Q4 2023 Forum Energy Technologies Inc Earnings Call

March 1, 2024

<unk> 2020 financial performance.

We delivered revenue and EBITDA growth of 6% and 14%.

Our EBITDA margins expanded 70 basis points to above 9%.

Building on the margin improvement achieved in 2022.

Overall these results were favorable in 2023 was a good year for S E T.

However, we are striving to be great.

It is helpful to put our performance into context with market conditions.

If we go back to this time last year.

The industry was coming up nine consecutive quarters of U S rig count growth.

With analysts and customers, indicating further growth ahead.

Internationally.

Rig count was making a steady ascent.

Averaging quarterly increases around 6%.

Putting it all together.

Our financial forecast was based on 15% rig count growth.

And at the time this felt like a conservative outlook, especially since the industry has grown 28% in 2022.

However, reality differed from the forecast.

<unk> prices were volatile the entire year.

Global crude oil prices ended down roughly 18% in U S natural gas prices were down 60%.

These factors caused global rig count to grow only 4%.

Instead of the 15% forecasted.

For these.

These market conditions led to lower than expected revenue and EBITDA growth in 2023.

And in the fourth quarter market activity and customer behavior continued the full year trend as exhibited by lower bookings and delayed payments.

Now turning to the 2024 guidance provided earlier in the call, let me share the basis for our forecast.

For the year.

We assume a range bound commodity prices with oil between 70 and $85 per barrel in U S natural gas prices between two and $3 per million Btu.

We anticipate 2024 average rig count to be down around 5% in the U S.

Flat in Canada, and up slightly in the international markets.

Putting those assumptions together, our planned forecast of flat global rig count in 2024, with some variability between quarters due to seasonality and budget timing.

Also we would expect operators to flex up or down their spending as the price outlook adjusts.

For our service company customers. We expect this we expect to see a bifurcation of demand between those focused on U S land and those with international and offshore operations.

In the U S.

Our activity based consumable product sales.

Should follow market activity, However, we anticipate softer demand for drilling and completions capital equipment.

Internationally, we continue to see opportunities and inquiries for capital equipment, and this will be an area of strength for FCT.

Also we are forecasting continued growth in offshore demand as service companies Rep ramp up operations.

Finally.

With the commissioning of the Trans Mountain Express pipeline, we assume.

Canadian oil prices will remain relatively robust and therefore expect to see a ramp up in second half activity for oil Sands development.

Putting it all together.

We're guiding $100 million to $120 million of EBITDA and $40 million to $60 million of free cash flow.

We anticipate substantial improvements in per share metrics.

And with this forecast.

We will generate significant adjusted net income per share.

We have the pieces in place for a great year.

I am now going to turn the call over to Lyle for more details on <unk> fourth quarter financial results and first quarter 2020 for outlook.

Thank you Neil good morning, everyone.

Our fourth quarter consolidated revenue increased by $6 million or 3%, while global rig count decreased 1%.

Our revenue benefited from backlog conversion in our subsea technologies and production equipment product lines.

EBITDA was down just over $1 million despite the increase in revenue at.

As unfavorable mix and slightly higher corporate costs offset volume growth.

Our book to Bill ratio was 87% for the quarter.

This follows the 111% book to Bill ratio in the third quarter timing of larger project bookings accounts for this lumpiness.

Taking the third and fourth quarters together yielded a 99% book to bill ratio for the second half.

In line with the full year of 2023 result.

The drilling and downhole segment revenue increased 12%.

Primarily due to project revenue for Rovs and cable management systems in our subsea technologies product line.

<unk> EBITDA was flat with the third quarter as the increase in subsea revenue came at lower contribution margin than the overall average.

The segment book to Bill ratio was 87%.

Typical fluctuation in order flow for subsea technologies drove this low ratio.

Recall that subsea came off a sizable order for four Perry <unk> work class Rovs systems in the third quarter.

As Neil mentioned, we expect strong revenue growth from subsea as backlog has doubled from a year ago and demand for traditional oil and gas and offshore wind remains robust.

Completions segment revenue decreased about 8%, primarily driven by lower seasonal coiled tubing sales into the middle East.

In the U S completions activity was moderately lower to start the fourth quarter before falling sharply with the expected seasonal frac holiday.

Activity exited the court exited the quarter with 50 fewer working frac fleets than at the end of the third quarter.

As a result completion company customers idled equipment.

Slowed purchases of consumable products and delayed demand for stimulation related capital.

However, our stimulation and intervention revenue was essentially flat as we delivered equipment that had been delayed by customers in the third quarter.

EBITDA was comparable to the third quarter due to favorable product mix and segment book to Bill ratio came in at 101%, which is typical for this segment.

Our production segment revenue and EBITDA were also comparable to the third quarter book to Bill ratio for the production segment was 63%.

For the fourth quarter.

This result was driven by the production equipment product line, where we typically see large project awards and lumpiness from quarter to quarter.

I would like to highlight the impressive impressive improvement. This team has made in 2023 the.

The segment delivered EBITDA margin improvement of 400 basis points with 42% incremental EBITDA margins compared with 2022.

Our focus on operating leverage continued cost management and the utilization of our Saudi Arabian facility drove this improvement.

Turning to cash in the balance sheet, we generated free cash flow of $9 million in the fourth quarter.

A result that was well short of our expectation of $26 million.

The shortfall resulted primarily from collections. Despite our days sales outstanding coming down receivables did not decline as much as we expected.

Additionally, cash from our longer term percentage of completion projects was delayed.

We also paid a few million dollars of transaction expenses related to the <unk> acquisition.

We have recalibrated, our expectations going forward to boost confidence in our forecast.

Notwithstanding a free cash flow Miss we progressed in our efforts to improve net working capital efficiency, our accounts receivable balance improved relative to our revenue as we return our days sales outstanding metric to historical norms.

And given the softer market outlook, our teams reduce the flow of inbound raw material to lower inventory balances and improve our terms.

We will focus on maintaining these efficiency gains in 2024.

We ended the quarter with $46 million of cash on hand, and $147 million of availability under our revolving credit facility with total liquidity of $193 million.

Our net debt was $91 million with a corresponding net leverage ratio of one four times.

Pro forma for the acquisition of Vera Perm, which closed in January our balance sheet remains strong.

Our net debt balance would have been $241 million and our.

Pro forma year, ending liquidity would have been $113 million.

With this liquidity and forecasted free cash flow in 2024, we expect to be in position to retire the 9% senior secured notes later this year, if we choose to do so.

In the meantime, we continue to explore options to refinance our long term debt considering options that provide additional flexibility without excessive incremental costs or restrictions.

As we indicated in our November call, we remain committed to returning net leverage to our pre Vera firm levels of one seven times EBITDA or better.

Let me provide some details behind our robust free cash flow forecast.

For the year cash interest is expected to be approximately 25 million.

Based on the 2025 notes and borrowings related to the acquisition.

Cash income taxes are expected to be around $20 million, primarily due to Canadian income.

Capital expense expenditures are expected at about $10 million in line with both FEP and Vera firms capital light structures.

Plus we expect approximately $7 million for other payments primarily related to the <unk> acquisition.

Along with flat global activity levels and revenue, we assume no overall change in net working capital.

These assumptions and our $100 million to $120 million EBITDA guide put free cash flow at between $40 million and $60 million.

This forecast compares favorably with the combined cash flow, we disclosed with the <unk> acquisition announcement.

And at <unk> current market cap.

That's an approximately 20% free cash flow yield.

I will conclude by providing our forecast for the first quarter of 2024.

Neil shared that we expect a flat global market this year with some volatility between quarters.

Several factors lead us to expect a softer first quarter.

These include recent E&P company mergers downward pressure on U S natural gas.

And recent volatility in Canadian crude oil pricing following uncertainty about the timing of the Trans Mountain Express pipeline startup.

Each factor of presents near term headwind for customer activity. Therefore, we forecast revenue and EBITDA ranges of $200 million to $220 million and $23 million to $27 million respectively.

For the first quarter, we anticipate negative free cash flow typical of our seasonal use of cash.

We believe industry activity will be higher through the remaining quarters supporting our full year guidance.

Here are a few details for modeling purposes for the first quarter, we anticipate corporate costs and interest expense to be 7 million each.

And depreciation and amortization expense of roughly $12 million.

As Rob mentioned, we did not adjust our valuation allowance following our analysis should we adjust these allowances in a future quarter. The result would be a onetime decrease in income tax expense and a similar increase in deferred tax assets.

Let me turn the call back over to Neil for closing remarks Neil.

Thank you Lyle.

We are excited to now have their perm in the family their contributions along with <unk> legacy business.

We will generate significant financial returns for our shareholders.

Our global footprint allows us to navigate.

Any volatility and uncertainty in the market.

Deliver to our customers wherever they are in the world.

Our DNA is built on developing new and improved products and solutions to enable greater efficiency and safety for our customers.

This innovation is at the core of what we do.

Before turning the call over for questions I would like to thank our employees for their dedication and tireless efforts.

Your commitment to doing the right thing and taking care of our customers is the cornerstone for <unk> success.

Gigi please take the first question.

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.

Please stand by while we compile the Q&A roster.

Our first question comes from the line of Blake Mclean from Daniel Energy Partners.

Hey, good morning, guys. Thanks for taking my questions here.

Blake.

So I wanted to talk a little bit about <unk>. As you guys have continued to dig into the business I was wondering if maybe you could provide us a little bit of an update on.

Integration synergies cross selling opportunities anything like that you can share.

Yeah, that's a great question and I think the integration first of all is going really well.

We're we've set up to.

Let them run the business as they were again.

They are great leaders and executed and we want to continue doing that and so are our main focus is getting them to be ready part of to be ready as part of a public company. So that's the work we're doing there on the integration.

As I look at the the synergies that we have.

It's exciting exciting to us as we mentioned in our comments that we think there's a great opportunity to expand our addressable market for artificial lift products, So where we're actively working together with the with a very firm team to look at cross selling our multi lift product line into it.

To Canada to the oil sands oil sands customers early stages now.

But we think Thats a great.

Great opportunity to expand our addressable market into Canada, especially with a great product line with multi lift.

Okay. Thank you that's helpful.

Look I know you guys are kind of knee deep in getting kind of that over the finish line and working through integration, but I was hoping maybe you could give us a little color on the opportunity set for additional M&A and kind of what does the market look like for smaller tuck in acquisitions or are there firm like deals spin.

Specific business or product line.

For product lines that you guys find particularly interesting and any color around that would be helpful.

Yeah.

Question, Yes, I think there is a lot of deals out there a lot of opportunities too.

Good pipeline there that we've built up and we continue to analyze.

You know I think the <unk> deal was a.

Homerun Grand Slam it may be hard to find another one at that kind of value in that kind of margin, but we'll continue to look.

Areas that we find really interesting or.

Artificial lift downhole as well as on the on the on the Frac and stimulation side. So we'll continue to look there.

But the key for US is we need to achieve our goals that we've set out right. We want to have we want to maintain a conservative leverage on our balance sheet, we need to find a business that has strong.

Industrial logic, it fits well within our portfolio.

And ideally we're going to have nice nice accretion. So I think in the near term will continue to build up our pipeline.

But we want to deliver also on the on the promises we've.

We've laid out there for the <unk> acquisition.

Yeah, Blake, it's low maybe just to chime in a little bit as Neil mentioned the market is as robust with activity, we're seeing more transactions getting across the finish line and both.

Both more activity with buyers and sellers.

I think from our perspective, one of the thing Thats important to keep in mind about MPT is with the breadth of our product lines that we have we have lots of different opportunities for shots on goal. So it gives us a really broad set of targets that would have meaningful industrial logic on a combination. So on one hand, it makes a little harder for us because.

We got more things to juggle, but I think those the opportunity set is really good.

And with the free cash flow that we can see coming off of <unk> now with our 2024 forecast. It gives us a real opportunity for what we might be able to do very accretively on a go forward basis. So we will as Neil mentioned, we will focus first on Bureau, perm getting that done and get our balance sheet back to.

The tighter leveraged level that we would like to see happen before we add any more use any more of a kind of debt.

There is a great opportunity set out there for us.

Got it makes tons of sense. Thank you guys again very much for the time this morning. Thank.

Thank you Blake.

Thank you.

One moment for our next question.

Our next question comes from the line of James storms from Stonegate.

Good morning.

Good morning, Dave.

How's it going.

Hoping we could start with kind of the cadence launch of guidance nine seasonality that we should watch out for it sounds like the first quarter should be typical but just curious you know as ferrochrome comes more online.

The Trans mountain pipeline gets closer to completion.

Anything out of the ordinary we should have on our radar.

Yes.

Yes, Dave this is while I'm happy to talk through that guidance I think our overall.

Guidance is just a few features just to really reiterate those but overall flat global activity U S being down about 5% I think of the Canadian market looks flat for the year and then the rest of the world Grinds, a little bit higher so as we look at our revenue set in with the addition of error Perm.

Then that means some differences in where the products might come in and where they might go.

Q1 does look softer as mentioned in the specific remarks with the other quarters being higher just to highlight for folks who may not be as familiar with Canada. The second quarter is generally a soft quarter in Canada due to the seasonality of breakup.

When operators need to slow down as the permafrost thaws and they've got that issue. So that'll be a seasonal seasonality that we would expect but activity wise. We think grows grows through the year internationally.

And as flat kind of overall for the year.

Understood very helpful.

And then just looking at.

Subsea, it's great to see that doubled its backlog.

What are the lead times like here.

And is there any potential for capacity.

Capacity expansion.

Yeah.

Good question lead times for for the subsea Rovs systems are generally less less than a year. So we will we'll book an order and deliver about a year there are some special.

Products that we make that would extend longer than that but when we talk about <unk> systems and cable management systems. Those are generally less than a year from booking to delivery.

As far as capacity.

The facilities that we have in place.

Had operated at much higher production levels in years past, so just like most of that.

We could increase our revenue by let's call it 50% or so with very minimal capacity investment or Capex investment. So a lot of operating leverage built in for us, it's adding the raw materials and and when necessary, adding some labor.

Understood. Thank you and then just one more for me if I could.

<unk> international growth outpacing the rig count there any lessons learned there that can make this repeatable and kind of how much more runway do you see in the international market.

Yeah.

We're excited I think as we mentioned in our call that may be the.

That the we keep seeing inquiries and opportunities for drilling capital and subsea equipment outside the outside the U S. I think that that runway continues.

I think what's helped US and this is something we talk about a lot is our international footprint, especially our Saudi Arabian.

Manufacturing facility that gives us the opportunity to address a lot more projects by having local local content there. So.

Our big lesson as we've stayed stayed consistent to begin international.

Manufacturer and we're now being rewarded for that with the increased investment outside the U S.

Thank you for taking my questions.

Thanks, Dave.

Thank you.

One moment for our next question.

Our next question comes from the line of Dan Pickering from Pickering Energy partners.

Good morning, guys. Thanks for taking the question.

If we could.

Talk just a little bit Neil maybe.

North American business looks softer onshore business looks softer.

Is that primarily activity are you seeing any pricing pressures at this point or a pricing is pricing holding steady and.

Is there any is there any particular business line you'd call out any pricing applications.

Yeah.

I think it's been fairly steady Dan so.

Certain product lines, you can have some up up or down a little bit of variability, but let's just put it as a big picture overall, I think pricing pricing has been steady.

We've adjusted our our capacity just like our customers, whether it's pressure pumper or drillers have adjusted theirs.

Lyle had mentioned in his comments that we were slowing down inbound raw material and so we're just not going to have as much available.

To match demand to match, our supply with demand and so we're going to be able to hold hold pricing at.

At a decent level.

We'll continue though to look at opportunities to innovate I think areas, where we have new products that we've brought to the market. We generally see better pricing better margins. So we'll continue down that path.

And any.

Yes.

Lots of talk around Red seal and our supply chain potential supply chain disruptions. There have you guys seen anything or anticipate any any issues around supply chain.

We have not seen the higher costs roll through yet, but we do expect there will be higher higher freight cost just due to the amount of time to to go around and availability.

The containers and the ships, obviously take them so.

We do see see some higher cost coming in a little bit of variability I think for US. We are in a again inventory reduction mode. So we have have on hand, a lot of what we need and we're not kind of a hand to mouth like we were maybe a year and a half or two years ago, saying, we're in a word a better positioned industries in a better position.

But we do see some some higher cost coming through on the freight side.

Okay. Thank you.

<unk>.

You talked about the backlog moving up meaningfully there.

Just kind of glancing.

You guys were.

Included kind of divisional revenues in your in your press release, and so as I look at <unk>.

That business. If we go back 21 was 74 million Bucks in revenue $22 $76 million 23, 70 <unk>.

70 round numbers.

Is the way the backlog moves through the system are we now anticipating.

Are we now anticipate that thats going to be kind of notably better than we've seen in the past three or four years.

I think.

There's a little bit of a timing as we deliver the backlog, we do expect it to be better than two.

2023 for sure.

<unk>.

We did enter the year with a stronger backlog than we had in prior years and we do continue to see good activity I think maybe one variable is 2023, we saw great aftermarket demand.

We would hope that would continue in 2024, but if if that slows down at all of that that would be.

Maybe a break that goes goes along it goes against the Aha.

Yes, Yes, I think Dan just put a point on it we do we do see a bump up in subsea revenue with the combination of backlog that we already have in hand, and the inquiry pipeline that we can see forward.

A benefit that subsea has as we do recognize revenue over time with percentage of completion for our bigger projects. So it's not some of our other product lines have a revenue recognized upon shipment. So it can be lumpier.

That tends to smooth it out.

But also means that we will have some revenue this year of that backlog and some more into 2025, so a driver for us will be.

Up revenue in subsea this year.

Okay.

And while you mentioned percentage of completion accounting, which.

Glad to one of my other questions, which was your comment in the prepared remarks were that.

You had some customers that.

Didn't pay as you expected.

Is that was that a timing issue is that.

Customer quality issue, what's is it just they're being stingy come and talk to us a little bit about collections.

Great question, and we've talked about collections Dan over the last several calls as a challenge with our free cash flow and you can see it if you look back in our days sales outstanding kind of climbed through the year early and we've ended up at about the same point that we ended last year. So we got back on track.

Looking at fourth quarter, specifically, our challenge and our expectation by looking at what was due was that we would have achieved a greater amount of collections in the fourth quarter and therefore better free cash flow, we did get back to where we started the year and now our challenge is to continue to work forward, we've got a great customer.

<unk> base, so the customers that we sell to the make up the majority of our revenue are really blue chip.

Operators they are blue chip service companies, we don't ever feel like we have a credit issue that's driving our collections problem here I think it is one more of timing theres some process that needs to be improved on our side and maybe on our customers.

And I think everybody in our industry is working hard to manage their cash flow, especially at year end periods like we just went through.

With that looking ahead into into 'twenty four we did recalibrate, our our forecast too to assume that our customers are going to hang on to their cash.

Like they have been and we don't we arent forecasting a bump in collections, so that 40 to 60 range.

Assume status quo without any improvement, but again, that's something that our teams are actively working on to improve.

Okay, and so and your free cash guidance you assume no net working capital improvement, maybe maybe we beat that with some of these efficiency measures that you are talking about.

That would be our goal absolutely yeah, Okay and then my.

I won on their Perm.

Remind us how youre going to report results there isn't going to be a stand alone.

Division if you will.

If not what sub segments to kind of be in and and then when do you anticipate or will you be providing sort of historical financials on <unk>. So we can kind of calibrate our models on a on a year over year basis.

Great Great questions, Dan I think from a structure question first part of the integration work that we're doing is answering that question internally how do we best organize Vera firms. So that we can get maximum benefit of sharing across product lines, Neil mentioned opportunities with artificial lift so we're exploring what.

Those others are and timing wise on that we'll report bear firms first quarter with <unk> financials in the first quarter. So what will definitely have that pinned down.

And the next quarter here from a historical perspective.

We'll be filing an S. Three.

With some historical financials for Vera Perm.

That'll happen here in the next next month or so and so we will have that those numbers out and that will be through the third quarter of 2023.

And then later in the year mid year, we will pop in the fourth quarter as well after that audit is finished so we will have good historical view come shortly.

And kind of roll that out as we get the.

The historical audits completed.

Great last question I promise.

Your your pro forma comment Neil on the <unk>.

On the balance sheet.

You said $91 million net debt as reported pro.

Pro forma would be.

$2 41, and so the implication there that 150 is is the cash cost of the acquisition and so.

So I assume that means no cash used off the balance sheet as part of the fair Perm consideration and we we through our credit line for the whole amount is that in the Scf note is that the right assumption.

Right. So all of those numbers in our net debt and so there are some movements on the margin of cash either cash coming in or cash going out for the transaction, but in general we did borrow the seller note, which was about $60 million and the bulk of the rest of that $1 50 went on to the revolver.

And when you think about.

Alright, I think your cash balance was $43 million 43 ish million. When you think about sort of what it takes to run the business around the globe.

How much cash kind of needs to be sitting on the balance sheet.

Versus versus available to pay down.

The revolver et cetera.

Yes no.

So a good question and with the global operations, we do have cash around the around the world very little of it is truly stuck cash that we can't can't access.

And so as we've looked at it and looked at the business.

We can we can take that number of cash on hand down pretty far we've got that agreement and with our.

Our lending banks as well that anything over a certain amount of cash we do sweep to them. So we can get that number down pretty far.

Call it in the $20 million to $30 million range as we manage cash.

Around the world.

Great. Thank you guys.

Thanks, Dan.

Thank you.

One moment for our next question.

Our next question comes from the line of Eric Carlson.

Hey, guys good morning.

Good morning, Eric here.

I was just wondering I mean, obviously it caused a little bit of a delay, but if you could if you could just share a little bit more on <unk>.

The deferred tax asset valuation allowance and kind of what went into them.

When deciding whether or not you could do something now I mean I assume.

The inflection point with bare Perm kind of.

Providing positive net income with kind of that.

That trigger but.

If you could just share a little bit more on kind of the.

Net operating operating loss carryforwards and the.

Tax allowance and then just kind of the impact that has potentially released and I mean it does.

The <unk>.

Q1, and Q2 with positive.

Net income from combined financials.

Wow, you released had or I mean, how do those conversations go with.

The auditors are internally when you guys are thinking about that.

No. Thanks for asking that question Eric.

Definitely was was disappointing to us to have to put off our earnings call last week around analysis of our Bas, but maybe just a little background of how that works as.

As we have tax losses in <unk>.

Jurisdictions around the world those accrue over time and that becomes the Nols or loss carryforwards that are on our balance sheet as a deferred tax asset.

In recent years, we've done what we do with assets assess those in place in some cases or in most cases valuation allowances against those saying that look it's more likely than not that we won't use them as a rule. So as we become net income positive in different jurisdictions around the world and we've got to assess as it.

Appropriate to have those allowances sitting against the deferred tax assets.

But one jurisdiction around the world that we were getting close to that point of and what do we do we may need to assess release.

We did that work we wanted to make sure we got to the right answer and we feel confident that we did.

Should that trend continue and should we continue to gain additional confidence in forward earnings that that would indicate.

Release of that valuation allowance and just the way that flows through the books that would show up as a decrease onetime decrease in income tax expense when we do it at a onetime increase in our deferred tax assets.

So when those happen if those happen, we'll definitely highlight that so we can see but just specifically with respect to <unk> operations are primarily in Canada and Canada is one of the few places is the place on the plant or the few places on the planet that we pay income taxes, and we do not have Nols.

To cover though so the acquisition of <unk> would not have really had an interplay in with the NOL.

Well and be a discussion that we have.

Okay.

Okay. That's helpful and then.

Maybe just looking at cash flow again.

It's helpful to kind of get your your outlook and kind of what what built into that.

And despite what I would say is activity pressure in the U S side, I mean I think the.

Activity was down about 20% from from last year.

It looks like the <unk> transaction, I mean, I guess at least pretty well timed in terms of looking at the runway for 2024, and then there's obviously a lot of optionality to the upside just kind of in the legacy business more focused on the U S.

And.

So we have I think it was $46 million of cash on the balance sheet now and expecting.

Yes.

60, more by year end and you did nothing with that cash, which is obviously not going to happen but.

You're really holding 35% to 45% of the entire market cap in cash.

And I guess, the very firm deal.

That I mean, good acquisitions and return of capital probably don't have to be mutually exclusive events you can do both.

And just when you're thinking about the debt I guess could you just spend some time on that and kind of the recap and the options you've looked at there.

Because it seems like the catalyst now as if you're if you have a business.

With a 20% free cash flow yield and your peers trade at low to mid single digits.

There's a lot of room to.

Return, some cash to the shareholders, either with buybacks or dividends or both but you have to clear off the debt to do that and that probably is the catalyst that drive share price meaningfully higher as people want to see that the cash you're generating can hit their their account, whether that's a dividend or just increase their share.

The company so.

But there's a lot to take in there, but can you just share kind of balance sheet debt and then.

We're five months away from when but that goes current so.

You've indicated you want to do something around.

Around that time.

Have you thought anything about a return of capital plan that could kind of meaningfully provide.

Provide a catalyst.

Eric Yeah, Let me, let me start with that and then maybe have Neil jump in.

And I think you said a lot and talked a lot about our things that we've been focused a lot on I think the starting point here is a strong balance sheet post post bear Perm got a good amount of liquidity here, we've got cash on the balance sheet and a really clear path forward to generating <unk>.

Free cash flow to put those two together we know we are in great shape and said on the call that we expect to be in position to to pay off the 9% notes at the end of the year and Youre right. They would become current in August so we see that as a possibility.

Debt management definitely something that we're committing to do committed to do and getting our balance sheet back towards that leverage we ended the year with $1 four times before Vera Perm getting our leverage back down we think is prudent and our business and so we will have some focus on that but as you mentioned with the.

The amount of cash that we're looking at here and the potential for go forward. These things arent all mutually exclusive so focus areas would be managing down our debt.

That can be actually debt payment our net debt reduction.

Second what can we do from a.

Return to shareholders of cash and third there are a lot of opportunities for acquisitions and what can we do from a strategic investment that makes a lot of sense. So.

As you mentioned and as we said on the call we will be focused on what those options are.

And do things that we believe drive the most value for our shareholders and I think a key piece that we can see here is what the impact of error Perm has been to our forward look.

Yes.

And I think where we see ourselves in a in a show me mode.

Need to deliver on the promise that we've laid out so our teams.

Ourselves here on this call we are focused on generating the free cash flow that we've laid out and ultimately that's what's going to give us the flexibility to look at further debt management and.

Shareholder return of capital to shareholders.

Great that's helpful.

About three questions into one there so I think thats all for me at this point.

Thanks, Eric.

Yes.

Alright, thanks, Sir thank you.

Yeah.

One moment for our next question.

Our next question comes from the line of Jeff Robertson from water Tower research.

Thanks, Good morning.

Neil can you just talk about you all when you acquired or announced the <unk> acquisition highlighted margin expansion that you anticipate on a pro forma basis can you just talk a little bit about how you expect that margin expansion to progress.

In the context of your 2020 for outlook.

Yes.

Good questions.

Again, we don't see a lot of cost and bringing their per month. So I think we talked about first synergies that there wouldn't be a lot of cost synergies, but we don't expect to add a lot of cost either so putting the two businesses together I think on an average over an entire year.

We should expect to see the 14% or so margin.

EBITDA margin that we've talked about I think the softness we do we do see to start the year.

<unk> margins could be.

Could be below that as we begin Q1.

But for the full year.

We do expect to see or we do expect our margins to be in that.

And the combination.

Round that 14%.

Neal you talked about.

$300 million.

Addressable market from the three products you highlighted.

In the backdrop of a flat <unk>.

<unk> level did those products do you think drive incremental opportunities for etsy.

To expand despite a flat backdrop.

Absolutely.

That's a key focus for our teams.

It's part of our strategic objectives.

To develop new products that help us grow faster than the market.

So.

For us the question is timing so anytime you have a new product it can take.

Sometimes takes longer than you expect to get it to be commercial.

But.

That is absolutely the number one way we're going to outgrow the market is through new product development I think we mentioned it in the call.

SaaS connect was a product that we introduced last year and we've had some really really good success and we're going to do what we can to expand that that product development and get that commercialized and grown as quickly as possible, but for us it's all about timing.

It is.

It is a key focus Jeff. This is while I may choose chime in with just a little one more example, like that that Neil talked about and how we see the opportunity to boost up revenue and that is with the <unk>.

<unk> hundred 20, and then our new smaller version. So we've had great success with the Iron Roughneck CFR 102000, 120000 foot pounds of torque tool that our customers are using to deal with larger diameter drill pipe.

A higher torque loads and they need a bigger tool some of the rigs whether it's in the U S or internationally have a smaller rig floor footprint and our FY 'twenty because it doesn't fit in the space and so we were kind of cut out of that as far as the market opportunity. So the focus of the team and introducing this new tool was get something that was <unk>.

In the space, but also allow those rigs to be able to upgrade to higher torque capacity and be able to do what the industry needs, which is deal with five five inch drill pipe. So that's an opportunity and from a capital spend perspective, even in a flat market. We do expect to see our customers make some of these small inc.

<unk> of capital its not a new rig or in the case of pressure pumping. It may not be a new frac fleet, but it could be an addition that enhances the capability of their equipment and let some drill more that's why we think even in a flat market. There is some opportunity there.

So the flow through loyal as the customers get a higher potentially can get a higher return on their investment which drives demand for the product.

That's right that's right and it makes them more competitive right. If a five an average drill pipe as a requirement of a rig and the rig can handle the torque load that's going to make that asset pretty uncompetitive.

Why not spend a few hundred thousand dollars and get your rig ready to go.

And you mentioned you highlighted the strength in the middle East.

In 2023 are in the quarter.

Do you think you will be able to leverage and pull through some of the Vera perm products into those markets and get access to.

Incremental business that you didn't have before.

That's a.

Definitely a focus that we have these international qualifications and getting.

Getting set up and put into the catalog they could take time, it's something that their promos actually already working on both the addition of our international footprint I understand the logistics as well as some of our stocking locations.

We've just increased.

Chances are probability of those going forward so.

It's something we're focused on probably not a 2024 a result, but it's something we're going to be working towards absolutely in the future.

Thanks, So I'll just quickly.

I don't remember, if Rob said well.

When do you expect the 10-K to be filed.

I think thats come out relatively shortly here in the next week or so okay.

Okay.

Thank you.

Alright, well. Thank you everyone for your support and participating in today's call. We look forward to talking to you again in early may to discuss our first quarter 2024 results.

This concludes today's conference call. Thank you for participating you may now disconnect.

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My name is Gigi and I'll be your coordinator for todays call. There is a process for entering the question and answer queue 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 advisor hand is raised to withdraw your question. Please press star.

<unk> one one again.

A link with instructions can also be found on the company's Investor Relations website under the events section at this time all participants are in a listen only mode and all lines have been placed on mute to prevent any background noise. This conference call is being recorded for replay purposes and will be available on the <unk>.

Its website.

I will now turn the conference over to Rob Cockler Victor of Investor Relations. Please proceed sir.

Thank you Gigi good morning, and welcome to <unk> fourth quarter and full year 2023 earnings Conference call with me today are and you'll look our president and Chief Executive Officer, and Lyle Williams, our Chief Financial Officer.

Yesterday, we issued our earnings release and it is available on our website.

This earnings release follows our preliminary press release issued on February 19, 2024 subsequent to that preliminary release, we finalized our analysis evaluation allowance no valuation allowance releases were made as a result of this analysis.

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 context of all factors that affect our business, including those disclosed in S. E T SEC filings our earnings release.

And the <unk> acquisition announcement.

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, unless otherwise noted all yearly comparisons our full year 2023 to full year 2022, and quarterly comparisons our fourth quarter 2023 to <unk> third quarter 2023, I will now turn the call over to Neil.

Thank you, Rob and good morning, everyone.

2023 was a transformative year for F N T.

In addition to executing our strategy, we accomplished two just get milestones that accelerate <unk> long term growth trajectory.

We began the year by reducing our long term debt by 48%.

And we ended 2023 with the announcement of the Vera Curb acquisition.

This highly accretive acquisition demonstrates strong business logic, while maintaining conservative net leverage and strong liquidity.

<unk> differentiated products and patent protected technologies complement our artificial lift product portfolio.

This combination expands the total addressable market.

For Ts artificial lift product family.

Together, we are a formidable manufacturer of highly engineered products and solutions.

And we expect the larger and more profitable S E T.

Generate significant financial returns for our shareholders.

In 2024.

We are forecasting EBITDA of $100 million to $120 million and free cash flow between 40 and $60 million.

These results at their mid points.

Wood represents 64% and 25 times growth for S E T.

This is what we mean by transformative.

In addition, we executed our organic growth strategy in 2023.

Excluding the contribution from their firm.

We leveraged our global footprint to grow our international and offshore businesses.

Industry investment has clearly increased outside the United States and we are benefiting.

Revenue grew in all international regions led by 72% increase in the Middle East.

In the aggregate international revenue expanded 23% more than twice the pace of international rig count growth.

For 2023 F <unk> non U S sales were 38% of total revenue.

From 33% last year.

Turning to offshore.

We saw a resurgence in demand for Rovs and aftermarket equipment to support oil natural gas and wind projects.

Orders in our subsea technologies product line were up almost 90%.

Primarily driven by new Rovs systems.

In addition, aftermarket revenue was up almost 40% supporting the higher utilization of the current global installed base.

In addition to utilizing our worldwide footprint, we continue to develop and commercialize new products.

This is accomplished by working closely with our customers.

Iterate newer and better solutions.

Further separating <unk> from our competitors.

Let me provide a couple of great examples from our global tubing and quality wireline product families.

In 2023.

Global tubing produced two world record setting strengths.

<unk> delivered into the middle East.

The first.

Was the longest two and three eighths inch diameter string it over eight miles long.

Our second record was for the heavier strength at 200000 pounds or the equivalent of 757 airplanes.

These milestone strings increased customer efficiency and capability.

Alignment, allowing them to reach hydrocarbons further from the rig and deeper below the surface.

Another example from a quality wireline product family.

In the first half of 2023, we set quarterly revenue records.

Driven by our successful Greece was cable design.

Our cable enables faster transitions between frac stages.

Thereby increasing pressure pumping efficiency.

In addition, we commercialize the next generation cable.

Which allows our customers to economically perform wireline operations at higher pressures.

Another part of our new product development initiatives centered around innovation and market disruption.

A great illustration of that comes from our Fr 120 Iron Roughneck.

Which was specifically designed to.

To address our customers' needs for heavier and larger drill pipe.

During the fourth quarter.

We delivered our 100 fr 120, and supplied a record number of units to our customers.

In a market where drilling contractors are cautious about capital spending.

Their enthusiasm for the <unk> hundred 20 demonstrates the value our solution provides.

Building on that success.

We have commercialized the next generation iron roughneck.

This new design has the same torque capacity of the existing model. However, it is much smaller and will fit on many more rigs.

Our drilling teams innovation significantly expands <unk> addressable market.

The next example is our Frac automated switch technology system or fast connect.

The fast connect system is a direct replacement of existing zipper manifolds.

It increases safety by eliminating personnel from high pressure dangers outs it drives efficiency by completing more frac stages per day, and it improves the well site environmental footprint by eliminating greed.

The first system has successfully transitioned between 250 zipper frac stages.

With an average cycle time, well below traditional methods.

And the SaaS connects system has had zero downtime.

After pumping 175 million pounds of sand.

At an average pressure of 12000 pounds per square inch.

All of this without an ounce of Greece, which is amazing.

Lastly.

Our multi lift product family.

Has successfully helped customers mitigate sand and gas challenges and their ESP artificial lift operations for many years.

Building on our expertise in the ESP market.

We have expanded our product offering into the rod lift market with the commercialization of the pub savr plus.

San and gases issues can lead to rod lift system failure.

Our unique solution addresses these issues and increases annual production, while reducing downtime and related costs.

With just these three examples our engineers and product managers have increased <unk> total addressable market by $300 million.

And in these markets, we have the best solution for our customers.

Our innovation is laying the foundation for sustainable and profitable growth in the years ahead.

In summary.

On these 2023 accomplishments.

<unk> is a bigger and more profitable company with lower leverage and greater access to a larger addressable market.

Shifting now to <unk> 2023 financial performance.

We delivered revenue and EBITDA growth of 6% and 14%.

Our EBITDA margins expanded 70 basis points to above 9%.

Building on the margin improvement achieved in 2022.

Overall these results were favorable in 2023 was a good year for S E T.

However, we are striving to be great.

It is helpful to put our performance into context with market conditions.

If we go back to this time last year.

The industry was coming up nine consecutive quarters of U S rig count growth.

With analysts and customers, indicating further growth ahead.

Internationally rig count was making a steady ascent.

Averaging quarterly increases around 6%.

Putting it all together.

Our financial forecast was based on 15% rig count growth.

And at the time this felt like a conservative outlook.

Especially since the industry has grown 28% in 2022.

However, reality differed from the forecast.

Commodity prices were volatile the entire year.

Global crude oil prices ended down roughly 18%.

U S natural gas prices were down 60%.

These factors caused global rig count to grow only 4%.

Out of the 15% forecasted.

For these.

These market conditions led to lower than expected revenue and EBITDA growth in 2023.

And in the fourth quarter market activity and customer behavior continue the full year trend as exhibited by lower bookings and delayed payments.

Now turning to the 2024 guidance provided earlier in the call, let me share the basis for our forecast.

For the year, we assume a range bound commodity prices with oil between 70 and $85 per barrel and U S natural gas prices between two and $3 per million Btu.

We anticipate 2024 average rig count to be down around 5% in the U S.

Flat in Canada, and up slightly in the international markets.

Putting those assumptions together, our planned forecast of flat global rig count in 2024.

With some variability between quarters due to seasonality and budget timing.

Also.

We would expect operators to flex up or down their spending as the price outlook adjusts.

For our service company customers.

We expect this we expect to see a bifurcation of demand between those focused on U S land and those with international and offshore operations.

In the U S.

Our activity based consumable product sales.

Should follow market activity.

However, we anticipate softer demand for drilling and completions capital equipment.

Internationally, we continue to see opportunities and inquiries for capital equipment and this will be an area of strength for S. E T.

Also we are forecasting continued growth in offshore demand as service companies Rep ramp up operations.

Finally.

With the commissioning of the Trans Mountain Express pipeline we.

We assume Canadian oil prices will remain relatively robust.

And therefore expect to see a ramp up in second half activity for oil Sands development.

Putting it all together.

We are guiding $100 million to $120 million of EBITDA and $40 million to $60 million of free cash flow.

We anticipate substantial improvements in per share metrics.

And with this forecast.

It will generate significant adjusted net income per share.

We have the pieces in place for a great year.

I am now going to turn the call over to Lyle for more details on <unk> fourth quarter financial results and first quarter 2020 for outlook.

Thank you Neil good morning, everyone.

Our fourth quarter consolidated revenue increased by $6 million or 3%, while global rig count decreased 1%.

Our revenue benefited from backlog conversion in our subsea technologies and production equipment product lines.

EBITDA was down just over $1 million, despite the increase in revenue as.

As unfavorable mix and slightly higher corporate costs offset volume growth.

Our book to Bill ratio was 87% for the quarter.

This follows the 111% book to Bill ratio in the third quarter timing of larger project bookings accounts for this lumpiness.

Taking the third and fourth quarters together.

The 99% book to Bill ratio for the second half.

In line with the full year of 2023 result.

The drilling and downhole segment revenue increased 12%.

Primarily due to project revenue for Rovs and cable management systems in our subsea technologies product line.

Segment EBITDA was flat with the third quarter as the increase in subsea revenue came at lower contribution margin than the overall average.

The segment book to Bill ratio was 87%.

Typical fluctuation in order flow for subsea technologies drove this low ratio.

Recall that subsea came off a sizable order for four Perry <unk> work class Rovs systems in the third quarter.

As Neil mentioned, we expect strong revenue growth from subsea as backlog has doubled from a year ago and demand for traditional oil and gas and offshore wind remains robust.

Completions segment revenue decreased about 8%, primarily driven by lower seasonal coiled tubing sales into the middle East.

In the U S completions activity was moderately lower to start the fourth quarter before falling sharply with the expected seasonal frac holiday.

Activity exited the court exited the quarter with 50 fewer working frac fleets than at the end of the third quarter.

As a result completion company customers idled equipment.

Slowed purchases of consumable products and delayed demand for stimulation related capital.

Over our stimulation and intervention revenue was essentially flat as we delivered equipment that had been delayed by customers in the third quarter.

EBITDA was comparable to the third quarter due to favorable product mix and segment book to Bill ratio came in at 101%, which is typical for this segment.

Our production segment revenue and EBITDA were also comparable to the third quarter book to Bill ratio for the production segment was 63% for the for the fourth quarter.

This result was driven by the production equipment product line, where we typically see large project awards and lumpiness from quarter to quarter.

I would like to highlight the impressive impressive improvement. This team has made in 2023.

The segment delivered EBITDA margin improvement of 400 basis points with 42% incremental EBITDA margins compared with 2022.

Our focus on operating leverage continued cost management and the utilization of our Saudi Arabian facility drove this improvement.

Turning to cash in the balance sheet, we generated free cash flow of $9 million in the fourth quarter.

As a result, there was well short of our expectation of $26 million.

The shortfall resulted primarily from collections. Despite our days sales outstanding coming down receivables did not decline as much as we expected.

Additionally, cash from our longer term percentage of completion projects was delayed.

We also paid a few million dollars of transaction expenses related to the <unk> acquisition.

We have recalibrated, our expectations going forward to boost confidence in our forecast.

Notwithstanding the free cash flow Miss we progressed in our efforts to improve net working capital efficiency, our accounts receivable balance improved relative to our revenue as we return our days sales outstanding metric to historical norms.

And given the softer market outlook, our teams reduce the flow of inbound raw material to lower inventory balances and improve our terms.

We will focus on maintaining these efficiency gains in 2024.

We ended the quarter with $46 million of cash on hand, and $147 million of availability under our revolving credit facility with total liquidity of $193 million.

Our net debt was $91 million with a corresponding net leverage ratio of one four times.

Pro forma for the acquisition of Vera Perm, which closed in January our balance sheet remains strong.

Our net debt balance would have been $241 million and our pro forma you're ending liquidity would have been $113 million.

With this liquidity and forecasted free cash flow in 2024, we expect to be in position to retire the 9% senior secured notes later this year, if we choose to do so.

In the meantime, we continue to explore options to refinance our long term debt considering options that provide additional flexibility without excessive incremental costs or restrictions.

As we indicated in our November call, we remain committed to returning net leverage to our pre Vera firm levels of one seven times EBITDA or better.

Let me provide some details behind our robust free cash flow forecast.

For the year cash interest is expected to be approximately $25 million base.

Based on the 2025 notes and borrowings related to the acquisition.

Cash income taxes are expected to be around $20 million, primarily due to Canadian income.

Capital expense expenditures are expected at about $10 million.

In line with both FEP and Bureau of firms capital light structures.

Plus we expect approximately $7 million for other payments primarily related to the <unk> acquisition.

Along with flat global activity levels and revenue, we assume no overall change in net working capital.

These assumptions and our $100 million to $120 million EBITDA guide put free cash flow at between $40 million and $60 million.

This forecast compares favorably with the combined cash flow, we disclosed with the <unk> acquisition announcement.

And at <unk> current market cap, that's in approximately 20% free cash flow yield.

I will conclude by providing our forecast for the first quarter of 2024.

Neil shared that we expect a flat global market this year with some volatility between quarters.

Several factors lead us to expect a softer first quarter. These.

These include recent E&P company mergers Downer.

Downward pressure on U S natural gas.

And recent volatility in Canadian crude oil pricing following uncertainty about the timing of the Trans Mountain Express pipeline startup.

Each factor of presents near term headwind for customer activity. Therefore, we forecast revenue and EBITDA ranges of $200 million to $220 million and $23 million to $27 million respectively.

For the first quarter, we anticipate negative free cash flow typical of our seasonal use of cash.

We believe industry activity will be higher through the remaining quarters supporting our full year guidance.

Here are a few details for modeling purposes for the first quarter, we anticipate corporate costs and interest expense to be 7 million, each and depreciation and amortization expense of roughly $12 million.

As Rob mentioned, we did not adjust our valuation allowance following our analysis.

Should we adjust these allowances in a future quarter. The result would be a onetime decrease in income tax expense and a similar increase in deferred tax assets.

Let me turn the call back over to Neil for closing remarks Neil.

Thank you Lyle.

We are excited to now have their firm and the FUT family their contributions along with <unk> legacy business.

We will generate significant financial returns for our shareholders.

Our global footprint allows us to navigate.

Any volatility and uncertainty in the market.

Deliver to our customers wherever they are in the world.

Our DNA is built on developing new and improved products and solutions to enable greater efficiency and safety for our customers.

This innovation is at the core of what we do.

Yes.

Before turning the call over for questions I would like to thank our employees for their dedication and tireless efforts.

Your commitment to doing the right thing and taking care of our customers is the cornerstone for FCT success.

Gigi please take the first question.

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.

Please standby, while we compile the Q&A roster.

Yeah.

Our first question comes from the line of Blake Mclean from Daniel Energy Partners.

Hey, good morning, guys. Thanks for taking my questions here.

Blake.

So.

I wanted to talk a little bit about bear in Perm as you guys have continued to dig into the business I was wondering if maybe you could provide us a little bit of an update on <unk>.

Integration synergies and cross selling opportunities anything like that you can share.

Yeah, that's a great question and I think the integration you know first of all is going really well.

We're we've set up to.

Let them run the business as they were again they they are they're great leaders and executed and we want to continue doing that and so what are our main focus is getting them to be ready part of to be ready as part of a public company. So that's the work we're doing there on the integration.

As I look at the the synergies that we have with exciting exciting to us is.

We mentioned in our in our comments that we think there's a great opportunity to expand our addressable market for artificial lift products, So where we're actively working together with the with a very firm team to look at cross selling our multi list product line into into Canada to the oil sands oil sands customers.

Early stages now.

But we think Thats a great.

Great opportunity to expand our addressable market into Canada, especially with a great product line, but multi lift.

Yeah.

Okay. Thank you that's helpful.

What does the market look like for smaller tuck in acquisitions or are there firm like deals.

Pacific business or product line.

What product lines did you guys find particularly interesting.

Any color around that would be helpful.

Yeah, Great question I think there is a lot of deals out there a lot of opportunities too.

Good pipeline there that we've built up and we continue to analyze.

I think that their perm deal was a homerun.

Homerun Grand Slam it may be hard to find another one at that kind of value in that kind of margin, but we'll continue to look.

Areas that we find really interesting our artificial.

Artificial lift downhole as well as on the on the on the Frac and stimulation side. So we'll continue to look there.

But you know the key key for US is we need to achieve our goals that we've set out right. We want to have we want to maintain a.

Conservative leverage on our balance sheet, we need to find a business that has strong.

Industrial logic, it fits well within our portfolio.

And ideally we're going to have nice nice accretion. So I think in the near term will continue to build up our pipeline.

But we want to deliver also on the on the promises we've.

We've laid out there for the <unk> acquisition.

Yeah, Blake, it's well, maybe just to chime in a little bit as Neil mentioned the market is is robust with activity, we're seeing more transactions getting across the finish line in both.

Both more activity with buyers and sellers.

I think from our perspective, one of the thing that's important to keep in mind about F. T is with the breadth of our product lines that we have we have lots of different opportunities for shots on goal. So it gives us a really broad set.

<unk> targets that would have meaningful industrial logic on a combination so on one hand, it makes a little harder for us because we got more things to juggle, but I think it was the opportunity set is really good and with the free cash flow that we can see coming off of F. T. Now with our 2024 forecast gives us.

Opportunity for what we might be able to do very accretively on a go forward basis. So we will as nil mentioned will focus first on barrel firm getting that done and get our balance sheet back to the tighter leverage level that we would like to see happen before we add any more use any more of a kind of a debt, but then.

There's a great opportunity set out there for us.

Got it makes tons of sense. Thank you guys again very much for the time this morning.

Thank you Blake.

Thank you.

One moment for next question.

Our next question comes from the line of James storms from Stonegate.

Good morning.

Good morning, Dave.

How's it going I'm, just hoping we could start with kind of the cadence launch guidance. Thanks seasonality that we should watch out for it sounds like the first quarter should be typical but just curious you know as ferrochrome comes more online.

Trans Mountain pipeline gets closer to completion.

Anything out of the ordinary we should have on our radar.

Yeah.

Yes, Dave this is while I'm happy to talk through that guidance I think look our overall.

The guidance says it was just a few features just to really reiterate those but overall flat global activity U S being down about 5% because the Canadian market looks flat for the year and then the rest of the world Grinds, a little bit higher so as we look at our revenue set in with the addition of <unk>.

Then that means some.

Some differences in where the products might come in and where they might go.

When operators.

Need to slow down as the permafrost thaws and they've got that issue. So that'll be a seasonal seasonality that we would expect but activity wise. We think grows grows through the year internationally.

And it is flat kind of overall for the year.

Understood very helpful. And then just looking at subsea, it's great to see that doubled its backlog what are lead times like here.

And is there any potential for capacity.

Capacity expansion.

Yeah.

Good question, Yes lead times for the subsea Rovs systems are generally less less than a year. So we will we will book an order and deliver about a year there are some special.

Products that we make that would extend longer than that but.

When we talk about Rovs systems, and cable management systems, those are generally less than a year from booking to delivery.

As far as capacity.

The facilities that we have in place.

Had operated at much higher production levels in years past. So just like most of S. E T.

We could increase our revenue by let's call it 50% or so.

So with very minimal capacity investment or Capex investment. So a lot of operating leverage built in for us, it's adding the raw materials.

And when necessary, adding some labor.

Understood. Thank you and then just one more for me if I could.

Great to see international growth outpacing the rig count there any lessons learned there that can make this repeatable and kind of how much more runway do you see in the international market.

Yeah.

Excited I think as we mentioned in our call that may be the.

You know that the we keep seeing inquiries and opportunities for drilling capital and subsea equipment outside the outside the U S. I think that that runway continues.

I think what's helped US and this is something we talk about a lot is our international footprint, especially our Saudi Arabian Manny.

<unk> manufacturing facility that gives us the opportunity to address a lot more projects by having local local content there. So.

You know our big lesson as we've stayed stayed consistent to begin international.

Manufacturer.

And we're now being rewarded for that with the increased investment outside the U S.

Thank you for taking my questions.

Thanks, Dave.

Thank you.

One moment for our next question.

Our next question comes from the line of Dan Pickering from Pickering Energy partners.

Good morning, guys. Thanks for taking the question.

If we could.

Talk just a little bit Neil maybe.

North American business look softer onshore business was softer.

Is that primarily activity are you seeing any pricing pressures at this point or a pricing is pricing holding steady and.

Is there any is there any particular business line you'd call out any pricing application.

Yeah.

I think.

It's been fairly steady Dan and so it.

Certain product lines, you can have some up up up or down a little bit of variability, but let's just put it as a big picture overall pricing pricing has been steady.

We've adjusted our our capacity just like our our customers, whether it's pressure pumper or drillers have adjusted theirs.

Lyle had mentioned in his comments that we were slowing down inbound raw material and so we're just not going to have as much available.

To match demand to match, our supply with demand and so we're going to be able to hold hold pricing at a at.

At a decent level.

And any.

There is.

Lots of talk around Red seal and our supply chain potential supply chain disruptions. There have you guys seen anything or anticipate any any issues around supply chain.

We we have not seen the higher costs roll through yet, but we do expect that.

We'll be higher higher freight cost just due to the amount of time to go around and the availability.

Of.

The containers and the shifts obviously take them so we.

But we do see some some higher costs coming through on the freight side.

Okay. Thank you.

<unk>.

You talked about the backlog moving up meaningfully there.

Kind of glancing you guys were.

Included the kind of divisional revenues in your in your press release, and so as I look at <unk>.

That business. If we go back 21 was 74 million Bucks in revenue 22, 76, 6 million 23, 70 call. It 70 round numbers.

Is the way the backlog moves through the system are we now anticipating.

Are we now anticipating that's going to be you know kind of notably better than we've seen in the past three or four years.

I think.

There is a little bit of a timing as we deliver the backlog, we do expect it to be better than that than the 2023 for sure.

<unk>.

We did enter the year with a stronger backlog than we had in prior years and we do continue to see good activity I think maybe one variable is 2023, we saw great aftermarket demand.

We would hope that would continue in 2024, but if if that slows down at all of that that would be maybe.

Maybe a break that goes goes along goes against the Aha.

Tends to smooth it out but.

It also means that we will have some revenue this year of that backlog and some more into 2025, so a driver for us will be.

Up revenue in subsea this year.

Okay.

And while you mentioned percentage of completion accounting, which.

Glad to one of my other questions, which was your comment in the prepared remarks were that you had some customers that.

Didn't pay as you expected.

Is that was that a timing issue is that a customer.

Customer quality issue, what's is it just they're being stingy come and talk to us a little bit on our collections.

Great Great question, and we talked about collections Dan over the last several calls as a challenge with our free cash flow and you can see it if you look back in our days sales outstanding kind of climbed through the year early and we've ended up at about the same point that we ended last year. So we got back on track.

I think looking at fourth quarter, specifically, our challenge and our expectation by looking at what was due was that we would have achieved a greater amount of collections in the fourth quarter, and therefore better free cash flow.

We did get back to where we started the year and our challenge is to continue to work forward. We've got a great customer base. So the customers that we sell to the makeup the majority of our revenue are really blue chip.

Especially at year end periods like we just went through and then.

With that looking ahead into into 'twenty four we did recalibrate, our our forecast too to assume that our customers are going to hang on to their cash.

Like they have been and we don't we aren't forecasting.

Bump in collections, so that 40 to 60 range.

Kind of assume status quo without any improvement, but again, that's something that our teams are actively working on to improve.

Okay, and so and your free cash guidance you assume no net working capital improvement, maybe maybe we beat that with some of these efficiency measures that you're talking about.

That would be our goal absolutely yeah, Okay, and then my one on their perm.

Remind us how you're going to report results there or is it going to be a standalone division.

Division if you will.

If not what sub segments going to be in and and then when do you anticipate or will you be providing sort of historical financials on their problems. So we can kind of calibrate our models on a on a year over year basis.

Great Great questions, Dan I think from a structure question first part of the integration work that we're doing is answering that question internally how do we best organize bear firms. So that we can get maximum benefit of sharing across product lines, Neil mentioned opportunities with artificial lift so we're exploring what.

Those others are and timing wise on that we'll report bear firms first quarter with <unk> financials in the first quarter. So what will definitely have that pinned down.

And the next quarter here from a historical perspective, we will be filing a and S. Three.

With some historical financials for Vera Perm.

That'll happen here in the next next month or so so we'll have that those numbers out and that will be through the third quarter of 2023.

And then later in the year mid year will pop in the fourth quarter as well after that audit is finished so we will have good historical view come shortly.

And kind of roll that out as we get the.

The historical audits completed.

Great last question I promise.

Your your pro forma comment Neil on the while on the balance sheet.

You said $91 million net debt as reported pro.

Pro forma would be.

$2 41, and so the implication there that 150 as is the cash cost of the acquisition and so.

So I assume that means no cash used off the balance sheet as part of the Vera Perm consideration and we we drew our credit line for the the whole amount is that and the Scf now is that the right assumption.

Right. So all of those numbers in our net debt and so there are some movements on the margin of cash either cash coming in or cash going out for the transaction.

But in general we did borrow the seller note, which is about $60 million and the bulk of the rest of that $1 50 went on to the revolver.

And when you think about.

Alright, I think your cash balance was 43 million 43 ish million. When you think about sort of what it takes to run the business around the globe.

How much cash kind of needs to be sitting on the balance sheet.

Versus you know versus available to pay down.

The revolver et cetera.

Yeah, No I'll also a good question and with the global operations, we do have cash around the around the world very little of it is truly stuck cash that we can't can't access.

And so as we've looked at it and looked at the business.

We can we can take that number of cash on hand down pretty far we've got that agreement in with our ABL lending banks as well that anything over a certain amount of cash we do sweep to them. So we can get that number down pretty far.

Call it in the $20 million to $30 million range as we manage cash.

Around the world.

Great. Thank you guys.

Thanks, Dan.

Thank you.

One moment for our next question.

Our next question comes from the line of Eric Carlson.

Hey, guys good morning.

Good morning, Eric here.

I was just wondering I mean, obviously it caused a little bit of a delay, but if you could if you could just share a little bit more on kind of the deferred tax asset valuation allowance and kind of what went into them.

And deciding whether or not you could do something now I mean I assume.

The inflection point with bare Perm kind of.

Providing positive net income with kind of that that trigger but just.

If you could just share a little more on kind of the.

Net operating operating loss carryforwards, and the deferred tax allowance and then just kind of the.

The impact as well.

That is potentially relief and I mean, it does the.

Q1, and Q2 with positive.

Net income from combined financial.

I think allow you to re leased out or I mean, how did those conversations go with.

The auditors are internally when you guys are thinking about that.

No.

Thanks for asking that question Eric.

He was was disappointing to us to have to put off our earnings call last week around analysis of our Bas, but maybe just a little background of how that works.

As we have tax losses in different jurisdictions around the world those accrue over time and that becomes the Nols or loss carryforwards that are on our balance sheet as a deferred tax asset.

Appropriate to have those allowances sitting against the deferred tax asset.

So the analysis is always how have we been doing profitability wise and more importantly, what's it look like on a go forward basis. So in this specific case, we had one jurisdiction it wasn't Canada and I'll come back to Eric for the second one jurisdiction around the world that we were getting close to that point of and what do we do we made.

Need to assess release.

We did that work we wanted to make sure we got to the right answer and we feel confident that we get.

Should that trend continue and should we continue to gain additional confidence in forward earnings that would indicate a.

Our release of that valuation allowance and just the way that flows through the books that would show up as a decrease onetime decrease in income tax expense when we do it at a onetime increase in our deferred tax assets.

So when those happen if those happen, we'll definitely highlight that so we can see but just specifically with respect to bear Perm bearer firms operations were primarily in Canada and Canada is one of the few places is the place on the plant or the few places on the planet that we pay income taxes, and we do not have Nols.

To cover though so the acquisition of <unk> would not have really had an interplay in with the NOL NOL and be a discussion that we have.

Okay.

Okay. That's helpful and then.

Maybe just looking at cash flow again.

It's helpful to kind of get your your outlook and kind of what what built into that.

Despite what I would say is activity pressure in the U S side, I mean, I think that.

Activity was down about 20% from from last year.

It looks like the <unk> transaction is I mean, I guess at least pretty well timed in terms of looking at the runway for 2024, and then there's obviously a lot of optionality to the upside just kind of in the legacy business more focused on the U S.

And.

So we have I think it was $46 million of cash on the balance sheet now and expecting.

Yes.

60, more by year end and you did nothing with that cash which is.

That's going to happen, but.

You're really holding 35% to 45% of the <unk>.

Your market cap in cash.

And I guess, the very firm deal.

That I mean, good acquisitions and return of capital probably don't have to be mutually exclusive events you can do both.

And just when you're thinking about the debt I guess could you just spend some time on that and kind of the recap and the options you've looked at there.

Because it seems like the catalyst now as if you're if you are a business with a 20% free cash flow yield and your peers trade at low to mid single digits.

There's a lot of room to.

Returning some cash to the shareholders, either with buybacks or dividends or both but you have to clear off the debt could do that and that probably is the catalyst that drive share price meaningfully higher as people want to see that the cash you're generating can hit their their account whether or not the dividend or just increased their share of the <unk>.

Company so.

There's a lot to take in there, but can you just share kind of balance sheet debt and then I mean, we're five months away from when but that goes current phone.

You've indicated you do something.

Around that time.

Have you thought anything about a return of capital plan that could kind of meaningfully.

Provide a catalyst.

Eric Yeah, Let me, let me start with that and then and maybe have Neil jump in.

And I think you said a lot and talked a lot about our things that we've been focused a lot on I think that the starting point here is a strong balance sheet post post bear Perm got a good amount of liquidity here, we've got cash on the balance sheet and a really clear path forward to generating <unk>.

Debt management definitely something that we're committing to do committed to do and getting our balance sheet back towards that leverage we ended the year with one four times before bearup firm getting our leverage back down we think is prudent and our business and so we will have some focus on that but as you mentioned with the.

The amount of cash that we're looking at here and the potential for go forward. These things arent all mutually exclusive so focus areas would be managing down our debts.

That can be actually debt payment our net debt reduction.

Second what can we do from a.

Our return to shareholders of cash and third there are a lot of opportunities for acquisitions and what can we do from a strategic investment that makes a lot of sense. So as.

As you mentioned and as we said on the call we will be focused on what those options are.

And do things that we believe drive the most value for our shareholders and I think a key piece that we can see here is what the impact of Vera Perm has been to our forward look.

Yes.

And I think where we see ourselves in a in a show me mode.

Need to deliver on the promise that we've laid out so our teams.

Ourselves here on this call we are focused on generating the free cash flow that we've laid out and ultimately that's what's going to give us the flexibility to look at further debt management and our.

Shareholder return of capital to shareholders.

Great that's helpful.

After about three questions into one there. So I think that's all for me at this point.

Thanks, Eric.

Alright, thanks, Sir.

One moment for our next question.

Our next question comes from the line of Jeff Robertson from water Tower research.

Thanks, Good morning.

Neil can you talk about you all when you acquired or announced the very firm acquisition highlighted our margin expansion that you anticipate on a pro forma basis can you just talk a little bit about how you expect the margin expansion to progress.

In the context of your 2020 for outlook.

Yeah, Yeah good questions.

Again, we don't see a lot of cost and bringing their per month. So I think we talked about first synergies that there wouldn't be a lot of cost synergies, but we don't expect that a lot of cost either so putting the two businesses together I think on an average over an entire year.

We should expect to see the 14% or so margin.

EBITDA margin that we've talked about I think the softness we do we do see to start the year.

<unk> margins could be.

Could be below that as we begin Q1.

But for the full year.

We do expect to see or we do expect our margins to be in that.

And the combination.

That 14%.

And Neal you talked about.

$300 million.

Addressable market from the three products you highlighted.

And the backdrop of a flat activity level do those products do you think drive incremental opportunities for etsy.

To expand despite a flat backdrop.

Absolutely.

That's a key focus for our teams.

It's part of our strategic objectives.

To develop new products that help us grow faster than the market.

So we for us.

The question is timing so anytime you have a new product it can take.

It sometimes takes longer than you expect to get it to to be commercial.

But.

That is absolutely the number one way we're going to outgrow the market is through new product development I think we mentioned in the call. Our SaaS connect was a product that we introduced last year and we've had some really really good success and we're going to do what we can to expand that product.

<unk> and get that commercialized.

And grown as quickly as possible, but for us it's all about timing.

It is.

It is a key focus Jeff let me just chime in with just a little one more example, like that that Neil talked about and how we see the opportunity to boost up our revenue and that is with the <unk>.

For 120, and then our new smaller version. So we've had great success with the Iron Roughneck CFR 102000, 120000 foot pounds of torque tool that our customers are using to deal with larger diameter drill pipe.

Those have a higher torque loads and they need a bigger tool some of the rigs whether it's in the U S or internationally have a smaller rig floor footprint and our FY 'twenty just doesn't fit in the space and so we were kind of cut out of that as far as the market opportunity. So the focus of the team and introducing this new tool was get some.

That would fit in the space, but also allow those rigs to be able to upgrade to higher torque capacity and be able to do what the industry needs, which is deal with five five inch drill pipe. So that's an opportunity and from a capital spend perspective, even in a flat market. We do expect to see our customers make some of these <unk>.

<unk> incremental adds of capital it is not a new rig or in the case of pressure pumping. It may not be a new frac fleet, but it could be an addition that enhances the capability of their equipment and let some drill more that's why we think even in a flat market. There is some opportunity there.

So the flow through loyal as the customers get a higher potentially could get a higher return on their investment which drives demand for the product.

That's right that's right and it makes them more competitive right. If a five an average drill pipe as a requirement of a rig and the rig can handle the tour load that's going to make that asset pretty uncompetitive.

Why not spend a few hundred thousand dollars and get your rig ready to go.

And you mentioned you highlighted the strength in the middle East.

In 2023 are in the quarter.

Do you think you will be able to leverage and pull through some of the Vera perm products into those markets and get access to them.

Incremental business that you didn't have before.

That's a that's definitely a focus that we have.

These are international qualifications and getting.

Getting set up and put into the catalog they could take time its something that <unk> was actually already working on both the addition of our kind of international footprint I understand the logistics as well as some of our stocking locations.

We've just increased the.

Chances are probability of those going forward so.

It's something we're focused on and probably not a 2024 a result, but it's something we're going to be working towards are absolutely in the future.

Thanks, So I will just quickly I don't I.

I don't remember, if Rob said well.

When do you expect the 10-K to be filed.

I think that's come out relatively shortly here in the next week or so.

Okay. Thank you.

Alright, well. Thank you everyone for your support and participating in today's call. We look forward to talking to you again in early may to discuss our first quarter 2024 results.

This concludes today's conference call. Thank you for participating you may now disconnect.

Q4 2023 Forum Energy Technologies Inc Earnings Call

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