Forum Energy Technologies, Inc.

Good morning, ladies and gentlemen, and welcome to the Forum Energy Technologies fourth quarter and full year 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 one one 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 also 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 fourth quarter and full year 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 it is available on our website, This earnings release follows our preliminary press release issued on February 19, 2024. Subsequent to that preliminary release, we finalized our analysis of valuation allowance. No valuation allowance releases were made as a result of this analysis. 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 context of all factors that affect our business, including those disclosed in FET's SEC filings, our earnings release, and the VERIPRM acquisition announcement. Finally, management statements may include non-GAAP financial measures. For a reconciliation of these measures, you may refer to our earnings release. During today's call, all statements related to EBITDA refer to adjusted EBITDA, and unless otherwise noted, All yearly comparisons are full year 2023 to full year 2022, and quarterly comparisons are fourth quarter 2023 to third quarter 2023. I will now turn the call over to Neil.

Thank you, Rob, and good morning, everyone. 2023 was a transformative year for FET. In addition to executing our strategy, we accomplished two significant milestones that accelerate FET's long-term growth trajectory. We began the year by reducing our long-term debt by 48%, and we ended 2023 with the announcement of the VeriPerm acquisition. This highly accretive acquisition demonstrates strong business logic while maintaining conservative net leverage and strong liquidity. VeriPerm's differentiated products and patent-protected technologies complement our artificial lift product portfolio. 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, and we expect the larger and more profitable FET will generate significant financial returns for our shareholders. In 2024, we are forecasting EBITDA of $100 to $120 million and free cash flow between $40 and $60 million. These results at their midpoints would represent 64% and 25 times growth for FET. This is what we mean by transformative. In addition, we executed our organic growth strategy in 2023. Excluding the contribution from VeriPerm, we leveraged our global footprint to grow our international and offshore businesses. Industry investment has clearly increased outside the United States, and we are benefiting. Revenue grew in all international regions, led by 72% increase in the Middle East. In the aggregate, international revenue expanded 23%, more than twice the pace of international rig count growth. For 2023, FET's non-US sales were 38% of total revenue, up from 33% last year. Turning to offshore, we saw a resurgence in demand for ROVs and aftermarket equipment to support oil, natural gas, and wind projects. Orders in our subsea technologies product line were up almost 90%, primarily driven by new ROV systems. In addition, aftermarket revenue was up almost 40%, supporting the higher utilization of the current global installed base. In addition to utilizing our worldwide footprint, we continue to develop and commercialize new products. This is accomplished by working closely with our customers to iterate newer and better solutions, further separating FET from our competitors. Let me provide a couple of great examples from our global tubing and quality wireline product families. In 2023, Global Tubing produced two world record setting strings, both delivered into the Middle East. The first was the longest two and three eighths inch diameter string at over eight miles long. Our second record was for the heaviest string at 200,000 pounds or the equivalent of a 757 airplane. These milestone strings increased customer efficiency and capability, allowing them to reach hydrocarbons further from the rig and deeper below the surface. Another example from our quality wireline product family, in the first half of 2023, we set quarterly revenue records driven by our successful greaseless cable design. Our cable enables faster transitions between frac stages thereby increasing pressure pumping efficiency. In addition, we commercialize the next generation cable, which allows our customers to economically perform wireline operations at higher pressures. Another part of our new product development initiatives centers around innovation and market disruption. A great illustration of that comes from our FR-120 iron roughneck. which was specifically designed to address our customers' needs for heavier and larger drill pipe. During the fourth quarter, we delivered our 100th FR-120 and supplied a record number of units to our customers. In a market where drilling contractors are cautious about capital spending, their enthusiasm for the FR-120 demonstrates the value our solution provides. Building on that success, we have commercialized the next generation iron roughneck. This new design has the same torque capacity of the existing model. However, it is much smaller and will fit on many more rigs. Our drilling team's innovation significantly expands FET's addressable market. The next example is our Frac automated switch technology system or Fast Connect. The Fast Connect system is a direct replacement of existing zipper manifolds. It increases safety by eliminating personnel from high pressure danger zones. It drives efficiency by completing more frac stages per day and it improves the well site environmental footprint by eliminating grease. The first system has successfully transitioned between 250 zipper frac stages with an average cycle time well below traditional methods. And the FastConnect system has had zero downtime after pumping 175 million pounds of sand at an average pressure of 12,000 pounds per square inch. All of this without an ounce of grease. This is amazing. Lastly, our multi-lift product family has successfully helped customers mitigate sand and gas challenges in their ESP artificial lift operations for many years. Building on our expertise in the ESP market, we have expanded our product offering into the raw lift market with the commercialization of the Pump Saver Plus. Sand and gas issues can lead to rod lift system failure. Our unique solution addresses these issues and increases annual production while reducing downtime and related costs. With just these three examples, our engineers and product managers have increased FET's total addressable market by $300 million. And in these markets, We have the best solution for our customers. Our innovation is laying the foundation for sustainable and profitable growth in the years ahead. In summary, based on these 2023 accomplishments, FET is a bigger and more profitable company with lower leverage and greater access to a larger addressable market. Shifting now to FET's 2023 financial performance, we delivered revenue and EBITDA growth of 6% and 14%. Our EBITDA margins expanded 70 basis points to above 9%, building on the margin improvement achieved in 2022. Overall, these results were favorable and 2023 was a good year for FET. However, We are striving to be great. It is helpful to put our performance into context with market conditions. If we go back to this time last year, the industry was coming up nine consecutive quarters of U.S. rig count growth, with analysts and customers indicating further growth ahead. Internationally, rig count was making a steady ascent. averaging quarterly increases around 6%. Putting it all together, our financial forecast was based on 15% rig count growth. And at the time, this felt like a conservative outlook, especially since the industry had grown 28% in 2022. However, reality differed from the forecast. Commodity prices were volatile the entire year, Global crude oil prices ended down roughly 18% and U.S. natural gas prices were down 60%. These factors caused global rig count to grow only 4% instead of the 15% forecasted. For FET, these market conditions led to lower than expected revenue and EBITDA growth in 2023. And in the fourth quarter, Market activity and customer behavior continued the full year trend, as exhibited by lower bookings and delayed payments. Now, turning to the 2024 guidance provided earlier in the call, let me share the basis for our forecast. For the year, we assume range-bound commodity prices, with oil between $70 and $85 per barrel and US natural gas prices between $2 and $3 per million BTU. We anticipate 2024 average rig count to be down around 5% in the US, flat in Canada, and up slightly in the international markets. Putting those assumptions together, our plan forecasts a flat global rig count in 2024 with some variability between quarters due to seasonality and budget timing. We would expect operators to flex up or down their spending as the price outlook adjusts. For our service company customers, we expect to see a bifurcation of demand between those focused on U.S. land and those with international and offshore operations. In the U.S., our activity-based consumable product sales should follow market activity. we anticipate softer demand for drilling and completions capital equipment. Internationally, we continue to see opportunities and inquiries for capital equipment, and this will be an area of strength for FET. Also, we are forecasting continued growth in offshore demand as service companies ramp up operations. Finally, with the commissioning of the Trans Mountain Express pipeline, we assume Canadian oil prices will remain relatively robust and therefore expect to see a ramp up in second half activity for oil sales development. Putting it all together, we are guiding $100 to $120 million of EBITDA and $40 to $60 million of free cash flow. We anticipate substantial improvements in per share metrics and with this forecast, FET will generate significant adjusted net income per share. We have the pieces in place for a great year. I am now going to turn the call over to Lyle for more details on FET's fourth quarter financial results and first quarter 2024 outlook.