Q1 2021 Forum Energy Technologies Inc Earnings Call
[music].
Morning, Ladies and gentlemen, and welcome to the Forum Energy Technologies first quarter 2021 earnings Conference call.
My name is Stephanie and I'll be your coordinator for today's call at.
At this time all participants are in a listen only mode and all lines have been placed on mute to prevent any background noise.
As a reminder, this conference call is being recorded for replay purposes.
I will now turn today's conference over to Lyle Williams, Chief Financial Officer. Please proceed sir.
Thank you Stephanie.
Good morning, and welcome to Forum Energy Technologies first quarter 2021 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 press release after the market closed yesterday and it 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, 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 for two weeks.
I'll now turn the call over to Chris.
Okay.
Thanks for all and good morning.
It will soon be one year since oilfield activity bottomed due to the pandemic and the increase in drilling and completion activity over the past 12 months has been significant.
Although our customers remain very conservative on their spending we are seeing that some idle equipment is being reactivated and.
And they are working off their inventory and consumable spares from decommissioned equipment.
Customers are becoming concerned about supply chain and says raw material prices and lead times are starting to increase.
As a result of these factors demand is improving nicely for Fep's short cycle products.
Customers may not yet be willing to spend capital dollars on new equipment, but clearly their spending is increasing to keep equipment working and to reactivate stacked equipment.
S E T is uniquely positioned to benefit.
Benefit from this short cycle spending to support higher drilling and completion activities.
As we have high graded our product portfolio, our higher margin products are especially benefiting from this increase and spending as Neil will talk about shortly.
During Q1 F T saw a 21% increase and our inbound orders compared to Q4.
And that's excluding from the comparison and the businesses we sold in Q4.
And our book to Bill ratio of 1.2 is our highest level ever for years.
Clearly the demand for our short cycle consumable products with.
Driving these orders so far and spending on capital goods remains constrained.
However, we are beginning to have positive customer discussions for our new generation of capital equipment for drilling and pressure pumping.
And subsea applications.
This accelerating level of inbound orders is very encouraging as bookings are obviously, the best leading indicator for our future financial results.
As our new orders convert to increased revenue a key consideration is how much of that revenue flows through to the bottom line.
I believe MPT has excellent operating leverage due to the significant structural cost reductions we have made.
Our available manufacturing capacity to accommodate more volume and revenue.
And our portfolio repositioning from lower margin to higher margin products.
Incremental margins will vary from quarter to quarter due to the mix and timing of shipments, but our performance in Q1 was exceptional.
S E T delivered 70% incremental margins as EBITDA increased from Q4 by $7 million on a $10 million increase and revenue.
Pro forma for the Q for divested valve lines.
And we're not a software company. So I don't expect our incremental margins to be at that level going forward, but I do think our operating leverage on higher revenue will be attractive.
The recovery and U S rig count will clearly be the most important driver for our near term results.
However, <unk> has exposure to markets away from U S upstream oil and gas more than 40% of our revenue comes from other drivers such as international activity, New energy and G. H G reduction.
And other non oil and gas sources.
And the longer term. These other revenue sources will become even more important for us.
Now, let me turn the call back to Lyle.
Thanks, Chris.
And the first quarter U S drilling and completion activity grew at a pace faster than was generally expected.
And resulted in strong financial performance.
Pro forma for the divestiture of our two valve brands and the fourth quarter, our overall bookings increased by 21% sequentially to $138 million.
And our revenue increased by 10% to $115 million.
As Chris said, our book to Bill ratio was over 1.2, and importantly, we built backlog and each of our product lines and the first quarter.
The magnitude and breadth of this backlog growth bodes well for the remainder of the year.
The strong top line performance refugee was led by our completions segment, where our primary products for short cycle consumables with high leverage to U S activity.
Completions bookings and revenue were up sequentially by 56% and 24% respectively.
These increases came despite the negative impact of the February freeze where operations for a number of our customers and the Permian basin were shut down for more than a week.
The significant restructuring efforts, we announced in late 2020 are nearing completion and enhanced our bottom line results for the quarter.
Consolidated EBITDA for the quarter of $2 million came in above our roughly breakeven guidance.
On a pro forma basis, EBITDA increased sequentially by $7 million or 70% incremental margins for partially attributable to a favorable favorable mix of completions segment revenues and demonstrates the strong operating leverage inherent in our leaner operating cost structure.
Comparing these first quarter 2021 results with the first quarter of 2020 on a pro forma basis for.
Further supports the significant benefits of our cost reduction efforts.
And comparison.
Revenue decreased by $55 million, while EBITDA increased by $1 million.
These solid incremental margins will normalize over time, yet we still have the capacity to increase our revenues without considerable addition to our fixed cost structure.
Therefore, we look forward to continued favorable incremental EBITDA margins through the year.
Looking ahead to the second quarter, our strong revenue correlation to U S rig count levels and the fact that U S rig count has already increased over the first quarter average supports our guidance. We expect revenues for the second quarter of between 125 and $135 million and <unk>.
EBITDA of between six and $8 million.
Let me share further information about our segment operating results for the first quarter.
On a sequential basis, our drilling and downhole revenues decreased by $1 million, while adjusted EBITDA increased by $2 million on the back of considerable restructuring efforts in this segment.
A couple of large international projects for our drilling product line were delayed by our customer at the end of March, causing the revenue decline and the segment.
Demand for our downhole products increased.
With growing activity and the U S and revenue and our subsea product line grew as additional revenues were recognized on capital projects and our growing backlog.
As I indicated earlier, our completions segment growth was impressive in the quarter revenue and adjusted EBITDA for the segment increased by $7 million and $4 million respectively.
Our pressure pumping products grew by an impressive 80% benefiting from both increased activity levels and from reactivation of fleets by our customers.
And the quarter, we booked orders for our treating iron and new innovative flexible host products.
And with activity continuing to increase we expect further strong revenue growth from these pressure pumping products.
Production segment revenues declined sequentially by $5 million and EBITDA declined by $1 million due to the divestiture of our a b C and quadrant valve brands at the end of the fourth quarter 2020.
On a pro forma basis however.
Revenues and adjusted EBITDA increased sequentially by $4 million and $1 million respectively.
Importantly for the first time and a number of quarters revenue for our valve solutions product line grew as downstream and user demand increased and certain of our distribution partners began to play stock orders as <unk>.
They reached their target inventory levels.
To wrap up segment results, our adjusted corporate expenses were $6 million and the quarter in line with our expectation.
We expect roughly similar results and the second quarter.
Our net loss, our net loss for the quarter on a consolidated basis was $30 million or $5 28 per diluted share.
Excluding $8 million of special items adjusted net loss for the first quarter was $3 95 per diluted share a sequential improvement of 85.
The $8 million of special items.
Includes $4 million of foreign exchange losses.
3 million of restructuring and other costs.
And a $1 million loss and extinguishment of debt from the repurchase of our convertible notes and the first quarter.
I'll say more about the loss on debt extinguishment and as I cover our balance sheet items.
And the first quarter, we made additional progress on improving our capital structure. We ended the first quarter with $101 million of cash and $142 million of availability under our revolving credit facility for total liquidity of $243 million.
Our net debt outstanding at the end of the first quarter was approximately $199 million calculated as $300 million of convertible notes outstanding less 100 and $101 million of cash.
And the quarter, we repaid the $13 million balance on our revolving credit facility that was outstanding at the end of 2020, and we repurchased $16 5 million principal amount of convertible notes for $15 $6 million.
The net carrying value of the repurchase debt, including unamortized debt discount and debt issuance costs was $14 $7 million, resulting and the 1 million loss on extinguishment of extinguishment of debt.
Even though the notes were repurchased at a discount to par.
As a reminder, all of our debt repurchases capital expenditures and acquisitions would reduce our obligation related to excess cash proceeds from our valves divestiture as defined and the convertible debt and venture.
Our free cash flow after net capital expenditures and the first quarter was approximately breakeven, which is slightly better than the guidance provided in the fourth quarter earnings call.
As expected our free cash flow and the quarter was negatively impacted by approximately $3 million of restructuring transaction and other costs as.
As well as the timing of typical first quarter working capital related items, such as payments of annual property taxes and certain employee related compensation.
Proceeds from the disposition of capital assets generated $2 million of cash and the first quarter.
And we generated $10 million of cash from net working capital due to solid reduction and our and our inventory.
And the second quarter, we expect free cash flow to be slightly negative.
As incremental EBITDA improvement is more than offset by the timing of our 14 million semiannual interest payment on our convertible notes.
And slightly and slight working capital growth on increasing revenues.
And as our EBITDA continues to grow through the year, we do expect free cash flow and a full year basis to be positive.
Now, let me turn the call over to Neil to discuss our ongoing initiatives and market opportunities.
Thank you Lyle.
Morning, everyone.
<unk> operational and financial results are encouraging and a number of areas.
Demand for our high margin consumable products is robust.
And the consolidation and portfolio optimization efforts, we began last year and produce strong incremental margins.
And third quoting activity for our drilling and subsea production and stimulation capital products is accelerating at a significant pace.
Let me address each of these key products key points and more detail.
As Chris and Lyle noted drilling and completion activity has increased significantly.
And to operate efficiently and safely our customers are demanding new consumable products.
The Destocking and Campbell is cannibalization efforts over the past few quarters has appeared to have run its course.
We are experiencing strong demand for sand control and cable protection products for artificial lift for multi lift solutions.
Coiled tubing and line pipe for global tubing.
Greece list wireline cable from quality wireline and <unk>.
<unk> production and valves from SPD.
And mud pump consumables for P quip.
Revenue growth from these products exceeds the growth rate of their market drivers and we expect this trend to continue in future quarters.
Also.
These products have strong margins and as they are generally highly engineered with proprietary designs and specialized manufacturing processes.
Moving onto our consolidation and portfolio optimization efforts, we made significant progress on the changes announced in our last conference call.
The team is executing our strategy of high grading our product portfolio.
And reducing fixed costs by consolidating manufacturing facilities.
The benefits of our effort to eliminate at least $20 million of annual expenses were evident and a strong incremental EBITDA margins discussed earlier.
In addition.
While <unk> has a smaller footprint today versus one year ago.
We maintain the capacity to significantly growth production.
This is important with regard to the the last item I want to highlight for you did for you today.
<unk> quoting levels for our capital equipment.
Before providing a few examples of demand.
I want to explain how that plays a different role and the capital equipment cycle versus many of our competitors.
We develop and sell engineered products that are key components of long life assets like Drillships.
And fracturing fleets.
Offshore support vessels and land drilling rigs.
The lifecycle of our component products is far shorter than the long life assets due to wear and obsolescence.
So while we do not expect a large rig a frac fleet capital build cycle we.
We do expect a replacement and upgrade cycle for many of our component products.
Strong quoting activity and initial bookings for this equipment is giving us confidence and that outlook.
One example is our single line manifold and high pressure flexible hose.
This solution allows our customers increase uptime significantly.
And is also ideal for simultaneous applications, where multiple wells are fracked at the same time.
Another example is the work class Rovs designed and sold by our subsea product line.
<unk> has a significant installed base of Rovs that is aging and require and replacement.
Demand for these vehicles is also increasing as our customers shift towards offshore wind farm installation service.
We are well positioned for the energy transition with our Rovs for the subsea team.
The last example, I want to provide is our fr 120, iron roughneck, a pipe handling tool used on drilling rigs.
We designed the Fr 120.
To have the highest torque density and and in the industry.
They can fit and almost any modern drilling rig.
While being able to breakout of 120000 pounds.
As the industry continues its shift to five and a half inch drill pipe more robust pipe handling tools are required and the fr 120 is vastly superior to existing rough next.
And this is a great example of the replacement and upgrade cycle, our key product components undergo.
In summary, we experienced strong demand for our high margin consumable products and the first quarter and expect this trend to continue.
Our.
Consolidation and portfolio optimization efforts have created significant operating leverage and we are and the early stages of a capital component replacement cycle cycle.
And where we are well positioned.
This is a great time to be with FCT.
I will now turn the call back over to Chris for his closing remarks.
Thanks Neil.
As you can tell we are pleased with the progress the team made and the first quarter and we are excited about our prospects for the rest of this year.
It's great to be back on offense after just playing defense for so long.
Our focus on cost reduction and working capital discipline has served us well and is now well ingrained at SVT.
Increasing orders and revenue coupled with our low cost structure will yield operating leverage and higher EBITDA.
We think this gives us a clear route to further delever, our balance sheet by triggering the mandatory conversion feature and our debt, which will help unlock shareholder value.
Thanks, very much Steph.
Stephanie let's open it up for questions.
Thank you at this time, if you'd like to ask and audio question. Please press star followed by the number one new telephone keypad once again and that is star one to ask a question.
And your first question is from the line of Dan Pickering of pay for Green energy.
Good morning, Thanks for taking my question.
Morning, Dan.
Yes.
I was looking back or try to and I am not sure I got all the way through the fourth quarter press release, but.
You've given guidance for the second quarter and so I think this is the first time and quite a while you felt comfortable enough to do that.
And I assume that's based on the quoting equipment on the capital side or is it the short cycle stuff for whats.
And what's driving sort of the improved confidence to kind of give us guidance as opposed to not.
Yes, Dan what's driving improved confidence is the increase and the our orders and the bookings and we talked a lot about that and today's call as you could tell I think.
Have given some implied guidance, but.
With the orders in hand now.
Which will lead to the revenue and.
Q2, and over the rest of the year I think we've got the confidence to be.
Be more specific.
And we're pleased about the prospects for conversion of bookings to revenue and then through the operating leverage we have good incremental margins and the improvement and EBITDA through.
And through the rest of this year.
Uh huh.
EBITDA guidance of six to 8 million and if we just take this quarter's $1 15.
Next Q2's guided to $1 25 to $1 35, we did 2 million of adjusted EBITDA. This quarter, so kind of the implied EBITDA margins incrementally or sort of 30% to 40% is that I realize 70 is not the right number.
Although it was great to see it this quarter, so that 30% to 40% do we think that holds for the second half of the year or is that just kind of a Q2 number.
30% to 40% is probably a level that we have.
Very good confidence and Dan and of course that is excluding any impact of pricing improvement, which would be additive.
Two the incremental margins.
And you stole my next question Chris switches.
Is there.
With this uptick in orders I mean is there any ability to move price or what do we what do we look forward to feel comfortable trying to get some of the lost pricing back.
Yes, Dan this is Neil.
There are some some opportunities to increase prices and certain certain areas.
And other ones there.
There's still excess excess capacity out there or inventory on the shelves to compete against.
But we are seeing though is on the supply chain, we are seeing lead times, extending and prices going up there and we are able to then pass those.
Pass those increases onto our customers too so.
We were able to mitigate a lot of the supply chain challenges.
The diversified supply base and the inventory.
But it is something we're going to we're going to follow closely.
And.
And monitor as well, yeah, I would just add that.
One of the more understandable reasons for <unk>.
Price increases to our customers is when we do.
And have demonstrable.
Cost increases from our side, so we will take those opportunities.
To increase pricing appropriately.
Awesome.
And Chris and your final comments, you talked about the mandatory debt conversion.
Can you just walk us through the mechanics of that.
And how much money does it bring in when can you trigger it.
How do you think about it or is it is it more of an automatic process.
Dan flow.
Ill take that one for us thanks Kyle.
Our convert roughly half of our outstanding debt would mandatorily convert to equity when our stock has traded above $30 a share for 20 days so.
So as we look ahead to continued increasing activity and.
And and ultimately driving up our results then we see that that $30 per share being being realistic and then mandatorily converting so that would effectively convert on today's numbers, roughly 150, or so million dollars of our debt to equity.
Dramatically and lower our outstanding debt and.
And at that time with higher EBITDA put us and the situation with very low forward leverage.
And.
Gotcha.
And last question for me and I'll, let someone else jump on when and when we think about the lash.
18 months, obviously, it's been.
And it's been a chaotic time period, you guys have been.
Doing significant cost reductions you've sold some businesses do.
And as outside observers is is this kind of forum, where going to C. For the next year is there.
You talked about offense, Chris I mean are there acquisitions that you might do or do we need to kind of stabilize the ship and.
And we think about acquisitions or growth in 2022 vs versus this year.
Yes, two aspects to that that I would say in terms of our.
Our offering and how we're going into the market.
And.
We're very.
Excited about some of the new products that we have coming so we think there will be some enhancements to our offering and.
The range of our customers.
Going forward, and including things and Linda and oil and gas and and <unk>.
The energy transition space.
Now from a non organic standpoint, our focus.
And priority is first on improving the balance sheet through the waves that while was describing.
And I think once we do have a strong balance sheet that's new.
Not viewed as.
Leveraged I think that puts us in a much better and stronger position to consider non organic growth.
Thanks, very much keep up the good work guys.
Thank you Dan.
Well looking at <unk>.
Yes.
I think that.
First question are.
Stole some of the questions from some other folks so I think we'll wrap it up here and Stephanie.
Stephanie Thank you very much and we'll talk to you next quarter.
Thank you. This does conclude today's conference call you may now disconnect.