Good morning, ladies and gentlemen, and welcome to the Forum Energy Technologies Second Quarter 2022 Earnings Conference Call. My name is Lilia, and I will be your coordinator for today’s call. As a reminder, this conference call is being recorded for replay purposes. I will now turn the conference over to Lyle Williams, Chief Financial Officer. Please proceed, sir.

Thank you, Lilia. Good morning, and welcome to FET’s second quarter 2022 earnings conference call. With me today is Neal Lux, our President and Chief Executive Officer. We issued our earnings 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. During today’s call, all statements related to EBITDA refer to the adjusted EBITDA. This call is being recorded, and a replay of the call will be available on our website. I will now turn the call over to Neal.

Thank you, Lyle. We just wrapped up a great quarter with a lot of highlights. Second quarter bookings were over $200 million, the highest since June 2019. We’ve increased our backlog for six consecutive quarters. Gross margins were the highest in three years. Revenue and EBITDA are up 25% and 138% respectively on a year-over-year basis. We are now more profitable than prior to the pandemic. These excellent financial results are the product of our business strategy and the improving macro environment. Two years ago, we implemented a strategy to radically improve the profitability of FET by maintaining a lean cost structure, focusing on markets where we have meaningful share, and commercializing new products. Today, I want to thank our team for executing on that strategy. These initiatives have served us well over the past few years and positioned us for outsized returns as activity accelerates in the current environment. Our market is the best it has been in many years. Macro economic indicators signal an extended period of growth for our industry. Oil and gas inventories remain at very low levels. Worldwide spare capacity is limited, and increases in supply cannot occur until investment grows significantly. Oilfield service companies have increased spending on consumable items and replacing capital components just to maintain current activity levels. These customers will need to invest more in equipment upgrades and new builds to grow activity further. FET is meeting these demands with a differentiated portfolio of consumable and capital products. On recent calls, we have highlighted a few of our new capital products, such as the FR120 Iron Roughneck for drilling rigs, and Serpent Series manifold and flexible hose systems for hydraulic fracturing well sites. This quarter, I want to highlight two of our consumable and aftermarket items. The first example is our high-quality wire line, conventional, and greaseless cables used by completion-focused service companies. The performance of these electric line cables is critical to the efficiency of zipper and simultaneous fracturing operations. Our teams, with many years of field experience, have developed innovative designs that can run in and out of the wellbore faster while lasting longer than competitive offerings. This performance has allowed us to win new customers and gain market share. Another example is within our drilling product line. One of our products is mud pump consumables. I recently visited a customer’s drilling rig with our technical team and inspected one of our patented branded bore fluid modules. Even though our module has many years of service, it was in almost new condition. The module performs significantly better than competitive products from low-cost countries, which tend to fail in less than a year. While I was very pleased with the durability of our product, I was even more excited to see our customer recognize its value. Our customer teams in the field want more reliability and performance over cheap and disposable options. This is a change in sentiment from the last few years and will favor manufacturers of highly engineered solutions like FET. Before handing it over to Lyle, I want to summarize that FET is in an outstanding position to thrive. The market fundamentals are the best they have been in many years. There are very few industries that have the wind at their backs like we do. We have the right portfolio of products to address fast growing niche markets in traditional oil and gas and new energy applications. Over the past two years, activity increases have driven strong revenue for our drilling and completion consumable products. Demand for our capital components will add another lever of growth. FET is well positioned for this demand. We have the capacity to increase revenue by 50% or more without significant growth in capital expenditures. Very few companies are in the position to excel like we are. I’ll turn the call over to Lyle for more detail on our second quarter results and our updated guidance.

Thank you, Neal. Our second quarter financial results were indeed strong. Revenue of $172 million and EBITDA of $15.5 million both exceeded the high end of our guidance range. EBITDA margin was 9% for the second quarter. On a sequential basis, revenue and EBITDA grew by $17 million and $7 million respectively, yielding a 38% incremental EBITDA margin. Revenue growth was roughly in line with the increase in the U.S. rig count, and our sequential bookings growth of 23% resulted in the second quarter book-to-bill ratio of 118%. Our increased profitability reflects significant operating leverage, continued net price improvement, and favorable mix associated with completions segment revenue growth. Looking ahead to the rest of the year, industry activity continues to drive strong demand for our products. We therefore forecast third-quarter revenue to be between $170 million and $180 million, and EBITDA to increase to between $16 million and $19 million. For the full year, we now expect EBITDA to be near the top end of our previous guidance range of $50 million to $60 million. Second quarter free cash flow of negative $26 million was in line with the first quarter and our guidance. As expected, our net working capital increased by $30 million, as revenue drove higher accounts receivable and inventory grew to mitigate supply chain challenges. We also made our semi-annual interest payment of $12 million at the beginning of the second quarter. As indicated last quarter, we forecast net working capital to decrease by the end of the year. We estimate second half free cash flow to be between positive $30 million and $40 million. We ended the quarter with total cash of $27 million and availability under our revolving credit facility of $114 million, for total liquidity of $141 million. Since FET is an asset-light products company with minimal required capital expenditures for growth, we expect to see a return to significant cash conversion of our EBITDA over the near-term. We will continue to look for ways to free up cash from our balance sheet to reduce net debt. For example, subsequent to the end of the second quarter, we sold the inventory and assets associated with one of our non-core drilling products to a competitor. The sale pulls forward a little more than $1 million in cash by monetizing that inventory and allows us to improve overall profitability. Let me share a few highlights from our segment results for the second quarter. Our Drilling & Downhole segment EBITDA increased by $3 million on a $5 million revenue increase, resulting in the second consecutive quarter of segment incremental EBITDA margins greater than 50%. Significant operating leverage and pricing in our drilling product line and favorable mix drove this strong performance. Orders for the Drilling & Downhole segment grew by 5% driven by strong growth in our drilling capital equipment, where we are seeing inquiries and orders accelerate as domestic and international customers upgrade and build new drilling rigs. Highlights for the quarter include an order for two drilling catwalks from a Middle East contractor. Orders for our new FR120 Iron Roughnecks tripled, and bookings for our Hawker Well service units nearly tripled in the quarter. Completion segment revenue was $66 million in the second quarter, an increase of $14 million or 26% sequentially. Bookings for the segment were $65 million for a book-to-bill ratio just under one, which is typical, as most of our completion products are short cycle consumables. All of the product lines in this segment grew revenue on the back of increased demand and improved performance by our supply chain. Of note, our global tubing revenues grew 28% as domestic and international customers increased their orders. Also, our quality wire line revenues grew 33%, with this operation achieving near record revenues in May. We are pleased to see these two strong contributors grow in the second quarter. We are also pleased with a meaningful increase in demand for our hydraulic fracturing capital products. Revenues for our power-ins, GHT radiators, and our Serpent Series, single line manifold and flexible hose offerings grew meaningfully. We’ve received positive feedback from our customers on the performance of our Serpent Series based on ease of setup and downtime reduction compared with legacy high pressure iron. We expect demand to further increase for these capital items, as our customers upgrade existing frac fleets and add new ones. Sequential incremental EBITDA margins for this segment of 28% were lower than typical due to less favorable mix and steel price inflation impacting second quarter results. In our production segment, revenue declined sequentially by $2 million or 5%. As COVID lockdowns implemented by the Chinese government disrupted manufacturing operations and shipments for our valves product line. Since these precautionary measures were lifted in June, our supply chain has recovered, and we expect a lift in the second half of the year. While revenues for the segment were slightly down, bookings were strong for both product lines. Valve bookings grew sequentially by 26% as customer demand increased for every market segment, led by a 35% increase in orders from upstream and midstream customers. Our production equipment bookings grew by $18 million or 85% sequentially. We received a large order from an operator in the Marcellus covering more than half of their demand for 2023. In addition, we’ve received two meaningful orders for electrostatic processing technology equipment from customers in the Middle East. While some of the revenue for these orders will be recognized in 2022, we are already building a solid backlog for delivery next year. Segment EBITDA increased on favorable valve margins and operating leverage in our production equipment product line. Let me provide a few details for modeling purposes. In the second quarter, corporate costs increased by approximately $1 million due to the timing of certain variable employee compensation costs. For the third quarter, we expect corporate costs to be unchanged, interest expense to be $8 million, and depreciation and amortization expense of roughly $10 million. We continue to expect full-year capital expenditures of less than $10 million and cash income taxes of roughly $4 million to $5 million. In summary, FET results reflect solid performance by our team in an improving market. We expect to take advantage of the strengthening market to drive further revenue growth and enhance product margins. With a decrease in our net working capital, we expect to generate positive free cash flow. Now let me turn the call over to Neal for closing remarks.

Thanks, Lyle. The story is simple: industry fundamentals are strong, orders are accelerating, and profitability is increasing. FET is a compelling company with a great future. Operator, please take the first question.

Thank you. Please stand by while we compile the Q&A roster. Our first question comes from the line of John Daniel from Daniel Energy Partners. Your line is open.

Good to see bookings and margins heading in the right direction. If you please forgive me, I’m away from my desktop, so I haven’t had a chance to really scrub the release and everything, but you caught a lot of nice victories and wins in terms of opportunities going forward. Can you kind of rank for me, if you will, like most excited over the next call it 6 to 12 months?

Yes, I think John, as you said, we had a lot of strong momentum across the portfolio. So we start with consumables like our artificial lift business multi-solution saw on the completion side with quality wire line and global tubing, also seeing good growth with our drilling consumables, but we also see more inquiries and orders for our capital equipment in the stimulation line product line with single line manifolds and power ends. We are also seeing good inbound inquiries for subsea ROEs.

I heard correctly, you called out a situation where a customer was basically pleased with your product offering and perhaps shying away from a lower price offering. Normally, at least for the last couple of years, it’s been people buying the cheapest they can get. Do you see this trend continuing? From an ESG perspective, do any of your customers care about buying American and North American versus international? Just any thoughts there would be appreciated.

John, that’s a great question. Again, we are seeing a flight to quality. Our customers are working very hard, fracking more hours at increased rates. They need reliable equipment. A few years ago, cash was tight, and the industry environment was tough. Our customers did what they had to survive and generate cash. Today, they are doing really well. We have seen a lot of great earnings reports from various segments. They are busy and they need reliable equipment, so I do see a flight to quality.

And then the last one for me, sort of not asking for pro forma guidance, Neal, but your book-to-bill is 1.2 times. Where do you think this could realistically get to over the next year?

You know, for us, it’s... I think it’s a great question. We’re excited about our industry, and when you think about the macro environment, it is really strong. I think there’s an obvious need to increase rig count. Our revenues could grow with the activity. You know, a thousand rigs next year could be quite possible, which would get us to a run rate of approximately $1 billion. With strong incremental margins, we believe that’s a transformative result.

Thank you for taking that and giving the answer. I appreciate it.

One moment for our next question. Next question comes from the line of Dan Pickering with Pickering Energy Partners. Your line is open.

Hi, Neal.

My phone blanked out as you were talking about your revenue potential at a thousand rigs next year. I think you’ve said $1 billion, but I just want to confirm that.

Yes, Dan, as Neal mentioned, we do correlate really well with U.S. rig activity. While that’s not always the driver of each of our product lines, it does correlate well. Our historic correlation would say a thousand rigs is roughly $1 billion of revenue. That’s 50% more than we have. We feel good about our capital capacity to be able to do that, and we could do 50% more revenue without significant CapEx in our facilities. The flow-through and drop-through of operating leverage and what that means from the bottom line is impressive. We’re excited about the potential, but we need to watch what our customers ultimately do with CapEx.

Yes, that makes sense. While during the call, I didn’t hear you talk much about pricing. Can you just give us a view on kind of gross pricing and net pricing? Are you able to pass along your cost increases? Can you ballpark for us what kind of new orders look like from a pricing perspective?

Sure, Dan. We’ve been talking about pricing for nearly a year now, pushing pricing and winning pricing gains really across the board. I think your question touches on where we’re getting net pricing gains that exceed inflation. The areas where we’ve seen those most net pricing gains are in our differentiated products where we add additional value to our customers. For example, the drilling fluid end module that Neal discussed allows us to push prices effectively. We’re also starting to see some net pricing gains even in more commoditized products. So we’re seeing pricing across the board and continue to push that as it goes. It’s important to note that our prices are still below where they were back in 2019.

And does it flow through almost immediately, or does it take a little while to push prices and realize it? Is it really a 2023 event before it impacts margins, or could we see that as quickly as Q4?

Yes, Dan. It depends on the nature of the products. For our consumable products, which are more book and ship, we’ll see that flow through more quickly. For items like our capital products or orders for production equipment that will ship mostly in 2023, any gain will take longer to realize. Our second quarter incremental EBITDA margins of 38% were substantially higher than our gross margins. That indicates some operating leverage is clearly at play, along with a favorable mix in completions while recognizing some net pricing benefit.

Got you. When you think about energy transition, I know you’ve talked in the past about that area you hope to generate additional revenues from going forward. Can you talk a little bit about where you might see your products applicable for non-oil patch applications?

Yes, Dan. As an equipment manufacturer, we have the engineering and capability to produce various products. Fortunately, our portfolio is adjacent to many of those energy transition markets. A good example is offshore wind farms. Those wind farms require support for installation and maintenance, and our ROVs from our subsea product line, with decades of experience, are really well positioned to address that. We also see mission control as key, especially at the well site and with our production equipment product line; we are touching those customers today and developing new products and technologies to help with that.

Okay. And last question, Lyle. Working capital, you guided toward a substantial kind of release of working capital, if you will, or free cash for the second half of the year. I think you mentioned, will we see free cash net for 2023 or for 2022? And then as we look to ’23, if that $1 billion number happens, would you see consuming working capital to help deliver that revenue growth?

Dan, good question. To recap key points on cash, in the first half of the year, we grew our net current assets excluding cash by about $50 million, with most of that resulting from increased inventories, which we planned to mitigate supply chain issues. We built a good buffer there. Looking ahead to the back half of the year, our guidance implies a slowing rate of top-line growth, leading to lower growth in receivables, but we expect inventory balances to turn and decline. We believe we can pull out the buffers we’ve put in place as we move forward. FET has historically had high free cash flow relative to our EBITDA due to low CapEx. We are in good shape there. While we will need to build some level of working capital as we grow, we expect strong cash flow conversion metrics along with solid top-line growth.

Great. Tailwinds are behind you. Thanks, guys.

Thank you, Dan.

Our next question comes from the line of Eric Carlson. Your line is open.

Hi, guys. Congrats on the results. I’ll maybe just piggyback a little bit on what everybody else has said and kind of when we focus on the outlook maybe going into the end of the year into 2023 and the cash flow available, what do you guys look at in terms of return of capital? I know that there’s a buyback outstanding. Some comments on that would be great. Additionally, I believe there’s some debt outstanding, $116 million of that principal value automatically converts at $27 per share. Clearly, we’re below that number now. As we look ahead, is there any ability to call that debt and remove approximately 4.3 million shares of dilution?

Yes, Eric, I think redeeming bonds prior to conversion, if we have the free cash flow, is a good investment. We would consider it as we generate free cash flow.

Eric, let me jump in with some detail. In the first half of the year, we did consume a good amount of cash in working capital. Overall, leverage for us as a company is still higher than we would like to see it. We need that overall leverage to come down. Free cash flow is a step in the right direction and seeing net debt come down is also important. We’re looking at all options to manage that leverage. I mentioned the small asset divestiture that we completed, which isn’t a giant needle mover for us but indicative of our strategy to get there. Regarding the convertible notes, about half of the notes will convert when our stock trades at $30 a share. We see that as a key driver as we’ve had that plan in place for the last couple of years, but $30 a share is a bit out of reach for now. So, we are considering other options to efficiently manage our debt. We have three years until maturity, so we have time to address that, and we’ll look for methods to improve our cash flow and reduce our leverage.

Our next question comes from the line of Peter Ehret with ERS of Texas. Your line is open.

Congrats on the quarter. I’m sure that’s got to feel pretty good at this point after a long time. So anyways, congrats on nice work, and thank you. Going back to the notes just for a minute; I know that there’s not a lot of liquidity there. So, couldn't do a lot anyways with just open market purchases, but did you do any of that during the quarter? And do you at least try to chip away on it in that way?

Yes, Peter, let me take that. We did not repurchase any notes in the quarter. As you mentioned, liquidity is really thin on the notes. Our larger repurchases were back in 2021 following the asset divestiture at the end of 2020; that was a return of cash to note holders as mandated. There are opportunities to consider. The notes have traded a little below par, but the liquidity is very limited. A key change for us is that in August, the effective no-call period on those notes expires and presents a new opportunity that we haven’t had until now.

Yes, of course. All you could do is buy in like $1 million, $2 million kind of things, and it wouldn’t make a lot of progress, but at least save you on dilution if the stock does hit $30. The other thing I was wondering about is what do you see out there in terms of M&A activity? Are things picking up? What are your general thoughts on the bid-offer spreads?

I think we’ve stated in prior calls that we see ourselves as a logical consolidator. We made a strategic acquisition last year in our drilling product line with Hawker Well Works. We believe that type of acquisition makes sense. We also seek technology that is disruptive or addresses new energy applications, like our Reach production solutions acquisition at the end of last year. We’re always on the lookout for good opportunities. We continue to analyze our portfolio and want to ensure we focus on the highest margin products and the largest addressable markets.

Peter, we’re indeed seeing more activity in the M&A markets. Sellers, whether they are private equity firms or family-owned businesses, are seeing a rising market as an opportunity to monetize. However, the bid-ask spreads are still quite wide, as sellers often have inflated expectations while buyers recognize the high value of cash in this market. Consequently, we haven't seen many deals completed as a result but anticipate continued activity in this space.

Thanks, Peter. This will conclude our call. We thank everybody for joining us today.

Ladies and gentlemen, that concludes the conference for today. Thank you for your participation. You may now disconnect.