Good morning, ladies and gentlemen, and welcome to the Forum Energy Technologies Fourth Quarter 2020Earnings Conference Call. My name is Angela and I will be your coordinator for today's call. At this time, all participants are in a listen-only mode, and all lines have been placed on mute to prevent any background noise. As a reminder this conference call is being recorded for replay purposes. I would now like to hand the conference over to Lyle Williams, Chief Financial Officer. Please proceed sir.

Thank you, Angela. Good morning, and welcome to Forum Energy Technologies' fourth quarter 2020 earnings conference call. With me today are Chris Gaut, Forum's Chairman and Chief Executive Officer; and Neal Lux, our Chief Operating 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. This call is being recorded and a replay of the call will be available on our website for two weeks. I will now turn the call over to Chris.

Thanks, Lyle, and good morning. After six years of oil and gas activity decline, 2020 stood out as a particularly challenging year. As a result of the energy demand destruction caused by COVID-19, drilling and well completion activity globally collapsed at the end of the first quarter, before beginning to improve slowly in the second half of the year. FET top line results followed that trend with a 46% decline in annual revenue from 2019 to 2020 as drilling activity measured by the average U.S. rig count declined 55%. The response by the Forum team was outstanding. We moved swiftly to manage cash, reducing our cash costs by 39% in the year and focused on monetizing inventory, generating over $50 million of cash flow from inventory reductions. As a result, our decremental adjusted EBITDA margins were a respectable 24%, and the Company posted positive free cash flow each quarter, with the exception of the second where restructuring and severance payments drove free cash flow negative. We also made excellent progress shoring up our balance sheet during 2020, reducing our net debt from $342 million to $201 million at year-end and extending the maturities of our bonds to 2025 and our bank credit facility to late 2022. I am proud of our team for their decisive actions to protect the Company and its shareholders. The fourth quarter reflected an inflection point in results for FET. Both the U.S. drilling rig count and the frac fleet count increased by 22% sequentially. Overall, our bookings increased 34%, and the book-to-bill ratio was our highest level since the market turned over in 2018. Revenues increased 9% sequentially to $113 million, in line with our expectations. Our adjusted EBITDA increased by $7 million to negative $2.6 million, ahead of our expectations with the benefit of our strategic cost cutting and favorable mix. We have taken major decisive action at FET during this downturn. As important as our cost cutting and balance sheet repair have been, I think the most transformative change we have made is the recent high grading of our product portfolio. We are now focused on our highest margin and most differentiated products, while exiting or deemphasizing our more commoditized lower-margin products. This significant change did result in the asset impairments in Q4 that Lyle will describe shortly. The key point is, with these changes, FET will be a simpler, higher-margin and higher return company. Lyle?

Thank you, Chris. During the fourth quarter, the rebound in oil and natural gas prices led to an increase in drilling and completions activity and higher sales of our consumable products. As Chris discussed, we continue to execute on our strategic restructuring actions, resulting in additional operating cost reductions, and we closed on the sale of our ABZ and Quadrant valve brands for $105 million in cash proceeds, lowering our net debt by approximately 1/3. Let me start by providing further information about our segment operating results for the fourth quarter. Our Drilling & Downhole revenue and adjusted EBITDA increased sequentially by approximately $7 million and $5 million, respectively. Our Drilling Technologies product line accounted for the majority of these increases. The 22% sequential increase in the U.S. rig count resulted in higher demand for our consumable drilling rig components. And international new rig projects drove an increase in our premium handling tools and drilling capital equipment. Our subsea product line continues to penetrate non-oil and gas markets with a substantial contract win, which contributed to a total of $28 million of orders for this product line in the fourth quarter. Demand for our artificial lift and casing hardware products was consistent with levels in the third quarter. Let me insert a comment here about the geographic mix of our revenue. While the U.S. is an important source of revenue for FET, our non-U.S. revenues were growing in importance, led by our Drilling & Subsea product lines. In the fourth quarter, revenue from outside the U.S. accounted for over 40% of our consolidated revenues. We expect activity in this more stable market to expand further in 2021. For our Completions segment, the increase in U.S. hydraulic fracturing activity drove a 56% increase in revenues and a $5 million sequential increase…

Thank you, Lyle. Good morning, everyone. To begin, I'd like to thank the employees of FET for embracing our number one core value, "no one gets hurt." Our response to COVID-19 and our safety results were outstanding in 2020. We finished the year with a total recordable incident rate of 0.53. We should all be incredibly proud of this result. As part of our strategic restructuring effort, we reevaluated our product portfolio at a granular level. While it's evident from this evaluation is that we have a number of products and solutions that provide significant value for our customers with limited competition and growing demand expected in 2021 and beyond. In the aggregate, these businesses generate EBITDA margins between 15% to 20% and a 400 to 450 in U.S. rig count environment and will have fantastic incremental margins as rig count grows towards 500 and 600 rigs. The teams that run these businesses are focused on maximizing value, developing new products and solutions and gaining share as the market grows. We are going to continue to invest in these businesses. What was also evident from our portfolio evaluation is that we have a number of products that would struggle to perform even when the rig count rebound to 800 units. Here, significant cost cutting and restructuring was required. During our last call, I discussed plans to eliminate at least $20 million of annual expenses. In the fourth quarter, these plans turn into actions. Within our underperforming businesses, we are consolidating facilities and product offerings, we are reducing a significant amount of fixed manufacturing costs. We have put our focus on products and solutions that customers value and have fewer direct competitors. We have set strict profitability guidelines for these businesses. And with this strategy, we expect FET to generate margins…

Thanks, Neal. We have made a lot of changes and improvements at FET. And we have significantly increased our earnings power for the new smaller OFS market we now have. So let me talk about our earnings power and how we see 2021. With commodity prices increasing, E&P spending has increased already this year. Since December, drilling rig count is up at least 13% in the U.S., and we expect that trend to continue. Given the impact of last week's frigid temperatures in Texas and Oklahoma, where a large percentage of our activity takes place, we are taking a cautious approach to guidance. We expect first quarter revenue to be around $119 million and EBITDA to be roughly breakeven. This compares with the fourth quarter revenue and EBITDA of $104 million and negative $5 million, respectively, adjusted pro forma for the sale of ABZ and Quadrant. Our first quarter guidance is, therefore, revenue up about 15%, with incremental margins in the mid-30s. We would expect further improvement in the second quarter as the full benefit of our cost cutting and restructuring efforts are realized. Looking to the back half of 2021, we subscribe to the view that overall U.S. crude oil production will remain flat throughout the year. To achieve this production level, activity, as measured by the number of frac crews working and the number of rigs drilling will have to increase from current levels. Forum's revenues are driven by short-cycle consumable products and are highly correlated with the U.S. rig count, although it's not a one-to-one relationship. Therefore, while forecasting the exact level of activity is difficult, we can share the level of EBITDA, we believe, is achievable at different levels of U.S. rig count. For example, in a quarter, with average U.S. rig count -- total U.S. rig count of 450 rigs, we expect our quarterly EBITDA would be between $7 million and $8 million. At an average of 500 total U.S. rigs, we expect our quarterly EBITDA would be roughly $10 million to $12 million or $40 million to $50 million per year. In the past, the rig count would have needed to be at least 50% higher for us to achieve these levels of profitability. Internally, we sometimes refer to all of these changes that we have made as Forum 2.0, a much leaner and more focused company. To mark this new beginning, we have also changed up our brand logo, which you may have noticed, and we have updated our website landing page and our LinkedIn page to showcase new product introductions. Please take a look and follow us for more details. Angela, we're ready for the first question.

[Operator Instructions] Your first question is from the line of Ian Macpherson with Simmons. Please go ahead.

I'm sorry, I missed the beginning, the prior call ran over a little bit, but I think I got most of it, especially helpful there at the end Chris with the framework for EBITDA. So just tying that back, I know they're moving pieces near-term with working capital, et cetera. But getting down to free cash out of EBITDA, can you just update us on where run rate interest expense is now after the asset sales?

Yes. Ian, this is Lyle. Thanks for joining, and thanks for the question. With our debt outstanding about 9% interest rate on those notes, overall interest expense would be 9% of $300 million, so about $27 million-$28 million a year. We do have an opportunity to pay in kind some of that interest. But I think with our cash from our transaction, we would look to pay that interest expense in cash.

And then just looking at your first quarter outlook, I think we've -- depending on what day of reported earnings, there's been a different perspective on what the weather impact was last week and what the lingering impact could be this week and maybe even into early February as supply chains normalize and delayed well pads start back up. So maybe if you could frame with us what your expectation is for the discrete weather impact and how known or unknown, you think the full extent of it is at this point?

Yes, Ian, that is a difficult question to answer at this point. Clearly, it was pretty much a lost week last week, one of 13 weeks in Q1, although, we will work hard to recover of some of that. So it won't be 1/13, but it won't be zero either. And it affects different businesses in different ways. I think chasing down the revenue side is what we'll be focused on. Obviously, our costs continued during that period. So we'll be trying to recover as much of that revenue as we can. But, clearly, it has some impact. Sorry, we can't be more specific just a few days after.

No, that's very helpful. Thanks Chris. Anyway, congratulations on all the levers you pulled to free up some runway here. And I just wanted to close my questions with whether your strategic options looking forward for this year contemplate any more significant disposals? And if not, what other sort of big issues you're contemplating with regard to shoring up the future?

Yes. We have made great progress on the balance sheet. If you look at the past two years in total, we have reduced our net debt by $270 million. And Forum does have some really good brands and operations. And I think the value of our businesses was demonstrated clearly in the sale of ABZ and Quadrant's $105 million in proceeds, cash in this market at 11x the Q4 run rate. Now, as far as selling other operations, I think what makes for a good sale between a buyer and a seller is when the asset under consideration is worth more to the buyer than it is to the seller. And as we look across our other -- our current stable of businesses and what the prospects are from this point forward and the upside that we see. We don't see that -- we feel there's a lot of upside and value there. So I don't expect that we'll have other material sales like we had of ABZ and Quadrant. But hey, as I say, if somebody comes in and has a very, very high value, we'll take a look.

Thanks, Ian.

Your next question is from the line of Dan Pickering with Pickering Energy. Please go ahead.

Good morning guys, thank you, and congrats on getting through 2020. I know it was a very tough year. So just a couple of questions around some of the things you said here on the conference call. Lyle you said or maybe it was Chris said, you would expect to meet or exceed the margins of your peers. Can you help us with who you consider the peers? I mean, what public company should we look at as the bogey that you're comparing yourself to?

Yes. So -- yes, Neal was talking about the -- as we see the long term benefit of what we're doing from our portfolio high grading, and we have quite a few businesses that generate very attractive EBITDA margins there. And we want to grow those businesses. And so I would say the manufacturing peers normalized are in the teens to upper teens EBITDA margins, and that is our longer term objective. I don't -- I think we'll be not out of the single digits in 2021. But I think we're -- with the progress we're making, and as I pointed out, the tremendous operating leverage we have as the rig count begins to improve, we'll be on our way towards that path and hope to achieve that level of EBITDA margins in the medium term.

So call it a mid-to-upper teens EBITDA margins 2022, '23 kind of goal. That certainly makes sense. You also mentioned the renewable sector, the energy transition sector is an area where you're selling things. I assume that's fairly small right now. But I mean, any quantification that you can help us with there? Is it 5% of total less, 10% roughly where we at right now?

Yes. I mean, it is small. But if we add all of our non-oil and gas operations, it's more significant. A lot of what we're doing in subsea space is in non-oil and gas now, wind farm and others. Neal?

Yes, Dan. I think what's -- a lot of our products have a dual-purpose where they can service oil and gas as well as the energy -- renewable energy industry. And, for example, our subsea with trenchers has both the pipeline and a cable application, our valve solution line, production equipment lines, they have equipment that can be utilized in multiple applications. We're also evaluating other product lines and determine what new markets we can address, and we're finding good opportunities. As an example, heat is important part of -- renewable heat is important part of renewable applications. And we see some of the technology we have in, for example, our cube radiators, they may have a good application in the renewable industry as well. So there's -- we think there's a lot of opportunities there. And again, it's a wide range of our experience that we can take a lot of shots to find our target.

A couple more, if you'll humor me. You talked about Q1 as kind of roughly breakeven EBITDA, 15% revs with mid-30s kind of incrementals. Rig count is obviously up more than that. I understand the last week. But I think my takeaway would be that your revenue guidance, at least feels pretty conservative given where rig count is at and the likelihood that rig count probably continues to increase, so no need to respond to that. That's more of a comment. But as we think about the levers around free cash, inventory has continued to be one. But at what point as we move through the year, do we think about working capital not contributing to free cash, if you will. So growth in revenues, receivables, et cetera, should be going up? Or do we have enough inventories still to monetize that working capital as a source of cash in 2021?

Sure, Dan. Dan, let me take that -- take both of those actually. So looking to Q1, I would highlight that we do have a high correlation of our revenue to U.S. rig count activity. That being said, as we look within each of our different product lines, we've got a mix of businesses including a combination of really short-cycle consumables that move really quickly when activity does, as well as some longer lived capital equipment. So as we look down through the segments in our guidance and think about that, we have assumed activity does increase. In our Completions product lines, we expect those to move pretty linearly with activity increases. Drilling & Downhole won't move quite as much. And really, that's because in the fourth quarter, we mentioned some sizable shipments of packages of premium drilling handling tools for new rig builds in the Eastern Hemisphere. So those look more like a capital or more of a lumpy revenue transaction. So when we normalize out over time, we'd expect that correlation to hold. Quarter-to-quarter, we might see some softness based on when larger shipments go out, so good pickup that you have there on our correlation. And then thinking about inventory and cash from working capital, just to reiterate what we did, if we net out the impairments and inventory that we took in 2020, we did generate roughly $50 million of cash in the year from inventory reductions. So as we look forward, we still have, what I would call, excess inventories, and they have the ability to reduce those inventories where revenue stays at lower levels of activity. As revenue picks up, I think that inventory instead of growing quickly, any kind of growth in inventory would be muted. We do think accounts receivable will grow through the year as revenues do. So net-net, we think working capital still is a contributor to cash flow, but at a much smaller level than it has been in the last couple of years.

Last question for me, at least this go around. Is -- could you just spend a little bit of time on the Production segment and that was clearly the softer spot in Q4. Can you just talk to us about trends in that business? And have we seen an indication? I mean, did they destock in Q4? But we think they might restock? How are you seeing kind of the January, February trends? And then tag teamed with that, not just a production question, but is there any pricing -- are you seeing any pricing in the system across any of the business lines? And thanks again for -- let me ask a bunch of questions.

Great, Dan. On the Production segment, both on the valve side and production equipment, there has been some destocking. On the valve side, we do sell to the big PBF distribution companies. And they have made a big point of trying to be more efficient from a working capital standpoint. And that's an effort that they have ongoing. And so that has had an impact on us. We work with them. They are good customers for us. And we also look at project work as well, which gets to the investment in the midstream and downstream, which hasn't been particularly strong here recently. And on the production equipment side, we do see larger operators tending to order in bulk and then work down their inventory of surface process equipment. And that was some of what we felt there. With the better oil and gas prices that we're seeing here currently, we do expect some pickup there, and we have seen some nice orders, so some improvement on that side we think is justified. On the valve side, as we're focused on fewer valves brands, we're hopeful that we can drive improved sales in that business through additional sales channels domestically and internationally. And then on pricing, Neal, you want to address that?

Yes. So we do see a little bit of pricing power in a few of our product lines. But I think, overall, there's still a lot of inventory capacity out in the market. However, we do see opportunities that, as we introduce new products that add value for our customers that we can increase margins with the introduction of those products. So that's an area we're going to focus on.

Yes. And Serpent product, that's an example isn't it, Neal?

That's correct. Where we're reducing the overall cost of ownership for our customer base and nonproductive time in the field, so that we can see an improvement in margins from products flow out versus flat But win-win, better margins for us, but significant value for the customers.

Thank you, Dan.

Thank you, Dan.

Well, we appreciate the questions and the interest. And thank you all very much. Have a great day. Thank you, Angela.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and have a wonderful day. You may all disconnect your lines.