Good morning, ladies and gentlemen, and welcome to the Forum Energy Technologies' First Quarter 2023 Earnings Conference Call. My name is Gigi, and I'll be your core leader for today's call. [Operator Instructions]. I will now turn the conference over to Rob Kukla, Director of Investor Relations. Please proceed, sir..

Thank you, Gigi. Good morning, and welcome to FET's First Quarter 2023 Earnings Conference Call. With me today are Neal Lux, our President and Chief Executive Officer; and Lyle Williams, our Chief Financial Officer. We issued our earnings release yesterday, and it is available on our website.

Please note that we are relying on the safe harbor protections afforded by federal law. Listeners are cautioned that our remarks may contain information other than historical information. These remarks should be considered in the context of all factors that affect our business, including those disclosed in FET's Form 10-K and our other SEC filings.

Finally, management's statements may include non-GAAP financial measures. For a reconciliation of these measures, you may refer to our earnings release. During today's call, all statements related to EBITDA refer to adjusted EBITDA. Unless otherwise noted, all comparisons are first quarter 2023 to fourth quarter 2022.

I will now turn the call over to Neal..

Thank you, Rob, and good morning, everyone. I would like to begin today's call by emphasizing 3 key points. First and foremost, we are focused on meeting or exceeding the commitments we make to our customers and investors.

We accomplished that during the first quarter as our employees executed to plan and delivered revenue, EBITDA and free cash flow within our guidance range. Our EBITDA and EBITDA margins both increased sequentially on relatively flat revenue. Second, the first quarter highlights FET's global reach.

We have abundant opportunities in the international and offshore markets to drive our growth through the rest of 2023 and beyond. And third, we set high expectations earlier this year. Today, I remain confident in our previous 2023 guidance of $80 million to $100 million of EBITDA and free cash flow of $20 million to $40 million.

Demand for our products is strong. Before addressing the market, let me briefly talk about bookings this quarter. Coming in at 95%, this is the first quarter in over 2 years with a book-to-bill ratio below 100%. Our product orders are typically book and ship or longer lead time capital equipment.

This can cause lumpiness in our quarterly book-to-bill ratio. Also, fourth quarter bookings were very strong, particularly with the addition of a $25 million Middle East project award. As we look out through the remainder of 2023, our current backlog and expected bookings should be sufficient to meet our full year revenue expectations.

Now let me walk through our markets and the opportunities we continue to see. During the first quarter, we saw a divergence in growth rates between the United States and international markets. The U.S. rig count was softer than originally expected.

This was driven by lower commodity prices, leading to less drilling and completion activity from private operators. However, equipment in the Lower 48 can be redeployed quickly, and our customers are forecasting a rebound in the second half of 2023. Also, even with a moderating rig count, service intensity and equipment utilization remain high.

For our service company customers, demand and pricing remains very strong for state-of-the-art upgraded equipment. They're older, less capable equipment is seeing less demand.

So clearly, our customers want to ensure their high-spec equipment is well maintained, and they want to have more upgraded in-demand equipment in this increasingly bifurcated market. FET can help our customers achieve this goal with our diverse products and solutions. In summary, while current market conditions are a bit soft, the U.S.

is expected to pick up in the back half of 2023. In contrast, international and offshore markets are currently strong and are becoming more important in supplying the world's energy needs. Investment and activity are shifting towards these markets. The planning, equipment build-out and deployment of these investments have longer runways.

This results in contractual customer commitments, which are less susceptible to short-term volatility. In our past several quarterly updates, we have stressed FET's extensive global reach. We are much more than a U.S. land-based company. In fact, in past cycles, our international sales approached 50% of total revenue.

FET's brand and footprint provide us access to global markets. As a result, we have seen our international leads and opportunities grow substantially over the past 6 to 12 months. For example, our drilling capital equipment product family has seen its Middle East opportunities increase almost threefold compared to 6 months ago.

And for our handling tool business, which already has a strong global presence, opportunities have doubled. International drillers are building new and upgrading existing rigs to increase their efficiencies and meet demand. Another example is within our coiled tubing product line, which generates more than 50% of its revenue outside of the U.S.

Our team saw a significant increase in commercial activity across Latin America, Europe and the Middle East. Within the offshore markets, our Subsea Technologies product line is seeing aftermarket demand increase 40% as our installed base goes back to work. New build, ROV and trencher inquiries are up as well.

The sales cycle from inquiry to award can take several months for these big-ticket items. So we are forecasting the bookings to occur later this year and into next year. And finally, we have some product lines that have been primarily focused on the U.S. markets, such as our extremely successful artificial lift product family.

Now we are exporting their success to new markets. They have recently entered several new Latin American countries and are in the process of expanding technical qualifications with national oil companies in the Middle East and Asia Pacific regions.

Geographic expansion with proven products and services will be an important growth lever in 2023 and beyond. International and offshore investment will be a larger portion of spending for energy production. As a global manufacturer of critical technology, FET will benefit from this trend.

We can also outpace the market with share gains through the introduction of new products. Last quarter, I introduced our new Frac Automated Switch Technology system. The FASTConnect system is a direct replacement of zipper manifold. The value proposition for our customers is very clear.

The FASTConnect increases safety by eliminating personnel from high-pressure danger zones, drives efficiency by completing more frac stages per day and improves the well site environmental footprint by eliminating grease. If all zipper manifolds were replaced with FASTConnect, we could eliminate 18 million pounds of grease annually.

That is an ESG win for our customers and the industry. I am happy to report that we are delivering our first unit to a key customer this month. Excitement around this solution is building, and we are having constructive conversations with potential customers who want to adopt this technology.

As we look further into the future, our product portfolio aligns with and supports energy transition markets, including offshore wind, submissions capture, geothermal and biogas. Although a small part of the FET story today, we are seeing early signs of activity and expect an acceleration in commercial and engineering efforts in the coming years.

To conclude, I remain excited about FET's growth opportunities. We are in the early stages of an energy investment cycle. To increase global living standards, the world needs energy, and the energy industry needs FET's innovative products and services. While the U.S. market has started slowly, it is expected to pick up in the back half of the year.

International and offshore activity growth is robust, driving revenue opportunity. And FET's new product pipeline will further support growth by taking market share. I'll now turn the call over to Lyle for more detail on our first quarter results and the second quarter 2023 outlook..

Thank you, Neal. Good morning, everyone. Our employees executed to plan and delivered a solid first quarter result. Revenue and EBITDA were within our guidance range at $189 million and $18 million, respectively.

Compared to the first quarter of 2022, revenue and EBITDA increased by an impressive 22% and 99%, respectively, and posted a margin improvement of 370 basis points. Sequentially, our consolidated revenue was down 1%. Softer U.S. market conditions were almost offset by growth in FET's international and offshore sales.

Importantly, excluding Subsea Technologies, which declined due to project timing, our international revenue increased 17% sequentially and 25% on a year-over-year basis. As Neal indicated, international market growth is driving additional revenue for FET.

Despite roughly flat revenue, EBITDA was up 7% sequentially, with margin improvement across all 3 segments. I would like to highlight FET's strong backlog, which is up 24% from the first quarter of last year. And backlog is up for 6 out of 7 product lines.

The Drilling Technologies backlog is up 31% year-over-year, with orders for international and domestic drilling rig upgrades. Stimulation and intervention backlog is up 18%, including a large number of orders for our GHT, JumboTron radiators.

Production equipment backlog is up 81%, with large bookings such as the Safaniya Project order in Saudi Arabia announced last quarter. Generally, our backlog is scheduled to deliver through this year and into 2024.

This backlog in hand and the increasing opportunity for our products in international and offshore markets provide the confidence we have in our full year outlook. Let me share some segment highlights. Overall, Drilling & Downhole results were encouraging.

Segment book-to-bill ratio was 105%, driven by the backlog builds in our artificial lift, drilling handling tools and drilling consumable product families. Our artificial lift bookings increased 33% sequentially. We are seeing increasing Gulf of Mexico and West African demand for our Cannon protectors as recompletion work picks up.

Segment bookings and revenue were up year-over-year, but down slightly sequentially, due to order and project timing. EBITDA increased sequentially, and EBITDA margins rebounded to the mid-teens on improved sales mix.

Our Completions segment is largely driven by plug-and-perf well completion activity in the U.S., which has been stable since the middle of last year. Segment revenue and EBITDA reflect this trend.

Revenue was roughly flat with the fourth quarter, while EBITDA increased with improved profitability in our coiled tubing product line, following the project cost challenges experienced in the fourth quarter.

After receiving large orders for pressure control equipment and radiators in the fourth quarter, bookings returned to the run rate of the previous 3 quarters. Other highlights for this segment include our quality wireline product family, which grew revenue 4%, beating the record it set last quarter.

And the Global Tubing team recognized revenue of approximately $3 million for 1 coil line pipe order. This revenue relates to a subsea pipeline installation in the Middle East. Finally, our Production segment revenue and profitability continue to move higher as the teams execute our strategy and deliver backlog.

Revenue increased 9% sequentially and 24% year-over-year, and EBITDA margin is up 780 basis points compared to the first quarter of 2022. Segment bookings decreased $15 million, as the large order we received last quarter was partially offset by approximately $6 million of valve orders won by our Forum Arabia team.

Now that the team has established our facility as a fully qualified supplier, it is encouraging to see these large awards. We expect that this key facility will provide strategic opportunities to pull through a variety of FET's products and equipment as our customers seek to benefit from having an in-country supplier.

Now let me share with you our second quarter forecast. Neal discussed how we see the markets going forward and reaffirmed our 2023 EBITDA guidance. For the second quarter, we expect overall flat global activity with continued international acceleration, offsetting U.S. softness.

Therefore, in the second quarter, we expect consistent results with revenue of between $180 million to $200 million and EBITDA between $16 million and $20 million. Here are a few details for modeling purposes. In the first quarter, corporate costs were slightly down from the fourth quarter, coming in where we expected.

In the second quarter, we anticipate corporate costs to be in line with the first quarter, interest expense to be $4 million and depreciation and amortization expense of roughly $8 million. We forecast full year capital expenditure of approximately $15 million and cash income taxes at around $9 million.

Free cash flow of negative $24 million was at the midpoint of our guidance range. We -- as we forecasted in last quarter's call, payments of annual cash incentives, property taxes and accrued interest related to the converted notes totaled $30 million in the first quarter.

We also built inventory to fulfill shipments from backlog, scheduled for delivery in 2023. While we are still experiencing some supply chain and logistical disruptions from time to time, this area is improving. In some instances this quarter, material arrived earlier than we expected due to improved supplier performance.

While this means our inventory was slightly higher than planned, we are pleased that supply chain challenges appear largely behind us. Our elevated accounts receivable balance is a work in progress. We're confident in the creditworthiness of our customer base.

However, despite ample cash on their balance sheets, our customers continue to stretch payments to meet their own cash flow goals. For example, 1 large publicly traded customer shifted a $5 million promised payment from March to April.

We have taken action to improve our internal processes and are working with our customers to constructively achieve timely payment without resorting to withholding critical shipments. Looking ahead, we expect positive free cash flow for the next 3 quarters and, as Neal noted, full year positive free cash flow of between $20 million and $40 million.

We ended the quarter with $47 million of cash on hand and $129 million of availability under our revolving credit facility with total liquidity of $176 million. As a reminder, our financial statements now reflect a mandatory debt conversion that dramatically reduced our debt by $123 million.

As of March 31, our net debt was down to $112 million, giving us a significantly improved financial position. With ample liquidity and a strengthened balance sheet, FET is well positioned to fund operations and take advantage of market growth opportunities. We continue to evaluate opportunities available to us for the deployment of our cash.

I will close by touching on some of these strategic alternatives. One option is to repay our long-term debt or repurchase additional shares. During the first quarter, we returned cash to shareholders, repurchasing approximately 139,000 shares of our common stock for about $3.5 million.

This leaves approximately $2.4 million under our authorization program. As a reminder, we are limited by our current indenture from additional repurchases beyond this authorization. Another option is funding for organic growth, which is already included in our plan for 2023 and our healthy free cash flow forecast.

Finally, another option could be accretive M&A transactions to further transform our product portfolio. Any transaction must make good industrial logic, be accretive to our earnings and be structured such that we maintain conservative net leverage. Before turning the call over for questions, I want to leave you with these points.

One, we delivered what we said we would deliver, as reflected in the first quarter results. Two, we are a global manufacturer with ample opportunities in the international and offshore markets to drive growth through the rest of 2023. Three, we set some high expectations early this year and reaffirm our original guidance.

Gigi, please take the first question..

[Operator Instructions]. Our first question comes from the line of John Daniel from Daniel Energy Partners..

Neal, I guess my first question is just tied to the international growth opportunities, which sounds impressive, the step change, I'm just curious, as you look at the opportunities and the drivers behind it, is it something as simple as just growing international demand broadly speaking? Or have you done something from a sales perspective, where you brought on some well-connected sales folks? Or is it a function of just other competition not hitting deliveries, instead now people are waking up and calling you? Just any color would be helpful..

Yes. No, it's a good question. I appreciate that, John. We've had historically some really great brands. internationally, especially on the drilling side, where we're seeing a lot of activity today, whether it's our handling tools or our capital equipment. And so we participated in the last build cycle some years ago.

And I think what we're seeing now is a reactivation and putting back to work, those rigs that had been sidelined for so long. And the customers are coming back to us and the equipment and efficiency that we deliver. So we're seeing those opportunities today. That's exciting.

I think another part of it is if you look at, I think we mentioned in the script earlier, our multi-list solutions product line. It's something we've had really good success within the United States, and we're starting to export that globally..

Okay. And then my follow-up is just on potential M&A opportunities down the road.

Does it ever make sense for you all to buy an equipment packager? Or would you rather just straight-up manufacture the equipment?.

We look at all opportunities. We evaluate where it makes the most industrial logic. I think we've set up ourselves as a key component manufacturer, where we don't build the rig or we don't build the whole frac fleet, but we do supply key technology that differentiates and increases the efficiency for our customers..

Our next question comes from the line of Eric Carlson..

Congrats, that's another good quarter. Might kind of lead into kind of your last comments in terms of returning capital to shareholders and just how you think about that.

Can you clarify me, just -- so basically, the thought would be we probably have $40 million to $60 million of free cash flow from Q2 to Q3 to get to that $20 million to $40 million for the full year.

Is that the right way to think about that?.

That's right, Eric. That would be the right way to think about it. If our guide is $20 million to $40 million, just to get to that midpoint, we'd need about that range of cash from here, yes..

Great. So I just want to think about that and kind of where we trade on a -- basically, if I'm looking to 12/31 of this year, we're trading somewhere in the 3 to 4x enterprise value to trailing 12-month EBITDA at that point in time, which is incredibly cheap compared to peers.

And just looking at -- from a return of capital perspective, obviously, and I've been pretty adamant about this, every dollar that we could put to the equity would be phenomenal, but there are restrictions there.

But if you just pretended that didn't exist, I mean you could remove a significant amount of float on the market given that amount of cash flow. I mean, it just seems like if there's something that we can do about the debt, that would be phenomenal.

And if there isn't, paying down the debt to remove that restriction, not that there's any concern of the debt level, I think that, that level is very appropriate for results. I think the interest expense is very appropriate.

But that restriction of not being able to take advantage of opportunities like we're in right now, I mean that is something that I think -- like if you can buy your own stock at 3 to 4x trailing 12-month EBITDA as of 12/31 this year, yes, that's where -- I just want your thoughts on that, really..

Yes. No, Eric, I love the thoughts, and we're very much in agreement with a lot of what you just shared. We do think our stock feels very cheap as it is, where it's trading versus our peers and given the outlook that we have, which is one of the reasons we spent a lot of time on the script talking about that.

So how do we deploy our cash that we're going to earn over the next 3 quarters and take advantage of the revolver we have, that really falls into the buckets that we laid out. So you hit a lot of our thoughts there. If I were to reiterate and punch on those, definitely be looking at opportunities to retire our debt.

The driver there is not necessarily to reduce our leverage. We want that to be conservative, but to provide flexibility for us in being able to return additional cash to shareholders. And then I think the other piece is around the M&A front is how do we find really good returns to use that cash.

And that's part of what we're doing, that could be a use of cash even with the restrictions we have on shareholder returns. So looking at all those options, and considering those very hard, our game plan right now is to execute our strategy, show the results over the next couple of quarters and let the market reward us when it's time..

Great. And that was kind of my second question is, I do like the thought of being very opportunistic.

I mean if you can do something that increases free cash flow per share, which then in turn increases your ability to return capital on a higher per share basis to someone like me who wants to own the stock for the next decade, because there's a huge tailwind here. I mean, I'm 100% supportive of that.

I think like it just seems like we're in this zone right now where there's such a phenomenal opportunity because of broader market volatility, that anything we can do to set ourselves up to take advantage of anything that happens in the next few years would be phenomenal. So I just appreciate that..

Great. Eric, I appreciate the comments and questions there because, again, we -- share your views. Again, we see a long term, long run way here for FET. We've outlined the areas where we see the growth for us to grow above and beyond. But the baseline is we do need more energy.

We need to make the investment around the world, and we are really well positioned to take advantage of that. Thank you..

Our next question comes from the line of Daniel Pickering from Pickering Energy Partners..

So I've got 3 or 4 questions, bear with me. Let me start kind of where Eric was at. He talked about paying down debt to free up the indenture.

Can you talk about can -- do you have to do open market purchases of debt? Or is there any way to remind us the call features of the debt right now?.

Great, great question. We can do open market purchases. And because a couple of years ago, we did retire some debt through that mechanism. The debt is callable and became callable in August of last year. So the debt is callable at this point. is the current premium on the call today, and that steps down in August to, I believe, , Dan, at that point.

So we've got that option to call or make a bigger move or do something on the open market to get that debt number down..

And your revolver today, you said 100 -- I can't remember the number, $120-something million.

What's the rough interest rate on that revolver at this point?.

It's $176 million of availability under the revolver. Interest rate, Dan, is -- it's now we just amended that to switch from LIBOR to SOFR, and so that is SOFR plus. And so we're trading -- I believe that rate is somewhere in the 7%-ish range right now. I don't have that off the top of my head, but that feels about right..

Okay. So call it, 7%, plus or minus. On the share repurchase side, I just -- this is a math question, and I apologize for the detail. But on the press release, you show $5.4 million of share repurchase, and then you talked today on the call about $3.5 million or something like that.

Is there -- was there -- what's the difference between those 2 numbers? Was that some internal stock repurchases? Or how do I reconcile the $3.5 million versus the $5.4 million?.

Yes. Great question. And we -- the delta there is tied to employee incentives and shares that were repurchased for tax purposes..

Got it. Okay. So you still have some firepower on -- under our indenture, a couple of million. Okay..

Yes. Yes. Call it, $2.4 million of ability there, yes..

Got you. Last question around -- so this kind of ties to the stock performance. We sold off pretty hard. I've made the assumption that some of your converted debt to equity holders have exited.

Do you have any color on -- do we have those guys out of the stock at this point? Are they still there? How do you feel about kind of just the overhang associated with the debt-to-equity swap?.

Yes, Dan, great question. And in a few weeks, we'll have a much better view on where everybody's holding stand. And our conversations with the holders, if you think about that group, we've got a group now that own quite a few shares, but they also still own quite a bit of debt.

And so we've spent a lot of time getting to know those larger holders well and be there. I think we've got some supportive holders in that group that see and understand the longer-term value. I think the other part of the equation is in looking at that, we did see a pretty material jump up in our trading volume right in the middle of the quarter.

And that came at the time with our stock price dropping a little bit faster than the market there. Our assumption there is that was a -- or a couple of holders selling some of their holdings. I don't think, by any means, we've seen that sold down at this point.

Volume just isn't quite high enough, but probably have another -- good another quarter or 2 of trading at our current activity level to really move through that..

Okay. Great. Your margins beat me to the upside.

And so when we think about the look forward from a margin perspective, is there anything about mix or pricing that would kind of change margins from here? Or do you expect that they kind of trickle up during the remainder of the year?.

Yes. Dan, I think we expect the margins to continue to increase through the year with our operating leverage. We are seeing some improvement in cost with our supply chain, and we expect to see that come through. Also, as we are introducing new products, we are getting higher margins for those products that standard.

So all -- we're excited about the look ahead. Again, we reaffirmed our guidance because we've sat down with our teams. We've sat with our customers. We feel good about the rest of the year..

Sure. Neal, you give good disclosure on your revenues on a quarterly and annual basis. '22, you were about 67% international. You're 70% in the fourth quarter. Your discussion is obviously bullish around the international outlook. Where do you think we -- what do you think '23 and then maybe even '24 looks like on that mix basis, U.S.

versus international?.

Yes. I think we continue to see the international growth -- again, I think we're well positioned with the capital equipment cycle. We've seen in the United States. I think we're going to see it obviously at a bigger level internationally. So I think that's going to continue to increase.

So I don't have a number, but as we said in our earlier remarks that in the past cycle, international sales were approximately 50% of our total revenue. I can see us trending in that direction..

Great. And then John asked -- kind of asked the M&A question, but can you give us sort of a qualitative look at the environment? I know that -- I know there are a lot of private equity-owned businesses that are reaching the end-of-fund life, things like that.

Do you sense that kind of seller expectations are coming back to reality or more into reality? It's really just kind of a pacing around M&A type question..

I don't think so yet. I think the -- there's been a slight compression in multiples for publicly traded companies. And again, that has to work its way, I think, through the private side. And I don't think it has quite yet. I think there's still some anchoring back to last year or before that even.

And so I think we just need to see some more time to it -- to get the sellers back in line..

Sure. Well, I guess the good news is you've got your businesses doing fine as is. It would be nice to bolt on in this environment. And if you want to do anything, I mean you don't have to be urgent or pay crazy numbers to get there. So....

That's right, Dan. I 100% agree with that. I mean we -- I love our business that we've set up. I think our organic growth has significant upside, especially as we continue to add rigs internationally and around the world to handle what we really need to get balanced in the oil and natural gas markets.

But I'd love to add some bolt-on or even transformative acquisitions that could step us up. We're willing to do it with, I think as Lyle mentioned, the right industrial fit, that also we can increase our margins. And finally, we don't want to be in a leverage situation like where we are now, and we want to continue that going forward..

Sure. Last question, $15 million is the CapEx number for the year in terms of guidance. You're notably below that run rate in the first quarter.

Is there a specific -- are you building facilities? Or is there a specific project that gets you to that $15 million number? Or are you just kind of giving yourself some leeway to accelerate spending into strong markets, if you see them?.

Yes. So there's no specific or large project in those numbers, Dan. So we do have a lot of flexibility to spend that CapEx when we do see the opportunity. So I think we'll be very diligent and smart with that spend to make sure when we do spend it, we have a clear line of sight to an opportunity..

Thank you. I would now like to turn the conference back over to Mr. Neal Lux for closing remarks..

Thank you, Gigi. We are excited about the opportunities that are in front of us and our ability to win more than our fair share to enable growth going forward. I am extremely proud of the FET team's hard work and dedication, and I am confident that we will deliver on the high expectations we have set for the year.

Thank you for your support, and we look forward to talking to you again in August to discuss FET's second quarter results..

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