Q3 2022 Forum Energy Technologies Inc Earnings Call

November 9, 2022

Speaker 1: You.

Speaker 1: The conference will begin shortly. To raise your hand during Q&A, you can dial star 11.

Speaker 2: Good morning, ladies and gentlemen, and welcome to the Fulham Energy Technology's third quarter 2022 earnings conference call.

Speaker 2: My name is Tawanda and I will be your coordinator for today's call.

Speaker 2: There is a process for entering the question and answer queue.

Speaker 2: A link with instructions can be found on the Company Investor's Relations website under the Events section.

Speaker 2: At this time, all participants are in listen-only mode, and all lines have been placed on mute to prevent any background noise.

Speaker 2: This conference call is being recorded for replay purposes and will be available on the company's website.

Speaker 2: I would now like to turn the conference over to Rob Kukla, Director of Investor Relations. Please proceed, sir.

Speaker 3: Thank you, Tawanda. Good morning and welcome to FET's third quarter 2022 earnings conference call. With me today are Neil Lux, our President and Chief Executive Officer, and Lyle Williams, our Chief Financial Officer.

Speaker 3: We issued our earnings release after the market closed yesterday and it is available on our website at ir.s-e-t.com. 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 context of the many factors that affect our business. All such remarks should be considered in context of the many factors that affect our business.

Speaker 3: including those disclosed in our Form 10-K along with other FCC filings.

Speaker 3: Management statements may include non-GAAP financial measures.

Speaker 3: For a reconciliation of these measures, refer to our earnings release.

Speaker 3: During today's call, all statements related to EBITDA will refer to adjusted EBITDA. And unless otherwise noted, all comparisons are third quarter 2022 to second quarter 2072. I will now turn the call over to Neal.

Speaker 4: Thank you, Rob, and welcome to your first of many FET earnings calls.

Speaker 4: We are excited to have Rob join the FET family. He has over 20 years of experience in the oil and gas industry.

Speaker 4: Over that time, he's held numerous positions within finance and investor relations. Rob is going to help us tell the FET story to more investors. Rob is going to help us tell the FET story to more investors.

Speaker 4: And we have a great story to tell.

Speaker 4: It begins with market fundamentals propelling investment in energy production, revenue increasing with global activity and higher capital equipment spend, margins expanding through operating leverage and portfolio optimization, and with our asset-like business model, converting EBITDA into free cash flow. Putting it all together, we have a compelling opportunity for further growth in shareholder value. The future is exciting for FET.

Speaker 4: My confidence in FET's outlook is rooted in our performance throughout the past two years and what we see today.

Speaker 4: In the third quarter, we grew backlog for the eighth consecutive quarter with bookings of 198 million.

Speaker 4: Demand for innovative products and solutions remains robust.

Speaker 4: After only three quarters, this year's EBITDA is already twice that for all of 2021.

Speaker 4: Our team is on track to deliver results that will meet the upper end of an aggressive 2022 plan.

Speaker 4: Importantly.

Speaker 4: We turned EBITDA into over $17 million of free cash flow in the third quarter.

Speaker 4: This is a fundamental element to FET's long-term success, and we remain confident.

Speaker 4: and our $30 to $40 million forecast a free cash flow for the second half of this year.

Speaker 4: It is also important to note this forecast includes a fourth quarter interest payment of $12 million.

Speaker 4: We just finished a great quarter and look forward to finishing the year strong.

Speaker 4: Now, I'd like to share some thoughts as we look ahead to next year.

Speaker 4: While the imbalance between global energy supply and demand...

Speaker 4: support strong domestic activity in 2023.

Speaker 4: Industry participants have mixed views on the trajectory of recount growth.

Speaker 4: However...

Speaker 4: service intensity will increase as the industry runs harder.

Speaker 4: pumping more hours, drilling more feet.

Speaker 4: pushing their equipment to full utilization.

Speaker 4: Activity and intensity in the United States will drive revenue growth for FET's wide range of well construction, artificial lift, and completions products.

Speaker 4: In addition,

Speaker 4: We expect international activity and capital equipment spending to be another driver of growth. Let me share some specifics.

Speaker 4: FET's international footprint and extensive global reach allows us to shift our products to nearly every oil and gas producing country in the world.

Speaker 4: 30 to 40 percent of our revenue comes from outside the United States.

Speaker 4: Our brands are well known and had a long track record of success.

Speaker 4: Recently, I had the opportunity to spend considerable time with our customers in the Middle East.

Speaker 4: Their excitement and expectation for activity next year and beyond is the strongest I have seen in many years.

Speaker 4: They are expanding their fleet.

Speaker 4: and adding equipment to meet burgeoning demand.

Speaker 4: FET will be a direct beneficiary with our portfolio of equipment that makes energy production safer and more efficient.

Speaker 5: Also,

Speaker 4: Increased capital spending on equipment by service companies will drive additional demand.

Speaker 4: During the last global investment cycle that ended in 2014,

Speaker 4: Capital equipment accounted for nearly half of our revenues.

Speaker 4: versus just a third today.

Speaker 4: as land and offshore rigs are reactivated or constructed.

Speaker 4: FET will supply key capital components like catwalks, mud pump parts,

Speaker 4: crane and pipe handling tools.

Speaker 4: We are seeing this demand already with inquiries and orders and expect it to accelerate in 2023 and beyond.

Speaker 4: Another area.

Speaker 4: of capital equipment spending where we see great growth is with hydraulic fracturing fleet.

Speaker 4: as our customers transition to more environmentally friendly engines.

Speaker 4: They are upgrading to our specialized cubed radiators.

Speaker 4: These radiators are significantly more efficient than horizontal versions, and we expect a major increase in deliveries for 2023.

Speaker 4: This is a great example where demand for capital equipment to replace aged and technically obsolete products compliments our strong consumable based business lives.

Speaker 4: with the market opportunities I just mentioned.

Speaker 4: We have a line of sight for further revenue growth.

Speaker 4: Importantly, we have the capacity in place today to meet those demands and more. In fact, we could grow revenue 50% with minimal capital investment.

Speaker 4: and with FET's high operating leverage.

Speaker 4: We expect to generate $25-$40 of EBITDA.

Speaker 4: for every $100 of incremental revenue.

Speaker 4: We have the opportunity for outsized earnings growth throughout this next investment cycle.

Speaker 4: On today's call, we are not presenting formal guidance for next year.

Speaker 4: However, we expect a growing US market.

Speaker 4: increasing international activity.

Speaker 4: And a capital equipment upgrade cycle will drive revenue growth in 2023.

Speaker 4: depending on the mix and timing.

Speaker 4: of how these drivers play out.

Speaker 4: we could see double-digit revenue growth with continued strong incremental EBITDA.

Speaker 4: with good management of networking capital, we expect meaningful free cash flow generation to further deleverage our balance sheet.

Speaker 4: As we continue to execute on our strategic initiatives and with the tailwind of this market,

Speaker 4: We remain confident in delivering strong financial performance in 2023 and beyond.

Speaker 4: I will turn the call over to Lyle for more detail on our third quarter results and outlook for the remainder of the year.

Speaker 6: Thank you, Neil.

Speaker 3: FET's third quarter financial performance was strong.

Speaker 3: Revenue of $182 million exceeded expectations.

Speaker 3: and EBITDA of $18 million fell in the middle of the guidance we provided.

Speaker 3: Comparing with third quarter of 2021, revenue is up 29%, and EBITDA up 147%.

Speaker 3: Over that time, solid execution of our strategy by the FET team has yielded a $50 million increase in our backlog.

Speaker 3: revenue growth in line with global drilling rig count, and pricing increases in excess of cost inflation.

Speaker 3: improving our EBITDA margins from 5% to nearly 10%.

Speaker 3: For the fourth quarter, we are guiding revenue of $180 to $190 million and EBITDA of $16 to $20 million.

Speaker 3: We acknowledge that at the midpoint, this guidance range implies roughly flat performance with the third quarter and modest incremental margins.

Speaker 3: However, it is important to recognize that this guidance includes additional variable employee incentive compensation and healthcare benefit expense.

Speaker 5: Bottom line.

Speaker 3: Even including this additional expense, our third and fourth quarter EBITDA results will put us at the top end of our full year guidance of $50 to $60 million.

Speaker 3: We are pleased that our third quarter free cash flow was just over $17 million.

Speaker 3: keeping us on track to be within our previous expectation for a back half 2022 free cash flow of $30 to $40 million.

Speaker 3: Our EBITDA to free cash flow conversion of nearly 100% benefited from keeping accounts receivable and inventory balances relatively flat.

Speaker 3: despite increasing revenue and from the lack of a quarterly cash interest payment.

Speaker 3: We will look to drive working capital down in the fourth quarter to achieve another quarter of strong free cash flow.

Speaker 3: Let me take a few moments to update you on our share repurchase program and capital structure.

Speaker 3: After the end of the third quarter, we repurchased a little under 28,000 shares of stock from SCF Partners.

Speaker 3: for total consideration of approximately $700,000 at then current market prices.

Speaker 3: These shares represent the last of the shares owned by the SCF funds.

Speaker 3: which provided the initial investment capital in the formation of FET more than 17 years ago.

Speaker 3: We are thankful for SES partnership over these many years.

Speaker 3: Accounting for this repurchase amount, we now have $8.2 million of authorization remaining under our share repurchase plan announced in the fourth quarter of 2021.

Speaker 3: On the debt side, our structure includes a $179 million ABL credit facility and long-term convertible notes.

Speaker 3: We ended the third quarter with $127 million of available capacity under the ABL and total liquidity of $147 million.

Speaker 3: With total ABL facility size some 20 million dollars greater than our third quarter borrowing days.

Speaker 3: This facility provides liquidity and flexibility for the years ahead.

Speaker 3: Reducing our leverage is a key company objective and focus.

Speaker 3: Now that our convertible notes are callable, we have additional flexibility in reaching that objective.

Speaker 3: Let me share how conversion of our $257 million of notes offers a unique path to substantial transformation of our balance sheet.

Speaker 3: Roughly 48% of these notes will convert to common stock on a mandatory basis.

Speaker 3: when the 20-day average of the daily VWAP of our stock is above $30.

Speaker 3: The remaining notes would then be treated as straight-jet with no further conversion feature.

Speaker 3: Pro forma for such a mandatory conversion as of the end of the third quarter, our fully diluted share count would be 10.6 million.

Speaker 3: Importantly, our net debt would be $125 million. This manageable amount of net debt is roughly 1.8 times our current run rate EBITDA of $70 million.

Speaker 3: and less than current ABL availability.

Speaker 3: We believe such a reduction in leverage merits a re-rating of our EBITDA trading multiple and considerable share price upside above current levels.

Speaker 3: Therefore, we are aggressively driving business performance to achieve this deleveraging objective.

Speaker 3: Shifting to operations, let me share a few highlights from our segment results for the third quarter, where each of our business segments posted increased even-time margins.

Speaker 3: our drilling and downhole segments revenue.

Speaker 3: With 75 million down slightly at 1%.

Speaker 3: The drilling technology's product line was up 13%.

Speaker 3: All sub-product lines achieved revenue growth driven by increasing global rig count.

Speaker 3: In contrast, the Subsea Technologies product line was down 27% as backlog timing and supply chain delays for electronic and hydraulic components cost recognition of revenue to shift into later periods.

Speaker 3: Orders for the drilling and downhole segment decreased by 1% as growth in bookings for drilling capital and consumable products were offset by a decrease in orders for subsea capital.

Speaker 3: It is noteworthy that our subsea capital bookings tend to be large and their timing fluctuates considerably from quarter to quarter.

Speaker 3: We are encouraged by the significant increases in offshore activity announced recently.

Speaker 3: the number of defense related spending projects under discussion.

Speaker 3: consistent demand for our ROV spares.

Speaker 3: Despite the drop in revenue, Segment Ibadah increased by 600,000, benefiting from operating leverage in our drilling product line and favorable mix across the segment.

Speaker 3: EBITDA margin for the segment was 17%.

Speaker 3: Completion segment revenue was $72 million in the third quarter, an increase of $6 million or 9%, despite the number of completions in the U.S. being essentially flat.

Speaker 3: The stimulation and intervention product line was up 17 percent as our pressure pumping customers acquired additional radiators, power ends, manifold trailers, and high-pressure hoses to support their activity and growth.

Speaker 3: Revenue for our quality wireline cables also grew 22%, setting a new quarterly revenue record.

Speaker 3: Bookings for the completion segment were 79 million, up 22%, resulting in a book-to-bill ratio of 109%.

Speaker 3: Demand for our stimulation products drove the bulk of the increase in orders.

Speaker 3: In addition, we received a $4 million order.

Speaker 3: for coiled line pipe for an offshore installation in the Middle East.

Speaker 3: Completion Segment EBITDA was $10 million in the third quarter for a 14% margin. EBITDA increased $2 million from improving product margins and favorable mix tied to increasing customer activity.

Speaker 3: In our production segment, revenue was $34 million, up 14%, as both product lines experienced double-digit revenue growth.

Speaker 3: As we mentioned last quarter, COVID lockdowns in China were lifted, allowing our valves, supply chain, and revenue to recover.

Speaker 3: Production segment bookings were $46 million for the quarter, down sequentially following the large annual bookings for production equipment we received in the second quarter.

Speaker 3: Even though total bookings were lower, segment book-to-bill ratio remained strong at 134 percent, as demand for our surface processing equipment continues to grow.

Speaker 3: Production segment EVA.doubles primarily on increased volume and operating leverage in our valves product line.

Speaker 3: EBITDA margin was 4%, nearly double the second quarter result.

Speaker 3: Our production segment markets are the most competitive that we face as a company.

Speaker 3: Margin performance this year has improved significantly with nearly 90% incremental EBITDA margins on modest revenue growth.

Speaker 3: We will drive future margin improvement in this segment by exploiting inherent operating leverage

Speaker 3: and in the longer term by focusing on higher margin emission reduction and alternative energy applications.

Speaker 3: Now let me provide a few details for modeling purposes.

Speaker 3: In the third quarter, corporate costs were flat with the second quarter as expected.

Speaker 3: For the fourth quarter, we expect corporate costs to be up slightly.

Speaker 3: interest expense to be $8 million, and depreciation and amortization expense of roughly $10 million.

Speaker 3: We continue to expect full year capital expenditures of less than $10 million and cash income taxes of roughly $4 to $5 million.

Speaker 3: In summary, FET results reflect another solid performance by our team in an improving market.

Speaker 3: Now let me turn the call over to Neil for closing remarks.

Speaker 6: Neil?

Speaker 4: Thanks, Lyle.

Speaker 4: Before closing, I want to acknowledge Veterans Day later this week, a very important day for the United States.

Speaker 4: On behalf of the entire FET family, we thank our veterans for their service.

Speaker 4: Also, I would like to recognize the performance of the FET team.

Speaker 4: you've done an amazing job executing at a high level and delivering for our customers.

Speaker 4: I am honored and thankful to be your colleague.

Speaker 4: Through this earnings season, our customers have made it clear they expect further growth.

Speaker 4: While we don't drill the holes or stimulate the wells or produce the hydrocarbons, we at FET make it happen by providing innovative products and solutions. We are critical to safer, cleaner, and more efficient energy production.

Speaker 4: I'm going to end today's prepared remarks with my message from last quarter.

Speaker 4: Our story is simple. Industry fundamentals are strong. Backlog is growing.

Speaker 4: Profitability is increasing. FET is a compelling company with a great future.

Speaker 7: Thank you.

Speaker 5: to Wanda.

Speaker 4: Please take the first question.

Speaker 2: Thank you. As a reminder, ladies and gentlemen, you will need to press star 11 on your telephone.

Speaker 2: Please stand by for our first question.

Speaker 2: Our first question comes from the line of John Daniel with Daniel Energy Partners. Your line is open. Your line is open.

Speaker 3: Hey guys, good morning. Thank you for taking my call.

Speaker 3: Neil, my first question has to do with the ad effect event and your trip over there. All the feedback I've had from folks that were there talked about how positive it was and how well attended. And I'm curious as you look at some of the demand opportunities, was it just from Middle East customers or did you have...

Speaker 8: Other international potential customers there that you also were speaking to and just elaborate a little bit more on.

Speaker 8: on what you learned over there.

Speaker 4: Yeah, thanks John . It was really a fantastic show. It's one I've attended many times over the years and this was definitely one of the highest participation events that I've seen.

Speaker 4: I think the general focus for sure is within the Middle East at that show and we really got a lot of great feedback from our customers who are looking to expand their fleets, add equipment and definitely are gearing up for a busy year, next year and beyond. So I think the focus definitely in the Middle East for that show but I think we expect a really good broad-based international year next year.

Speaker 8: Okay, outperforming North America.

Speaker 4: Yeah, I think we're going to see really good demand internationally. In the North American side, we do see good capital equipment orders and inquiries coming from service companies. So I think we mentioned in our remarks radiators as one example, but following that with aftermarket and other opportunities on the frac side. So I think service intensity in the US will keep us.

Speaker 4: will keep us growing, will keep us busy, but we now will have an additional, I think, tailwind of adding on or reactivating capital equipment internationally as well.

Speaker 8: Okay, final question has to do with your comment on the radiators. As you're getting the orders for these, is it from the existing frack companies rebuilding fleets, or are you also seeing POs coming from the packagers who might be building equipment for potentially new entrants to the market? Any color there would be great.

Speaker 4: I think the general feel is most of the units are existing fleets where they're upgrading to a DGB engine and they're also then upgrading their radiator. I think in some cases we are providing radiators for power applications. I think that would be for newer fleets, but that would be primarily on the e-frag side.

Speaker 8: Okay, cool. Thank you very much guys.

Speaker 5: Thanks, Sean.

Speaker 9: Thank you.

Speaker 2: Please stand by for our next question.

Speaker 2: Our next question comes from the line of Eric Carlson. The line is open.

Speaker 10: Hi guys, thanks for taking my question and again on another quarter. I just had one follow up on kind of the pro forma if and when

Speaker 10: that ends up converting we're looking at.

Speaker 10: basically $125 million of net debt. And also freeing up about $11 million of interest expense when that happens as well. But do you have

Speaker 10: I got a target in that debt to EBITDA on mind and maybe just looking forward I mean what what do you see with now that we're at kind of that inflection point of positive free cash flow like

Speaker 10: where does that cash flow get allocated on a go forward basis?

Speaker 3: Great question, Eric. Thank you for that. We tried to give some good color on how that conversion would work, and you're right, you picked that up. So $125 million of net debt posted conversion pro forma for Q3.

Speaker 3: and wanted to guide ahead to continue free cash flow generation, both in the fourth quarter here as well as into 2023. So as we look ahead, our target, historically we would have said that target kind of between one and two times net debt to EBITDA. I think as we look at our business and where we stand, we want to be a conservative viewer of working capital. Our business does have a lot of operating leverage in it.

Speaker 3: So on the upside, that's very positive. And to be cautious then, how do we think about net debt is more of a function maybe of our accounts receivable base so that we keep that at a modest number. I think what that means is that post a conversion, we would be looking to continue reducing our net debt on a go-forward basis. We have the ability with those notes being callable at this point to bring them in and availability under our revolver should we choose to do that to be more aggressive.

Speaker 10: Great, that's helpful. Maybe shifting gears, I don't know if you guys have thought about it at all or what the implication is of kind of the Inflation Reduction Act and how that can maybe play into some of your products that support kind of the energy transition, so to speak. Is there any benefit to that as a producer of equipment?

Speaker 4: There is, and I think as Lyle mentioned in his remarks with our production equipment, generally that product line is generally the most competitive one we face. What we are doing and we have done is made some investments in newer technologies that can handle methane emissions. And so we have a few fuel trials today that have been ongoing where we're helping our customers.

Speaker 4: continue to produce without emitting additional methane. So I think that's an exciting area. I think with prior calls we have mentioned our coil line pipe that's been used for carbon capture use and sequestration. I think that's another area of positive growth too.

Speaker 4: Overall, I think we can, as an equipment manufacturer, we can skate to where the puck is going. And I think we'll continue to look and talk to our customer base and continue to put R&D into new products and solutions that help them ultimately reduce their emissions and take advantage of any benefits of the inflation reduction act.

Speaker 5: Thanks guys, appreciate it.

Speaker 5: Thank you.

Speaker 2: Thank you. As a reminder, ladies and gentlemen, that's star 11 to ask the question.

Speaker 2: Please stand by for our next question.

Speaker 11: Thank you.

Speaker 2: Our next question comes from the line of Dan Pickering with Pickering Energy Partners. Your line is open.

Speaker 12: Good morning, gentlemen. Thanks for doing the call today.

Speaker 13: Good morning, Dan. Thanks, Dan.

Speaker 12: Sure. So, a couple of questions here. Bear with me. If I just checking the math, I want to make sure your comment about 30 to 40 million of free cash in the second half. So, we back off the 17 that we printed in the third quarter. So, call it another 13 to 23 million in Q4.

Speaker 12: is that that assumes all the working capital adjustments, etc. So that's net net of everything, correct?

Speaker 3: That's right Dan and that does include our semi-annual interest payment just over 12 million that will be in the third quarter. So to get there with kind of our implied EBITDA guide does mean we're going to pull working capital down in the fourth quarter.

Speaker 12: Okay, got it. And you would expect to see that in the inventory primarily or payables or just across the board?

Speaker 3: Pretty across the board. Our team has done a good job on the receivables. We know there's a history in the industry of holding some payments at the end of the year. So we're conscious of that. So our big focus really is around inventory and having some good line of sight to how that is going to roll through with our revenue.

Speaker 12: Great, helpful. You talked about Lyle in the fourth quarter continued sounds like revenue growth at the midpoint of your guidance range. Flattish margins at the midpoint. Talk to us a little bit about this comp expense that you discussed. I mean, is this millions of dollars? Is it a small number and just trying to figure out how to think about how the business is performing apples to apples away from that comp delta?

Speaker 3: Yeah, no, happy to do that. You know, just to give a little more color on that, Dan, our practice is to accrue incentive comp when it's earned through the year. And as our performances continue to accelerate here at the back end, we're accruing a higher level of bonus expense than we would have in previous quarters. If we normalize for those expenses, kind of what happened in the third, where we took a little bit of extra, and in the fourth, incremental margins would be in the high 30s....

Speaker 3: So kind of in the high end of what we'd expect is a range, to give you an idea there. So pretty good incrementals x those incremental costs.

Speaker 4: Yeah, I think the business, there's really no change in the underlying fundamental business. I think the teams had a great year, again almost three times the amount of EBIT that we had last year. And our teams are delivering the results, so we're excited to have them earn that compensation.

Speaker 4: no change in the underlying fundamental business. I think the teams had a great year, again almost three times the amount of EBITDA we had last year, and our teams are delivering the results. So we're excited to have them earn that compensation.

Speaker 12: So I'm going to try to extrapolate a couple of things that you talked about. If we think about this...

Speaker 12: Q4 revenue run rate and some growth on top of that as we go into 23 given

Speaker 12: the outlook from both international and domestic, when it feels like we're knocking on, you know, 800 million plus of revenues for next year. Lyle, you talked about 25 to 40% incrementals. And so, I mean, it feels like, you know, we've got pretty strong free cash generation next year, even if working capital picks up with those higher revenues. So, um.

Speaker 12: You know.

Speaker 12: I just want to confirm the 25 to 40 percent incrementals for next year feel like they're doable. Is that just operating leverage or are we getting some price there?

Speaker 3: Yes, great question. And I think you did pick up kind of what we did. Again, we don't want to get too far ahead on guidance for next year with some of the uncertainty, but there are a lot of pluses that we see out there and feel comfortable that revenue is definitely up from here. And we hold with that long-term incremental margin concept of 25 to 40 percent. The low end is really our gross margin. So almost getting no leverage out of that. We want to keep our

Speaker 3: So higher than that would be some operating leverage. And at the high end, then, is going to be a little more a function of gaining some net price, which we've been able to do through the year in certain product lines.

Speaker 3: So I think you get there on the EBITDA line and again we were pretty bullish about the cash flow. If you knock out some of the fixed...

Speaker 3: cash items that we have in the year take those away from EVA. Interest expense is $25 million. This year our tax, cash taxes call it four, and this year our capex was just under ten. So if you kind of net those out that's about $40 million worth of cash that would go out the door. So that gets us to a pretty bullish-

Speaker 3: free cash flow number before changing working capital. And we could fund that pretty well and still be positive, significantly positive, on a free cash flow number next year.

Speaker 12: Yeah, I mean ballpark, I mean it looks like 100 million EBITDA's in striking range. So that's, I mean, what a difference a year or two makes. Congratulations. It's our project tokh Cafe on our website, it was

Speaker 12: You mentioned the SDF Repurchase share repurchase so SDF is now totally out from all of their funds And so they're no longer shareholder in the business.

Speaker 3: That's right. Okay. We're really pleased that they stuck around with us for 17 years. As you know, that's a long hold period for a private equity investor, and they've been great partners for us through these years. So we're pleased that they were part of the formation of FET.

Speaker 12: Yeah, absolutely. Well, and it's, you know, it's been a bit of an overhang to have have their, their selling pressure so it's good to good to see them out at this point. I think.

Speaker 12: That's the majority of my question. I would, if you don't mind to talk to just the mechanics, my expectation is,

Speaker 12: you're going to hit your whatever it was $30 VWAP 20 day average.

Speaker 12: sometime in the next, call it couple of quarters, and what's the actual mechanics? When that happens, then do you call the debt? You just issue a press release and mandatorily, you know, convert? What actually is the process once that hurdles reached? If you decide to do it, I assume you will.

Speaker 3: Yeah, good question. And the conversion feature there, Dan, is mandatory. So it's not an optional or decision thing like a call could be, for example. So when we rolled across that, we would notify the trustee and the note holders of the fact that the conversion threshold had been met and work through the trustee to exchange roughly 48% of those outstanding notes for shares. So we'd have a big de-levering event and some new shareholders joined in to the end of the family.

Speaker 12: Gotcha. Last question for me as we think about this.

Speaker 12: free cash generation. You talked about wanting to pay down debt.

Speaker 12: as and when you can. You've also got a fairly inexpensive stock even after the performance here to date. How does ShareRepurchase fit in the mix?

Speaker 12: on a go for basis.

Speaker 4: Dan, we like to have the kind of flexibility to...

Speaker 4: You know, repurchase shares or call debt and so I think we're going to continue to look at that going forward. We have our obviously our authorization from the board. To buy back another 8Million dollars or so of shares and again have the callability of these.

Speaker 4: convertible bonds. I think we'll continue to look at it. I agree with you. Our share repurchases are compelling, but so is also reducing our debt to get the trading multiple up as well.

Speaker 4: I agree with you, our share repurchases are compelling, but so is also reducing our debt to get the trading multiple up as well.

Speaker 12: Great, thank you guys, keep it up.

Speaker 13: Thank you.

Speaker 4: All right, this concludes our call. We appreciate everyone's time.

Speaker 4: We appreciate everyone's time. Thank you very much.

Speaker 2: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

Speaker 11: Thank you.

Speaker 1: The conference will begin shortly. To raise your hand during Q&A, you can dial star 11. you

Speaker 11: you

Speaker 2: Good morning, ladies and gentlemen, and welcome to the Foreign Energy Technology's third quarter 2022 earnings conference call.

Speaker 2: My name is Tawanda and I will be your coordinator for today's call.

Speaker 2: There is a process for entering the question and answer queue.

Speaker 2: A link with instructions can be found on the Company Investor Relations website under the Events section.

Speaker 2: At this time, all participants are in listen-only mode, and all lines have been placed on mute to prevent any background noise.

Speaker 2: This conference call is being recorded for replay purposes and will be available on the company's website. Please see the complete disclaimer at https://sites.google.com/+puckett-rock-

Speaker 2: I would now like to turn the conference over to Rob Kugler, Director of Investor Relations. Please proceed, sir.

Speaker 3: We issued our earnings release after the market closed yesterday and it is available on our website at ir.f-e-t.com.

Speaker 3: 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 context of the many factors that affect our business, including those disclosed in our Form 10-K along with other FEC filings.

Speaker 3: Management statements may include non-GAAP financial measures. For a reconciliation of these measures, refer to our earnings release.

Speaker 4: Thank you, Rob, and welcome to your first of many FET earnings calls.

Speaker 4: We are excited to have Rob join the FET family. He has over 20 years of experience in the oil and gas industry.

Speaker 4: Over that time, he's held numerous positions within finance and investor relations.

Speaker 4: Rob is going to help us tell the FET story to more investors.

Speaker 4: and we have a great story to tell.

Speaker 4: It begins with market fundamentals propelling investment in energy production.

Speaker 4: revenue increasing with global activity, and higher capital equipment spend.

Speaker 4: margins expanding through operating leverage and portfolio optimization.

Speaker 4: and with our asset-like business model, converting EBITDA into free cash flow. Putting it all together, we have a compelling opportunity for further growth in shareholder value. The future is exciting for FET.

Speaker 4: My confidence in FET's outlook is rooted in our performance throughout the past two years and what we see today.

Speaker 4: In the third quarter, we grew backlog for the eighth consecutive quarter with bookings of 198 million.

Speaker 4: Demand for innovative products and solutions remains robust.

Speaker 4: After only three quarters, this year's EBITDA is already twice that for all of 2021.

Speaker 4: Our team is on track to deliver results that will meet the upper end of an aggressive 2022 plan.

Speaker 4: to deliver results that will meet the upper end of an aggressive 2022 plan. Importantly,

Speaker 4: We turned EBITDA into over $17 million of free cash flow in the third quarter.

Speaker 4: This is a fundamental element to FET's long-term success, and we remain confident.

Speaker 4: and our $30 to $40 million forecast a free cash flow for the second half of this year.

Speaker 4: It is also important to note this forecast includes a fourth quarter interest payment of 12 million. We just finished a great quarter and look forward to finishing the year strong.

Speaker 4: Now, I'd like to share some thoughts as we look ahead to next year.

Speaker 4: while the imbalance between global energy supply and demand...

Speaker 4: support strong domestic activity in 2023.

Speaker 4: Industry participants have mixed views on the trajectory of recount growth.

Speaker 4: However...

Speaker 4: service intensity will increase as the industry runs harder.

Speaker 4: pumping more hours, drilling more feet.

Speaker 4: pushing their equipment to full utilization.

Speaker 4: Activity and intensity in the United States will drive revenue growth for FET's wide range of well construction, artificial lift, and completions products.

Speaker 4: and intensity in the United States will drive revenue growth for FET's wide range of well construction, artificial lifts, and completions products. For more information on costs, visit Google.comands image and find out more about the future

Speaker 4: We expect international activity and capital equipment spending to be another driver of growth. Let me share some specifics.

Speaker 4: FET's international footprint and extensive global reach allows us to shift our products to nearly every oil and gas producing country in the world.

Speaker 4: 30 to 40 percent of our revenue comes from outside the United States.

Speaker 4: Our brands are well known and have a long track record of success.

Speaker 4: Recently, I had the opportunity to spend considerable time with our customers in the Middle East.

Speaker 4: Their excitement and expectation for activity next year and beyond is the strongest I have seen in many years.

Speaker 4: They are expanding their fleet and adding equipment to meet burgeoning demand.

Speaker 4: FET will be a direct beneficiary with our portfolio of equipment that makes energy production safer and more efficient.

Speaker 4: Also, increased capital spending on equipment by service companies will drive additional demand.

Speaker 4: During the last global investment cycle that ended in 2014,

Speaker 4: Capital Equipment accounted for nearly half of our revenues.

Speaker 4: equipment accounted for nearly half of our revenues versus just a third today.

Speaker 4: as land and offshore rigs are reactivated or constructed.

Speaker 4: FET will supply key capital components like catwalks, mud pump parts,

Speaker 4: FET will supply key capital components like catwalks, mud pump parts, cranes, and pipe handling tools.

Speaker 4: We are seeing this demand already with inquiries and orders and expect it to accelerate in 2023 and beyond.

Speaker 4: Another area of capital equipment spending where we see great growth is with hydraulic fracturing fleets. As our customers transition to more environmentally friendly engines, we will continue to deliver more and more

Speaker 4: They are upgrading to our specialized cube radiators.

Speaker 4: These radiators are significantly more efficient than horizontal versions, and we expect a major increase in deliveries for 2023.

Speaker 4: This is a great example where demand for capital equipment to replace aged and technically obsolete products complements our strong consumable based business lives.

Speaker 4: with the market opportunities I just mentioned.

Speaker 4: We have a line of sight for further revenue growth.

Speaker 4: Importantly, we have the capacity in place today to meet those demands and more. In fact, we could grow revenue 50% with minimal capital investment.

Speaker 4: and with FET's high operating leverage.

Speaker 4: We expect to generate $25-$40 of EBITDA.

Speaker 4: for every $100 of incremental revenue. We have the opportunity for outsized earnings growth throughout this next investment cycle.

Speaker 4: On today's call, we are now presenting formal guidance for next year.

Speaker 4: However, we expect a growing US market.

Speaker 4: increasing international activity.

Speaker 4: And a capital equipment upgrade cycle will drive revenue growth in 2023.

Speaker 4: equipment upgrade cycle will derive revenue growth in 2023. Depending on the mix and timing,

Speaker 4: of how these drivers play out.

Speaker 4: we could see double-digit revenue growth with continued strong incremental EBITDA.

Speaker 4: with good management of networking capital, we expect meaningful free cash flow generation to further deleverage our balance sheet.

Speaker 4: As we continue to execute on our strategic initiatives and with the tailwind of this market,

Speaker 4: We remain confident in delivering strong financial performance in 2023 and beyond.

Speaker 4: I will turn the call over to Lyle for more detail on our third quarter results and outlook for the remainder of the year.

Speaker 4: over to Lyle for more detail on our third quarter results and outlook for the remainder of the year. Thank you, Neil.