Good morning, ladies and gentlemen. Welcome to the Forum Energy Technologies Second Quarter 2023 Earnings Conference Call. My name is Giji, and I will be your coordinator for today's call. There is a process for entering the question-and-answer queue. A link with instructions can be found on the company's Investor Relations website under the Events section. [Operator Instructions] At this time, all participants are in a listen-only mode and all lines have been placed on mute to prevent any background noise. 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.

Thank you, Giji. Good morning, and welcome to FET's second 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 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 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. And unless otherwise noted, all comparisons are second quarter 2023 to first quarter 2023. I will now turn the call over to Neal.

Thank you, Rob, and good morning, everyone. To start today, I'm going to share our view on recent market conditions and the outlook for the remainder of 2023. Commodity price declines and volatility have been consistent theme throughout the year. For example, during the second quarter, oil prices fluctuated significantly between a range of USD80 and USD67 per barrel. Further, oil prices were below $75 per barrel, about 70% of the trading days during the quarter. For the natural gas complex, prices remained below $3 during the second quarter after spending almost all of 2022 above $4. As a consequence, the appetite for exploration and production company investment was dampened and rig count declined. Despite lower investment levels, decreasing U.S. service demand, U.S. drillers and pressure pumpers remain relatively disciplined with pricing. This was achieved by idling equipment. As a result, day rates were generally robust for utilized high-spec rigs, wireline and coiled tubing units and pressure pumping equipment. Ultimately, this discipline is good for our industry. But in the short term, this means lower U.S. drilling and completion activity. The combination of lower commodity prices and firm service pricing drove operators, particularly privately held operators, to pull back on drilling activity. Last year, private operators increased their rig count by 25%. That trend has completely reversed. This year, they have dropped all the rigs they added last year and then some. While public operators tend to have a longer-term focus, even their activity has declined this year. In total, U.S. rig count is down 81 rigs or 11% from the end of the first quarter, an elevated rate of decline, very few industry observers expected. This has also led to a softening of hydraulic fracturing activity. Pressure pumpers and related service providers began to see more white space on…

Thank you, Neal. Good morning, everyone. For the second quarter, revenue and EBITDA were within our guidance range at $185 million and $17 million, respectively. Compared to the second quarter of 2022, revenue and EBITDA increased by 8% and 12%, respectively, with margin improvement of about 40 basis points. Sequentially, our consolidated revenue was down 2%. As Neal detailed earlier, softer U.S. market conditions were almost offset by FET's international and offshore sales. Specifically, U.S. revenue decreased by $10 million, while international revenue increased by $6 million. Despite the modest revenue decline, overall EBITDA was essentially flat. Bookings rebounded in the second quarter with a $7 million increase. Once again, backlog increased for the 10th of the last 12 quarters. At the end of the second quarter, our backlog is up 13% from a year ago. Product lines that have larger international sales base drove this growth in revenue. The drilling technologies and downhole technologies backlogs increased 20% and 25% year-over-year, respectively. In addition, our production equipment product line had a nice backlog build. Year-over-year, backlog is up 46%, with large bookings this quarter for U.S.-based production equipment and international ForuMix technology sales as well as benefit from the Saudi Arabia desalter project we booked last quarter. In general, our backlog is scheduled to deliver through this year and into 2024, providing support for our full year forecast. Let me share some additional segment details. The drilling and downhole segment had sequential revenue growth of 5%, led by the drilling technologies and subsea technologies product lines. EBITDA was down about $0.5 million, due to less favorable product mix. Segment book-to-bill ratio was 102%, driven by the increased demand for subsea ROVs, drilling capital equipment and bearings. Of note, our subsea bookings increased 35% sequentially. We are excited about the strengthening…

We remain steadfast in the belief that our industry must increase capital spending to supply energy for growing global demand. To increase living standards around the world, operators must invest in new fields and optimize production from existing ones. Service companies must invest in new equipment and components to increase their efficiency and lower their costs. All sides point to a rebound in U.S. activity and acceleration in offshore and international demand and the resumption of the capital equipment upgrade cycle. The market dynamics are in place for a strong run for FET. And we have the teams in place to capture a growing share of the market through innovation, with the opportunities in front of us, I am excited about FET's future. Gigi, please take the first question.

[Operator Instructions] Our first question comes from the line of John Daniel from Daniel Energy Partners.

Hi, guys. Just two questions. You've discussed or you made a comment about the rising orders on the manifolds. And I'm curious, can you just walk us through what the ongoing opportunities are for maintenance and the replacement cycle for those manifolds?

Yes. I think on the manifold side, we're continuing to see our customers upgrade their fleets going towards electric. And generally, they're also upgrading their manifold systems to really complete that upgrade. We're kind of in, I'd say, early stages of that. We're seeing a number of manifold inquiries that we're turning into orders. But I think through the year, the key is adding the technology. So we've added some new check valves that last longer and lower the operating costs, as well as our high-pressure flexible hoses. So that's the small diameter that go for the pump to our manifold as well as the large diameter that go from the manifold to the wellhead.

Right. But it sounds like the fluid ends are we to think about multiple replacement opportunities per year. Is that or am I wrong on that?

So as we think about what's the consumable or what we're excited about is our check valves and the kits that go along with and those are consumables. The hoses last 1.5 to two years. From the ones we delivered in 2021, we are starting to see a replacement cycle. But really for us, it's replacing the iron that folks are still using on their fleets with hose, replacing their old manifolds with just better technology that's easier to maintain and faster the setup.

Okay. And the final question just has to do with North America onshore versus international. Things look good, right? When you look out into the international market, it's a little bit dicey here in North America land. I'm just curious, as a management team, are you spending more time dealing with sort of localized headaches or spending more time out there doing BD and international pitches?

Yes. So I think we have the infrastructure in place, John, that we can address both, I think, efficiently without having to sacrifice one or the other. And I think that's carried over from our history of having roughly half of our revenue come from international. On the U.S. side, I think I mentioned in our comments that we are starting to see an improvement. And it really starts with commodity prices, right? And oils had a nice run in July, up 16% or so. Inventories are low. And we're starting to see early signs of confidence from our drilling customers. So I think that's a positive side. But -- so in our view, it's not if rig count increases, but when. That's the kind of the spot we're in right now.

Okay, that’s all I had. Thanks for including me.

Yes. Thanks, John.

Alright. Take care, guys.

Thank you. One moment for our next question. Our next question comes from the line of Daniel Pickering from Pickering Energy Partners.

Good morning, gentlemen.

Good morning, Dan. A - Lyle Williams Good morning, Dan.

So a couple of questions, if you don't mind. I was intrigued by your comment, Neal, of the inquiry for the upgrades in North America. You made it sound like it was more of a systematic sort of a bunch of rigs, not just a one-off type of inquiry. Can you tell us a little bit more about that? Is that a package where the ticket size would be bigger than you're typically booking in the drilling segment? Or is it just sort of a standard order opportunity?

It would be for multiple rigs and it's an upgrade of their existing capability. I don't want to get into too much details. We're still early in the discussion. But to me, what I found intriguing and as a positive sign is that they're thinking about next year and wanting probably get their operating costs lower. So it was for our FR120, again, which I think is the leading iron roughneck in the industry. We have a big installed base now. Customers are seeing the benefit. In fact, I think what's also driving it, Dan, is the operators are pushing for it. They want to avoid downtime that they're seeing with the older iron roughnecks that are still being used on even what are so-called high-spec rigs. So to have a true high-spec rig. I think you need a tool like our FR120.

And that inquiry came at the beginning of the quarter before rig count really rolled? Or did it come kind of recently, so they're asking, even though rig count is down and there's a little bit of activity pressure?

Yes. This is very recent, which is why I really don't have too much information, but this is kind of out of the line.

Yes, that's encouraging. And then you talked about the international opportunity. I think you said you're tracking 20 opportunities in the Middle East. How do those typically work through the system? Do you get the indication there may be something, are you bidding and it takes six months for those contracts to be awarded? Is it a second-half of '24 or first-half of '24 type opportunity?

Sure. I think generally, they're pretty fast for our part of the equipment. What you can see is a new build rig other parts and pieces can get held up and maybe slow down our revenue recognition, for example, because there's not ready to handle everything. But compared to, for example, subsea, which is a much longer, let's say, order to delivery time, these should be relatively quick. This is a three to six month type process unless the rig manufacturer has more delays in their process.

Okay. Great. While you mentioned backlog, can you quantify for us what the aggregate backlog is at the end of the second quarter?

Yes, Dan, we typically haven't quantified that backlog, but it is up nicely over last year. I think that's the key point. Typically, our business is kind of two-thirds more consumable, things that look more like book and ship and 40% capital, which is more of what's in backlog. If we think back to the last major capital build cycle all the way back in 2014, that capital piece of our business was greater than 50%. So as we see that backlog growing, I think we'll see a push to more long lead delivery, better visibility in revenue and a higher capital versus consumable mix to our business. So we're seeing that and I want to give the indication that, that backlog is in hand and has continued to grow really over the last three years.

Yes. Great.

And maybe [Multiple Speakers] in the cycle too, Dan, of the same offshore pickup, which for us, the subsea is kind of a later part. And what's exciting is that we're already seeing some really nice demand for our ROVs today. And we think with the combination of offshore wind build-out, and I think where offshore energy buildout as well that the installed base needs to grow, and we're well positioned to fill that need.

Great. I've got a couple more, kick me off if you've got a big backlog of questioners. While, could you help us with, as you think about your second-half guidance, $50 million, give or take, of free cash and your Q3 EBITDA guidance, does that imply, I'm just trying to think about what U.S. rig count you sort of baked into your expectations? Is it that rig count stabilizes here? Is it that it drops a little bit more? Just want to try and properly calibrate expectations if rig count took another 10% dive, would we worry about the guidance range? Or have you kind of incorporated further weakness in your forecast?

Yes. Great question, Dan, and it's almost the $64,000 question. But I think as we thought about that in Q2, if you look at Q2 versus Q1, rig count was down in the U.S., 5%. If you look at current levels of rig count, I guess, as of last week, rig count was down 8% more from the second quarter. So our view is everything we're hearing is that we're nearing a bottom in rig count here. So I think when we indicated, we do think that the U.S. is going to be down slightly. That's kind of hanging in that range of where we are today for rig count, but also beginning to see some softening on the pressure pumping side, as well as on as there's been indication of that white space there. So maybe a flat from here with the back end of the year, beginning to see some counter seasonal pickup.

Okay, okay. Thank you, you scaled back your CapEx for the back half of the year. Neal, I ask every quarter about acquisitions. Does the current dynamic one, make you less excited about trying to find bolt-ons? And two, is it making things easier to do or harder to do?

Great question, Dan. I think what's encouraging is that it does seem like deals are getting done now at reasonable valuations that the bid and ask is much closer. So I think that's encouraging. While it would be great to be on a full-bore growth mode to be looking for acquisitions. I think this is a great opportunity to be opportunistic, and we'll continue to evaluate what's out there. Key as well is our liquidity. We feel really good about where we're at on the balance sheet and how we could handle our long-term debt. So I think putting all that together, we want to continue to find businesses that have a great industrial fit for us, high margin, nice mode, and we're going to continue to be opportunistic and try to find a deal that makes sense for FET.

Great. Fantastic, thank you guys. Appreciate you taking my questions.

Thanks, Dan.

Thank you, Dan.

Thank you. One moment for our next question. Our next question comes from the line of [Eric Carlson] (ph).

Hey, guys. Good morning.

Hey, good morning, Eric.

Good morning.

I guess just some thoughts. I mean it does seem, at least encouraging that, I mean, we're looking at almost 40% EBITDA growth year-over-year, given kind of the pullback in activity. And my question is more just center around when we look at the potential for the free cash flow in the back half of the year and then probably activity growth into 2024 as inventories kind of force the issue there and hopefully, price kind of triggers activity gains. Just thinking a little bit about if you guys have thought, I mean, what do you do with that cash as we kind of turn the corner here if activity bottoms in Q3 and we see things start to rebound. It looks a little bit promising, but $50 million of free cash flow added to the balance sheet in the back half of the year. You probably have some momentum going into 2024. Just when we look at kind of the debt levels that we kind of had pre-pandemic to now being about one-thirds of that and interest expense down considerably. I mean, what do you look to do with the cash? I know there's been talk to acquisitions, but obviously, the current valuation of the stock I mean I'm kind of a broken record at this point, but it's obviously very attractive and the debt is in the way of doing a lot of return of capital type things like peers are doing and the large steps have kind of reiterated they're going to return 50% of free cash flow or a greater number of that? I mean how do you guys think if you could just paint a picture on a one to two year basis and looking at the debt plus any other options to return capital buybacks and obviously being opportunistic if acquisitions. But if you could lay out anything that you have in terms of soft if the cycle continues to play out like we probably think it will. I mean, what does that look like? If you could just share some thoughts.

Sure, Eric. Why don't I take a crack at that, and appreciate the question. I think first is maybe to make sure we set the context around one of the key natures of FET's business as a manufacturing company, and that is a capital-light business, meaning we ought to be able to convert a good portion of our EBITDA into free cash flow. CapEx is light. And over time, we will build working capital. But as the business softens, then net working capital could unwind. So that's not a permanent investment. So we end up with a strong free cash flow numbers. That's what we're seeing in our full year guidance. And clearly, with the seasonality of a build early in the year and some reversal in the next half, we'll have a lot of free cash flow generation. So you're right, and we are excited about that and see that happening to roll forward to 2022. Obviously, we could have a very similar-looking free cash flow trend. We've talked on earlier calls about what do we do with cash and our balance sheet. We are in a good position with that. Our notes mature in 2025. So we've got a long time to deal with that and a lot of free cash flow runway. So one option for dealing with that is an organic path. The other is to look at something and take advantage of plugging in some portion of that or all of that and more of a long-term debt and retaining liquidity for an M&A opportunity or the opportunity to grow our business. We see a lot of opportunities in that in the space. Neal alluded to a better market for deals. There are a lot of private companies that are in a position of wanting to try to find some opportunity for their business. So that could put us in a position to take advantage of those kind of opportunities. So we're considering the fact that we've got a strong balance sheet now and real opportunities to transform the business with the right kind of a deal, but looking out there.

Yes. We want to grow our free cash flow per share, and that's organically and inorganically where it makes sense.

Great. And then if you think a little bit about, I mean, the goal of growing free cash flow per share is to ultimately find a way to return that to shareholders. I mean when you look at the valuation of the stock now, kind of the year-over-year growth in EBITDA despite activity being down, I mean it seems like if you can find opportunities to, I guess, remove the restrictions of the debt and be able to kind of invest in yourself by buying your own stock, that seems like kind of the number one priority, at least in my head. And then ultimately, if you can continue to kind of grow on that free cash flow per share, you might get into the scenario where you can actually return some cash while also growing organically and inorganically. Yes, that's just kind of my thoughts there.

Yes. I appreciate that, Eric. I think we have a lot of options going forward. And again, I think as you mentioned, we are really proud of the results we achieved, right, in a relatively flat or down market for the projection to grow EBITDA of 36% this year. That's a great result. And I think we can do more. And so we're going to continue to do that. We appreciate your support and the question. Thank you.

Thank you. At this time, I would like to now turn the conference back over to Neal Lux, Chief Executive Officer, for closing remarks.

Thank you, Gigi. And again, everyone on the call, thank you for your support and participation today. We look forward to talking to you again in November to discuss our third quarter results. Thank you.

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