Good morning, ladies and gentlemen, and welcome to the Forum Energy Technologies Fourth Quarter and Full Year 2019 Earnings Conference Call. My name is Annie, 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 place on mute to prevent any background noise.

[Operator Instructions] I will now turn the conference call over to Bill Austin, Vice President of Corporate Development and Investor Relations. Please proceed, sir..

Thank you, Annie. Good morning and welcome to Forum Energy Technologies Fourth Quarter 2019 Earnings Conference Call. With us today to present formal remarks are Cris Gaut, Forum's Chairman and Chief Executive Officer; as well as Pablo Mercado, our Chief Financial Officer; and Lyle Williams, Senior Vice President of Operations.

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.

These statements involve risks 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 publicly update or revise any forward-looking statement to reflect future events, information or circumstances that arise 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 statements may include non-GAAP financial measures. For a reconciliation of these measures, refer to our earnings release. This call is being recorded.

A replay of the call will be available on our website for two weeks following the call. I'm now pleased to turn the call over to Cris Gaut, our Chief Executive Officer..

Thanks Bill and by the way we are welcoming Bill Austin back to Forum. He is now our VP of corporate development and Investor Relations. Good morning everyone.

When I assume the role of CEO a little over one year ago I laid out a plan that would focus on three things and those are generating strong free cash flow to reduce net debt, emphasizing our winning products to improve on our market position and third improving operating and cost efficiency.

2019 was certainly a challenging year for our industry and for the oilfield equipment sector. However, I believe our team has done an admirable job on these objectives. I would like to report on our 2019 progress in each of these areas.

Forum generated $90 million of free cash flow during the year representing greater than 70% annualized free cash flow yield on our current equity market capitalization and a greater than 120% conversion rate of EBITDA to cash.

Over the year we’ve reduced our net debt by $130 million through a combination of strong free cash flow and divestitures of non-core assets. We ended the year with net debt of $342 million, $58 million of cash on the balance sheet and undrawn revolver.

The second objective is focusing on our winning products which are those that provide critical value to our customers and remain in high demand even in a constrained spending environment. And secondly have strong brand recognition and margin potential.

Now more than ever our customers are demanding products that enable them to achieve greater efficiencies. We expect this trend to continue as the industry focuses on improving returns.

As a result we are expanding and improving our highly engineered products that outperform the competition in areas like artificial lift, intervention and hydraulic fracturing.

These products create value for our customers by reducing the cost of set-up in cycle time at the well site, increasing the effectiveness of our customers’ asset and even increasing the oil production rate. We fully expect market interest for these products to be high during 2020 despite reluctance by our customers to spend.

Let me give you an example of how this focus on winning products is working for us. We have developed a suite of products in the artificial lift area that significantly improved the operating life of Downhole electric submersible pumps by addressing problems with solids and gas in the production stream.

These high margin products we have developed delivered real value for the operator in terms of reduced lease operating expense, less downtime and better production rates. Sales of these artificial lift products increased each quarter during 2019 and are now up over 50% since the fourth quarter of 2018.

Regarding the third objective improving operating and cost efficiency we made significant strides in 2019 by reducing our cost structure. Some examples include consolidating facilities, removing layers of management, reducing professional fees and generally limiting discretionary spending.

This has resulted in a 20% reduction in SG&A in the fourth quarter of 2019 compared to the prior year. In addition we have implemented process efficiencies that have reduced our direct costs which Lyle will be talking about in a few minutes. Continued progress on these three objectives will set the company up for long term success.

As we look ahead, we expect a low level of customer activity and great reluctance to spend that we saw in the fourth quarter to continue in the first quarter of 2020.

In addition concerns about the Corona virus and its potential impact on the Chinese and global economy are creating uncertainty about the demand for oil between of implications for the demand of Forums with products.

As a result for the first quarter of 2020 we expect our EBITDA to be approximately flat compared to the fourth quarter of 2019 but with some downside exposure to this forecast if there is not a fairly swift recovery in China from the Corona virus.

Oilfield activity is off to a slow start in 2020 due to low oil and gas prices and constrain spending budgets. In subsequent quarters we expect international activity to accelerate and cannibalization and destocking in North America market to let its course as Drilling and completion activity stabilizes.

This will drive improved orders and revenue for Forum over the course of the year. Again this forecast is subject to a recovery of the Chinese economy fairly soon. On that basis we expect our full year 2020 EBITDA to be in the range of $60 million to $70 million.

Given our capital life business model and continued conversion of excess inventory into cash, we expect a very high rate of conversion of EBITDA to cash to continue in 2020. Regardless of the environment we will manage Forum for the market as it exists and focus on our key objectives.

Now let me ask Pablo to take you through our results and financial position.

Pablo?.

Thank you Cris. Good morning. As Cris mentioned 2019 was marked by a significant decrease in drilling and completion activity and a reluctance to spend by our customers particularly in the fourth quarter. Our total revenue for the year was $957 million, down 10% from 2018. Adjusted EBITDA was $73 million or 8% of revenue, down $24 million from 2018.

Despite the declining activity throughout the year Forum generated strong free cash flow of $90 million in 2019 and exceeded our target of reaching a $100 million free cash flow run rate in the second half of the year.

Our fourth quarter revenue with $200 million, down $40 million sequentially due to the reduced capital and operating spending by our customers resulting from budget exhaustion and their mandate to preserve cash. However, we did see an inflection in our bookings driven by new orders for international projects.

Our book to bill ratio was above 1 for the first time in several quarters with improvement in all three segments. Our adjusted EBITDA for the fourth quarter was $11 million or 5% of revenue, down $11 million from the third quarter.

This was in line with our expectations despite the little revenue as we continue to reduce our costs throughout the organization. I will also note that our adjusted EBITDA does not add back $4 million of non-cash equity based compensation.

Net loss for the quarter was $12 million or $0.11 per diluted share, excluding $3 million or $0.02 per share of special items adjusted net loss with $0.09 diluted share. Special items for the quarter on a pre-tax basis included again on disposition of assets of $2 million.

Other charges primarily for discontinued products of $4 four million and an $8 million foreign exchange loss. We provided a reconciliation table of these special items in our earnings release for your reference. I will now summarize our segment results on a sequential basis.

In our Drilling and Downhole segment orders were $74 million, an 8% decrease from the third quarter resulting from significantly constrained customer spending particularly for drilling and well construction consumable products in the U.S. Market.

Segment revenue was $78 million, a $10 million or 11% sequential decrease due to the fall to the equipment receipt by our customers to the first quarter and the lower demand for consumable products. Adjusted EBITDA for the segment was $9 million in the fourth quarter, a sequential decrease of $3 million.

Approximately half of the decrease was related to the third quarter divestiture of our equity interest in Ashtead. In our completion segment orders decrease 10% to $58 million. Segment revenue was also $58 million, a sequential decrease of $12 million or 17% due to the severe slowdown in the U.S. onshore completions market.

In addition, our pressure pumping customers continue to cannibalize their idle fleets and destock their consumables. Several also retired assets which will be healthy for utilization levels and ultimately for equipment buying patterns.

Adjusted EBITDA for the segment was $5 million, a $6 million sequential decrease resulting from the loss of operating leverage due to lower volumes and lower cost recovery compared to the third quarter.

Production segment orders were $70 million, a sequential increase of 26% primarily due to two large international orders for desalinization equipment and significant orders for well site production equipment for deliveries throughout 2020.

These strong orders were partially offset by a decrease in orders for valves and distribution customers continue to desofter inventories to reduce working capital at year-end.

Segments revenue was $65 million, a 20% decrease primarily due to lower sales of valves and to a lesser extent load deliveries of surface production equipment as exploration and production budgets were exhausted.

Adjusted EBITDA for the segment was $3 million, down $3 million sequentially due to the loss of operating leverage despite cost reductions and unfavorable sales mix. I will now discuss some additional details about our financial results and financial position at the Forum level.

Our free cash flow after net capital expenditures in the fourth quarter was very strong at $26 million aided by strong collections of receivables. The $90 million of free cash flow that we generated in 2019 represents a conversion of EBITDA to cash in excess of 120%. We expect continue to deliver a high conversion of EBITDA to cash in 2020.

As in 2019 cash flow will be lower in the first quarter due to the timing of annual payments a higher material receipts. Our program to reduce excess inventory yielded mingle for results in both the fourth quarter and throughout 2019. We decreased our inventory position by $29 million in the fourth quarter and $64 million for the year.

We expect the moderation of excess inventory to continue in 2020 and beyond. Also in the fourth quarter we close on a small non-core asset divestiture which generated $4 million of cash proceeds. As a result and in combination with our free cash flow we’ve reduced net debt by $29 million in the fourth quarter.

We ended the year with $58 million of cash on the balance sheet and undrawn revolver and liquidity of $287 million. Our primary use of free cash flow in 2020 will be to continue to reduce net debt. We're also working to address the maturity of our $400 million of bonds during the fourth quarter of 2021.

Potential solutions could include arrangements with existing bond holders and/or raising new money. Due to the sensitive nature of these discussions we cannot say more on this topic at this time. Our net capital expenditures in the fourth quarter were $3 million, bringing our total capital expenditures for the year to $15 million.

We are capital light business and we expect our total capital expenditures for 2020 to be around the same maintenance level as in 2019. Our reported diluted per share count for the quarter was 110 million shares. Interest and depreciation and amortization were $7 million and $15 million respectively in the fourth quarter.

We expect these expenses to remain at similar levels in the first quarter. Adjusted corporate expenses were $6 million in the fourth quarter and we expect them to be approximately $7 million in the first quarter due to higher payroll tax and full accruals for incentive compensation and medical insurance.

Both our corporate expenses and total SG&A were down more than 10% revenue decline in 2019. We will continue to have some tax expense despite an overall net loss as we're not recognizing tax benefits in loss-making jurisdictions, the container recognized tax expense for some international jurisdictions with income.

Once we turn profitable into laws making jurisdictions we will have a relatively low tax rate as we begin to use our net operating losses. For more information about our financial results please review the earnings release on our website. Now let me turn the call over to Lyle to discuss some key operating initiatives..

Thank You Pablo. Hello everyone. In the fourth quarter we saw another significant reduction in inventory of $29 million following the $26 million reduction in the third quarter. For the year we decreased our inventory by $64 million or 13% which is a very good movement in the right direction.

As Cris mentioned inventory monetization remains an opportunity and focus area for generating incremental cash flow. We will improve our inventory terms by following the strategies that helped us reduce inventory in 2019.

These include improving inventory planning, partnering with our suppliers on consigned inventory and streamlining our operations using lean techniques. We are also liquidating slower moving inventories and discontinuing some margin diluted sub- product areas.

In addition to monetizing inventory these actions will improve customer responsiveness by reducing our manufacturing lead times.

For example our drilling and Downhole team has improved plant operations by leveraging lean techniques to virtually connect distribution locations back to our vendors and by implementing metrics to quickly adjust their performance. On the cost management front we also made progress in the fourth quarter.

Despite a 16% sequential decline in revenue our gross margins remained fairly constant. Because of our variable cost structure operations management was able to flex cost downward quickly to match reductions and activity while retaining ample capacity to serve future customer demands.

We will continue our focus on managing cost, controlling what we can in this volatile market. We're not only focused on managing cost but also on growing our revenues through a number of avenues. Revenues from outside the U.S. continued to grow in importance with roughly one third of revenue in the fourth quarter coming from outside the U.S.

We expect non-U.S. revenues to continue growth into 2020 as our large service company customers pull through our well construction and intervention products including casing hardware, coil tubing and wire-line and related pressure control equipment.

In the fourth quarter, we received a large order for EDGE electrostatic desalting equipment from the Middle East and we have recently trained local Forum employees for recertification of our drilling and intervention capital equipment in that region. We also expect market share gains from some of our new differentiated products.

Cris has already discussed our growing artificial lift offerings. In addition our new pressure pumping products are garnering attention. Earlier this month at the SPE Hydraulic Fracturing Technology Conference we’ve launched our 3,300 horsepower frac power end and our innovative high-pressure hose.

Both of these products work with our full offering of pressure pumping hardware to address some of our customers’ biggest challenges while simplifying setup and increasing safety at the job site. A very topical subject is the Corona virus and its potential impact. Let me address that for Forum.

We currently source components and finish products for a number of our product lines directly from China. China is also an increasingly important sales market for our products and we have recently expanded sales of our well intervention products into the country.

Forum, many of our suppliers and even financial institutions closed operations in response to regulations imposed by the Chinese government. Furthermore, these government mandated shutdowns have also impacted seaports and airports which may cause transportation delay. The situation on the ground is changing daily.

So we will continue to monitor these events as they unfold. I am thankful to be able to report that our China based employees are all healthy and taking proper precautions to protect themselves and their families. In the past year tariffs and now the Corona virus have been headwinds to our supply chain efforts in China.

We are pleased with our Chinese supply chain partners have worked with us to overcome these challenges. Let me turn the call back over to Cris for closing remarks..

Thanks Lyle. We are proud of our team's hard work and achieving fourth quarter results. Overall business remains tough and we appreciate all the efforts. We continue to believe that under investment deferred maintenance and cannibalization of equipment by our customers in the U.S. onshore market is not sustainable.

Having said that Forum's balanced portfolio in international and offshore markets as well as our exposure to non-upstream markets is a positive for Forum and we expect the percentage of our revenue coming from those markets to grow going forward.

We will continue to focus on the things we can control which include working capital and managing our costs in order to drive free cash flow. We will also continue to focus on our winning products which we can grow even in challenging markets. Thank you for your interest and at this point we will open the line for questions.

Annie, let's take the first question..

[Operator Instructions] We have a question from the line of Sean Meakim from JP Morgan. Your line is open..

Hi, good morning..

Hey Sean..

So could we maybe just start with your expectations for free cash in 2020 and maybe try to characterize the range of outcomes? I’ve recognized some of the uncertainty in China.

Let's just say that the $60 million to $70 million EBITDA range holds, do you expect working capital especially inventory to be a source of cash again? How would you bracket the outcomes on free cash maybe in dollar terms or conversion rates or relatives generated in 2019 just looking to get your range of outcomes on free cash..

Yes. So the biggest driver of our ability to reduce our inventory is the level of cost of goods sold what we can sell. So if we see a pickup and demand we have the goods on the shelf and we can turn them to cash.

So to the extent our revenue our cost of goods sold is lower that is more difficult to the extent things pick up and we continue to build orders from here that will be a positive. Relative to our conversion of EBITDA to cash we expect that to continue to be at a very high rate and our goal is 100% conversion of EBITDA to cash..

Okay. Got it. That's helpful. Thank you.

And then looking at the success you're having with the artificial lift products, could we talk about how much of that is North American driven versus international opportunities just given the applications can be quite different and then just other tangential products that you could develop to solve similar problems for E&Ps related to ESP are there other ways in which we can drive related type of revenue growth?.

Yes. So I mean to be clear particularly for those who aren't as familiar with [indiscernible] product line, we are selling accessories around artificial lift and electric submersible pump and [indiscernible]. So we sell Downhole products that help prevent sand from clogging up ESPs.

Our gasguard product that breaks up gas slugs which are very difficult on all types of artificial lift pumps. To your question Sean to date we have seen tremendous demand and acceptance of these products with more and more customers for the U.S. land market and we're at the early stages of expanding those products to international markets.

We are seeing good interest and beginning to see good orders internationally, particularly in the Middle East where ESPs are used quite a bit and in Latin America and so again we see that as the source of the international growth that we were talking about.

Another area of the accessories we have for our artificial lift products are the variety of the protectors that we offer that go on the production liner to protect the cables, power cables and injection lines and that is another high margin, high demand product offering and as we're seeing more offshore products I'm sorry offshore activity and more high-value wells drilled for example in the Gulf of Mexico we're seeing uptake there too.

So yes today that's been primarily a U.S. market but as offshore and international growth it's not just our other drilling and legacy Downhole products where we're seeing an increase in demand but in the [lease] artificial lift products as well..

Sean, we are also participating little more on the gas lift side as well through the core of line pipe product that we developed as part of our core tubing product offering and diversifying into that part of the market. So these are kind of gas injection lines going back to the well from the gathering station..

Got it. Great. Thank you very much..

Thanks..

We have another question from the line of George O'Leary from TPH Corporation. Your line is open..

Good morning guys..

Good morning..

Congrats on the free cash flow and I think the goal of 100% conversion of EBITDA was nice to hear as well.

As you think about 2020 and incremental leverage you have to reduce net debt, is there anything left to do on the divestiture front and just how is, how does that market look to there but asks really wider other incremental opportunities for you to go to the divestiture route to reduce net debt?.

Hey George, it's Pablo. So yes we did move the needle a bit through divestiture in 2019, 40 million plus of sale proceeds of really some products that didn't generate a lot in the way of EBITDA or cash flow for us.

So while we were successful doing that and continuing to look at the portfolio for opportunities to turn non-cash flow generating assets into cash the M&A market is difficult. There are not a lot of buyers out there. So I wouldn't put, when we say we have a goal out there doing that but continue to evaluate opportunities. .

Great. That's helpful and then you mentioned some products or sub-products that you guys will no longer be looking at to sell moving forward.

I wonder you guys could provide some examples of those and what business unit those may be associated with?.

George, it’s Lyle. So one of the things that we did in the fourth quarter particularly in our valves business was evaluate some minor product offerings that we had that as Pablo mentioned weren't cash contributing and we ceased those just ceased operations of selling those.

We are able to divert the resources that we had dedicated those to some of our higher margin and our better performing products in the valves business..

So we [indiscernible] similar things that we’re offering there and some of the other areas as well and as we look to move more towards the winning products and things that got good customer demand and a bit more differentiated that's where we're putting more of the resources..

Okay. Great. That's helpful and then just one more from the standard trajectory of free cash flow in the 2020 timeframe. I think Pablo you mentioned that cash flow would be lower in the first quarter which is one seasonally normal and then two just starting off of a very low level of activity in North American particular so that makes some sense.

Just any way you could frame the magnitude of kind of free cash flow compression sequentially quarter-on-quarter? Do you still think you can convert 100% of that EBITDA to free cash flow in the first or should we look for a free cash flow conversion to be better in the second, third quarters of the year?.

Yes, George that's a reasonable expectation what you described this kind of the one times conversion kind of throughout the year obviously there'll be some variability but that's reasonable for the first quarter.

The reason as you mentioned a little bit seasonal if you look at the first quarter last year it was lower than the ramp up we had in the back half of the year for the reasons I mentioned in the prepared remarks we also had pretty good collections.

We had some payments that came a bit early in the fourth quarter so therefore they are not there in the first quarter..

All right. Great. Thanks guys. I will turn back over..

Thanks George..

[Operator Instructions] We do have another question from the line of Chase Mulvehill from the Bank of America Your line is open..

Hey good morning..

Hi, Chase..

Hey, I guess I want to come back to the guidance, the annual guidance for $60 million to $70 million of EBITDA for this year. Could you maybe just kind of help us understand just kind of the framework behind that and especially kind of we think about U.S. activity.

maybe it's E&P CapEx that you want to talk to or something like that?.

Yes, I think the bigger macro obviously we can talk about oil prices supply demand but drivers for us that are key that the direction in the rate count, the rate counts going up and we're putting more rigs to work. They need to be real fit and that's a positive on the frac side.

We feel that at this point there's been a lot of destocking of consumable products and although there may be more frac units that go into attrition or are retired, our view is largely those are not in operating condition at any rate and in order if one were to try to put those back there would need to be money spent on those and we're at a point now with the destocking of consumable products that it's more hand to mouth.

We've seen a leveling off I think in demand there but as there's a need to continue to maintain that equipment keep it working and if there's any increase in units going back to work that would be, those would be positive for demand for our products. So those would be some macro or drivers for our business.

The increasing use of artificial lift we've already addressed. International 30% of our revenue is international and we expect that to be a growing portion over time. The offshore in subsea market is another positive.

We're seeing more discussions and bids going on there that we're working hard to turn into orders and also while mentioned the process industry projects that we won in the fourth quarter we're seeing an increase in a number of those projects that are being talked about very good margin, lumpier bigger projects and we're hoping of landing more of those as well..

Okay. And on the completion side, if I looked at margins and decremental is there in the fourth quarter, realizing that revenues were down a decent chunk.

You had some pretty hefty decrementals as we kind of move forward, I don't know if you want to kind of talk a little bit about incrementals as you start revenues improve or maybe kind of over the next few quarters where you think absolute level of margins can go for this segment..

Yes, I mean it's a good margin segment for us. We were hurt in the transition from Q3 to Q4 by some cost recovery issues that we don't see that being a factor from fourth quarter to first quarter. So the gross margin contribution on an incremental basis is high in our complete business.

So the increase in sales there would clearly be accretive to our overall results. I feel our innovation products that are doing well. Our [indiscernible] line, our wire line cable got some very good technology there. So new products coming out, great margins, course coil tubing pipe that we sell, very good product line, very good margins.

And as completions are done particularly in the first half of the year is E&P companies want to go and get ahead on their production goals for the year. That should be good for those product lines..

Okay. Understood. I will squeeze one more in.

if we look out for 2020 and it kind of looks like maybe revenues have kind of stabilized and you might kind of work on higher from here but on the cost side can you talk about what you are doing to kind of focus on cost and to take more cost out of the business?.

We worked hard on SG&A in recent periods and I think we’ve made great progress there and really [indiscernible] to organization. Another step that we are doing is and improving our direct costs and our manufacturing costs and maybe Lyle you can talk about some of the things we are doing in that regard..

Sure. We talk a little bit in prepared remarks about the efficiency of our focus on lean operations and what those do as far as not just reducing cost but also improving our responsiveness to our customers. We have got a good solid organization working on supply chain, so working on the material cost.

Materials are large component of our cost of goods sold. So continuing in that focus developing our supply chain and increasing those.

I think as we think about footprint and what we have from an operational perspective Cris mentioned SG&A have also done a good job of optimizing that footprint and getting production into the right operating places, right operating locations and manufacturing locations to be as efficient as we can. So some really good progress that's been made there.

More ground to cover. And the team has done a great job of implementing those [both] responsive to the change and market demand..

[indiscernible] and that seems to be not getting worse at this point maybe a little bit better but we are also making progress on our mediation efforts in that regard but those are burden but we are doing better job of addressing those which goes right to our cost..

All right. Understood. All right, thanks Cris, thanks Lyle, I’ll back over..

Thanks very much. Well we appreciate your attention and interest in Forum and we will talk to everybody next quarter. Thanks very much. Goodbye..

Ladies and gentlemen this concludes today's conference call. You may now disconnect. Thank you for participating..