Forum Energy Technologies Inc. Q1 2023 Earnings Call
Yeah.
Good morning, ladies and gentlemen, and welcome to the Forum Energy Technologies first quarter 2023 earnings Conference call. My name is G. G and I'll be your coordinator for todays call. There is a process for entering the question and answer queue.
Instructions can be found on the company's Investor relations website under the events section.
To ask a question during the session you will need to press star one one on your telephone you will then hear an automated message advising your hand is raised to withdraw your question. Please press star one one again.
At this time all participants are in a listen only mode and all lines have been placed on mute to prevent any background noise. This conference call is being recorded for replay purposes and will be available on the company's website I will now turn the conference over to Rob Kugler Director of Investor Relations. Please proceed sir.
Yeah.
Thank you Gigi good morning, and welcome to <unk> first quarter 2023 earnings Conference call with me today are Neil Lux, Our President and Chief Executive Officer, and Lyle Williams, Our Chief Financial Officer, We issued our earnings release yesterday and it is available on our website.
Please note that we are relying on the safe harbor protections afforded by federal law listeners are cautioned that our remarks may contain information other than historical information.
Remarks should be considered in the context of all factors that affect our business, including those disclosed in <unk> Form 10-K, and our other SEC filings.
Finally management's statements may include non-GAAP financial measures for a reconciliation of these measures you may refer to our earnings release during todays call all statements related to EBITDA refer to adjusted EBITDA unless otherwise noted all comparisons our first quarter 2023 to fourth quarter 2022.
I will now turn the call over to Neil.
Thank you, Rob and good morning, everyone.
I would like to begin today's call by emphasizing three key points.
First and foremost we are focused on meeting or exceeding the commitments, we make to our customers and investors.
We accomplish that during the first quarter as our employees executed the plan and delivered revenue EBITDA and free cash flow within our guidance range.
Our EBITDA and EBITDA margins, both increased sequentially and relatively flat revenue.
Second the first quarter highlights.
<unk> global reach.
We have abundant opportunities in the international and offshore markets to drive our growth through the rest of 2023 and beyond.
And third we set high expectations earlier this year today I remain confident in our previous 2023 guidance of $80 million to $100 million of EBITDA and free cash flow of $20 million to $40 million demand for our products is strong.
Before addressing the market.
Let me briefly talk about bookings this quarter.
Coming in at 95%. This is the first quarter in over two years with a book to bill ratio below 100%.
Our product orders are typically book and ship or longer lead time capital equipment.
This can cause lumpiness in our quarterly book to Bill ratio.
Also fourth quarter bookings were very strong, particularly with the addition of a 25 million dollar Middle East Project Award.
As we look out through the remainder of 2023, our current backlog and expected bookings should be sufficient to meet our full year revenue expectations.
Now, let me walk through our markets and the opportunities we continue to see.
During the first first quarter, we saw divergence in growth rates between the United States and international markets.
The U S rig count was softer than originally expected.
This was driven by lower commodity prices, leading to less drilling and completion activity from private operators. However equipment in the lower 48 can be redeployed quickly and our customers are forecasting a rebound in the second half of 2023.
Also.
Even with a moderating rig count service intensity and equipment utilization remain high.
For our service company customers demand and pricing remains very strong for state of the art upgraded equipment.
They are older less capable equipment is seeing less demand so clearly.
Our customers want to ensure their high spec equipment is well maintained.
And.
They want to have more upgraded in demand equipment in this increasingly bifurcated market.
<unk> can help our customers achieve this goal with our diverse products and solutions.
In summary, while current marketing market conditions are a bit soft the U S is expected to pick up in the back half of 2023.
In contrast international and offshore markets are currently strong and are becoming more important and supplying the worlds energy needs.
Investment and activity are shifting towards these markets.
Planning equipment build out and deployment of these investments have longer runways.
This result, and contractual customer commitments, which are less susceptible to short term volatility.
In our past several quarterly updates we have stressed <unk> extensive global reach.
We are much more than a U S land based company.
In fact in past cycles, our international sales approached 50% of total revenue.
<unk> brand and footprint provide us access to global markets.
As a result, we have seen our international leads and opportunities grow substantially over the past six to 12 months.
For example, our drilling capital equipment product family.
It's middle East opportunities increased almost threefold compared to six months ago.
For handling tool business, which already has a strong global presence.
Opportunities have doubled.
International Drillers are building, new and upgrading existing rigs to increase their efficiencies and meet demand.
Another example is within our coiled tubing product line.
Which generates more than 50% of its revenue outside of the U S.
Our team saw a significant increase in commercial activity across Latin America, Europe , and the middle East.
Within the offshore markets, our subsea technologies product line is seeing aftermarket demand increased 40% as our installed base that goes back to work.
Newbuild Rovs and trencher inquiries are up as well.
The sales cycle from inquiry to award can take several months for these big ticket items.
So we are forecasting the bookings to occur later this year and into next year.
And finally.
We have some product lines that have been primarily focused on the U S markets.
As our extremely successful artificial lift product family.
Now we are exporting their success to new markets.
They have recently entered several new Latin American countries and are in the process of expanding technical qualifications with national oil companies in the Middle East and Asia Pacific regions.
Geographic expansion with prove it products and services.
He will be an important growth lever in 2023 and beyond.
International and offshore investment will be a larger portion of the spending for energy production.
As a global manufacturer of critical technology.
<unk> will benefit from this trend.
We can also outpaced the market with share gains through the introduction of new products.
Last quarter I introduced our new Frac automated switch technology system.
The SaaS Kinect system is a direct replacement of zipper manifolds.
The value proposition for our customers is very clear to SaaS connect increases safety by eliminating personnel from high pressure danger zones drives efficiency.
Completing more frac stages per day and.
And improves the well site environmental footprint by eliminating Greece.
If all zipper manifolds, where replace with SaaS connect we could eliminate 18 million pounds of Greece annually.
That is an ESC win for our customers and the industry.
I am happy to report that we are delivering our first unit to a key customer this month.
Excitement around this solution is building and we're having constructive conversations with potential customers, who want to adopt this technology.
As we look further into the future.
Our product portfolio aligns with and support energy transition markets, including offshore wind submissions capture geothermal and biogas.
Although a small part of the story today.
We are seeing early signs of activity and expect an acceleration in commercial and engineering efforts in the coming years.
To conclude I remain excited about <unk> growth opportunities.
We are in the early stages of an energy investment cycle.
To increase global living standards, the world needs energy and the energy industry needs Fct's innovative products and services.
While the U S market has started slowly as expected to pickup in the back half of the year.
International and offshore activity growth is robust driving revenue opportunity.
And <unk>, new product pipeline will further support growth by taking market share.
I'll now turn the call over to Lyle for more detail on our first quarter results in the second quarter 2023 outlook.
Thank you Neil good morning, everyone.
Our employees executed to plan and delivered a solid first quarter result.
Revenue and EBITDA were within our guidance range at $189 million and $18 million respectively.
Compared to the first quarter of 2022 revenue and EBITDA increased by an impressive 22% and 99%, respectively and posted a margin improvement of 370 basis points.
Sequentially, our consolidated revenue was down 1%.
Softer U S market conditions for almost offset by growth in <unk> international and offshore sales.
Importantly, excluding subsea technologies, which declined due to project timing, our international revenue increased 17% sequentially and 25% on a year over year basis.
As Neal indicated international market growth is driving additional revenue for MPT.
Despite.
Roughly flat revenue EBITDA was up 7% sequentially with margin improvement across all three segments.
I would like to highlight <unk> strong backlog, which is up 24% from the first quarter of last year and backlog is up for six out of seven product lines.
The drilling technologies backlog is up 31% year over year with orders for international and domestic drilling rig upgrades.
Stimulation and intervention backlog is up 18%, including a large number of orders for our GHT Jumbo Tron radiators.
Production equipment backlog is up 81% with large bookings such as the <unk> project order in Saudi Arabia announced last quarter.
Generally our backlog is scheduled to deliver through this year and into 2024.
This backlog in hand, and the increasing opportunity for our products and international and offshore markets provide the confidence we have in our full year outlook.
Let me share some segment highlights.
Overall drilling and downhole results were encouraging.
Segment book to Bill ratio was 105% driven by the backlog build in our artificial lift drilling handling tools and drilling consumable product families.
Our artificial lift bookings increased 33% sequentially, we are seeing increasing Gulf of Mexico, and West African demand for our cannon protectors as re completion work picks up.
Segment bookings and revenue were up year over year, but down slightly sequentially due to order and project timing.
EBITDA increased sequentially and EBITDA margins rebounded to the mid teens on improved sales mix.
Our completions segment is largely driven by plug and perf well completion activity in the U S, which has been stable since the middle of last year.
Segment revenue and EBITDA reflect this trend.
Revenue was roughly flat with the fourth quarter, while EBITDA increased with improved profitability in our coiled tubing product line. Following the project cost challenges experienced in the fourth quarter.
After receiving large orders for pressure control equipment, and radiators and the fourth quarter bookings returned to the run rate of the previous three quarters.
Other highlights for this segment include our quality wireline product family, which grew revenue, 4%, beating the record set last quarter.
And the global tubing team recognized revenue of approximately $3 million for one coiled line pipe order.
This revenue relates to a subsea pipeline installation in the middle East.
Finally, our production segment revenue and profitability continue to move higher as the teams execute our strategy and deliver backlog.
Revenue increased 9% sequentially and 24% year over year, and EBITDA margin is up 780 basis points compared to the first quarter 2022.
Segment bookings decreased $15 million as the large order we received last quarter was partially offset by approximately $6 million of valve orders won by our Forum Arabia team.
Now that the team has established our facility as a fully qualified supplier. It is encouraging to see these larger awards.
We expect that this key facility will provide strategic opportunities to pull through a variety of <unk> products and equipment as our customers seek to benefit from having an in country supplier.
Now, let me share with you our second quarter forecast Neil discussed how we see the markets going forward and reaffirmed our 2023 EBITDA guidance.
For the second quarter, we expect overall flat global activity with continued international acceleration offsetting U S softness.
Therefore in the second quarter, we expect consistent results with revenue of between $180 million to $200 million and EBITDA between 16 and $20 million.
Here are a few details for modeling purposes.
In the first quarter corporate costs were slightly down from the fourth quarter coming in where we expected.
In the second quarter, we anticipate corporate costs to be in line with the first quarter interest expense to be 4 million and depreciation and amortization expense of roughly $8 million.
We forecast full year capital expenditure of approximately $15 million and cash income taxes at around $9 million.
Free cash flow of negative $24 million was at the midpoint of our guidance range.
As we forecasted in last quarter's call payments of annual cash incentives property taxes and accrued interest related to the converted notes.
Totaled $30 million in the first quarter.
We also built inventory to fulfill shipments from backlog scheduled for delivery in 2023.
While we are still experiencing some supply chain and logistical disruptions from time to time this area is improving.
In some instances this quarter material arrived earlier than we expected due to improved supplier performance.
While this means our inventory was slightly higher than planned we are pleased that supply chain challenges appear largely behind us.
Our elevated accounts receivable will balance is a work in progress.
We're confident in the creditworthiness of our customer base. However, despite ample cash on their balance sheets are customers continued to stretch payments to meet their own cash flow goals.
For example, one large publicly traded customer shifted a $5 million promised payment from March to April .
We have taken action to improve our internal processes and are working with our customers to constructively achieve timely payment without resorting to withholding critical shipments.
Looking ahead, we expect positive free cash flow for the next three quarters and as Neil noted full year positive free cash flow of between 20 and $40 million.
We ended the quarter with $47 million of cash on hand, and 120 $129 million of availability under our revolving credit facility.
With total liquidity of $176 million.
As a reminder, our financial statements now reflect a mandatory debt conversion that dramatically reduced our debt by $123 million.
As of March 31, our net debt was down to $112 million, giving us a significantly improved financial position.
With ample liquidity and a strengthened balance sheet.
<unk> is well positioned to fund operations and take advantage of market growth opportunities.
We continue to evaluate opportunities available to us for the deployment of our cash I will close by touching on some of these strategic alternatives.
One option is to repay our long term debt or repurchase additional shares.
During the first quarter, we returned cash to shareholders repurchasing approximately 139000 shares of our common stock for about $3 5 million.
This leaves approximately $2 $4 million under our authorization program.
As a reminder, we are limited by our current indenture from additional repurchases beyond this authorization.
Another option is funding for organic growth, which is already included in our plan for 2023, and our healthy free cash flow forecast.
Finally.
Another option could be accretive M&A transactions to further transform our product portfolio.
Any transaction must make good industrial logic be accretive to our earnings and be structured such that we maintain conservative net leverage.
Before turning the call over for questions I want to leave you with these points.
One we delivered what we said we would deliver as reflected in the first quarter results.
<unk>, we are a global manufacturer with ample opportunities in the international and offshore markets to drive growth through the rest of 2023.
Three we set some high expectations early this year and reaffirm our original guidance.
<unk>. Please take the first question.
Thank you as a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one one again.
Our first question comes from the line of John Daniel from Daniel Energy Partners.
Hey, good morning, Thanks for including me.
Yes.
Neil I guess my first question is just tied to the international growth opportunities, which sounds.
The step change.
Curious as you look at the opportunities and the drivers behind it is it is it.
Something as simple as just growing international demand broadly speaking or have you done something from a sales perspective, we brought on some well connected sales folks or is it a function of just.
Other competition not hitting deliveries inside now people are waking up and calling you just any color would be helpful. Yes.
Yes.
Good question appreciate that John .
We've had historically some really great brands.
<unk>, especially on the drilling side, where we're seeing a lot of activity today.
Whether it's our handling tools or our capital equipment and so we participated in the last build cycle.
Some years ago, and I think what we're seeing now is.
As a reactivation and putting back to work those rigs that have been sidelined for so long.
And the customers are coming back to us and in the equipment and efficiency that we deliver so where we're seeing those opportunities today, that's exciting I think another part of it is.
If you look at I think we mentioned in the script earlier.
Our multi list solutions product line, it's something we've had really good success with in the United States and we're starting to export that export that globally.
Okay.
And then my follow up is just on potential M&A opportunities down the road does it ever make sense.
Are you all to Dubai.
To buy an equivalent packager or would you rather just straight up manufacture the equipment.
We look at all opportunities, we evaluate where it makes the most industrial logic I think we've set up ourselves as a as a key component manufacturer, where we don't build the rig or we don't build the whole the whole Frac fleet, but we do supply key key technology that.
That differentiates and increases the efficiency for our customers.
Okay fair enough ill, let some others jump in thank you.
Thanks, John Thanks, John .
Thank you one moment for our next question.
Our next question comes from the line of Eric Carlson.
Good morning, Eric.
Good morning, Congrats guys on another good quarter and I appreciate you taking my questions.
I kind of read into kind of your last comments in terms of returning capital to shareholders and just how you think about that.
Can you clarify this.
So basically the thought would be we probably have.
40% to $60 million of free cash flow from Q2 to Q3 to get to that 20%.
$40 million for the full year that the right way to think about that.
That's right Eric that would be the right way to think about it. Our guide is $20 to 40, just to get to that midpoint.
We need about that range of cash from here yes.
<unk>.
So just wanted to think about that and kind of where we trade on a basically.
If im looking at 12 31 of this year, we're trading somewhere in the three to four times enterprise value to trailing 12 month EBITDA at that point in time, which is incredibly cheap compared to peers.
Looking at from a return of capital perspective, obviously and I've been pretty adamant about this obviously every dollar that we can put the equity would be phenomenal, but there are restrictions there.
But if you just prepayment that didn't exist I mean, you could remove a significant amount of float on the market given that amount of cash flow.
It just seems like if.
If there is something that we can do about the debt that would be the phenomenal and if there isn't.
Paying down the debt to remove that restriction not that theres any concern of the debt level I think that that level is very appropriate for our results I think the interest expenses very appropriate, but that restriction of not being able to take advantage of opportunities like we're in right now.
That is something that that I think like if you can buy your own stock at three to four times trailing 12 month EBITDA as of 12 31 this year.
Yes, that's where I just wanted your thoughts on that really.
Yes, Eric.
Love the thoughts and.
And we're very much in agreement with a lot of what you just shared we do think our stock feels very cheap as it is we're trading versus our peers and given the outlook that we have which is one of the reasons. We spent a lot of time on the script talking about that.
So how do we deploy our cash.
We're going to earn over the next three quarters and take advantage of the revolver, we have that really falls into the buckets that we laid out so.
So you had a lot of our thoughts there if I were to reiterate and punch on those definitely be looking at opportunities to retire our debt. The driver there is not necessarily to reduce our leverage we want that to be conservative, but to provide flexibility for us and being able to return additional cash to.
<unk>.
And then I think the other piece is around the M&A front is how do we find.
Really good returns to us to use that cash.
And Thats part of what we're doing that could be a use of cash even with the restrictions we have on shareholder returns. So looking at looking at all those options and considering those very hard.
Our game plan right now is to execute our strategy showed the results over the next couple of quarters.
And and let the market, let the market reward us when it's time.
Great.
And that was kind of my second question is I do like the thought of being very opportunistic I mean, if you can do something.
That increases free cash flow per share, which then in turn increases your ability to return capital on a higher.
A higher per share basis to someone like me, who wants to own the stock for the next decade because of the huge tailwind here.
Im 100% of supportive supportive of that.
Thank Mike.
So it seems like we're in this.
Zone, right now, where there is such a phenomenal opportunity because of broader market volatility that.
Anything we can do to set ourselves up to take advantage of anything that happens in the next few years would be phenomenal. So I appreciate that.
Thanks again for taking my questions.
Eric I appreciate the comments and questions there because again, we share share your views again, we see a long term.
Long runway here for FEP, we've outlined the areas, where we see the growth for us to grow above and beyond but the baseline is we do need more energy, we need to make the investment around the world.
And we are really well positioned to take advantage of that thank you.
Yeah.
Okay.
Thank you one moment for our next question.
Yeah.
Our next question comes from the line of Daniel Pickering from Pickering Energy partners.
Good morning, guys. Thanks for the call today.
Hi, Dan good morning.
So I've got three or four questions Bear with me, let me start kind of where Eric was that he talked about paying down debt to free up you didn't share can you talk about.
Ken do you have to do open market purchases of debt or is there any way to remind us on the call features of the debt right now.
Great Great question, we can do.
Do open market purchases.
Because a couple of years ago, we did retire some debt through that mechanism.
The debt is callable became callable in August of last year. So.
That's callable at this 0.1.
104, and a half as the current premium on the call today and that steps down in August .
Two I believe one or two and a half Dan.
At that point so.
So we've got that option to call or make a bigger move or do something on the open market.
Get that get that debt number down.
And.
And your revolver today, you said 100.
I can't remember the number 120 something million.
Whats the rough interest rate on that on that revolver at this point.
Once it's 176 of availability.
Under the revolver.
Interest rate Dan is.
Now, we just amended that to switch from LIBOR to sofa.
So that's that is.
<unk> plus and so we're trading I believe that rate is somewhere in the seven ish ish range right now.
Don't have that off the top of my head, but that feels about right.
Okay, so call it 7% plus or minus.
On the share repurchase side I. Just this is a math question and I apologize for the detailed back.
On on the press release.
Show $5 4 million of share repurchase and then you talked today on the call about three and a half or something like that.
Is there what's the difference between those two numbers with some internal stock repurchases or.
How do I reconcile with three 5% to five four.
Yes, great Great question, and we the Delta there is tied to.
Employee employee incentives and.
Shares that were repurchased for tax purposes.
Got it okay. So you still have some firepower on.
Yes under the indenture, a couple million dollars to call it $2 million to $4 million of Av.
Okay.
Ability there yes.
Got you. Thank you.
John .
Last question. So this kind of ties to the stock performance, we sold off pretty hard I've made the assumption that some of your converted debt to equity holders have exited do you have any any color.
On.
Do we have those guys out of the stock at this point or are they still there how do you feel about kind of is it just the.
Overhang associated with the debt to equity swap.
Yes, Dan Great Great question and in a few weeks, we'll have a much better view on where everybody's holding stand.
And our conversations with with the holders.
About that group, we've got a group now that own quite a few shares but they also still own quite a bit of debt.
And so we've spent a lot of time getting to know those larger holders well and be there I think we've got some supportive holders in that group.
Let's see in.
And understand the longer term value.
I think the other part of the equation is and looking at that we did see a pretty material jump up in our trading volume right in the middle of the quarter and that came at a time with our stock price dropping a little bit faster than the market. There. Our assumption there is that was a or a couple of holders selling.
Some of their holdings.
By any means we've seen that sold down at this point volume just isn't quite high enough, but probably have another good another quarter or two of trading at our current activity level too to really move that move through that.
Okay great.
On your margins.
Beat me to the upside and so when we think about the look forward from a margin perspective is there anything about mix or pricing that would kind of change margins from here do you expect that kind of trickle up.
During the remainder of the year.
Yes, Dan I think we expect the margins to continue to increase through through the year with our operating leverage.
We are seeing some improvement in cost with our supply chain and we expect to see that come through.
Also as we are introducing new products, we are getting getting higher margin.
For those products that are standard so.
All we're excited about the look ahead again, we reaffirmed our guidance because we have sat down with our teams we've sat with our customers.
We feel we feel good about the rest of the year.
Sure.
Neil year, you give good disclosure on your revenues on a quarterly and annual basis for 'twenty. Two you were about 67% International Youre, 70% in the fourth quarter.
Your discussion is obviously bullish around the international outlook, where do you think.
What do you think 'twenty three and then maybe even 24 it looks like on that on that mix basis U S versus international.
Yes, I think we continue to see the international International grow.
Again, I think we are well positioned with the with the capital equipment cycle.
We've seen in the United States I think we're going to see it obviously had a bigger bigger level internationally. So I think thats going to continue to increase so.
Don't don't have a number but as we said in our earlier remarks that the past cycle international sales of approximately 50% of our total revenue.
I can see us trending in that direction.
Thank you.
Great and then.
John asked kind of ask the M&A question, but can you give us.
Can you give us a.
Sort of a qualitative look at the environment I know that I know there are a lot of private equity owned business is better.
Reaching the end of fund life things like that do you sense that kind of seller expectations are coming.
Back to reality or more into reality.
Really just kind of a pacing around M&A type question.
I don't.
I don't think so yet.
The there's been a slight compression in.
Multiples for publicly traded companies and again that that has to work its way I think through the private side.
Don't think it has quite yet I think there is still some.
Anchoring back to to last year or before that even and so I think we just need to see some more some more time to it to get the to get the sellers back in line.
Sure well I guess the good news is.
You've got.
Your business is doing fine as Dan said, it would be nice to bolt on in this environment do anything when you don't have to be.
Urgent or pay crazy numbers to get there. So that's at $100 to 100% agree with that I mean, we I love I Love our business that we've set up I think our organic growth has significant upside, especially as we continue to add rigs internationally and around the world.
To handle what we really need to get balanced in the oil and natural gas markets.
But I'd love to add some bolt on or even transform of acquisitions that could take a step us up oriented do it with I think as Lyle mentioned the right industrial fit.
Also we can increase our margins and finally, we don't want to be in a.
Our leverage situation, we like like where we are now and want to continue that going forward.
Sir last question 15 million is the Capex number for the year in terms of guidance.
Notably below that run rate in the first quarter is there a specific are you building facilities or is there.
Is there a specific project that that gets you to that $15 million number or are you just kind of getting yourself, some leeway to to accelerate spending into into strong markets you can see them.
Yeah. So there's no specific or large project in and those those numbers Dan. So we do have a lot of flexibility to two <unk>.
Spend that capex when we do see the opportunities I think will be very diligent and smart with that with that spend too to make sure. We do spend it we have a clear line of sight too to an opportunity.
Okay, great. Thanks, guys I appreciate it.
Thank you Dan.
Thank you.
Thank you I would now like to turn the conference back over to Mr. Neil Lux for closing remarks.
Thank you Gigi.
We are excited about the opportunities that are in front of us and our ability to win more than our fair share to enable growth going forward I am extremely proud of the team's hard work and dedication and I am confident that we will deliver on the high expectations. We have set for the year. Thank you for.
Your support and we look forward to talking to you again in August to discuss <unk> second quarter results.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
Yes.
Okay.
Okay.
Okay.
Okay.
Okay.
Yes.
Okay.
Okay.
Okay.
[music].
Okay.
Okay.
Okay.
Okay.
Yes.
Yeah.
Okay.
Yeah.
Okay.
Yes.
Yes.
Okay.
Okay.
[music].
Yes.
Okay.
Okay.
[music].
Okay.
[music].
Sure.
Okay.
Yes.
Yes.
[music].
Okay.
Okay.
[music].
Thank you.
[music].
Sure.