Q4 2020 Forum Energy Technologies Inc Earnings Call
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Okay.
Good morning, ladies and gentlemen, and welcome to the Forum Energy technologies fourth quarter, 'twenty and 'twenty earnings Conference call. My name is Angela and I will be your coordinator for today's call. At this time all participants are on a listen only mode and all lines have been placed on mute to prevent any background noise. As a reminder, this conference call.
And is being recorded for replay purposes I like to turn the conference over to you Loud Williams Chief Financial Officer. Please proceed sir.
Thank you Angela and.
Good morning, and welcome to Forum Energy Technologies fourth quarter 2020 earnings Conference call.
With me today are Chris Gaut, Forum's, Chairman and Chief Executive Officer, and Neal <unk>, our Chief operating officer.
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 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 and.
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 Chris.
Thanks, Lyle and good morning.
After six years of oil and gas activity decline 2000, twenty's stood out as particularly challenging here as.
As a result of the energy demand destruction caused by COVID-19 drilling and well completion activity globally collapsed at the end of the first quarter before beginning to improve slowly and the second half of the year.
F N <unk> top line results, followed that trend with a 46% decline and annual revenue from 2019 to 'twenty and 'twenty as drilling activity measured by the average U S rig count declined 55%.
The response by the Forum team.
The response by the Forum team was outstanding.
We moved swiftly to manage cash.
Reducing our cash cost by 39% and a year and focused on monetizing inventory generating over $50 million of cash flow from inventory reductions.
As a result.
And our decremental adjusted EBITDA margins were a respectable 24% and the <unk>.
Company posted positive free cash flow each quarter.
With the exception of the second where restructuring and severance payments drove free cash flow negative.
We also made excellent progress shoring up our balance sheet during 2020, reducing our net debt from $342 million to $201 billion at year end and extending the maturities of our bonds to 2025, and our bank credit facility.
<unk>.
To late 2022.
I am proud of our team for their decisive actions to protect the company.
And its shareholders.
The fourth quarter reflected an inflection point and results for S E T.
Both the U S drilling rig count and the Frac fleet count increased by 22% sequentially.
Overall, our bookings increased 34% and the book to Bill ratio was our highest level since the market turned it over in 2018.
Revenues increased 9% sequentially to $113 million in line with our expectations.
Our adjusted EBITDA increased by $7 million.
Negative $2 6 million ahead of our expectations with the benefit of our strategic cost cutting and favorable mix.
We have taken major decisive action and F. During this downturn.
As important as our cost cutting and balance sheet repair have been I think the most transformative change. We have made is the recent high grading of our product portfolio.
We are now focused on our highest margin and most differentiated products, while exiting or de emphasizing our more commoditized.
Lower margin products.
This significant change did result, and.
And the asset impairments and Q4 the line will describe shortly.
The key point is with these changes will.
And will be a simpler higher margin and higher.
Higher return company.
Thank you Chris.
During the fourth quarter, the rebound in oil and natural gas prices led to an increase in drilling and completions activity and higher sales of our consumable products.
As Chris discussed we continued to execute on our strategic restructuring actions.
Resulting in additional operating cost reductions and we closed on the sale of our a b C and quadrant valve brands for $105 million and cash proceeds and lowering our net debt by approximately one third.
Let me start by providing further information about our segment operating results for the fourth quarter.
Our drilling and downhole revenue and adjusted EBITDA increased sequentially by approximately $7 million and $5 million respectively.
Our drilling technologies product line accounted for the majority of these increases.
The 22% sequential increase and the U S rig count resulted in higher demand for our consumable drilling rig components.
And international New rig projects drove an increase and our premium handling tools and drilling capital equipment.
Our subsea product line continues to penetrate non oil and gas markets with a substantial contract win which contributed to a total of $28 million of orders for this product line and the fourth quarter.
Demand for our artificial lift and casing hardware products was consistent with levels and the third quarter.
Let me and sort of comment here about the geographic mix of our revenue.
While the U S is an important source of revenue per Rep T. Our non U S revenues were growing in importance led by our drilling and subsea product lines.
And the fourth quarter revenue from outside the U S accounted for over 40% of our consolidated revenues, we expect activity and this more stable market to expand further in 2021.
For our completions segment, the increase and U S. Hydraulic fracturing activity drove a 50%, 56% increase and revenues and a $5 million sequential increase and adjusted EBITDA.
Revenues were especially higher for our consumable coiled tubing and wireline products required by service companies to increase well completions.
Production segment segment revenues declined sequentially by 20% and adjusted EBITDA declined by $3 million.
Our valve solutions product line continued to feel the negative impacts of low demand from end customers and the midstream and downstream markets.
This low demand was exacerbated by inventory destocking by our distributors.
Revenues for our production equipment product line will also down primarily due to lower shipments to customers in the northeast following a large shipments and the third quarter.
Orders for the production segment were up $1 million sequentially and the book to Bill ratio was one one indicating higher activity levels anticipated in 2021.
On a consolidated basis, our net loss for the fourth quarter was $33 million or $5 and 85 per diluted share.
Excluding $6 million of net special items adjusted net loss for the fourth quarter was $4 80 per diluted share a sequential improvement of $1 20.
A complete reconciliation of adjusted net loss is provided and our earnings release for your reference.
The $6 million net adjustment to our income is comprised of and $88 million gain on the sale of our a b C and quadrant valve brands, which is offset by $85 million of asset impairments and restructuring costs as well as $7 million and foreign exchange losses and two.
<unk> million dollars of transaction expenses.
Let me provide additional detail on these adjustments.
On December 31, we sold the assets associated with the a b C and quadrant valve brands, Danville, and Smith Cooper international for $105 million and cash.
For context, and 2020, the a b C and quadrant product families generated revenues of $42 million and EBITDA of approximately $12 million.
$2 4 million of that EBITDA was recognized in the fourth quarter.
We were pleased with the value of the transaction and nearly 11 times annualized fourth quarter 2020, EBITDA and.
And it being fully funded with cash at closing.
The cash received reduced our net debt at December 31 from.
From $306 million to $201 million and provides <unk> with liquidity to consider strategic alternatives and the current market.
And January we repaid the $13 million outstanding on our ABL with these proceeds.
In addition to the sale of ABC and quadrant of the fourth quarter. Our teams made significant progress executing our strategy of high grading our product portfolio and reducing fixed costs.
And the quarter, we made changes to a number of products consolidating manufacturing facilities and rationalizing our product offerings.
Neil will provide details on the benefits of these moves and his prepared remarks.
As a result of these changes we recognized impairments primarily of inventory associated with products, we are exiting and operating leases for facilities. We are closing.
As well as costs associated with those facility consolidations and severance charges. These.
And these impairments totaled $85 million.
The sale of ABC and quadrant and the strategic rationalization actions set up for success and this rising market with a strengthened balance sheet leaner cost structure, and our portfolio of defer and differentiated products.
Our free cash flow after net capital expenditures and the fourth quarter was $4 million.
And this result benefited from improved operations, partially offset by costs paid for severance and facility closures.
Proceeds from the disposition of certain capital assets generated $2 million of cash and the fourth quarter and we decreased net working capital by $24 million due to strong collections and a solid reduction in our inventory.
And the first quarter, we expect our free cash flow to be slightly negative as net working capital increases and the timing of payroll and tax related payments offset our anticipated increase in EBITDA.
Interest expense was $9 million and the fourth quarter, including noncash amortization of the fair value discount on our bonds and.
And depreciation and amortization and stock based compensation were $12 million and $2 million respectively.
We expect these expenses to remain at similar levels and the first quarter.
Adjusted corporate expenses were $5 million and the fourth quarter, and we expect them to be up slightly and the first quarter due to timing of certain expenses.
We ended the fourth quarter with $129 million of cash and $111 million of availability under our revolving credit facility for total liquidity of $240 million.
This should be sufficient to fund operating cash needs for the foreseeable future.
Our net debt outstanding at the end of the fourth quarter was $201 million calculated at $330 million of principal amount of debt outstanding.
Yes, and $129 million of cash.
And the fourth quarter, we redeemed the remaining $13 million of 2021 notes.
Following that redemption, no 2021 notes remain outstanding and our ABL revolving credit facility now matures in October of 2022.
In addition, and the fourth quarter, we completed a one for 20 reverse stock split which brought forum into compliance with the NYSE trading requirements. We now have 558 million shares outstanding.
Now, let me call turn the call over to Neil to discuss our key initiatives and market opportunities and 2021.
Thank you Lyle and good morning, everyone.
To begin I'd like to thank the employees of RPT from.
Embracing our number one core value no one gets hurt.
Our response to COVID-19.
And our safety results were outstanding and 2020.
We finished the year with a total recordable incident rate of 0.53.
We should all be incredibly proud of this result.
And.
As part of our strategic restructuring effort.
We reevaluated our product portfolio at a granular level.
While it is evident from this evaluation.
Is that we have a number of products and solutions that provide significant value for our customers with a limited competition and growing demand expected in 2021 and beyond.
And the aggregate these businesses generate EBITDA margins between 15% to 20% and a 400 to 450 U S rig count environment.
And we will have fantastic incremental margins as rig count growth towards 500 600 rigs.
The teams that run these businesses are focused on maximizing value.
<unk> new products and solutions.
And gaining share as the market growth.
We are going and going to continue to invest and these businesses.
What was also evident from our portfolio evaluation and.
Is that we had a number of products that would struggle to perform even when the rig count rebounds to 800 units.
Here significant cost cutting and restructuring was required.
During our last call.
And I discussed plans to eliminate at least $20 million of annual expenses.
And the fourth quarter. These planned turned into action.
Within our underperforming businesses.
We are consolidating facilities and product offerings.
We are reducing a significant amount of fixed manufacturing cost.
We have put our focus on products and solutions that customers value.
And that has fewer direct competitors.
We have set strict profitability guidelines for these businesses and.
And with this strategy.
We expect <unk> to generate margins that meet or exceed our peers.
And we look ahead to the future.
<unk> is in a great position to capitalize on a normalizing and rig count.
We have a strong market position and drilling handling tools and consumables.
Wireline.
Coiled tubing artificial lift defaulter and well intervention pressure control equipment.
We will continue to add engineered solutions.
Like our surface series and 15000 Psi high pressure flexible hose.
Eliminate 90% of the potential leak paths on a frac site.
This product should significantly decreased nonproductive time.
We have released we have recently completed field trials.
And our supplying a leading pressure pumping company six fleets work of our circuit series houses.
Also.
And engineered products manufacturer with a wide breadth and experience, we are well positioned to participate and the energy transition towards a net zero carbon emissions.
In fact, a number of our products are used and the renewable energy industry today.
We provide products utilized and offshore wind farm installation biodiesel production and emissions capture to name a few.
And this trend continues to materialize and our teams are actively working to repurpose and redesign existing products and solutions for the renewable energy industry.
Also we are developing new products and help operators and service companies meet their greenhouse gas emissions goals.
Over the next few quarters. These solutions will be introduced into the market and we will have a positive impact for <unk>.
We have made dramatic changes to our company. These changes have positioned <unk> to be an industry leader.
Readily excited about our future and the impact we will make.
I'll now turn the call back to Chris for closing remarks.
Thanks, Neal we have made a lot of changes and improvements at S&P.
And we have significantly increased our earnings power for the new smaller LFS market, we now have.
So let me talk about our earnings power and how we see.
2021.
With commodity prices, increasing E&P spending has increased already this year.
Since December drilling rig count is up at least 13% and the U S and we expect that trend to continue.
Given the impact of last week's frigid temperatures, and Texas, and Oklahoma, where a large percentage of our activity takes place we are taking a cautious approach to guidance.
We expect first quarter revenue to be around $119 million and EBITDA to be roughly breakeven.
This compares with the fourth quarter revenue and EBITDA of $104 million and negative $5 million, respectively. Adjusted pro forma for the sale of ABC and ABC and quadrant.
Our first quarter guidance is therefore revenue up about 15% with incremental margins and the mid thirties.
We would expect further improvement and the second quarter as the full benefit of our cost cutting and restructuring efforts are realized.
Looking to the back half of 2021, we subscribe to the view that overall U S crude oil production will remain flat throughout the year.
To achieve this production level Act.
Activity as measured by the number of Frac crews working and the number of rigs drilling will have to increase from current levels.
<unk> revenues are driven by short cycle consumable products and are highly correlated correlated with the U S rig count although it is not a one to one relationship.
Therefore, while forecasting the exact level of activity is difficult we can share the level of EBITDA. We believe is achievable at different levels of U S rig count for example.
And a quarter.
With average U S rig count total U S rig count of 450 rigs.
We expect our quarterly EBITDA would be between seven and $8 million.
At an average of 500 total U S rigs.
We expect our quarterly EBITDA would be roughly $10 million to $12 million or <unk> $40 million to $50 million per year.
And the past the rig count would have needed to be at least 50% higher for us to achieve these levels of profitability.
Internally, we sometimes refer to all of these changes that we have made as forum to point out.
A much leaner and more focused company.
To Mark this new beginning we have also changed up our brand logo, which you may have noticed and.
And we have updated our website landing page and our Linkedin page to showcase new product introductions.
Please take a look and follow ups for more details.
Angela.
We're ready for the for the first question.
Ladies and gentlemen, if you have a question at this time. Please press the star followed by the number one key on your Touchtone telephone is your question asked and answered or you wish to remove yourself from the queue. Please press the pound key.
I guess first question is from the line of Ian Macpherson with Simmons. Please go ahead.
Thanks, Good morning team and I'm, sorry, I missed the beginning the prior call ran over a little bit, but I think I got most of it especially helpful. There at the and Chris with the framework for EBITDA.
Tying that back.
There are moving pieces near term with working capital et cetera.
And getting down to free cash out of EBITDA can you just.
Update us on where run rate interest expenses now after the asset sales.
Yeah, and this is <unk>.
And while thanks for thanks for joining and thanks for the question.
And with our with our debt outstanding about 9% interest interest rate on those notes overall interest and interest expense would be.
9% of 300 million, so about 27 $28 million a year, we do have an opportunity to pay and kind some of that interest, but I think with our cash from our transaction. We will look to pay that interest expense and cash. Okay. That's helpful. Thanks and then.
And this.
Looking at your first quarter outlook I think.
Depending on what day, you reported earnings and Theres been a different perspective, and what the weather impact was last week and what the lingering impacts could be this week and maybe even.
And the early February as supply chains.
<unk> and delayed well well pads and.
Starting back up so maybe that you could frame what this what what your expectation is for the discrete weather impact and how and no.
And we are unknown and you think the full extent of it is at this point.
Yes, and that is a difficult question to answer at this point clearly was pretty much a last week last week, one of 13 weeks and Q1, although we will work hard to recover.
Some of that.
So.
It won't be.
113th, but it wont be zero.
And it affects different businesses and <unk>.
Different ways.
I think chasing down the revenue side and what we'll be focused on and obviously our costs.
Continued during that.
That period so.
And we'll be trying to recover as much of that revenue.
Revenue as we can but clearly has some impact sorry, we can't be more specific.
Just a few days after.
No that's very helpful. Thanks, Chris.
Anyway, congratulations on all of the levers you pull to free up.
And runway here and.
I just wanted to close my questions with whether your strategic options looking forward for this year contemplate any more significant disposals.
And if not what other sort of big issues Youre contemplating with regard to.
Shoring up the future.
Yes.
We have made great progress on the balance sheet. If you look at the past two years and total we have.
Reduced our net debt by $270 million.
And forum does have some really good brands and operations and I think the.
The value of.
Our businesses.
<unk> demonstrated clearly and the sale of ABC and quadrants.
$105 million and.
Proceeds cash and this market.
At 11 times.
The Q4 run rate.
Now as far as selling other operations I think what makes for a a good sale between a buyer and a seller is when.
The asset.
Under consideration is worth more to the buyer than it is to the seller.
And as we look across our other.
And our current stable of businesses.
And what the prospects are from this point forward and and the upside that we see.
And we don't see.
Ah.
Net.
We feel theres, a lot of upside and value there. So I don't expect and we will have other material sales.
Like we had.
Z and QUADRA.
But.
And as I say, if somebody comes in and.
<unk> has a very very high value.
We will take a look.
Understood. Thank you Chris.
Thanks Ian.
Your next question is from the line and Dan Pickering with Pickering Energy. Please go ahead.
Good morning, guys. Thank you and congrats on getting through 2020, I know it was a very tough year. So just a couple of questions around some of the things you said here on the conference call. While you said or maybe it was Chris said, you would expect to meet or exceed.
And the margins of your peers.
And can.
Can you help us with who you consider the peers I mean, what public companies should we look at as the bogey and compare that you're comparing yourself to.
Yes, So neal was talking about the.
As we see the long term benefit of what we're doing.
Our portfolio of <unk>.
High grading and.
And have quite a few businesses that generate very attractive.
EBITDA margin stand.
And we want to grow those businesses and.
So I would say manufacturing peers.
Normalized <unk> and the.
C T.
Teens to upper teens, EBITDA margins and that is our.
Longer term objective.
It will be non out of the single digits and.
2021, but I think we are with the progress, we're making and and as I.
Pointed out the <unk>.
Tremendous operating leverage we have as the rig count begins to improve.
We'll be on our way towards that path and.
Hope to achieve that.
Level of EBITDA margins and and.
And the medium term.
Okay, so call it a.
Mid to upper teens, EBITDA margin 2022, 23 kind of kind of call that.
That certainly makes sense.
You also mentioned.
The renewable sector of the energy trends that position sector is an area, where you are selling things I assume that's fairly small right now, but I mean any quantification that you can help us with there is it 5% of total last 10%.
Roughly where are we at right now, yes, I mean, it is small, but if we add all of our non oil and gas operations. It's more significant a lot of what we're doing and subsea spaces.
And non oil and gas now wind farm and others and Neil.
Yes, Dan I think a lot of our products have a dual purpose, where they can service oil and gas as well as the energy renewable energy industry and.
For example, our subsea with trenches.
Both the pipeline and our cable application and valve solution line production equipment line. They have equipment that can be utilized and multiple applications.
Also evaluate and other product lines and determining what what new markets, we can address and.
And we're finding good opportunities and as an example.
He is an important part of removal. He is important part of renewable applications and we see some of the technology. We have and for example, our cube Radiator's. They may have a good application and the renewable industry as well. So we think theres a lot of opportunities there and again, it's a wide range of our experienced that.
And we can take a lot of a lot of shots to define.
Defined our target.
Okay. Thank you a couple more if I, if youll hear and humor me.
You talked about.
Q1, as kind of roughly breakeven EBITDA.
15% revenue with mid Thirty's kind of Incrementals.
And rig counts, obviously up more than that I understand the last week.
But I think my takeaway would be that that your revenue guidance at least feels pretty conservative given where rig counts that and the likelihood that rig count probably continues to increase so no need to respond to that and that's more of a comment but as we think about the levers around free cash.
Inventories.
He has continued to be one but at what point as we move through the year.
Do we think about working capital or.
Not contributing to free cash if you will so growth and revenues receivables et cetera should be going up or do we have enough inventories still to monetize that working capitals.
A source of cash in 2021 sure Dan Dan Let me take that take both of those actually so look into Q1.
I would highlight that we do have a high correlation of our revenue to U S rig count activity.
That being said as we look within each of our different product lines. We've got a mix of businesses, including a combination of really short cycle consumables that move really quickly when activity does as well as some longer lived capital equipment. So so as we look down through the segments and our guidance and think about that.
Have assumed activity does increase and our completions product lines, we expect those to move pretty linearly with activity increases.
Drilling and downhole won't move quite as much and really that's because in the fourth quarter. We mentioned some sizable shipments from packages of premium drilling handling tools for new new rig builds and the eastern hemisphere. So those look more like a capital or more of a lumpy revenue transactions. So when we normalize out over.
Her time, we'd expect that correlation to hold quarter to quarter, we might see some softness based on when larger shipments go out so.
Good good good pickup that you have there on a correlation and then thinking about inventory and cash from working capital just to reiterate what we did if we net out the impairments and inventory that we took in 2020, we did generate roughly $50 million of cash.
And year from inventory reductions and so as we look forward we see.
Still have what I would call excess inventories and they have the ability to reduce those inventories where revenue stays at lower levels of activity as revenue picks up I think that inventory instead of growing quickly any kind of mute and growth and inventory would be muted.
We do think accounts receivable will growth through the year as revenues do.
So net net we think working capital is still as a contributor to cash flow, but at a much smaller level than it has been in the last couple of years.
That's very helpful. Last question from me at least this go round.
Could you just spend a little bit of time on the production segment and.
That was clearly the softer spot in Q4.
Can you just talk to us about.
About trends and that business and have we seen and indication I mean did they destock in Q4, but we think they might restock. How are you seeing kind of the January February trends and then.
Tag teamed with that not just the production question, but is there any pricing and you're seeing any pricing and the system across any of the business line and thanks, and thanks again for letting me ask a bunch of questions.
Great day.
On the production segment.
Both on the valve side and production equipment and there has been some destocking.
On the valve side, we do sell to the big.
PBF and distribution companies and.
They have made a big point of trying to be more efficient from a working capital.
Standpoint, and.
That's.
And effort that they have ongoing.
And so that has had an impact on us.
We're look we work with them there are good customers for us.
And we also.
And look at project work as well.
Which gets to the investment and the midstream and downstream which hasn't been.
Particularly strong here.
Recently and Im.
On the production equipment side.
We do see larger operators tending to.
Order and bulk and then work down their inventory.
Surface.
Process equipment and.
And that was some of what we felt there with the better oil and gas prices that we're seeing here currently we do expect some pick up there and we have seen some nice orders so some improvement on that side.
And we think is justified.
And outside as we're focused on fewer valves brands.
We're hopeful that we can drive improved sales and that business through additional sales channels domestically and internationally.
Okay.
And then on pricing.
You want to address that yes.
So we do see a little bit of pricing power and a few of our product lines, but I think overall there.
Still a lot of a lot of inventory and capacity out in the market.
However, we do see opportunities that as we introduce new products that add value for our customers that we can increase margins with the introduction of those projects products. So that's an area we're going to focus on.
Yes and surface product.
And that's an example isn't it Neil that's correct, where we're reducing the overall.
Cost of ownership for our customer base, and and Nonproductive time, and the field that we can see and improvement in margins from from product right net flow iron versus versus ly, but win win and get a better margin for us but.
Significant value for the customers.
Great. Thanks, guys. Congrats again on getting through 2020. Thank you Dan Thank you Dan.
We appreciate.
The questions and the interest and thank you all very much have a great day. Thank you Angela.
Ladies and gentlemen. This concludes today's conference call. Thank you for your participation and have a wonderful day you may all disconnect your lines.
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