Good morning, ladies and gentlemen, and welcome to the Forum Energy Technologies Third Quarter 2021 Earnings Conference Call. My name is Annie 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 will now turn the conference over to Lyle Williams, Chief Financial Officer. Please proceed sir.

Thank you Annie. Good morning, and welcome to Forum Energy Technologies third quarter 2021 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. The improvement in drilling and completions activity is continuing with strong rig count additions during the third quarter both domestically and internationally. We are also seeing more interest in offshore oil and gas activity, as well as subsea opportunities in defense and for the energy transition. All of this improvement in activity drove another strong increase in our inbound orders, the fifth increase in quarterly bookings in a row. We are now seeing higher orders across all of our product lines and in the third quarter we had a record high book-to-bill ratio for the company. Our longer lead time capital equipment businesses such as subsea and parts of our drilling product line are seeing strong orders that stretch into next year. Even our short-cycle businesses are seeing high orders as customers become more concerned about availability. However, this sharp increase in demand is running into the same supply chain issues affecting all manufacturing companies and indeed affecting us all now in our daily life. Cost of raw materials are up significantly and virtually everything is taking longer to ship or is on back order with freight costs up several-fold. Although our team at FET is doing a good job managing these issues, we are not immune. And supply chain did have even more of an impact on our revenue and margins in the third quarter than we previously anticipated. Without these additional supply chain delays our, revenue would have been $10 million to $15 million higher than the level we actually achieved in the third quarter. We are, of course, raising our prices as a result of cost inflation and we did realize some pricing improvement in Q3 to partially offset higher input costs. However, we expect that in this fourth quarter, our pricing…

Thank you, Chris. In the third quarter, the FET team was able to deliver $141 million of revenue and $7 million of adjusted EBITDA, a 9% sequential increase. In addition, orders grew sequentially by 11% to $176 million. The strong backlog we now have sets the stage for meaningful revenue growth into next year. Let me share further information about our segment operating results for the third quarter. On a sequential basis, our Drilling and Downhole revenues increased 3% or $2 million and adjusted EBITDA also increased by $2 million. Incremental margins for the segment were well over 100% sequentially. All three product lines in the segment contributed to the strong operating performance. Subsea led with fulfillment of large capital equipment orders. Our artificial lift product offerings continued market share gains and our drilling product line benefited from favorable product mix. In our Completions segment, revenue increased by 7% to $50 million as North American well completions activity trended higher in the quarter. In addition, orders for this segment grew 26% to $60 million, due primarily to orders for new product offerings, which we expect to deliver over the next six months. However, due to significant material and freight cost increases, adjusted EBITDA for the segment decreased by $1 million. In our production segment, the timing of customer order patterns is relatively lumpy compared to our other product lines. As such, orders for the third quarter grew sequentially 6%, due to large orders of desalinization process equipment and revenues decreased by $1 million, due to lower sales in our Production Equipment product line, partially offset by higher sales of valves into the downstream market. Adjusted EBITDA was roughly in line with second quarter results, despite the lower revenues. The production segment has been particularly impacted by cost inflation and supply…

Thank you, Lyle. This morning I will provide additional details on our strong bookings, supply chain challenges, price increases and energy transition. At FET our team of experts work closely with customers to develop products and solutions to make energy production safer, cleaner and more efficient. A great example of these efforts is our Serpent Series high-pressure flexible hose and single-line manifold system. This solution with our patent-pending modular end connections, eliminates nearly all failure points and lead path experienced with traditional high-pressure flow wire while increasing uptime. Since its introduction in the second quarter, we have booked eight fleets of our Serpent Series solution at a value of just under $20 million. This is a great start and as high-pressure flexible hoses replaced flow iron more broadly in 2022 and beyond the addressable market should be significant. We have an excellent growth opportunity ahead. Switching gears from US onshore to international offshore our subsea product line had another very successful quarter. With four remotely operated vehicles booked during the quarter, the team has landed 11 for the year. When paired with our launch and recovery systems, the value of these orders is nearly $5 million each. These vehicles are utilized in harsh environments. Very few companies can meet the technical challenge, FET can with the engineering capabilities we have developed over the last few decades. And we believe we are only scratching the surface. Our vehicles and expertise are well suited to serve the offshore wind market during site survey in preparation construction and maintenance. This product line is poised for growth in the coming energy transition. Additionally, our Subsea product line continues to serve the defense sector. During the quarter we completed sea trials and final delivery of our LR11 rescue submarine. Also, we have a number of…

Thanks, Neal. I'll wrap up today's prepared remarks by thanking our fellow employees, for their diligent effort and by taking a look back at what FET has accomplished, over the past year. In the third quarter of last year, we completed the exchange of our long-term notes for convertible notes extending significant debt maturities to 2025 and providing a clear path to further leverage reduction. In December, we sold a business for over $100 million, which reduced our net debt by approximately one-third. At the beginning of 2021, we improved EBITDA by another $20 million annually through portfolio cost restructuring. While all of these efforts were underway, the team grew our top line maintaining the long-range correlation of our revenue with US rig count. Pro forma for the business divestiture, our quarterly revenue is up $48 million compared with the third quarter 2020 and our bookings have more than doubled. Over this same time period our quarterly annual -- I'm sorry our quarterly adjusted EBITDA has improved to $20 million or $80 million annually reflecting 42% incremental EBITDA margins. We are now a leaner, more profitable enterprise with a clear path to significant debt reduction and substantial upside in earnings. Annie, may we please open the call for our first question.

Thank you, sir. [Operator Instructions] Our first question comes from the line of Ian MacPherson from Piper Sandler. Your line is open. You my ask your questions.

Hi. Good morning, everyone.

Hi, Ian.

Hi, Ian.

So I wanted to ask just a couple of questions upfront. Obviously, I think the positive highlight of your report here is the orders, which continue to show strong improvement. And I was wondering if you could maybe tease for us how Q4-to-date order trajectory is looking and what that means in terms of your visibility into top line improvement in Q1 and Q2? And then -- that's the first question. Then the second one I had is really just, what needs to get unstuck and fixed in order to get past the margin impacts that everyone is suffering, everyone, I guess, in your world and many businesses are suffering, near term, if we're going to get to the margins that you aspire to. Is it within your realm of control right now to get margins where you think they should be, or do you really need to see the macro factors with supply chain normalize before we can get to better margins than what you're envisioning for Q4?

Sure. Ian, I'll start with the first part on bookings and the trajectory. We continue to see strong inbound quoting activity for our key products. In the third quarter, we had some fairly large bookings come through with our ROVs and with our single-line manifold systems. And so we think that those are pretty large ones, chunky. But I think our overall trend is continuing forward and may or may not equal what we did in the Q3 with those large ones, but I think the overall momentum continues forward.

And demand is strong, Ian, as you can imagine with activity continuing to improve. So that relationship between higher activity, using rig count as the benchmark there, and our revenue and orders continues to hold. As for your second question regarding margins, I think we are making progress there. If you look at the segment level, we've made great progress in our Drilling, Downhole and Subsea segment and pleased with the margin progression there. And they're doing well. Our Completions business has also made very good progress and I think they've got more running room to go, as they implement some of these price changes we talked about and overcome some of the cost increases for steel and so forth. So really good progress there. Obviously, we'll benefit from the operating leverage of higher revenue that within the Production segment, I think, they have been particularly impacted by the supply chain challenges, Ian, and that's really held back the margins there. A couple of reasons for that, one, within our production equipment, we took orders months and months ago, late last year first quarter this year that, we're delivering now, and we've had significant cost increases that were not anticipated then. So that has impacted the margins, similar on the Valves business, with a long supply chain there, but also given our sourcing a lot from Asia significant delays in – which affects fulfillment, as well as cost increases, right? So price increases to overcome that, catching up with the cost increases, and now getting in some of those delayed orders. So we have the material on the shelf to supply the demand that we see, realize the operating leverage within the Valves business, and the Forum overall. So I think, those will be key elements to the higher margins going forward. And we don't want to understate the potential for price improvement in many of our businesses.

Got it. Thank you very much, Chris and Neal. Appreciate the color.

Great. Thanks, Ian.

Thank you, sir. [Operator Instructions] We have another question from the line of Dan Pickering from Pickering Energy Partners. Your line is open. You may ask your question.

Hi. Good morning, guys. Thanks for taking my questions. I just want to check my math. I think Lyle or Chris, I heard you say that, we think the supply chain issues cost us $10 million to $15 million in – on the revenue side, I'm not sure, if I heard an EBITDA implication. Do we think that that 25% 30% incremental margins would make sense and so we would have had a another $2 million or $3 million of EBITDA in Q3, if not for the supply chain?

Dan, I think you're on with that kind of a number. We definitely felt that $10 million to $15 million with supply chain challenges and 25% to 30% incrementals would have been very reasonable given the impact of those. We look ahead and think about a similar knock-on effect in the fourth quarter. And hence, we've taken down our guidance, a bit from what we had previously done at the EBITDA level. Supply chain challenges continue to be out there. But also, we saw in the third quarter something that will be incremental to that is a bit of a slowdown with operations in some of our service company customers. They delayed operations and therefore delayed pick up of what would have been more book and ship revenue for us. So we saw kind of an incremental to that, a knock-on effect in the third quarter. So yes, we could quantify $10 million to $15 million worth of product that we couldn't get out the door and we know that there was a bit more. So, definitely an impact from not only supply chain, but also from COVID operations in the field.

Well, when you say delayed by our service company customers, you're not saying that they didn't have the work. You're saying that, they had problems with labor or with quarantines, or things like that where they couldn't staff or perform the work that they had contracts.

That's right.

Well, we will blame COVID for what looks like you would have probably exceeded your guidance, if not for those issues. And I appreciate you incorporating that in the go-forward guidance. On the share repurchase kind of a two-pronged question here. Is there any specific timing associated with the authorization? And have you given any thought to sort of the -- any parameters around what you're going to implement that repo?

Yes. I mean, we think this is a great value here as we said Dan. And so there's nothing that stands in the way of us beginning that program. As you know there are rules about volume limitations and so forth. And of course we'll be abiding by those. But we've got the resources and we've got the will to move forward with the plan.

Yes. And Chris is there any -- so $10 million -- I mean, obviously 8% of the shares is a meaningful number. You've got $50 million of cash. Do you -- are you using a debt-to-cap measure, or how are you thinking about 10 turning into 20 or why won't 5? How do you think about sizing?

Yes. We do have some constraints within our credit agreements as things stand at this point in time. So that's a factor Dan. And also let's see how this program proceeds right?

Sure, sure. Last question. I usually ask 10, I'm only going to ask three this time. Energy transition you talked about some new products there. You talked about growth opportunities. Do we think about that as similar margin opportunity to your existing business? Is it a better margin opportunity? How could it impact the kind of mix as we move ahead?

Yes, we're starting to get these new opportunities and it's great to see them. And I think with our -- again our wide reach and our ability to touch a lot of different adjacent markets gives us a lot of shots at this. As we think about it I think the margins should be in line with our existing businesses. And depending on the amount of innovation we can add potentially more with some new thoughts and new ideas because we are entering new territory here. But yes I think it's a great opportunity and I'm really pleased that we have so many shots on goal here.

Okay. So no need to buy your way into that market you're getting acceptable profitability as is and maybe some margin upside?

Right no loss leaders there. That's right.

Okay. Thank you very much. Appreciate it guys.

Well, Annie we're going to end the call at this point. We appreciate the interest and the questions and we will talk to you all next quarter. Thank you very much.

Thank you, sir. Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you for participating. You have a good day.