Q2 2023 Forum Energy Technologies Inc Earnings Call
Good morning, ladies and gentlemen, welcome to the Forum Energy Technologies second quarter 2023 earnings Conference call. My name is Gigi and I'll be your coordinator for todays call. There is a process for entering the question and answer queue.
Link with 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.
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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.
Thank you Gigi good morning, and welcome to <unk> second 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 today may contain information other than historical information. These 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.
Our 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 today's call all statements related to EBITDA refer to adjusted EBITDA.
And unless otherwise noted all comparisons are second quarter 2023 to first quarter 2023, I will now turn the call over to Neil.
Thank you, Rob and good morning, everyone.
To start today I'm going to share our view on recent market conditions and the outlook for the remainder of 2023.
Commodity price declines and volatility are they consistent theme throughout the year. For example, during the second quarter oil prices fluctuated significantly between a range of 80 and $67 per barrel.
Further oil.
Oil prices were below $75 per barrel about 70% of the trading days during the quarter.
For the natural gas complex.
Rice's remained below $3 during the second quarter after spending almost all of 2020 to about four <unk>.
As a consequence the.
The appetite for exploration and production company investment was dampened and rig count decline.
Despite lower investment levels decreasing U S service demand.
U S drillers and pressure pumper has remained relatively disciplined with pricing.
This was achieved by idling equipment.
As a result day rates were generally robust for utilized highest spec rigs wireline and coiled tubing units and pressure pumping equipment.
Ultimately this discipline is good for our industry.
But in the short term this means lower U S drilling and completion activity.
The combination of lower commodity prices and firm service pricing drove operators.
Particularly privately held operators to pull back on drilling activity.
Last year private operators to increase their rig count by 25%.
That trend has completely reversed.
This year they have dropped all the rigs they added last year and then some.
While public operators tend to have a longer term focus.
Even their activity has declined this year.
In total U S rig count is down 81 rigs or 11% from the end of the first quarter and elevated rate of decline very few industry observers expected.
This has also led to a softening of hydraulic fracturing activity.
Pressure pumper and related service providers began to see more white space on their calendars and reduce their spending for fleet additions and upgrades.
Despite these weaker U S market conditions, our teams are executing and RPT is outperforming.
Continue to gain market share with our winning products and solutions.
Compared to the second quarter 2022.
U S revenue was up 4% versus a relatively flat average quarterly rig count.
As we look out for the remainder of this year U.
U S rig count and Frac activity will be weaker than we anticipated in early may.
In this environment and given our customers' capital discipline.
We anticipate a slight uptick in idle units.
This will defer some demand for our products into later this year our 2024.
However, within the last month commodity prices have rebounded and the outlook has improved.
With some in the industry expecting U S rig count to bottom close to current levels in the third quarter.
Although the timing of an activity increase is uncertain we.
We anticipate an upward inflection occurring later this year or early next it.
It is important to remember that for the drilling rigs and Frac fleets that are working service intensity remains high.
They need the best performing equipment to be efficient in this market.
And very recently, we have received a large capital equipment inquiry from a north American drilling contractor, who is looking to upgrade a sizeable portion of their fleet in anticipation of stronger activity.
Despite this budding optimism, we now expect 2023 U S drilling and completion activity to be lower than our previous forecast.
As a result, we now expect to generate around $80 million in EBITDA, which is the low end of our original guidance.
While I am disappointed that market conditions are preventing us from achieving our goal of $100 million of EBITDA for the year.
I am pleased with <unk> performance during the cycle.
With the updated guidance.
Our EBITDA would be up 36% year over year with revenue meaningfully outperforming the global market.
Our updated guidance assumes international and offshore revenue growth will partially offset the U S decline.
While the U S market has been challenging.
The international markets are just the opposite this was evident in the second quarter.
International revenue increased 10% sequentially outpacing international rig count growth.
Looking ahead large international field development production and LNG projects are being approved.
As a result, this is giving our customers demand visibility through 2025 and beyond.
With S&P's global footprint and strategic manufacturing facilities, we are winning work as demonstrated by our growing backlog.
This gives us momentum heading into next year as his global Upcycle continues.
During last quarter's call.
I talked about the growth in leads and opportunities we have seen in the international markets.
To increase their efficiencies and meet growing demand international drillers are building, new and upgrading existing rigs.
For example, we have opportunities on 20 newbuild rigs for two customers in the middle East.
They want it.
<unk> full suite of capital equipment, including Iron Roughnecks, Catwalks cranes and handling tools.
We are building on our wins from the second quarter, when we sold more iron roughnecks internationally than all of last year.
On the offshore side customer activity is increasing as well in the second quarter, we booked new and refurbished rovs.
In addition.
We expect to announce the award of several <unk> new builds in the third quarter.
These vehicles are expected to be utilized for both traditional energy production and offshore wind construction.
As new energy investment ramps up during the decade, our portfolio of vehicles is expected to be utilized in all phases of future offshore wind installations.
In addition to international and offshore growth MPT is gaining market share through commercial efforts and new product development.
The development of new products and solutions helps our customers drive efficiencies and lower operating costs.
While also creating value through environmental and safety benefits.
We are making good progress on these efforts as new products accounted for almost 50% of revenue and our stimulation product family this quarter.
Also we are developing our next generation iron roughneck and based off the success of our Fr 120.
We will expand our addressable market significantly.
In addition to developing new products, we continuously update and differentiate winning ones.
One example of many is the latest version of Iron Saar like Greece, those cable system.
A popular product, where we extended our lead over the competition.
<unk> had a record sales month in June as more and more customers adopted our technology as their preferred solution.
BT has changed in the landscape.
Delivering new and innovative solutions to our customers.
I will now turn the call over to Lyle for more detail on our second quarter results in the third quarter of 2023 outlook.
Thank you Neil.
Good morning, everyone.
For the second quarter revenue and EBITDA were within our guidance range at $185 million and $17 million respectively.
Impaired to the second quarter of 2022 revenue and EBITDA increased by 8% and 12% respectively with margin improvement of about 40 basis points.
Sequentially, our consolidated revenue was down 2%.
As Neil detailed earlier softer U S market conditions were almost offset by Fut's international and offshore sales.
Specifically U S revenue decreased by $10 million, while international revenue increased by $6 million.
Despite the modest revenue decline overall EBITDA was essentially flat.
Bookings rebounded in the second quarter with a $7 million increase.
Once again backlog increased for the 10th of the last 12 quarters.
At the end of the second quarter, our backlog is up 13% from a year ago.
Product lines that have larger international sales base drove this growth in revenue.
The drilling technologies, and downhole technologies backlogs increased 20% and 25% year over year, respectively.
In addition, our production equipment product line had a nice backlog build year over year backlog is up 46% with large bookings this quarter for U S based production equipment and International Forum mix technology sales as well as benefit from the Saudi Arabia Desalt are.
<unk>, we booked last quarter.
In general our backlog is scheduled to deliver through this year and into 2020 for providing support for our full year forecast.
Let me share some additional segment details.
The drilling and downhole segment had sequential revenue growth of 5% led by the drilling technologies and subsea technologies product lines.
EBITDA was down about a half a million dollars due to less favorable product mix.
Segment book to Bill ratio was 102% driven by the increased demand for subsea rovs drilling capital equipment and bearings.
Note, our subsea bookings increased 35% sequentially.
We are excited about the strengthening outlook for international drilling and subsea opportunities as customers add capacity and upgrade equipment to support future oil and gas production.
And offshore wind farm development.
Completions segment revenue and EBITDA were impacted this quarter by slowing frac related power end and radiator sales as pressure pumper hit pause on capacity expansion and upgrades.
However, we did see higher demand for manifolds high pressure hoses pressure control equipment and wireline this quarter.
Orders for coiled tubing also increased with nice awards in the Middle East and Latin America.
The completions segment set several records this quarter, our quality wireline product family grew three grew revenue, 3% again, beating the record set last quarter.
Our stimulation team sold a record number of high pressure closes this quarter.
And the global tubing team milled, a new world record string of two and three eighths inch tubing coming in at 43000 feet.
Finally, our production segment had another strong quarter of orders up 30% from the last quarter with a book to bill of 126%.
Production equipment posted strong orders with several large international Forum mixed technology and U S production based awards for 2020 for delivery.
Valve solution product line orders decreased sequentially coming off a very strong first quarter that included approximately $6 million of orders one by our Forum Arabia team.
Revenue increased 10% year over year with EBITDA margins up 380 basis points.
Sequentially revenue was down, but we were able to keep EBITDA margins relatively steady at stronger levels, we have seen over the past few quarters.
Now, let me share with you our third quarter forecast.
Neel discussed how we see the market going forward to summarize neil's comments.
U S rig count declines of 11% this quarter or more severe than we had expected. We also saw our frac customers begin to have white space on their calendars subsequent to these rig declines.
Hence, we expect third quarter U S activity to decrease slightly.
And we expect international activity to continue steady expansion.
Our third quarter forecast is on par with the second quarter with forecasted revenue and EBITDA ranges of $180 million to $200 million and $16 million to $20 million respectively.
Here are a few details for modeling purposes.
In the second quarter corporate costs were down slightly from the first quarter and the third quarter, we anticipate corporate costs to be generally in line with the second quarter interest expense to be 4 million.
And depreciation and amortization expense of roughly $8 million.
For the full year cash income taxes are expected to be around $9 million.
Primarily due to Canadian income.
Turning to cash in the balance sheet free cash flow of negative $7 million was driven by an increase in net working capital.
Similar to last quarter earlier than anticipated supply chain deliveries.
As well as purchases to meet our previously stronger outlook for 2023 drove inventory higher.
Also our accounts receivable balance increased this quarter, despite a decrease in revenue.
Our customers continue to stretch payments to reflect stronger cash flow on their reported financials.
Given the softness in the U S markets, we have made adjustments to our plans to ensure strong cash flow.
For one we have decided to hold off on noncritical capital expenditures through the back half of this year.
For the full year of 2023, we now expect capital expenditures to go from our previous guidance of approximately $15 million to approximately $8 million on par with 2022.
And the first six months of 2023, we have spent just under $3 million.
This reduction in capital expenditures will not impact our ability to design build and deliver products to our customers.
In addition to modifying capital expenditures our teams are driving down working capital by tightening our supply chain and reducing the flow of inbound raw material <unk>.
And we are working with our customers to achieve more appropriate collection timing.
Despite our lower activity outlook for the remainder of the year. We are confident we will make progress in improving our working capital.
Through our enhanced collection efforts with our customers inventory management for the softer outlook and reduced capital expenditures, we expect to deliver full year free cash flow of approximately $20 million.
This implies second half 2023 free cash flow of approximately $50 million.
We ended the quarter with $25 million of cash on hand, and $146 million of availability under our revolving credit facility with total liquidity of $171 million.
As of June 30, our net debt was $119 million with a corresponding leverage ratio of one seven times.
<unk> remains well positioned to fund operations, and exploit organic and strategic growth opportunities with ample liquidity and a strong balance sheet let.
Let me turn the call back to Neil for closing remarks Neil.
We remain steadfast in our belief that our industry must increase capital spending to supply energy for growing global demand.
To increase living standards around the world operators must invest in newfield and optimize production from existing ones.
Service companies must invest in new equipment and components to increase their efficiency and lower their cost.
All signs point to a rebound in U S activity and acceleration in offshore and international demand and a resumption of the capital equipment upgrade cycle that.
Market dynamics are in place for a strong run for FCT.
And we have the teams in place to capture a growing share of the market through innovation.
With the opportunities in front of us.
Im excited about <unk> future.
Gigi please take the first question.
As a reminder to ask a question. Please press star one to one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one one again.
Please stand by while we compile the Q&A roster.
Our first question comes from the line of John Daniel from Daniel Energy Partners.
Hey, guys.
Two questions.
Sir you made a comment about rising orders on.
And I'm curious can you just walk us through what the ongoing.
Opportunities are for maintenance and the replacement cycle for those vessels.
Yes, I think.
Yes.
I think on the on the medical side.
We continue to see our customers upgrade upgrade their fleets going towards electric and generally. They are then also upgrading their manifold systems to really complete that upgrade.
We're kind of in early stages of that we're seeing a number of manifold enquiries that were turning into orders.
But I think.
Through the year the key is adding the technology. So we've added some new check valves that last longer.
Lower the operating costs as well as our our high pressure flexible hoses. So that's the.
Small diameter that go for the path to our manifold as well as the the large diameter that go from the medical to the wellhead.
But it sounds like the fluid ends or way to think about multiple replacement opportunities per year is that or am I wrong on that.
So I think that if we think about what's a consumable are what we're excited about is our check valves and the kits that go along with them. Those are consumables. The houses last 152 years. So we are.
From the ones we delivered in.
In 2021, we are starting to see a replacement cycle, but really for us it's replacing the iron that folks are still using on their on their fleets were.
Laura replacing their old manifolds with better technology that is easier to maintain and faster the setup.
Okay and.
And the final question just has to do it.
North America onshore versus international look good right. When you look out into the international market, It's a little bit Dicey here North America land I'm, just curious as a management team are you spending more time dealing with sort of localized headaches are spending more time out there doing BD international pitches.
So I think we're we have the infrastructure in place John that we can address address both I think efficiently without having to sacrifice one or the other.
And I think that's carried over from our history of having roughly half of our revenue.
Come from international.
On the U S side, I think I mentioned in our comments that we are starting to see an improvement and it really starts with commodity prices right and oils had a nice run in July up 16% ourselves inventories are low.
And we're starting to see early signs of confidence from our drilling customers. So, yes, I think thats a positive side, but so our view, it's not when rig count increases.
We've kind of increases but win.
That's the kind of the spot we're in right now.
Okay. That's all I got thanks for including me.
Yes, Thanks, Josh Alright take care guys.
Thank you one moment for our next question.
Our next question comes from the line of Daniel Pickering from Pickering Energy partners.
Good morning, gentlemen.
Good morning, Dan.
So a couple of questions. If you don't mind I was intrigued by your comment Neil.
Inquiry for the upgrades in North America, you made it sound like it was more of a systematic sort of.
A bunch of rigs not just a one off type of inquiry Kenya.
Can you tell us a little bit more about about that is that a is that a.
Our package, where the ticket size would be bigger than your typically booking and the drilling segment or is it just sort of a standard order opportunity.
It's.
So it would be for multiple multiple rigs.
It is an upgrade of their existing capability and I don't want to get into too much details. We're still early in the discussion but to me what I found.
Intriguing and is a positive sign is that theyre thinking about next year and wanting to get their operating costs lower so.
That it was for our Fr 120, again, which I think is the leading iron roughneck and the industry. We have a lot of big installed base now customers are seeing the benefit that I think what's also driving it Dan is the operators are pushing for it.
They want to avoid downtime.
Seeing with the older Iron roughneck et cetera that are still being used on even wetter. So called high spec rigs so to have a true high spec rig I think you need a tool like like our FY 'twenty.
And that and that inquiry came.
At the beginning of the quarter before rig count really rolled or did it come kind of a recently, so they're asking even though rig counts down and theres, a little bit of activity pressure yes.
Yes.
This is very reset which is why I really don't have too much information, but this is kind of coming off the line.
That's encouraging.
And then you talked about the international opportunity I think you said you were you were.
<unk> had 2020 sort of Youre tracking 20 opportunities in the middle East.
How do those typically work through the system do you do you get the indication there may be something are you bidding and it takes.
Six months for those contracts are tend to be awarded is it second half of 'twenty for first half of 2004 type of opportunity.
Sure.
Generally there are up pretty fast for our are part of the equipment.
On a newbuild rig.
There are other parts and pieces can get held up and maybe slow down our revenue recognition for example, because they're just not ready to handle handle everything.
But compared to for example, subsea which has a much longer let's say order to delivery time.
Would be relatively quick. This is this is a three to six month type process unless the.
The rig manufacturer has more delays in their process.
Okay great.
Yes.
While you mentioned you mentioned backlog.
Can you quantify for us what the aggregate backlog is at the end of the second quarter.
Yeah, Dan we typically haven't quantified that backlog, but it is up it is up nicely over last year and I think that's the that's the key point.
Typically our business is kind of two thirds more consumable things that look more like book and ship and 40% capital.
Which is more of what's in backlog, we think back to the last major capital build cycle back in all the way back in 2014.
That capital piece of our businesses more was greater than 50%. So so as we see that backlog growing I think we will see a push to a more long lead delivery better visibility and revenue.
And in a higher capital versus consumable mix to our business. So so we're seeing that and want to give the indication that that backlog is in hand.
<unk> continued to grow really over the last three years.
Yes.
Great and maybe.
And the cycle to Dan of seeing the offshore pick up which for US. The subsidy is kind of later part and what's exciting is that.
We're already seeing some really nice nice demand for our rovs today.
And we think with the combination of offshore wind build out and I think were offshore energy build out as well that the installed base needs to grow and we are well positioned to fill that to fill that need.
Uh huh.
Right.
I've got a couple more kicked me off if you've got a big backlog of questionnaires.
Could you help us with.
As you think about your second half guidance.
$50 million give or take of our free cash and.
Q3, EBITDA guidance does that imply is.
I'm just trying to think about what U S rig count you sort of baked into your expectations as it is at that rig count stabilizes here is it that it drops a little bit more just wanted to try and properly calibrate expectations. If rig count took another 10% dive.
Would we would we worry about the guidance range or have you kind of incorporated further weakness.
In your forecast Yeah, Great question, Dan and it's almost a $64000 question.
But I think as we've thought about that.
In Q2, if you look at Q2 versus Q1 rig count was down in the U S 5%.
If you look at current levels of rig count I guess as of as of last week rig count was down 8% more from the second quarter. So so our view is everything we're hearing is that we're nearing a bottom.
In rig count here. So so I think when we indicated we do think that the U S is going to be down slightly that's kind of hanging in that range of where we are today for rig count.
But also beginning to see some softening on the pressure pumping side as well.
There has been an indication of that white space there.
There so maybe a flat from here with the back half back end of the year beginning to see some counter seasonal pickup.
Okay. Okay.
Thank you.
You you scaled back your Capex.
For the back half of the year.
Neil.
I ask every quarter about acquisitions does does the current dynamic.
One make you.
Less excited about trying to find bolt ons and too.
Is it making things easier to do are harder to do.
Great question, Dan I think what's encouraging is that it does seem like deals are getting done now at reasonable reasonable valuations.
Didn't ask is much closer so I think that's encouraging.
Well it would be great to be on a full full bore growth mode.
If you look at for acquisitions I think this is a great opportunity to be opportunistic and we will continue to evaluate whats out there.
Key as well as our liquidity, we feel really good about.
Where we're at on the balance sheet and how we could handle our our long term debt. So I think putting all that together.
We want to continue to fine.
Businesses that have a great industrial fit for us high margin.
Nice.
Nice mode.
And we're going to continue to be to be opportunistic and try to find us.
A deal that makes sense for <unk>.
Great.
Fantastic. Thank you guys. Appreciate you taking my questions.
Thanks, Dan Thank you Dan.
Thank you.
One moment for our next question.
Our next question comes from the line of Eric Carlson.
Hey, guys good morning.
Hey, good morning, Eric Good morning.
Yes.
Some thoughts I mean, it does seem.
The encouraging that I mean, we're looking at almost 40% EBITDA growth year over year, given kind of the pullback in activity.
And.
My question is more just center around when we when we looked at the potential for the free cash flow in the back half of the year.
Probably activity growth in the 2024.
Inventories kind of forced the issue there.
Hopefully price kind of triggers activity game.
Just thinking a little bit about if you guys have thought.
I mean, what do you do with that cash as we kind of turned the corner here if activity bottoms.
Q3, and we see things start to rebound.
It looks a little bit promising but.
So $50 million of free cash flow added to the balance sheet in the back half of the year.
You probably have some momentum going into 2024.
Just when we looked at kind of the debt levels that we kind of had pre pandemic to now being about a third of that in <unk>.
Interest expense down considerably.
What do you what do you look to do with the cash I know theres been talk to acquisition.
Obviously, the current valuation of the stock.
I mean.
I'm kind of a broken record at this point, but it's obviously very attractive but that isn't the way of doing a lot of return of capital type type things like peers are doing in the large steps with kind of reiterated they're going to return 50% of free cash flow or a greater number of that I mean, how do you guys think.
If you could just paint a picture on a one to two year basis and looking at the <unk>.
Plus any other options to return capital buyback then.
Obviously being opportunistic if acquisition, but if you could lay out anything that you have in terms of thoughts. If this cycle continues to play out.
We probably think it will I mean, what does that look like if you can just share some thoughts.
Sure Eric why don't I take a take a crack at that and I. Appreciate the I appreciate the question.
I think first is maybe just make sure we set the context around one of the key natures of <unk> business as a manufacturing company and that is a capital light business, meaning we ought to be able to convert.
Good portion of our EBITDA into free cash flow.
Capex is light and over time, we will build working capital, but as the market is.
Business Softens, then that working capital could unwind so that's not a permanent investment so we end up with a strong.
Our strong free cash flow numbers, that's what we're seeing in our full year guidance and clearly with the seasonality of our build early in the year and some reversal in the next half.
A lot of free cash flow generation. So so you're right and we are excited about that and see that happening to roll forward to 2022, obviously, we could have a very similar looking.
Similar looking free cash flow trend.
We've talked on earlier calls about what do we do with cash and our balance sheet.
We are in good position with that our notes mature in 2025. So we've got a long time to deal with that and a lot of free cash flow runway. So one option for dealing with that as an organic path. The other the other is to look at something and take advantage of plugging in some portion of that or.
Or all of that in a little more of a long term debt and retaining liquidity for an M&A opportunity or the opportunity to grow our business, we see a lot of opportunities in that space, Neil Neil alluded to a better market for deals. There are a lot of private companies that are in a position of wanting to.
To try to find some opportunity for their business, so that could put us in a position to take advantage of those kind of opportunities. So we're considering the fact that we've got a strong balance sheet now and real opportunities to transform the business.
With the right kind of a deal.
We're looking out there.
We want to grow our free cash flow per share.
That's organically and Inorganically, where it makes sense.
Uh huh.
Great.
Then if you think a little bit about I mean.
Golar.
Growing free cash flow per share is ultimately find a way to return that to shareholders.
When you look at the valuation of the stock now kind of year over year growth in EBITDA, despite activity being down.
Down I mean it seems.
Like if you can find opportunities to.
I guess remove the.
Restrictions on the debt and be able to kind of invest in yourself.
And by by buying your own stock that seems like kind of a number one priority at least in my head.
And then ultimately if you can continue to kind of grow on that free cash flow per share you might get into the scenario, where you can actually return some cash while also growing organically and <unk>.
And inorganic clinically so.
Yes.
That's just kind of my thoughts there.
I appreciate that Eric I think we have a lot of a lot of options.
Going forward and again I think as you mentioned, we are really proud of the results we achieved.
Relatively flat or down market, but if.
Jackson to grow EBIT at 36% this year.
A great result, and I think we can we can do more so we're going to we're going to continue to do that we appreciate.
Okay.
We appreciate your support and Thats great. Thanks.
Thank you.
Thank you at this time I would like to now turn the conference back over to Neal <unk> Chief.
Chief Executive Officer for closing remarks.
Thank you Gigi and again, everyone. The call. Thank you for your support and participation today, we look forward to talking to you again in November to discuss our third quarter results.
Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
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