Q4 2019 Earnings Call
Good morning, ladies and gentlemen, and welcome to the Forum energy technologies fourth quarter and full year 2018 earnings Conference call. My name is any and it would be a card either for today's call. At this time always buckets funds are you nobody can only be mode and all lines have been based on mute to prevent any back Illinois.
We will be facility being a question and answer session. After the speaker's remarks as a reminder, it's gone friends call. Its dania, Florida for replay purposes. After the speaker's remarks, they I was.
In fact, you onto the forgets for asking question.
I will now turn the conference call all book to Bill Austen, Vice President corporate development and Investor Relations. Please proceed sir.
[music]. Thank you.
Good morning, and welcome to Forum Energy Technologies fourth quarter, 20, Nike Inc. earnings Conference call.
With us today to present formal remarks, or Cris Gaut woman forms chairman and Chief Executive Officer.
Pablo Mercado, our Chief Financial Officer, and while Williams Senior Vice President of operation.
We issued our earnings release last night and is available on our website.
The statements made during this conference call, including the answers. Your question May include forward looking statement.
These statements involve risks and uncertainties that may cause actual results or events to differ materially from those expressed or implied such statements.
Those risks include among other things.
There's that we have described in our earnings release and in our filings with the Securities and Exchange Commission.
We do not undertake any ongoing obligation other than that always by law to publicly update or revise any forward looking statements reflect future events information or circumstances that arise after this call.
In addition, this conference call contains time sensitive information reflects managements best judgment only as of the date of the logical.
Measured statements May include non-GAAP financial measures reconciliation of these measures refer to our earnings release.
This call is being recorded.
A replay of the call will be available on our website for two weeks following the call.
I'm now pleased to turn the call over to Cris gaut or <unk>, our Chief Executive Officer.
Thanks Bill.
And by the way we are welcoming bill Austen back to for him. He is now our VP of corporate development and Investor Relations.
Good morning, everyone.
What I assumed the role of CEO, a little over one year ago I laid out a plan that would focus on three things.
And those are generating.
So on free cash flow to reduce net debt.
Emphasizing our winning products to improve on our war market position.
And third improving operating in cost efficiency.
2019 was certainly a challenging year for our industry and for the oilfield equipment sector.
However, I believe our team has done an admirable job on these objectives.
I would like to report on our 20 Nike progress at each of these areas.
Form generated $90 billion or free cash flow during the year, representing a greater than 70%.
Annualized free cash flow yield on our current equity market capitalization.
And a greater than 120% conversion rate of EBITDA cash.
Over the year, we reduced our net debt by $130 million through a combination of strong free cash flow and divestitures of non core assets.
We ended the year with net debt of $342 billion.
$88 million a cash on the balance sheet.
And and Undrawn revolver.
The second objective is focusing on our winning products, which are those that.
Abide critical value to our customers and remain in high demand even in a constraint spending environment.
And.
Secondly, how strong brand recognition and margin potential.
Now more than ever our customers are demanding products that enable them to achieve greater efficiencies.
We expect this trend to continue as the industry. It focuses on improving returns.
As a result, we are expanding and improving our highly engineered products that outperformed the competition in areas like artificial lift.
Intervention and hydraulic fracturing.
These products great value for our customers by reducing the cost of set up an cycle time at the well site.
Increasing the effectiveness of our customers assets.
And even increasing their oil production right.
We fully expect market interest for these products to be high during 2020, despite reluctance by our customers to spend.
Let me give you an example of how this focus on winning products is working for us.
We have developed a suite of products any artificial lift area.
That's significantly improved the operating life of downhole.
Electric submersible pumps by addressing problems with solid than gas in the production stream.
These high margin products, we have developed deliver real value for the operator in terms of reduced lease operating expense less downtime and better production right.
Sales of these artificial lift products increased each quarter during 20 like team.
I don't know up over 50% since fourth quarter 2018.
Regarding the third objective.
Proving operating in cost efficiency, we made significant strides in 20 like team by reducing our cost structure.
Some examples include consolidating facilities, removing layers of management, reducing professional fees and generally limiting discretionary spending.
This is where adult resulted in a 20% reduction and that's DNA in the fourth quarter 2019 compare to the prior year.
In addition, we have implemented process efficiencies.
That reduced our direct costs, which while we'll be talking about in a few minutes.
Continued progress on these three objectives will start the company up for long term success.
As we look ahead.
We expect the low level of customer activity and great reluctance to spend that we saw in the fourth quarter to continue in the first quarter 2020.
In addition concerns about the Corona virus and its potential impact on the Chinese the global economy are creating uncertainty about the demand for oil.
Which would have implications for the man to forms products.
As a result for the first quarter 2020, we expect our EBITDA ought to be approximately flat compared to the fourth quarter 29 team.
But with some downside exposure to this forecast if there's not a fairly swift recovery in China.
From the Corona buyers.
Oilfield activity is off to a slow start in 2020 due to low oil and gas prices constrained spending budgets.
Subsequent quarters, we expect international activity to accelerate cannibalization and de stocking in North American market to run its course as drilling and completion activity stabilizes.
This will drive improved orders and revenue perform over the course of the year.
Again, this forecast is subject to recovery of the Chinese economy fairly soon.
Oh that basis, we expect our full year 2020, EBITDA ought to be in the range of $60 million to $70 million.
Given our capital light business model and continued conversion of excess inventory into cash we expect a very high rate of conversion of EBITDA cash.
And to continue and 2020.
Regardless of the environment, we will manage forum for the market as it exists and focus on our key objectives.
Now, let me ask Pablo to take you through our results and financial position Pablo.
Thank you Chris good morning.
As Chris mentioned 29, P. and was marked by significant decrease in drilling and completions activity and a reluctance to spend by our customers, particularly in the fourth quarter.
Our total revenue for the year with $957 million down 10% 2018.
Adjusted EBITDA was $73 million or 8% of revenue.
About $24 million from 28.
Despite the declining activity throughout the year form generated strong free cash flow $90 million and 29 PM and exceeded our target, reaching a 100 million dollar free cash flow run rate in the second half a year.
Our fourth quarter revenue was $200 million down $40 million sequentially.
Due to the reduced capital and operating spend as being by our customers, resulting from budget exhaustion and their mandate to preserve cash.
However, we did see an inflection in our booking.
Driven by new orders for international projects.
Our book to Bill ratio was about one or the first time in several quarters with improvement in all three second.
Our adjusted EBITDA for the fourth quarter was $11 million or 5% Robyn.
Down 11 million from the third quarter.
It's watch in line with our expectations. Despite the low revenue as we continue to reduce our costs throughout the organization.
I would note that our adjusted EBITDA, that's not add back $4 million non cash equity based compensation.
Net loss for the quarter was $12 million or 11 cents per diluted share.
Excluding $3 million or two cents per share of special items.
Adjusted net loss was nine cents per diluted share.
Special items.
For the quarter on a pre tax basis included.
Gain on disposition of assets of $2 million.
Other charges, primarily for discontinued products a $4 million.
And then 8 million dollar foreign exchange loss.
We provided a reconciliation table of these special items in our earnings release for your reference.
I will now summarize our segment results on a sequential basis.
And our drilling in downhole segment orders were $74 million and 8% decrease from the third quarter.
Resulting from significantly constrained customer spending, particularly for drilling and well construction consumable products in the U.S. market.
Segment revenue was $78 million.
10 million dollar or 11% sequential decrease due to the falls to the equipment receipts by our customers to the first quarter and the lower demand for consumable products.
Adjusted EBITDA for the segment was 9 million malls in the fourth quarter.
Sequential decrease of 3 million.
Approximately half of the decrease was related to the third quarter divestiture of our equity interest in Aspen.
In our completion segment orders decreased 10% to $58 million.
Segment revenue was also $58 million, a sequential decrease of 12 million or 17% due to the severe slow down into U.S. onshore completions market.
In addition, our pressure pumping customers continued to cannibalize your idle fleet and destock their consumables.
Several also retired assets, which will be healthy for utilization levels and ultimately for equipment buying patterns.
Adjusted EBITDA for the segment was $5 million, a 6 million dollar sequential decrease resulting from the loss of operating leverage due to lower volumes.
And lower cost recovery compared to the third quarter.
[noise] production segment orders were $70 million, a sequential increase of 26% primarily due to two large international orders for desalinization equipment and significant orders for Wellsite production equipment for deliveries throughout 2020.
The strong orders were partially offset by a decrease the oldest for valves <unk> distribution customers continue to destock their inventories to reduce working capital at year end.
Segment revenue was $65 million at 20% decreased primarily due to lower sales of valves and to a lesser extent lower deliveries of surface production equipment, that's exploration and production budgets works often.
Adjusted EBITDA for the segment was $3 million down 3 million sequentially.
Due to the loss of operating leverage despite cost reduction and then favorable sales mix.
I will now discuss some additional details about our financial results and financial decision at the form level.
Oh free cash flow after net capital expenditures in the fourth quarter was very strong at $26 million aided by strong collections of receivables.
The $90 million a free cash flow that we generated in 2019 represents a conversion of EBITDA to cash in excess of 120%.
We expect to continue to deliver a high conversion of EBITDA to cash in 2020.
I said 20, my team cash flow will be lower in the first quarter did due to the timing of annual payments a higher material we see.
Our program to reduce access inventory yielded meaningful oversold in both the fourth quarter and throughout 2019.
We decreased our inventory position by $29 million in the fourth quarter and $64 million for the year.
We expect the modification of excess inventory to continue and 2020 and beyond.
Also in the fourth quarter, we closed on a small non core asset divestiture, which generated $4 million of cash proceeds.
As far as bulk and in combination with <unk> free cash flow, we reduced net that by $29 million into fourth quarter.
We ended the year with $58 million of cash on the balance sheet and on drawn revolver and liquidity of $287 million.
Our primary use of free cash flow and pointing pointing will be to compete to reduce net debt.
We're also working to address the maturity of our 400 million dollarss of bonds due in the fourth quarter of 2021.
Perpetual solutions could include arrangements with existing bondholders Andal racing new money.
Due to the sensitive nature of these discussions we cannot pay more on this topic at this time.
Our net capital expenditures in the fourth quarter were $3 million, bringing our total capital expenditures for the year to $15 million.
For a capital light business and we expect our total capital expenditures for 2020 could be around the same maintenance level. That's in 29.
Our reported diluted share count for the quarter was 110 million shares.
Interest and depreciation and amortization were 7 million and $15 million, respectively in the fourth quarter.
We expect these expenses to remain at similar levels in the first quarter.
I took a corporate expenses were $6 million in the fourth quarter, and we expect them to be approximately 7 million into first quarter.
Due to higher payroll tax and pull accruals for incentive compensation and medical insurance.
Both our corporate expenses.
[laughter] excuse me.
In total S. DNA were down more than that 10% revenue decline in 2019.
We will continue to have some tax expense despite an overall net loss.
We're not recognizing tax benefit in loss, making jurisdiction, but computer recognized tax expense for some international jurisdictions with anchor.
Once we turn profitable in the loss, making jurisdictions, we will have a relatively low tax rate as we begin to use our net operating losses.
More information about our financial results. Please review the earnings release on our website.
Now, let me turn the call over to while this caused some key operating initiatives.
Thank you Pablo Hello, everyone.
In the fourth quarter, we saw another significant reduction in inventory of $29 million.
Following the 26 million dollar reduction in the third quarter.
For the year, we decreased our inventory by $64 million or 13%, which is a very good movement in the right direction.
As Chris mentioned inventory monetization remains an opportunity and focus area for generating incremental cash flow.
We will improve our inventory turns by following the strategies that helped us reduce inventory in 2019.
These include improved improving inventory planning partnering with our suppliers on consigned inventory and streamlining our operations using lean techniques.
We're also liquidating slower moving inventory and discontinuing some margin dilutive some product areas.
In addition to monetizing inventory these actions will improve customer responsiveness by reducing our manufacturing lead times.
For example, our drilling in downhole team has improved plant operations by leveraging lean techniques to virtually connected distribution locations back to our vendors and by implementing metrics to quickly adjust their performance.
On the cost management front, we also made progress in the fourth quarter.
Despite a 16% sequential decline in revenue our gross margins remained fairly constant.
Because of our variable cost structure operations management was able to flex cost downward quickly to match reductions in activity, while retaining ample capacity to serve future customer demands.
We will continue our focus on managing cost controlling what we can in this volatile market.
We're not only focused on managing cost, but also on growing our revenues through a number of avenues.
Revenues from outside the U.S. continued to grow in importance with roughly one third of total revenue in the fourth quarter coming from outside the U.S.
We expect non U.S. revenues to continue growth into 2020, as our large service company customers pull through our well construction and intervention products, including casing hardware coil tubing, and wireline and related pressure control equipment.
In the fourth quarter, we received a large order for edge electrostatic defaulting equipment from the middle East.
We have recently train local form employees for recertification of our drilling an intervention capital equipment in that region.
We also expect market share gains from some of our new differentiated products.
Chris has already discussed our growing artificial lift offerings. In addition, our new pressure pumping products are garnering attention.
Earlier this month at the S.P. hydraulic fracturing technology conference. We launched we launched our 3300 horsepower Frac power end and our innovative high pressure whos.
Both of these products work with our full offering a pressure pumping hardware to address some of our customers biggest challenges, while simplifying set up an increasing safety at the job site.
A very very topical subjects is the corona virus and its potential impact let me address that for four.
We currently source components and finished products for a number of our product lines directly from China.
China is also an increasingly important sales market for our products and we have recently expanded sales of our well intervention products into the country.
For many of our suppliers and even financial institutions closed operations in response to regulations imposed by the Chinese government.
Furthermore, these government mandated shutdowns of also impacted seaports and airports, which may cause transportation delay.
The situation on the ground is changing daily. So we will continue to monitor these events as they unfold.
I'm thankful to be able to report that our China based employees are all healthy and taking proper precautions to protect themselves and their families.
In the past year tariffs and now the Corona virus had been headwinds to our supply chain efforts in China.
We're pleased with how our Chinese supply chain partners have worked with us to overcome these challenges.
Let me turn the call back over to Chris for closing remarks.
Thanks, [laughter]. Thanks slot, we're proud of our team's hard work in achieving fourth quarter results.
Overall business remains tough and we appreciate all the efforts.
We continue to believe that under investment deferred maintenance and cannibalization of equipment by our customers in the U.S. onshore market is not sustainable.
Having said that forms balanced portfolio in international and offshore markets as well as your exposure to non upstream markets is a positive for forum.
And we expect the percentage of our revenue coming from those markets to grow going forward.
We will continue to focus on the things we can control, which include working capital and managing our costs in order to drive free cash flow.
We will also continue to focus on our winning products, which we can grow even in challenging markets.
Thank you for your interest in at this point, we will open the line for questions.
Any let's take the first question.
And gentlemen.
At this time.
The number one.
Telephone.
Question.
Yes.
A question.
Sean.
From Jpmorgan your line.
Hi, good morning.
Hey, John.
So could we maybe just start with your expectations for free cash in 2020 and.
Maybe try to to characterize the range of outcomes I recognize some of the uncertainty in China, Let's just say that the $60 million to $70 million EBITDA range holds you expect working capital, especially inventory to be a source of cash again.
How would you bracket the outcomes on free cash maybe in dollar terms or conversion rates are relative to what you generated in 2019, just looking to get.
Your range of outcomes on free cash yes.
So you know the biggest driver of our ability to reduce our inventory is you know the level of cost of goods sold what we can sell so.
You know that if we see a pickup in demand Oh, we have the goods on the shelf and.
You know, we can turn them the cash.
So you know.
To the extent of revenue or cost of gold <unk> cost of goods sold is lower that is in a more difficult to the extent things pick up and we continue to build orders from here that will be a positive.
Relative.
To our conversion of EBITDA to cash we expect that to continue to be at a very high rate in our goal is 100% conversion of EBITDA cash.
Okay got it that's helpful. Thank you [noise].
And then you know looking at.
The success, you're having with the artificial lift products.
Could we talk about.
How much of that is north American driven versus international opportunities just given.
The applications can be quite different and then just on the other tangential products that you could develop to solve similar problems for MPS related to U.S.P. or are there other ways in which we can drive.
Related type of revenue gross yeah, yeah, so I mean to be clear.
Particularly for those who aren't as familiar with.
As product line.
We were selling accessories around artificial lift and electric submersible pump and rod lift et cetera. So.
You know, we sell downhole products that help prevent sand from clogging up yes piece.
Our gas card fraud products that breaks up gaslogs, which are very difficult on all types of artificial lift pumps.
To your question Sean today.
We have seen tremendous demand and acceptance of these products with more and more customers. It for the U.S. land market.
We're at the early stages of expanding those products to international markets.
We are seeing.
Good interest and.
Beginning to see good orders internationally, particularly in the Middle East, where you Sps or are you quite a bit.
And in Latin America.
And so again, we see that as a source of the international growth that we were we were talking about.
Another area of the accessories, we have for our artificial lift products are the variety of.
The <unk> tractors that we offer.
That that go on the production liner to protect the.
Cables power cables and a injection lines and that is you know another high margin high demand.
Our product offering and as we're seeing more offshore products I'm, sorry offshore activity and more high value wells drilled for example, the Gulf of Mexico.
We're seeing uptake there too so.
Ah, yes today, that's been primarily the U.S. market, but as offshore and international growth.
It's not just our other drilling and and legacy downhole products, where we're seeing an increase in demand, but in the lease artificial lift products as well.
So we're also.
We're also participating a little more on that gas lift side as well through the course of line pipe product that we developed as part of our coiled tubing.
Product offering in diversifying into.
That part of the market. So these are kind of gas in an injection mines going back.
To the well from the gathering station <unk> compression stations yet.
Got it great. Thank you very much.
Thanks.
We have another question from the light often George.
From TPH.
Your line is.
Morning, guys.
Morning.
Congrats on the the free cash flow and I think that the goal of 100% conversion of EBITDA is when nice to hear as well as you think about 2020 and the incremental leverage you have to reduce net debt.
Is there anything less to do on the divestiture front and just how is how does that mark and looked at air bid asks really wide or other incremental opportunities for you to go the divestiture out to reduce net debt.
Hey, George its Pablo.
So yeah, we did move the needle a bit through divestitures and 2019, the 40 million plus of a sale proceeds of really.
Some products that didn't generate a lot and the way of EBITDA or cash flow for us.
So while we were successful doing that and continuing to look at the portfolio for for opportunities to turn non cash flow generating assets into cash.
You know the M&A market, it's difficult there not a lot of buyers out there. So I wouldn't put 'em, yeah, I wouldn't say, we have a goal out there doing that.
But continue to evaluate opportunities.
Great. That's helpful. And then you mentioned some.
Products are sub products that.
So no longer be looking to sell moving forward I Wonder you guys can provide some.
Gambles are those in what business unit those may be associated with.
George is while so so one of the things that we did in the fourth quarter, particularly in our valves business was evaluate some some some minor a product offerings that we had that as possible mentioned were cash couldn't contributing.
And we see those are just these operations of selling those were able to divert a the resources that we had dedicated those too some of our higher margin and at or better performing products in the valves business. So we send out some of things, but we were off of their and.
Some of the other areas as well and as we look to.
Move more towards you know the winning products and.
Things that that got good customer demand and in a bit more differentiated that's where we're putting more the resources.
Okay, Great. That's helpful. And then just one more for me just on the trajectory of free cash flow in.
The 2020 timeframe I think probably you mentioned that cash would be lower in the first quarter, which is one seasonally normal and then to just starting off a very low level of activity in North American particular, so that makes some sense.
David.
Anyway, you can framed in magnitude of kind of free cash flow compression sequentially quarter on quarter, you still the convert 100% of that EBITDA free cash flow and in the first or.
Should we look for free cash flow conversion to to be better in the second third quarters or the year.
Yeah, George that's a reasonable expectation would you describe this kind of the onetimes conversion.
Got it throughout the year, obviously there'll be some variability, but but that's reasonable for the first quarter.
Yeah. The reason, that's you mentioned a little bit seasonal if you look at the first quarter last year was lower.
Then the ramp up we had in the back half of their.
For the reasons I mentioned on the prepared remarks.
We also had pretty good collections, we had some.
Payments that came a bit early in the fourth quarter.
So therefore, they're not they're in the first quarter.
Alright, great. Thanks, guys I'll turn it back over.
Next to it.
Again, ladies and gentlemen, if you have a question at this time lease graphic card.
And then the number one key on your thoughts tone telephoned. We do have another question from the line outside Ti well deals and the bank of America. Your line is open.
Hey, good morning, I'm, Okay, Hey, I guess I want to come back to the guidance you eat the annual guidance for 60 to 70 million of EBITDA for this year could you maybe just kinda help us understand just kind of the framework are behind that and especially kind of we think about U.S. activity, maybe it's <unk>.
Banks that you want to talk to or something like that.
Yeah I think.
The bigger the macro or you know obviously, yeah, we can talk about Oh price supply demand.
Yeah, but you know drivers for us that our key.
The direction in the rig count.
The rig counts going up and we're putting more rigs to work they need to be re outfitted and and Oh thats a positive.
You know on the on the Frac side, we feel that at this point.
There's been a lot of de stocking of consumable products.
And although there may be more frac units that.
Go into attrition or or retired.
Our view is largely those or not in operating condition at any rate.
And in order if one were to try to put those back there there wouldn't need to be money spent on those.
And we're at a point now with the de stocking up consumable products.
That it's more hand to mouth.
Yeah, we've seen a leveling off I think and demand there.
But as there's a need to continue to maintain that equipment keep it working and if there's any.
Increase in units going back to work that would be as would be positive poor demand.
For our products.
So those would be some demand some nacco <unk> or drivers for our business the increasing use of artificial lift we've already addressed.
The international.
You know, 30% of our revenues international and we expect that to be a growing portion.
Overtime [noise].
The the offshore and sub sea market.
Is a another positive we're seeing a more discussions and bids going on there that we're working hard to turn into orders.
And also while mentioned be process industry.
Projects that we won in the fourth quarter, we're seeing an increase in.
The number of those that projects that are being talked about.
Very good margin Lumpier bigger projects and we're hoping to.
Glad anymore those as well.
Okay Alright.
On the completion side, if I looked at a you know margins in Decrementals there in the fourth quarter I'm. Realizing that revenues were down you know a decent chunk. You know you had some pretty hefty decrementals as we kind of move forward I'm you know I don't know if you want to kinda talk a little bit about Incrementals as you start you know revenues improve.
You know, where maybe you kinda you know over the next few quarters, where you think absolute level of margins can go for this segment.
Yeah, I mean, that's it's a good margin ER segment for US there we were hurt in.
The transition from Q3 to Q4 by some cost recovery issues that you know, we don't see that are being a factor.
From fourth quarter to first quarter.
So you know the gross margin contribution on an incremental basis is high in our completions business. So.
They have increase in sales there would clearly be accretive.
Into our overall results.
You know some of our intervention products that are doing well said as.
Our eat align our our wireline cable.
Got some very good technology, there, so new products coming out right margins course say.
Coil tubing life coiled tubing pipe that we sell very good product line very good margins.
And.
As.
Completions are done and the particularly the first after the year as a U.P. companies when they got to get ahead on their production goals for the year that should be a the good for those product lines.
Okay understood.
Squeeze one more in you know if we look out for 2020 and it kinda looks like maybe revenues have kind of stabilized you know and you might you know kind of work on higher from here.
On the cost side could you talk about what's your do into kind of focus on cost and to take more cost out of the business <unk>. We've worked hard on SGN a.
In recent periods and I think we've made great progress there and really send out the organization.
Another step that we're doing is and.
Improving our direct costs in our manufacturing cost and maybe allow you can.
Talk about some of things we're doing in that regard sure sure we talked a little bit in prepared remarks about the efficiency of.
Our focus on lean operations and what those do as far as not just reducing cost but also.
Improving our responsiveness to our customers we've got a good solid organization working on on supply chains were working on material cost.
Materials or a large component of our cost of goods sold so continuing that focus of developing our supply chain.
And increasing those.
I think as we as we think about footprint and what we have from an operational perspective.
Chris mentioned that she they've also done a good job of optimizing that footprint and getting production into the right operating places right operating locations and manufacturing locations to be as efficient as we can so some really good progress that's been made there.
More more ground to cover but the team and the team has done a great job of of implementing those while being responsive to change end market demand.
Tariff also been a burden for Jason, yes, and that seems.
To be not getting worse at this point, maybe a bit better, but we're also making progress on our read remediation efforts in that regard, but those are burden.
Definitely we're doing a better job addressing those which goes right to right to our costs.
Understood already thanks, Chris Thanks, I'll turn it back over.
Thanks, very much well we appreciate.
Your your attention and interest.
And for them and well, we'll talk to everybody next quarter, thanks very much.
Goodbye.
Ladies and gentlemen. This concludes today's conference call you may now disconnect. Thank you for.
[music].