Q2 2021 Forum Energy Technologies Inc Earnings Call

August 6, 2021

[music].

Good morning, ladies and gentlemen, and welcome to the Forum Energy Technologies second quarter 2021 earnings Conference call. My name is Carmen and that will be your coordinator for today's call. At this time all participants are in a listen only mode. 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 and turn the conference over to Lyle Williams Chief Financial Officer. Please proceed sir.

Thank you Carmen and good morning, and welcome to Forum Energy Technologies second quarter 2021 earnings Conference call.

With me today are Chris Gaut, Forum's, Chairman and Chief Executive Officer, and Milwaukee, Our Chief operating officer.

We issued our earnings 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 2 weeks.

I'll now turn the call over to Chris.

Thanks, <unk> and good morning.

A strong recovery and drilling and completions activity is well underway and FEP is taking full advantage and we're now seeing our customers placed orders for our manufactured capital equipment as well as our short cycle consumable products, our inbound orders increased sequentially by 15%.

Sequentially, the fourth successive quarterly increase and orders for our current business portfolio are now nearly back to pre pandemic levels.

The higher order levels are now beginning to flow through our financial results as revenue increased sequentially by 20% and the second quarter.

With our growing backlog and stable and strong brands and products. We expect continued strong revenue growth and the second half of this year and continuing into 2022.

Market conditions for FMT are favorable as our customers have largely exhausted their ability to cannibalize the stacked equipment and have depleted their inventories of spares.

The positive trends and global drilling and completion of activity, coupled with our customers need to restock their inventory and replace the old equipment sets.

Sets up outstanding market fundamentals for <unk> domestic and international business.

In addition, our non oil and gas and energy transition businesses continued to expand.

With excellent opportunities for the future and the areas of GHT reduction energy efficiency defense and infrastructure.

With the rapid improvement in demand, we are seeing supply chain constraints as others in our industry have commented on.

Such things as raw materials, and logistics have shown, especially rapid and sharp price increases.

We cannot pass through these cost increases as quickly as they have changed but we will make it up over time.

Neil will talk more about this and a few minutes.

We doubt that we will be able to fully offset the supply chain of inflation in the Q3, but by Q4 more of our price increases will be flowing through our results.

By the end of this year, we expect our EBITDA run rate to be at 10% to $14 million per quarter and based on what our customers are now, saying about their growth plans and assuming the global economy continues its current trajectory we have excellent growth prospects for 2022.

We generated nice positive free cash flow and Q2, despite the increase of our receivables and we expect to be positive and cash flow and the second half of this year.

We believe our liquidity and cash resources will be more than adequate to fund our continued growth.

Now, let me turn it back to Lyle.

Thank you Chris.

I am pleased to report on the strong operating results delivered by the team this quarter on.

Our topline growth exceeded U S rig count growth with bookings, increasing by 15% and revenue increasing by 20%.

The correlation of our revenue with the U S rig count is holding and we see upside potential as we ship as we shipped large orders of drilling and subsea capital equipment.

And as we grow our non oil and gas businesses.

Revenue from markets outside the U S provide additional sustainable upside for MPT.

Total revenue from outside the U S was 44% of revenue and the second quarter up 28% sequentially and 40% when compared with the same period last year.

Our second quarter bookings reflect our strong position and activity driven.

Short cycle consumable products and continued demand growth for our differentiated capital equipment.

In particular, our drilling and downhole segment led the strong order performance with a 39% sequential increase and bookings.

Including large drilling and subsea orders that Neil will discuss.

Our revenue increased by 20% to $137 million on the quarter.

Revenue grew and almost every product line, including including sizable project shipments of drilling rig handling tools and North America and completion products.

EBITDA increased by 5 million to $7 million, which was in line with our $6 million to $8 million guidance for the quarter.

We would've generated even higher EBITDA growth and the quarter, but for the impact of freight and steel inflation that we're seeing.

Looking ahead, our guidance for the third quarter as revenue to be between 145, and $155 million and EBITDA to be between 7 and $9 million.

Let me share further information about our segment operating results for the second quarter.

On a sequential basis, our drilling and downhole revenues increased 26% or $13 million and adjusted EBITDA increased by $4 million.

Several large international projects for our drilling technologies product line that shipped in the quarter accounted for the significant revenue increase for the segment.

We also saw a nice increase in revenue for our artificial lift and subsea products.

And our completions segment revenue and adjusted EBITDA increased by $9 million and $2 million respectively.

Revenue grew for all product lines and the segment led by our pressure pumping products that continue to benefit from the strong activity levels and this market.

Incremental EBITDA margins for the completions segment were lower than we typically experience due primarily to the aforementioned material and freight cost increases.

And our production segment bookings and revenue tend to be lumpy due to the size and timing of individual orders.

As a consequence overall segment orders decreased sequentially, while revenues increased $1 million and the mix of lower margin production equipment combined with cost inflation resulted in $700000 of lower EBITDA for the segment.

To wrap up segment results, our adjusted corporate expenses were $6.5 million and the first quarter in line with our expectation, we anticipate similar results and the third quarter.

The special items called out and the release include of $4 million loss on extinguishment of debt.

3 million of restructuring and other costs and $1 million gain on foreign exchange.

Free cash flow of $4 million exceeded our guidance for the quarter as working capital decreased more than expected, we paid $14 million of interest and the second quarter from our semiannual interest payment and smallest and of small additional amount tied to the debt we retired and the second quarter.

Net of this interest payment unlevered free cash flow for the quarter was $18 million.

We expect free cash flow and the second half and full year to be positive.

We ended the quarter with total liquidity of $186 million comprised of cash on hand of $60 million and $126 million of availability under our asset backed credit line, which remains undrawn.

And the second quarter, we repurchased $42 million face value of our 2025 convertible notes, leaving a total outstanding balance of notes of $259 million.

Under the indenture for these notes we have an obligation related to the net proceeds from our valves divestiture that occurred at the end of last year.

This obligation requires us to return what is defined as excess cash proceeds from the divestiture to holders of the notes within 1 year of the closing of the transaction.

Based on the cash deployed to repurchase notes of this year and capital expenditures for the remainder of 2021 and we're pleased to share that this obligation has been satisfied.

And the full $60 million of cash on our balance sheet is now available for deployment and growth initiatives.

I'll wrap up with the discussion of our long term debt and the benefits of conversion of our debt to equity.

Of the convertible notes outstanding at the end of the second quarter, roughly 1 half with mandatorily convert to common stock when stock prices trade above $30 for 20 days.

The impact of that conversion would increase our diluted share count from $5.5 million to $10 million and would be a significant benefit to the FUT balance sheet, reducing net debt by approximately $120 million to about $80 million on a pro forma basis as of June 30.

Our result are resulting debt to market capitalization will be approximately 26%.

The prospect of this significant reduction to our leverage ratio improved.

The improving market fundamentals and strong financial results provide confidence and the stability of FEP and.

And should improve equity valuation.

Other small and mid cap oilfield service equipment companies with low leverage ratios currently trade and an enterprise value of 6 to 10 times 2022 EBITDA.

As our core markets and the <unk> financial results continue to improve we look forward to the conversion of our debt and a significantly improved balance sheet.

Now, let me turn the call over to Neil.

Thank you Lyle.

Good morning, everyone.

To begin I'd like to thank the employees of the SVT for their dedication and professionalism.

While we are smaller more focused company today.

Our employees continue to deliver big results.

And they have net rapidly increasing customer doesn't the customer demand, while maintaining a strong safety culture.

We have some of the best employees and the industry and it is exciting to be of part of this great team.

Shifting to our customers.

The momentum for <unk> products and solutions continues to increase.

Demand for our consumable and aftermarket products is very strong.

We are capitalizing on outstanding brand and market share to deliver great results and our wireline handling tools mud pump consumables coiled tubing artificial.

Artificial lift and subsea businesses.

These businesses deliver high incremental margins, and we will grow as fast or faster than rig count over the long term.

And our last call on <unk>.

Mentioned strong quoting activity or capital equipment component.

These components are either.

Either packaged on new asset or use the upgrade underutilized asset for us and more challenging environments.

And during the second quarter.

Both were turned into orders.

The subsea team booked 3 remotely operated vehicles and launch and recovery systems for use and offshore in Brazil.

Including 2 Aro the orders received and the third quarter.

We have booked a total of set and Rovs this year.

These are highly engineered products used and incredibly challenging environments and SVT as the preferred choice.

In addition to that great win.

We were awarded of large handling to order for 17 rig Newbuild program and Asia.

The end users technical specifications are challenging.

And the Forum D&B oil tools team had the best solution.

Even in an environment, where price still matters.

Customer recognized our value proposition.

We have a lot of great products and I could talk all morning about each of them, but for the sake of time I'll end with our Fr 120.

This is another solution, where <unk> stands above the competition.

Our iron Roughneck pipe handling tool has the lowest cost of ownership and the industry.

And is the ideal device for larger diameter drill pipe.

The Fr 120 meet the drilling contractor requirement to go deeper faster and straighter.

It is a clear winner and the market.

And we are doing everything we can to meet surging demand.

As with many others and our industry, we are seeing headwinds relating to raw material prices lead times and freight costs.

Depending on the product deal costs are up from.

And from 40% to 200% since the start of the year.

Shipping costs from Asia to the U S are 3 times higher year over year, along certain lanes.

Deliveries of key hydraulic sub components had been delayed significantly.

The combination of these issues had a second quarter cost impact and the range of a couple of million dollars.

These issues will have a similar impact and the third quarter.

To combat this inflation, we are pushing price increases for most products.

This will have a positive impact on our book and ship business.

But it will not affect the backlog.

Which we have already booked at a fixed price.

While no 1 likes of price increase.

And our customers understand the supply chain challenges our world economy is experiencing.

And given the strong demand for their services.

They had been able to raise prices to their customers as well.

What does this mean for FCT.

With our considerable backlog existing contract and competitive competitive conditions and a few markets.

Price increases will not materially improve our results of above the third quarter guidance provided by <unk>.

However.

Given our strong consumable and aftermarket sales mix.

We should see a meaningful improvement and EBITDA during the fourth quarter as Chris mentioned in his opening remarks.

Looking ahead of the future.

We are very encouraged by the macro environment.

World GDP is expanding towards pre COVID-19 levels.

Oil and natural gas demand is outpacing supply and prices are signaling the need for investment.

And the oilfield equipment cannibalization cycle has run its course.

Our customers need to upgrade their equipment for today, it's more challenging environment and to buy more consumables for the drilling and completion operations.

<unk> is well positioned to capitalize on this trend with our strong brand and excellent service.

We are also well positioned to participate in the coming energy transition.

Our breadth of experience and engineered solutions from.

From submarines and wind farm of support vehicles.

And to methane capture and processing.

And the geothermal applications.

We will be a key contributor and Decarbonising the world.

In fact, this is not just a vision but of reality.

We are currently supply and critical components for our carbon sequestration project.

Over the project's lifetime.

Many millions of tons of industrial source cotwo will be captured and sequestered.

As an added benefit.

Our product is a significantly smaller carbon footprint versus the competition.

This is of great start and.

And we're excited to be a key contributor to reducing Cotwo <unk>.

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

Thanks Neil.

There are a few points I'd like to highlight for you. This morning.

The fundamentals have moved and the MPT favor overreach.

Over recent months, there has been a significant shift and our customers' attitude and motivations.

Finding ways to avoid spending money to now needing to spend money to sustain operations and put more equipment back to work.

Second we see our orders and revenue continued to grow with the positive shift in spending momentum by our customers.

The increasing revenue will unleash the significant operating leverage and our business given our now favorable structure port are fixed and overhead costs.

Although our variable raw material and logistic costs are temporarily impacting our gross margins were.

We are taking price actions that will restore our incrementals.

Third with the increased revenue and operating leverage driving our improving EBITDA.

We have a clear path to deleveraging our balance sheet, which should lead to a re rating of the stock the multiple expansion on the higher <unk>.

EBITDA.

I believe the FEP is on the right course, and we have an excellent team.

Thank you.

Carmen, let's take the first question.

Thank you.

And as a reminder to ask the question simply press Star 1 on your telephone and we have a question from Dan Pickering with Pickering Energy. Your line is open.

Good morning, guys.

Couple of the couple of questions.

When you talked about and thank you for the color on the.

Impact of the.

The cost inflation, so when I do the math of a couple of million Bucks of cost hits to the.

And next quarter.

And youre kind of midpoint of your guidance that would say revenue revenues up 12 or $13 million and.

EBITDA of $1 million and half of it would be 3 and a half if you didn't have the $2 million of cost that's sort of of 30% incremental EBITDA.

Level ex the cost is that how we should be thinking about Q.

Q4, or should incrementals actually be better given the pricing impacts.

Dan. Thanks, This is alive and I'll take a little bit of debt and.

And as we think about our.

Incrementals going forward, what we do see is.

As with our backlog that we have in place today.

The fixed prices.

This increases are going to have a better impact on some of our short cycle products and after that and backlog bleeds through so Q3, therefore being a little bit softer.

We'll have some backlog that's already been booked and the fourth quarter, but we do expect to see improving incrementals on that backlog as we see call. It net price from here on.

And on some of those new bookings.

Okay.

And.

Wow.

And I've got you talking the.

The working capital increase on the receivables side was pretty big $18 million on a $23 million increase and revenues quarter to quarter.

That was that these big Inc. International projects that are shipping, but they take a while to pay and how do we think about.

Working capital impacts and the second half of the year.

Good question and thanks.

From the <unk>.

Days sales outstanding or DSO perspective, which is how we look at receivables were roughly in line with where we were at the end of the first quarter. So so those receivables call it and the 70 to 80 day range on average.

Where the industry has pushed us with customers.

Not necessarily and impact from the change in mix.

With our with our international customers, we work hard to secure debt payment or some sort of guarantee of that payment upfront and it can have a little bit of mix as far as timing.

But generally that's where that is so we were we were comfortable with the the dsos that we have and therefore, the resulting increase and AAR.

Okay and.

Yes.

Yes, if if if.

Revenues and then continue to increase.

And Q3 and Q4.

Sort of how do you view the.

The working capital requirement for the for that revenue Bill Yes.

Yes, really really 2 big pieces for us in terms of working capital so.

And we've said and would expect debt our receivables we continue to grow as our revenue grows.

On the other hand as inventories.

And so in the second quarter, we saw inventories come down.

<unk> nicely and.

And it would expect that with the inventories that we do have the ability to hold those generally so so maybe not have those come down the way that they would who of activity picking up be able to hold roughly consistent inventory level. So our big drag on working capital improvement is going to be receivables.

But net net about similar with inventories.

And and.

Chris as you you talked about 'twenty 2 as cash.

And of a further growth year.

And we're exiting fourth quarter and the 10.

The $10 million to $14 million range sort of $12 million at the midpoint there.

So we've got a call it a $50 million run rate for 'twenty 2.

And how do you think about growth are you thinking about growth from the Q4 level. So we should be thinking about at least $50 million of EBITDA for 'twenty 2.

Or is it growth from the average of 22.

So thanks, Dan we're thinking about growth from the exit rate from 2021.

And we're not putting a quantification on that yet at this point, but we think that.

With the ongoing improvement and drilling and completion activity the need to reinvest.

And our customers.

And increasingly finding that they need to restock their inventories and update the capital equipment.

All of those things should lead to higher revenue for us and that flowing through and good margins in 2022 and growth and 22 from the exit rate in 'twenty 1.

Okay, and potentially some expanding incrementals and then from that 30% level, just because of hopefully some pricing and operating leverage.

Yes, I mean, the thing about incrementals as they do vary from quarter to quarter of bit there is a mix element there.

We had very high Incrementals in Q1.

I think over the course of this year, if you look over several quarters on Incrementals will be.

Fine.

And I think will show.

Good Incrementals in 2022 as well.

Okay.

And Im monopolizing, the Q&A, but I'm going to keep doing it just the second I was encouraged by.

The fact that you have given guidance right for a while the industry. It was too hard to know what was going on it seems like from an order perspective, you're you're comfortable now with with some visibility.

So I'm sort of struck by improving visibility improving profitability and and.

And stock price sits on your underperforming or at least have been.

And weak and I'm just curious is there anything associated with the.

And the debt I know, it's the convert is there any on.

Our focus is there and army here, where folks of shorting the stock to the long the debt or something like that that debt.

Might have an influence on stock price performance or is it just this is the way small cap oilfield service stocks are trading right now.

While there is.

Certainly an element of the ladder.

But to the extent.

And owner of the converts who.

<unk> is a high yield investor is going to be converted and the equity I think they are probably thinking about.

Pre positioning for that so that'll be.

It's something we'll have to work through but.

On the fundamentals should rule of the day right.

And as our EBITDA and gets up and it becomes clear and that we're on our way to forcing the conversion.

Unleveraged, and not just deleveraging, but and leveraging the balance sheet.

And that.

Should get.

Attention and as I say.

Driving of re rating of the stock.

Right and.

And there is the mandatory conversion with the.

And the 30 day or a 20 day stock price over 30 Bucks is their wins. The first time you can can you kind of push conversion other than that.

Stock price.

And trigger.

Yes.

And the Youre right the amended the mandatory convert happens when our stock trades above $30.4 for 20 days.

Not an opportunity for us to force the conversion there is an optional conversion at $27.

The holders, but our view of would be the unlikely that a holder would convert so probably we're looking at debt conversion happening at the $30 period.

Got it and the alternatives for us are going to be looking at the call.

That window opens for us about this time next year.

Okay any other questions. Thank you Dan Thank you.

Thank you yes. Our next question comes from Peter <unk> with IRS.

Hey, great. Thanks for taking the call and the terrific quarter of Gee, it's been a long time right, but it's nice to see things.

C things moving moving and such a great direction now.

Just a few things.

What are you seeing your capex needs as being now and.

I guess really kind of a little prospectively here now the things, we just sorted out so much what's the capex and that we should think about yes. Thanks Peter.

So our capex numbers are still relative.

Very low.

And our needs would be really low going forward as and equipment manufacturer are big capital expenditures are going to be facilities machine tools and things like that.

And even with our restructuring efforts that we undertook late last year, we have significantly we saw a significant capability and capacity in terms of both of those so as we look forward even for the rest of the year, we've kind of guided that our full year capex would be under $10 million.

And our forecast is lower than that so we see a pretty low need for capex.

As a general rule on a go forward basis.

Okay and.

Okay and just a quick question about so are you going to GAAP.

Pick that extra portion of the of the coupon or do you think you will pick that up and cash.

Yeah, we've been we've been paying that.

And cash and would expect that we would continue to do that given the cash that we have on on the balance sheet debt.

And I would expect but just wanted to ask and then just the amount debt.

That would fall out of the mandatory conversion, what's the dollar amount you see that as currently.

Sure.

Use of using the data that's in our indenture Peter.

And that's roughly looks like somewhere about $120 million of debt outstanding debt would convert.

At the time of the mandatory conversion.

Okay.

On an EBIT percent yes.

Okay and.

And just a few comments on the overall M&A environment and just what do you see out there.

Yes, I think Peter that.

There are interesting things developing and the M&A market.

Whether it is privately owned companies.

Private equity owned companies that have been kind of stuck.

Or the opportunity for consolidation.

Forums the view is that.

We would like to.

And get our equity value up.

And the clearest way to do that is the deleveraging and re rating of the stock.

So on.

Our first priority is in that direction.

But we are following.

Available out there and we're seeing.

And improving.

M&A landscape with less competition.

Okay, Okay, that's really yet, but yes, and again nice quarter. Thanks, Thanks, Peter Thanks, Peter.

Thank you and this ends our Q&A session I would like to turn it back to Chris Scott for his final remarks.

Welcome and thank you and we appreciate the interest and we're going to keep up the the hard work here and S&P.

Thank you very much and we'll talk to you next quarter.

Bob.

And with that we conclude our conference for today. Thank you for your participation you may now disconnect.

[music].

Good morning, ladies and gentlemen, and welcome to the Forum Energy Technologies second quarter 2021 earnings Conference call. My name is Carmen and I will be your coordinator for today's call. At this time all participants are in a listen only mode.

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 the conference over to Lyle Williams Chief Financial Officer. Please proceed sir.

Thank you Carmen and good morning, and welcome to Forum Energy Technologies second quarter 2021 earnings Conference call.

With me today are Chris Gaut, Forum's, Chairman and Chief Executive Officer, and Milwaukee, Our Chief operating officer.

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

Before we began and we would like to caution listeners regarding forward looking statements.

Our remarks today may contain the information other than the historical information.

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 2 weeks.

I'll now turn the call over to Chris.

Thanks, <unk> and good morning.

A strong recovery in drilling and completions activity is well underway and FEP is taking full advantage. We are now seeing our customers placed orders for our manufactured capital equipment as well as our short cycle consumable products, our inbound orders increased sequentially by 15%.

Sequentially, the fourth successive quarterly increase and orders for our current business portfolio are now nearly back to pre pandemic levels.

The higher order levels are now beginning the flow through our financial results as the revenue increased sequentially by 20% and the second quarter.

With our growing backlog and stable and strong brands and products. We expect continued strong revenue growth and the second half of this year and continuing into 2022.

Market conditions for FMT are favorable as our customers have largely exhausted their ability to cannibalize the stacked equipment and have depleted their inventories of spares.

The positive trends and global drilling and completion activity, coupled with our customers need to restock their inventory and replaced all the equipment.

Sets up outstanding market fundamentals for <unk> domestic and international business.

In addition, our non oil and gas and energy transition businesses continued to expand.

With excellent opportunities for the future and the areas of GHT reduction energy efficiency defense and infrastructure.

With the rapid improvement in demand, we are seeing supply chain constraints as others in our industry have commented and such.

Such things as raw materials, and logistics that show, the especially rapid and sharp price increases.

We cannot pass through these cost increases as quickly as they have changed but we will make it up over time.

Neil will talk more about this and a few minutes.

We doubt that we will be able to fully offset the supply chain inflation and Q3, but by Q4 more of our price increases will be flowing through our results.

By the end of this year, we expect our EBITDA run rate to be of $10 million to $14 million per quarter and based on what our customers are now, saying about their growth plans and assuming the global economy continues its current trajectory we have excellent growth prospects for 2022.

We generated nice positive free cash flow and Q2, despite the increase of our receivables and we expect to be positive and cash flow and the second half of this year.

We believe our liquidity and cash resources will be more than adequate to fund our continued growth.

Now, let me turn it back to Lyle.

Thank you Chris.

I'm pleased to report on the strong operating results delivered by the team this quarter.

Our top line growth exceeded U S rig count growth with bookings, increasing by 15% and revenue increasing by 20%.

The correlation of our revenue with U S rig count is holding and we see upside potential as we ship as we shipped large orders of drilling and subsea capital equipment and.

And as we grow our non oil and gas businesses.

Revenue from markets outside the U S provide additional sustainable upside for MPT.

Total revenue from outside the U S was 44% of revenue and the second quarter up 28% sequentially and 40% when compared with the same period last year.

Our second quarter bookings reflect our strong position and activity driven short cycle consumable products and continued demand growth for our differentiated capital equipment.

And particular, our drilling and downhole segment led the strong order performance with a 39% sequential increase in bookings.

Including large drilling and subsea orders that Neil will discuss.

Our revenue increased by 20% to $137 million on the quarter.

Revenue grew and almost every product line, including including sizable project shipments of drilling rig handling tools and North America and completion products.

EBITDA increased by 5 million to $7 million, which was in line with our $6 million to $8 million guidance for the quarter.

We would've generated even higher EBITDA growth and the quarter, but for the impact of freight and steel inflation that we're seeing.

Looking ahead, our guidance for the third quarter as revenue to be between 145, and $155 million and EBITDA to be between 7 and $9 million.

Let me share further information about our segment operating results for the second quarter.

On the sequential basis, our drilling and downhole revenues increased 26% or $13 million and adjusted EBITDA increased by $4 million.