Good morning, ladies and gentlemen, and welcome to the Forum Energy Technologies Third 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. [Operator Instructions] A link with instructions can be found on the company’s Investor Relations website under the Events section. 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 third quarter 2023 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 announced FET’s acquisition of Variperm Energy Services. Both press releases are available on our website. Investor presentation slides relating to the Variperm acquisition are also 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 SEC filings, our earnings release, and Variperm acquisition announcement. Management’s statements may include non-GAAP financial measures. For a reconciliation of these measures, you may refer to our earnings release and Variperm acquisition announcement. During today’s call, all statements related to EBITDA refer to adjusted EBITDA. And unless otherwise noted, references to FET’s standalone comparative financial results are third quarter 2023 to second quarter 2023. And finally, statements relating to FET and Variperm on a combined basis are trailing 12 months as of September 30, 2023. I will now turn the call over to Neal.

Thank you, Rob, and good morning, everyone. As noted in yesterday’s press release, we are extremely pleased to announce the Variperm Energy Services acquisition. I want to welcome the Variperm employees to the FET family. We are excited to have you join our team and look forward to working together following closing in January. I also want to recognize the strong support we received from our syndicate of credit facility lenders. Before discussing our transformative acquisition, I would like to spend a few minutes on FET’s third quarter results and 2023 outlook. During the quarter, soft U.S. market conditions continued with rig count declining 10%. This was counter to the industry’s and our expectations at the time of our earnings call. We also saw a rapid decline in activity based capital equipment demand from our pressure pumping customers, who passed orders in response to softening well completion activity. This led to a $14 million sequential revenue decline in our stimulation and intervention product line. Excluding this product line, FET’s revenues would have been up 6%, a significantly higher growth rate as compared to global rig count, which was effectively flat in the quarter. While revenue was down, we experienced an increase in bookings during the quarter, demonstrating the benefit of our global footprint. Our sales and marketing teams have been actively working with customers positioning FET as a key partner, and their efforts are paying off. We had another strong quarter of backlog growth supported with a 111% book-to-bill ratio. In fact, all three segments posted a book-to-bill ratio greater than 100%. Overall, I am pleased with how well our teams executed this quarter and managed through market headwinds. We have successfully grown international revenues, which have mostly offset declining activity in the United States. Even though revenue declined slightly,…

Thank you, Neal. Good morning, everyone. As Neal mentioned, we are very excited about the Variperm acquisition. Let me hit some of the details of the transaction and financial highlights. This week we signed agreements to acquire the equity of Variperm for total consideration of 2 million shares of FET stock and $150 million of cash. As of signing, this equated to roughly $195 million of total consideration, or 3.7 times Variperm’s trailing 12 months of EBITDA. We expect the transaction to close in January following Canadian regulatory approval and satisfaction of other customary closing conditions. To give context to the regulatory review, FET and Variperm did not provide overlapping products or services. In addition, to avoid closing delays, all sources of cash have been secured and leave the combined company with a conservative amount of leverage and adequate liquidity to both manage future obligations and fund organic growth. Cash consideration for the transaction will be funded through $90 million of cash from on hand balances and borrowings under our ABL credit facility and from the funding of a $60 million seller term loan. Prior to closing the Variperm acquisition, we will explore an alternative financing arrangement to the seller term loan. Following closing and without regard to any alternative financing arrangement, we expect net leverage to be 1.9 times EBITDA with liquidity of roughly $140 million. I am pleased to announce that in conjunction with the acquisition, FET lenders agree to amend our ABL credit facility to among other things, permit the Variperm acquisition, increase the aggregate revolving commitments from $179 million to $250 million and extend the maturity date to September 2028 and allow the seller term loan. The amendment is conditioned upon the closing of the acquisition. Once finalized, the expansion of the revolver is advantageous to…

Thank you, Lyle. We believe the Variperm acquisition is transformational. However, it does not change who we are. We remain a manufacturer of highly engineered and differentiated products, operating in niche markets where we have competitive advantages. We are a global company whose solutions are utilized around the world, making our customers’ operations safer, more efficient and environmentally friendly. We believe demand for energy and the investment required to supply it will continue to grow FET revenue. We have a long-term tailwind. And we can grow faster than the market through the introduction of new products while remaining committed to our capital light business model. Adding a great business like Variperm makes the FET story even more compelling for existing shareholders and new ones. Giji, please take the first question.

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

Hey, guys. Congratulations on the acquisition. Hopefully, you can hear me okay.

Yeah. Thanks, John.

Okay, good. Sorry. Just driving here. I know you mentioned there’s not necessarily a product overlap per se with the transaction. But I’m curious, is there an opportunity where the person you’re selling to within the customer base might be the same person. I’m not trying to get to like a bundling concept, but just where you’re bringing more to the table, if you will, the same buyer. Does that make sense?

That does, John. Yes, I think there’s a great opportunity for our multi-lift product family. If you think about the wells where Variperm’s products are being utilized, generally, there’s an ESP involved on the production well. And we think that’s a great opportunity to cross sell or utilize. I think Variperm’s great success with their customers. We also share some of the – from our other parts of our production segment, where we sell through distribution partners. Many of the end users are the same customers that Variperm sells to today. So I think we have some. But I think this is a great opportunity to expand that as we integrate and get to know each other even better.

Right. Okay. And I know everybody wants to talk international, so I’ll let my – the next people ask that question, but on the U.S. land side, coiled tubing, I don’t know if you saw some pretty impressive announcements by the coiled tubing providers in terms of the total distance they’ve been achieving, in terms of the wells. What are you guys seeing right now on not just the demand for the coil itself, but any changes in designs as these laterals keep going longer?

Yes, absolutely, John. That’s a key focus for our teams. I think as you may have known over the years, we’ve spent a lot of time hiring engineers, specifically in our coil that have experience in the field and developing specific designs to get to longer laterals. And we believe with the designs and kind of proprietary approach that we take, just by utilizing our product versus a competitor’s, you can give more reach and more weight on bit with products from Global Tubing.

Okay. Is there a theoretical maximum that you guys see in terms of how far it will actually go out? It seems to keep getting longer.

Yes. I think it really comes down to our customers’ equipment and ability to move it. But I think what I’ve seen and I’ve been involved in the business now for many years, is that our customers always seem to find a way to overcome challenges, whether it’s the transportation or amount of pipe they can get on a reel. So I think as long as our customers and service companies remain creative, I think we have the product that can allow them to do the job.

Okay. That’s all I got. Thank you for including me.

Thanks, John.

Thanks, John.

Thank you. [Operator Instructions] Our next question comes from the line of Jeff Robertson from Water Tower Research.

Thank you. Good morning.

Good morning, Jeff.

You all talked, Neal, about your fourth quarter outlook. Can you add any color on the kind of conversations you’re having with customers as there’s – based on how they’re thinking about 2024.

Yes. I think it’s a – depending on which part of the completion side or drilling side that they sit, you can kind of get a little bit of different color. But I think the general view is that the second – sorry, the first half of next year will be stronger than the first. I think it’s second half of this year. So I think the – really the idea is how fast do we start out of the gate? Do we have a quick first quarter ramp up as the E&P companies utilize their budgets or not? So I think that would be that focus on U.S. land. Now, internationally, we just had a great show in early October, and I think that show set again record attendance. And I think that reflects the sentiment that we’re seeing internationally.

When you think about the Variperm offering suite, you mentioned international. If you take some of those products to international markets, places like the Middle East, is there some sort of an adoption process that they would have to go through to be certified?

Yes, I believe there would be. I think every operator has different standards. But I think what’s helpful and what value that we could provide is we’ve gone through those evaluations with our other product lines and have the contacts, have the long-term stability. Again, we’ve been – we’ve had a company in Saudi Arabia for many years now, a footprint there, similar in Abu Dhabi. So I think having that long-term footprint relationship and knowing the landscape that we operate in could ease or speed up the adoption or qualification if we approach that.

A question on the margin improvement that you show on slide four of the deck, is there – when you combine these products – product lines, excuse me and think about 2024, 2025. Do you see the opportunity for further margin improvement beyond what you’re showing on the slide?

Yes. Hey, Jeff. It’s Lyle. Why don’t I take that, So the slide, just so we reference back to what we’re looking at is just a combined TTM of the two companies from September 30. And so we haven’t included any synergies we’ve talked about that, but we haven’t stuck any synergies in those numbers. I think what’s unique about FET as a manufacturing products company, and it fits with Variperm as well, is the concept of operating leverage. Each business has relatively low fixed costs, but the costs that we do have can be leveraged across more volume. So as revenues increase, then we do tend to see improved margins from operating leverage. And I think another thing that’s similar about both businesses is the capability of introducing and growing the revenue from higher margin, more differentiated products. We’ve been doing that at FET for a number of years and driven up our margin effectively that way and expect we see the same opportunity for Variperm. So, yes, I do think we have the opportunity for some margin expansion there. And those are two of the key drivers.

Thanks. And if I can one last one, just on the financing, Lyle, you talked about retiring the 9% bonds next year. With bigger – with a larger balance sheet scale, would you expect to retire those through free cash flow or would you expect to maybe combine some sort of financing to extend the maturities out?

Good question there. And just to be clear, what our comment was related to is with the financing structure that we’ve already talked about and free cash flow generation that we expect for next year, we’d be in position to organically without any other kind of debt retire those notes. I think anything else we do would be opportunistic as we look at the market.

Thank you. Thanks for clarifying that.

Thank you, Jeff.

Thank you. [Operator Instructions] Our next question comes from the line of Eric Carlson [ph].

Hey, Eric, Good morning.

Congrats on the announcement. When we’ve talked about acquisitions in the past, it’s almost seemed – like, it’d be a hard thing to accomplish to buy something that could actually make you cheaper on a go forward basis. I was just kind of running our numbers now and FET is at about 4.5 times trailing 12-month EBITDA. So kind of combined with the purchase, it looks like at the end of the year, assuming the stock price stays kind of where it is about four times. So that seems – as we’ve reiterated many times, very cheap. And then I think a lot of people kind of focused on the accretion. But when you look at cash flow and the ability that gives you to be very flexible, whether it’s retire the notes with cash, if you can do a larger, broader financing and free that up to create even more value. And then just one of the things I was interested in is obviously this brings SCF back into the mix, which is probably not a long-term holder, just given the nature of their business. And when you look at that cash flow, if we were able to kind of do a broader long-term debt package, is there an opportunity there to take advantage of perhaps them needing or wanting to sell once the lockup would expire? I’m just kind of curious on when you think broader and kind of continuing to manage the balance sheet, which you guys have done a phenomenal job off at the bottom and you kind of touched on where debt has moved from then to now. But just kind of thoughts on the balance sheet and the optionality and just thinking about a go forward plan and understanding that a lower float stock like you guys have has some challenges, but that also offers a lot of opportunity. So yes, just thoughts would be great.

Great questions there, Eric. And definitely things that we thought about in this acquisition and our prepared remarks really aimed at a lot of time was spent on making sure we got the balance sheet right and stable. So we’d be in a super spot going forward and I think we’ve achieved that. Now we have – as you mentioned, that flexibility. So we will generate free cash flow. We do have the opportunity just to organically retire notes. We don’t have to look outside. And so I do think that creates some options for us. As we do think about SCF, we’re pleased to have the current shareholders of Variperm become shareholders of FET. I think that was a vote of confidence by them in the business that they’re selling, but also in the combined company. And as you mentioned, long-term, these are probably sellers of the notes. We do have a 180-day lockup on those shares agreed with the sellers to give time for the acquisition to integrate and to marinate here. But after that we expect those shares to be freely traded and be out in the market. So I think the ultimate end of that increased float is a good thing for us that we’ll get more volume out there and under the right financing structure, timeline like you talked about, provides us the opportunity to potentially acquire some of those shares with our stronger free cash flow.

Great. Yes. This is exciting. It looks great. Appreciate the work and yes, keep it up.

Thank you, Eric.

Thank you. [Operator Instructions] Our next question comes from the line of Daniel Pickering from Pickering Energy Partners.

Morning, gentlemen.

Good morning, Dan.

So I’m going to – bear with me, I’m going to ask a number of questions about Variperm, just because it’s – obviously it’s a very meaningful transaction for you and we’re just kind of learning the business. I appreciate the deck that you put on your website about it. And so when we look at this business, I guess, first question is, we’re seeing the results on a historical trailing 12 basis. Is there anything – it’s an equipment sale based business and so is there anything lumpy about the last year? Just thinking about what the next year or 2024 looks like. Is 2023 a representative look to 2024? Any lumpiness in the revenue profile?

Yes, Dan. I don’t think there was any large projects that were unusual that they delivered in 2023. I think as we look ahead and as we modeled the business, our focus was looking at – what’s the kind of demand that’s going to come from the maintenance drilling, right. Just to keep production flat. And I think that’s where our expectations is that 90% to 95% of the go forward was really just to make up for declining activity or declining production.

Yes. And Dan, I would just chime in on that. If we look back over time at the business, they’ve got a really great correlation with energy prices and with activity very similar to our business and probably mirror the more activity driven side of FET rather than the bit lump, more lumpy capital side of FET. So expectation is that over time this will be a dampener of volatility on combined FET revenues.

Yes. And I think another interesting driver that I’m not sure if you heard John Daniel’s comment on longer laterals, that’s another great driver in this business as they continue to drill newer wells and fill in the development, they’re extending their laterals, which for Variperm and the combined company will be more product per well. So as the meter [indiscernible] we have more revenue per well.

Got you. And this product – it is a new well product. So it’s not a – there aren’t a lot of maintenance revenues associated here. It goes in the well when the well is drilled and then you’re waiting on the next well drilled to generate your next set of revenue.

Correct. I think there’s some occasionally remediation work where they’ll go in an existing well. But I think that the typical is that it’s a new well – and a new set of well, excuse me, an injector and a producer that’s in the ground to fill in the maintenance capital and utilize the steam generation of the central processing plant.

Got you. And as you think about your opportunities set internationally, so this is a heavy oil application. Where do you see the top two, three, four countries that you might focus an expanded sales effort?

I think we’ll want to focus on areas where we have a good footprint, where we can utilize our fixed cost and do this in a good and profitable way. I think the Middle East and the areas around there and the countries around the Middle East are really going to be our key focus. Again, that’s where we at FET have seen the most activity. And I think if we step outside of Canada, I think that’s the next big area.

Okay. And the kind of historical information that you showed in the acquisition press release highlighted, they had a couple of million bucks of CapEx on a trailing 12-month basis. That’d be your expectation. So, low capital intensity here for the business?

Absolutely. It’s a strong conversion of EBITDA to free cash flow, which I think is something that really drew us to this business along with what the team has been able to accomplish and the technology, the customer relationships, and then the outcomes they have, I think just really are all fantastic.

Okay. Cost opportunities. They’re an existing business. You’re an existing business. Is there any overlap here? Should we expect you to save some money out of the combination?

Dan, as we look at Variperm very well run private company. Don’t expect a lot in the way of cost synergies or cost additions for that matter, as we integrate them into FET. The business is really well run. They’ve done a great job. And so expectation is that they will continue on their current path.

Okay, perfect. Again, thanks for letting me press on all these things. So SCF was mentioned earlier they’re locked up for 180 days. I saw that in your commentary. Is there any restriction in allowing them after that 180 days to distribute out to their shareholders? Do they have to control this stock or could it wind up out with their LPs?

There’d be no shareholders. I’m sorry. No restrictions after that 180-day on the shareholders. So again, our expectation is getting those extra shares and float out on the market could actually be beneficial to the story. And so we look forward to that.

Yes. And Lyle any – so we didn’t see any announcements, so no SCF person comes on the Board post the close of the deal.

No, that’s right. That’s right. So we’ve got – as you know, and others know, we’ve got a great independent Board, a lot of experience in the industry and they do a super job of representing all of our shareholders.

Yes. Perfect. And then don’t laugh because you just – you’ve now had this announced for a grand total of 12 hours or something like that. But I’m assuming that Variperm was not the only potential acquisition that you guys have been looking at. It’s a big one. You’ve now got that in place. But as we think about your history of making acquisitions as you success begets success. So as you think about sort of looking into 2024 and the other things you’ve had on the list here, does this sort of take you out of the acquisition game for a while as you integrate Variperm? Or do we keep thinking about are there other potential things like this out there for you?

I think our near-term focus will be the successful closing and integration of Variperm, but the thesis that we have is still in place that we think there are a number of good businesses that are out there and consolidation absolutely makes sense. We’re going to continue to analyze and screen and identify good fits and where they make sense. We don’t want to let good opportunities get by.

And Lyle, you’ve mentioned several times, it doesn’t hurt to have an increased float for your business. We’re taking debt up here to 1.9 times. Is there any thought and I know you’ve got some flexibility on this seller note, is there any thought that you need more equity as a component of this transaction in other words, is 1.9 times uncomfortable? Is it a comfortable level? How do you think about this mix of cash? But there’s a lot of debt here, debt versus equity.

Yes. No, Dan, great question. And as mentioned, we really are pleased with the mix that we have on equity and cash/debt consideration for the transaction. 1.9 times is a comfortable number for us and primarily because as we look forward both FET and Variperm are well set to generate cash, free cash flow going forward and manage that debt. And so we feel very good about the directionality where we stand and where we can take it. And then just as a reminder, hitting on the fact that we would expect net leverage to drop by the end of next year to between 1 and 1.3 times. I think that’s indicative of what can happen with that cash flow and with even modest growth and EBITDA, we could get there.

Great. Thank you guys. Appreciate it.

Thank you.

Thanks, Dan.

Thank you. I would now like to turn the conference back over to Neal Lux, CEO for closing remarks.

Thank you, Giji. And thank you all who are on the call today for your support and participation. We look forward to talking to you again next year in early March to discuss FET’s fourth quarter and full year results. Thank you.

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