Forum Energy Technologies, Inc. (NYSE:FET) Q4 2023 Earnings Call Transcript
Forum Energy Technologies, Inc. (NYSE:FET) Q4 2023 Earnings Call Transcript March 1, 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 Fourth Quarter and Full Year 2023 Earnings Conference Call. My name is Gigi, and I'll be your coordinator for today's call. [Operator Instructions]. 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 Fourth Quarter and Full Year 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 it is available on our website. This earnings release follows our preliminary press release issued on February 19, 2024. Subsequent to that preliminary release, we finalized our analysis of valuation allowance. No valuation allowance releases were made as a result of this analysis. 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 context of all factors that affect our business, including those disclosed in FET's SEC filings, our earnings release and the Variperm acquisition announcement. 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 yearly comparisons are full year 2023 to full year 2022 and quarterly comparisons are fourth quarter 2023 to third quarter 2023. I will now turn the call over to Neal.
Neal Lux: Thank you, Rob, and good morning, everyone. 2023 was a transformative year for FET. In addition to executing our strategy, we accomplished 2 significant milestones that accelerate FET's long-term growth trajectory. We began the year by reducing our long-term debt by 48%, and we ended 2023 with the announcement of the Variperm acquisition. This highly accretive acquisition demonstrates strong business logic while maintaining conservative net leverage and strong liquidity. Variperm's differentiated products and patent-protected technologies complement our artificial lift product portfolio. This combination expands the total addressable market for FET's artificial lift product family. Together, we are a formidable manufacturer of highly engineered products and solutions, and we expect the larger and more profitable FET will generate significant financial returns for our shareholders.
In 2024, we are forecasting EBITDA of $100 million to $120 million and free cash flow between $40 million and $60 million. These results at their midpoints would represent 64% and 25x growth for FET. This is what we mean by transformative. In addition, we executed our organic growth strategy in 2023. Excluding the contribution from Variperm, we leveraged our global footprint to grow our international and offshore businesses. Industry investment has clearly increased outside the United States, and we are benefiting. Revenue grew in all international regions, led by 72% increase in the Middle East. In the aggregate, international revenue expanded 23%, more than twice the pace of international rig count growth. For 2023, FET's non-U.S. sales were 38% of total revenue, up from 33% last year.
Turning to offshore. We saw a resurgence in demand for ROVs and aftermarket equipment to support oil, natural gas and wind projects. Orders in our Subsea Technologies product line were up almost 90%, primarily driven by new ROV systems. In addition, aftermarket revenue was up almost 40%, supporting the higher utilization of the current global installed base. In addition to utilizing our worldwide footprint, we continue to develop and commercialize new products. This is accomplished by working closely with our customers to iterate newer and better solutions, further separating FET from our competitors. Let me provide a couple of great examples from our Global Tubing and quality wireline product families. In 2023, Global Tubing produced 2 world record-setting strings, both delivered into the Middle East.
The first was the longest 2-3/8 inch diameter string at over 8 miles long. Our second record was for the heaviest string at 200,000 pounds or the equivalent of a 757 airplane. These milestone strengths increase customer efficiency and capability, allowing them to reach hydrocarbons further from the rig and deeper below the surface. Another example from our quality wireline product family. In the first half of 2023, we set quarterly revenue records, driven by our successful greaseless cable design. Our cable enables faster transitions between frac stages, thereby increasing pressure pumping efficiency. In addition, we commercialized the next-generation cable, which allows our customers to economically perform wireline operations at higher pressures.
Another part of our new product development initiatives centers around innovation and market disruption. A great illustration of that comes from our FR120 iron roughneck, which was specifically designed to address our customers' needs for heavier and larger drill pipe. During the fourth quarter, we delivered our 100th FR120 and supplied a record number of units to our customers. In a market where drilling contractors are cautious about capital spending, their enthusiasm for the FR120 demonstrates the value our solution provides. Building on that success, we have commercialized the next-generation iron roughneck. This new design has the same torque capacity of the existing model. However, it is much smaller and will fit on many more rigs. Our drilling team's innovation significantly expands FET's addressable market.
The next example is our Frac Automated Switch Technology System, or FASTConnect. The FASTConnect system is a direct replacement of existing zipper manifold. It increases safety by eliminating personnel from high-pressure danger zones. It drives efficiency by completing more frac stages per day, and it improves the well site environmental footprint by eliminating grease. The first system has successfully transitioned between 250 zipper frac stages with an average cycle time well below traditional methods. And the FASTConnect system has had 0 downtime after pumping 175 million pounds of sand at an average pressure of 12,000 pounds per square inch, all of this without an ounce of grease, this is amazing. Lastly, our Multilift product family has successfully helped customers mitigate sand and gas challenges in their ESP artificial lift operations for many years.
Building on our expertise in the ESP market, we've expanded our product offering into the raw lift market with the commercialization of the Pump Saver Plus. Sand and gas issues can lead to rod lift system failure. Our unique solution addresses these issues and increases annual production, while reducing downtime and related costs. With just these 3 examples, our engineers and product managers have increased FET's total addressable market by $300 million. And in these markets, we have the best solution for our customers. Our innovation is laying the foundation for sustainable and profitable growth in the years ahead. In summary, based on these 2023 accomplishments, FET is a bigger and more profitable company with lower leverage and greater access to a larger addressable market.
Shifting now to FET's 2023 financial performance. We delivered revenue and EBITDA growth of 6% and 14%. Our EBITDA margins expanded 70 basis points to above 9%, building on the margin improvement achieved in 2022. Overall, these results were favorable, and 2023 was a good year for FET. However, we are striving to be great. It is helpful to put our performance into context with market conditions. If we go back to this time last year, the industry was coming up 9 consecutive quarters of U.S. rig count growth with analysts and customers indicating further growth ahead. Internationally, rig count was making a steady ascent, averaging quarterly increases around 6%. Putting it all together, our financial forecast was based on 15% rig count growth.
And at the time, this felt like a conservative outlook, especially since the industry had grown 28% in 2022. However, reality differed from the forecast. Commodity prices were volatile in the entire year. Global crude oil prices ended down roughly 18%, and U.S. natural gas prices were down 60%. These factors caused global rig count to grow only 4% instead of the 15% forecasted. For FET, these market conditions led to lower-than-expected revenue and EBITDA growth in 2023. And in the fourth quarter, market activity and customer behavior continued the full year trend as exhibited by lower bookings and delayed payments. Now turning to the 2024 guidance provided earlier in the call, let me share the basis for our forecast. For the year, we assume range-bound commodity prices, with oil between $70 and $85 per barrel and U.S. natural gas prices between $2 and $3 per million Btu.
We anticipate 2024 average rig count to be down around 5% in the U.S., flat in Canada and up slightly in the international markets. Putting those assumptions together, our planned forecasts a flat global rig count in 2024 with some variability between quarters due to seasonality and budget timing. Also, we would expect operators to flex up or down their spending as the price outlook adjusts. For our service company customers, we expect to see a bifurcation of demand between those focused on U.S. land, and those with international and offshore operations. In the U.S., our activity-based consumable product sales should follow market activity. However, we anticipate softer demand for drilling and completions capital equipment. Internationally, we continue to see opportunities and inquiries for capital equipment, and this will be an area of strength for FET.
Also, we are forecasting continued growth in offshore demand as service companies ramp up operations. Finally, with the commissioning of the Trans Mountain Express pipeline, we assume Canadian oil prices will remain relatively robust and, therefore, expect to see a ramp up in second half activity for oil sands development. Putting it all together, we are guiding $100 million to $120 million of EBITDA and $40 million to $60 million of free cash flow. We anticipate substantial improvements in per share metrics. And with this forecast, FET will generate significant adjusted net income per share. We have the pieces in place for a great year. I am now going to turn the call over to Lyle for more details on FET's fourth quarter financial results and first quarter 2024 outlook.
David Williams: Thank you, Neal. Good morning, everyone. Our fourth quarter consolidated revenue increased by $6 million or 3%, while global rig count decreased 1%. Our revenue benefited from backlog conversion in our Subsea Technologies and production equipment product lines. EBITDA was down just over $1 million despite the increase in revenue as unfavorable mix and slightly higher corporate costs offset volume growth. Our book-to-bill ratio was 87% for the quarter. This follows the 111% book-to-bill ratio in the third quarter, timing of larger project bookings accounts for this lumpiness. Taking the third and fourth quarters together, yields a 99% book-to-bill ratio for the second half, in line with the full year 2023 result.
The Drilling and Downhole segment revenue increased 12%, primarily due to project revenue for ROVs and cable management systems in our Subsea Technologies product line. Segment EBITDA was flat with the third quarter as the increase in Subsea revenue came at lower contribution margin than the overall average. The segment book-to-bill ratio was 87%. Typical fluctuation in order flow for Subsea Technologies drove this low ratio. Recall that Subsea came off a sizable order for 4 Perry-XLX world-class ROV systems in the third quarter. As Neal mentioned, we expect strong revenue growth from Subsea as backlog has doubled from a year ago and demand for traditional oil and gas and offshore wind remains robust. Completions segment revenue decreased about 8%, primarily driven by lower seasonal coiled tubing sales into the Middle East.
In the U.S., Completions activity was moderately lower to start the fourth quarter before falling sharply with the expected seasonal frac holiday. Activity exited the quarter with 50 fewer working frac fleets than at the end of the third quarter. As a result, Completion company customers idled equipment, slowed purchases of consumable products and delayed demand for stimulation-related capital. However, our stimulation and intervention revenue was essentially flat as we delivered equipment that had been delayed by customers in the third quarter. EBITDA was comparable to the third quarter due to favorable product mix, and segment book-to-bill ratio came in at 101%, which is typical for this segment. Our Production segment revenue and EBITDA were also comparable to the third quarter.
Book-to-bill ratio for the production segment was 63% for the fourth quarter. This result was driven by the Production Equipment product line, where we typically see large project awards and lumpiness from quarter to quarter. I would like to highlight the impressive improvement this team has made in 2023. The segment delivered EBITDA margin improvement of 400 basis points with 42% incremental EBITDA margins compared with 2022. A focus on operating leverage, continued cost management and the utilization of our Saudi Arabian facility drove this improvement. Turning to cash and the balance sheet. We generated free cash flow of $9 million in the fourth quarter, a result that was well short of our expectation of $26 million. The shortfall resulted primarily from collections.
Despite our days sales outstanding coming down, receivables did not decline as much as we expected. Additionally, cash from our longer-term percentage of completion projects was delayed. We also paid a few million dollars of transaction expenses related to the Variperm acquisition. We have recalibrated our expectations going forward to boost confidence in our forecast. Notwithstanding the free cash flow miss, we progressed in our efforts to improve net working capital efficiency. Our accounts receivable balance improved relative to our revenue, as we returned our days sales outstanding metric to historical norms. And given the softer market outlook, our teams reduced the flow of inbound raw material, to lower inventory balances and improve our terms.
We will focus on maintaining these efficiency gains in 2024. We ended the quarter with $46 million of cash on hand and $147 million of availability under our revolving credit facility with total liquidity of $193 million. Our net debt was $91 million with a corresponding net leverage ratio of 1.4x. Pro forma for the acquisition of Variperm, which closed in January, our balance sheet remains strong. Our net debt balance would have been $241 million, and our pro forma year-ending liquidity would have been $113 million. With this liquidity and forecasted free cash flow in 2024, we expect to be in a position to retire the 9% senior secured notes later this year if we choose to do so. In the meantime, we continue to explore options to refinance our long-term debt, considering options that provide additional flexibility without excessive incremental costs or restrictions.
As we indicated in our November call, we remain committed to returning net leverage to our pre-Variperm levels of 1.7x EBITDA or better. Let me provide some details behind our robust free cash flow forecast. For the year, cash interest is expected to be approximately $25 million based on the 2025 notes and borrowings related to the acquisition. Cash income taxes are expected to be around $20 million, primarily due to Canadian income. Capital expenditures are expected at about $10 million, in line with both FET and Variperm's capital-light structures. Plus, we expect approximately $7 million for other payments primarily related to the Variperm acquisition. Along with flat global activity levels and revenue, we assume no overall change in net working capital.
These assumptions and our $100 million to $120 million EBITDA guide put free cash flow at between $40 million and $60 million. This forecast compares favorably with the combined cash flow we disclosed with the Variperm acquisition announcement. And at FET's current market cap, that's an approximately 20% free cash flow yield. I'll conclude by providing our forecast for the first quarter of 2024. Neal shared that we expect a flat global market this year with some volatility between quarters. Several factors lead us to expect a softer first quarter. These include recent E&P company mergers, downward pressure on U.S. natural gas and recent volatility in Canadian crude oil pricing following uncertainty about the timing of the Trans Mountain Express pipeline start-up.
Each factor presents near-term headwind for customer activity. Therefore, we forecast revenue and EBITDA ranges of $200 million to $220 million and $23 million to $27 million, respectively. For the first quarter, we anticipate negative free cash flow typical of our seasonal use of cash. We believe industry activity will be higher through the remaining quarters, supporting our full year guidance. Here are a few details for modeling purposes for the first quarter. We anticipate corporate costs and interest expense to be $7 million each and depreciation and amortization expense of roughly $12 million. As Rob mentioned, we did not adjust our valuation allowance following our analysis. Should we adjust these allowances in a future quarter, the result would be a onetime decrease in income tax expense and a similar increase in deferred tax assets.
Let me turn the call back over to Neal for closing remarks. Neal?
Neal Lux: Thank you, Lyle. We are excited to now have Variperm in the FET family. Their contributions along with FET's legacy business will generate significant financial returns for our shareholders. Our global footprint allows FET to navigate any volatility and uncertainty in the markets to deliver to our customers wherever they are in the world. Our DNA is built on developing new and improved products and solutions to enable greater efficiency and safety for our customers. This innovation is at the core of what we do. Before turning the call over for questions, I would like to thank our employees for their dedication and tireless efforts. Your commitment to doing the right thing and taking care of our customers is the cornerstone for FET's success. Gigi, please take the first question.
Operator: [Operator Instructions]. Our first question comes from the line of Blake McLean from Daniel Energy Partners.
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