Good morning, ladies and gentlemen, and welcome to the Forum Energy Technologies Second Quarter 2022 Earnings Conference Call. My name is Lilia, and I will be your coordinator for today’s call. [Operator Instructions] 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, Lilia. Good morning, and welcome to FET’s second quarter 2022 earnings conference call. With me today is Neal Lux, our President and Chief Executive 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. During today’s call, all statements related to EBITDA refer to the adjusted EBITDA. This call is being recorded, and a replay of the call will be available on our website. I will now turn the call over to Neal.

Thank you, Lyle. We just wrapped up a great quarter with a lot of highlights. Second quarter bookings were over $200 million the highest since June 2019. We’ve increased our backlog for six consecutive quarter, gross margins was the highest in three years. Revenue and EBITDA are up 25% and 138% respectively on a year-over-year basis. We are now more profitable than prior to the pandemic. These excellent financial results of the product of our business strategy and improving macro environment. Two years ago, we implemented a strategy to radically improve the profitability of FET by implementing and maintaining a lean cost structure focusing on market where we have meaningful share and commercializing new products. Today, I want to thank our team for executing on that strategy. These initiatives have served us well over the past few years and positioned us for outsized return as activity accelerates in the current environment. Our market is the best it has been in many years. Macro economic indicator signal and extended period of growth for our industry. Oil and gas inventories remain at very low level. Worldwide spare capacity is limited and increases in supply cannot occur until investment grows significantly. Oilfield service companies have increased spending on consumable items and replacing capital components just to maintain current activity levels. These customers will need to invest more in equipment upgrades and new builds to grow activity further. FET is meeting these demands with a differentiated portfolio of consumable and capital products. On recent calls, we have highlighted a few of our new capital products, such as the FR120, Iron Roughneck for drilling rigs, and Serpent Series manifold and flexible host system for hydraulic fracturing well sites. This quarter, I want to highlight two of our consumable and aftermarket items. The first example is…

Thank you, Neal. Our second quarter financial results were indeed strong. Revenue of $172 million in EBITDA $15.5 million both exceeded the high end of our guidance range. EBITDA margin was 9% for the second quarter. On a sequential basis, revenue and EBITDA grew by $17 million and $7 million respectively yielding a 38% incremental EBITDA margin. Revenue growth was roughly in line with the increase in U.S. rig count. And our sequential bookings growth of 23% resulted in the second quarter book-to-bill ratio of 118%. Our increased profitability reflects significant operating leverage, continued net price improvement and favorable mix associated with completions segment revenue growth. Looking ahead to the rest of the year, industry activity continues to drive strong demand for our products. We therefore forecast third quarter revenue to be between $170 million and $180 million and EBITDA to increase to between $16 million and $19 million. For the full year, we now expect EBITDA to be near the top end of our previous guidance range of $50 million to $60 million. Second quarter free cash flow of negative $26 million was in line with the first quarter and with our guidance. As expected, our net working capital increased by $30 million, as revenue drove higher accounts receivable and inventory grew to mitigate supply chain challenges. We also made our semi-annual interest payment of $12 million at the beginning of the second quarter. As indicated last quarter, we forecast net working capital to decrease by the end of the year. We estimate second half free cash flow to be between positive $30 million and $40 million. And we ended the quarter with total cash of $27 million and availability under our revolving credit facility of $114 million, for total liquidity of $141 million. Since FET, is an asset-light…

Thanks, Lyle. The story is simple, industry fundamentals are strong, orders are accelerating profitability is increasing. FET is a compelling company with a great future. Operator, please take the first question.

Thank you. [Operator Instructions] Please stand-by while we compile the Q&A roster. And our first question coming from the line of John Daniel from Daniel Energy Partners. Your line is open.

Good to see bookings and margins heading in the right direction. If you please forgive me, I’m away from my desktop, so I haven’t had chance to really scrub the release and everything, but you caught a lot of nice victories and wins in terms of opportunities going forward, but just can you kind of rank for me, if you will, like, most excited over the next call it 6 to 12 months?

Yes, I think John, as you said, we had a lot of drought strength across the portfolio. So, we start with consumables like for example our artificial lift business multi solution saw on the completion side with quality wire line and global tubing, also seeing good growth with our drilling consumables, but we also see more inquiries and orders for our capital equipment that’s in the stimulation line, product line with single line manifold and power ends. And we’re also seeing in drilling, as well mentioned with the FR120 Iron Roughneck and Catwalks also seeing good that inbound inquiries for subsea ROEs.

I heard correctly, you called out a situation where a customer was basically pleased with your product offering and perhaps shying away from a lower price for an offering. Normally, at least the last couple of years, it’s been people buying the cheapest they can get. Do you see this trend continuing the quality, if you will and from an ESG perspective to any of your customers at this point care about buying American, North American versus international just any thoughts there would be appreciated?

John that’s a great question. Again, we are seeing, is a flight to quality. I think as you, I know, you follow our industry really well. And what we hear is high utilization, right. So our customers are working they are fracking more hours and they are fracking more hours in a day than they had been in the past, they’re drilling as fast as they can. And they need reliability. So, a few years ago cash was tight, it was tough industry environment. Our customers did what they had to do to survive and generate cash to do that. Today they are doing really well, right. We saw a lot of great earnings call from that our segment. But they’re busy and they need reliable equipments, I do see a flight to quality.

And then the last one for me, sort of, not asking pro forma guidance Neal, but your book-to-bill is 1.2 times. Where do you think this could realistically get to over the next year?

You know, for us, it’s…

What would be your hope if you will?

Yes. No, no I think it’s a great question. We’re excited about our industry, right. And when you think about the macro environment, it is really, really strong. And I think there’s an obvious need to increase rig count and our revenues and grow with that activity. You know, 1,000 rigs next year, I think it’s quite possible. And that gets us to a run rate of, let’s call it a $1 billion. And we have strong incremental and I think, with 30%, incremental EBITDA margins, I think that’s a very transformative result.

Thank you for taking that and giving the answer. I appreciate it.

One moment for our next question. Next question coming from the line of Dan Pickering with Pickering Energy Partners. Your line is open.

Hi, Dan.

My phone blanked out as you were talking about your revenue potential at 1,000 rigs next year. I think you’ve said $1 billion, but I just want to confirm that.

Yes. Dan, as Neal mentioned, we do correlate really well with U.S. rig activity. While that’s not always the driver of each of our product lines of businesses, it does correlate well. And our historic correlation would say 1,000 rigs is roughly $1 billion of revenue. And so that’s 50% more than we have. We feel good about our capital capacity to be able to do that. We could do 50% more revenue without significant CapEx in our facilities and the flow-through and drop-through of operating leverage and what that means from the bottom line is impressive. So excited about the potential. We’ve got to watch what our customers ultimately do with CapEx, both E&P operators and the service companies, but all indications are spending and the industry is going to go up.

Yes. That makes sense. While during the call, I didn’t hear you talk much about pricing. Can you just give us a view on kind of gross pricing and net pricing, are you able to pass along your cost increases? And can you ballpark for us what kind of new orders look like from a pricing perspective?

Sure, Dan. We’ve been talking about pricing for nearly a year now and pushing pricing and winning pricing gains really across the board. I think your question is really a good one is where are we getting net pricing gains that beat inflation. I think the areas where we’ve seen those most net pricing gains are in our more differentiated products where we add additional value to our customers. For example, the drilling fluid end module that Neal talked about, we’re able to really push price and products like that, where we’re creating extra value. . We’re also starting to see some net pricing gains in even some more of our commoditized products, whether that’s on some more of our drilling consumables or even in our valves product line. So we’re seeing pricing across the board and continue to push that as it goes. I think it’s important to note that our prices are still below where they were back in 2019. And so as spending goes up as the market is getting tighter as our service company customers are pushing pricing and getting price with their customers on higher demand, we’ll be looking to do the same.

And while, does that flow through? Does it flow through almost immediately? Or does it take a little while to kind of push price, get price and then realize it is really a ‘23 event before it impacts margins? Or could we see that in as quickly as Q4?

Yes. As we look at the business, I think that depends on the kind of nature. So our consumable products, Dan, that are more book and ship, we’re going to see that flow through more quickly. things like our capital items or we mentioned the order for production equipment that’s going to ship mostly in 2023. Any gain there is going to be a much longer-term drive to get there. Our second quarter incremental EBITDA margins of 38% were substantially higher than our gross margins, and that does drive a little bit of operating leverage there, clearly, some favorable mix with completions but also recognizing some net pricing benefit.

Got you. When you think about energy transition. I know that you’ve talked in the past that, that’s 1 area you hope to generate some revenues on a go-forward basis. Could you just talk a little bit about where you might see your products applicable for non-oil patch applications?

Yes. Dan, I think as equipment manufacturer. Again, we have the engineering and capability to make a lot of different products. And thankful because of our portfolio, we are adjacent to, I think, to a lot of those energy transition markets. Great example, offshore wind farms. Those wind farms require support for installation and maintenance. And our ROVs from our subsea product line, where we have decades of experience are really well positioned to address that. We also see missions control as a key, especially at the well site. And with our production equipment product line, we are touching those customers today. And we’re developing new products and technologies to help with that.

Okay. And last question, Lyle. Working capital, you guided toward a substantial kind of release of working capital, if you will, or free cash for the second half of the year. I think you said or maybe Neal said in his closing remarks, will we see free cash net for 2023 that’s -- or sorry, for 2022. And then as we look to ‘23, let’s pretend that $1 billion number happens would you see consuming working capital to help deliver that revenue growth?

Dan, good question. So kind of recap key points on cash. In the first half of the year, we grew our net current assets, excluding cash by about $50 million, with most of that coming from increasing inventories, on plan to mitigate what’s going on supply chain. So we’ve built a good buffer there. And as we look ahead to the back half of the year, our guidance implies kind of a slowing rate of top line growth. And with that, then lower growth in receivables, but we do see inventory balances turn and decline. So the buffers we put in place, we think we can pull those out later in the year as we get there. So looking ahead, where do we get? FET has always been a good story with high free cash flow relative to our EBITDA because we have really low CapEx. We’ve mentioned where our CapEx position is. I think we’re in good shape there. And while as we grow, we’ll undoubtedly need to build some level of working capital we ought to have really good EBITDA cash flow conversion metrics with strong top line growth.

Great. Tailwinds are behind you. Thanks guys.

Thank you, Dan.

Our next question coming from the line of Eric Carlson. Your line is open.

Hi, guys congrats on the results. I’ll maybe just piggyback a little bit on what everybody else has said and kind of when we focus on the outlook maybe going into the end of the year into 2023 and the cash flow available, what do you guys look at in terms of return of capital? I know that there’s a buyback outstanding. Some comments on that would be great. And then additionally, I believe there’s of the debt outstanding, $116 million of that principal value automatically converts at $27 per share. Clearly, we’re below that number now. And as we look ahead, is there any ability to I guess, look at potentially calling that debt and removing what is approximately 4.3 million shares of dilution. Just some comments on that would be great. Thanks.

Yes, Eric, I think redeeming bonds prior to conversion with -- if we had the free cash flow, I think, is a good investment, one we, would we would look to do it as we -- again, as we generate free cash flow.

Eric, let me jump in maybe with a little bit of some detail there. So the first half of the year, we did consume a good amount of cash and working capital. And as we step back and think macro, overall leverage for us as a company is still higher than we would like to see it. So we need that number, we need that overall leverage to come down. Free cash flow, as you mentioned, clearly, is a step in the right direction and seeing net debt come down. And we’re looking at all the different options that we have to get that leverage in the right place. I mentioned the small asset divestiture that we had, not a giant needle mover for us, but I think indicative of the kind of thinking we’re having of continuing to get there. So give some details back on those convertible notes, we do have the notes convertible. We’ve talked about that being a key drive and a way to get there. And a reminder that roughly half of the notes, we updated that number in the Q that we’ll file later today. It’s about $122 million worth of notes would convert when our stock trades at $30 a share. And so we see that as a very nice plan for us is what we’ve had in place for the last couple of years. But as you say, $30 a share is a little bit out. So we are looking at other options in ways that we could manage the debt. We’ve got three years until maturity. So we have time. to deal with that, and we’ll keep looking at ways to get cash out of our balance sheet being more efficient and ultimately reducing our total level of leverage.

And our next question coming from Peter Ehret with ERS of Texas. Your line is open

Congrats on the quarter. I’m sure that’s got to feel pretty good at this point after a long time. So anyways, congrats in nice work, and thank you. But going back to the notes just for a minute and I could dwell on this too much, but I know that there’s just not a lot of liquidity there. So couldn’t do a lot anyways with just open market purchases, but did you do any of that during the quarter? And do you at least try to chip away on it in that way?

Yes, Peter, let me take that. We did not repurchase any notes in the quarter. As you mentioned, liquidity is really thin on the notes. Our big repurchases that we did were back in 2021 following the asset divestiture we did at the end of 2020, kind of a return of cash back to note holders per the indenture. So definitely some opportunity out there. The notes have traded a little below par. But as you mentioned, there’s not a lot of liquidity in the notes. I think a big change for us is that in August, the effective no call period on those notes expires and there’s a call premium out there, but they become callable in August. So that presents a new opportunity that we really haven’t had there before that time.

Yes, of course, all you could do is buy in kind of 1 million, 2 million kind of things and it wouldn’t make a lot of progress, but at least save you on dilution, maybe if the stock does hit $30, but the other thing I was just wondering about what do you see out there just M&A-wise, things picking up, bid offer spreads kind of what are your thoughts in general?

I think we’ve said in prior calls, we think we are a logical consolidator. We did this last year in our drilling product line with Hawker Well Works. We think that type of acquisition makes sense. We also like that technology that’s disruptive or addresses new energy applications. Again, a good example of that was our Reach production solutions acquisition that we did again at the end of last year. So always looking at good opportunities. We continue to look at our portfolio and analyze and we want to make sure we have the highest margin products that we can and address the largest addressable markets we can.

But are things functioning out there? Just how is the balance? Are things better bid or better offered for other companies? Or how would you characterize that?

Peter, we’re definitely seeing more activity in the M&A markets. Sellers, some of those have been in, whether they’re private equity sellers or even families that have been in business for a long time, are seeing a rising market as an opportunity to monetize something. The bid-ask spreads from our view, are still extremely high with sellers thinking they’ve got something really big here. And buyers recognizing that if you’ve got cash in this market, it’s really valuable. And so there’s still that spread. We haven’t seen a ton of deals get done as a result. But I think we’ll continue to see activity out in the space and question as to how much is actually going to get completed.

Thanks, Peter. This will conclude our call. We thank everybody for joining us today.

Ladies and gentlemen, that does contour conference for today. Thank you for your participation. You may now disconnect.