Good morning, ladies and gentlemen, and welcome to the Forum Energy Technologies Fourth Quarter and Full Year 2023 Earnings Conference Call. My name is Gigi, and I'll be your coordinator for today's call. This conference call is being recorded for replay purposes and will be available on the company's website. 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 Fourth Quarter and Full Year 2023 Earnings Conference Call. With me today are Neal Lux, our President and Chief Executive Officer; and Lyle Williams, our Chief Financial Officer. Yesterday, we issued our earnings release, and it is available on our website. This earnings release follows our preliminary press release issued on February 19, 2024. Subsequent to that preliminary release, we finalized our analysis of valuation allowance. No valuation allowance releases were made as a result of this analysis. Please note that we are relying on the safe harbor protections afforded by federal law. Listeners are cautioned that our remarks today may contain information other than historical information. These remarks should be considered in context of all factors that affect our business, including those disclosed in FET's SEC filings, our earnings release, and the Variperm acquisition announcement. 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. And unless otherwise noted, all yearly comparisons are full year 2023 to full year 2022, and quarterly comparisons are fourth quarter 2023 to third quarter 2023. I will now turn the call over to Neal.

Thank you, Rob, and good morning, everyone. 2023 was a transformative year for FET. In addition to executing our strategy, we accomplished two significant milestones that accelerate FET's long-term growth trajectory. We began the year by reducing our long-term debt by 48%, and we ended 2023 with the announcement of the Variperm acquisition. This highly accretive acquisition demonstrates strong business logic while maintaining conservative net leverage and strong liquidity. Variperm's differentiated products and patent-protected technologies complement our artificial lift product portfolio. This combination expands the total addressable market for FET's artificial lift product family. Together, we are a formidable manufacturer of highly engineered products and solutions, and we expect the larger and more profitable FET will generate significant financial returns for our shareholders. In 2024, we are forecasting EBITDA of $100 million to $120 million and free cash flow between $40 million and $60 million. These results at their midpoints would represent 64% and 25% growth for FET. This is what we mean by transformative. In addition, we executed our organic growth strategy in 2023. Excluding the contribution from Variperm, we leveraged our global footprint to grow our international and offshore businesses. Industry investment has clearly increased outside the United States, and we are benefiting. Revenue grew in all international regions, led by a 72% increase in the Middle East. In the aggregate, international revenue expanded 23%, more than twice the pace of international rig count growth. For 2023, FET's non-U.S. sales were 38% of total revenue, up from 33% last year. Turning to offshore, we saw a resurgence in demand for ROVs and aftermarket equipment to support oil, natural gas, and wind projects. Orders in our Subsea Technologies product line were up almost 90%, primarily driven by new ROV systems. In addition, aftermarket revenue was up almost 40%, supporting the higher utilization of the current global installed base. In addition to utilizing our worldwide footprint, we continue to develop and commercialize new products. This is accomplished by working closely with our customers to iterate newer and better solutions, further separating FET from our competitors. Let me provide a couple of great examples from our Global Tubing and quality wireline product families. In 2023, Global Tubing produced two world record-setting strings, both delivered into the Middle East. The first was the longest 2-3/8 inch diameter string at over 8 miles long. Our second record was for the heaviest string at 200,000 pounds or the equivalent of a 757 airplane. These milestone strengths increase customer efficiency and capability, allowing them to reach hydrocarbons further from the rig and deeper below the surface. Another example from our quality wireline product family. In the first half of 2023, we set quarterly revenue records, driven by our successful greaseless cable design. Our cable enables faster transitions between frac stages, thereby increasing pressure pumping efficiency. In addition, we commercialized the next-generation cable, which allows our customers to economically perform wireline operations at higher pressures. Another part of our new product development initiatives centers around innovation and market disruption. A great illustration of that comes from our FR120 iron roughneck, which was specifically designed to address our customers' needs for heavier and larger drill pipe. During the fourth quarter, we delivered our 100th FR120 and supplied a record number of units to our customers. In a market where drilling contractors are cautious about capital spending, their enthusiasm for the FR120 demonstrates the value our solution provides. Building on that success, we have commercialized the next-generation iron roughneck. This new design has the same torque capacity as the existing model. However, it is much smaller and will fit on many more rigs. Our drilling team's innovation significantly expands FET's addressable market. The next example is our Frac Automated Switch Technology System, or FASTConnect. The FASTConnect system is a direct replacement of existing zipper manifold. It increases safety by eliminating personnel from high-pressure danger zones. It drives efficiency by completing more frac stages per day, and it improves the well site environmental footprint by eliminating grease. The first system has successfully transitioned between 250 zipper frac stages with an average cycle time well below traditional methods. And the FASTConnect system has had zero downtime after pumping 175 million pounds of sand at an average pressure of 12,000 pounds per square inch, all of this without an ounce of grease, this is amazing. Lastly, our Multilift product family has successfully helped customers mitigate sand and gas challenges in their ESP artificial lift operations for many years. Building on our expertise in the ESP market, we've expanded our product offering into the raw lift market with the commercialization of the Pump Saver Plus. Sand and gas issues can lead to rod lift system failure. Our unique solution addresses these issues and increases annual production while reducing downtime and related costs. With just these three examples, our engineers and product managers have increased FET's total addressable market by $300 million. And in these markets, we have the best solution for our customers. Our innovation is laying the foundation for sustainable and profitable growth in the years ahead. In summary, based on these 2023 accomplishments, FET is a bigger and more profitable company with lower leverage and greater access to a larger addressable market. Shifting now to FET's 2023 financial performance. We delivered revenue and EBITDA growth of 6% and 14%. Our EBITDA margins expanded 70 basis points to above 9%, building on the margin improvement achieved in 2022. Overall, these results were favorable, and 2023 was a good year for FET. However, we are striving to be great. It is helpful to put our performance into context with market conditions. If we go back to this time last year, the industry was coming up on nine consecutive quarters of U.S. rig count growth, with analysts and customers indicating further growth ahead. Internationally, rig count was making a steady ascent, averaging quarterly increases around 6%. Putting it all together, our financial forecast was based on 15% rig count growth. And at the time, this felt like a conservative outlook, especially since the industry had grown 28% in 2022. However, reality differed from the forecast. Commodity prices were volatile the entire year. Global crude oil prices ended down roughly 18%, and U.S. natural gas prices were down 60%. These factors caused global rig count to grow only 4% instead of the 15% forecasted. For FET, these market conditions led to lower-than-expected revenue and EBITDA growth in 2023. And in the fourth quarter, market activity and customer behavior continued the full-year trend as exhibited by lower bookings and delayed payments. Now turning to the 2024 guidance provided earlier in the call, let me share the basis for our forecast. For the year, we assume range-bound commodity prices, with oil between $70 and $85 per barrel and U.S. natural gas prices between $2 and $3 per million BTU. We anticipate a 2024 average rig count to be down around 5% in the U.S., flat in Canada, and up slightly in the international markets. Putting those assumptions together, our plan forecasts a flat global rig count in 2024, with some variability between quarters due to seasonality and budget timing. Also, we would expect operators to flex up or down their spending as the price outlook adjusts. For our service company customers, we expect to see a bifurcation of demand between those focused on U.S. land and those with international and offshore operations. In the U.S., our activity-based consumable product sales should follow market activity. However, we anticipate softer demand for drilling and completions capital equipment. Internationally, we continue to see opportunities and inquiries for capital equipment, and this will be an area of strength for FET. Additionally, we are forecasting continued growth in offshore demand as service companies ramp up operations. Finally, with the commissioning of the Trans Mountain Express pipeline, we assume Canadian oil prices will remain relatively robust and, therefore, expect to see a ramp-up in second-half activity for oil sands development. Putting it all together, we are guiding $100 million to $120 million of EBITDA and $40 million to $60 million of free cash flow. We anticipate substantial improvements in per-share metrics. And with this forecast, FET will generate significant adjusted net income per share. We have the pieces in place for a great year. I am now going to turn the call over to Lyle for more details on FET's fourth-quarter financial results and first-quarter 2024 outlook.

Thank you, Neal. Good morning, everyone. Our fourth-quarter consolidated revenue increased by $6 million or 3%, while global rig count decreased 1%. Our revenue benefited from backlog conversion in our Subsea Technologies and production equipment product lines. EBITDA was down just over $1 million despite the increase in revenue as unfavorable mix and slightly higher corporate costs offset volume growth. Our book-to-bill ratio was 87% for the quarter. This follows the 111% book-to-bill ratio in the third quarter; timing of larger project bookings accounts for this lumpiness. Taking the third and fourth quarters together yields a 99% book-to-bill ratio for the second half, in line with the full-year 2023 result. The Drilling and Downhole segment revenue increased 12%, primarily due to project revenue for ROVs and cable management systems in our Subsea Technologies product line. Segment EBITDA was flat with the third quarter as the increase in Subsea revenue came at lower contribution margin than the overall average. The segment book-to-bill ratio was 87%. Typical fluctuation in order flow for Subsea Technologies drove this low ratio. Recall that Subsea came off a sizable order for four Perry-XLX world-class ROV systems in the third quarter. As Neal mentioned, we expect strong revenue growth from Subsea as backlog has doubled from a year ago and demand for traditional oil and gas and offshore wind remains robust. Completions segment revenue decreased about 8%, primarily driven by lower seasonal coiled tubing sales into the Middle East. In the U.S., completions activity was moderately lower at the start of the fourth quarter before falling sharply with the expected seasonal frac holiday. Activity exited the quarter with 50 fewer working frac fleets than at the end of the third quarter. As a result, completion company customers idled equipment, slowed purchases of consumable products, and delayed demand for stimulation-related capital. However, our stimulation and intervention revenue was essentially flat as we delivered equipment that had been delayed by customers in the third quarter. EBITDA was comparable to the third quarter due to favorable product mix, and the segment book-to-bill ratio came in at 101%, which is typical for this segment. Our Production segment revenue and EBITDA were also comparable to the third quarter. The book-to-bill ratio for the production segment was 63% for the fourth quarter. This result was driven by the Production Equipment product line, where we typically see large project awards and lumpiness from quarter to quarter. I would like to highlight the impressive improvement this team has made in 2023. The segment delivered EBITDA margin improvement of 400 basis points with 42% incremental EBITDA margins compared with 2022. A focus on operating leverage, continued cost management, and the utilization of our Saudi Arabian facility drove this improvement. Turning to cash and the balance sheet. We generated free cash flow of $9 million in the fourth quarter, a result that was well short of our expectation of $26 million. The shortfall resulted primarily from collections. Despite our days sales outstanding coming down, receivables did not decline as much as we expected. Additionally, cash from our longer-term percentage of completion projects was delayed. We also paid a few million dollars of transaction expenses related to the Variperm acquisition. We have recalibrated our expectations going forward to boost confidence in our forecast. Notwithstanding the free cash flow miss, we progressed in our efforts to improve net working capital efficiency. Our accounts receivable balance improved relative to our revenue, as we returned our days sales outstanding metric to historical norms. And given the softer market outlook, our teams reduced the flow of inbound raw material to lower inventory balances and improve our terms. We will focus on maintaining these efficiency gains in 2024. We ended the quarter with $46 million of cash on hand and $147 million of availability under our revolving credit facility, with total liquidity of $193 million. Our net debt was $91 million with a corresponding net leverage ratio of 1.4x. Pro forma for the acquisition of Variperm, which closed in January, our balance sheet remains strong. Our net debt balance would have been $241 million, and our pro forma year-ending liquidity would have been $113 million. With this liquidity and forecasted free cash flow in 2024, we expect to be in a position to retire the 9% senior secured notes later this year if we choose to do so. In the meantime, we continue to explore options to refinance our long-term debt, considering options that provide additional flexibility without excessive incremental costs or restrictions. As we indicated in our November call, we remain committed to returning net leverage to our pre-Variperm levels of 1.7x EBITDA or better. Let me provide some details behind our robust free cash flow forecast. For the year, cash interest is expected to be approximately $25 million based on the 2025 notes and borrowings related to the acquisition. Cash income taxes are expected to be around $20 million, primarily due to Canadian income. Capital expenditures are expected at about $10 million, in line with both FET and Variperm's capital-light structures. Plus, we expect approximately $7 million for other payments primarily related to the Variperm acquisition. Along with flat global activity levels and revenue, we assume no overall change in net working capital. These assumptions and our $100 million to $120 million EBITDA guidance put free cash flow at between $40 million and $60 million. This forecast compares favorably with the combined cash flow we disclosed with the Variperm acquisition announcement. And at FET's current market cap, that's an approximately 20% free cash flow yield. I'll conclude by providing our forecast for the first quarter of 2024. Neal shared that we expect a flat global market this year with some volatility between quarters. Several factors lead us to expect a softer first quarter. These include recent E&P company mergers, downward pressure on U.S. natural gas, and recent volatility in Canadian crude oil pricing following uncertainty about the timing of the Trans Mountain Express pipeline start-up. Each factor presents near-term headwinds for customer activity. Therefore, we forecast revenue and EBITDA ranges of $200 million to $220 million and $23 million to $27 million, respectively. For the first quarter, we anticipate negative free cash flow typical of our seasonal use of cash. We believe industry activity will be higher through the remaining quarters, supporting our full-year guidance. Here are a few details for modeling purposes for the first quarter. We anticipate corporate costs and interest expense to be $7 million each and depreciation and amortization expense of roughly $12 million. As Rob mentioned, we did not adjust our valuation allowance following our analysis. Should we adjust these allowances in a future quarter, the result would be a one-time decrease in income tax expense and a similar increase in deferred tax assets. Let me turn the call back over to Neal for closing remarks.

Thank you, Lyle. We are excited to now have Variperm in the FET family. Their contributions along with FET's legacy business will generate significant financial returns for our shareholders. Our global footprint allows FET to navigate any volatility and uncertainty in the markets to deliver to our customers wherever they are in the world. Our DNA is built on developing new and improved products and solutions to enable greater efficiency and safety for our customers. This innovation is at the core of what we do. Before turning the call over for questions, I would like to thank our employees for their dedication and tireless efforts. Your commitment to doing the right thing and taking care of our customers is the cornerstone for FET's success. Gigi, please take the first question.

Our first question comes from Blake McLean from Daniel Energy Partners.

So I want to talk a little bit about Variperm. As you guys have continued to dig into the business, I was wondering if maybe you could provide us a little bit of an update on integration, synergies, cross-selling opportunities, anything like that you could share?

Yes. That's a great question. And I think the integration, first of all, is going really well. We set up to let them run the business as they were. Again, they're great leaders and executors, and we want to continue doing that. And so our main focus is getting them to be ready as part of a public company. So that's the work we're doing there on the integration. As I look at the synergies that we have, what's exciting to us is we mentioned in our comments that we think there's a great opportunity to expand our addressable market for artificial lift products. So we're actively working together with the Variperm team to look at cross-selling our Multilift product line into Canada to the oil sands customers. Early stages now, but we think that's a great opportunity to expand our addressable market into Canada, especially with a great product line with Multilift.

That's good. Okay. That's helpful. Look, I know you guys are kind of knee-deep in getting kind of that over the finish line and working through integration. But I was hoping maybe you could give us a little color on the opportunity set for additional M&A. Kind of what does the market look like for smaller tuck-in acquisitions or Variperm-like deals, specific business or product lines that you guys find particularly interesting? Any color around that would be helpful.

Yes, that's a great question. I believe there are numerous opportunities available, and we have built a solid pipeline that we continue to evaluate. The Variperm deal was a huge success, and while it might be challenging to find another deal of that caliber in terms of value and margin, we will keep searching. We are particularly interested in areas like artificial lift, downhole operations, as well as frac and stimulation services. However, our priority is to achieve the goals we've established. We want to maintain a conservative leverage on our balance sheet and find a business that has strong industrial rationale, aligns well with our portfolio, and ideally offers nice accretion. In the short term, we will keep enhancing our pipeline while also delivering on the commitments we've made regarding the Variperm acquisition.

Yes, Blake, it's Lyle. I want to add that, as Neal mentioned, the market is active. We're witnessing an increase in completed transactions and more engagement from both buyers and sellers. From our viewpoint, it's crucial to note that FET has a wide range of product lines, providing us with numerous opportunities. This broad range allows us to target various areas that have solid industrial logic for potential combinations. While it can complicate our operations since there are more elements to manage, the overall opportunity is promising. Coupled with the anticipated free cash flow from FET reflected in our 2024 forecast, we have a significant chance for future growth. As Neal indicated, our immediate focus will be on finalizing the Variperm acquisition and restoring our balance sheet to our desired leverage levels before considering any additional debt. Nonetheless, there are many exciting opportunities ahead for us.

Our next question comes from the line of Dave Storms from Stonegate.

Just hoping we could start with kind of the cadence around your guidance and any seasonality that we should watch out for. It sounds like the first quarter should be typical. I'm just curious, as Variperm comes more online, as the Trans Mountain pipeline gets closer to completion, if there's anything out of the ordinary we should have on our radar?

Yes, Dave, this is Lyle. Happy to talk through that guidance. I think like our overall guidance has just a few features just to reiterate those. But overall, flat global activity, U.S. being down about 5%. I think the Canadian market looks flat for the year. And in the rest of the world, grinds a little bit higher. So as we look at our revenue set in with the addition of Variperm, then that means some differences in where the products might come in and where they might go. Q1 does look softer, as mentioned in the specific remarks with the other quarters being higher. Just to highlight for folks who may not be as familiar with Canada, the second quarter is generally a soft quarter in Canada due to the seasonality of breakup when operators need to slow down as the permafrost thaws and they've got that issue. So that will be a seasonality that we would expect. But activity-wise, we think grows through the year internationally and is flat kind of overall for the year.

Understood. Very helpful. And then just looking at Subsea, it's great to see that it doubled its backlog. What are the lead times like here? And is there any potential for capacity expansion?

Yes. Good question. Lead times for the Subsea ROV systems are generally less than a year. So we'll book an order and deliver about a year. There are some special products that we make that would extend longer than that. But when we talk about ROV systems and cable management systems, those are generally less than a year from booking to delivery. As far as capacity, the facilities that we have in place had operated at much higher production levels in years past. So just like most of FET, we could increase our revenue by, let's call it, 50% or so with very minimal capacity investment or CapEx investment. So a lot of operating leverage built in for us. It's adding the raw materials and wouldn't necessarily adding some labor.

Understood. And then just one more for me, if I could. Great to see international growth outpacing the rig count there. Any lessons learned there that can make this repeatable? And kind of how much more runway do you see in the international market?

Yes, we're excited. As we mentioned during our call, we continue to see inquiries and opportunities for drilling capital and Subsea equipment outside the U.S., indicating that our prospects are still strong. A key factor in our success is our international presence, particularly our manufacturing facility in Saudi Arabia, which allows us to engage in more projects by utilizing local resources. Our main takeaway is that we have remained dedicated to being an international manufacturer, and we are now seeing the benefits of increased investment outside the U.S.

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

If we could talk just a little bit, Neal, maybe. I know North American business looks softer, onshore business looks softer. Is that primarily activity? Are you seeing any pricing pressures at this point or is pricing holding steady? And is there any particular business line you'd call out any pricing implications?

Yes, I think it's been fairly steady. Certain product lines may see some variability, but overall, pricing has remained stable. We've adjusted our capacity in line with our customers' adjustments, whether they are pressure pumpers or drillers. Lyle mentioned that we're slowing down inbound raw material, which means we won't have as much available to meet demand. This allows us to maintain pricing at a reasonable level. We will also continue to explore opportunities for innovation. In areas where we have introduced new products, we typically observe better pricing and improved margins, and we'll pursue this strategy moving forward.

There has been a lot of discussion regarding the Red Sea and the potential for supply chain disruptions. Have you experienced any issues or do you expect any problems related to the supply chain?

We have not seen the higher cost roll through yet, but we do expect there will be higher freight costs just due to the amount of time to go around and the availability of the containers and the ships obviously take them. So we do see some higher costs coming in a little bit of variability. I think for us, we are in a, again, inventory reduction mode. So we have on hand a lot of what we need, and we're not kind of hand to mouth like we were maybe one and a half years or two years ago. So I think we're in a better position. The industry is in a better position, but we do see some higher costs coming through on the freight side.

Subsea, you've indicated that the backlog has increased significantly. Looking at the divisional revenues listed in your press release, for Subsea, the revenue was $74 million in '21, $76 million in '22, and approximately $70 million in '23. Considering how the backlog is processed, are we expecting this to improve noticeably compared to what we've experienced over the last three to four years?

I think the timing of delivering the backlog plays a role here. We do expect it to improve compared to 2023. We started the year with a stronger backlog than in previous years, and we continue to see positive activity. One factor to consider is that in 2023, we experienced strong aftermarket demand, which we hope will carry into 2024. However, if there is any slowdown in that demand, it could negatively impact the backlog we currently have.

Yes, Dan, to clarify, we are anticipating an increase in Subsea revenue due to both our existing backlog and the inquiries we are seeing moving forward. A key advantage for Subsea is that we recognize revenue over time based on the percentage of completion for our larger projects, unlike some of our other product lines that recognize revenue upon shipment, which can lead to more variability. This approach helps stabilize our revenue flow and means that we will realize some revenue from that backlog this year and additional amounts into 2025. Therefore, we expect Subsea revenue to be a key driver for us this year.

Okay. Lyle, you mentioned percentage of completion accounting, which leads me to my next question regarding your earlier comment about some customers not paying as expected. Was that a timing issue or a matter of customer quality? Are they simply being stingy? Please share more about the situation with collections.

Great question. And we've talked about collections, Dan, over the last several calls as a challenge with our free cash flow. And you can see it if you look back at our days sales outstanding kind of climbed through the year early, and we've ended them at about the same point that we ended last year. So we got back on track. I think looking at the fourth quarter specifically, our challenge, our expectation by looking at what was due was that we would have achieved a greater amount of collections in the fourth quarter and, therefore, better free cash flow. We did get back to where we started the year and now our challenge is to continue to work forward. We've got a great customer base. So the customers that we sell to that make up the majority of our revenue are really blue-chip operators. They're blue-chip service companies. We don't ever feel like we have a credit issue that's driving our collections problem here. I think it is one more of timing. There's some process that needs to be improved on our side and maybe on our customers. And I think everybody in our industry is working hard to manage their cash flow, especially at year-end periods like we just went through.

And I think with that, looking ahead into '24, we did recalibrate our forecast to assume that our customers are going to hang on to their cash like they have been. And we aren't forecasting a bump in collection. So that $40 million to $60 million range kind of assumed status quo without any improvement. But again, that's something that our teams are actively working on to improve.

Yes. Okay. And so in your free cash guidance, you assume no net working capital improvements. Maybe we beat that with some of these efficiency measures that you're talking about?

That would be our goal, absolutely.

Great questions, Dan. I think from a structure question first, part of the integration work that we're doing is answering that question internally. How do we best organize Variperm so that we can get maximum benefit of sharing across product lines? Neal mentioned opportunities with artificial lift. So we're exploring what those others are. And timing-wise on that, we'll report Variperm's first quarter with FET financials in the first quarter. So we'll definitely have that pin down in the next quarter here. From a historical perspective, we will be filing an S-3 with some historical financials for Variperm. That will happen here in the next month or so. And so we'll have those numbers out, and that'll be through the third quarter of 2023. And then later in the year, midyear, will pop in the fourth quarter as well after that audit is finished. So we'll have good historical view come shortly and kind of roll that out as we get the historical audits completed.

Great. Last question, I promise. Can you clarify your comment on the balance sheet? You mentioned that the reported net debt of $91 million would be $241 million pro forma. This suggests that the cash cost of the acquisition is $150 million. I assume this means that no cash was utilized from the balance sheet as part of the Variperm consideration, and we drew our credit line for the full amount. Is that correct?

Right. So all those numbers, Dan, are net debt. And so there's some movements on the margin of cash, either cash coming in or cash going out for the transaction. But in general, we did borrow the seller note, which is about $60 million, and the bulk of the rest of that $150 million went on to the revolver.

Okay. Given your cash balance of approximately $43 million, how do you assess what is necessary to operate the business globally and how much cash should remain on the balance sheet versus what is needed to pay down the revolving credit line?

Yes. No. Also a good question. And with the global operations, we do have cash around the world. Very little of it is truly stuck cash that we can't access. And so as we've looked at it and looked at the business, we can take that number of cash on hand down pretty far. We've got that agreement in with our ABL lending banks as well that anything over a certain amount of cash, we do sweep to them. So we can get that number down pretty far, kind of, call it, in the $20 million to $30 million range as we manage cash around the world.

Our next question comes from the line of Eric Carlson.

I was wondering if you could provide more details on the deferred tax assets and the valuation allowance. What factors influenced your decision on whether to take action now, particularly considering the positive net income from Variperm? Additionally, could you elaborate on the net operating loss carryforwards and the deferred tax allowance? What potential impact would releasing that have? With the positive net income reported in Q1 and Q2, does it open the possibility for a release? How do discussions about this with the auditors and internally typically proceed?

Thank you for your question, Eric. It was certainly disappointing for us to postpone our earnings call last week regarding our BAs. To provide some background, as we incur tax losses in various jurisdictions worldwide, these accumulate over time and form the NOLs or loss carryforwards that appear on our balance sheet as a deferred tax asset. In recent years, we have assessed these assets and, in most cases, established valuation allowances to indicate that it is more likely than not that we will not utilize them. As we attain net income in different jurisdictions globally, we need to evaluate whether it is still appropriate to maintain these allowances against our deferred tax assets. The analysis focuses on our profitability trend and, more importantly, future expectations. In this particular instance, we had one jurisdiction, Canada, where we were nearing a decision point regarding the need to assess a release. We conducted the necessary work and feel confident in our conclusion. If this trend persists and we continue to gain confidence in future earnings, that could lead to a release of the valuation allowance. This process would result in a one-time reduction in income tax expense and a corresponding one-time increase in our deferred tax assets. If and when these occurrences happen, we will certainly highlight them. Specifically regarding Variperm, its operations are mainly in Canada, which is one of the few locations where we pay income taxes and do not have NOLs to offset those. Therefore, the acquisition of Variperm does not significantly relate to our NOL and valuation allowance discussions.

That's helpful. Looking at cash flow again, it's beneficial to get your outlook and what contributes to that. Despite the activity pressure on the U.S. side, where activity is down about 20% from last year, the Variperm transaction seems well-timed regarding the runway for 2024. There is also significant potential for upsides in the legacy business that is more focused on the U.S. Currently, we have $46 million in cash on the balance sheet and expect to add another $40 million to $60 million by year-end. If we did nothing with that cash, which we obviously won't, we would be holding 35% to 45% of the entire market cap in cash. The Variperm deal showed that good acquisitions and returning capital do not have to be mutually exclusive; you can do both. Regarding debt, could you discuss the recapitalization and the options you've considered? It seems the catalyst now is that if your business has a 20% free cash flow yield while peers are trading at low to mid-single digits, there is ample opportunity to return cash to shareholders through buybacks or dividends. However, addressing the debt is essential to achieving that, and it could significantly drive share prices higher as investors want to see the cash generated reaching them, either as dividends or in increased ownership. There’s a lot to consider, but could you share insights on balance sheet debt? We're five months away from when the debt becomes current, and you've mentioned wanting to address that around that time. Have you thought about a return of capital plan that could serve as a meaningful catalyst?

Eric, yes, let me start with that and then maybe have Neal jump in. And I think you said a lot and talked a lot about our things that we've been focused a lot on. I think that the starting point here is a strong balance sheet post-Variperm. We got a good amount of liquidity here, we get cash on the balance sheet and a really clear path forward to generating free cash flow. So put those two together, we know we're in great shape and said on the call that we expect to be in a position to pay off the 9% notes at the end of the year. And you're right, they would become current in August. So we see that as a possibility. Debt management, definitely something that we're committing to do and getting our balance sheet back towards that lever. We ended the year with 1.4x before Variperm, getting our leverage back down. We think it's prudent in our business. And so we'll have some focus on that. But as you mentioned, with the amount of cash that we're looking at here and the potential for going forward, these things aren't all mutually exclusive. So focus areas would be managing down our debt, that can be actually debt payment or net debt reduction. Second, what can we do from a return to shareholders of cash? And third, there are a lot of opportunities for acquisitions and what can we do from a strategic investment that makes a lot of sense. So as you mentioned and as we said on the call, we will be focusing on what those options are and do things that we believe drive the most value for our shareholders. And I think the key piece that we can see here is what the impact of Variperm has been to our forward look.

I think we see ourselves in a show-me mode that we need to deliver on the promise that we've laid out. So our teams, ourselves here on this call, we are focused on generating the free cash flow that we've laid out. And ultimately, that's what's going to give us the flexibility to look at further debt management and return of capital to shareholders.

Our next question comes from the line of Jeff Robertson from Water Tower Research.

Neal, can you discuss the margin expansion you mentioned when you announced the Variperm acquisition and how you expect it to develop in relation to your outlook for 2024?

Yes, that’s a good question. We don’t anticipate significant costs associated with bringing Variperm on board. We mentioned before that while there won't be much in terms of cost synergies, we also don't expect to incur substantial additional costs. Therefore, when we combine the two businesses, we should expect to maintain an EBITDA margin of around 14% on average for the entire year. However, we might see some softness at the start of the year, which could result in lower margins as we begin Q1. For the full year, we still expect our combined margins to be around that 14% mark.

And Neal, you talked about the $300 million addressable market from the three products you highlighted. In the backdrop of a flat activity level, do those products, do you think drive incremental opportunities for FET to expand despite a flat backdrop?

Absolutely. That’s a key focus for our teams. It’s part of our strategic objectives to develop new products that help us grow faster than the market. For us, the question is timing. Anytime you have a new product, it can take longer than you expect to become commercial. However, developing new products is the primary way we will outperform the market. We introduced FASTConnect last year, and it has been very successful. We are committed to expanding that product development and getting it commercialized and growing quickly. For us, it’s all about timing, and it is a key focus.

And Jeff, this is Lyle. I want to provide another example similar to what Neal mentioned regarding our opportunity to increase revenue, specifically with the FR120 and our new smaller version. We have seen significant success with the Iron Roughneck, which is the FR120, a tool that delivers 120,000 foot pounds of torque and is being used by our customers for larger diameter drill pipe. These larger pipes have higher torque requirements, necessitating a bigger tool. However, some rigs, both in the U.S. and abroad, have limited space on the rig floor, which makes the FR120 impractical. Consequently, we missed out on that market opportunity. The team has focused on launching a new tool that fits within this constrained space while enabling these rigs to upgrade to higher torque capacity and effectively handle 5.5-inch drill pipe. This represents a potential opportunity. From a capital expenditure standpoint, even in a stagnant market, we anticipate that our customers will consider making small incremental investments in capital. This may not involve purchasing a new rig, or in the case of pressure pumping, a new frac fleet, but rather additions that enhance their existing equipment's capabilities and enable them to drill more efficiently. Therefore, we believe there are opportunities even in a flat market.

So the flow-through, Lyle, as customers potentially see a higher return on their investment, drives demand for the product?

That's right. That's right. It makes them more competitive, right? If a 5.5-inch drill pipe is a requirement of a rig and the rig can't handle the torque load, that's going to make that asset pretty uncompetitive. And so why not spend a few hundred thousand dollars and get your rig ready to go.

You mentioned the strength in the Middle East in 2023 or in the quarter. Do you think you will be able to leverage some of the Variperm products into those markets and gain access to additional business that you didn't have before?

That's definitely a focus that we have. These international qualifications and getting set up and put into the catalog, they could take time. It's something that Variperm was actually already working on both the addition of our kind of international footprint. I understand the logistics as well as some of our stocking locations. We've just increased the chances or probability of those going forward. So something we're focused on; probably not a 2024 result, but it's something we're going to be working towards absolutely in the future.

Lyle, just quickly, I don't remember if Rob said. When do you expect the 10-K to be filed?

I think that should come out relatively shortly here in the next week or so.

All right. Well, thank you, everyone, for your support and participating in today's call. We look forward to talking to you again in early May to discuss our first quarter 2024 results.

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