U.S. Markets close in 6 hrs 15 mins

Edited Transcript of FET earnings conference call or presentation 28-Apr-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Forum Energy Technologies Inc Earnings Call

HOUSTON May 11, 2017 (Thomson StreetEvents) -- Edited Transcript of Forum Energy Technologies Inc earnings conference call or presentation Friday, April 28, 2017 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* C. Christopher Gaut

Forum Energy Technologies, Inc. - Chairman and CEO

* James Whelan Harris

Forum Energy Technologies, Inc. - CFO and EVP

* Mark S. Traylor

Forum Energy Technologies, Inc. - VP of IR & Planning

* Prady Iyyanki

Forum Energy Technologies, Inc. - President and COO

================================================================================

Conference Call Participants

================================================================================

* Bradley Philip Handler

Jefferies LLC, Research Division - MD and Senior Equity Research Analyst

* Brandon Chase Mulvehill

Wolfe Research, LLC - Oil Services Analyst

* Jacob Alexander Lundberg

Credit Suisse AG, Research Division - Research Analyst

* John David Anderson

Barclays PLC, Research Division - Research Analyst

* John H. Watson

Simmons & Company International, Research Division - Analyst, Research

* Martin W. Malloy

Johnson Rice & Company, L.L.C., Research Division - Director of Research

* Robert James MacKenzie

Iberia Capital Partners, LLC, Research Division - MD of Equity Research

* Vaibhav Vaishnav

Cowen & Company - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, ladies and gentlemen, and welcome to the Forum Energy Technologies Earnings Release Conference Call for the First Quarter 2017. My name is Andrew and I will be your coordinator for today's call. (Operator Instructions) As a reminder, this conference call is being recorded for replay purposes. After the speakers' remarks today, I will instruct you on the procedures for asking questions. I will now turn the conference over to Mr. Mark Traylor, Vice President of Investor Relations. Please proceed, sir.

--------------------------------------------------------------------------------

Mark S. Traylor, Forum Energy Technologies, Inc. - VP of IR & Planning [2]

--------------------------------------------------------------------------------

Thank you, Andrew. Good morning, and welcome to the Forum Energy Technologies First Quarter 2017 Earnings Conference Call. With us today to present formal remarks are Cris Gaut, Forum's Chairman and Chief Executive Officer as well as Prady Iyyanki, President and Chief Operating Officer; and Jim Harris, our Chief Financial Officer. We issued our earnings release last night, and it is available on our website. The statements made during this conference call, including the answers to your questions may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Forward-looking statements involve risks and uncertainties that may cause actual results or events to differ materially from those expressed or implied in such statements. Those risks include, among other things, matters that we have described in our earnings release and in our filings with the Securities and Exchange Commission. We do not undertake any ongoing obligation, other than that imposed by law, to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after this call. In addition, this conference call contains time-sensitive information that reflects management's best judgment only as of the date of the live call. Management statements may include non-GAAP financial measures. For a reconciliation of these measures, refer to our earnings release. This call is being recorded. A replay of the call will be available on our website for 2 weeks following the call. I'm now pleased to turn the call over to Cris Gaut, our Chief Executive Officer.

--------------------------------------------------------------------------------

C. Christopher Gaut, Forum Energy Technologies, Inc. - Chairman and CEO [3]

--------------------------------------------------------------------------------

Thanks, Mark. Good morning. I will begin with an overview and talk about the current market conditions. Afterwards, I will turn it over to Prady who will address the ramp up in activity and our outlook, and then Jim will discuss our financial results and the impact of resetting our SG&A cost run rate for the recovery. The recovery in the U.S. land drilling and completions activity is well underway and Forum is highly leveraged to it. Our U.S. revenue in the first quarter increased 25% sequentially roughly in line with the change in the U.S. rig count. The primary contributors were completions, drilling consumables and production equipment, which collectively grew by 33% in the first quarter. For the third consecutive quarter, we saw an increase in our inbound orders, which is a good indicator of our near-term business prospects. Forum's total inbound orders during the first quarter were $194 million, that's a 6% increase from the level in the fourth quarter. And the first quarter book-to-bill ratio was 113% for the company as a whole led by 119% for the Completions segment.

Orders in our Completions segment increased 31% and were up 50% for our pressure pumping products as customer spending improved on almost all product offerings across the segment. During the quarter, orders from our pressure pumping customers were particularly strong as they were spending money to reactivate their hydraulic fracturing fleets.

Orders in our drilling product line were up 13% resulting in a book-to-bill ratio of 107% during the quarter, primarily on the continuing demand for rig consumable products and mud pump upgrade packages for the U.S. land drilling market.

Despite the weak fundamentals in the subsea oil and gas market, Forum was able to achieve a book-to-bill ratio of 119% in the first quarter for our subsea product line, which continues to focus on non-oilfield opportunities.

In our production equipment product line, our book-to-bill ratio was 123% as demand continues to be strong for U.S. onshore well completions. With over 70% of our business tied to the U.S. land market, Forum is uniquely well positioned among manufacturing companies to benefit from the strong domestic recovery, which is underway. I will now turn the call over to Prady. Prady?

--------------------------------------------------------------------------------

Prady Iyyanki, Forum Energy Technologies, Inc. - President and COO [4]

--------------------------------------------------------------------------------

Thanks, Cris. Good morning, everyone. The growth in orders and revenue for our products is leading to increased demand load on our manufacturing facilities. We continue to ramp up production at many of our manufacturing plants and are seeing strong demand for our drilling consumable products, most of the Completions segment and wellsite production equipment. For these manufacturing plants, our current indication is for full cost absorption in the second or third quarter of this year.

We have sufficient roofline in manufacturing equipment capacity and do not have facility constraints. As part of the ramp-up in our production, we have hired a substantial number of additional manufacturing employees during the quarter and expect to continue recruitment throughout the remainder of the year. Our procurement team has done a great job securing capacity from our suppliers for long-lead items, mitigating a supply chain risk by diversifying our supply base and shortening the delivery times of many other critical items.

As the recovery continues to gain momentum, we are beginning to see the benefit of better manufacturing cost absorption, operational efficiencies and lower procurement cost. For certain products in U.S. land where demand is especially strong and where the lead times are extending, we are beginning to see the opportunities of price increases. I'm confident in our ability to increase our operating margins as the recovery gains momentum. Our sales and engineering teams continue to work with the customers to develop new products. In particular, we are developing several new products in the Completions segment to address the longer laterals and higher service intensity and sand loadings now required in the shale plays. Let me give you a few examples.

We just delivered our first new pressure pumping manifold trailer, the ICBM which is a clean design to simplify the assembly operations and services. This allows for a quicker and safer setup in field and eliminates premature failure from the high-pressure branch connections.

We designed a new innovative Racetrack suction manifold which attaches to the fluid end for better sand distribution; therefore, extending the life of the fluid end. We have already sold over 40 units during the quarter.

We've also engineered a new 60-inch valve over valve stainless steel Quintuplex fluid end to match with the 3,000-horsepower frac pump.

Another good example is our J-Mac pressure pumping power end.

We're getting good traction from customers on this product due to the proven reliability and performance.

We've added 5 new customers during the quarter and have received orders for over 250,000 horsepower thus far in 2017 and continue to gain momentum.

Our pipeline of M&A targets is strong, with a primary focus on expanding our completions offering for the midstream and downstream opportunities. As we look ahead to the second quarter of 2017, we expect our orders for consumable products to increase as the recovery continues in the U.S. land market, our revenue to improve by around 12% to 15%, positive EBITDA for the first time since 2015, and a diluted loss per share to be in the range of $0.12 to $0.09. Let me ask Jim to take you through the results and financial positions. Jim?

--------------------------------------------------------------------------------

James Whelan Harris, Forum Energy Technologies, Inc. - CFO and EVP [5]

--------------------------------------------------------------------------------

Thank you, Prady, and good morning, everyone. Our first quarter revenue was $171 million, a 16% increase sequentially. This is the second sequential increase in our quarterly revenue in the last 2 years. Our adjusted EBITDA increased $2 million and our adjusted net loss per share was $0.14, excluding special items, an improvement from the fourth quarter as the industry began the transition to the U.S. land upturn. The step change in SG&A cost required to participate in the U.S. recovery is now in place and represents a more normalized run rate for the year.

I will summarize our segment results on a sequential basis for the quarter and provide additional details on the first quarter results. Our Drilling & Subsea segment revenue of $62 million was up 13%, primarily due to the strong improvement in sales of drilling consumable products. The Completions segment revenue of $42 million increased to 21% sequentially as customer spending improved on higher well construction and completions activity in North America. Our Production & Infrastructure segment revenue of $68 million, was up 18% due to improved sales of our U.S. land well site production equipment and the addition of the Cooper Valves asset acquisition during the first quarter.

Although for the quarter, we had adjusted EBITDA of negative $3.4 million, importantly we crossed over to positive EBITDA for the last month of the quarter. As we guided in our last quarter call, the first quarter improvement in earnings included overcoming the step change increase in SG&A necessitated by the improving market conditions. In the first quarter, we reinstated historical pay practices for our employees at a quarterly cost of approximately $5 million. These practices include a return to full work schedules, accruing for expected 2017 bonuses at target levels and providing company matching contributions to the Forum 401(k) plan. In addition, we added about $1 million of SG&A cost in the quarter that will benefit our operations going forward as the recovery continues. Further, our SG&A run rate now includes the operations of the Cooper Valves asset acquisition. The adjusted SG&A increased $6 million in the first quarter and was approximately $60 million. Going forward, incremental revenue should require modest, variable SG&A cost increases. Excluding the step change cost additions in the quarter, our incremental EBITDA margins were 35% with little or no pricing improvement.

The net loss for the first quarter was $16 million or $0.16 per share. The quarter included special items on a pretax basis comprised of $2 million of foreign exchange losses and $1 million of transaction and other expenses. The adjusted net loss, excluding these items and the associated income taxes was $0.14 per share.

Our free cash flow after net capital expenditures in the first quarter was negative $18 million. Throughout the downturn, we successfully converted working capital to cash to continue to generate positive free cash flow. In anticipation of the continuing recovery, we are investing in our highest demand inventory items to respond to the rapid upturn in activity. The increase in sales volumes are also translating into corresponding increasing -- increases in accounts receivable.

These investments resulted in a negative free cash flow in the quarter. While we expect to use cash in operations for the first half of 2017, as earnings continue to improve throughout the year with activity levels, we should return to generating positive free cash flow in the second half of the year.

Our gross capital expenditures in the first quarter were $3.5 million. Our budget for 2017 capital expenditures is approximately $30 million, which is sufficient for maintenance and select growth investments, primarily in the Middle East.

Our balance sheet and financial position remains strong. We ended the quarter with $205 million of cash on hand and with no bank debt outstanding. We remain well positioned and ready to execute our acquisition strategy.

Our weighted average diluted share count for the first quarter was 95.9 million shares. When we turn profitable on a net income basis, the diluted share count will increase to approximately 98.6 million shares to once again include the impact of options.

Net debt at the end of the first quarter was $194 million, up $32 million, bringing our net debt to total capitalization ratio to 13.5%.

Interest expense was $6.6 million in the first quarter. Corporate expenses were $7.8 million, and we expect corporate expenses to be around $8 million in the second quarter.

Depreciations and amortization expense was $16 million for the quarter and should be similar in the second quarter. Our effective tax rate for the first quarter operating loss was 45%. The higher effective tax rate benefit is attributable to discrete items, which occurred in the quarter. We estimate our effective tax rate for the remainder of the year will be 37%. For more information about our financial results, please review the earnings release on our website. Now let me turn the call back over to Cris.

--------------------------------------------------------------------------------

C. Christopher Gaut, Forum Energy Technologies, Inc. - Chairman and CEO [6]

--------------------------------------------------------------------------------

Thanks, Jim. Before we go to Q&A, let me just note that this is my last conference call as CEO having had the privilege to serve as CEO of Forum since its inception 7 years ago. I will continue to be active as Chairman and will participate in that role in future conference calls. We brought Prady on board 3 years ago to create a more professional, streamlined and efficient organization that would be among the leaders in the oilfield manufacturing space. Since then, Prady has proven himself at every turn to be an excellent leader with strong business judgment. I was pleased to recommend to our Board his move to CEO next month and I look forward to the continued growth and prosperity of the company under Prady's leadership. Prady?

--------------------------------------------------------------------------------

Prady Iyyanki, Forum Energy Technologies, Inc. - President and COO [7]

--------------------------------------------------------------------------------

Thank you, Cris. I'm honored to lead Forum into its next chapter. Cris successfully set the direction for Forum's business and financial strategy with the transition to being a public company and built the Forum's foundation of trust with investors and customers. He established Forum as a strong competitor within the oilfield equipment manufacturing sector and has proven to be an excellent mentor for me and for many others. I'll ask Cris to continue to assist in this leadership transition. In his new position, he will be actively involved with our large strategic matters as well as acquisition and capital markets reports. I look forward to continuing my strong partnership with Cris. We have a great team, a seasoned Board and a strong business model. I'm excited to lead the next phase of significant profitable growth for Forum. I thank you for your interest. At this point, we will open the line for questions. Operator, please take the first question.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from David Anderson with Barclays.

--------------------------------------------------------------------------------

John David Anderson, Barclays PLC, Research Division - Research Analyst [2]

--------------------------------------------------------------------------------

So strong top line quarter overall, and clearly you guys have leveraged to kind of all the right parts of the business. I guess the part that is a little disappointing to us is just the EBITDA progression here. You talked about kind of these additional costs that are in there and Prady, I think you said full cost absorption by second or third quarter. Can you help us just kind of understand what we should be thinking about in terms of the incremental margins going forward? Or, I guess, maybe should we be thinking about where kind of the fourth quarter should end up? It's just a little hard to kind of -- trying to figure out what the trajectory is right now on the EBITDA path?

--------------------------------------------------------------------------------

C. Christopher Gaut, Forum Energy Technologies, Inc. - Chairman and CEO [3]

--------------------------------------------------------------------------------

Hi David, I think Jim made the point as he was going through the explanation of the SG&A step change that we had that -- excluding that -- the impacts of the SG&A one-time effects here. The incremental margins were 35% in Q1 without any pricing improvement. I think the implication in the guidance that we've given is that the incremental margins in Q2 will be a bit better than that. And as we move forward with the recovery here and what the incrementals are from there for the company as a whole will depend upon a few things. As you point out, absorption -- getting to full absorption is a positive factor, until you get to full absorption, and then you kind of use that one. But what hasn't kicked in yet is pricing. Prady talked about some of the pricing opportunities that we are seeing, beginning to see. And so incremental margins in the fourth quarter will depend upon what rate of improvement in pricing we have across our businesses by that point in time. But I think the overall message is that we had good incremental margins, excluding the well-telegraphed change in SG&A that we talked about last quarter. And they should be better in the next quarter.

--------------------------------------------------------------------------------

John David Anderson, Barclays PLC, Research Division - Research Analyst [4]

--------------------------------------------------------------------------------

So as we talk about pricing. I guess, one thing I've been kind of curious about is kind of lead times for some of your drilling and completion equipment. Apart from some of the smaller operators, it's taking a little bit longer to get flow iron, and I would imagine that would be a precursor to kind of this long awaited inventory restocking cycle. Can you talk about those dynamics right now in terms of what are you seeing out there? Is it a little early to start seeing these -- this stretching and kind of how you think this kind of walks forward in terms of inventory restocking and pricing and lead times and all that?

--------------------------------------------------------------------------------

Prady Iyyanki, Forum Energy Technologies, Inc. - President and COO [5]

--------------------------------------------------------------------------------

Yes, I think especially in the pressure pumping, David, we still have inventory of the irons and some of the other parts. But some of the long lead items like where you need forgings and castings, we're already seeing an extension in the lead times, which does give the opportunity to have discussions on pricing. So those discussions have already started.

--------------------------------------------------------------------------------

C. Christopher Gaut, Forum Energy Technologies, Inc. - Chairman and CEO [6]

--------------------------------------------------------------------------------

But the demand for treating iron is high, and we are ramping up our rate of production there as quickly as we can to address the rapid increase in demand. And it's basic economics, demand and supply. And when demand exceeds supply that's what we all learned in economics class, right.

--------------------------------------------------------------------------------

Prady Iyyanki, Forum Energy Technologies, Inc. - President and COO [7]

--------------------------------------------------------------------------------

Yes. If you look at our Completions segment as a segment of both bookings, incrementals and also revenue we're already strong.

--------------------------------------------------------------------------------

John David Anderson, Barclays PLC, Research Division - Research Analyst [8]

--------------------------------------------------------------------------------

Okay. And hence, also why you need to increase the SG&A because you have more people working and they are going to be all working in there. Just a last question. Can you -- Prady, I think you had said something with midstream and downstream opportunities in there and I noticed in the release you talked of valve orders, how it was very strong in this quarter. Can you quantify that valve order increase for us a bit? I'm just kind of curious how that lined up with the rig count and maybe what some of the primary drivers are behind that part of the business? We haven't really talked about that too much, valves in the last few years. So just kind of curious how much this is going to be a driver over the next couple of years?

--------------------------------------------------------------------------------

Prady Iyyanki, Forum Energy Technologies, Inc. - President and COO [9]

--------------------------------------------------------------------------------

That's a good question, David. But I think the valves numbers we gave out are -- I think the Cooper acquisition has, obviously, helped but independent from the Cooper acquisition, if we look at our valve business, we have presence in midstream, downstream and upstream. And we are seeing activity on the upstream side, which is driving some of the bookings in the valves, and we had a pretty strong quarter from a bookings standpoint in valves.

--------------------------------------------------------------------------------

C. Christopher Gaut, Forum Energy Technologies, Inc. - Chairman and CEO [10]

--------------------------------------------------------------------------------

Yes, from that midstream and downstream, good demand, pretty steady. The increase in demand for valves is on the upstream side as one would expect. In addition to that greater demand for the upstream valves is the addition of Cooper, which is highly levered to the power industry, which we didn't really have exposure to before.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

And our next question comes from Jacob Lundberg with Credit Suisse.

--------------------------------------------------------------------------------

Jacob Alexander Lundberg, Credit Suisse AG, Research Division - Research Analyst [12]

--------------------------------------------------------------------------------

Just wanted to drill down on the guidance for 2Q a little more. Are you guys able to speak to what in your mind the guidance range on EPS implies from an EBITDA perspective? It looks like it's maybe around $6 million to $8 million, you agree with that?

--------------------------------------------------------------------------------

C. Christopher Gaut, Forum Energy Technologies, Inc. - Chairman and CEO [13]

--------------------------------------------------------------------------------

Yes, obviously, Jacob we didn't give EBITDA guidance we gave revenue and EPS and you all have your model. But I think that's the parameters that we wanted to back get back to. The reason we've given exquisite guidance here this quarter for the first time in several quarters, I think is a reflection of our growing confidence and visibility in the business that we haven't had throughout this downturn. But now with the growth in orders, the several quarters of strong book-to-bill ratio and for us, given a lot of book and ship business, anything over 1.1 is very good and that -- we had those kind of book-to-bill ratios across the company. So given the greater visibility, our confidence -- yes, we have the ability to look ahead and say we are going to give guidance, and so that's why we did that this quarter.

--------------------------------------------------------------------------------

Jacob Alexander Lundberg, Credit Suisse AG, Research Division - Research Analyst [14]

--------------------------------------------------------------------------------

Okay, great. And then, I guess, looking for a sense of momentum in the Completions business, can you speak to how March compared with January from sort of a sequential growth perspective?

--------------------------------------------------------------------------------

Prady Iyyanki, Forum Energy Technologies, Inc. - President and COO [15]

--------------------------------------------------------------------------------

Yes, I think there is a sequential growth on month-over-month. And right now, we're trying to ramp up as fast as we can, get people as fast as we can, and we're seeing sequential improvement. In fact, I would expect April to be stronger than March.

--------------------------------------------------------------------------------

Jacob Alexander Lundberg, Credit Suisse AG, Research Division - Research Analyst [16]

--------------------------------------------------------------------------------

Okay, great. And then the last one if I could. Can you tell us how much Cooper Valves contributed in the first quarter from a revenue perspective?

--------------------------------------------------------------------------------

James Whelan Harris, Forum Energy Technologies, Inc. - CFO and EVP [17]

--------------------------------------------------------------------------------

So, Jacob, we will have disclosures in our 2. Given the size, it's fairly limited and historically, we've not provided that information other than what I've said already about the SG&A contribution.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

And our next question comes from Brad Handler with Jefferies.

--------------------------------------------------------------------------------

Bradley Philip Handler, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [19]

--------------------------------------------------------------------------------

I guess, before I ask a question, Cris, I know, this doesn't sound like it's a goodbye and I hope it's not a goodbye. But I just wanted to wish you very well in your this next phase and just to sort of say how much I have enjoyed kind of taking -- being with you or following you guys through this process of you sort of coming to public with Forum as well as sort of with such a clear vision and then watching so much of that come to fruition. That's been fun to watch and fun to ride along with you on.

--------------------------------------------------------------------------------

C. Christopher Gaut, Forum Energy Technologies, Inc. - Chairman and CEO [20]

--------------------------------------------------------------------------------

Thank you, Brad.

--------------------------------------------------------------------------------

Bradley Philip Handler, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [21]

--------------------------------------------------------------------------------

Okay. A couple of questions, I guess for me. The 250,000 of orders, obviously, a nice big number there. Maybe a couple of questions around that. Do you have a sense for how much of that relates to new horsepower versus reactivating horsepower? And then the second question is a little bit more specific to J-mac. Is that -- is that new customer base or are you upgrading and rebuilding J-Mac power ends themselves?

--------------------------------------------------------------------------------

Prady Iyyanki, Forum Energy Technologies, Inc. - President and COO [22]

--------------------------------------------------------------------------------

I'll take the second one first. If we look at our J-Mac power end, I mean, in the first quarter alone, we've added new customers, which has not been a customer base for J-Mac in the past. And one of the reasons why we secured that customer base is because of our proven reliability and performance of the power ends. And the second question was the -- was the horsepower. I think we're seeing both. We're seeing new oil companies coming to the frac market, then we're also seeing the refurbished power ends. So we're seeing a combination of both in -- not only in the powering business but across the board for our pressure pumping product line.

--------------------------------------------------------------------------------

C. Christopher Gaut, Forum Energy Technologies, Inc. - Chairman and CEO [23]

--------------------------------------------------------------------------------

Brad, I'll add a little. That a lot of the orders were for new equipment. So that is an element there, more than one might have thought 3 months ago in this space. But there is also a healthy dose of replacing the power ends on existing fleets and sometimes -- in some cases moving from an older model pump to the newer model, more efficient, longer-lasting pumps that J-Mac offers. Now you also asked about refurbishment. So this would not include refurbishment. If we're refurbishing a pump that goes into our service revenue. But these are new power ends that we're talking about.

--------------------------------------------------------------------------------

Bradley Philip Handler, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [24]

--------------------------------------------------------------------------------

Okay. Thanks for clarifying that. And then just an unrelated follow-up even if it's a little open-ended. I guess, I'm curious about the -- in the current market, which has more than its fair share of uncertainty around the direction of crude, despite the momentum in the U.S. Can you comment on what that does to M&A conversations. In other words, you guys have spoken pretty clearly in the past about the need to find bottom before sellers kind of decided they are ready to sell and the presumption was that, I think, that there was a platform now on a basis now to see some more M&A. Given kind of this constant churn and perhaps, to some degree, a lower setting of oil price in some people's heads, has that lessened the M&A potential in your mind as you think about the next 6 months or 12 months, I don't know, some color on that would be appreciated?

--------------------------------------------------------------------------------

C. Christopher Gaut, Forum Energy Technologies, Inc. - Chairman and CEO [25]

--------------------------------------------------------------------------------

I don't think it lessens it, Brad. With this kind of recent dip, hopefully, it will take some of the froth off of expectations. I think another factor when you think about M&A is the IPO market, right. Sometimes, people are thinking about whether I should sell a company or whether I can take it public. Clearly, the IPO market the froth has come off there. And so, yes, I think -- I don't think it had an -- from our standpoint as a buyer, it has not have a negative impact on the M&A market and hopefully, it helps bring things into line. We will be active -- we are active and we're building our pipeline in the M&A space.

--------------------------------------------------------------------------------

Prady Iyyanki, Forum Energy Technologies, Inc. - President and COO [26]

--------------------------------------------------------------------------------

And Brad, probably the other thing I'll add is our first priority is always with the Completions segment and the activity in the Completions segment has picked up across the board. As a result I think most of the companies are going from red to green which is -- which becomes easier not only to award valuations but more from a seller's standpoint they'll have the impression that they're selling at the trough.

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

And our next question comes from Rob MacKenzie with Iberia Capital.

--------------------------------------------------------------------------------

Robert James MacKenzie, Iberia Capital Partners, LLC, Research Division - MD of Equity Research [28]

--------------------------------------------------------------------------------

Congratulations, Prady, and thanks for all of your service, Cris, it was fun as well. Question for you, again, following up on the horsepower question just asked. When you look at orders so far, obviously, there is some lead time to deliver those power ends and fluid ends that you guys also sell. What portion of the kind of idle U.S. frac equipment do you think has placed the order so far to be refurbished and reactivated versus how much do you think is left to place those orders for?

--------------------------------------------------------------------------------

Prady Iyyanki, Forum Energy Technologies, Inc. - President and COO [29]

--------------------------------------------------------------------------------

Yes, I think good question, Rob. I think there is still room. I think we are still in the early phase of the recovery on the frac side, even though at the peak it was 14 million horsepower and today, we are probably at 10 million horsepower or 8 million to 10 million horsepower. But we do still see opportunity and we're in the very early phase of the recovery on the frac side.

--------------------------------------------------------------------------------

Robert James MacKenzie, Iberia Capital Partners, LLC, Research Division - MD of Equity Research [30]

--------------------------------------------------------------------------------

And any kind of way to put some numbers around that, I mean is this 250,000 horsepower that you guys won? Is there 3x less that or more, 4x, 2x? What's left in terms of revenue opportunity?

--------------------------------------------------------------------------------

C. Christopher Gaut, Forum Energy Technologies, Inc. - Chairman and CEO [31]

--------------------------------------------------------------------------------

Yes, there was 8 working and we're trying to get to 10 million-horsepower. A lot of that increment requires new power ends, new pumps, right. And from here to get back to the 18 that we were at back in '14, you know that's a lot more pumps, right. There are -- from here every incremental fleet that goes back to work is going to require more spending, not less. And that's why also people are looking at, gosh, should I bring that older stuff back or does it makes sense to kind of build new. It's like refurbishing that old house. And so I think we'll continue to see fleets -- existing fleets brought back. But we're digging deeper and deeper into the stacked equipment.

--------------------------------------------------------------------------------

Prady Iyyanki, Forum Energy Technologies, Inc. - President and COO [32]

--------------------------------------------------------------------------------

And I'll also say that utilization is still at the 85% kind of range. And as utilization goes to 90% and 95%, that will also drive activity.

--------------------------------------------------------------------------------

Robert James MacKenzie, Iberia Capital Partners, LLC, Research Division - MD of Equity Research [33]

--------------------------------------------------------------------------------

Right. Okay. Thank you. And then I wanted to come back to -- switch gears to the production equipment side. Obviously, didn't repeat the stellar quarter you had in the fourth quarter, but with the pace of Completions ramping up, I would think that orders there would look pretty bright the next couple of quarters. Can you give us some more color on how you see that trajectory playing out?

--------------------------------------------------------------------------------

Prady Iyyanki, Forum Energy Technologies, Inc. - President and COO [34]

--------------------------------------------------------------------------------

Yes, Rob, I think one thing we did share in the last call, Rob, there was a $16 million of a chunky order we got from 1 particular customer who was planning for '17, and there was a chunky order in -- in fourth quarter of '16. So if you take that out, I think production equipment guys had a pretty good order, but production equipment as the docks start getting completed, the activity in the production equipment will pick up. And I think the Completions side right now is lagging behind a little bit on the drilling front evident from the number of docks being increased in the Permian and the other basins. But as they start completing the docks, there will a need for production equipment. Now in the case of production equipment, the lead times are a little bit longer than consumable items so we usually see a quarter ahead, and that's one of the reasons why we saw that in the fourth quarter.

--------------------------------------------------------------------------------

Operator [35]

--------------------------------------------------------------------------------

And our next question comes from Martin Malloy with Johnson Rice.

--------------------------------------------------------------------------------

Martin W. Malloy, Johnson Rice & Company, L.L.C., Research Division - Director of Research [36]

--------------------------------------------------------------------------------

Cris, good luck with your future endeavors. I just had a question maybe on the long -- the items that you're starting to see the lead times stretch out. Can give us a little more perspective on how long those lead times are stretching out? And also when we should look for the impact of pricing increases starting to flow through to numbers? Is that more of a third, fourth quarter type event?

--------------------------------------------------------------------------------

Prady Iyyanki, Forum Energy Technologies, Inc. - President and COO [37]

--------------------------------------------------------------------------------

Yes. I think Marty where we're seeing some lead time increases, just not as I would say across the market, is the forgings whether it's the -- on the frac side where we do have -- the frac activity continues to gain momentum, those lead times will increase. As of now, they have not increased significantly, but we are putting -- we're securing a supply chain for the rest of the year. And our Procurement team has done a pretty good job of securing the supply for the forgings. But that's where we're seeing it today. But as the recovery continues, I think we will see the increase in lead times across the board, which at the same time gives the opportunity on the price side. I would say we will start seeing some minimal price increase starting in the second quarter, Marty, but as the year progresses, I think we'll start seeing more pricing opportunities. And we'll start seeing it on the frac side first and then I think it will spread across the board.

--------------------------------------------------------------------------------

Martin W. Malloy, Johnson Rice & Company, L.L.C., Research Division - Director of Research [38]

--------------------------------------------------------------------------------

Okay. And if I could ask just on the international markets, can you update us there on what you're seeing, particularly in the Middle East?

--------------------------------------------------------------------------------

Prady Iyyanki, Forum Energy Technologies, Inc. - President and COO [39]

--------------------------------------------------------------------------------

Yes, yes. Our operation in the Middle East is on track. I think in the second half, we expect the operation to start producing some product, probably in the fourth quarter of this year. I mean, some of the capital equipment orders we've been talking about in the Middle East, Marty, I think the Saudi has already canceled the rigs but the Kuwait and NDC, which we've talked to you in the past, I think, they're moving to the right. So the capital equipment, I think, is moving to the right, but our presence in the Middle East is getting stronger. And I think starting in the second half we'll start seeing some activity from our standpoint.

--------------------------------------------------------------------------------

Operator [40]

--------------------------------------------------------------------------------

And our next question comes from Chase Mulvehill from Wolfe Resources (sic) [Research].

--------------------------------------------------------------------------------

Brandon Chase Mulvehill, Wolfe Research, LLC - Oil Services Analyst [41]

--------------------------------------------------------------------------------

I just want to echo everyone's sentiments. Congrats Prady and Cris, wish you all the best and try to enjoy a little bit more free time. I guess the first question. If we can kind of talk about the pace of orders throughout 1Q, and if they really accelerated as you got into March?

--------------------------------------------------------------------------------

Prady Iyyanki, Forum Energy Technologies, Inc. - President and COO [42]

--------------------------------------------------------------------------------

On the frac side for sure. Yes, we did see that momentum I would say in the Completions segment, we did see March being stronger than January. But I would also say part of that is contingent on -- I think, the Completions activity is lagging behind the drilling activity. And I think our customers are trying to mobilize the crew, the equipment, the logistics and whatnot, right. And I think there is a lag between those 2. So as they stop completing the activity, we do expect our Completions segment to see more activity, and that's what was evident in the first quarter at least March versus January. Some of the other product lines have got different dynamics. I think in the case of production equipment, as I said, the lead times are a little longer, so we saw a very strong 4Q. We saw some chunky orders, and we expect to be pretty constant on the move forward basis, but I think the activity will increase. If we look at our drilling product line, I think the activity we are seeing is in 3 places, right, is the module -- the mud pump upgrade model, which is usually 1 to 2 quarters ahead. So we started seeing that activity in the third quarter of 2016. 3Q, 4Q and 1Q we started -- all those 3 quarters we saw the mud pump upgrade. But where we see the increase in activity is the consumable side, the OpEx part of the drilling consumables portfolio. And now, we are seeing the activity on the drilling capital equipment side, but more from a services standpoint, where our customers are trying to upgrade or remanufacture some of the capital equipment like catwalks and roughnecks.

--------------------------------------------------------------------------------

Brandon Chase Mulvehill, Wolfe Research, LLC - Oil Services Analyst [43]

--------------------------------------------------------------------------------

That's very helpful, it's great color. Appreciate it. And could we -- I don't know if you can help us here when we think about drilling, and then also think about Completions. How much of your revenues kind of come from services for each of these businesses versus product?

--------------------------------------------------------------------------------

C. Christopher Gaut, Forum Energy Technologies, Inc. - Chairman and CEO [44]

--------------------------------------------------------------------------------

Yes, the service is not -- itself is not a big part of our revenue. And that aftermarket services is often a means to sell products. So in our drilling business, if we bring in one of our catwalks for a drilling contractor we'll rework it. But we're selling a lot of parts there too. And certainly, on the pressure pumping side, when a pump truck comes in for recertification, whether it's in one of our yards or what we're doing out on the field, we're going through their treating iron, their manifold trailer and recertifying it, but of course, replacing any worn parts. So in many cases, the service is a means to an end to sell additional products, which is where the margin is.

--------------------------------------------------------------------------------

Brandon Chase Mulvehill, Wolfe Research, LLC - Oil Services Analyst [45]

--------------------------------------------------------------------------------

Okay. That's helpful. The last one and then I'll turn it back over. On pricing, if we think about completions and kind of where pricing is today versus kind of where it peaked at in 2014. Could you kind of help us understand how much pricing has compressed on average for this segment?

--------------------------------------------------------------------------------

Prady Iyyanki, Forum Energy Technologies, Inc. - President and COO [46]

--------------------------------------------------------------------------------

Yes, I will give a range across the portfolio and then I will give you the extremes, if it helps. Across the portfolio, probably we lost about 15% to 20% pricing across the portfolio at an average. On the frac side, we lost more and on the valve side, we lost less.

But on the way up too, it's going to work the same way. I think we'll gain more pricing on the frac side and less on the valve side.

--------------------------------------------------------------------------------

Operator [47]

--------------------------------------------------------------------------------

And our next question comes from Vaibhav Vaishnav with Cowen & Company.

--------------------------------------------------------------------------------

Vaibhav Vaishnav, Cowen & Company - Analyst [48]

--------------------------------------------------------------------------------

It was a pleasure working with you. So if I think about implied incrementals of about 40% in 2Q. What are the puts and takes of that actually declining as we look into second half? Or is there a case that they should be at least in line or better?

--------------------------------------------------------------------------------

Prady Iyyanki, Forum Energy Technologies, Inc. - President and COO [49]

--------------------------------------------------------------------------------

I would say there are few elements for that. I would say, as Cris mentioned, there are operational efficiencies, there is procurement cost and there are cost absorption on the operational side, right. And then there is also pricing on the commercial side, right. So I think it depends on how we recover the price -- I think on the operational side, the procurement sinkings, the operational efficiencies and cost absorption we expect to get. Those are already done, right, we expect to get those. But we also mentioned there is a cost absorption starting in Q2. Some of the plans will be absorbed. In the third quarter all plans, where we think the activity, will be fully absorbed. So the pricing of the element is how it recovers starting in the second quarter.

--------------------------------------------------------------------------------

C. Christopher Gaut, Forum Energy Technologies, Inc. - Chairman and CEO [50]

--------------------------------------------------------------------------------

And that procurement impact flowing through as it works its way through our inventory cost, that benefit.

--------------------------------------------------------------------------------

Vaibhav Vaishnav, Cowen & Company - Analyst [51]

--------------------------------------------------------------------------------

Thinking about the drilling business, at least the way I think is that's 1/3 consumables, 1/3 handling tools and 1/3 capital equipment. Can you help us think about what -- so consumables, obviously, is progressing well. Can you help us think about if the capital equipment backlog -- the revenue from that backlog is near trough or has already troughed. And also on the handling tools how's that progressing?

--------------------------------------------------------------------------------

Prady Iyyanki, Forum Energy Technologies, Inc. - President and COO [52]

--------------------------------------------------------------------------------

Yes, on the capital equipment side, Yes, I think, our bottom of depleting the backlog was a couple of quarters ago. So consumables -- the drilling consumables is a big part of the drilling pipeline today. However, I think, on the handling tools, we expect to start seeing some activity probably in the fourth quarter. We're at the very early stages of recovery, there is still some destocking and cannibalization which needs to take its course, but we expect starting in fourth quarter we'll be handling tools. I think the capital equipment piece is a probably to be 18 pieces. But where we are seeing activity in the capital equipment already is what we talked about is on the services side where our customers are trying to upgrade or refurbish the capital equipment. And there are also some discussions, very early stages with our customers, is as they go to the next phase of getting the rigs -- the older rigs back into work, the amount of money they need to spend from their wallet -- from a capital standpoint will become a little bigger than what they have spent in the past. It's more like a 1 to 5 kind of range -- $1 million to $5 million kind of range. If that happens, obviously, we will participate in that growth too.

--------------------------------------------------------------------------------

Vaibhav Vaishnav, Cowen & Company - Analyst [53]

--------------------------------------------------------------------------------

Okay. Okay, that's helpful. And last one, I'm going to try my luck with this. Can we get to breakeven EPS by the end of fourth quarter and the path to getting there?

--------------------------------------------------------------------------------

James Whelan Harris, Forum Energy Technologies, Inc. - CFO and EVP [54]

--------------------------------------------------------------------------------

We've given guidance for the upcoming quarter, that's a big change for us. We haven't given guidance for some time. And what happens in the fourth quarter really depends on what happens with oil prices and the activity in the industry. So I don't really want to comment that far out and give guidance that far out.

--------------------------------------------------------------------------------

Prady Iyyanki, Forum Energy Technologies, Inc. - President and COO [55]

--------------------------------------------------------------------------------

It also depends on what is the rig count at the end of the year, what's the horsepower on the frac side by the end of the year, right. I mean all those things will play a role here.

--------------------------------------------------------------------------------

Operator [56]

--------------------------------------------------------------------------------

Our last question comes from John Watson with Simmons.

--------------------------------------------------------------------------------

John H. Watson, Simmons & Company International, Research Division - Analyst, Research [57]

--------------------------------------------------------------------------------

I want to dig back in on that 250,000 horsepower. Could you say how much of that -- was it 4 full pumps, power ends and fluid ends versus just power ends?

--------------------------------------------------------------------------------

C. Christopher Gaut, Forum Energy Technologies, Inc. - Chairman and CEO [58]

--------------------------------------------------------------------------------

Yes, I mean, for us, we sell them separately. So we take orders for the power end and separately for the fluid end. So sometimes, therefore, they're complete pump, but in terms of how we track it internally, we track them in a separate way. So we sold a lot of fluid ends during the quarter and certainly, there was a ramp up there. But the power ends are bigger-ticket items on an individual basis, and that's why we've highlighted there that number. On the fluid ends, since we do track that independently, of course, the bigger demand for fluid ends is on the replacement market. So I can't tell you exactly how many fluids ends we sold with the power ends. But the demand for both is strong.

--------------------------------------------------------------------------------

John H. Watson, Simmons & Company International, Research Division - Analyst, Research [59]

--------------------------------------------------------------------------------

Okay. That's helpful. And then on the longer lead times for horsepower that's mentioned in the press release. Does that imply that some of the orders that you received in the 250,000 number, that's some of those might not be delivered until '18 or is that too long of a lead time?

--------------------------------------------------------------------------------

Prady Iyyanki, Forum Energy Technologies, Inc. - President and COO [60]

--------------------------------------------------------------------------------

No, I think that's a long lead time. I think it's within 2017 orders. I don't think the lead times have gone past '17, at least from our standpoint because we can still deliver power ends within '17 and more importantly, I think our lead times are off by a month, but not significantly, not at this point.

--------------------------------------------------------------------------------

John H. Watson, Simmons & Company International, Research Division - Analyst, Research [61]

--------------------------------------------------------------------------------

Okay. So if I wanted to buy a J-Mac power end today, I could get it by December 31.

--------------------------------------------------------------------------------

C. Christopher Gaut, Forum Energy Technologies, Inc. - Chairman and CEO [62]

--------------------------------------------------------------------------------

Yes, we got your number.

--------------------------------------------------------------------------------

Prady Iyyanki, Forum Energy Technologies, Inc. - President and COO [63]

--------------------------------------------------------------------------------

We got your number. Especially if you want it. In December the pricing is significantly higher though.

--------------------------------------------------------------------------------

C. Christopher Gaut, Forum Energy Technologies, Inc. - Chairman and CEO [64]

--------------------------------------------------------------------------------

All right. Well, thank you all, appreciate your attention, and good questions. And have a good weekend. Thanks. Bye.

--------------------------------------------------------------------------------

Operator [65]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.