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spk00: Good morning, ladies and gentlemen, and welcome to the Forum Energy Technologies first quarter 2022 earnings conference call. My name is Kirby, and I will be your coordinator for today's call. At this time, all participants are in 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. You may press star 1 if you have any questions. I will now turn the conference over to Lyle Williams, Chief Financial Officer. Please proceed, sir.
spk01: Thank you, Kirby. Good morning, and welcome to FET's first quarter 2022 earnings conference call. With me today is Neil Lux, our President and Chief Executive 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 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 Neil.
spk04: Thank you, Lyle. During our last call, I listed many reasons why FET is a great company and investment. Our employees, strong industry fundamentals, forums, innovative products and solutions, access to growing markets outside oil and gas, and opportunity for significant margin expansion. Since that call, our foundation has only grown stronger. We continue to recruit and retain entrepreneurial, dedicated, and customer-focused employees. Our teams make a remarkable impact for the company and are our greatest differentiator. We are thankful to have such wonderful colleagues. And I am thankful for the position we are in today. From all indications, we are at the beginning of a prolonged energy investment cycle. The unfortunate conflict in Ukraine has highlighted a trend already underway but somewhat invisible to the general public. The world needs energy and, more importantly, The world needs to invest heavily in secure energy supply. Commodity prices are trending near multi-year highs, and exploration and production companies are generating very strong free cash flows. The table is set for increases in traditional oil and gas investment. Despite favorable market conditions, we have only seen a modest increase in oil field service activity. Compared to the 2000 to 2018 cycle, U.S. rig count has grown 33% slower since the 2020 trough. Capital discipline by E&P operators has starved service companies and caused them to run their equipment as hard as possible for as little money as possible. Obsolescence, cannibalization, And human capital challenges have significantly constrained the capacity of the oil field services industry. So, what does that mean for today? New components are needed to maintain current levels of activity. I toured the Permian Basin a few weeks ago and saw stacked equipment parked near fence lines across many yards. It is hard to believe this equipment can be mobilized in its current state. So what does the future look like from here? To grow energy supply meaningfully, a lot more equipment is needed. The good news is strong utilization has allowed service companies to finally regain pricing power. This is encouraging as it will provide the capital that our customers need to make significant investments in new equipment to meet future demand. This should sustain investment and boost our capital sales in coming years, a remarkable change in trajectory. The technical demands required to drill and complete wells today is significantly greater than the last cycle. Upgrades to key components like iron roughnecks will benefit from our FR120 solution, which is capable of efficiently handling large diameter drill pipe. We see a similar theme for hydraulic fracturing operations. Traditional flow iron and manifold systems are not reliable under the pressure and continuous pumping hours required in today's completions. Our serpent series, flexible hose, and single line manifold system eliminates 95% of connections and associated downtime. These are just a few examples how our innovative products and solutions make energy production safer and more efficient. While the near-term case for oil and natural gas is clear, there is a future growth cycle for low-carbon energies like offshore wind, and FET is in a fantastic position to participate in this growth by utilizing our core competencies in engineering, designing, and manufacturing subsea remotely operated vehicles and trenchers. These specialized tools are required for the installation and maintenance of wind turbines. We believe vehicle demand for offshore wind can exceed the installed base for subsea oil and gas support in the coming decade. is an amazing opportunity for future growth, one where we can leverage our decades of expertise and subsidy towards the transition to lower carbon energy. Between traditional oil and gas markets and energy transition, we are pleased with the breadth of our top-line growth avenues. In addition, we have significant opportunities to expand profit margin in the near term. First, we are mitigating the inflationary pressures in our supply chain that was experienced in 2021. Second, demand is outstripping supply for the products our customers value and will allow for future sustainable net price benefit. Third, as an asset-light, scalable manufacturing company, we have significant operating leverage inherent in our business. I want to emphasize, that we have maintained the capacity that was built to meet much higher demand from prior periods of growth. This means we can dramatically increase our revenue within the existing footprint and leadership structure. While incremental margins will vary quarter to quarter, over the long term, we expect to generate $25 to $40 of EBITDA for every $100 of incremental revenue. If you believe, as we do, that the world is just now entering a new energy investment cycle, FET is poised for outsized earnings growth. This will benefit our balance sheet because roughly half of our debt converts to equity at a fixed stock price. And this is a unique opportunity to significantly de-lever the company and expand our EBITDA trading multiples. I am pleased with our strong start to 2022, our best result since before the pandemic. The pieces are in place. We have the fuel for long-term growth. I believe the best is yet to come. Let me now turn the call over to Lyle for more detail on our first quarter financial results. Lyle?
spk01: Thank you, Neal. Our first quarter 2022 results demonstrate the strong market demand for our products and operating leverage for our businesses. We grew our backlog again for the sixth quarter in a row with a 3% increase in bookings. Excluding a decrease in lumpy production equipment product line, FET bookings grew by over 11% this quarter. Revenues of $155 million fell in the middle of our previous guided range and EBITDA of $9 million exceeded the high end of our guidance by $2 million. On a sequential basis, revenue and EBITDA grew by $7 million and $5 million respectively, representing a 68% incremental EBITDA margin. This strong incremental margin performance includes a sequential reduction in employee medical and annual incentive compensation expenses. So on a normalized basis, incremental EBITDA margins exceeded 30%, which is well above our gross margins, reflecting the benefits of operating leverage and the fact that we began to see net price increases flow through the income statement. We expect this pricing trend to accelerate in future quarters. Let me share a few highlights from our segment results for the first quarter. Our drilling and downhole segment revenue of $71 million represented approximately 46% of total company revenues. Segment revenues increased by 7% sequentially and 46% on a year-over-year basis. Orders for the drilling and downhole segment grew by 17%, outpacing the 8% growth in global rig count. The strong booking and revenue growth were driven by increased demand for our land and offshore drilling and well construction equipment with particular strength coming from international markets. For example, in the drilling product line, we recognized revenue of $3 million for handling tool packages for four new land rigs to be utilized in Asia. And we booked another $4 million for handling tool packages for new rigs in the Middle East and Latin America. In addition, subsequent to the end of the quarter, we were awarded a $15 million five-year contract for casing hardware for a major Middle East contractor. These awards demonstrate the benefit of our exposure to growing international markets. Segment adjusted EBITDA of $9 million represents the strongest performance since the fourth quarter of 2019. Impressive incremental margins for this segment of 59% were driven by favorable mix in each of our product lines and by net pricing gains in select areas. Completion segment revenue was $53 million in the first quarter, a $2 million increase, as ongoing revenue growth was constrained by supply chain delays impacting our customers' operations and a record low inventory of drilled but uncompleted wells for E&P operators. Segment EBITDA of $5 million was flat as revenue growth was offset by a one-time $1 million reserve taken in the first quarter against certain accounts receivable. After a slow start to the year, completion segment revenues accelerated through the quarter with especially strong demand for our cables from Quality Wireline. In our production segment, first quarter results improved slightly as revenue and EBITDA each increased by $1 million. Strong incremental margins were driven by the valve product line, which benefited from improved operational execution and favorable product mix. Orders in the first quarter were $40 million, a $6 million decrease, as our production equipment product line experienced lower orders following very strong annual order receipts in the fourth quarter. Of note, our valve product line orders increased by 21%. to the highest booking level since the beginning of the pandemic. Also, the Valves Saudi Arabia facility finalized its corporate purchasing agreement with Saudi Aramco. This long awaited approval is an important milestone and paves the way for future demand. As a result of this award and subsequent to the end of the quarter, our Valves product line received a large order for Valves to be assembled and tested in our Saudi facility. To wrap up segment results, corporate costs decreased by approximately $1 million due to the timing of certain variable employee compensation costs. The special items called out in our release for the first quarter include $6 million of foreign exchange gains and $4 million of restructuring, transaction, and other costs primarily related to the modification of long-term incentive awards associated with the retirement of our former CEO. Looking ahead, the U.S. rig count has continued to climb to start the second quarter, driving strong demand for our products. We therefore forecast second quarter revenue to increase to between $160 and $170 million, and adjusted EBITDA to be between $11 and $14 million. For the full year, we continue to expect EBITDA to be in line with our previous guidance of $50 to $60 million. Turning to the balance sheet, we ended the quarter with total cash of 21 million and availability under our revolving credit facility of 141 million for total liquidity of $162 million. Cash balances decreased by 26 million in the first quarter, primarily due to $30 million of net working capital growth. During last quarter's call, we outlined efforts to mitigate supply chain challenges. These include diversifying our supply chain and investing in key raw material and component inventories to mitigate risks and delays. In the first quarter, we did increase inventory, securing material early in the year to provide greater confidence in meeting known and planned customer demand. We expect to build inventory again in the second quarter and to see a turn in inventory balances in the second half of the year. Given recent lockdowns in China, we remain concerned that the fragile state of worldwide logistics may again impact our results. Nonetheless, we are pleased with the progress to start the year. In addition to inventory bills, customer delays in payment of accounts receivable at the end of the quarter and typical first quarter cash outflows for annual accrued expenses impacted our free cash flow results. We expect second quarter free cash flow to be similar to our first quarter results, with customers continuing to stretch receivables, the aforementioned inventory purchases impacting cash flow, and our $12 million semi-annual interest payment. We expect free cash flow in the second half of 2022 to turn significantly positive as earnings continue to improve and networking capital levels normalize. resulting in roughly break-even free cash flow for the full year 2022. Before turning the call back over to Neal, let me provide a few details for modeling purposes. For the second quarter, we expect corporate costs of $6.5 million, interest expense of $8 million, and depreciation and amortization expense of roughly $10 million. We continue to expect full-year capital expenditure of less than $10 million and cash income taxes of roughly $4 to $5 million. Now let me turn the call over to Neal for closing remarks. Neal? Thanks, Lyle.
spk04: Today is a great day to be an employee and investor in FET. Industry fundamentals are fantastic. Oil and gas operators have cash to fund energy supply growth Service company pricing has returned the levels that support reinvestment in new equipment. And FET is poised to benefit in the near term through top line growth, higher margins, and EBITDA multiple expansion. Kirby, we'd like to take the first question, please.
spk00: First question comes from the line of Dan Pickering of Pickering Energy Partners. Dan, your line is now open.
spk02: Great, thanks. Good morning, gentlemen.
spk01: Morning, Dan.
spk02: Morning. So as I look here, just help us a little bit. You did beat your guidance for the first quarter, and we can obviously see how the segment results stacked up. But when you think about what you were expecting versus what happened, where were the upsides for you in the quarter?
spk04: Yeah, I mean, Dan, I think it was a broad – kind of broad across our product lines, but especially our drilling and downhole product lines saw really good bookings and then delivery of those bookings during the quarter.
spk02: Gotcha. And then as we think about the improvement as we continue into the second quarter, drilling drives that as well. Is that going to be the leader in Q2 on an incremental basis?
spk04: I think drilling will continue to grow, but we did see our completion segment pick up momentum in, you know, in March, and that's continued. So we think completions will be strong as well. I think overall we're just, you know, the breadth of our portfolio, we are seeing, you know, really good momentum just across the board.
spk01: Dan, I would chip in just not only on the specifics of the product line but where we're seeing that growth come from. We wanted to highlight a bit about what's going on internationally as well for our businesses, and seeing that growth come through really well with shipments of backlog in our drilling and downhole product lines, and then really finally starting to see some uptake on the valves business as well. That's been a project we've been working on for a while here, and it's encouraging to see that take off not only in the first quarter, but also what we expect through the next few quarters.
spk02: Do we think that that turns our production business to kind of a positive EBITDA as the Saudi facility and the international shipments start to happen?
spk01: Yes, Dan, that's what we're looking for. As we talked about on some previous calls, we did a lot of restructuring of our valves business through 2021, really ending that at the end of last year, and now it's a volume play. We've got the cost structure right. And as we see activity picking up globally, but in particular in the Middle East, we're looking for better times ahead for that segment.
spk02: Great. Thank you. And then if I could just, you talked, Neal, at the end of your remarks around supply chains, or maybe Lyle, I think you discussed it, this kind of supply chains, adding inventory. So when you think about when we hear things like supply chain and inventory builds and their risks, I assume that everything you talked about is built into how you're guiding for your Q2 results as well as your full year EBITDA. So supply chain is still a pain, but it sounds like that's been incorporated in your thinking, in your guidance.
spk04: That's right, Dan. We took some steps to mitigate that. the issues we were having that we experienced in the back half of 2021. We feel like we've gotten ahead, but I think it's something we're always concerned about, especially with further lockdowns in China.
spk02: Yeah, sure. And then, okay, Lyle, sorry, go ahead.
spk01: Yeah, no, no, it's okay. If you look at our Q1 results and see what we've seen, our EBITDA, margin in Q1 basically came back to where we were in the second quarter or so of last year. And so what that says is we're starting to see the net price improve. Net price gains that we got get our EBITDA margin back and recover from the inflationary cost impact that we had at late last year. And then as we progress forward, thinking about the progression on that, continuing to gain those net price improvements helps to drive up the margin. and applying some incremental EBITDA margins that are higher maybe than our traditionals have been over the last few quarters. So we're starting to see that come through. Last quarter, Neil talked about having some equilibrium in inflation where, okay, we don't necessarily need costs to decrease, but it would sure be nice to see a decrease in the rate of inflation. And we felt that in the first quarter, and we're able to gain that net price And that is probably one assumption we have thinking ahead, that costs will maintain at a reasonable inflation rate and we won't see the same kind of spikes that we saw in late 2021.
spk02: Lyle, does that mean we might see a double-digit margin at the EBITDA line kind of on an exit basis by Q4, or is that more a 23 event?
spk01: I do think, Dan, we could get there. And really that comes from volume, activities up, and we think that that activity growth continues, maybe at a modest rate through the year, given some of the industry supply chain constraints. But in addition to that, we've grown our backlog pretty handily. It's now over $200 million. It's been a long time since we've had that much backlog, and that begins to turn into in the third quarter and fourth quarter of this year. So that will provide top-line boost. So we'll get some operating leverage on that top-line boost, which helps our margins, plus any incremental net price that we can push through gives us those incrementals that could get us above double digits. And that's where we're headed.
spk02: Sounds constructive. Thank you, guys.
spk01: Thank you, Dan.
spk04: Okay. Next question.
spk00: Again, if you have any questions, please press star 1 on your telephone. Next question comes from the line of John Daniel of Daniel Energy. John, your line is now open.
spk03: Thank you, and thanks for including me. Neil, as you well know, there's a number of privately held, some small, some big capital equipment providers out there, and I'm just curious if you could talk a little bit about the appetite to do some consolidation as the year unfolds.
spk04: Yeah, thanks, John. You know, we looked at our acquisitions kind of in, you know, really two lenses. You know, one where we're adding, you know, a new technology or potentially disruptive technology. We did that in the fourth quarter with our acquisition of REACH production solutions. And then we also think about consolidation. And, you know, in the fourth quarter, we had another tuck-in acquisition with Hawker WellWorks. And we like doing that. So I think for now, we're going to keep the deals, I think, relatively small, but we're always on the look. But we are definitely proponents of consolidation in the industry. So I think it's there, and I think we're an ideal consolidator as we get our balance sheet in the right position.
spk03: Fair enough. Can you say if you're being shopped a lot of deals right now? And then just to follow on, if you could, as you decide to look at more opportunities, whenever that time might be, do you focus more on traditional oil and gas type businesses or do you focus more on energy transition? And I've got one follow-up.
spk04: Yeah. I think when we look at, you know, the technology, you know, we see the – we want to add that in the energy transition phase. So, you know, for example, REACH was an energy transition phase. But I think as we consolidate, that would be more in the traditional oil and gas where we can get the scale, take out the cost, and have good operating leverage. Fair enough. And then the last one for me, perhaps.
spk01: John, I'll jump in really quickly on your question about are we being shopped a lot of deals now. And I'd say that the activity around smaller deals, mostly private, small private businesses either owned by an entrepreneur or founder or owned by a private equity group, that volume of activity has picked up dramatically in the last four or five months. I think as enthusiasm for the cycle has come in and owners are seeing that this is an opportunity to monetize some of their investment.
spk03: Fair enough. And then final one for me. Thanks, Lyle. perhaps a dumb question, so I apologize, but on the supply chain front, can you talk about how much of the steel or forgings that you guys procure for your operation, like how much of that comes from international markets versus domestically sourced?
spk04: Yeah. Maybe I'll talk a little bit more in general about our strategy there is that we want to have multiple avenues to secure a supply. So if it's international, we want to have multiple countries where we procure from, or ideally we'll have a domestic source and an international source. I think we haven't seen any real major delays with the raw materials that we need, so we're going to continue to follow, but we hope our diversified supply chain will allow us to avoid the worst of those. Okay, fair enough. Thank you, gentlemen. Thank you. All right. Thank you for joining our call, and we look forward to talking to you in three months.
spk00: Thank you so much to our presenters and to everyone who participated. This concludes today's conference call. You may now disconnect. Have a great day.
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