Yahoo Finance Forum Energy Technologies, Inc. (NYSE:FET) Q1 2024 Earnings Call Transcript
Forum Energy Technologies, Inc. (NYSE:FET) Q1 2024 Earnings Call Transcript May 3, 2024
Forum Energy Technologies, Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, ladies and gentlemen, and welcome to the Forum Energy Technologies First Quarter 2024 Earnings Conference Call. My name is Gigi, and I'll be your coordinator for today's call. [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.
Rob Kukla: Thank you, Gigi. Good morning, and welcome to FET's first quarter 2024 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 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 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 first quarter 2024 to fourth quarter 2023. I will now turn the call over to Neal.
Neal Lux: Thank you, Rob, and good morning, everyone. When we announced the Variperm acquisition late last year, we used words like transformative, accretive and scale. This quarter, we realized the value of Variperm adds to the FET's financial results. Sequentially, we achieved 9% revenue growth and importantly, EBITDA increased 69% with EBITDA margins improving by 460 basis points. The teams delivered on our promises with both revenue and EBITDA within our guidance range with favorable sales mix and continued cost management, our EBITDA came in at $26 million, above the midpoint of the range. I am pleased with our 13% EBITDA margins. I am confident we will achieve our mid-teens margin goal with our differentiated products and operating leverage.
As expected, bookings rebounded in the first quarter and our book-to-bill ratio was 101%. With approximately 80% of our product portfolio sales being consumable and activity-based a book-to-bill ratio around 100% is generally expected. However, we will occasionally exceed this level when we receive large awards from our capital-intensive and project-based businesses. As expected during the quarter, with oil prices around $80 per barrel and depressed gas prices, U.S. rig count and frac counts were flat. However, we did see a pickup in demand in our stimulation and intervention product line. Our quality wireline business saw a nice uptick in demand for our premium greaseless cable systems. Although, the global rig count was essentially flat, we did see some seasonal softness in the international markets as customers were slow to release budgets.
Let me briefly discuss Variperm and its operational results this quarter. First off, the integration of Variperm is going very well. Our teams have done an excellent job of working together. And importantly, we have integrated their financial results into our operating systems, which is critical for a publicly traded company. This is never an easy task, and I would like to thank everyone involved for making this happen in such a short timeframe. This acquisition broadens and enhances FET's existing Artificial Lift and Downhole offerings. The sales teams from FET's traditional Downhole product line and Variperm are making substantial progress working together. This collaboration should expand FET's total addressable market in Canada through revenue synergies and the broadening of our customer base.
Operationally, Variperm has great leaders that will continue to run the business as efficiently and successfully as they did prior the acquisition. Earlier this year, we outlined our market views for Canada and forecasted a softer first half of the year, driven by uncertainty of the Trans Mountain Express Pipeline startup and seasonal breakup. Variperm's first quarter results were generally in line with our expectations, but softer than historical revenue run rate due to these near-term headwinds. Despite lower revenue, Variperm managed costs very effectively and margins held steady. Looking ahead, we anticipate stronger oil sands activity in the back half of the year as operators in Canada realize higher prices for their oil. Based on the first quarter results and with no material change to our original global rig count forecast, which was roughly flat, we are reaffirming our full year 2024 guidance with EBITDA of $100 million to $120 million and free cash flow of $40 million to $60 million.
Before turning the call over to Lyle, let me discuss our growth and profitability strategy to beat the market. We will continue to capture opportunities for market activity. With Variperm now in our portfolio between 75% and 80% of our revenue should be tied to activity. We will use our trusted brands and relentless commercial efforts to increase our share within existing markets. As we grow, we will focus on niche markets where FET has truly differentiated itself. We have developed strong intellectual property and proprietary know-how over many years of operation. This strength is combined with our people or experts in their fields and who understand how to solve our customers' problems. This creates a strong barrier of entry and maintains a favorable competitive landscape for FET.
Therefore, we can command higher margins and generate greater returns. Also, we will continue to develop and commercialize new products as well as continuously innovate and improve our current product portfolio. This is accomplished by working closely with our customers to iterate newer and better solutions, further separating us from our competitors. This allows FET to capture more market share while expanding its total addressable market. During last quarter's call, I went into great detail on a number of examples, including our greaseless wireline cable system, our FR120 iron roughneck, our FASTConnect manifold system and the Pump Saver Plus. Our innovation is laying the foundation for sustainable and profitable growth in the years ahead.
In addition, we have an optimized global footprint with strategically located manufacturing and distribution hubs. Our asset-light model allows FET to supply products and solutions to our customers wherever they are. We can be nimble and pivot with changing market conditions to go where our customers lead us. We do not need to spend capital within a specific country or region where activity is growing. We just shipped our products there. Lastly, we will take advantage of increasing service intensity. To keep up with growing operator demands for greater efficiency, reduction in well costs and increased safety, our customers are doing a lot more with less equipment. Their drilling rigs and frac fleets are being pushed to run at full utilization with more pumping hours, more stages, more drilling fleet (ph) and reduced time between wells.
To achieve this, they do not need to invest in new fleets or rigs, but must upgrade their capabilities to keep up and remain relevant. That's where FET's products are critical and allow our customers to drive these efficiencies. I'm now going to turn the call over to Lyle for more details on FET's first quarter financial results and second quarter 2024 outlook.
Lyle Williams: Thank you, Neal. Good morning, everyone. I'm going to start by discussing the rationale for our new reporting segments, the Drilling and Completion segment and the Artificial Lift and Downhole segment. This structure mirrors our internal management and reporting structure and it better aligns reporting segments with the markets, activity drivers and customers we serve. For example, the Drilling and Completions segment focuses on oilfield services customers, while the Artificial Lift and Downhole segment serves E&P operators and other end users. We will continue to report revenue in our historical seven product lines with revenues with Variperm's financial results included in the Downhole product line. We have a broad product and solutions offering, which can make understanding FET a challenge for new investors.
The new reporting segments simplify FET's investment story. We have provided supplemental schedules in the earnings release showing 2023 quarterly results in the new reporting format. After the filing of this quarter's Form 10-Q, we will issue an 8-K that includes recast historical financial information. Let me share some additional information regarding our new segments and their first quarter results. The Drilling and Completions segment is comprised of the drilling, subsea coiled tubing and stimulation and intervention product lines. The customer base within this segment includes many of the world's largest oilfield service companies, primarily in the drilling, hydraulic fracturing, well intervention and deepwater installation and service markets.
We supply mission-critical consumable products and capital equipment to these companies, allowing them to improve efficiency, reduce well costs and increase the safety of their operations. The majority of the capital equipment provided by FET falls within the Drilling and Completion segment and represents roughly one-third of segment revenue. Industry activity measured by global rig count or U.S. frac spread count drives this segment. Although rig count has declined over the last decade, the quality and capability of rigs has greatly improved. For example, over the last 10 years in the U.S., the average footage drilled per rig is up 2 times to 3 times. On the frac side, quality and capability of hydraulic fracturing fleets follows a similar trend.
Wells have gotten longer with more stages and more profit (ph) than in recent years. However, the number of frac fleets operating has not increased. Wells completed per fleet is up almost 60% over the last 10 years. The gains will not stop here. Operators demand greater capabilities and efficiencies, and these gains are only possible because our customers have invested in the products that FET provides. In the first quarter, the Drilling and Completions segment revenue decreased 6%, primarily related to two ROV projects that were completed last quarter, lower demand for drilling capital equipment and lower international coiled tubing sales. During the quarter, we saw an increase in demand in our stimulation and intervention product line. Our customers were catching up on the pullback witnessed in the second half of the year.
In fact, we set a new quarterly revenue record for our greaseless wireline cables. Favorable product mix drove segment EBITDA growth of 13%, resulting in EBITDA margins improving 190 basis points to 12%. Orders were $117 million, up $3 million with a book-to-bill ratio of 98%. The Artificial Lift and Downhole segment includes the Downhole Production Equipment and Valve Solutions product lines, combining Variperm's premium Downhole Solutions with our Davis-Lynch casing hardware and our Multilift Artificial Lift Solutions enhances FET's existing Artificial Lift portfolio, and it facilitates revenue synergies from sales pull-through both in Canada and around the globe. The Artificial Lift and Downhole segment customers primarily include E&P operators and other end users who own or process oil and natural gas from production at the well site to downstream processing and refining.
This segment's revenue were primarily driven by well count, well complexity and well production. Compared to a decade ago, the average wells in the U.S. -- the average wells per rig in the U.S. is up almost 40%, and those wells are on average almost twice as long and produce 3 times as much oil per well. This is possible by our customers' strategic investment in products and technologies that FET provides, both in the well and on the surface. Earlier, Neal discussed the transformational impact Variperm had on FET's financial results. This is also evident in the Artificial Lift and Downhole segment's sequential improvement, with revenue growth of 42%, EBITDA expansion of 107% and margin improvement of 680 basis points to 22%. In addition to the impact of Variperm, Artificial Lift and Casing Equipment sales increased, while revenue from Processing Equipment and Valves declined.
Favorable product mix boosted EBITDA improvements in the quarter. Orders were $88 million, an 89% increase driven by contributions from Variperm. The segment book-to-bill of 105% was above 1 as we secured long lead time orders for production equipment. Our consolidated first quarter results were down the guidance fairway in terms of revenue and EBITDA. For the second quarter, we expect revenue and EBITDA growth in the U.S. and international markets where budgets have been approved and customers are executing on their spending plans. However, these increases may be offset by the second quarter Canadian breakup. Depending on the weather, this seasonal impact typically causes Canadian rig count activity to decrease by around 50% from the first to second quarter.
With a larger portion of our revenue now derived from Canada, breakup could have a more significant impact on our results than in previous years. We anticipate second quarter revenue in the range of $200 million to $220 million and EBITDA in the range of $24 million to $28 million. Here are a few details for modeling purposes for the second quarter. We anticipate corporate costs of $7 million, interest expense to be $8 million and depreciation and amortization expense of roughly $13 million. Let me turn our attention to free cash flow results. We are pleased with our first quarter free cash flow of $2 million exceeded our expectation and guidance. Putting this in context, in each of the past two years, our first quarter free cash flow was roughly negative $25 million as we made beginning of the year payments for property taxes and annual incentives and as we build working capital to fuel full year growth plans.
The improvement this year came from two sources: the Variperm acquisition and net working capital management. The Variperm acquisition was especially attractive because of their ability to convert EBITDA to free cash flow. Variperm did that in the first quarter, generating cash flow in line with our expectation and their historical trend. We expect this performance to continue through the year. Net working capital pro forma for the Variperm acquisition was roughly flat quarter-on-quarter in contrast to the builds in net working capital we experienced in the prior two years. Our teams managed inbound material receipts and lowered inventory levels while meeting customer demand. We have the ability to drive inventory lower and will push for increased inventory turns through the year.
As a reminder, our free cash flow -- I'm sorry, our full year free cash flow guidance assumed our EBITDA of $100 million to $120 million, less cash taxes and interest of $45 million; CapEx of $10 million and approximately $7 million for other payments, primarily related to the Variperm acquisition. We did not assume any reduction in net working capital for the year. Therefore, our solid first quarter performance and second quarter outlook increases our confidence in achieving our full year free cash flow guidance of $40 million to $60 million. And for the second quarter, we expect free cash flow to be positive, in line with our full year guidance. We have fielded investor questions about our plans to address our 2025 notes and for returning cash to shareholders.
Our base case plan for both has not changed since the announcement of the Variperm acquisition last November. Let me review the specifics of our plan, starting with liquidity. We ended the first quarter with $49 million of cash on hand and $72 million of availability under our revolving credit facility with total liquidity of $121 million. Between our current liquidity and guided 2024 free cash flow, we expect to retire the remaining $134 million of our 9% senior secured notes by the end of the year. These notes mature in August of 2025 and are callable at no premium beginning in August of this year. In a similar fashion, we expect to utilize 2025 free cash flow to pay off the seller note around the middle of 2025. This seller note matures at the end of 2026 and is callable at any time without premium or penalty.
In summary, in five to six quarters, we expect to have retired all of our long-term debt with net leverage of around 1 times trailing EBITDA. With this low leverage and flexible capital structure, we would be in a position to return a portion of our free cash flow to shareholders through share repurchases or dividends. As an example, of a dividend or repurchase using 50% of our 2024 free cash flow could be $20 million, $30 million or around a 10% yield at current market prices. And this would still leave considerable free cash flow for net debt reduction, other strategic growth investments or incremental distributions. We have explored options to refinance our long-term debt and enhance flexibility for a more rapid return of cash to shareholders.
To-date, we have not found an option that meets our expectations or requirements. We will continue to evaluate options that could accelerate the timing and size of potential distributions while we execute our base case plan. Let me turn the call back to Neal for closing remarks. Neal?
Neal Lux: Thank you, Lyle. Operationally, our customers are demanding greater efficiencies and safety in the field with less equipment. We have led and will continue to lead these efforts through innovative products and solutions. Financially, we delivered solid results to start the year. The markets are holding steady with our expectations, and this gives us greater confidence in achieving our full year guidance. With our strong liquidity and expected cash generation, we have a clear path to paying off our long-term debt. This will provide greater flexibility and optionality for returning cash to shareholders. Lastly, we could not make this happen without the hard work and dedication of our employees. Thank you. Gigi, please take the first question.
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