Q1 2022 Forum Energy Technologies Inc Earnings Call
Good morning, everyone.
Operator, and today's conference is scheduled to begin momentarily until that time your lines will again be placed on hold thank you for your patience.
This is the operator in today's conference is scheduled to begin momentarily.
So that time your lines will again be placed on hold thank you for your patience.
[music].
Good morning, ladies and gentlemen, and welcome to the Forum Energy technologies first quarter 2022 earnings conference call.
My name is Kirby 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.
Press Star one if you have any questions.
I'll now turn the conference over to allow Williams Chief Financial Officer. Please proceed sir.
Thank you Kirby.
Good morning, and welcome to <unk> first quarter 2022 earnings Conference call.
With me today is Neil walks, our president and Chief Executive 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 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 with other SEC filings.
Management's statements May include non-GAAP financial measures for.
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 Neil.
Thank you Lyle.
During our last call I listed many reasons why <unk> is a great company and investment.
Our employees stay.
<unk> industry fundamentals.
Innovative products and solutions.
Access to growing markets outside oil and gas and opportunity for significant margin expansion.
Since that call.
Our foundation has only grown stronger.
We continue to recruit and retain entrepreneurial dedicated and customer focused employees.
Our teams make a remarkable impact for the company and our greatest differentiator.
We are thankful to have such wonderful colleagues.
And I am thankful for the position we are in today.
From all indications.
We are at the beginning of a prolonged energy investment cycle.
The unfortunate conflict in Ukraine has highlighted a trend already underway, but somewhat invisible to the general public.
The world needs energy and more importantly, the world needs to invest heavily in secure energy supply.
Commodity prices are trending near multiyear highs and.
In exploration and production companies are generating very strong free cash flows.
The table is set for increases in traditional oil and gas investment.
Despite favorable market conditions.
We have only seen a modest increase in oilfield service activity.
Compared to the 2000 to 2018 cycle U S rig count has grown 33% slower since the 2020 trough.
Capital discipline by E&P operators has starved service companies and.
And caused them to run their equipment as hard as possible.
As little money as possible.
Obsolescence cannibalization and.
And human capital challenges have significantly constrained the capacity of the oilfield services industry.
So what does that mean for today.
New components are needed to maintain current levels of activity.
Towards the Permian Basin, a few weeks ago.
And saw stacked equipment parked near.
Thanks lives across many yards.
It is hard to believe this equipment can be mobilized in its current state.
So what does the future look like from here.
To grow energy supply meaningfully.
A lot more equipment is needed the good news is.
Strong utilization has allowed service companies to finally regain pricing power.
This is encouraging as it will provide the capital that our customers need.
To make significant investments in new equipment to meet future demand.
This should sustain investment and boost our capital sale in coming years.
Remarkable change in trajectory.
The technical demands required to drill and complete wells today.
Significantly greater than the last cycle.
Upgrades the key components like Iron Roughnecks will benefit from our Fr 120 solution, which.
Which is capable of efficiently handling large diameter drill pipe.
We see a similar theme for hydraulic fracturing operations.
Traditional flow iron and manifold systems are not reliable under the pressure and continuous pumping hours required in today's completions.
Surface series flexible hose and single line manifold system eliminate 95% of connection and associated downtime.
These are just a few examples how our innovative products and solutions make energy production safer and.
And more efficient.
While the near term case for oil and natural gas is clear.
There was a future growth cycle for low carbon energy like offshore wind and S. E. T is in a fantastic position to participate in this growth by.
By utilizing our core competencies in engineering designing and manufacturing.
Subsea remotely operated vehicles and trenches.
The specialized tools are required for the installation and maintenance of wind turbines.
We believe vehicle demand for offshore wind can exceed the installed base for subsea oil and gas support in the coming decade.
This is an amazing opportunity for future growth.
One where we can elaborate leverage our decades of expertise in subsea towards the transition to lower carbon energy.
Between traditional oil and gas markets and energy transition, we are pleased with the breadth of our topline growth avenues.
In addition.
We have significant opportunities to expand profit margin in the near term.
First we are mitigating the inflationary pressures in our supply chain that was experienced in 2021.
Second.
Man is outstripping supply for the products, our customers value and will allow for future sustainable net price benefit.
Third is an asset light scalable manufacturing company, we have significant operating leverage inherent in our business.
Want to emphasize that we have maintained the capacity that.
That was built to meet much higher demand from prior periods of growth. This means we can dramatically increase our revenue.
Within the existing footprint and leadership structure.
While incremental margins will vary quarter to quarter over the long term, we expect to generate 25 to $40 of EBITDA.
For every $100 of incremental revenue.
If you believe as we do that.
But the world is just now entering a new energy investment cycle.
<unk> is poised for outsized earnings growth.
This will benefit our balance sheet.
Roughly half of our debt converts to equity at a fixed stock price.
And this is a unique opportunity to significantly delever, the company and expand our EBITDA trading multiple.
I am pleased with our strong start to 2022.
Our best result, since before the pandemic.
The pieces are in place.
We have the fuel for long term growth I believe the best is yet to come.
Let me now turn the call over to Lyle for more detail on our first quarter financial results while thank.
Thank you Neil.
Our first quarter 2022 results demonstrate the strong market demand for our products and operating leverage for our businesses.
We grew our backlog again for the sixth quarter in a row with a 3% increase in bookings.
Excluding a decrease in lumpy production equipment product line.
Bookings grew by over 11% this quarter.
Revenues of $155 million go into the middle of our previous guided range and EBITDA of $9 million exceeded the high end of our guidance by $2 million.
On a sequential basis revenue and EBITDA grew by $7 million and $5 million, respectively, representing a 68% incremental EBITDA margin.
This strong incremental margin performance includes a sequential reduction in employee medical and annual incentive compensation expenses.
So on a normalized basis incremental EBITDA margins exceeded 30%, which is well above our gross margins, reflecting the benefits of operating leverage.
And the fact that we began to see net price increases flow through the income statement.
We expect this pricing trend to accelerate in future quarters.
Let me share a few highlights from our segment results for the first quarter.
Our drilling and downhole segment revenue of $71 million represented approximately 46% of total company revenues.
Segment revenues increased by 7% sequentially and 46% on a year over year basis.
Orders for the drilling and downhole segment grew by 17% outpacing the 8% growth in global rig count.
The strong booking and revenue growth were driven by increased demand for our land and offshore drilling and well construction equipment with particular strength coming from international markets.
For example in the drilling product line, we recognized revenue of $3 million for handling tool packages for four new land rigs to be utilized in Asia.
And we booked another $4 million for handling tool packages for new rigs in the Middle East and Latin America.
In addition, subsequent to the end of the quarter, where we were awarded a 15 million dollar five year contract for casing hardware for a major middle East contractor.
These awards demonstrate the benefit of our exposure to growing international markets.
Segment, adjusted EBITDA of $9 million represents the strongest performance since the fourth quarter of 2019.
Impressive incremental margins for this segment of 59% were driven by favorable mix in each of our product lines and by net pricing gains in select areas.
Completions segment revenue was $53 million in the first quarter of $2 million increase as ongoing revenue growth was constrained by supply chain delays impacting our customers' operations and.
And our record low inventory of drilled but uncompleted wells for E&P operators.
Segment EBITDA of $5 million was flat as revenue growth was offset by a one time $1 million reserve taken in the first quarter against certain accounts receivable.
After a slow start to the year completions segment revenues accelerated through the quarter with especially strong demand for our cables from quality wireline.
In our production segment first quarter results improved slightly as revenue and EBITDA each increased by $1 million.
Strong incremental margins were driven by the valve product line, which benefited from improved operational execution and favorable product mix orders in the first quarter were $40 million or $6 million decrease as our production equipment product line experienced lower orders following very strong.
Truong annual order receipts.
In the fourth quarter.
Of note our valves product line orders increased by 21% to the highest booking level since the beginning of the pandemic.
Also the valves, Saudi Arabia facility finalized its corporate purchasing agreement with Saudi Aramco.
This long awaited approval is an important milestone and paves the way for future demand.
As a result of this award and subsequent to the end of the quarter. Our valves product line received a large order for valves to be assembled and tested in our Saudi facility.
To wrap up segment results corporate costs decreased by approximately $1 million due to the timing of certain variable employee compensation costs.
The special items called out in our release for the first quarter includes $6 million of foreign exchange gains.
And 4 million of restructuring transaction and other costs.
Primarily related to the modification of long term incentive awards associated with the retirement of our former CEO .
Looking ahead.
In the U S rig count has continued decline to start the second quarter driving strong demand for our products.
We therefore forecast second quarter revenue to increase to between $160 million $170 million and.
And adjusted EBITDA to be between 11% and $14 million.
For the full year, we continue to expect EBITDA to be in line with our previous guidance.
A $50 to $60 million.
Turning to the balance sheet, we ended the quarter with total cash of $21 million and availability under our revolving credit facility of $141 million for total liquidity of $162 million.
Cash balances decreased by $26 million in the first quarter.
Primarily due to $30 million of net working capital growth.
During last quarter's call, we outlined efforts to mitigate supply chain challenges.
These include diversifying our supply chain and investing in key raw material and component inventories to mitigate risks and delays in.
In the first quarter, we did increase inventory.
Securing material early in the year to provide greater confidence in meeting known and planned customer demand.
We expect to build inventory again in the second quarter and to see a turn in inventory balances in the second half of the year.
Given recent lockdowns in China, we remain concerned that the fragile state of worldwide logistics may again impact our results.
Nonetheless, we are pleased with the progress to start the year.
In addition to inventory builds customer.
Customer delays in payment of accounts receivable at the end of the quarter and typical first quarter cash outflows for annual accrued expenses impacted our free cash flow results.
We expect second quarter free cash flow to be similar to our first quarter result, with customers continuing to stretch receivables via.
The aforementioned inventory purchases impacting cash flow.
And our 12 million semiannual interest payment.
We expect free cash flow in the second half of 2022 to turn significantly positive as earnings continue to improve and net working capital levels normalize, resulting in roughly breakeven free cash flow for the full year 2022.
Before turning the call back over to Neil Let me provide a few details for modeling purposes.
For the second quarter, we expect corporate costs of $6 5 million interest expense of 8 million and depreciation and amortization expense of roughly $10 million.
We continue to expect full year capital expenditure of less than $10 million in cash income taxes of roughly $4 million to $5 million.
Now, let me turn the call over to Neil for closing remarks Neil.
Thanks, a lot.
Today is a great day to be an employee and investor and FPP.
Industry fundamentals are fantastic.
Oil and gas operators have cash to fund energy supply growth <unk>.
Service company pricing has returned to levels that support reinvestment in new equipment and <unk>.
<unk> is poised to benefit in the near term through topline growth higher margins and EBITDA multiple expansion.
Kirby, we'd like to take the first question. Please.
First question comes from the line of Dan Pickering, Pickering Energy Partners Dan. Your line is now open.
Great. Thanks, good morning, gentlemen.
Good morning, Dan Good morning.
So as I look here I mean, just help us a little bit you did you did beat your guidance for the first quarter and.
We can obviously see how the segment results stack stacked up but when you think about what you were expecting versus what happened where we are the upsides for you in the quarter.
Yes, I mean, I think it was Dan I think it was abroad.
Kind of broad across our product lines, but especially our drilling and downhole.
Product line.
Really good really good bookings and then delivery of those bookings during the quarter.
Gotcha, and then as we think about the improvement as we continue into the second quarter drilling drives that as well is that going to be a leader in Q2.
On an incremental basis.
I think drilling will continue to grow but we did see our completions segment pick up momentum in.
In March and that's continued so we think completions will be will be strong as well.
I think overall, we're just the breadth of our portfolio. We are seeing really good momentum just across the board.
And and.
Dan I would chip go ahead, please just not only on.
On the specifics of the product lines, but where we're seeing that growth come from.
I wanted to highlight a bit about what's going on internationally as well for our businesses and seeing that growth.
Come through really well with shipments of backlog in our drilling and downhole product lines.
And then really finally, starting to see some uptake on the valves business as well, but that's been a project we've been working on for a while here and it's been it's encouraging to see that take off not only in the first quarter, but also what we expect through the next few quarters.
Do we think do we think that that turns are our production business to kind of a positive EBITDA as as the Saudi facilities in international shipments start to happen.
Yes, Dan that's what we're looking for as we've talked about on some previous calls.
<unk>, we did a lot of restructuring of our <unk> business through 2021 really ending that at the end of last year.
And now it's a volume play we've got the cost structure right.
And as we see activity picking up.
Globally, but in particular in the Middle East, we're looking for better times ahead for that segment.
Great. Thank you and then.
If I could just you talk to Neil at the end of your remarks around supply chain. So maybe while I think you discussed at this kind of supply chains, adding inventory.
So when you think about.
When we hear things like supply chain and inventory builds and there are risks.
Assume that everything you talked about is built into how youre guiding for your Q2 results as well as share full year EBITDA. So supply chain is still a pain, but it sounds like that's been incorporated in your thinking and your guidance.
That's right Dan.
We took some steps to mitigate the issues we were having that we experienced in the back half of 2021, we feel like we've gotten ahead.
But I think it's something we're always as always concerned about especially with further lockdown in China.
Yes sure.
And then.
Sure.
Okay. Sorry go ahead no no. It's okay. If you look at our kind.
Q1 results and see what we've seen our EBITDA margin in Q1 basically came back to where we were in a quarter or so of last year.
And so what that says is we are starting to see the net price improve net price gains that we got to get our EBITDA margin back and recover from the inflationary cost impact that we had late last year.
And then as we progress forward thinking about the progression on that continuing to gain those net price improvements helps to drive up the margin.
Applying some.
Incremental EBITDA margins that are higher maybe than our traditional have been over the last few quarters.
So we're starting to see that see that come through.
Last quarter, Neil talked about having some equilibrium in full and inflation. We're okay, we don't necessarily need cost to decrease but it would sure be nice to see a.
A decrease in the rate of inflation and we felt that in the first quarter and were able to gain that net price and that is probably one assumption we have thinking ahead.
Net debt costs, we'll maintain at a reasonable inflation rate and we won't see the same kind of spikes that we saw in late 2021.
Okay.
Does that does that mean, we might I mean, we might see a double digit margin at the EBITDA line kind of on an exit basis by Q4 or is that more of a 'twenty three event.
Yeah.
I do think then we could get there.
And really that comes from volume activities up and we think that that activity growth continues maybe at a modest rate through the year given some of the industry supply chain constraints.
But in addition to that we've grown our backlog pretty handily, it's now over $200 million.
It's been a long time since we've had that much backlog and that begins to turn in the third quarter and fourth quarter of this year, so that will provide topline boost.
So we'll get some operating leverage on that top line boost which helps our margins plus any incremental net price that we can push through gives us those incrementals that they could get us above double digits and that's that's where we're headed.
Sounds constructive thank you guys.
Thank you Dan.
Okay.
Next question.
Again, if you have any questions. Please press star one on your telephone.
Next question comes from the line of John Daniel Daniel Energy John Your line is now open.
Thank you and thanks for including me.
Neil.
You will know Theres, a number of privately held.
Some small some big capital equipment providers out there and I'm just curious if you could talk a little bit about the.
Appetite to do some consolidation as the year unfolds.
Yeah. Thanks.
Thanks, John .
We looked at our we look at our acquisitions kind of and you know really to two folk two lenses, one where we're adding a new technology or disrupt potentially disruptive technology.
Did that in the fourth quarter with our acquisition of reach.
Production solutions and then we also think about consolidation in the <unk>.
The fourth quarter, we had another tuck in acquisition with HOKA well works.
And we like doing that so I think for now.
With our we're going to keep the deals I think relatively small, but we're always on the look but as we.
We are definitely proponents of.
Consolidation in the industry, because I think it's there and I think we're in ideal consolidator.
Get our balance sheet in the right position.
Fair enough for you guys being can you say, if youre being shopped a lot of deals right now.
And then just a follow on.
As you know.
As you decide to look at more opportunities whenever that time might be.
Focus more on traditional.
Oil and gas type businesses or do you focus more on energy transition and I've got one follow up.
Yes.
I think.
When we look at the.
Technology.
We see the we want to add that in the energy transition phase. So for example reach was was an energy transition.
But I think as we consolidate that would be more in the traditional oil and gas where we can get to scale.
I think I'll take up the cost and have good operating leverage.
Fair enough and then the last one John perhaps John I'll turn it didn't really quickly on your question about are we or are we being shopped a lot of deals now.
And I would say that the activity around smaller deals, mostly private small private businesses either owned by an entrepreneur founder or owned by a private equity group that volume of activity has picked up dramatically in the last four five months.
I think his enthusiasm for the cycle has come in and owners or are seeing that this is an opportunity to monetize.
Some of their investment.
Fair enough and then final one for me Thanks, a lot on perhaps.
A dumb question, so I apologize, but on the supply chain front can you talk about how much of that.
Steel or forgings that you guys procure free operation like how much of that comes from international markets versus domestically sourced.
Yes.
Maybe I'll talk more a little bit more in general about what our strategy. There is that we want to have multiple multiple avenues to secure supply. So if it's international we want to have multiple <unk>.
Countries, where we have supply when we procure from or ideally, we'll have a domestic stores and an international stores.
So I think we haven't seen any any real.
Real major delays with.
The raw materials that we need some more and continue to follow but we hope to happen. We hope our diversified supply chain will allow us to avoid the worst of those.
Fair enough. Thank you gentlemen.
You.
Alright.
We thank you for joining our call and we look forward to talking to you in three months.
Thank you so much to our presenters and to everyone who participated this concludes today's conference call. You may now disconnect have a great day.