Q2 2022 Forum Energy Technologies Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Okay.
Good morning, ladies and gentlemen, and welcome to the Forum Energy technologies second quarter 2022 earnings conference call.
My name is Livia and I'll be your coordinator for today's call.
As a reminder, theres new possible entering the question and answer queue.
Ask a question during the Q&A session, you will need to press star one one.
Instructions can be found on the company's Investor relations website under the events section.
At this time all participants are in a listen only mode and all lines have been placed on mute to prevent any background noise.
A reminder, this conference call is being recorded for replay purposes.
I will now turn the conference over July Williams, Chief Financial Officer. Please proceed sir.
Thank you Olivia good morning.
Welcome to <unk> second quarter 2022 earnings conference call.
With me today is Neal 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 a reconciliation of these measures refer to our earnings release.
During today's call all statements related to EBITDA refer to adjusted EBITDA.
This call is being recorded and a replay of the call will be available on our website.
I'll now turn the call over to Neal.
Thank you Lyle.
We just wrapped up a great quarter with a lot of highlights.
Second quarter bookings were over 200 million the highest since June 2019, we've.
We've increased our backlog for six consecutive quarters.
Gross margins were the highest in three years Rev.
Revenue and EBITDA are up 25% and 138% respectively on a year over year basis.
We are now more profitable than prior to the pandemic.
These excellent financial results are the product of our business strategy and improving macro environment.
Two years ago.
We implemented a strategy to radically improve the profitability of that.
T.
By implementing and maintaining a lean cost structure, focusing on markets, where we have meaningful share and commercializing new products.
Today I want to thank our teams for executing on that strategy.
These initiatives have served us well over the past two years and position us for outsized returns.
As activity accelerates in the current environment.
Our market is.
He is the best it has been in many years.
Macro economic indicators signal, an extended period of growth for our industry.
Oil and gas inventories remain at very low levels.
Worldwide spare capacity is limited.
And increases in supply cannot occur until investment grows significantly.
Oilfield service companies have increased spending a consumable items.
Replacing capital components.
To maintain current activity levels.
These customers will need to invest more in equipment upgrades and new builds to grow activity further.
S. E. T is meeting these demands with a differentiated portfolio of consumable and capital products.
On recent calls we have highlighted a few of our new capital products.
Such as the Fr 120, iron roughneck for drilling rigs.
And surface series Maniple medical flexible health system.
For hydraulic fracturing well site.
This quarter.
I'll highlight two of our consumable and aftermarket items.
First example is our quality wireline conventional increase list cables used by completions focused service companies.
The performance of these electric line cable is critical to the efficiency of zipper and Simon <unk> operations.
Our teams with many years of field experience.
We have developed innovative designs that can run in and out of the wellbore faster, while lasting longer than competitive offerings.
This performance has allowed us to win new customers and gain share.
Another example is within our drilling product line or one of our products, we offer as mud pump consumables.
I recently visited a customer's drilling rig with our technical team.
An expected one of our patented banded bar fluid end modules.
Even though our modulus and many years of service.
It was an almost new condition.
The module performed significantly better than a competitive product from a low cost country, which tends to fail in less than a year.
While I was very pleased with the durability of our product.
I was even more excited to see our customer recognize its value.
Our customer's teams in the field, what we're liability and performance over cheap and disposable.
This is a change in sentiment from the last few years and will favor manufacturers of highly engineered solutions like S. E T.
Before handing it over to Lyle I want to summarize while FCT is in an outstanding position to thrive.
The market fundamentals are the best they've been in many years.
There are very few industries that have the wind at their backs like we do.
We have the right portfolio of products to address fast growing niche markets in traditional oil and gas and new energy applications.
Over the past two years.
Activity increases have driven strong revenue for our drilling and completions consumable products.
Demand for our capital components will add another lever of growth.
<unk> is well positioned for this demand.
We have the capacity to increase revenue by 50% or more without significant growth capex.
Very few companies are in the position to excel like we are.
I will turn the call over to Lyle for more detail on our second quarter results and our updated guidance.
Thank you Neal.
Our second quarter financial results were indeed strong.
Revenue of 172 million and EBITDA of $15 5 million both exceeded the high end of our guidance range.
EBITDA margin was 9% for the second quarter.
On a sequential basis revenue and EBITDA grew by $17 million and $7 million, respectively, yielding a 38% incremental EBITDA margin.
Revenue growth was roughly in line with the increase in U S rig count.
And our sequential bookings growth of 23% resulted in a second quarter book to bill ratio of 118%.
Our increased profitability reflects significant operating leverage continued net price improvement and favorable mix associated with completions segment revenue growth.
Looking ahead to the rest of the year industry activity continues to draw sorry continues to drive strong demand for our products.
We therefore forecast third quarter revenue to be between 170, and $180 million and EBITDA to increase to between 16 and $19 million.
For the full year, we now expect EBITDA to be near the top end of our previous guidance range of $50 million to $60 million.
Second quarter free cash flow of negative $26 million was in line with the first quarter and with our guidance.
As expected our net working capital increased by $30 million as revenue drove higher accounts receivable and inventory grew to mitigate supply chain challenges.
We also made our semi annual interest payment of $12 million at the beginning of the second quarter.
As indicated last quarter, we forecast net working capital to decrease by the end of the year.
We estimate second half free cash flow to be between positive 30 and $40 million.
And we ended the quarter with total cash of $27 million and availability under our revolving credit facility of $114 million for total liquidity of $141 million.
Since <unk> is an asset light products company with minimal required capex for growth, we expect to see a return to significant cash conversion of our EBITDA over the near term.
We will continue to look for ways to free up cash from our balance sheet to reduce net debt.
For example, subsequent to the end of the second quarter, we sold the inventory and assets associated associated with one of our noncore drilling products to a competitor.
The sale of pulls forward, a little more than $1 million in cash by monetizing that inventory and allows us to improve overall profitability.
Let me share a few highlights from our segment results for the second quarter.
Our drilling and downhole segment EBITDA increased by $3 million on a $5 million revenue increase resulting in the second consecutive quarter of segment incremental EBITDA margins greater than 50%.
Significant operating leverage and pricing in our drilling product line.
And favorable mix drove this strong performance.
Orders for the drilling and downhole segment grew by 5% driven by strong growth in our drilling capital equipment, where we are seeing inquiries and orders to accelerate as domestic and international customers upgrade and build new drilling rigs.
Highlights for the quarter include an order for two drilling catwalks from our middle East contractor.
Orders for our new Fr 120, Iron Roughnecks tripled.
And bookings for our Hawker well service units nearly tripled in the quarter.
Completions segment revenue was $66 million in the second quarter, an increase of $14 million or 26% sequentially.
Bookings for the segment were $65 million for a book to Bill ratio just under one which is typical as most of our completions products or short cycle consumables.
All of the product lines in this segment grew revenue on the back of increased demand and improved performance by our supply chain.
Of note our global tubing revenues grew 28% as domestic and international customers increased their orders.
Also our quality wireline revenues grew 33% with this operation achieving near record revenues in May.
We are pleased to see these two strong contributors grow in the second quarter.
We're also pleased with a meaningful increase in demand for our hydraulic fracturing capital products.
Revenues for our power ins GHT radiators, and our surface series single lying manifold and flexible hose offerings grew meaningfully.
We've received positive feedback from our customers on the performance of our surface series based on the ease of setup and downtime reduction compared with legacy high pressure iron.
We expect demand to further increase for these capital items as our customers upgrade existing frac fleets and add new ones.
Sequential incremental EBITDA margins for this segment of 28% or lower than typical due to less favorable mix and steel price inflation impacting second quarter results.
In our production segment Rep.
Revenue declined sequentially by $2 million or 5%.
As Covid lockdowns implemented by the Chinese government.
Disrupted manufacturing operations and shipments for our valves product line.
Since these precautionary measures were lifted in June our supply chain has recovered and we expect an uplift in the second half of the year.
While revenues for the segment were slightly down bookings were strong for both product lines valves.
<unk> bookings grew sequentially by 26%.
As customer demand increased for every market segment led by a 35% increase in orders from upstream and midstream customers.
Our production equipment bookings grew by $18 million or 85% sequentially.
We received a large order from an operator in the Marcellus covering more than half of their demand for 2023. In addition, we received two meaningful orders for electrostatic processing technology equipment from customers in the middle East.
While some of the revenue for these orders will be recognized in 2022, we're already building a solid backlog for delivery next year.
Segment, EBITDA increased unfavorable valve margins.
And operating leverage in our production equipment product line.
Let me provide a few details for modeling purposes in the second quarter corporate costs increased by approximately $1 million due to the timing of certain variable employee compensation costs for the third quarter, we expect corporate costs to be unchanged.
Interest expense could be $8 million and.
And depreciation and amortization expense of roughly $10 million.
We continue to expect full year capital expenditure of less than $10 million and cash income taxes of roughly $4 million to $5 million.
In summary.
Results reflect solid performance by our team in an improving market.
We expect to take advantage of the strengthening market to drive further revenue growth and enhanced product margins and with a decrease in our net working capital we expect to generate positive free cash flow.
Now, let me turn the call over to Neal for closing remarks Neal.
Thanks Lyle.
The story is simple.
Industry fundamentals are strong.
Orders are accelerating.
Profitability is increasing.
<unk> is a compelling company with a great future.
Operator, please take the first question.
Thank you and as a reminder, ladies and gentlemen, I would like to ask a question. Please press star one one please standby, while we compile the Q&A roster.
And our first question coming from the line of John Daniel from Daniela and what your partners. Your line is open.
Hey, guys good morning.
Doug good to see bookings and margins heading in the right direction.
Please forgive me I'm away from my desk, So I haven't had a chance to really scrub the release and everything but.
You called a lot of nice victories in wins in terms of opportunities going forward, but just can you kind of rank for me. If you will like most excited over.
Over the next call it.
Six to 12 months.
Yes.
I think Jon as you said.
We had a lot of broad strength across the portfolio, we thought with consumables.
Like for example, our artificial lift business multi lift solutions.
On the completion side with quality wireline in global tubing also seeing good growth with our drilling consumables, but we also see more inquiries and orders for our capital capital equipment. That's in the stimulation line product line with staying aligned manifold and power ends and then we're also set.
And drilling.
Bill mentioned with the Fr 120, Iron Roughneck and catalogs also thing good inbound inquiries for subsea Rovs.
Okay.
If I heard correctly you called out.
A situation where a customer.
Was basically pleased with your product offering and perhaps shying away from a lower price for an offering.
Normally at least the last couple of years, it's been people buying the cheapest thinking get.
Do you see this trend continuing that quality, if you will and.
I'm, an ESG perspective any of your customers at this point care about buying <unk>.
American North American versus international just any thoughts there would be appreciated.
Yes.
That's a great question again with we are seeing is a flight to quality.
I think as you I know you follow our industry really well.
And what we hear is high utilization right. So our customers are working they're they're.
Fracking more hours in the day than they had been in the past there theyre drilling as fast as they can.
And they need reliability.
No.
A few years ago cash with tight tough industry environment, our customers did what they had to do to survive and generate cash to do that.
Today. They are they are doing really well right. We saw a lot of great earnings calls from from that.
Our segment.
But they are busy and they need reliable equipment I do see a flight to quality.
And then the last one for me.
Not asking for formal guidance Neal or Lyle, but your book to Bill was call. It one two times.
Where do you think this could realistically get to over the next year.
For us it's Robert here.
What would be your hope.
You will.
Yes exactly.
Hi.
No no I think it's a great question.
Excited about our industry right and when you think about the macro environment. It is it is really really strong and I think there is an obvious need to increase increase rig count in our revenues and grow with that activity.
1000 rigs next year, I think it's quite possible and that gets us to a run rate of let's call. It a $1 billion and okay.
We have strong incrementals and I think with 30% incremental EBITDA margins I think thats a very transformative.
Result.
Right.
Thank you for taking that given given an answer I appreciate it.
Yes, absolutely.
One moment our next question.
And our next question coming from the line of Dan Pickering with Vigor and energy partners. Your line is open.
Thanks, Dan.
My phone blanked out as you were talking about your revenue potential at 1000 rigs next year I think you said $1 billion, but I just wanted to confirm that.
Yes, Dan.
As Neal mentioned, we have we do correlates really well with.
U S rig activity well.
That's not always the driver of each of our product lines of businesses. It does correlate well and our historic correlation would say 1000 rigs is roughly $1 billion of revenue and so that's.
50% more than we have we feel good about our capital capacity to be able to do that we could we could do 50% more revenue without significant capex in our facilities.
And the flow through and drop through of operating leverage and what that means from a bottomline is impressive. So excited about the potential we have got to watch what our customers ultimately do with Capex, both E&P operators and service companies, but all indications are spending is in the industry is going to go up.
Yes that makes sense.
Lyle during the call I didn't hear you talk much about pricing can you can you just give us a view on.
What kind of gross pricing and net pricing are you able to are you able to pass along cost increases and can you ballpark for us what kind of new.
New orders look like from a pricing perspective.
Sure Dan.
We've been talking about pricing for nearly a year now and pushing pricing and winning pricing gains really across the board I think your question is really a good one is where are we getting net pricing gains that beat inflation.
Inflation I think the areas, where we've seen those most net pricing gains are in our more differentiated products, where we add additional value to our customers. For example, the drilling fluid end module that Neal talked about we're able to really push price and products like that where we're creating extra value.
We're also starting to see some net pricing gains even some more of our commoditize products.
That's on some more of our drilling consumables are even in our in our valves product line.
So we're seeing pricing across the board.
And continue to push that as it goes I think it's important to note that our prices are still below where they were back in 2019.
So as that spending goes up as the market is getting tighter as our service company customers are pushing price and getting price with their customers on higher demand, we will be looking to do the same.
And Lyle does that flow through.
As it flowed through almost immediately or does it take a little while to get to.
Push price get price and then realize it is it really a 'twenty three event before it impacts margins there could we see that in.
As quickly as Q4.
Yes.
As we look at the business I think that depends on the kind of nature. So our consumable products that are more book and ship, we're going to see that flow through more quickly.
Things like our capital items or and we mentioned the order for production equipment that is going to ship, mostly in 2023 any gain there it's going to be a much longer term drive to get there.
Our second quarter incremental EBITDA margins of 38% were substantially higher than our gross margins.
That does it drive a little bit of operating leverage there is clearly some favorable mix with completions, but also recognizing some net pricing benefit.
Got you.
<unk>.
When when you think about.
Energy transition I know that that you've talked in the past that that's one area you hope to generate some revenues on a go forward basis can you just talk a little bit about about where you might see here products applicable for non oil patch applications.
Yes, Dan I think.
Equipment manufacturer again with the engineering.
And capability to make a lot of different products.
And thankfully because of our portfolio. We are adjacent to <unk> I think there are a lot of the energy transition.
Mark It's a great example, offshore offshore wind farms.
Those wind farms are require some.
Port for installation and maintenance.
<unk> from our subsea product line, where we have decades of experience are really well positioned to to address that.
C emissions control.
As a key especially at the well site and with our production equipment.
<unk> line.
We are touching those customers today.
And we're developing new products and technologies to help with that.
Thank you Annie.
And last question Lyle.
King capital.
You guided toward a substantial.
The release of working capital, if you will or free cash for the second half of the year.
I think you said or maybe Neal said in his closing remarks.
Will we see free cash net for 2023.
That's our sorry for 2022, and then as we look to 'twenty three.
<unk>.
Let's let's pretend that billion dollars number happens.
Would you would you see consuming working capital.
To help deliver that revenue costs.
Dan.
Good question, so kind of a recap key points on cash in the first half of the year. We grew our net current assets, excluding cash by about $50 million with most of that coming from increasing inventories unplanned to mitigate what was going on supply chain. So we built a good buffer there and as we look ahead to the back half of the year.
Our guidance implies kind of a slowing rate of topline growth and with that then lower growth in receivables, but we do see inventory balances turn in decline. So the buffers. We put in place. We think we can pull those out later later in the year as we get there. So looking ahead, where do we.
Yet <unk> has always been a good story with high free cash flow relative to our EBITDA, because we have really low capex, we've mentioned, where our capex position is I think we're in good shape, there and while as we grow we will undoubtedly need to build some level of working capital we ought to have really good EBITDA cash flow conversion metrics.
With strong topline growth.
Great.
Windsor behind you thanks, guys.
Thank you Stan.
And our next question coming from the line of Eric Olson Your line is open.
Hi, guys congrats.
Congrats on the results.
Maybe just to piggyback a little bit on what everybody else has.
Said and kind of when we focus on the outlook, maybe going into the end of the year and into 2023 and the cash flow available. What do you guys look at in terms of return of capital I know that there there is a buyback outstanding.
Some comments on that would be great and then.
Additionally, I believe there is.
The debt outstanding of $116 million of that principal value automatically converts at $27 per share.
Clearly we're below that number now and as we look ahead is there any ability to.
I guess look at potentially calling that debt and removing.
Approximately $4 3 million.
Shares of dilution.
Rents on that would be great. Thanks.
Okay.
Rick I think.
Redeeming redeeming bonds prior to conversion with if we had free cash flow I think is a good a good investment and one we would we would look to do it.
Again, as we generate free cash flow.
Great.
Let me jump in maybe with a little little bit of some detail. There. So the first half of the year and we did consume a good amount of cash in working capital.
As we step back and think macro overall leverage for us as a company is still higher than we would like to see it. So we need that number we need that overall leverage to come down free cash flow. As you mentioned clearly is a step in the right direction and seeing net debt.
Come down and we're looking at all the different options that we have to get that leverage in the right place mentioned the small asset divestiture that we had not a giant needle mover for us, but I think indicative of the kind of thinking we are having.
Continuing to get there so give some details back on on.
On those convertible notes, we do have the notes convertible we've talked about that being a key drive in way to get there and the reminder that.
Roughly half the notes, we updated that number in the Q.
That that we'll file later today, it's about $122 million worth of notes would convert when our stock trades at $30 a share.
And so we see that as a very nice plan for US is what we've had in place for the last couple of years, but as you say $30 a share is a little bit out. There. So we are looking at at other options and ways that we can manage the debt. We've got three years until maturity. So we have time to deal with that and we will keep looking.
It weighs too.
Get cash out of our balance sheet being more efficient.
And ultimately, reducing our total level of leverage.
Very helpful. Thanks.
Hi, Congrats Eric Okay.
And our next question coming from the line of Peter Appert with Urs of Texas. Your line is open.
Hi, Thanks for taking the call congrats on the quarter I'm sure that's got to feel pretty good at this point.
After a long time.
Oh, yes, so anyways, congrats and nice work and thank you.
Just going back to the notes just for a minute.
To dwell on this too much but.
Know that Theres, just not a lot of liquidity there.
I really couldnt do a lot anyway with just open market purchases, but did you do any of that during the quarter.
Do you at least try to chip away on it in that way.
Yeah, Peter Let me, let me take that we did not repurchase any notes in the quarter as you mentioned liquidity really thin.
On the notes are big repurchases that we did were back in 2021 following the asset divestiture. We did at the end of 2020 kind of a return of cash back to note holders per the indenture. So.
Some some opportunity out there the notes have traded a little below par.
But as you mentioned, there's not a lot of liquidity in the notes I think a big change for US is that in August .
The.
The effective no call period on those notes expires and there is a call premium out there, but they become callable in August so that presents a new opportunity that that we really haven't had there before that time right. Okay. Yes of course.
Could do is buy in kind of one $2 million kind of things and I wouldn't make a lot of progress, but at least maybe some dilution maybe if the stock does hit 30 Bucks, but.
<unk>.
The other thing I was just wondering about what you see out there just M&A M&A wise things picking up bid offer spreads kind of.
What are your thoughts in general.
Yeah again.
I think we said in prior calls you know we think we are logical consolidator. We did this last year in our drilling product line width with HOKA well works, we think that that type of acquisition makes sense.
So like that technology that disruptive or addresses new energy applications again, a good example of that was a reach.
Production solutions acquisition that we did again at the end of last year or so.
Always always looking at good good opportunities, we continue to look at our portfolio and.
Analyze and we want to make sure we are.
We have the highest margin products that we can address the largest addressable markets again.
Okay.
Are things functioning out there do you usually see.
Yes.
How does the balances are things better bid or better offered for other companies or how would you characterize that.
Peter we're definitely seeing more activity in the M&A markets.
Sellers some of those who have been and whether there are private equity sellers or even families that have been in.
Business, a long time, we're seeing a rising market as an opportunity to monetize something the bid ask spreads from our view we are still extremely high.
With with sellers thinking they've got they've got something really big here and buyers recognizing that if you've got cash in this market, it's really valuable.
So there is still that spread we haven't seen a ton of deals getting done as a result, but I think we'll continue to see.
Activity out in the space and question as to how much is actually going to get kind of get completed okay, alright, great. Thanks for the color.
Okay. Thanks Peter.
This will conclude our call and we thank everybody for joining us today.
Ladies and gentlemen that doesn't go conference for today. Thank you for your participation you may now disconnect.
The conference will begin.
T to raise Johan during Q&A, you can dial star one one.
[music].
Okay.
[music].