020, SG&A expenses decreased by $8 million to $90 million after excluding these short-term legal expenses. These improvements in SG&A stem from our 2020 cost out initiatives. On the engineering R&D side, we saw a modest increase in 2020 to $19 million as we work to bring the VXTe to market. Now looking at bookings for the year. Product bookings were negatively impacted by the difficult market conditions in 2020. After approximately $388 million in bookings during 2019, the uncertainty surrounding the pandemic and its impact on commodity prices led to customers holding off or delaying decisions to book orders for their upcoming projects.

We saw smaller orders with less predictable timing. We now see one or two orders being the difference between a $40 million or a $60 million bookings quarter. We expect the effects of the pandemic to persist into the first half of 2021, but are cautiously optimistic that things will gradually recover as the year progresses. We believe there is some upside if operators see increased stability in prices and confidence in the global economic recovery returns with the recent rollout of COVID-19 vaccines. We expect the road to recovery to be more gradual. We are taking actions related to our productivity initiatives driven by our LEAN management philosophy and are targeting a $10 million cost improvement on an annualized basis.

These savings will come primarily from changes in our manufacturing and supply chain functions, including an increase in outsourcing for our downhole tools business. The timing of these productivity actions will take place over the course of the year and is expected to deliver roughly $5 million of realized benefit in 2021. Moving on to capital expenditure or capex. In the fourth quarter of 2020, our capex totaled just under $2 million. And for the full year, it was around $12 million. This represents a minimum maintenance level of capex that we have seen over the past two years. We are, however, anticipating an increase in capex to range in between $15 million to $17 million in 2021. The increase is partly related to growth in our downhole tools business. We are also investing in manufacturing safety and equipment and our information technology infrastructure.

We will monitor conditions to adjust our capex if necessary, but we believe these investments will support growth and improve our long-term efficiency and profitability. Now let me turn to the balance sheet. We continue to maintain a strong balance sheet and remain focused on protecting our cash position with no debt. At year-end, we had cash on hand of $346 million and a further $40 million of availability in our ABL facility. This results in approximately $386 million of available liquidity. Our balance sheet and liquidity position are critical for us. It gives our customers confidence in our ability to execute on our commitments and provides financial flexibility.

Moving on to free cash flow. Free cash flow for the fourth quarter was a negative $18 million. For the full year, it was negative $33 million. Both the quarter and full year free cash flow was slowed by several headwinds, many of which were related to the pandemic. Firstly, we saw a number of large customers whole payments that were due at year-end until early in January. While we are accustomed to disturb our balance sheet management by our customers, this amount was beyond our normal experience. Secondly, we saw inventory build in 2020, driven by customers requesting delays in shipments and our need to continue to procure materials for upcoming projects.

We also strategically added inventory for our expanding downhole tools business and subsea trees for stocking programs. Both these factors led to an increase in inventory. These working capital increases were partially offset by a federal tax refund. We believe we have laid the foundation for a strong recovery. We executed in improving billing turnaround and worked to improve our collection efforts and expand payment terms with vendors. We expect we will see benefits of these efforts more clearly in 2021. Free cash flow is a primary focus for us as a management team. We have tied all annual incentives for our entire leadership team to free cash flow.

We are focused on all aspects of working capital. We have dedicated a cross-functional team working on inventory reduction in a more gradual recovery environment. Our auditor cash teams are gaining traction on reducing time to bill. And we are continuing to leverage our supply base by moving to a more vendor-managed inventory program. In the current environment and given the initiatives I just mentioned, we expect to be able to generate 5% free cash flow yield. The bottom line is that free cash flow is a key metric for the management team. Prior to turning the call back over to Blake for closing comments, I will give some color on what we expect to see in 2021. Based on the current view and the conversations with customers, we expect 2021 bookings to be around $200 million for the year.

At these product booking levels and with the anticipated growth in our downhole tools business, we expect to see revenue to come in flat to slightly down from 2020. We are forecasting 40% decremental margins for any given decline in revenue as we hold costs critical to address a recovery. As I mentioned earlier, we are forecasting a free cash flow yield around 5% in 2021. We are well positioned to achieve this goal and have aligned management objectives and incentives toward meeting this target. To sum up, while we see near-term headwinds from the hangover of the pandemic, we see a gradual recovery in sight. We have a proven track record of executing and meet these near-term challenges head on as we prepare for the recovery and focus on our strategic initiatives. We have a strong financial position and a strong management team to execute in this market environment.

With that, I will turn the call back over to Blake.

Blake T. DeBerry -- Chief Executive Officer

Thanks, Raj. As we enter 2021, we believe there are signs to be optimistic that a recovery, even a more gradual one, is beginning to take form. We have established several strategic initiatives, which will position Dril-Quip to thrive in the years ahead. First, we are continuing to progress our consolidation through collaboration strategy through peer-to-peer collaborations that help to expand market access for our technology. We see these collaborations through several lenses.

With respect to VXTe, we believe via conversations and significant pull from both customers and peers in the market that VXTe monetization remains a midterm opportunity via Dril-Quip providing the IP kit to our peers for delivery to end customers. With wellheads, as a best-in-class wellhead provider, we believe both our superior technology and qualification lend themselves to partnering with multiple peers in integrated offerings. Finally, with our connectors, we believe that real opportunity exists to partner with pipe providers around the world to build out better supply chains to improve delivery to our customers. The common theme of these strategies is to expand share while reducing overall industry capacity. Second, we have a downhole tool business that we believe has not fulfilled its potential.

We would expect to have a business here that has a market share similar to our wellhead franchises in most markets. Quite frankly, we've struggled over the last few years with that business. But we've laid the foundation in 2020 for significant growth in 2021. We have a new leader. We've shuttered underperforming bases. We place smart bets with stock and added business development resources in key regions. Further, we are only beginning to capitalize on our technology as outlined via our XPak DE technology. Finally, as I'm sure you followed, we've moved from an organization of transformation to an organization that demands real annual productivity improvements.

These productivity initiatives span our organization and will make us nimble in difficult times while allowing us to scale up when the market returns. Productivity and LEAN are now the way we do business and will serve us well in good and bad times. As we look to the market increasingly focused on energy transition, we are continuing to be green by design, delivering lower carbon options for our customers, continuing to drive R&D that reduces the carbon footprint for our customers and following our customers in their transition. While we are in the early stages of our R&D, rest assured that you can expect us to bring the same level of innovation to energy transition that we have to our customers over the last several decades.

In conclusion, the culmination of all these efforts leads to increasing market share by using technology and execution as a differentiator. We will be keenly focused on free cash flow generation in a competitive free cash flow yield to attract investment and ultimately benefit our shareholders. As Raj indicated, we are continuing several key working capital reduction initiatives in 2021. We take these commitments seriously and have tied our annual performance compensation toward meeting these goals. I look forward to providing further updates on the progress we are making across all our strategic areas in the coming quarters and sharing the benefits of success with our employees, customers and shareholders.

I will now turn the call over to the operator to open up the line for questions.

Questions and Answers:

Operator

[Operator Instructions] First question comes from Sean Meakim with JPMorgan. Please go ahead.

Sean Meakim -- JPMorgan -- Analyst

Thanks. Hey, good morning.

Blake T. DeBerry -- Chief Executive Officer

Good morning.

Sean Meakim -- JPMorgan -- Analyst

I'm really starting to enjoy these annual chat that you guys put together. A lot of great information. So thanks for doing it. To start off with orders, I think it's really -- one of the key focuses for investors, in the short term, the $40 million to $60 million per quarter guide is in effect setting the bar at not only trough levels. And maybe the midpoint implies a bit better than what you've got in 2020, but it's a similar range or how you've been thinking about the business.

But beyond '21, I think there's more room for optimism, as you noted, in terms of where in the macro, where offshore spending can go? And then specifically to Dril-Quip, there's the potential for the new product innovations to garner more awards and then the peer partnerships also seem to offset the possibility of faster growth relative to what the overall market offers. So maybe could you just help us think about what are the -- if we're to have this conversation a year from now, and we look back on what '21 offered you. What are the potential outcomes that could deviate from that base case range? And if anything, it would be nice to kind of do a little more block building toward what the medium-term looks like as some of these initiatives actually flow through into the financials?

Blake T. DeBerry -- Chief Executive Officer

So, Sean, let me pass that to Jeff because he's doing a lot of work on the peer-to-peer stuff, which I think is probably the biggest focus here. So...

Jeffrey J. Bird -- President and Chief Operating Officer

Yes. So a few comments there. We talk about that $40 million to $60 million range. If you look at the first half of the year, it's probably going to be closer to that $40 million range, ramping up in the back half of the year. If we think about things like peer-to-peer and some of the large tenders, let me separate those out. There are a number of items right now from a tender standpoint that are in play. They keep getting pushed out month-to-month, quarter-to-quarter right now.

So we're optimistic those are going to land in the year, but we're optimistic that they're likely to land in the back half of the year. Now as we've talked about earlier, there's not a lot -- it doesn't take a lot to move something above or below that $40 million to $60 million range. But I think you should expect that to be $40 million to $60 million on the low side at the beginning, high side at the end. If we think about the peer-to-peer, we're already working on a number of those relationships today.

You likely won't see a big splash around that in the first half of the year. But I think if you're sitting here a year from now, what you'd probably see is increased bookings as a result of those peer-to-peer relationships. So we're having great conversations in a number of areas. And those will start to show up in the bookings, probably the last half of this year, probably candidly more the fourth quarter of this year in a meaningful way and maybe early next year. If we think about the peer-to-peer, just touching on those, there's really two or three areas we see that. We've talked a lot about wellheads and our wellhead conversations are probably more advanced than any of our other conversations. And think about that as really an opportunity that instead of us selling the wellhead to an end customer, often our customers like to buy the tree and the wellhead together. And this is an opportunity for us to work with other tree providers to provide the wellhead to them.

So they've got a more competitive offering to the end customer. On the connector side, we're a little bit earlier stages in that connector side, but there's really some opportunities there, we believe, to pair up with pipe manufacturers around the world and be more thoughtful about how we can provide a better supply chain to our end customers. And then we've talked a great deal about VXTe monetization and that's probably a little -- that's probably the furthest out of any of them. There's some technology work that needs to be done with a number of the tree providers there, but there is interest both on a customer side and on a tree provider side as well.

Sean Meakim -- JPMorgan -- Analyst

That's great. Yes, I think that really frames the short-term and the medium-term well. So then maybe on margin progression. So you noted revenue flat to down in '21. That makes sense based on how orders shook out and what you're expecting for this year, 40% decrementals, you're holding for a recovery. Can we maybe just focus on gross margins and talk about the potential range of outcomes there, the different levers, whether it's mix, throughput, etc, just how we think about the progression for gross margins, I think, would be helpful.

Raj Kumar -- Vice President and Chief Financial Officer

Sean, this is Raj. Yes, talking about profitability in relation to gross margins. If I look into 2021, I talked about the 40% decrementals. We are holding a bit of cost in anticipation of the recovery that Jeff has alluded to. And in terms of mix, we're seeing a very similar mix from '20 going into '21. So I wouldn't say there's any major shift there. The thing that we're going to be cognizant of is the cost actions that we did last year are going to flow through. The full year annualized cost actions are going to flow through into this year. So that's going to be a help there.

We're also shifting our focus. I mean, we've always had this LEAN focus, this productivity focus, and that's going to help us this year. We are looking at $10 million of upside there, of which $5 million would hit into 2021. So on an annualized $10 million is a good guide. We are seeing some headwinds. I talked on the call about -- early on in the script, I talked about the lapsing of the government subsidies. So that's going to be a headwind for us in terms of margins. That's around $3 million to $4 million of headwind that we're going to see. And we have, in this environment, reinstated some -- the variable compensation. I mentioned we have tied that to the free cash flow initiative because that is so critical for us in this environment. But that's also in some estimation, a headwind for us. So those are the puts and takes as I look at margins going forward.

Sean Meakim -- JPMorgan -- Analyst

That's really helpful. Thanks everybody. Thanks, John.

Jeffrey J. Bird -- President and Chief Operating Officer

Thank you.

Operator

The next call comes from James West of Evercore ISI. Please go ahead.

James West -- Evercore ISI -- Analyst

Hey, good morning guys. James question on free cash flow. And understanding that you guys are focused on it and management compensation is tied to it. So there's definitely -- it's a target area for you. Is there something within perhaps the inventories that you're unable to move because of longer cycle equipment? Or is this -- what are we missing? Why are we not converting some of the working capital faster than one would expect?

Raj Kumar -- Vice President and Chief Financial Officer

So James, thanks for the question on the inventory aspect of working capital. Last year was a unique year, right? So we had to deal with the delays, the both on the customer side as well as on the vendor side, where we had to receive stuff a bit early and then we had shipment interruptions, etc. So there were some headwinds against what -- on the inventory side.

Now I want to shift to '21 and with what we've put together in terms of information technology, around inventory and being better able to manage it, given the tools that we've put in place, I think you're going to see a very different environment in '21, granted that we are flat to slightly down in terms of revenue. So it's more of a gradual recovery, and that's a headwind in terms of inventory liquidation. But I can quite confidently say that we should see a year-over-year decrease on total inventory levels. You should expect anywhere from $15 million, with a stretch, maybe up to $20 million of inventory reduction.

James West -- Evercore ISI -- Analyst

Okay. Okay. Great to hear. And then, I think a question from me, maybe for Blake. Within the customer base right now. I would assume that any inventory they had taken from you or any -- or as they taken from you, they kind of destocked this already, whether it's wellheads on especially, but I guess, one, is that the case? And two, could that lead to perhaps some type of -- I understand the market will be a gradual recovery, but maybe a little bit more of a bump when people get back to -- as people get back to work because they need to kind of restock their own inventories?

Blake Holcomb -- Director of Investor Relations.

Yes, that's a good observation, James. So unlike the in '14, '15 time frame where our customers had a pretty high anticipation of activity level they cut back. We don't have that in this down cycle. And our customers had pretty much burned through their inventory in that period. And so currently, where we believe their inventory is with the activity level, it's not going to take much -- many wells drilled before that inventory is burned down, and then the reorder cycle will commence. So once the activity level picks up, I think you're going to see bookings respond pretty quickly.

James West -- Evercore ISI -- Analyst

Right. Okay, all right, great, thanks guys. Thanks, James.

Blake T. DeBerry -- Chief Executive Officer

Thank you.

Operator

Next question from Taylor Zurcher, Tudor, Pickering and Holt. Please go ahead.

Taylor Zurcher -- Tudor, Pickering and Holt -- Analyst

Hey, good morning guys.

Jeffrey J. Bird -- President and Chief Operating Officer

Morning.

Taylor Zurcher -- Tudor, Pickering and Holt -- Analyst

Morning. The first question is on some of the comments you made on the energy transition. Clearly, the e-Series of products you have is one avenue to kind of effectuate that change, at least within your existing product portfolio. You also mentioned in the presentation some opportunities you're exploring around carbon capture and storage and geothermal. And so I'm curious on that kind of suite of the market or section of the market. Are those things that you could apply your existing skill set and existing technology know how to kind of wait into? Or would we be thinking more about sort of some inorganic growth opportunities to kind of weight into those markets?

Jeffrey J. Bird -- President and Chief Operating Officer

Yes. So this is Jeff. We've done a couple of things there, rightly, as you point out, all of our customers have a carbon reduction target. And most of those targets, we believe, are going to come on the back of their vendors. So we're doing the right things there from green-by-design standpoint to help our customers reduce their carbon footprint. If you think about carbon capture specifically, that's an area where, candidly, there's a fair amount of overlap right now, and we have products that we could bring to bear almost immediately around carbon capture.

And then as you think longer-term on the renewable side, that's where we'll follow our customers. We've really done a good job, I think, over the last five, six, 10 years on the R&D front. So we do think we have the intellectual horsepower internally to bring R&D to bear in that area as well. To that end, we've actually recently carved out a specific group that's now working directly for me. To start to look at both carbon reduction, carbon capture and then longer-term around the renewable side as well. We wouldn't be afraid of M&A. But right now, I think we're looking at it more from an organic standpoint than an inorganic standpoint.

Taylor Zurcher -- Tudor, Pickering and Holt -- Analyst

Okay. Great. And my follow-up, you touched on sort of the margin profile moving forward. And you'll get some extra cost out with the LEAN initiatives. On the flip side, the government subsidies rolling off will be a bit of a negative headwind. And then the other negative headwind are some of these COVID impacts that are still having a meaningful impact on the margins today. Can you just talk about how you see some of that COVID impacts hopefully lessening over the first half of the year? Maybe it takes longer than that. But any color there would be helpful.

Raj Kumar -- Vice President and Chief Financial Officer

Yes. So, Taylor, this is Raj here, by the way. If you look at last year, I think we had about a $15 million headwind from COVID. This was due to all the delays and all the issues we had in terms of manufacturing, etc. Going into this year, I would expect that as the year progresses and as vaccinations get rolled out, as the year progresses, I would expect that, that sort of that sort of headwind trend line is going to abate, evidently, for the first half of the year. I'm not as confident as the back half of the year, Taylor.

Taylor Zurcher -- Tudor, Pickering and Holt -- Analyst

Dealer OK, understood. Thanks for your honest the answers. Thank you.

Operator

Next question comes from Connor Lynagh, Morgan Stanley. please go ahead.

Connor Lynagh -- Morgan Stanley -- Analyst

Yeah, thanks. I think,James is asking something along these lines. But I was wondering if you could just sort of sketch out if we're thinking about cash flows for 2021. And ultimately, where I'm driving with this is trying to think through the exit rate. But can you just help us understand big cash moving pieces, how much of working capital release you're expecting? And basically, what I'm wondering is if you could sort of frame for us as we look out longer in time, is this mid-single-digit free cash margin, how we should think about your business? Do you think you can do better? Do you think you can do worse? Just thoughts around that.

Raj Kumar -- Vice President and Chief Financial Officer

Connor, this is Raj. Yes. So talking about the major facets of free cash flow, right, looking at working capital. On the DSO side, on the accounts receivable side, last quarter was a horrendous quarter in terms of our customers managing their balance sheet and doing window dressing at the end of the year. We expect that situation to improve. It's just that we're stepping up our collections efforts. We are getting more in tune with our customers and understanding how they're going to convert accounts receivable to cash. I do expect that those gymnastics that they play are going to happen every quarter. So we've kind of factored that in.

We're going to do what we can control. I'm going to say that I expect this year with whatever we are doing, that DSO should improve about 30 days year-over-year. On the inventory side, I already talked about -- I mentioned to James, I'm looking at a $15 million to $20 million release of inventory, given all the actions that we put in place around there. On the DPO side, it's probably going to be around the periphery. We're running around 60 days. There's still some opportunity, but it's not going to be that as material as what you're seeing on the inventory and the AR side. We also have, from a cash position, opportunity that was delayed due to the pandemic last year from real estate sales.

So we do expect $6 million to $7 million of real estate sales that should come in this year to help in our cash position. So with all of these, I would say that I expect a 5% yield on revenue, right, on revenue is achievable in 2021. In fact, if I was looking at Q1, I'd say we could potentially meet or exceed that number. And on a longer-term basis, you've got to understand that we are a long-cycle business. We have a projects component to our business. And when there is a recovery, there is going to be some build to inventory, right, because of the project nature. And when we look over the cycle, I would say that a 3% to 5% yield on revenue is a reasonable expectation.

Connor Lynagh -- Morgan Stanley -- Analyst

Got it. There was a lot of helpful context there. So appreciate it. I mean, I guess just at a higher level, you've got a very substantial cash balance. You'll be free cash positive this year, admittedly, some of that's working capital. But how do you think about that cash balance? What's the sort of investment priorities, return of capital? You've talked in the past somewhat about M&A. But I think if we look at other sectors of the economy, the context has been that valuations are quite high because of what's going on in the public markets, but just any thoughts around that would be great.

Raj Kumar -- Vice President and Chief Financial Officer

Yes. So I talked about keeping some dry powder for a recovery. We remain cautiously optimistic over '21. But going into '22, we think the market is going to be a bit more buoyant than what we're seeing right now, evidently. So we have to put aside maybe $150 million to $200 million to help us there on the upside. We do look at M&A. We look at the R&D side, things that can accelerate our technology road map, that will probably be cash related. But on transformational R&D, we don't see using cash or debt for that matter in terms of getting a transaction done. On the transformational side, we will always stick to -- I think our equity is the best currency for us right now.

Connor Lynagh -- Morgan Stanley -- Analyst

Thank you.

Raj Kumar -- Vice President and Chief Financial Officer

Thank you.

Operator

[Operator Instructions] Next question is from Dave Anderson of Barclays. Please go ahead.

Dave Anderson -- Barclays -- Analyst

Hey, good morning guys. question on Brazil. This is a country you've had a strong presence in for many years. Brazil might be one of the few offshore markets to grow this year. I'm pretty sure you fulfilled all -- most, if not all of the prior contract. I was wondering you just kind of talk about the status down there. Does Petrobras still have an inventory to work through? I believe a lot of that equipment wasn't still OK to move through. But maybe just kind of talk about in terms of what you heard about in new tender. I think you had talked about some of that a little bit in the past. So maybe just an update on Brazil, please.

Blake T. DeBerry -- Chief Executive Officer

Yes. Certainly. So your memory is correct. Petrobras had a substantial amount of inventory. When we first got those numbers, we kind of ran the math in their run rate. And we figured that 2020 would be the logical time they would come out for bid. And in fact, Petrobras had announced they were doing multiple tenders for a total of 70 wellhead systems that, that was in the works during 2020. All of that work is still on the cards. The bids are still out there, but it has just slid to the right. So at present, we haven't -- we're in discussions with them about tenders coming up, but there is nothing active, but we do expect that to happen early on in '21.

Dave Anderson -- Barclays -- Analyst

And assuming that does come through, like where are you with your facility at Macae down there? I'm assuming it's way scaled down now. I mean are there challenges to bring that back up to meet that? I mean if you're talking 70, that's not a huge number in terms of wellheads, but just how do you thinking about that?

Jeffrey J. Bird -- President and Chief Operating Officer

Yes. This is Jeff. We still have the facility in Brazil. And candidly, you're right to say we did scale it down some. However, we have had some recent activity there, and we're able to scale it back up again pretty quickly. So we're confident that if and when that order is received, that we'll be able to scale back up again. It shouldn't be a problem. We have a significant amount of work there from an aftermarket operation standpoint.

Dave Anderson -- Barclays -- Analyst

Of course. I saw the new CEO in Petrobras, so who knows where that's going. That's a totally different question. We don't have to talk about that today. One other question, Jeff, you had talked about these partnerships with tree manufacturers on the wellhead side. Something I've always kind of thought about, they certainly do go hand-in-hand. You're talking about pursuing those with some tree manufacturers. You, of course, have also -- are a tree manufacturer.

You've tried to build that market out for many years. So doesn't this create some conflicts out there with that? Of course, we know that one of your major competitors there also is a tree manufacturer. So maybe can you just expand a little bit on that partnership agreement, please?

Jeffrey J. Bird -- President and Chief Operating Officer

Yes. So the way we think about it is this, our sweet spot, really, from a tree standpoint, are the smaller independents, if you will, is our sweet spot. When you get into the larger, the IOCs and some of the larger NOCs, we're a little bit more challenged there from a tree standpoint. But candidly, we're probably better positioned from a wellhead standpoint than a lot of other tree manufacturers. So those customers where it's not necessarily our sweet spot, that's where we think it makes sense for us to partner with other tree providers and go to market.

And really, while we're talking about them independently, the VXTe and that wellhead peer-to-peer kind of go hand-in-hand, if you think about it, right? Imagine us providing the wellhead to those tree providers, but also perhaps supplying the VXTe technology. As I said earlier, VXTe is going to take a little bit longer because there's some technical hurdles that we've got to work through with the tree providers, but those are both opportunities that we don't really think will conflict. There might be a little bit of conflict at the edges, but not large.

Dave Anderson -- Barclays -- Analyst

Okay. And then in terms of -- when you say a partnership, does that mean a partnership in terms of how you're bidding out projects together? Does that mean that's a partnership in terms of kind of marrying the technologies together and kind of integrating them? Just maybe just a little bit more on that? Sorry, I'm taking up so much time on the call today.

Jeffrey J. Bird -- President and Chief Operating Officer

Yes, no worries. I think on the wellhead side, you'd probably likely see -- just think about it very simply as a price list with lead times and pricing that we would negotiate with a tree provider that we'd be able to provide them they would integrate our technology, our wellhead into their tree on that side. On the VXTe side, it's a little bit more integrated. Think about them providing the tree and us really providing the kit -- the IP kit, if you will, underneath the tree, which would, by the way, on VXTe, would also include the wellhead.

Dave Anderson -- Barclays -- Analyst

Thank you very much guys.

Jeffrey J. Bird -- President and Chief Operating Officer

Thanks.

Operator

This concludes our question-and-answer session. Now I'd like to turn the conference back over to Mr. Blake DeBerry for closing remarks.

Blake T. DeBerry -- Chief Executive Officer

Well, first off, I just want to thank everyone for attending the call this morning, and appreciate the questions and your input. Just close with that we are much more optimistic going into '21 than we were at the start of the pandemic, and we believe we've positioned the company pretty well for the environment that we're in. And we like our strategy going forward. And I look forward to updating you on our progress as we come to the close of each quarter with our fireside chats. So until then, take care.

Operator

[Operator Closing Remarks].

Duration: 48 minutes

Call participants:

Blake Holcomb -- Director of Investor Relations.

Blake T. DeBerry -- Chief Executive Officer

Raj Kumar -- Vice President and Chief Financial Officer

Jeffrey J. Bird -- President and Chief Operating Officer

Sean Meakim -- JPMorgan -- Analyst

James West -- Evercore ISI -- Analyst

Taylor Zurcher -- Tudor, Pickering and Holt -- Analyst

Connor Lynagh -- Morgan Stanley -- Analyst

Dave Anderson -- Barclays -- Analyst

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