Forum Energy Technologies, Inc.

Good morning, ladies and gentlemen, and welcome to the Forum Energy Technologies' fourth quarter 2020 earnings conference call. My name is Angela, and I will be your coordinator for today's call. At this time, all participants are on a listen-only mode, and all lines have been placed on mute to prevent any background noise. As a reminder, this conference call is being recorded for replay purposes. I will ask to turn the conference over to Lyle Williams, Chief Financial Officer. Please proceed, sir.

Thank you, Angela. Good morning and welcome to Forum Energy Technologies' fourth quarter 2020 earnings conference call. With me today are Chris Gott, Forum's chairman and chief executive officer, and Neil Lux, our chief operating officer. We issued our earnings release after the market closed yesterday and is available on our website. Before we begin, we would like to caution listeners regarding forward-looking statements. Our remarks today may contain information other than historical information. Please note that we are relying on the safe harbor protections afforded by federal law. All such remarks should be considered in the context of the many factors that affect our business, including those disclosed in our Form 10-K along with other SEC filings. Management statements may include non-GAAP financial measures. For a reconciliation of these measures, refer to our earnings release. This call is being recorded and a replay of the call will be available on our website for two weeks. I will now turn the call over to Chris. Thanks Lyle and good morning. After six years of oil and gas activity decline, 2020 stood out as a particularly challenging year. As a result of the energy demand destruction caused by COVID-19, drilling and well completion activity globally collapsed at the end of the first quarter, before beginning to improve slowly in the second half of the year. FET top line results followed that trend with a 46% decline in annual revenue from 2019 to 2020, as drilling activity measured by the average US rate count declined 55%. The response by the forum team was outstanding. We moved swiftly to manage cash, reducing our cash costs by 39% in the year, and focused on monetizing inventory, generating over $50 million of cash flow from inventory reductions. As a result, our decremental adjusted EBITDA margins were a respectable 24%, and the company posted positive free cash flow each quarter, with the exception of the second, where restructuring and severance payments drove free cash flow negatively. We also made excellent progress shoring up our balance sheet during 2020, reducing our net debt from $342 million to $201 million at year end, and extending the maturities of our bonds to 2025 and our bank credit facility to late 2022. I am proud of our team for their decisive actions to protect the company and its shareholders. The fourth quarter reflected an inflection point in results for FET. Both the U.S. drilling recount and the crack fleet count increased by 22% sequentially. Overall, our bookings increased 34%, and the book-to-bill ratio was our highest level since the market turned over in 2018. Revenues increased 9% sequentially to $113 million, in line with our expectations. Our adjusted EBITDA increased by $7 million to negative 2.6 million ahead of our expectations with the benefit of our strategic cost cutting and favorable mix. We have taken major decisive action at FET during this downturn. As important as our cost cutting and balance sheet repair have been, I think the most transformative change we have made is the recent high grading of our product portfolio. We are now focused on our highest margin and most differentiated products while exiting or de-emphasizing our more commoditized lower margin products. This significant change did result in the asset impairments in Q4 that Lyle will describe shortly. The key point is with these changes, FET will be a simpler, higher margin, and a higher return company. Lyle? Thank you, Chris. During the fourth quarter, the rebound in oil and natural gas prices led to an increase in drilling and completions activity and higher sales of our consumable products. As Chris discussed, we continued to execute on our strategic restructuring actions, resulting in additional operating cost reductions. And we closed on the sale of our ABZ and Quadrant valve brands for $105 million in cash proceeds, lowering our net debt by approximately one-third. Let me start by providing further information about our segment operating results for the fourth quarter. Our drilling and downhole revenue in adjusted EBITDA increased sequentially by approximately $7 million and $5 million, respectively. Our drilling technologies product line accounted for the majority of these increases. The 22% sequential increase in the U.S. rig count resulted in higher demand for our consumable drilling rig components. And international new rig projects drove an increase in our premium handling tools and drilling capital equipment. Our subsea product line continues to penetrate non-oil and gas markets with a substantial contract win which contributed to a total of $28 million of orders for this product line in the fourth quarter. Demand for our artificial lift and casing hardware products was consistent with levels in the third quarter. Let me insert a comment here about the geographic mix of our revenue. While the U.S. is an important source of revenue for FET, our non-U.S. revenues are growing in importance, led by our drilling and substitute product lines. In the fourth quarter, revenue from outside the U.S. accounted for over 40% of our consolidated revenues. We expect activity in this more stable market to expand further in 2021. For our completion segment, the increase in U.S. hydraulic fracturing activity drove a 56% increase in revenues and a $5 million sequential increase in adjusted EBITDA. Revenues were especially higher for our consumable coil tubing and wireline products required by service companies to increase well completions. Production segment revenues declined sequentially by 20% and adjusted EBITDA declined by $3 million. Our valve solution product line continued to feel the negative impacts of low demand from end customers in the midstream and downstream markets. This low demand was exacerbated by inventory destocking buyer distributors. Revenues for our production equipment product line were also down, primarily due to lower shipments to customers in the northeast, following large shipments in the third quarter. Orders for the production segment were up $1 million sequentially, and the book-to-go ratio was 1.1, indicating higher activity levels anticipated in 2021. On a consolidated basis, our net loss for the fourth quarter was $33 million, or $5.85 per diluted share. Excluding $6 million of net special items, adjusted net loss for the fourth quarter was $4.80 per diluted share, a sequential improvement of $1.20. A complete reconciliation of adjusted net loss is provided in our earnings release for your reference. The $6 million net adjustment to our income is comprised of an $88 million gain on the sale of our ABZ and Quadrant valve brands, which is offset by $85 million of asset impairments and restructuring costs, as well as $7 million in foreign exchange losses and $2 million of transaction expenses. Let me provide additional detail on these adjustments. On December 31st, we sold the assets associated with the ABZ and Quadrant valve brands to Anvil and Smith Cooper International for $105 million in cash. For context, in 2020, the ABZ and Quadrant product families generated revenues of $42 million and EBITDA of approximately $12 million. $2.4 million of that EBITDA was recognized in the fourth quarter. We are pleased with the value of the transaction at nearly 11 times annualized fourth quarter 2020 EBITDA and it being fully funded with cash at closing. The cash received reduced our net debt at December 31st from $306 million to $201 million and provides FET with liquidity to consider strategic alternatives in the current market. In January, we repaid the $13 million outstanding on our ABL with these proceeds. In addition to the sale of ABZ and Quadrant in the fourth quarter, our teams made significant progress executing our strategy of high grading our product portfolio and reducing fixed costs. In the quarter, we made changes to a number of products, consolidating manufacturing facilities and rationalizing our product offerings. Neil will provide details on the benefits of these moves in his prepared remarks. As a result of these changes, we recognized impairments, primarily of inventory, associated with products we are exiting and operating leases for facilities we are closing, as well as costs associated with those facility consolidations and severance charges. These impairments total $85 million. The sale of ABZ and Quadrant and the strategic rationalization actions set FET up for success in this rising market with a strengthened balance sheet, leaner cost structure, and a portfolio of differentiated products. Our free cash flow after net capital expenditures in the fourth quarter was $4 million. This result benefited from improved operations partially offset by costs paid for severance and facility closures. Proceeds from the disposition of certain capital assets generated $2 million of cash in the fourth quarter, and we decreased networking capital by $24 million due to strong collections and a solid reduction in our inventory. In the first quarter, we expect our pre-cash flow to be slightly negative as networking capital increases and the timing of payroll and tax-related payments offset our anticipated increase in EBITDA. Interest expense was $9 million in the fourth quarter, including non-cash amortization of the fair value discount on our bonds. And depreciation and amortization and stock-based compensation were $12 million and $2 million, respectively. We expect these expenses to remain at similar levels in the first quarter. Adjusted corporate expenses were $5 million in the fourth quarter, and we expect them to be up slightly in the first quarter due to timing of certain expenses. We ended the fourth quarter with $129 million of cash and $111 million of availability under our revolving credit facility for total liquidity of $240 million. This should be sufficient to fund operating cash needs for the foreseeable future. Our net debt outstanding at the end of the fourth quarter was $201 million, calculated as $330 million of principal amount of debt outstanding, less $129 million of cash. In the fourth quarter, we redeemed the remaining $13 million of 2021 notes. Following that redemption, no 2021 notes remain outstanding, and our ABL revolving credit facility now matures in October of 2022. In addition, in the fourth quarter, we completed a one for 20 reverse stock split, which brought Forum into compliance with the NYSE's trading requirements. We now have 5.58 million shares outstanding. Now let me turn the call over to Neil to discuss our key initiatives and market opportunities in 2021.

Thank you, Lyle. Good morning, everyone. To begin, I'd like to thank the employees of FBT for embracing our number one core value, no one gets hurt. Our response to COVID-19 and our safety results were outstanding. in 2020. We finished the year with a total recordable incident rate of 0.53. We should all be incredibly proud of this result. As part of our strategic restructuring effort, we re-evaluated our product portfolio at a granular level. What was evident from this evaluation is that we have a number of products and solutions that provide significant value for our customers with limited competition and growing demand expected in 2021 and beyond. In the aggregate, these businesses generate EBITDA margins between 15% to 20% in a 400 to 450 U.S. recount environment and will have fantastic incremental margins as rig count grows towards 500 and 600 rigs. The teams that run these businesses are focused on maximizing value, developing new products and solutions, and gaining share as the market grows. We are going to continue to invest in these businesses. What was also evident from our portfolio evaluation is that we have a number of products that would struggle to perform even when the rig count rebounds to 800 units. Here, significant cost cutting and restructuring was required. During our last call, I discussed plans to eliminate at least $20 million of annual expenses. In the fourth quarter, these plans turned into actions. Within our underperforming businesses, We are consolidating facilities and product offerings. We are reducing a significant amount of fixed manufacturing costs. We have put our focus on products and solutions that customers value and that have fewer direct competitors. We have set strict profitability guidelines for these businesses, and with this strategy, we expect FEP to generate margins that meet or exceed our peers. As we look ahead to the future, FEP is in a great position to capitalize on normalizing rig count. We have a strong market position in drilling, handling tools and consumables, wireline, coil tubing, artificial lift, defaulters, and well intervention pressure control equipment. We will continue to add engineered solutions like our Serpent Series 15,000 PSI high-pressure flexible hose, which eliminates 90% of the potential leak paths on a track site. This product should significantly decrease non-productive time. We have recently completed field trials and are supplying a leading pressure pumping company six fleets worth of our Serpent Series hoses Also, as an engineered products manufacturer with a wide breadth of experience, we are well positioned to participate in the energy transition towards net zero carbon emissions. In fact, a number of our products are used in the renewable energy industry today. We provide products utilized in offshore wind farm installation, biodiesel production, and emissions capture, to name a few. As this trend continues to materialize, our teams are actively working to repurpose and redesign existing products and solutions for the renewable energy industry. Also, we are developing new products to help operators and service companies meet their greenhouse gas emissions goals. Over the next few quarters, these solutions will be introduced into the market and will have a positive impact for FDT. We have made dramatic changes to our company, These changes have positioned FET to be an industry leader. I'm incredibly excited about our future and the impact we will make. I'll now turn the call back to Chris for closing remarks.