Q3 2020 Forum Energy Technologies Inc Earnings Call

95 Energy Technologies, Inc.

This conference call.

Time, all participants, saying a listen only mode.

According to further assist piece that started zero and operator will come back online to assist you. Thank you I would now like to hand, the conference over to your host Mr. Lyle.

Keith financial I'd say, the five years.

Thank you Laura.

Good morning, and welcome for energy technologies third quarter two.

20 earnings conference call.

With me today are Cris Gaut, Forum's, Chairman and Chief Executive Officer.

Neil walks, our executive Vice President of operations.

We issued our earnings release after the market closed yesterday and is available on our website.

Before we begin we would like to caution listeners regarding regarding forward looking statements. Our remarks today may contain information other than historical information.

Please note that we're 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's 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.

I will now turn the call over to Chris.

Thanks, a lot and good morning.

The U.S. drilling rig count in the third quarter was down over 70% from the previous year.

And 35% from the second quarter 2022.

To the lowest levels on record.

Despite this collapse for was able to limit our revenue decline to just 9% sequentially.

Revenue from outside North America was up 14%.

Also we were able to improve our EBITDA through further cost cuts and efficiencies and generate positive free cash flow.

It is important to know that forms operating results are directly related to the level of oil service drilling and completion activity most.

Most of our business is selling short cycle products to service companies to sustain replace and upgrade their drilling and completion operations.

We believe the third quarter was clearly the bottom in oil service activity drilling and completions activity or now rebounding.

We begin to see we began to see an increase in our orders in the latter part of Q3, resulting in an 8% sequential increase in our bookings in the third quarter.

We expect a strong increase in our inbound orders in Q4 as our customers put equipment back to work.

We are also participating in the new equipment orders in the Middle East and Asia. It's.

That's what wasn't all that oil field activity for our subsea business.

These increased bookings in Q3, and Q4 will drive higher revenue for core performance in Q4.

It's impressive incremental margins.

We have made dramatic progress in reducing our cost structure. Since we began these efforts at the beginning of 2019.

Our cash costs, excluding our materials costs are down almost 50% over this period as we have significantly reduced our overhead expense.

I am also pleased with the progress on our debt structure and our liquidity position.

In August we extended the maturity of our bonds from 2021.

To 2025.

And our a b L credit facility is undrawn.

Form is positioned to benefit and the recovery in drilling and completions activity from the unsustainably low levels experienced recently.

Wow.

Thank you Chris.

During the quarter, we transformed the company's balance sheet and.

And we have begun to see the benefits of our significant cost reduction efforts first let me speak to the improvements made to our capital structure.

In the beginning of the quarter, we successfully completed a par for par exchange or the majority of our 2021 notes for new convertible notes extending the maturity of the 2025.

At the end of the third quarter, we had $129 billion of liquidity.

This should be sufficient liquidity to fund operating cash needs for the foreseeable future even in a robust market recovery.

Subsequent to the third quarter, we issued a call notice to redeem the remaining $13 billion of 2021 knows when these notes are retired the maturity of our ABL credit facility will extend to October 2022.

In addition, we announced a one for 20 reverse stock split and will begin trading next Tuesday November 10 at the new ratio and higher stock price.

We anticipate that the higher trading prices will bring for us into compliance with the NYSE is trading requirements.

Second I want to highlight the significant progress during the quarter and respective cost reductions and the benefits we are seeing.

Since the beginning of 2019, we have reduced annualized cash costs by over $180 million nearly 50%.

These reductions include $23 million in the third quarter alone but.

Because of these cost reductions EBITDA increased $2 million in the quarter. Despite a 10 million dollar reduction in revenue.

While we are pleased with the success of these savings results our expectations for only a modest market recovery compel us to take additional cost reduction actions in the fourth quarter.

We believe with our leaner cost structure. Following these reductions we can achieve breakeven EBITDA.

Levels of industry activity of about 325 working rigs in the U.S.

This is a significant improvement from our historical breakeven level.

Lays the foundation for high earnings tour activity and foreign revenue is ultimately increase.

In summary form is transformed balance sheet provides a long runway for the company to benefit from a leaner cost structure.

Activity levels and market share gains lift forms revenue.

With that context, let me cover our results for the quarter.

Net loss for the quarter was $22 million or 19 cents per diluted share.

Excluding a 29 million dollar gain on extinguishment of debt.

Million Dollarss of special items, and $3 million of foreign exchange losses.

Adjusted net loss was 30 cents per diluted share.

The special items resulted from ongoing cost reduction efforts.

And include impairments of certain operating leases and other assets.

As well as restructuring charges.

A complete reconciliation of net income is provided in our earnings release for your reference.

Our free cash flow after net capital expenditure in the third quarter was $6 million. We've benefited from the receipt of $14 million of tax loss carry back allow them to the cares Act, which was partially offset by $9 million of cash interest paid in the quarter.

Proceeds from the disposition of certain capital assets.

Net of capital expenditures generated $2 million of cash in the third quarter, we expect asset dispositions to be a source of cash again in the fourth quarter pending the completion of a few ongoing property sales.

Excluding the tax benefit we generated $12 million from decreases at our networking capital and expect production of working capital to continue.

For the fourth quarter we.

We expect our free cash flow to once again exceed EBITDA.

Interest expense was $8 million in the third quarter, and depreciation and amortization and stock based compensation were 12 million and $2 million respectively.

We expect these expenses to remain at similar levels in the fourth quarter.

Adjusted corporate expenses were $5 million in the third quarter, and we expect them to be up modestly in the fourth quarter.

We continue to have some tax expense. Despite an overall net loss as we're not recognizing tax benefits and loss, making jurisdictions, but continue to recognize tax expense for some international international jurisdictions with income.

Once we turn profitable in jurisdictions that are currently loss, making we expect to have a relatively low tax rate as we begin to use our net operating losses.

Yeah.

The pace of our balance sheet shows that $122 million sequential decrease in long term debt.

The 37 million is comprised primarily of a $33 million debt discount and additional decreases related to debt issuance costs.

The debt discount reflects the fair value discount on the 2025 notes under the accounting rules for debt Extinguishments, where we recorded the new debt had an estimated 90% of par.

This discount and additional debt issuance costs will be amortized as additional non cash interest expense over the life of the notes.

For clarity purposes, the difference between the $33 million debt discount and the 29 million dollar gain on extinguishment of debt recorded in the income statement.

Related to $3.5 million of early participation payments made to bondholders during the day exchange.

Since segment results are detailed in our earnings release I will share just a few highlights here.

The 35% sequential decrease in drilling activity and the U.S. had a meaningful impact on our drilling and downhole segment.

As demand for drilling rig components, and well construction casing hardware was significantly impacted.

However, we're already seeing green shoots of activity in these product offerings as drilling rig count has increased by about 50 rigs after bottoming in August.

Furthermore, in these product families. Our Permian basin sales teams are making strides to improve our market share and we anticipate growing revenues going forward.

Our subsea product line continues to penetrate the defense industry and offshore wind development, which has this helps sustain overall sub sea revenues despite ongoing ongoing declines in the offshore oil and gas spending.

In the quarter subsea revenues decline based on lower revenue recognized on the execution of existing backlog.

[noise] artificial lift products or a bright spot for the segment.

Demand for these products is more tied to well completions activity and we saw a 30% increase in revenue for these products in the quarter.

Neil will provide additional background and color on this important product family in his prepared remarks.

The increase in us well completion activity also benefited our completions segment.

As our service company customers and pressure pumping.

Wireline and coiled tubing services put their assets back to work they increased spending on replacement and consumable items.

We saw a large increase in revenue for wireline products in particular, our empire like graceless, wireline cable, which increases the efficiency of our customers operations.

Man for our stimulation products also increased in the quarter as customers replaces consumable items to put their fleets back to work.

Finally in the production segment, our valves product line continued to feel the negative impacts of slow underlying demand comp.

Compounded by reductions in inventory across distribution channels.

Orders in revenue in almost every part of the health of the valves product line were negatively impacted.

We believe the distributor de stocking to be transitory and that underlying activity in the midstream and downstream markets will ultimately increase just as we have seen completions and drilling activity increase.

That said the valves business team took decisive action in the quarter to reduce costs and.

It actually increased EBITDA in the quarter, despite a meaningful decrease in revenue.

Revenues for our production equipment product line were down primarily due to the slowdown in shipments to our customers in the mid continent and Permian basins.

Orders, however were up significantly in the product line as customers placed orders for future shipments in both oil and gas focused basis.

This increase in commitments by our customers is consistent with strengthening drilling and completion activity in the U.S.

Now, let me turn the call over to Neil to discuss some of our key operating initiatives.

Thank you Lyle.

Good morning, everyone.

As we head into the final quarter of a difficult year.

Arthur recognized for an incredible employees.

The challenges we have experienced within our society industry and company have been monumental.

The Forum team has responded with resolve persistent and determination.

Thank you.

Looking back at the market during Q3.

The trends between drilling and completion activity diverged event.

After bottoming during Q2 Frac activity in the U.S. has more than doubled.

Well that increase was from a very low base.

Its contract with the us drilling rig count.

Which bottom halfway through the quarter, but has increased far less from that point.

This divergence Europe demand for completions focused solutions.

While drilling and well construction products lag.

We saw that trend and formed smoking for products and solutions tied well completions, they significantly increased quarter over quarter.

This includes environmentally.

Our premium refunds wireline cable.

Derek coil coil tubing.

And our natural gas production focused gpus.

We expect to see further growth for these solutions in the fourth quarter, especially as customers bring equipment back into service.

Another product that witness increased demand in the quarter with Sandguard, our S&P sand management system.

Sandguard as part of our artificial lift offering which is marketed as for multi listed solutions.

This slide offers sand management gas mitigation and cable protection systems that extend the life of our customers' artificial lift program.

These solutions work on almost all type of artificial lift and are not tied to a certain brand apart.

Also great characteristic of this line is.

That is driven by production.

Demand comes from new completions and Workovers.

In fact about 50% of our sales go into older producing wells.

For a multi lift solutions generate strong results, regardless of the level of drilling and completion activity.

Another trend we continue to monitor is the buildup of drilling and completion equipment in the middle East and Asia.

This activity slowed a bit during Q3 due to COVID-19 travel restrictions.

However.

We expect activity to recover in Q4 as national oil companies.

The big four service companies.

Local middle East providers resume operation.

This will drive bookings and revenue for our premium drilling handling tools mud pump consumables blowout preventers and coil tubing.

Shifting to the cost side.

We have significantly reduced expenses across the board.

That's correct and Lyle mentioned in their remarks.

Our cash costs have been reduced by nearly 50% since last year.

However, in an environment, where U.S. drilling rig count.

Is expected to average between 304 hundred units next year.

More cost need to be taken out of the business.

We're continuing to review our portfolio of products.

We have a number of products that generate substantial profit even at low levels of activity.

These products also deliver significant economic value to our customers. They are differentiated with limited competition and they will grow strongly through the next cycle.

We will continue to invest in these products to develop new technology and to take additional market share.

Concurrently.

Given the expected level of activity next year we.

We will significantly reduce expenses for products that are not profitable with their current cost structure.

We have begun.

And we'll continue to simplify and consolidate and potentially exit certain of these products.

These actions are are currently expected to be completed by early 2021.

And we'll eliminate an additional $20 million to $30 million of annual expenses.

After these actions are complete.

We will have significantly lowered our breakeven EBITDA and enhance our operating leverage.

I will now turn the call back over to Chris for closing remarks.

Thanks Neil.

What a year 2020 has been for so many reasons, who could have predicted negative oil prices, resulting in a sudden stop engine oilfield activity driving the rig count to record low levels.

The worst is behind US just from an oil and gas perspective opt.

Operators have begun to ramp up their drilling and completion activity. So they can try to sustain their oil production levels.

Meanwhile, the U.S. gas market is looking better than it has in years.

At four of.

Our new orders turned up in Q3 for the first time in several quarters. This.

This is the necessary precondition for our revenue to increase which we expect to occur in Q4.

As activity levels begin to recover four of results will show a direct improvement.

We expect our Q4 revenue to be at least as high as the $113 million generated in Q2.

We also expect our sequential incremental EBITDA margins to exceed 35%.

With the recent changes to our debt structure, we now have a sustainable financial position and the cash resources to fund our growth.

Our much more efficient cost structure means we will achieve an attractive earnings level at a much lower level of drilling completion activity that in the past.

Thank you for your interest in for.

Laura at this point, we will open the line for questions.

Thank you Sam.

Ladies and gentlemen, if you have a question at this time. Please press Star then the number one what are your plans.

Stone Palestine again, that's star then the number one well on the Touchstone telephone. If your question has been answered you.

You wish to move yourself from the queue. Please press the pound pool, we'll pause for just a moment to compile the tyranny of Austin.

Thank you first question comes from the line of Bob Plainville farms is doing she partners. Your line is now like go ahead.

Thank you good morning, guys good.

Good morning.

I guess I'll start by saying congratulations on all the progress on the debt front that was a herculean effort and it looks like it gives you a lot of runway. So congratulations on that that's the comment question would be.

So Neil.

You mentioned a fairly significant.

Reduction in expenses, another 20 to 30 million in annualized expenses.

Associated with with some efforts around your various product lines does that is that number.

Something that is you talked about breakeven EBITDA at I think 325 rigs.

Do we.

Do we think about this lowering the the required number of rigs to get to breakeven in the U.S. or or was that incorporated in that comment.

Hi, Dan Yeah that.

The additional costs.

Savings that we're going to take out a bit additional cost take out of the business isn't included in that that breakeven estimate that we put for 325 rigs.

So it's part of our effort to lower that breakeven point and continue to do what we can and we're not assuming.

Assuming any improvement in the market from a pricing standpoint, or something like that that would.

Eventually come along and help.

Help increase the operating leverage even more.

Sure. Thank you and then when we look at the orders that you are taking today can you can you talk about or what margins or profitability looks like on those orders compared to where we might have been in Q1 or Q2. This year is it better worse the same.

Yeah I mean.

One of the things we're trying to take advantage of here Dan is across our portfolio, we have product lines that have.

Very strong margins, even in today's market and we have others just given the low activity the margins margins are low.

I don't think it's such that we've had a significant change in the margins within the product line, but what we're trying to do is put the resources behind those product lines that have these higher margins and we think we'll have the near term benefit.

The market recovery, such as in our completions area high margin products benefiting from this upturn and will will.

Try financial performance.

Great and then one last one and I'll re queue and let others ask questions. Your your working capital.

Continues to be a oh and increases in cash flows for you.

You indicated I think in the prepared remarks that you expect that to be able to continue.

Any sort of order of magnitude you are kind of taken out somewhere between.

10, and $20 million a quarter of receivables and inventory do you think that that trend can be sustained and how much working capital do we think we might see in 2021, given you expect activity to improve in revenues to pick up.

Yeah, Dan this is while a good question. So I think as we see the orders begin to inflect and revenue pick up one of the headwinds will have is building accounts receivable as the business begins to grow.

We do still continue to have significant opportunity on the inventory side of our working capital reduction the team's done a really nice job of reducing inventory over the past a bunch of quarters and we think that would continue and at least an initial part of a recovery in activity in revenue begin to act.

All right.

And then at some point that would slow down as we need to build up some revenue in certain key areas, where we're a little bit lighter. So we think that will continue and provide a source of cash above our EBITDA level. So we can continue to have that cash flow conversion to be higher yes, and the inventory.

Source of cash should offset the build and receivables.

So net net neutral at worst, but probably a net positive in terms of cash impact.

That's right that's what we're planning for yes.

And then of course that EBITDA growing as a contributor and our capital spending requirement. We are capital light very very little in the way of Capex.

Great. Thank you.

Thank you Dan.

Well very good.

Laura I think that.

That'll that'll wrap us up here and we appreciate the interest.

And we look forward to talking to everyone.

This quarter. Thank you very much.

Thank you Sam. Thank you so much presented some again. Thank you everyone for participating. This concludes today's conference you may now disconnect. Thanks.

Hi, everybody.

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