Forum Energy Technologies, Inc.

Good morning, ladies and gentlemen, and welcome to the Forum Energy Technologies second quarter 2021 earnings conference call. My name is Carmen, and I will be your coordinator for today's call. At this time, all participants are in a listen-only mode. 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 now turn the conference over to Lyle Williams, Chief Financial Officer. Please proceed, sir.

Thank you, Carmen. Good morning, and welcome to Forum Energy Technologies' second quarter 2021 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 it 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 our 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. A strong recovery in drilling and completions activity is well underway, and FET is taking full advantage. We are now seeing our customers place orders for our manufactured capital equipment as well as our short-cycle consumable products. Our inbound orders increased sequentially by 15%, sequentially the fourth successive quarterly increase, and orders for our current business portfolio are now nearly back to pre-pandemic levels. The higher order levels are now beginning to flow through our financial results as revenue increased sequentially by 20% in the second quarter. With our growing backlog and stable and strong brands and products, We expect continued strong revenue growth in the second half of this year and continuing into 2022. Market conditions for FET are favorable as our customers have largely exhausted their ability to cannibalize their stacked equipment and have depleted their inventories of spares. The positive trends in global drilling and completion activity coupled with our customers' need to restock their inventory and replace old equipment sets up outstanding market fundamentals for FET's domestic and international business. In addition, our non-oil and gas and energy transition businesses continue to expand with excellent opportunities for the future in the areas of GHG reduction, energy efficiency, defense, and infrastructure. With the rapid improvement in demand, we are seeing supply chain constraints, as others in our industry have commented. Such things as raw materials and logistics have shown especially rapid and sharp price increases. We cannot pass through these cost increases as quickly as they have changed, but we will make it up over time. Neil will talk more about this in a few minutes. We doubt that we will be able to fully offset the supply chain inflation in Q3, but by Q4, more of our price increases will be flowing through our results. By the end of this year, we expect our EBITDA run rate to be at $10 to $14 million per quarter. And based on what our customers are now saying about their growth plans and assuming the global economy continues its current trajectory, we have excellent growth prospects for 2022. We generated nice positive free cash flow in Q2, despite the increase in our receivables, and we expect to be positive in cash flow in the second half of this year. We believe our liquidity and cash resources will be more than adequate to fund our continued growth. Now let me turn it back to Lyle. Thank you, Chris. I'm pleased to report on the strong operating results delivered by the FET team this quarter. Our top line growth exceeded U.S. rig count growth with bookings increasing by 15% and revenue increasing by 20%. The correlation of our revenue with U.S. rig count is holding and we see upside potential as we ship large orders of drilling and subsea capital equipment and as we grow our non-oil and gas businesses. Revenue from markets outside the U.S. provide additional sustainable upside for FET. Total revenue from outside the U.S. was 44 percent of revenue in the second quarter, up 28 percent sequentially, and 40 percent when compared with the same period last year. Our second quarter bookings reflect our strong position in activity-driven, short-cycle consumable products and continued demand growth for our differentiated capital equipment. In particular, our drilling and downhole segment led the strong order performance, with a 39% sequential increase in bookings, including large drilling and subsea orders that Neil will discuss. Our revenue increased by 20% to $137 million in the quarter. Revenue grew in almost every product line, including sizable project shipments of drilling rig handling tools, and North American completion products. EBITDA increased by $5 million to $7 million, which was in line with our $6 to $8 million guidance for the quarter. We would have generated even higher EBITDA growth in the quarter, but for the impact of freight and steel inflation that we are seeing. Looking ahead, our guidance for the third quarter is revenue to be between $145 and $155 million in EBITDA to be between $7 and $9 million. Let me share further information about our segment operating results for the second quarter. On a sequential basis, our drilling and downhole revenues increased 26%, or $13 million, and adjusted EBITDA increased by $4 million. Several large international projects for our drilling technologies product line that shipped in the quarter accounted for the significant revenue increase for the segment. We also saw a nice increase in revenue for our artificial lift and subsea products. In our completion segment, revenue and adjusted EBITDA increased by $9 million and $2 million, respectively. Revenue grew for all product lines in the segment, led by our pressure pumping products that continue to benefit from the strong activity levels in this market. Incremental EBITDA margins for the completion segment were lower than we typically experience due primarily to the aforementioned material and freight cost increases. In our production segment, bookings and revenue tend to be lumpy due to the size and timing of individual orders. As a consequence, overall segment orders decreased sequentially while revenues increased $1 million, and the mix of lower margin production equipment combined with cost inflation resulted in $700,000 of lower EBITDA for the segment. To wrap up segment results, our adjusted corporate expenses were $6.5 million in the first quarter in line with our expectation. We anticipate similar results in the third quarter. The special items called out in the release include a $4 million loss on extinguishment $3 million of restructuring and other costs, and $1 million gain on foreign exchange. Free cash flow of $4 million exceeded our guidance for the quarter as working capital decreased more than expected. We paid $14 million of interest in the second quarter from our semiannual interest payment and a small additional amount tied to the debt we retired in the second quarter. Net of this interest payment unlevered free cash flow for the quarter was $18 million. We expect free cash flow in the second half and full year to be positive. We ended the quarter with total liquidity of $186 million, comprised of cash on hand of $60 million and $126 million of availability under our asset-backed credit line, which remains undrawn. In the second quarter, we repurchased 42 million face value of our 2025 convertible notes, leaving a total outstanding balance of notes of $259 million. Under the indenture for these notes, we have an obligation related to the net proceeds from our valves divestiture that occurred at the end of last year. This obligation requires us to return what is defined as excess cash proceeds from the divestiture to holders of the notes within one year of the closing of the transaction. Based on the cash deployed to repurchase notes this year and capital expenditures for the remainder of 2021, we are pleased to share that this obligation has been satisfied and the full $60 million of cash on our balance sheet is now available for deployment in growth initiatives. I'll wrap up with a discussion of our long-term debt and the benefits of conversion of our debt to equity. Of the convertible notes outstanding at the end of the second quarter, roughly one half would mandatorily convert to common stock when stock prices trade above $30 for 20 days. The impact of that conversion would increase our diluted share count from $5.5 million to $10 million and would be a significant benefit to the FET balance sheet, reducing net debt by approximately $120 million to about $80 million. on a pro forma basis as of June 30th. Our resulting debt to market capitalization would be approximately 26%. The prospect of this significant reduction to our leverage ratio, improving market fundamentals and strong financial results provide confidence in the stability of FET and should improve equity valuation. Other small and mid-cap oilfield service equipment companies with low leverage ratios currently trade in an enterprise value of 6 to 10 times 2022 EBITDA. As our core markets and FET financial results continue to improve, we look forward to the conversion of our debt and a significantly improved balance sheet. Now let me turn the call over to Neil.

Thank you, Lyle. Good morning, everyone. To begin, I'd like to thank the employees of FET for their dedication and professionalism. While we are a smaller, more focused company today, our employees continue to deliver big results. And they have met rapidly increasing customer demand while maintaining a strong safety culture. We have some of the best employees in the industry and it is exciting to be a part of this great team. Shifting to our customers, Momentum for FET's products and solutions continues to increase. Demand for consumable and aftermarket products is very strong. We are capitalizing on outstanding brands and market share to deliver great results in our wireline, handling tools, mud pump consumables, coil tubing, artificial lift, and subsea businesses. These businesses deliver high incremental margins and will grow as fast or faster than rig count over the long term. In our last call, I mentioned strong quoting activity for capital equipment components. These components are either packaged on new assets or used to upgrade underutilized assets for use in more challenging environments. During the second quarter, quotes were turned into orders. The subsea team booked three remotely operated vehicles and launch and recovery systems for use in offshore Brazil, including two ROV orders received in the third quarter. We have booked a total of seven ROVs this year. These are highly engineered products used in incredibly challenging environments, and is the preferred choice. In addition to that great win, we were awarded a large handling to order for a 17-rig new build program in Asia. The end user's technical specifications are challenging, and the Forum B&Z Oil Tools team had the best solution. Even in an environment where price still matters, the customer recognized our value proposition. We have a lot of great products, and I could talk all morning about each of them, but for the sake of time, I will end with our FR-120. This is another solution where FET stands above the competition. Our iron roughneck pipe handling tool has the lowest cost of ownership in the industry and is the ideal device for larger diameter drill pipes. The FR-120 meets drilling contractor requirements to go deeper, faster, and straighter. It is a clear winner in the market, and we are doing everything we can to meet surging demand. As with many others in our industry, we are seeing headwinds relating to raw material prices, lead times, and freight costs. Depending on the product, steel costs are up, from 40 to 200 percent since the start of the year. Shipping costs from Asia to the U.S. are three times higher year over year along certain lanes. Deliveries of key hydraulic subcomponents have been delayed significantly. The combination of these issues had a second quarter cost impact in the range of a couple of million dollars. These issues will have a similar impact in the third quarter. To combat this inflation, we are pushing price increases for most products. This will have a positive impact on our book and ship business, but will not affect the backlog, which we have already booked at a fixed price. While no one likes a price increase, our customers understand the supply chain challenges our world economy is experiencing. And given the strong demand for their services, they have been able to raise prices to their customers as well. What does this mean for FVT? With our considerable backlog, existing contracts, competitive conditions, and a few markets, price increases will not materially improve our results above the third quarter guidance provided by Lyle. Given our strong consumable and aftermarket sales mix, we should see a meaningful improvement in EBITDA during the fourth quarter, as Chris mentioned in his opening remarks. Looking ahead to the future, we are very encouraged by the macro environment. World GDP is expanding towards pre-COVID levels. Oil and natural gas demand is outpacing supply and prices are signaling the need for investment. And the oil field equipment cannibalization cycle has run its course. Our customers need to upgrade their equipment for today's more challenging environment and to buy more consumables for their drilling and completion operations. FET is well positioned to capitalize on this trend with our strong brand and excellent service. We're also well positioned to participate in the coming energy transition. Our breadth of experience in engineered solutions from submarines and wind farm support vehicles to methane capture and processing to geothermal applications, we will be a key contributor in decarbonizing the world. In fact, this is not just a vision, but a reality. We are currently supplying critical components for a carbon sequestration project. Over the project's lifetime, many millions of tons of industrial source CO2 will be captured and sequestered. As an added benefit, our product has a significantly smaller carbon footprint versus the competition. This is a great start, and we are excited to be a key contributor to reducing CO2 emissions. I will now turn the call over to Chris for closing remarks.