Q3 2021 Forum Energy Technologies Inc Earnings Call

Conference call. My name is Annie and I will be your coordinator for today's call. 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 I'll turn the conference over to Lyle Williams Chief Financial Officer. Please proceed sir.

Thank you Andy.

Good morning, and welcome to Forum Energy Technologies third quarter 2021 earnings earnings Conference call.

With me today are Chris Gaut forums.

Forum's, Chairman and Chief Executive Officer, and Neal Lux, 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.

I'd like to caution listeners regarding forward looking statements.

Our remarks today may contain information other than historical information.

Please note that we are 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.

<unk> 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 will now turn the call over to Chris.

Thanks, Lyle and good morning.

The improvement in drilling and completions activity is continuing with strong rig count additions during the third quarter, both domestically and internationally.

We are also seeing more interest in offshore oil and gas activity as well as subsea opportunities in defense and for the energy transition.

All of this improvement in activity drove another strong increase in our inbound orders.

The fifth increase in quarterly bookings in a row.

We are now seeing higher orders across all of our product lines in the third quarter, we had a record high book to Bill ratio for the company.

Our longer lead time capital equipment businesses, such as subsea in parts of our drilling product line are seeing strong orders that stretch into next year.

Even our short cycle businesses are seeing high orders as customers become more concerned about availability.

However, this sharp increase in demand is running into the same supply chain issues affecting all manufacturing companies.

And indeed affecting us all now in our daily life.

Cost of raw materials are up significantly.

Virtually everything is taking longer to ship, whereas on backwater with freight costs up several fold.

Although our team at S. E. T is doing a good job managing these issues we are not immune.

In supply chain did have even more of an impact on our revenue and margins in the third quarter than we previously anticipated.

Without these additional supply chain delays, our revenue would have been $10 million to $15 million higher than the level, we actually achieved in the third quarter.

We are of course, raising our prices as a result of cost inflation and we did realize some pricing improvement in Q3 to partially offset higher input costs.

However, we expect that in this fourth quarter, our pricing will begin to catch up with cost inflation and our margins will start to improve again.

Given the current level of thought the supply chain constraints, and resulting limits on productivity our guidance for F <unk> fourth quarter.

Our revenue in the range of $1 45 to $1 $55 million.

And EBITDA of $9 million to $11 million, so revenue $1 $45 million to $155 million EBITDA $9 million to $11 million.

With higher activity levels, and our strong orders, we expect an improved growth rate in 2022 and supply chain issues.

Become more manageable.

Industry fundamentals have improved with high oil and gas prices very attractive economics for drilling and completion.

And the need to reactivate and maintain more oil service equipment.

So we believe the outlook for F. T is very attractive. We also believe our stock is undervalued relative to other asset light manufacturing companies in our sector.

Especially given the hour high international exposure.

Spanning opportunities as part of the energy transition and the clear path, we have to automatically de lever our balance sheet once our stock exceeds $30.

For these reasons, our board has authorized a $10 million stock buyback program.

Representing about 8% of our shares outstanding at the current stock price.

We feel our own stock represents the highest return best investment available to us now.

And with that I'll turn it back to Lyle.

Thank you Chris.

In the third quarter, the <unk> team was able to deliver $141 million of revenue and.

And $7 million of adjusted EBITDA, and 9% sequential increase.

In addition orders grew sequentially by 11% to $176 million with.

With strong backlog, we now have sets the stage for meaningful revenue growth into next year.

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

On a sequential basis, our drilling and downhole revenues increased 3% or $2 million.

And adjusted EBITDA also increased by $2 million.

Incremental margins for this segment were well over 100% sequentially.

All three product lines in this segment contributed to the strong operating performance.

Subsea led with fulfillment of large capital equipment orders.

Our artificial lift product offerings continued market share gains and our drilling product line benefited from favorable product mix.

In our completions segment revenue increased by 7% to $50 million as North American well completions activity trended higher in the quarter.

In addition orders for this segment grew 26% to $60 million.

Due primarily to orders for new product offerings, which we expect to deliver over the next six months.

However.

Due to significant material and freight cost increases adjusted EBITDA for the segment decreased by $1 million.

In our production segment, the timing of customer order patterns as relatively lumpy compared to our other product lines.

As such orders for the third quarter grew sequentially, 6% due to large orders of desalinization process equipment.

And revenues decreased by $1 million due to lower sales in our production equipment product line, partially offset by higher sales of valves into the downstream market.

Adjusted EBITDA was roughly in line with second quarter results. Despite the lower revenues.

The production segment has been particularly impacted by cost inflation and supply chain disruption due to the long lead time between customer order placement and order fulfillment.

We are actively pushing pricing in this segment to recover future profitability.

To wrap up segment results, our adjusted corporate expenses were $6 $5 million in the third quarter in line with the previous quarter the.

The special items called out in the release for the third quarter include $3 million of restructuring transaction and other costs.

And a $4 million gain on foreign exchange.

Free cash flow in the third quarter was negative $6 million.

Our net income adjusted for noncash items improved by $6 million sequentially.

However changes in net working capital.

<unk> $14 million of cash in the quarter.

Customers held back trade receivable payments at the end of the third quarter driving up our accounts receivable faster than we grew our revenues.

We also paid $7 million for the termination of a benefit plan.

Due to the aforementioned supply chain constraints, we have targeted inventory purchases to secure materials for 2022 revenues.

And we expect customers to once again withhold payments at the end of the fourth quarter.

So we currently forecast fourth quarter free cash flow will be negative.

Roughly equal to our $12 million semi annual interest payment with cash flow from operating activities net of working capital changes to be approximately breakeven.

Despite the build in networking capital in the back half of 2021, our liquidity position remains strong.

In September we amended our ABL credit facility to subject to certain exceptions extend the maturity to September 2026, and reduced the facility size to $179 million.

This new facility size reduces loan commitment fees, while providing significant flexibility to grow our borrowing capacity along with revenue.

Following this amendment, we ended the third quarter with total liquidity of $181 million.

Prized of $50 million of cash on hand.

Plus 131 million of availability under our credit facility.

Which remains totally undrawn.

We ended the quarter with net debt of 207 million comprised of $257 million of senior notes due August 2025, less the $50 million of cash on hand.

Now, let me turn the call over to Neal to further discuss our operating initiatives Neal.

Thank you Lyle.

This morning.

Jim will provide additional detail on our strong bookings.

<unk> chain challenges price increases.

And energy transition.

S E T. Our team of experts work closely with customers to develop products and solutions to make energy production safer cleaner and more efficient.

Great example of these efforts is our surface series high pressure flexible hose and single line manifold system.

This solution.

With our patent pending modular and connection.

Eliminate nearly all failure points and leap path experience with traditional high pressure flow liar, while increasing uptime.

Since its introduction in the second quarter.

Booked eight fleets of our surface series solution at a value of just under $20 million.

This is a great start and at high pressure flexible hoses replaced flow iron more broadly in 2022 and beyond.

The addressable market should be significant.

We had an excellent growth opportunity ahead.

Switching gears from U S onshore.

International offshore.

Our subsea product line had another very successful quarter.

With four remotely operated vehicles booked during the quarter. The team has landed 11 for the year.

When paired with our launch and recovery systems. The value of these orders is nearly $5 million each.

These vehicles are utilized in harsh environment.

Very few companies can meet the technical challenge.

Ken.

With the engineering capability, we had developed over the last few decades.

And we believe we are only scratching the surface.

Our vehicle and expertise are well suited to serve the offshore wind market during site survey in preparation construction and maintenance.

This product line is poised for growth in the coming energy transition.

Additionally.

Our subsea product line continues to serve the defense sector.

During the quarter.

We completed sea trials and final delivery of our Allo <unk> 11 rescues submarine.

Also we have a number of ongoing naval projects with various countries around the world ongoing.

We are very pleased by the results delivered by our subsea product line and their prospects for the future.

In addition to the examples I just provided.

We maintained good order flow across many markets, including our consumable and aftermarket products.

Overall for the third quarter was a strong one for bookings.

As Chris mentioned in his opening remarks more of those bookings would have been turned into revenue without the supply chain disruptions experienced in the quarter.

We had disruptions for inbound raw material and outbound shipment of finished goods.

On the inbound side, our vendors struggled to meet delivery commitments.

Due to employee constrained and a lack of key component.

These issues within compounded by shortages of containers and vessel space.

Outbound shipping was also an issue for the delivery of finished goods.

There are fewer vessels sailing each month and booking space is limited.

With roughly 40% of our revenue shift internationally. This is impactful.

In other instances our customers have black the manpower due to COVID-19, and associated quarantine the pickup and receive their orders.

Our teams are working closely with vendors to mitigate to mitigate the impact of these delays.

In some cases, we can substitute component in <unk>.

Others, we air freighted material to meet customer deadlines.

Also as Lyle mentioned, we're building strategic inventory buffer ongoing supply chain uncertainties.

Given the current environment around the world and across industries. It will take some time to catch up.

We're getting the supply chain. The line is important it is also important that we regain our margin through price increases.

We have been strategic with our pricing and thoughtful of the markets we participate in.

That said, we have raised prices on almost all product and will likely do so again.

While price increases are never popular.

Our customers understand that inflationary pressures are pervasive throughout our economy from grocery stores to the gas station.

This is a fluid situation.

We will continue to monitor our cost and just prices accordingly.

My last topic. This morning is with <unk>.

With regards to energy transition.

At FSP, we solve problems for our customers by utilizing our engineering and manufacturing talent.

And we reach a lot of different markets.

This gives us many opportunities to participate in the energy transition space.

A good example of third quarter was seen in our production equipment product line.

Historically.

We are focused on providing well site equipment like gas processing units power.

However by combining our core manufacturing competencies with innovative process engineering.

We were able to secure a sizable biogas equipment order.

With our product animal and food waste will be turned into renewable natural gas.

This is a great first order and what could be a SaaS growing an impactful market.

Another area of focus is helping our customers reduce methane emissions.

Our team that SPD will begin marketing a new choke early next year that aligns with that goal.

Importantly.

Our trim kit can be inserted into the existing choke, allowing our customers to immediately reduce their methane emissions in a cost effective manner.

With a growing focus on ESG by operators. This new product is really exciting I cannot wait to see what they develop next.

Thank you for your time this morning, and I'll now turn the call over to Lyle for closing remarks. Thanks.

Thanks Neal.

I'll wrap up today's prepared remarks by thanking our fellow employees for their diligent effort.

And by taking a look back at what <unk> has accomplished.

<unk> over the past year.

In the third quarter of last year, we completed the exchange of our long term notes for convertible notes.

Extending significant debt maturities to 2025, and providing a clear path to further leverage reduction.

In December we sold the business for over $100 million.

Which reduced our net debt by approximately one third.

At the beginning of 2021, we improved EBITDA by another $20 million annually through portfolio cost restructuring.

While all of these efforts were underway the team grew our topline.

Maintaining the long range correlation of our revenue with U S rig count.

Pro forma for the business divestiture, our quarterly revenue is up $48 million compared with the third quarter 2020, and our bookings have more than doubled.

Over this same time period, our quarterly annual I'm, sorry, our quarterly adjusted EBITDA has improved to $20 million or $80 million annually, reflecting 42% incremental EBITDA margins.

We are now a leaner more profitable enterprise with a clear path to significant debt reduction and substantial upside in earnings.

Annie Please open the call for our first question.

Thank you, Sir ladies and gentlemen, if you have a question at this time. Please press star and then the number one key on your telephone is your question has been answered or you wish to remove yourself from the queue breath bounty.

Our first question comes from the line of Ian Macpherson from Piper Sandler. Your line is open you may ask your question.

Hi, good morning, everyone.

Yes.

So.

I wanted to ask just a couple of questions upfront obviously.

I think the positive highlight of your of your report here is the orders which continue to show.

Strong improvement and I was wondering if you could maybe tease for us how.

Q4 to date order trajectory is looking and what that means in terms of.

Your visibility into top line.

Improvement in Q1 and Q2.

And then that's the first question and then the second one I had is really just what needs to get on stock and fixed in order to get past.

The margin <unk>.

<unk> that everyone is suffering everyone I guess in your world and many businesses are suffering near term, if we're going to get to.

The margins that you aspire to.

Is it within your realm of control right now to get margins, where where you think they should be or do you really need to see.

<unk> with supply chain nor.

Normalize before we can get to.

Better margins than.

What youre envisioning for Q4.

Yes.

Okay sure I'll start with the.

The first part on bookings and trajectory.

We continue to see strong inbound quoting activity.

For our key products in the third quarter, we had some some fairly large large bookings come through.

With our with our Rovs and with our single <unk> Medical systems.

We think that.

Those are those are pretty large one chunky.

Our overall trend is continuing.

<unk> forward and.

May or may not equal what we did in Q3 with those large ones, but I think the overall overall momentum continues forward demand is strong.

As you can imagine with activity continuing to improve so.

That relationship between higher activity.

Using rig count as the.

Benchmark, there and our revenue and orders continue.