Mark S. Traylor - Vice President-Investor Relations C. Christopher Gaut - Chairman & Chief Executive Officer James W. Harris - Executive Vice President and Chief Financial Officer Prady Iyyanki - President & Chief Operating Officer.

George O’Leary - Tudor, Pickering, Holt & Co. Securities, Inc. J. David Anderson - Barclays Capital, Inc. Samantha Hoh - Evercore ISI Marc Bianchi - Cowen & Co. LLC Jacob Lundberg - Credit Suisse Securities (USA) LLC (Broker) Martin W. Malloy - Johnson Rice & Co. LLC Robin E. Shoemaker - KeyBanc Capital Markets, Inc. Sean C.

Meakim - JPMorgan Securities LLC John Daniel - Simmons & Company International.

Good morning, ladies and gentlemen, and welcome to the Forum Energy Technologies Earnings Release Conference Call for the Second Quarter 2016. My name is Neesy, and I will be your coordinator for today's call. At this time, all participants are in a listen-only mode, and all lines have been placed on mute to prevent any background noise.

We will be facilitating a question-and-answer session after the speaker's remarks. As a reminder, this conference call is being recorded for replay purposes. After the speaker's remarks today, I will instruct you on the procedures for asking questions. I will turn the conference over to Mr. Mark Traylor, Vice President of Investor Relations.

Please proceed, sir..

Thank you, Neesy. Good morning, and welcome to Forum Energy Technologies second quarter 2016 earnings conference call. With us today to present formal remarks are Cris Gaut, Forum's Chairman and Chief Executive Officer; as well as Prady Iyyanki, President and Chief Operating Officer; and Jim Harris, our Chief Financial Officer.

We issued our earnings release last night, and it is available on our website. The statements made during this conference call including the answers to your questions may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act.

Forward-looking statements involve risk and uncertainties that may cause actual results or events to differ materially from those expressed or implied in such statements. Those risks include, among other things, matters that we have described in our earnings release and in our filings with the Securities and Exchange Commission.

We do not undertake any ongoing obligation other than that imposed by law to publically update or revise any forward-looking statements to reflect future events, information or circumstances that arrive after this call.

In addition, this conference call contains time-sensitive information that reflects management's best judgment only as of the date of the live call. Management's statements may include non-GAAP financial measures. For a reconciliation of these measures, please refer to our earnings release. This call is being recorded.

A replay of the call will be available on our website for 30 days following the call. I am now pleased to turn the call over to Cris Gaut, our Chief Executive Officer..

Thanks, Mark, and good morning. I will begin with a summary of our second quarter performance, make some observations about the current market conditions and outlook and talk about our plan for Forum going forward.

And then, I will turn it over to Jim who will discuss our financial results and liquidity position, followed by Prady who will address our business improvement and operational excellence initiatives.

Although oil prices have improved from the very low levels in the first quarter of 2016, industry activity in Q2 reached extremely depressed levels as evidenced by the 35% drop in the average North America rig count from the first quarter.

The low level of drilling and completions activity resulted in lower volumes for us, but just a 10% decline in our revenue to $143 million in the second quarter. Our net loss per share was $0.19 excluding special items. The steps we have taken to reduce our cost structure and improve our operating efficiency are working.

We continue to streamline our cost structure and as a result, we were able to hold our decremental margins to just 13% in the second quarter. With these cost and efficiency initiatives, we believe we could achieve incremental margins of as much as 50% in the early stages of a recovery.

Despite the very challenging environment, we strengthened our financial position during the second quarter. Forum generated free cash flow after capital expenditures of $16 million during the second quarter. Our strong balance sheet provides us with stability but also allows us to pursue disciplined acquisition and product development strategies.

Forum's total inbound orders during the second quarter were $128 million, a 9% decrease from the level in the first quarter. The second quarter book-to-bill ratio was 90% for the company as a whole; 85% for the Drilling & Subsea segment; 114% for the Completions segment; and 84% for the Production & Infrastructure segment.

The rig count continued its decline during the quarter, and our service company customers remained reluctant to spend on anything that is not absolutely necessary. This further destocking of their inventory of consumable items should lead to pent-up demand for our products.

In our production equipment product line, orders were up 17% in the second quarter as operators made plans to complete their backlog of drilled-but-uncompleted wells. We continue to see improved quoting activity for our well side surface production equipment.

Orders for subsea equipment were up sequentially as we received an order to supply three remotely operated vehicles for a multipurpose ice-class vessel. The order includes two Perry work class ROV systems and one Sub-Atlantic observation class ROV.

When oil prices approached $50 in the second quarter, we saw an increase in inquiries as customers put drilling rigs back to work.

As we now look ahead to the third quarter, we expect our orders to increase and our financial results to be in line with or slightly better than the second quarter level, provided oil prices are not less than last quarter's $45 average.

There are market indications that this historical down cycle has bottomed, although the timing and pace of a true recovery are not yet clear.

Forum's strong balance sheet, cash flow and leverage to North America drilling and completions, consumable products and our improved cost structure and operational capability all position us well for the market upturn. Our plans for Forum going forward are geared around preparing for the upturn, as Prady will describe.

We have our streamlined organization and facility plan in place, and we have redeployed resources to emphasize business development and a focus on our early cycle businesses. We are also busy working on potential acquisition opportunities that would complement and expand our existing businesses.

Let me ask Jim to take you through our financials and our balance sheet position.

Jim?.

Thank you, Cris, and good morning, everyone. I will summarize our results for the quarter comparing the second quarter 2016 with the first quarter of 2016. Consolidated revenue of $143 million for the second quarter was down 10% sequentially in line with our expectations as global drilling and completions activity levels continues to decline.

Our Drilling & Subsea segment revenue of $57 million was down 13% due to the decline in working drilling rigs and lower demand for subsea robotics and equipment. The Completions segment revenue of $25 million declined 29% sequentially due to lower well construction and completions activity in North America.

Our Production & Infrastructure segment revenue of $62 million was up 2% on increased sales of valves to the midstream gas transmission industry, partially offset by lower surface production equipment deliveries in the United States. The net loss for the second quarter was $29 million or $0.31 per diluted share.

The quarter included special items totaling $19 million on a pre-tax basis. The adjusted net loss excluding these items and the associated income taxes was $0.19 per diluted share.

The special items were comprised of pre-tax charges of $29 million for inventory reserves, restructuring charges and other items partially offset by $10 million in currency translation gains.

Our second quarter adjusted operating loss was $23 million, excluding special items compared to an adjusted operating loss of $21 million from the first quarter.

Our decremental operating margins of 13% for the quarter on the reduced revenue were better than our guidance of a percentage in the 20%s are we are benefiting from our cost reduction and efficiency initiatives. At these significantly lower industry activity levels, our revenue is even lower than our 2016 plan.

Our evaluation of inventory conducted at the end of 2015 was based on the 2016 plan. We reevaluated all of our inventories according to our excess and slow-moving policy guidelines in light of the current slower moving environment.

Most of the $25 million addition to the inventory reserves is attributable to the mechanical application of this policy overlaid by management judgment where we deemed appropriate.

We generated $16 million of free cash flow in the second quarter which includes operating cash flow, less capital expenditures net of PP&E sales proceeds, but before acquisitions. Our cash balances did not increase as much as this free cash flow would indicate primarily because of the impact of exchange rates at the end of the quarter on our non-U.S.

cash balances and the acquisition consideration. We expect to use non-U.S. cash to cover local costs and investments in those respective currencies and therefore, there is no economic impact. We have demonstrated our ability to continue to generate free cash flows throughout the downturn.

At these lower activity levels, however, we are liquidating our inventories at a slower pace, and we will not have the continued benefit of reducing accounts receivable as the business stabilizes. We now expect to generate about $20 million of free cash flow over the second half of 2016.

As activity levels pick up in the recovery, we should benefit from the opportunities to sell more out of our existing inventory stock. Drilling & Subsea recorded an adjusted operating loss of $12 million; Completions, $8 million; and Production & Infrastructure had adjusted operating income of $4 million.

On these extremely low plant volumes, we are continuing to experience labor and overhead absorption issues but we believe that maintaining the current capability will be critical to our response to the upturn.

We expect incremental operating margins to be higher than normal in the early stages of the recovery as the load on our plants increases and we achieve better absorption of these costs. Our weighted average diluted share count for the second quarter was 90.7 million shares.

Net debt at the end of the second quarter was $259 million, bringing our debt to total capitalization ratio to 17.8%. Interest expense was $6.8 million in the second quarter. Corporate expenses were $6.7 million and we expect corporate expenses to continue to be around $7 million per quarter.

Capital expenditures were $5.8 million in the quarter, offset by $3.4 million in proceeds from the sale of property, plant and equipment. Our 2016 CapEx budget remains approximately $20 million which is sufficient for maintenance and select investments.

Depreciation and amortization expense was $15.7 million in the quarter and should be similar throughout 2016. Our effective tax rate on the second quarter loss was 42.6% and our estimated annual effective tax rate is now 38%. The higher effective tax rate is attributable to losses incurred in the U.S.

and benefited at a higher statutory rate, offset by earnings outside the U.S. taxed at lower rates. For more information about our financial results, please review the earnings release on our website. I will now turn the call over to Prady to update you on several of our initiatives.

Prady?.

Thanks, Jim. Good morning, everyone. I will discuss the progress we made during the quarter in positioning Forum to take advantage of a market recovery including the streamlining of our operations, product development and new market penetration.

With the consolidation of our operations having been substantially completed by the end of first quarter, we are now seeing the full benefit of our efforts in the company's second quarter results with decremental margins of 13% versus the previous quarter results.

As an example of our consolidation efforts, we have now achieved an approximately 25% reduction in our global manufacturing footprint without sacrificing manufacturing capability and have gained similar significant efficiencies in other areas of our operations.

In terms of our procurement initiative, we are on track for a year-end savings rate of 15% to 18% compared to 2014 pricing levels. As a result, the procurement savings will be substantial enough for choosing volumes increase during the recovery, and we believe there will significant additional saving opportunities in the coming years.

We are making good progress on lean and value engineering across the company. And even at these reduced activity levels, we expect significant savings in 2016.

We also continued to streamline our organization structure and have completed the consolidation of our Completions segment by combining the stimulation and intervention in downhole product lines under one executive leader.

Similar to our consolidation of the Production & Infrastructure segment during the first quarter, we believe this new structure will provide greater focus on customer synergies and operational efficiencies. In addition, we have simplified and resized the organization of our subsea product line.

Although this products line continues to execute backlog, gain market share and diversifying to non-oil and gas markets, we are expecting a slower recovery in this area for business which is in line with offshore market trends. These initiatives will significantly reduce our permanent cost structure.

We expect that the benefit of the company will be magnified as activity increases, positioning Forum for high incremental margins in the eventual recovery. Now, I would like to discuss our investments. In the Middle East, our new commercial organization and product development. We believe these focus areas will increase our market share and revenue.

I recently visited several countries in the Middle East and I'm excited about our opportunities in the region.

Our focus in the Middle East over the next few quarters will be on evaluating and developing manufacturing operations in Saudi Arabia in order to allow us to localize the products and qualify them with NOCs, national oil companies, and build our sales team in the region.

We believe there's an opportunity to more than double the company's market share over the next three to four years. We also recently appointed an executive leader for strategic marketing and business development with responsibility across all product lines.

This newly-created position will be responsible for strategic marketing and account management to improve our market share with current customers and develop new customers globally and will lead our entry into new markets. Another area of focus for us is new product development.

As the market turns and activity picks up, we expect this aspect of our business to continue to be one of our predominant areas of investment. We plan to introduce about 20 new products in 2016. And I already introduced several new products year-to-date.

One example of a recently introduced product that is gaining significant interest from our customers is our innovative frac missile trailer. This new trailer has a single large diameter with high pressure piping and 70% fewer connections. These features increase reliability and durability and significantly reduce the operating cost for our customers.

Another example is our drilling product lines, 7,500 psi mud pump upgrade package that continues to gain momentum with the customers as they plan to upgrade rigs to handle longer lateral wells and higher pressures required in today's drilling environment.

I'm pleased with our team's work in all the focus areas I've discussed, and believe that our efforts will help differentiate Forum and significantly improve the company's market presence during the recovery. Now, I'll hand it back it to – I'll now turn the call over to Cris for – moderate Q&A..

Thanks, Prady. I want to recognize the entire team at Forum for their hard work and determination which has allowed us to reduce our cost structure very significantly and improve our efficiency. The impact of these changes is evident in our second quarter results with our excellent performance on decremental margins and continued strong cash flow.

Forum is well-positioned at this point in the market cycle. We have much exposure to the early cycle Completions business and to the upturn in North America activity. We are not burdened by high exposure to the offshore deepwater market or a need to wait for the next capital build cycle. I like our position.

At this point, we will open the line for questions.

Neesy?.

Thank you. Our first question will come from the line of George O'Leary from Tudor. Your line is open..

Good morning, guys..

Hi, George..

Impressive quarterly results and the 0.9 times book-to-bill stood out. But in your commentary highlighting the 114% book-to-bill in the Completions segment was particularly interesting.

Any incremental color on what within the Completions segment was really the driver there? Was it more on the downhole side i.e., Bridge Plug type products or more consumable equipment associated with pressure pumping spreads? Just curious on what drove that impressive book-to-bill?.

Yeah. So, I think the book-to-bill ratio was actually higher in the pressure pumping consumable. As some of our customers, as they talked about in our conference calls, are putting some equipment back to work now. They are of course very concerned about the pricing in their business, and that puts a lot of information on their cash flow.

So, they're still cautious in their spending and holding off until they absolutely need to spend. But it is a case that they have now gotten to the point where they need to – they have a stable or increasing level of activity, which is going to drive more utilization and more need for replacement products.

But it was not just in the stimulation and intervention product line, the downhole business also had a book-to-bill ratio in excess of 100%..

That's very helpful color. Thank you. On the Middle East, I heard there was some interesting commentary from you, Prady.

I guess, talking about breaking further into that Saudi market, could you discuss a little bit or help frame for us kind of what the size of that market is to you guys from a revenue or from an earnings standpoint just so we can understand how much kind of a doubling in penetration over a three- to four-year period would mean for Forum?.

Yeah. I'll talk specific to Saudi, George, and then I'll expand on the Middle East region.

I think our focus in Saudi Arabia right now over the next few quarters is primarily how do we localize our manufacturing operation to take advantage of some of things which the Kingdom is trying do to get some local content into Saudi Arabia and – which gives you also a preferential treatment from a pricing standpoint.

So, we would like to take advantage of that and we are evaluating our options of how do we set the manufacturing operation in Saudi Arabia. You got to go through the approval processes and all that, which we're going through as we speak. But speaking of the region in general, we expect to double our market share in the Middle East.

I mean this year, probably, we'll do about $50-plus million in the region in the Middle East. And we can easily double our market share over the next three to four years. I think over the next two quarters, our priorities are how do we get all the products qualified in the region through the NOC process, which is a pretty long process.

And then, once the products get qualified, I think we'll start gaining our market share. And I think we can easily double our market share. Maybe there's more opportunity. But we are evaluating as we speak. We need to put a lot of boots on the ground. We are working through all that as we speak..

Great. That's really helpful color. Maybe if I can just sneak in one more. The cost improvements in the decrementals were really solid in the second quarter. And it sounds like you have the roofline situation essentially complete at this point.

So, if I heard you right, it sounded like Q3 revenues could be sort of flattish quarter-on-quarter given the cost side of the equation. Could there be some margin improvement or were you also guiding sort of expectations at the EBITDA or operating income line flattish quarter-on-quarter? Just want to make sure I have that all squared away..

The activity level remains the way it was in the second quarter. One of the things which Cris talked about is as long as the oil price was at a $45 average and the activity remains at that level, with the revenue which is what we expect to be about flattish versus second quarter.

We do expect to see some margin improvement in third quarter, primarily because of all the cost actions we've taken. And as Jim mentioned, we do expect our incrementals to be higher..

Great. That was very helpful. Thanks for the color, guys..

Very good..

Thank you. Our next question will come from the line of David Anderson from Barclays. Your line is open..

Hey. Good morning, Cris. Just getting back on that Completions business. Can you just talk about kind of – I think most of your kind of short cycle U.S. exposure is in that business.

Has anything kind of changed in your outlook from the last quarter? If I recall correctly, you've been talking about kind of a year-end inflection point year-end kind of pick up in that.

Has anything kind of changed in your outlook so far?.

Yeah, David. When we talk about our short cycle activity based businesses that are early to pick up, let's not lose sight of the production equipment business within our Production & Infrastructure segment.

That's probably the first one to pick up because operators need to place the orders for that equipment in advance of bringing on a new well on production. And that's why we did see a pickup, a handsome pickup in orders in that product line during the second quarter, and we expect that trend to continue.

If operators are going to complete these docks, our business is kind of analogous to a well head, meaning you cannot complete that well without having that well site production equipment. So, that was I think a bright spot in Q2 and one we expect going forward and is an early indicator for us.

Yes, you're right about our pressure pumping consumables and other completion products. But those are – don't have much – as much lead time associated with them. They're kind of bought as needed.

So, we do expect a continued improvement in our orders there and our book-to-bill there during the third quarter, provided more wells are being completed and this increase in frac activity this trend continues.

I think the other downhole products business within our Completions segment, which also had a good book-to-bill ratio in Q2 would be another beneficiary of these as longer laterals. But again, it is a business that's kind of bought on an as needed basis and doesn't have a lead time associated with it.

So, it doesn't have as much kind of advanced notice of an upturn as the production equipment does. But you add those three businesses together for us, and that's about 35% of our revenue or so..

So, probably a little early to call kind of the bottom in Completions, I guess, because you're saying (29:00) just in time is kind of on the quarter.

So, you probably cannot make that statement quite yet?.

Right..

Okay. I just have a question on the M&A.

Kind of curious as to when you're going after these smaller companies which has sort of been what you've been going after, what does that competition look like? How many people are showing up for these? I mean, I know a lot of this is tends to be kind of more conversations, are not acquisitions are up for sale necessarily.

But I'm just wondering kind of what your competition looks like in some of these and how that's changed over let's say the last, I don't know, six months or so?.

Well, David, if you wait until the business broker or the investment bank sends out the book, you're going to have a lot of competition, right..

Right..

So, the key for us is to try to identify opportunities that are earlier staged than that, we're not wanting to go through that process. And that takes a lot of beating the bushes and going out to meet the entrepreneurs and develop a relationship over time.

And many of the – 17 or 18 deals that we – completed acquisitions that we've done over the past several years have had a very long gestation period. So, we've got a pipeline of those that we're working on. And that's how we try to differentiate our story than others.

Now, that's not to say that even if we've developed a relationship, that the seller is not going to want to do a market check. They probably will. And there will be some competition and it often involves private equity, but we know how to handle that. And we've been relatively successful with it. We're not going to win every deal.

You certainly – it's kind of like baseball, you're not going to bat more than .500, right, and far from it. But I think our batting average is decent here..

I know we talked yesterday about going after smaller acquisitions and kind of building up the business that way.

Is that a concern at all? Do they kind of play in a different pond than you? Does that alter your views at all in the M&A market?.

What's small to NOV is big for us still. When they talk about a deal of $400 million being small, that would be big for us. So, we haven't done many deals of that size. So, yeah, they are looking what they call smaller deals, but those would still qualify as big deals for us.

It's not to say that there's not the potential overlap there at the margin, but – and we have crossed paths with them from time to time, but the small end of their range is the big end of our range I would say..

Okay. Great. Thank you, Cris..

Thanks, David..

Thank you. Our next question will come from the line of James West from Evercore ISI. Your line is open..

Hey. This is actually Samantha Hoh filling in for James. So most of my questions have been addressed, but I did wanted to hear more about this new mud pump upgrade package that Prady introduced. Just kind of curious.

Is this a strategy that you guys are – have used before to sort of go after the various trends in the longer laterals and what not, and just adjusting some pieces of equipment not the whole new capital equipment, but just a part that is essential that needs to be upgraded.

And then, can you qualify just sort of how the whole upgrade work? What sort of pieces are you selling in and then also what the aftermarket opportunity is going forward?.

Yeah. Well, I think that's a great question, Samantha. As you mentioned, I think the trend in the market is longer lateral walls and higher pressure as a result; one of the things the drilling operators do need to position themselves for the upturn is to have higher power mud pump upgrades.

And we have already seen several of those orders come through, and our pipeline is pretty strong. As the activity picks up, we expect all the drilling operators, most of them, will upgrade their drill rigs with the mud pump upgrades. Now we are already competitive on the mud pump upgrade.

We expect our reliability and the durability and the operating cost to be much better. As a result, we are gaining a lot of traction in the marketplace. So, for your question now, Samantha, yes. As we see the market trends, we are developing a product portfolio to be aligned with those trends.

And another good example is if we look on the Completions side, we have a pretty strong portfolio of products which we're going to introduce and we have already introduced in the first half, and we're going to further introduce in the second half.

The other example I talked about, the missile trailer, frac missile trailer is another good example where we're reducing the operating cost for our customers significantly, again, following the same trend in the space.

Now, to answer your question on what's the market potential and where do we go from here, as we talked about, we are expecting about 20 new products to be commercialized in 2016. We have commercialized a few already. Our pipeline is pretty strong.

There's a pretty good portfolio of products we're going to introduce on the Completions segment, pretty much compared to (35:12) frac plugs, more on the pressure pumping side, the valves and seats. We've reduced the operating cost significantly for our customers.

They're looking for efficiency plays, which reduced not only the operating cost, but improves the life of the product which improves the durability and reliability. In most of the product portfolio, we are aligned and we are developing is in that direction..

I will just....

Okay..

Add on the pump upgrade that with these long laterals to drive the mud motors, you need more hydraulic horsepower. And there's still a substantial amount of the Tier 1 rigs that need that 7,500 psi upgrade, which involves a change out of the fluid end side of the drilling rigs, mud pumps and all the associated hardware on the fluid end side.

And it costs several hundred thousand dollars per rig typically to do that upgrade.

And there is a significant aftermarket component to that, that once we would do the capital side, we would also be in the prime position to do the ongoing work with maintaining the mud components up on the rig associated with that higher pressure and higher working and have more intensive work that is still prevalent in many areas of the service and drilling side these days..

And the probably the first phase of our opportunity will be North America which is where the upgrades will happen. But all the international market, most of the international market will also follow North America down the road which will also give us further opportunities..

That's really great.

And I was just wondering during when you – I mean, well, I know we're still a far from being at the point where customers are probably worrying about getting the aftermarket piece reliably, but is there any sort of contracts associated with that? Sort of like a service agreement afterwards? And then is that something that's going to be booked into orders or is it just so short cycled that it's just out the door the minute you get these orders?.

If you're the primary provider of the mud pump consumables for a drilling contractor, they're going to want to maintain some consistency in the consumables for the mud pumps for that rig and across their rigs. So, that – it's more of that type of relationship than it is a contract..

Okay. Great. Thank you so much..

Thank you, Samantha..

Thank you. Our next question will come from the line of Marc Bianchi from Cowen. Your line is open..

Thank you..

Hey, Marc..

Maybe just – hey. Maybe just following up on that last line of questioning and the discussion there.

What do you see is the market opportunity for upgrading rigs at higher capacity mud pumps or how do we think about the addressable market there for you guys and maybe how many are you tracking in the near term as business opportunities?.

Well, as I say, there are still quite a few, whether it's 50% of the Tier 1 rigs or not, I – that might be a rough guess as to the number of Tier 1 rigs that are out there, not just working rigs but Tier 1 rigs working and not working that are not upgraded to the 7,500 psi. So, there are still quite a few to do.

And we would have good relationships with a number of the leading drilling contractors. I don't want to go into who those are and who those aren't. But they're still – that is clearly a competitive need out there to do these long laterals.

Some of the other areas for upgrades that we're particularly exposed to, the handling tools and of course the catwalks. And everything's about walking rigs now and mobility, and that is an upgrade that we're doing also with our catwalks.

Another product that we're introducing is one of the, I guess, the largest catwalks out there and we're working with a rig builder to deliver that for some new rigs as well. So, the catwalks is a continued strength for us both onshore and offshore.

Both onshore on Tier 1 drilling rigs but even down to our Little Tripper for the workover and well service market..

Great. Okay. Okay. Great. Thanks. Maybe just switching over to the commentary about incremental margins of something in the 50% range in the recovery. I think previously we talked about something in the mid-30%s there.

I'm just kind of curious, is that all cost cut that's driving that? And any other kind of comments you can have about sort of how you're getting that 50% is pretty impressive..

Well, the primary drivers, as Jim was saying, is the absorption of a – the better absorption of our manufacturing costs. So, clearly, our manufacturing plans are not busy today. We are carrying a large amount of unabsorbed costs. And we, in other words, can produce significantly more products at the same costs we have today.

And that leads to obviously a very high contributor to our overall margins. And that would be the one big factor. And then thinking about that, what our incremental margins are, it's driven by volumes, Marc, and we're not really including the pricing recovery there, so.

That is a different assumption and when that comes, that is obviously – that would be a big adder to incremental margins, when and if that comes..

Marc, I'd like to just make sure we're clear that these higher incremental margins that we're talking are asset-turn. So the early quarters, as activity improves and we see this absorption improve, we'll seen incremental margins in that higher up to 50% kind of range.

But the range you are commenting on in the concept called high-20%s, low-30%s is more of a steady state. Once we've gone through that inflection point, we'll settle down to incrementals more in the range..

And Marc, probably the other thing I'll add is, as the efficiency gains, which is we're not buying much from a material standpoint, even though our savings are by the end of the year will be 15% to 18%. And there's still further a lot of opportunity in the procurement front.

And as we have mentioned, the lean savings will be very significant in 2016 too. So the efficiency gains, as the activity picks up, will be magnified, apart from the absorption issues which Cris was talking about..

Yeah. That procurement benefit will be significant..

Okay. Thanks. I guess just maybe one more on that.

Is there a way to think about how much revenue could increase before you go back to those high 20%s to 30% type range?.

Well, we have significantly underutilized our manufacturing plan as you can imagine. So, I think we have some good running room here to get to fully utilization and until we can fully absorb all of our manufacturing and overhead that we have. I think we've got a good running room, Marc. It's not a near-term issue there..

Okay. Fair enough. Thanks very much..

Thanks, Marc..

Thank you. Our next question will come from the line of Jake Lundberg from Credit Suisse. Your line is open..

Hey, guys..

Hi. Hi, Jake..

Just kind of following up on the same line of questions. So, I think you said in the past that in terms of man-hours, you were currently operating at something like 20%-25% of capacity.

So I mean, should we think that maybe revenues could quadruple from here before you would run out of that, the operating leverage driving those higher amount of margins?.

I would say most of the operations are running on a reduced work schedule, not at the 25% as you mentioned. But from a people standpoint, Jacob, they're running at anywhere from 30 to 32 hours depending on where the plant is.

So, I think the first phase, as the market turns, is to get back to the full schedule first, which gives another 20%, 25% of – from a people standpoint and then the overtime before we start adding any people..

Yes.

From a people standpoint..

Yes. But I think Jake's point is once we get to full schedule overtime, and then staff up to fully utilize our facility, yeah, we've got a lot of increase in potential there.

So, before we have to think about certainly adding roofline, but that's when you're running your plant most efficiently is when you're running your first shift at 60 hours, 50, 60 hours a week and you've got a second shift, then you can say that you're at an efficient production rate and gosh, yeah, we're a long way from there..

Okay. Great. That's really helpful. And then so, kind of thinking about the second half if, I think rig count is up today something like 7% versus second quarter average or so.

If we were up a little more than that overall for the third quarter and then say that we sort of stay there up slightly again in the fourth quarter, I mean, do you think you could hit EBITDA breakeven in all of the businesses by the end of the year under that scenario?.

Yeah. The businesses that recover early which Cris has described as the production equipment product line and the completions. And those businesses have been at least the completions more book and ship businesses.

As we see those improve, we're going to see the most improvement in EBITDA from those product lines in the early days and I'd say by the end of the year, we could be in a good place.

Drilling maybe a little bit more delayed because even though rigs are going back to work, there's still the destocking that's taking place and it usually takes a couple of quarters before that starts converting to orders and revenue but the other early cycle product lines should come back more quickly..

Okay. Great. And if I could sneak one more in. Are you guys able to share what you think your current market share is of mud pumps in the U.S.

and maybe where you think you could bring that level to in the next cycle?.

Yeah. We think we're probably number two or three in that space..

Okay. Very helpful. Thanks guys..

Great..

Thank you. Our next question will come from the line of Martin Malloy from Johnson Rice. Your line is open..

Good morning..

Hey, Marty..

I've got a question on the ROV segment and with the Technip and FMC pending merger. I just wanted to maybe get your comments about how that might change the dynamics for – in the ROV market.

Maybe some of Technip's competitors might not want to buy ROVs from them as much as they previously might be inclined to?.

Yeah. It's a good question and we don't know the answer to it. But you're pointing to the fact that one of our primary competitors in this consolidated space of building and selling ROVs is FMC with their Schilling brand. And of course, our Perry brand, years and years ago, was owned by Technip.

And who knows whether they want to – what their feeling is about that business on a combined basis going forward. But you're raising a separate issue which is we sell our ROVs to the offshore contractors, Technip and others. And if the Schilling brand of FTI is owned by a competitor.

How does that change the feelings for some of the other customers out there about buying from a competitor? It's a good question. Don't know the answer to it, but time will tell. In other spaces, that is often – in other sectors of the industry that is often an issue as to we'd rather buy from an independent supplier rather than from a competitor.

And that is why Forum does kind of draw a pretty bright line that we are an independent provider of manufactured products and equipment. We don't compete with our customers, and they can take some confidence in that..

Okay. And then my second question, if – I was wondering if you could maybe talk about differences in the inquiries or orders that you're seeing between the international and the U.S. market.

The international market, how that compares to what you're seeing in the domestic market?.

The international market has also slowed off, Marty, same as North America, depending on what the product lines are. In the case of – for example, the capital equipment. I would say we are seeing more from the international standpoint that – in the North America.

But on the consumables front, I think we are seeing the same pressure from the international market as we are seeing in North America.

Now, the Middle East obviously is very buoyant with all the activity and the amount of investments they're going to make in the region, and that's one of the reasons why we're focusing on the Middle East to improve our presence and also improve our market share..

And when you're talking about capital equipment, I think you're primarily referring probably to the drilling capital equipment, and we are seeing some good opportunities there in the Middle East, for instance..

Great. Thank you..

Thanks..

Thank you. Our next question will come from the line Robin Shoemaker from KeyBanc Capital Market. Your line is open..

Thanks. Cris, I wanted to ask on your – going back to your incremental margin prediction. How much if anything is required in terms of a pricing recovery to meet those margins? I totally understand that it's all about utilization of your fixed costs.

But have you conceded pricing in any of your product lines and does pricing recovery factor into those incrementals?.

Robin, we have definitely like everyone in this downturn conceded pricing. No question about that. Our assumption is that it will not be easy to recover the pricing. So, that is not the basis of our feeling about the high incremental margins in the early stage of a recovery.

What drives that is volume, better utilization of our facilities and importantly as Prady pointed out, the efficiencies that we're gaining for example on the procurement side and the progress that Prady and Darin Harvey and our procurement team has done a great job as we, for the first time at Forum have really brought kind of 21st century procurement methodology to bear on Forum supply chain..

Right. Okay..

Robin, over a period of time, what we're expecting is over the next two years, even if it fall back 40% of the pricing, the rest of it will be offset with the cost initiatives and the efficiency, and we can get back the margins to about 18% plus..

Okay, understood. Just a specific question on what's happening with regard to sales of fluid ends to your pressure pumping customers and some of them are talking about reactivating some fleets in response to higher demand.

So are you selling new kind of your 1,000 horsepower quintuplex pumps? Is it mainly an after-market business right now? Just wondering if you can give us an update on J-Mac and how you perceived the upturn that you're describing in inquiries affecting them..

Yeah. The number of power ends we're starting at this point, Robin, is low. We're selling some but not many because you really have to talk about a pressure pumping company wanting to bring a stacked fleet out of cold stack and put it back to work before you'd be talking about really selling many power ends.

The fluid ends or complete pumps – the fluid ends that we're selling today are primarily the replacement fluid ends when one becomes unusable out in the field. Now, as stacked equipment goes back to work, when that does happen and it's not happening yet, then the number of fluid ends that would be required would be substantially higher.

And of course, as we move to higher utilization even for the fleet that's out there working today. All of the pressure pumping companies are saying, gosh, we first like to get to full utilization of equipments in the field.

Well that would be great from our standpoint because that means more hours on the pump per week, per month which means more demand for these consumable products of treating iron and fluid adds. So there would be demand – both for the – driven by how many hours.

The existing equipment is working, but then a step change when you're talking about redeploying and reequipping a stack spread..

Yeah. Yeah. Okay. Good. Well, thanks a lot, Cris..

Very good, Robin..

Thank you. Our next question will come from the line of Sean Meakim from JPMorgan. Your line is open..

Hey. Good morning..

Hi, Sean..

I just want to touch a little bit on the valves; you highlighted some strength in that business during the quarter particularly in the midstream transmission side. CapEx budget is pretty tough there this year particularly in the early part. Just curious, if you can give us a sense of, is that just some seasonal strength.

Could you see some good project work or just kind of typical stocking? A little more detail on what was driving that opportunity..

The midstream part of the segment at least from our standpoint has been pretty stable.

Sean, in fact, we have a secured few orders in the first half of 2016 and we expect at least based on our reports in one of the products we are commercializing, in fact we just in the second quarter we commercialized a slab gate valve, which is a new product for us, which is a distributed valve in the midstream space and we have secured some customers already.

So, we do expect the midstream space primarily stable for us, primarily because we're gaining market share in that space. In the case of downstream even though its stable, we are seeing a lot of pressure or market softness on the refinery side, even the petrochemical part of the segment is pretty resilient..

Pretty resilient. Yep..

Okay.

And I guess on midstream, I guess, could you – is there any more detail about the types of customers, I mean the transmission folks versus selling gas utility or anything – any more detail of how that's underlying or even on the transmission projects you find that's very stable?.

Actually both on the transmission side and on the gas utility side we have secured orders in the first half of 2016. So even though there could be market softness there, we are gaining market share in both areas..

Yeah. There's the ongoing work of utilities of having to kind of rebuild their system as it's quite old and unsafe. And then of course there are these transmission lines trying to debottleneck this system out there and then those feeder lines going into these new, all these new petrochemical plants that are being built..

Got it. Thank you for that.

And then just maybe circle back on the Middle East, as you think about that opportunity set, can you give us a sense of how the capital commitments deploy over time, maybe CapEx or working capital? How much you may need to deploy to take advantage of that opportunity?.

Yeah. We are not CapEx – most of the CapEx investments we make are in – are pretty small numbers. So the capital investment we're going to make in Saudi Arabia will be a small number. If I have to give you a range, probably I would say less than $10 million, also significantly less than $10 million for sure..

Yeah. It's probably in the....

Probably the $5 million range..

Yes..

May be even less..

Lease of facility probably....

Correct..

And move some equipment. So, it will be pretty insignificant, actually..

Correct.

But the key there is the supply chain development for us to take the benefit of the localization part of Saudi Arabia and what they're looking at is not to localize the whole product but the parts of the localization of product which is assembly test and maybe painting, which qualifies us from a localization standpoint to take the benefit of the localization initiative in the Kingdom..

Right. Okay. Great. Thank you very much..

We'll take one more question..

Thank you. Our final question will come from the line of John Daniel from Simmons & Company. Your line is open..

Hi, gentlemen. Thank you for fitting me in. First question is, just relates to the inventory write-down.

Can you – was the (01:00:18) inventory work in process and just some color on the types of inventory that were impacted would be helpful?.

So, John, it includes the full span of inventory. So, the way our policy works, we look at inventory as it moves. And traditionally, we've always looked at the way the policy's been applied, just look at historical movement.

The way we've applied it this year both mid-year and at the end of the last year, has been to look forward because of the severe downturn and the change in the outlook going forward, we've applied that policy looking forward. But it has – it does cut across all ranges of the inventory..

Okay. Given that the write-down is driven more by, if you will, the mechanical application of that policy, I'm assuming you can still use or sell some of those products in the future.

And if that's the case – I mean I'm assuming that would lead to higher potential artificial margin improvement, if you will, on future sales? Is that right?.

So we only took 100% reserves on inventory that we had plans to scrap, and there is some of that in the reserve that we've added. And the rest, we've limited it to what we felt brought the inventory down to a lower cost of market type of value. So we will be watching as these inventories come out, how that reserve reverses.

I wouldn't expect it to come back too quickly. But it is fair to say that we've got inventory now, what we consider to be a fair-carrying value and should be reflective of market margins on a go-forward basis..

Okay. All right. Another one here for you is let's assume you have a customer that enters your restructuring process or it looks like it's apparent they will be entering that process, to the extent you have a receivable then.

At what point would you take a reserve against that?.

Very good question. So we have had heightened procedures this year for monitoring the credit that we extend to customers and have tightened that credit as we've seen customers reaching positions of potentially having to go into a restructuring.

So our policy does work on an aging basis, but we will judgmentally – add the reserves if we think there's risk, I would say given the tightness of our processes this year, we've had very good fortune thus far to not have to take significant charges for bad debt reserves despite some of our customers being in difficult positions, and that's been a matter of keeping receivables current and a lot of effort to make sure that the collections are taking place on a timely basis..

Okay..

And John, also some these restructurings particularly for the public companies have been restructurings, debt or equity swaps, but we have been able to continue business and continue to get paid..

Okay.

And that's – that's the reason we're going down this path, because there's been some speculation by the better capitalized service companies that vendors will be less likely to work with those that are distressed given their potential risk, if you will, of the receivables risk, so since you're a vendor to these guys, you're a good person to ask and it seems like this is not – you're not going to abandon your relationships with these distressed companies and in fact they might.

Is that a fair statement? You're still going to work with them and then certainly once they come out of a restructuring process..

Yeah, yeah. That wouldn't be a good assumption on their part..

Okay, just want to confirm that. And then the last one, I don't know if you would be willing to answer this one, but I'll ask anyways is what's the revenue opportunity for you for each 7,500 psi system upgrade..

Yeah, several hundred thousand dollars per rig..

All right. Okay. Thanks, guys. Thanks for your time..

Thanks, John..

Well, thank you very much for good questions and your attention and your interest in Forum. And we'll talk to you next quarter..

Thank you, Neesy. You can end the call..

Thank you, ladies and gentlemen. This will conclude our call. Have a great day..