Good morning, ladies and gentlemen, and welcome to the Forum Energy Technologies First Quarter 2021 Earnings Conference Call. My name is Stephanie, 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.

As a reminder, this conference call is being recorded for replay purposes. I want to turn today's conference over to Lyle Williams, Chief Financial Officer. Please proceed, sir..

Thank you, Stephanie. Good morning, and welcome to Forum Energy Technologies' first quarter 2021 earnings conference call. With me today are Chris Gaut, Forum's Chairman and Chief Executive Officer; and Neal Lux, our Chief Operating Officer. We issued our press release after the market closed yesterday and it is available on our website.

Before we begin, we would like to caution listeners regarding forward-looking statements. Our remarks today may contain information other than historical information. Please note that we are relying on the safe harbor protections afforded by federal law.

All such remarks should be considered in the context of the many factors that affect our business, including those disclosed in our Form 10-K along with other SEC filings. Management's statements may include non-GAAP financial measures. For a reconciliation of these measures, refer to our earnings release.

This call is being recorded, and a replay of the call will be available on our website for two weeks. I will now turn the call over to Chris..

Thanks, Lyle, and good morning. It will soon be one year since oil field activity bottomed due to the pandemic and the increase in drilling and completion activity over the past 12 months has been significant.

Although our customers remain very conservative on their spending, we are seeing that some idle equipment is being reactivated and they are working off their inventory and consumable spares from decommissioned equipment. Customers are becoming concerned about supply chains as raw material prices and lead times are starting to increase.

As a result of these factors, demand is improving nicely for FET’s short-cycle products. Customers may not yet be willing to spend capital dollars on new equipment, but clearly their spending is increasing to keep equipment working and to reactivate stacked equipment.

FET is uniquely positioned to benefit from this short-cycle spending to support higher drilling and completion activity. As we have high graded our product portfolio, our higher margin products are especially benefiting from this increase in spending as Neil will talk about shortly.

During Q1, FET saw a 21% increase in our inbound orders compared to Q4, that's excluding from the comparison of the businesses we sold in Q4 and our book-to-bill ratio of 1.2 is our highest level in over four years.

Clearly, the demand for our short-cycle consumable products was driving these orders so far as spending on capital goods remains constraint. However, we are beginning to have positive customer discussions for our new generation of capital equipment for drilling, pressure pumping and subsea applications.

This accelerating level of inbound orders is very encouraging as bookings are obviously the best leading indicator for our future financial results. As our new orders convert to increased revenue, a key consideration is how much of that revenue flows through to the bottom line.

I believe FET has excellent operating leverage due to the significant structural cost reductions we have made, our available manufacturing capacity to accommodate more volume in revenue, and our portfolio repositioning from lower margin to higher margin products.

Incremental margins will vary from quarter-to-quarter due to the mix and timing of shipments, but our performance in Q1 was exceptional. FET delivered 70% incremental margins as EBITDA increased from Q4 by $7 million on a $10 million increase in revenue pro forma for the Q4 divested valve lines.

Now, we're not a software company, so I don't expect our incremental margins to be at that level going forward, but I do think our operating leverage on higher revenue will be attractive. The recovery in U.S. rig count will clearly be the most important driver for our near-term results. However, FET has exposure to markets away from U.S.

upstream oil and gas. More than 40% of our revenue comes from other drivers, such as international activity, new energy and GHG reduction, and other non-oil and gas sources. In the longer term, these other revenue sources will become even more important for us. Now, let me turn the call back to Lyle..

Thanks, Chris. In the first quarter, U.S. drilling and completion activity grew at a pace faster than was generally expected and resulted in strong FET financial performance.

Pro forma for the divestiture of our two valve brands in the fourth quarter, our overall bookings increased by 21% sequentially to $138 million and our revenue increased by 10% to $115 million. As Chris said, our book-to-bill ratio was over 1.2, and importantly, we build backlog in each of our product lines in the first quarter.

The magnitude and breadth of this backlog growth bodes well for the remainder of the year. The strong top line performance for FET was led by our completion segment, where our primary products are short-cycle consumables with high leverage to U.S. activity. Completions bookings and revenue were up sequentially by 56% and 24%, respectively.

These increases came despite the negative impact of the February freeze, where operations for a number of our customers in the Permian Basin were shut down for more than a week. The significant restructuring efforts we announced in late 2020 are nearing completion and enhanced our bottom line results for the quarter.

Consolidated EBITDA for the quarter of $2 million came in above our roughly break even guidance. On a pro forma basis, EBITDA increased sequentially by $7 million.

Our 70% incremental margins were partially attributable to a favorable mix of completion segment revenues and demonstrate the strong operating leverage inherent in our leaner operating cost structure.

Comparing these first quarter 2021 results with the first quarter of 2020 on a pro forma basis, further support the significant benefits of our cost reduction efforts. In comparison, revenue decreased by $55 million while EBITDA increase by $1 million.

These solid incremental margins will normalize over time, yet we still have the capacity to increase our revenues without considerable addition to our fixed cost structure. Therefore, we look forward to continued favorable incremental EBITDA margins through the year. Looking ahead to the second quarter, our strong revenue correlation to U.S.

rig count levels and the fact that U.S. rig count has already increased over the first quarter average supports our guidance. We expect revenues for the second quarter of between $125 million and $135 million and EBITDA of between $6 million and $8 million. Let me share further information about our segment operating results for the first quarter.

On a sequential basis, our Drilling & Downhole revenues decreased by $1 million while adjusted EBITDA increased by $2 million on the back of considerable restructuring efforts in this segment.

A couple of large international projects for our drilling product line were delayed by our customer at the end of March, causing the revenue decline in the segment. Demand for our downhole products increased with growing activity in the U.S.

and revenue in our subsea product line grew as additional revenues were recognized on capital projects in our growing backlog. As I indicated earlier, our completion segment growth was impressive in the quarter. Revenue and adjusted EBITDA for the segment increased by $7 million and $4 million, respectively.

Our pressure pumping products grew by an impressive 80% benefiting from both increased activity levels and from reactivation of fleets by our customers. In the quarter, we've booked orders for our treating iron, a new innovative, flexible host products.

And with activity continuing to increase, we expect further strong revenue growth from these pressure pumping products. Production segment revenues declined sequentially by $5 million and EBITDA declined by $1 million due to the divestiture of our ABZ and quadrant valve brands at the end of the fourth quarter of 2020.

On a pro forma basis however, segment revenues and adjusted EBITDA increased sequentially by $4 million and $1 million respectively.

Importantly, for the first time in a number of quarters revenue for our Valve Solution product line grew as downstream end-user demand increased and certain of our distribution partners began to place stock orders as they reach their target inventory levels.

To wrap up segment results, our adjusted corporate expenses were $6 million in the quarter in line with our expectation. We expect roughly similar results in the second quarter. Our net loss for the quarter on a consolidated basis was $30 million or $5.28 per diluted share.

Excluding $8 million of special items, adjusted net loss for the first quarter was $3.95 per diluted share, a sequential improvement of $0.85.

The $8 million of special items includes $4 million of foreign exchange losses, $3 million of restructuring and other costs and a $1 million loss in extinguishment of debt from the repurchase of our convertible notes in the first quarter. I'll say more about the loss in debt extinguishment as I cover our balance sheet items.

In the first quarter we made additional progress on improving our capital structure. We ended the first quarter with $101 million of cash and $142 million of availability under our revolving credit facility for total liquidity of $243 million.

Our net debt outstanding at the end of the first quarter was approximately $199 million, calculated as $300 million of convertible notes outstanding less $100 million – $101 million of cash.

In the quarter we repaid the $13 million balance on our revolving credit facility that was outstanding at the end of 2020 and we repurchased 16.5 million principle amount of convertible notes for $15.6 million.

The net carrying value of the repurchased debt, including unamortized debt discount and debt issuance costs was $14.7 million resulting in a $1 million loss on extinguishment of debt, even though the notes were repurchased at a discount to par.

As a reminder, all of our debt repurchases, capital expenditures and acquisitions would reduce our obligation related to excess cash proceeds from our valves divestiture as defined in the convertible debt debenture.

Our free cash flow after net capital expenditures in the first quarter was approximately breakeven, which is slightly better than the guidance provided in the fourth quarter earnings call. As expected our free cash flow in the quarter was negatively impacted by approximately $3 million of restructuring, transaction and other costs.

As well as the timing of typical first quarter working capital related items, such as payments of annual property taxes and certain employee related compensation. Proceeds from the disposition of capital assets generated $2 million of cash in the first quarter.

And we generated $10 million of cash from networking capital due to solid reduction in our inventory.

In the second quarter, we expect free cash flow to be slightly negative as incremental EBITDA improvement is more than offset by the timing of our $14 million semi-annual interest payment on our convertible notes and slight working capital growth on increasing revenues.

As our EBITDA continues to grow through the year, we do expect free cash flow on a full-year basis to be positive. Now let me turn the call over to Neal to discuss our ongoing initiatives and market opportunities..

Thank you, Lyle. Good morning everyone. FETs operational and financial results are encouraging in a number of areas. First, demand for our high-margin and consumable products is robust. Second, the consolidation and portfolio optimization efforts we began last year have produced strong incremental margins.

And third, quoting activity for our drilling, subsea, production and stimulation capital products is accelerating at a significant pace. Let me address each of these key products – key points in more detail.

As Chris and Lyle noted, drilling and completion activity has increased significantly and to operate efficiently and safely, our customers are demanding new consumable products. The destocking and cannibalization efforts of the past few quarters has appeared to have run its course.

We're experiencing strong demand for sand control and cable protection products for artificial lift from Multilift Solutions, coiled tubing and line pipe from Global Tubing, greaseless wireline cable from Quality Wireline, mud gate productions valves from SPD and mud pump consumables from P-Quip.

Revenue growth from these products exceeds the growth rate of their market drivers. And we expect this trend to continue in future quarters. Also, these products have strong margins as they are generally highly engineered with proprietary designs and has specialized manufacturing processes.

Moving on to our consolidation and portfolio optimization efforts, we made significant progress on the changes announced in our last conference call. The team is executing the strategy of hybriding our product portfolio and reducing fixed costs by consolidating manufacturing facilities.

The benefits of our effort to eliminate at least $20 million of annual expenses were evident in the strong incremental EBITDA margins discussed earlier. In addition, while FET has a smaller footprint today versus one year ago, we maintain the capacity to significantly grow production.

This is important with regard to the last item I want to highlight for you today, strong quoting levels for our capital equipment. Before providing a few examples of demand, I want to explain how FET plays a different role in the capital equipment cycle versus many of our competitors.

We develop and sell engineered products that are key components of long-life assets, like drill ships, hydraulic fracturing fleets, offshore support vessels and land drilling rigs. The life cycle of our component products is far shorter than the long-life assets due to wear and obsolescence.

So while we do not expect a large rig or frac fleet capital build cycle, we do expect a replacement and upgrade cycle for many of our component products. Strong quoting activity and initial bookings for this equipment is giving us confidence in that outlook. One example is our single-line manifold and high pressure flexible hose.

This solution allows our customers to increase uptime significantly. It is also ideal for simul-frac applications where multiple wells are fracked at the same time. Another example is the world class ROV designed and sold by our Subsea product line. FET has a significant installed base of ROVs that is aging and requiring replacement.

Demand for these vehicles is also increasing as our customers shift towards offshore wind farm installation service. We are well-positioned for the energy transition with our ROVs from the Subsea team. The last example I want to provide is our FR120 Iron Roughneck, a pipe handling tool used on drilling rigs.

We designed the FR120 to have the highest torque density in the industry. They can fit on almost any modern drilling rig while being able to break out 120,000 pounds. As the industry continues it shifts to 5.5 inch drill pipe, more robust pipe handling tools are required and the FR120 is vastly superior to existing roughnecks.

This is a great example of the replacement and upgrade cycle our key product components undergo. In summary, we experienced strong demand for our high margin consumable products in the first quarter and expect this trend to continue. Our consolidation and portfolio optimization efforts have created significant operating leverage.

And we are in the early stages of a capital component replacement cycle, where we are well-positioned. This is a great time to be with FET. I will now turn the call back over to Chris for his closing remarks..

Thanks Neal. As you can tell, we are pleased with the progress the FET team made in the first quarter. And we are excited about our prospects for the rest of this year. It's great to be back on offense after just playing defense for so long. Our focus on cost reduction and working capital discipline has served us well and is now well-ingrained at FET.

Increasing orders and revenue, coupled with our low cost structure will yield operating leverage and higher EBITDA. We think this gives us a clear route to further delever our balance sheet by triggering the mandatory conversion feature in our debt, which will help unlock shareholder value. Thanks very much. Stephanie, let's open it up for questions..

[Operator Instructions] And your first question is from the line of Dan Pickering of Pickering Energy..

Good morning. Thanks for taking my question..

Good morning Dan..

I was looking back or trying to – I'm not sure I got all the way through the fourth quarter press release, but you've given guidance for the second quarter. And so I think this is the first time in quite a while you felt comfortable enough to do that.

I assume that's based on the quoting equipment on the capital side or is it the short-cycle stuff or what's driving sort of the improved confidence to kind of give us guidance as opposed to not?.

Yeah. Dan, what's driving our improved confidence is the increase in our orders and the bookings. And we talked a lot about that in today's call as you could tell.

I think we have given some implied guidance, but with the orders in hand now, which will lead to their revenue in Q2, but over the rest of the year, I think we've got the confidence to be more specific.

And we're pleased about the prospects for conversion of bookings to revenue and then through the operating leverage, we have good incremental margins and the improvement in EBITDA through the rest of this year..

The EBITDA guidance is 6 million to 8 million I mean, if we just take this quarter’s $115 million, next Q2 is guided to $125 million to $135 million. We did $2 million of adjusted EBITDA this quarter.

So kind of the implied EBITDA margins incrementally are sort of 30% to 40%, if that I realized 70 is not the right number, although it was great to see at this quarter.

So that 30% to 40% do we think that holds through the second half of the year or is that just this kind of a Q2 number?.

30% to 40% is probably a level that we have very good confidence in Dan, and of course that is excluding any impact of the pricing improvement, which would be an additive to the incremental margins..

You stole my next question Chris, which is, is there – with this uptick in orders, I mean, is there any ability to move price or what do we – what do we look forward to feel comfortable trying to get some of the lost pricing back?.

Yes, Dan this is Neal. There are some opportunities to increase prices in certain areas and other one, there's still excess capacity out there or inventory on the shelves to compete against.

But we are seeing that is on the supply chain, we are seeing lead times extending and prices going up there and we are able to then pass those increases onto our customers too.

So we're able to mitigate a lot of the supply chain challenges with a diversified supply base and inventory, but it's something that we're going to follow closely and monitor as well..

Yes. I would just add that one of the more understandable reasons for price increases to our customers is when we do have demonstrable cost increases from our side. So we will take those opportunities to increase pricing appropriately..

And Chris, in your final comments, you talked about the mandatory debt conversion.

Can you just walk us through the mechanics of that? How much money does it bring in? When can you trigger it? How do you think about it? Or is it more of an automatic process?.

Dan, it’s Lyle. I'll take that one for us. Our convert – roughly half of our outstanding debt would mandatorily convert to equity when our stock has traded above $30 a share for 20 days.

So as we look ahead to continue increasing activity and ultimately driving up our results, then we see that that $30 a share being realistic and then mandatorily converting. So that would effectively convert on today's numbers roughly $150 million or so of our debt to equity. Dramatically, then lower our outstanding debt.

And at that time with higher EBITDA, put us in a situation with very low forward leverage..

Got you. Last question for me, I'll let someone else jump on. When we think about the last 18 months, obviously, it's been a chaotic time period. You guys have been doing significant cost reductions. You've sold some businesses.

As outside observers, is this kind of the Forum we're going to see for the next year? Is there – you talked about offense, Chris.

I mean, are there acquisitions that you might do? Or do we need to kind of stabilize the ship and we think about acquisitions or growth in 2022 versus this year?.

Yes, two aspects to that, Dan. I would say in terms of our offering and how we're going to market, we're very excited about some of the new products that we have coming. So we think there will be some enhancements to our offering and the range of our customers going forward and including things in the non-oil and gas and energy transition space.

Now, from a non-organic standpoint, our focus and priority is first on improving the balance sheet through the ways that while I was describing. And I think once we do have a strong balance sheet that's not viewed as leveraged, I think that puts us in a much better and stronger position to consider non-organic growth..

Thanks very much. Keep up the good work, guys..

Thank you, Dan..

Well, it looks like – Yes. I think that our first questionnaire, still some of the questions from some other folks, so I think we'll wrap it up here, Stephanie. Thank you very much, and we'll talk to you next quarter..

Thank you. This does conclude today's conference call. You may now disconnect..