Earnings Call Transcript - FET Q1 2023

Operator, Operator

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. I will now turn the conference over to Rob Kukla, Director of Investor Relations. Please proceed, sir.

Rob Kukla, Director of Investor Relations

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.

Neal Lux, President and CEO

Thank you, Rob, and good morning, everyone. I would like to begin today's call by emphasizing three 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 two 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 remain very strong for state-of-the-art upgraded equipment. Their 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 six to twelve months. For example, our drilling capital equipment product family has seen its Middle East opportunities increase almost threefold compared to six 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 for 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, emissions 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.

Lyle Williams, CFO

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 three 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 six out of seven 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 three 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 one 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 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 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, one 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 three 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.

Operator, Operator

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

Neal Lux, President and CEO

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.

Operator, Operator

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