Earnings Call Transcript - FET Q1 2024

Operator, Operator

Good morning, ladies and gentlemen, and welcome to the Forum Energy Technologies First Quarter 2024 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.

Rob Kukla, Director of Investor Relations

Thank you, Gigi. Good morning, and welcome to FET's first quarter 2024 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. 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 the context of all factors that affect our business, including those disclosed in FET's Form 10-K and 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 2024 to fourth quarter 2023. I will now turn the call over to Neal.

Neal Lux, CEO

Thank you, Rob, and good morning, everyone. When we announced the Variperm acquisition late last year, we used words like transformative, accretive, and scale. This quarter, we realized the value of Variperm adds to FET's financial results. Sequentially, we achieved 9% revenue growth and, importantly, EBITDA increased 69%, with EBITDA margins improving by 460 basis points. The teams delivered on our promises with both revenue and EBITDA within our guidance range. With favorable sales mix and continued cost management, our EBITDA came in at $26 million, above the midpoint of the range. I am pleased with our 13% EBITDA margins. I am confident we will achieve our mid-teens margin goal with our differentiated products and operating leverage. As expected, bookings rebounded in the first quarter, and our book-to-bill ratio was 101%. With approximately 80% of our product portfolio sales being consumable and activity-based, a book-to-bill ratio around 100% is generally expected. However, we will occasionally exceed this level when we receive large awards from our capital-intensive and project-based businesses. As expected during the quarter, with oil prices around $80 per barrel and depressed gas prices, the U.S. rig count and frac counts were flat. However, we did see a pickup in demand in our stimulation and intervention product line. Our quality wireline business saw a nice uptick in demand for our premium greaseless cable systems. Although the global rig count was essentially flat, we did see some seasonal softness in the international markets as customers were slow to release budgets. Let me briefly discuss Variperm and its operational results this quarter. First off, the integration of Variperm is going very well. Our teams have done an excellent job of working together. Importantly, we have integrated their financial results into our operating systems, which is critical for a publicly traded company. This is never an easy task, and I would like to thank everyone involved for making this happen in such a short timeframe. This acquisition broadens and enhances FET's existing Artificial Lift and Downhole offerings. The sales teams from FET's traditional Downhole product line and Variperm are making substantial progress working together. This collaboration should expand FET's total addressable market in Canada through revenue synergies and the broadening of our customer base. Operationally, Variperm has great leaders that will continue to run the business as efficiently and successfully as they did prior to the acquisition. Earlier this year, we outlined our market views for Canada and forecasted a softer first half of the year, driven by uncertainty regarding the Trans Mountain Express Pipeline startup and seasonal breakup. Variperm's first-quarter results were generally in line with our expectations, but softer than historical revenue run rate due to these near-term headwinds. Despite lower revenue, Variperm managed costs very effectively, and margins held steady. Looking ahead, we anticipate stronger oil sands activity in the back half of the year as operators in Canada realize higher prices for their oil. Based on the first-quarter results and with no material change to our original global rig count forecast, which was roughly flat, we are reaffirming our full year 2024 guidance with EBITDA of $100 million to $120 million and free cash flow of $40 million to $60 million. Before turning the call over to Lyle, let me discuss our growth and profitability strategy to outperform the market. We will continue to capture opportunities for market activity. With Variperm now in our portfolio, between 75% and 80% of our revenue should be tied to activity. We will use our trusted brands and relentless commercial efforts to increase our share within existing markets. As we grow, we will focus on niche markets where FET has truly differentiated itself. We have developed strong intellectual property and proprietary know-how over many years of operation. This strength is combined with our people, who are experts in their fields and who understand how to solve our customers' problems. This creates a strong barrier to entry and maintains a favorable competitive landscape for FET. Therefore, we can command higher margins and generate greater returns. Additionally, we will continue to develop and commercialize new products and continuously innovate and improve our current product portfolio. This is accomplished by working closely with our customers to iterate newer and better solutions, further separating us from our competitors. This allows FET to capture more market share while expanding its total addressable market. During last quarter's call, I went into great detail on a number of examples, including our greaseless wireline cable system, our FR120 iron roughneck, our FASTConnect manifold system, and the Pump Saver Plus. Our innovation is laying the foundation for sustainable and profitable growth in the years ahead. Furthermore, we have an optimized global footprint with strategically located manufacturing and distribution hubs. Our asset-light model allows FET to supply products and solutions to our customers wherever they are. We can be nimble and pivot with changing market conditions to go where our customers lead us. We do not need to spend capital within a specific country or region where activity is growing; we just ship our products there. Lastly, we will take advantage of increasing service intensity. To keep up with growing operator demands for greater efficiency, reductions in well costs, and increased safety, our customers are doing significantly more with less equipment. Their drilling rigs and frac fleets are being pushed to run at full utilization with more pumping hours, more stages, more drilling, and reduced time between wells. To achieve this, they do not need to invest in new fleets or rigs; they must upgrade their capabilities to keep up and remain relevant. That's where FET's products are critical and allow our customers to drive these efficiencies. I'm now going to turn the call over to Lyle for more details on FET's first-quarter financial results and second-quarter 2024 outlook.

Lyle Williams, CFO

Thank you, Neal. Good morning, everyone. I want to begin by explaining the reasons for introducing our new reporting segments: the Drilling and Completion segment and the Artificial Lift and Downhole segment. This new structure aligns with our internal management and reporting framework, ensuring that our reporting segments correspond more closely with the markets, activity drivers, and customers we engage with. For instance, the Drilling and Completions segment caters to oilfield services clients, while the Artificial Lift and Downhole segment focuses on E&P operators and other end-users. We will still report revenue across our historical seven product lines, with Variperm's financial results incorporated into the Downhole product line. Our extensive product and solution offerings can present a challenge for new investors in understanding FET. The new reporting segments clarify FET's investment narrative. We have included supplementary schedules in the earnings release that outline 2023 quarterly results in this new reporting format. Following the filing of this quarter's Form 10-Q, we will release an 8-K with recast historical financial data. Now, let me provide further insight into our new segments and their first-quarter performance. The Drilling and Completions segment encompasses the drilling, subsea coiled tubing, and stimulation and intervention product lines. This segment's customer base includes many leading oilfield services firms, mainly involved in drilling, hydraulic fracturing, well intervention, and deepwater installation and service markets. We supply essential consumable products and capital equipment to these companies, enabling them to enhance efficiency, lower well costs, and improve safety in their operations. Most of the capital equipment supplied by FET falls under the Drilling and Completion segment and accounts for approximately one-third of segment revenue. Industry activity, measured by global rig count or U.S. frac spread count, influences this segment. While rig count has decreased over the last ten years, the quality and capability of rigs have significantly improved. For instance, in the U.S., the average footage drilled per rig has increased two to three times over the past decade. Likewise, the quality and capability of hydraulic fracturing fleets have followed a similar trajectory. Wells are now longer, featuring more stages and proppant than in previous years, yet the number of operating frac fleets has not risen. The completed wells per fleet have increased nearly 60% over the last ten years. These advancements will continue as operators seek higher capabilities and efficiencies, achievable due to the investments our customers have made in FET products. In the first quarter, the Drilling and Completions segment revenue fell 6%, mainly due to two ROV projects completed in the last quarter, a decrease in demand for drilling capital equipment, and lower international coiled tubing sales. During the quarter, we observed an uptick in demand for our stimulation and intervention product line, as customers caught up on the slowdown experienced in the latter half of the year. In fact, we achieved a new quarterly revenue record for our greaseless wireline cables. A favorable product mix led to segment EBITDA growth of 13%, resulting in EBITDA margins improving by 190 basis points to 12%. Orders totaled $117 million, an increase of $3 million, with a book-to-bill ratio of 98%. The Artificial Lift and Downhole segment includes the Downhole Production Equipment and Valve Solutions product lines. Combining Variperm's premium Downhole Solutions with our Davis-Lynch casing hardware and our Multilift Artificial Lift Solutions enhances FET's existing Artificial Lift portfolio and encourages revenue synergies from sales across Canada and internationally. Customers in this segment mainly include E&P operators and other end-users involved in the extraction and processing of oil and natural gas from the well site to downstream processing and refining. Revenue in this segment is primarily influenced by well count, complexity, and production. Over the past decade, the average number of wells per rig in the U.S. has risen by almost 40%, with those wells being, on average, nearly twice as long and yielding three times as much oil per well. This is achievable because of our customers' strategic investments in FET's products and technologies, both in the well and on the surface. Earlier, Neal mentioned the transformative effect Variperm had on FET's financial results, which is also reflected in the sequential growth of the Artificial Lift and Downhole segment, with revenue up 42%, EBITDA increasing by 107%, and margin growth of 680 basis points to 22%. In addition to Variperm's influence, sales of Artificial Lift and Casing Equipment rose, although revenue from Processing Equipment and Valves fell. A positive product mix also contributed to EBITDA improvements this quarter. Orders reached $88 million, marking an increase of 89% due to Variperm's contributions. The segment's book-to-bill ratio of 105% was above one, as we secured long lead time orders for production equipment. Our consolidated first-quarter results aligned with guidance for revenue and EBITDA. Looking ahead to the second quarter, we anticipate revenue and EBITDA growth in both the U.S. and international markets, where budgets have been approved and customers are moving forward with their spending plans. However, these gains may be tempered by the seasonal Canadian breakup, which typically results in a significant drop in rig count activity, around 50%, from the first to second quarter. Given that a larger share of our revenue now comes from Canada, the breakup may have a more pronounced effect on our results compared to prior years. We expect second-quarter revenue to be between $200 million and $220 million, with EBITDA ranging from $24 million to $28 million. For modeling the second quarter, we estimate corporate costs to be $7 million, interest expenses to be $8 million, and approximately $13 million for depreciation and amortization.

David Williams, CFO

Thank you, Neal. I'm excited to share with you the rationale for our new reporting segments, the Drilling and Completion segment and the Artificial Lift and Downhole segment. This structure mirrors our internal management and reporting structure better aligns reporting segments with the markets, activity drivers, and customers we serve. For example, the Drilling and Completions segment focuses on oilfield services customers, while the Artificial Lift and Downhole segment serves E&P operators and other end-users. We will continue to report revenue in our historical seven product lines, with revenues from Variperm's financial results included in the Downhole product line. We have a broad product and solutions offering, which can make understanding FET a challenge for new investors. The new reporting segments simplify FET's investment story. In the first quarter, the Drilling and Completions segment revenue decreased 6%, primarily related to two ROV projects that were completed last quarter, lower demand for drilling capital equipment, and lower international coiled tubing sales. In the first quarter, the Drilling and Completions segment revenue decreased 6%, primarily related to two ROV projects that were completed last quarter, lower demand for drilling capital equipment, and lower international coiled tubing sales.

Neal Lux, CEO

Operationally, our customers are demanding greater efficiencies and safety in the field with less equipment. We have led and will continue to lead these efforts through innovative products and solutions. Financially, we delivered solid results to start the year. The markets are holding steady with our expectations, and this gives us greater confidence in achieving our full-year guidance. With our strong liquidity and expected cash generation, we have a clear path to paying off our long-term debt. This will provide greater flexibility and optionality for returning cash to shareholders. Lastly, we could not make this happen without the hard work and dedication of our employees. Thank you. Gigi, please take the first question.

Josh Jayne, Analyst

I just wanted to follow up. Maybe you could just walk us through your activity assumptions. It's great that you highlighted 75% to 80% of the revenue going forward will be tied to activity but just maybe your assumptions going forward for this year on the U.S. land market and how you're thinking about not only rig count but well count going forward for the balance of the year?

Neal Lux, CEO

Yeah, I appreciate it. So really no change to our outlook from the beginning of the year. We expected the U.S. rig count to be down. If we were a U.S.-only company, it would be more challenging. For us, internationally, we do see rig count growing, especially as the year gets started. We have a slow start to the year but should grow in the back half. Similar story with Canada and oil sands activity; we see this as a second-half boost to the year. Overall, global rig count is roughly flat with the U.S. down a bit, but Canada flat and international making up for the U.S. being down.

Josh Jayne, Analyst

Could you discuss the international markets outside of the U.S. that you find promising for the next 18 to 24 months? I would like to hear your thoughts not only regarding land operations but also about the Subsea business and its potential in that time frame.

Neal Lux, CEO

The Middle East land and jackup market has experienced some growth over the past few years, and we anticipate this trend will continue. We have a strong position in the region and plan to leverage it, particularly now that Variperm allows us to explore the export of some products and projects there. Another significant area for us is offshore; we believe we are close to fully utilizing our ROVs. We see substantial opportunities for ROV awards in areas like Brazil, Guyana, and the Golden Triangle in West Africa and the Gulf of Mexico over the next 18 months.

David Storms, Analyst

Just hoping, obviously, you had very strong margins in Lift and Downhole but I understand a lot of that is from the Variperm acquisition. Can you help us kind of just parse out how much of those margins are from Variperm and how much of those margins are from pre-Variperm operations?

David Williams, CFO

Sure, Dave. I think as you think about the big uplift in our overall margins, as Neal mentioned, really significant on a total basis and for the Artificial Lift and Downhole segment even more impactful. A lot of that is the benefit from the acquisition of Variperm. We also had a bit of favorable mix. We had stronger sales in the quarter for our Artificial Lift and Casing Hardware products and a little bit softer for our other products, which is production equipment and valves, which typically have a softer contribution margin. So the vast majority of that growth is with Variperm, which we expected, and then a little bit of mix after that within the rest of the segment.

David Storms, Analyst

Understood. That's very helpful. Just one more for me, more of a logistical question. I know Variperm came to you pretty turnkey. How much or if any, integration is left to squeeze out more synergies or anything like that?

David Williams, CFO

Yeah. As I said, it was very well run. The integration is going well, and we're pleased with where we are now. Again, as we traditionally have, when you buy a great business, we want to let them keep running the business as they are. I think where we see more opportunity is getting our teams working together and looking at revenue synergies. So I think we're in very early innings there, but we're starting to quote packages together. That would be a big uplift, and we'll keep driving that; it takes time. So I think that's going to occur over the next few quarters, but early returns are exciting.

Daniel Pickering, Analyst

A couple of questions. I just want to make sure that I think, Neal, I heard you say when we looked at the traditional Downhole technology business that the non-Variperm revenues were higher quarter-to-quarter. Is that Q4 to Q1? Is that right? So we had some strength in that business.

Neal Lux, CEO

That's correct.

Daniel Pickering, Analyst

Okay, great. And so I'm just kind of thinking about Variperm quarter-to-quarter. It sounds like you had a little weakness there revenue-wise, but that's just a function of what's happening in Canada right now?

Neal Lux, CEO

That's correct. I think the delays in the Trans Mountain. I think their customer base, who are the large, very large operators in the oil sands, I think they tapped the brakes a little bit coming into the year, and we will have just a little bit of seasonal slowdown here in Q2 with breakup. Our plan and our conversations lead us to expect a more robust second half where we get back to the revenue run rate we were at last year.

Daniel Pickering, Analyst

Got you. Okay. And then a question for you, Lyle, just to make sure I understand, we've got about $90 million on the revolver one. I just want to confirm that that's the case. And there's no penalty for paying that down fast flow. You don't have any requirements to hold a balance on that revolver, do you?

Neal Lux, CEO

No, you're correct in that we can pay that off at any time. The balance there ended probably right around $96 million, so just a little bit higher than it was at the beginning of the year.

Daniel Pickering, Analyst

Got you. I have two questions. First, regarding the Variperm acquisition, are you considering any other acquisitions? What is the current deal environment like? Second, from an operational perspective, did you notice any consistent trends as you progressed through Q1? Did anything soften or accelerate during that period? I'm trying to understand the trend as we head into Q2.

David Williams, CFO

Let me start with the second part, Dan. We did notice an increase in activity as the quarter progressed. While it wasn't an extreme acceleration, things did pick up. Part of this can be attributed to international markets, which had some delays in budget releases—a situation that's not uncommon. However, we observed a rise in international activity as the quarter continued, giving us some confidence heading into Q2 and the latter part of the year. Regarding M&A, there are some promising opportunities available. We have a strong pipeline to explore across our diverse product lines, providing us with many possibilities. The Variperm acquisition was a significant success regarding value margin. If we can identify another opportunity like that, we would be pleased. Yet, we will adhere to our criteria, ensuring strong industrial logic within our portfolio and maintaining conservative leverage on our balance sheet. Financial accretion is a key focus for us moving forward. Overall, we have a solid plan to generate cash this year to improve our balance sheet and intend to maintain that momentum. At the same time, we will remain open to good opportunities that come our way.

Erik Carlson, Analyst

I was wondering if you could elaborate a bit more on Variperm. GMX recently announced that it will be coming online. From a business perspective, is the majority of the revenue coming from the oil sands market, or is it mainly during the drilling and completion phase, making it an activity-based business? Once the products are installed in a well, are there adjustments that need to be made? I'm trying to understand the relationship between rig count and well count in that business and what will drive revenue moving forward.

David Williams, CFO

Erik, this is Lyle. I'll take that a bit. And then, Neal, if you want to chime in. Yes, the Variperm products are primarily used in the drilling and completion of oil sands wells with their sand control products and flow control, mitigating sand incursion and maximizing the benefit of the steam injection into the well. They do have a strong linkage with activity and rig count as a good measure, recognizing that not all rigs in Canada drill in the oil sands. There's a little bit of nuance to that piece. There is another piece of Variperm's business where about 15% of their revenue in the first quarter did not come from Canada. They ship products into the U.S. and into different markets. In this quarter, we had revenue coming out of Latin America and the Middle East. So it’s really a global business that matches well with us. As Neal mentioned, our ability to maximize pull-through there will be a good add for Variperm.

Neal Lux, CEO

I think I would add one more piece to that. The activity that they see on the drilling and completion side is not just related to new projects. The majority of the activity is work on existing projects where you have the steam generation facility in place, and then they're adding wells to that. So it's not relying on new budgets or new money coming in, but really keeping the existing projects going where we think 95% of their activity is going to come from.

Unknown Analyst, Analyst

Great. That's helpful. Regarding the Middle East, the business is already surpassing pre-COVID numbers compared to some larger peers. Listening to the H&P call, I noted they are receiving rig deliveries and planning additional tenders as they concentrate on unconventional gas development. From your perspective, what do you see as the driving forces behind their ambitious gas production expansion in the Middle East moving forward?

Neal Lux, CEO

I think in a couple of areas in Saudi. Particularly, on our capital equipment side, as companies like H&P transition rigs or add rigs internationally, they're going to need to upgrade the equipment on those rigs. This presents a great opportunity for us on our capital side, especially the drilling equipment. On the gas development side, what's helpful to us is many of the products and solutions we designed for U.S. unconventional operations are being applied internationally, whether it's Argentina or the Middle East; they're using our equipment there. This creates a great opportunity in our stimulation and intervention product line and our coiled tubing product line as well, where we see significant activity.

Unknown Analyst, Analyst

That's helpful. And then I guess you guys addressed a lot of the plans on the balance sheet and what you see on a go-forward basis. I noticed, obviously, a very small amount of it looked like shares were repurchased during the quarter. Just wondering what you have left on that kind of first smaller authorization.

David Williams, CFO

In the first quarter, the share repurchases were related to equity awards for employees, specifically the cash tax portion that the company recouped and paid in cash. However, we did not repurchase any shares in the market during that quarter. We currently have a limited amount of authorization remaining and some capacity under our existing agreements to pursue that. Our strategy is to use our liquidity and cash flow to reduce long-term debt, which will give us more flexibility to establish larger and quicker distributions to our shareholders. We are quite enthusiastic about this.

Unknown Analyst, Analyst

That's great. Regarding the financial accretion, it seems to focus more on a per share metric. From the proxy statement released, it appears that most of the incentive is primarily based on EBITDA margin, with a smaller emphasis on free cash flow and some strategic objectives. My point is that the incentives should reflect that appropriately.

Neal Lux, CEO

Yeah. No, Erik, that's a great point, one that we agree with 100%. We've aligned our 2024 incentive very closely with free cash flow, increasing that weighting so that not just the executive team but all key managers will be aligned with generating free cash flow. We started to see the results of our focus on free cash flow last year. We had a tough first quarter for a manufacturing company in terms of cash flows due to sizable seasonal cash payments. To be cash flow positive in Q1, I'm excited about that; it's something we want to continue. Our executive team has significant equity ownership, and we are aligned with our shareholders. We are focused on driving the results you outlined and that Lyle mentioned regarding getting debt down and finding the best option for shareholder returns. We're looking forward to that.

Unknown Analyst, Analyst

Great. Yes. Well, great quarter. And I just keep driving forward.

Operator, Operator

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