Forum Energy Technologies, Inc.

Good morning, ladies and gentlemen, and welcome to the Forum Energy Technologies third quarter 2023 earnings conference call. My name is Gigi, and I'll be your coordinator for today's call. There is a process for entering the question and answer queue. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. A link with instructions can be found on the company's Investor Relations website under the Events section. At this time, all participants are in a listen-only mode, and all lines have been placed on mute to prevent any background noise. This conference call is being recorded for replay purposes and will be available on the company's website. I will now turn the conference over to Rob Kukla, Director of Investor Relations. Please proceed, sir.

Thank you, Gigi. Good morning, and welcome to FET's third quarter 2023 earnings conference call. With me today are Neil Lux, our President and Chief Executive Officer, and Lyle Williams, our Chief Financial Officer. Yesterday, we issued our earnings release and announced FET's acquisition of VeriPerm Energy Services. Both press releases are available on our website. Investor presentation slides relating to the VeriPerm acquisition are also available on our website. Please note that we are relying on the safe harbor protections afforded by federal law. Listeners are cautioned that our remarks today may contain information other than historical information. These remarks should be considered in the context of all factors that affect our business, including those disclosed in FET's SEC filings, our earnings release, and VeriPerm acquisition announcement. Management statements may include non-GAAP financial measures. For a reconciliation of these measures, you may refer to our earnings release and the VeriPerm acquisition announcement. During today's call, all statements related to EBITDA refer to adjusted EBITDA. And unless otherwise noted, references to FET's standalone comparative financial results are third quarter 2023 to second quarter 2023. And finally, Statements relating to FET and Verifirm on a combined basis are trailing 12 months as of September 30, 2023. I will now turn the call over to Neil.

Thank you, Rob, and good morning, everyone. As noted in yesterday's press release, we are extremely pleased to announce the Verifirm Energy Services acquisition. I want to welcome the Verifirm employees to the FET family. We are excited to have you join our team and look forward to working together following closing in January. I also want to recognize the strong support we received from our syndicate of credit facility lenders. Before discussing our transformative acquisition, I would like to spend a few minutes on FET's third quarter results and 2023 outlook. During the quarter, soft US market conditions continued with rig count declining 10%. This was counter to the industry's and our expectations at the time of our earnings call. We also saw a rapid decline in activity-based capital equipment demand from our pressure pumping customers who paused orders in response to softening well completion activity. This led to a $14 million sequential revenue decline in our stimulation and intervention product line. Excluding this product line, FET's revenues would have been up 6%, a significantly higher growth rate as compared to global recount, which was effectively flat in the quarter. While revenue was down, we experienced an increase in bookings during the quarter, demonstrating the benefit of our global footprint. Our sales and marketing teams have been actively working with customers positioning FET as a key partner, and their efforts are paying off. We had another strong quarter of backlog growth supported with a 111% book-to-bill ratio. In fact, all three segments posted a book-to-bill ratio greater than 100%. Overall, I am pleased with how well our teams executed this quarter. and managed through market headwinds. We have successfully grown international revenues, which have mostly offset declining activity in the United States. Even though revenue declined slightly, gross profit and EBITDA remained steady. In general, we held our pricing firm and did not sacrifice margins for volume. Also, we managed expenses well through a combination of increased utilization and cost savings initiatives. These efforts allowed us to deliver EBITDA within our guidance range and generate $24 million in free cash flow this quarter. Looking ahead to the fourth quarter, indications are that the U.S. rate count may have finally bottomed. The modest increases seen the past few weeks have been encouraging. We anticipate average RIG and FRAC fleet counts will remain below third quarter levels. This is based on feedback from our customers that they anticipate a holiday slowdown due to budget exhaustion. Internationally, we expect activity to remain high with RIG counts modestly increasing. Putting it together, we expect the operating environment for FET to be similar to the third quarter. Therefore, we are forecasting revenue and adjusted EBITDA to be flat compared to the third quarter. And we are confident in delivering $45 to $55 million of free cash flow in the second half of 2023. Our ability to generate cash is an important part of our business and gives us flexibility to pursue strategic opportunities. This leads us back to VeriPur. a company we have been watching closely for a few years. We've previously outlined our acquisition criteria, and this transaction checks all the boxes. It is expected to be highly accretive, transform FET's financial metrics, and increase free cash flow. The mix of cash and equity consideration allows us to maintain conservative net leverage and strong liquidity. This strategic acquisition demonstrates strong industrial logic as various differentiated products and technologies complement our artificial lift product portfolio. From a financial perspective, the combination meaningfully increases the scale and profitability of FET. Putting the two companies together expands EBITDA to 121 million and increases EBITDA margins to 14%. This elevates FET above many of our peers and improves our investment profile. Also, the transaction's valuation and financing is highly accretive to earnings and cash flow metrics. If the free cash flow yield for the combined companies is similar to what FET has recently experienced, this acquisition would create significant value for shareholders. And the acquisition is a continuation of the value our management team has created over the past few years. For those unfamiliar with the FET story, we entered the COVID pandemic with around $400 million in total debt. We refinanced our senior notes in August of 2020 during a time of existential risk for the industry. In addition, we streamlined our business, eliminated significant fixed costs, and divested non-core assets. From a base EBITDA of $20 million in 2021, We are on track to grow EBITDA by 250% in 2023. The combination of these steps drove our share price and helped us achieve mandatory conversion on nearly half of our outstanding long-term debt. Through free cash flow generation, asset sales, and debt to equity conversion, we reduced our net leverage from 4.8 times in 2019 to 1.4 times EBITDA at the end of the third quarter. More importantly, these actions allowed us greater flexibility to generate shareholder value, including through strategic and accretive acquisitions. And that is where we are today. With VeriPerm, we are acquiring a leading manufacturer of sand and flow control products for heavy oil production. They have a great customer base of large-cap operators and have maintained long-term relationships, in some cases over 25 years. Verifirm has four primary manufacturing locations and just under 300 employees. Their highly engineered and customized products are protected with patents and proprietary manufacturing techniques. As we think about longer-term growth prospects, VeriPUR has a clear path of increased customer adoption within Canada and upside from international and offshore markets using FET's global distribution network. Also, this combination expands the total addressable market for FET's artificial lift product family. Together, we are a formidable manufacturer of highly engineered products and solutions for the energy market. This is an exciting development for FET. I am going to turn the call over to Lyle for more detail on the acquisition and FET's financial results.