Good day, ladies and gentlemen, and welcome to the Q2 2013 Forum Energy Technologies Inc Earnings Conference Call. My name is Ian. I will be your operator for today. At this time, all participants are in listen-only mode. (Operator Instructions) As a reminder, this call is being recorded for replay purposes. Now, I’d like to turn the call over to Mr. Mark Traylor, Vice President, Investor Relations and Planning. Please proceed, sir.

Thank you, Ian. Good morning, and welcome to Forum Energy Technologies’ quarterly earnings conference call for the second quarter 2013. With us today to present formal remarks is Chris Gaut, Forum’s Chairman and Chief Executive Officer; as well as Jim Harris, Senior Vice President and Chief Financial Officer. Also with us today are Forum’s two division Presidents: Charlie Jones, President of the Drilling & Subsea division; and Wendell Brooks, President of our Production & Infrastructure division. 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 include information that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Forward-looking statements involve risk and uncertainties that may cause actual results or events to differ materially from those expressed or implied in such statements. These 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 our 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’s statements may include non-GAAP financial measures. For reconciliation of these measures, please refer to our earnings news release available on our website. This call is being recorded. A replay of the call will be available on our website for 30 days following the call. I am now pleased to turn the call over to Chris Gaut, our CEO.

Thanks Mark. Good morning. I will start with an overview of the quarter and offer a few thoughts on the outlook for our business and then turn it over to Jim, who will provide greater detail on our financial performance. In the second quarter 2013, we’ve generated $60 million of EBITDA, $368 million of revenue producing EBITDA margins of 16.4%. Diluted earnings per share were $0.34 excluding $0.02 related to transaction expenses and foreign exchange losses. Our second quarter revenue, operating income and margin were roughly flat with our first quarter results. We are disappointed that we did not generate the revenue growth and margin improvement in the first half of the year that we had expected. The revenue growth did not materialize due to the flat North America rig count and the depressed pressure pumping market. We carry costs in expectation of additional revenue growth thus negatively impacting our margins. We are now addressing the cost overhang and we will see improvement in margins in second half of this year. Total orders during the second quarter were $356 million. We had an 8% decrease in orders from the first quarter primarily due to a more normalized level of orders for our subsea product line after the exceptionally high volume of orders received in this product line during the first quarter. Bookings increased sequentially in drilling, downhole production equipment and flow equipment. The second quarter book to bill ratio was 97% for the company as a whole, 101% for Drilling and Subsea and 91% Production and Infrastructure division. The Drilling Technologies product line experienced another strong increase in orders for both consumable products and capital equipment. We were pleased to receive several significant orders for specialized handling tools from international markets as a result of our strategy to expand outside…

Thank you, Chris, and good morning everyone. Consolidated revenues of $368 million for the second quarter are down approximately 1% sequentially. Our Drilling and Subsea segment revenue declined 6% sequentially, while our Production and Infrastructure segment revenue increased 5%. Net income for the second quarter was $30 million, down $2 million from the first quarter. Operating margins were flat sequentially with the first quarter, excluding transaction expenses. We did not achieve the expected margin improvement for the second quarter as revenue was lower than we estimated principally in Drilling Technologies and Flow Equipment. Our cost structure was in line with the higher revenue expectations depressing margins. We are addressing our cost structure to adjust appropriately to the current market. Recent order levels for Drilling Technologies had been encouraging with sequential increases of nearly 20% for two quarters in a row following three quarters with decline in orders. These incremental orders have been for international destinations with significantly longer lead times and with deliveries starting later in the third quarter. As a result, while order levels have been in line with our estimates, the associated revenue recognition has lagged. We should see modest improvement in Drilling Technologies revenue in the third quarter with further increases in the fourth quarter as we deliver on these international orders. As we take actions to reduce our cost structure and as our revenues increased, margins should improve over the balance of the year. While our Flow Equipment customers have seen improved activity levels, the current pricing environment is challenging with ample inventories and capacity availability, which is putting pressure on our margins for certain products. We expect modest improvements in revenue in the second half of the year for Flow Equipment with better prospects in 2014. I will now review our segment results comparing the…

Thanks, Jim, and thank you for your interest. At this point, we will open the line for questions. Ian, let’s take the first question

Thank you, sir. (Operator Instructions) That question is from the line of Doug Becker, Bank of America/Merrill Lynch. Please go ahead, Doug. Doug Becker - Bank of America/Merrill Lynch: Thanks. I want to touch base on third quarter margins in Drilling and Subsea, it seems like the Downhole expansion is proceeding as expected that carries higher margins in some of the other businesses, just what type of jumps can we see in margins in the third quarter in D&S?

Yes, Doug, I think there would be two drivers for the increase in margins that we are expecting or three actually in the third quarter. As you point out, the Downhole business as it improves and increases in volume, we’ll have a positive mix effect on our business. Also in drilling, as we begin to see some of these increased orders that we have been realizing since the beginning of 2013, those will begin to flow through. And from a both an operating leverage standpoint and from a mix standpoint, those contributions will be accretive. And then the third element will be the contribution from our cost realignment program. So, we would look for an increase in our margins in the third quarter in D&S of at least several percentage points. Doug Becker - Bank of America/Merrill Lynch: Okay, that makes sense. As we start thinking about 2014 just if we could touch base on some of the larger moving pieces here, I guess just offhand it would seem like Downhole the expansion that should have a positive – pretty significant positive year-over-year impact. Subsea, the growth outlook store looks very good there. And I guess I would think about those as 20% businesses growth from a growth standpoint year-over-year, would you agree with that and then maybe some of the other business lines, we are just kind of thinking about revenue growth in the ‘14?

Yes. So, our Downhole business, we think we have very good prospects and we are pleased with our market position and potential there. The subsea business as the fundamentals are excellent as you point out, it is a lumpy business. As I mentioned in my remarks, it does depend a bit on when our offshore construction company customers lands new contracts in their order rate, but at this point, our expectation for planning purposes is that the orders going into 2014, our expectation there is strong. On the drilling side, I think we have potential with these increased orders that we’re seeing the complements and benefit of having Blohm & Voss as part of our drilling operation and the combined offering we have there the opportunity to drive out some costs. The revenue growth probably not as strong as you outlined. But I think the potential for margin expansion in our drilling business from where we are now is excellent. Doug Becker - Bank of America/Merrill Lynch: If we kind of pull those together would we see Drilling and Subsea or Production and Infrastructure margin growth – revenue growth, which one would be higher?

Yeah. Mike yes, 2014 is that D&S would have higher revenue growth for the reasons just described. But if we see a recovery in the pressure pumping business, that could be a real good contributor there. Production equipment continues to rock along at very high growth rates for us. So, I would agree the D&S probably has the higher growth prospects for 2014 at this point unless we see a turn in the pressure pumping market. Doug Becker - Bank of America/Merrill Lynch: Okay, thank you.

Thanks Doug.

Thank you. We have another question for you. This comes from the line of Jeffrey Tillery at Tudor, Pickering, Holt. Please go ahead.

Hi, good morning.

Hi, Jeff.

When we’re thinking about the drillings products business with the orders being executed more internationally now, for the consumables what should be think about is the right cycle time for turning into revenue. And then same question for capital equipment and is that capital equipment cycle time much different than what you see domestically?

Yeah, good question and we’ve seen the change there Jeff, which has affected our ability to forecast the business. The fact is that the rate of turning orders into revenue has lengthened. When the market was hot for consumables that was very much a book and ship and our customers wanted that in short order. We are now seeing customers placing orders for consumables that they are putting I think these products into their warehouse now rather than selling direct to the rig. So, that part has lengthened. And certainly the international side of our capital equipment which is the growing portion of our capital drilling equipment side definitely longer, typically we don’t recognize revenue until that equipment is received internationally excluding the shipping time. So, the combination there I think we could see maybe a full quarter’s worth of increase and the rate at which our bookings are turning into revenue in the drilling business.

You covered it. And Drilling and Subsea margins I mean is this quarter on a percentage basis we were able to hold flat despite the revenue decline. Is that just all mix (indiscernible) we got subsea down a little bit and we had downhole up so that explains the kind of full is a more complete explanation for that in the margins, is that fair?

You’re right Jeff, yes.

And then just given the pretty hefty M&A integration you guys are going to be undertaking in the second half of the year. Do you guys feel full on the front over the next four to six months or do you guys feel like you have capacity to do some more?

Jeff, I think we need to be clear about this. Our priority is at this point internal in improving our efficiency and improving our execution and improving our internal ability deliver on results, that’s where our focus is. We have done I think some very good acquisitions. We continued to actively, be active in the acquisitions market, but our first priority is on making sure our internal house in order at this point.

Okay, good, I think this is what most folks wanted to hear, and just the last question is just for Jim with the acquisitions in the fourth quarter how much D&A does that add?

The DNA that we should see is just under $7 million that’s related to Blohm & Voss and Moffat, global tubing reported on an equity basis we don’t do any add back for EBITDA there Jeff, so just under $7 million.

And the $7 million.

That’s annual.

Annual.

Annual, okay, perfect. Thank you.

Thank you for your question. We have another question for you. This comes from Jonathan Sisto at Credit Suisse. Please go ahead.

Good morning gentlemen.

Good morning Jonathan.

Charlie, may be one for you over the course of earnings season we’ve heard a lot about drilling efficiencies, but yet wells are getting longer, service intensity is going up. Have you all or your division looked at a way of quantifying that maybe increased demand for consumables as we go forward?

And thank you for your question. And are you talking about really drilling equipment because our downhole equipment is also affected by that. And trying to quantify used on normal rig count metrics is getting more difficult for all of us in the industry, that’s for sure.

Okay, but I guess is the consumable demand increasing per rig, or per well or do you see it kind of staying flat as we move forward?

Well, what we are seeing is it’s really a function of the activity on the rig, right. And what the footage being drilled and the difficulty and also the higher weight of equipment that we are running, it is consuming we think on a per rig basis are slightly higher percentage of consumables. If you look at the U.S. rig count for example year-over-year look at prior quarter year ago versus today I think is down around 11% in North America. And if you look at our consumables revenue on that basis it’s not down as much.

Okay, very good. One last one if I can Chris, subsea good orders in the first quarter kind of took a natural pause here in the second kind of all systems go there I presume as we look into ’14 to some extent, is that true?

Yeah we believe so and we are very pleased with the contribution that we are getting from the Dynacon large business. Our capacity expansion should be coming on there during the – will be coming on there during the third quarter, which is timely for us. We’ve got potential with Moffat and on the ROV, our based ROV business, yeah, fundamentally strong. We have seen an increase here in interest and orders for our big trenchers and more have been talked about there, so that’s another increment to the business here over the past year.

I’ll turn it back, Wendell keep up the good work.

Thank you.

Thanks, Jonathan.

Thank you. We have another question for you this one is from Robin Shoemaker, Citigroup. Please go ahead, Robin.

Thank you. I wanted to ask a kind of broader question is so many companies here now are talking about large upstream projects moving to the right and in fact even (press around) this morning talked about 13 upstream projects mostly offshore that it’s moved out of the 2013 into 2014. And so in your interactions with customers what kind of insights do you have about that and how generally is it impacting you?

Yeah, so there is an impact there Robin and for the subsea business in particular as we mentioned there for – other than the replacement element of our ROE orders for our customers when they are just replacing whether they have lost or it’s no longer efficient. The new additions to their fleet, they do match with projects and we and that’s part of the difficulty we have in forecasting exactly when those order is going to be placed is these projects have been slipping to the right. So, where we fall in the timeline of a project, the trees are ordered well in advance of when our orders would take place, but it does give us some advance indication what could be happening in our business. Charlie, any additions?

Yes, I agree, it doesn’t affect the Downhole or the drilling as much for sure.

Okay. And one question on the consumable products side, do you continue to see customers working down their own inventories, and do you still expect at some point a kind of snapback in that arena? I think we touch briefly on this last quarter, but I wonder if the destocking at the customer level continues.

Well, this is Charlie. From the drilling consumables perspective, we think we are kind of at an in and out rate. We are not seeing really a drawdown. The fact that it’s flat rather than looking forward is causing some pricing competition that probably wouldn’t be there, people were speculating that we are really going to go further up or further down. We do expect a snapback, the question is when? And as Jim told you that we are not expecting a snapback this year, because we are not exciting the rig count in U.S., which drives some predominance of our consumables business to occur this year. But as soon as opinions change and people believe, I start to believe there is going to an increase, then it does trigger that snapback, and we do have a lot of data that shows that is the case.

Right.

I have been saying that, that snapback would be associated with quitting rigs currently not working back to work or new rigs that aren’t completely outfitted.

Yes, okay. So, since we don’t see that it’s kind of a steady state market for consumables. Yes, alright, thanks a lot.

Thank you for your question. We have another question for you. This one is from Brandon Dobell at William Blair. Please go ahead, Brandon.

Thanks. Maybe focusing on the acquisitions for a second, you mentioned a $0.10 accretion, I guess the assumption for those, so two questions there, I was assuming that’s an annualized number or maybe it was just a back half of the year number? And then what kind of I guess revenue and/or cost synergy assumptions kind of have gone into that $0.10 accretion number?

So, Brandon, first, that’s a back half number.

Okay.

So, the $0.10 is for the second half of the year. We have the revenue number. It should be north of $100 million. We generally don’t experience cost synergies on an acquisition. And in fact with the acquisitions that we do generally bringing those up to with the systems and the personnel up to a level to work for a public company, and there are costs that we incur and that’s built into the estimates that we have given.

Okay.

Brandon, on that revenue number keep in mind that there is no revenue associated with Global Tubing as that’s reported on one line.

Right.

So, that’s just for the other two.

Okay. And then to touch on your valve comment there for a second, it sounds like there is a mix issue, probably some push out on timing as well. Is there anything you can do to change the trajectory of the margins in that business, or is it just more about timing on projects and those kinds of things or what else can you do to kind of put that business back in the right spot?

Yes. So, that is one of the areas where we are looking at some cost realignment to recover some of the margin, but when they will also as we look out to later parts of the year, we are seeing talk and increase more bigger orders, right.

Right. We have had some projects that have moved to the right that now are in the bid stage, and we expect those projects to materialize in the – but later part of this year. So, we do see an increasing activity. We had some activity in the heavy oil area in the second quarter, which was not was a little bit larger than expected and that is not profitable as some of the upstream activity in the U.S., which impacted the second quarter, but projects are moved to the right. It looks like they are now coming into the frame for activity in action later in the year, and combine with the cost reduction, as Chris mentioned we feel better about the third and fourth quarters.

Okay. And then final one from me, you guys have talked less about, I think just about systems investments in particular that drive a little more manufacturing efficiencies, how much room do you guys think you have in inventory turns and DSOs as you look out between now and kind of the end of ‘14, should we expect improvements across those methods to drive better free cash or do you think you have captured a lot of that opportunity?

Brandon, let me take the DSOs first. We have implemented a system there, and we did come inside of 60 days and as of June 30th. We do think there is opportunity there to get down into the mid 50s.

Okay.

So, continuing to see more opportunities to improve and we have been there at selected times just not at the end of the quarter. And on inventory turns, we – with these systems implementations and other changes in the manufacturing, we do see opportunities continue to increase turns there. So, there should be opportunities to see free – good free cash flow coming related to inventories.

Okay, thanks guys. I appreciate it.

Thanks, Brandon.

Thank you for your question. We have another question for you. This comes from Brad Handler, Jefferies. Please go ahead Brad.

Thanks. Good morning guys.

Hi Brad.

Could, let’s see maybe just get into some specifics that will help a little bit. I wonder if you can quantify for us maybe the capacity or the throughput expansion on the Downhole side and maybe help us calibrate kind of what the growth potential is as a result of that in Downhole products?

Right, so we feel that we have a scalable business there, but we can take on significant growth particularly from large international orders and that’s our target. And we are on our way there. I think that’s opening up the facility for more throughput and some of the things we are doing on our supply chain contribute to that. So, could – do we have the ability to put more and say 25% increase into that business, yeah I think we do. And I think an advantage of a business like ours here is with fairly modest investments we continue to scale up our capacity. I think also as we made some of these changes our ability to react to customers needs for corporate turn, quick order, customer needs has been enhanced and those are higher margin contracts. So, we can both pick on larger volume international contracts and the higher margin short-term domestic orders. And that’s where we want to get to being able to serve both those markets and that will have – help us both on the volume side and on the margin side Brad.

Okay, that’s a helpful color actually. I appreciate that, ample vacation. Let me just do an unrelated one. I don’t think we have heard that much color from you on the call on the flow equipment side I mean you mentioned the pricing pressure that sounded consistent with what you were anticipating more or less in prior public commentary. But could you give us a sense of maybe keying off Robin’s question is on other consumables, but can you comment on the de-stocking process I guess by your competitors, it sounds like inflow equipment any sense you have as to whether there is some signs of bottoming there. And then again any sort of updated cover on the potential for a snapback if in light of your more subdued rig count outlook?

It’s a very competitive market now for these pressure pumping consumables, flow and fluid ends. And it’s competitive for all of us there. And there is ample supply and capacity. So, we all know that the number of stages being fracked is at a pretty decent level and the trend there is positive as the big pressure pumping companies have indicated. So, that I think will help absorb eventually some of this capacity, but we continue to think this is going to be a bit of a continued dogfight for a while right?

Yes, I think there is plenty of inventory available but when our competitors and it’s still very price competitive in certain products. It’s a book and chip business right now. So, it’s all matter of execution. That said, it feels to us like the – our customers are busy and they are apiece, they feel like they know what their pricing is going to be, they can plan their business better. So, we feel that’s a change that our customers are apiece with their business models and it’s going to take a while for this competitive overhang to work its way through, but it will. In the meanwhile, we are working hard in our cost structure both from a manufacturing standpoint and making sure we execute and don’t miss an order, but it’s a very competitive environment, and we think it will be for a while.

Right. And I’ll focus on the service side as a leading book for our customers that’s proven successful up in the Northeast. And we are now in the process of building that up in the Bakken, so, we feel that will be a helpful factor. And another one is that we have increased our emphasis on the slow back side of the business and as we continue to broaden our offering.

Okay, those are the interesting points, but maybe I will exploit those with you offline. Thanks guys.

Thanks Brad.

Thank you. We have another question for you. This one is from Mike Urban of Deutsche Bank. Please go ahead.

Thanks. Good morning guys.

Thanks Mike. Mike, how are you?

I’m good. Thanks. So, Chris, you’ve talked a little bit about some of the adjustments primarily on the cost side based on the business environment that you see right now. I guess this is a little bit broader or longer term question as it pertains to what you see structurally out there. And I guess specifically what I am talking about is, I think the efficiency of the drilling rigs out there at least the U.S. onshore rigs has surprised just about everybody positively? Does that change your long-term view of your market position, I guess especially as that would pertain to rig capital equipment, you’ve grown the business outside the U.S. and I would expect you would be able to continue to do that, but do you view these changes you are having to make as more cyclical and we will we see recovery at some point or you are thinking about the longer term structural implications for the efficiency?

Yes. So, this trend is more drilling efficiency and higher completion and well count, but not so much on the rig side obviously helping our production equipment or downhole tools business things like that, but on the drilling side, strategically it does cause us on our capital equipment for both our legacy drilling business and of course for Blohm & Voss, more emphasis international and offshore. We are not going after big integrated drilling packages, but we are addressing certain niche capital products for jack-up rigs both upgrade and new build. And that’s more engineering content, but I think on a combined basis now we have the capability to better address that market. Charlie, any additions?

I will agree.

And as that shift takes place toward more international and offshore, is that something that you can address the way you are currently configured especially from a manufacturing facility standpoint or do you have to make some changes to that, perhaps some investments in other markets outside of the U.S. or different markets within U.S. just trying to understand how that might affect the investment profile?

Well, we just did the announcement of the investment in Blohm & Voss. And that clearly is perfect alignment with that strategy, and it will be complementary to us as we go forward and reshape the business to better address the international market. That’s why we are so excited about this acquisition.

But I don’t think it’s going to be a fundamental shift in the business, we feel that with our combined facilities and manpower, we will be able to address these opportunities. And if we need to gear up in a certain area we will do that, but we are not looking to build a new facility in Malaysia or anything like that if that’s the question.

Okay. It’s from me. Thank you.

Thanks.

Thank you, Mike. We have another question for you. This one is from Blake Hutchinson, Howard Weil. Please go ahead Blake.

Good morning guys.

Hey, Blake.

Just a couple of quick ones for me, first of all, I apologize if I missed this. But did you give an overall order flow number or have we kind of been in that as a useful metric for you guys at this point?

Maybe we did give an overall order number, so our orders or in-bound orders for this second quarter were $356 million that compares to the prior quarter of $385 million. I think I mentioned that four of our six product lines had increases in orders during the period as did D&S overall. But the subsea business orders were that’s the one area where the orders were down significantly and that’s just because they were so exceptionally high in Q1.

Okay nothing to worry on trend line adjusting for that so? Okay.

No. Even those out there well over (indiscernible) 100%.

Great. And then just if I take the sum, total or you have given a lot of good information on the inputs by the sub-segments on the call as I just – we need to be perfectly clear as we leave the call, it sounds like the margin here by fourth quarter is somewhere in the 20% range on the EBITDA line, will that be the right take away for us to have. And then as you think – as you think about the business without an inflection in the U.S. is that about what the current activity backdrop offers you in terms of margin or would you hope to extend on that as we head into ’14?

So, Blake taking 2013 first we have historically achieved EBITDA margins north of that 20%. And based on the order levels that drilling has seen and that we expect to deliver in the back half of the year, we do see that is achievable by the fourth quarter, not in the third quarter, we should move towards in the third quarter, but achieved by the fourth. And then we would expect in 2014 to consistently be above that and I would say in line with the historical EBITDA margins that we posted.

Great, so that hasn’t been ruled out as the target or adjusted here and it’s just a bit of timing affect?

That’s right.

Okay, great, that’s all I have guys. I appreciate it.

Thank you. We have another question for you. This comes from William Thompson at JPMorgan. Please go ahead.

Hi, good morning guys

Hi, William.

Obviously you guys used – have revised your internal top line forecast on a weaker U.S. rig count. And your guys story is really a backlog story, just trying to sense on how confident you are on the second half revenue, now that you are obviously seeing strong subsea and drilling orders earlier this year. Now, when can we expect those to pull-through as revenue is that more latter this year or is that more of a 2014 event?

Obviously, we have brought down our revenue and earnings guidance due to this flat rig count that was not expected by us or others, I don’t think going into the year and that’s been the primary driver of that. Nonetheless, we are seeing an increase in – a strong increase in orders for our drilling business now. As we pointed out, the rate at which those orders turn to revenue has lengthened due to changes in the market more international, the more measured pace and discipline in the domestic market. But having those orders in hand it does give us confidence and the increase in revenues in our drilling business, we are seeing the benefits of our strategy in the Downhole product line and we feel that our growth opportunity is there that we feel good about for the second half of the year. The production equipment revenue growth that has been a very strong and excellent story for us, and based on the increase in orders backlog, we feel good about that. Wendell talked about the valve business has flattened not here recently that we are seeing some bigger projects meeting valves late in the year right.

Yes.

Well equipment, it’s too early to call the turn there. So, that’s where we are and that’s what gives us the confidence in the guidance we are now giving, but clearly we have reset our guidance for the rest of the year.

And as a follow-up and excuse me if I missed this in the prepared remarks, but did you guys quantify what the impact is on the week Canadian breakup season and if we could expect a little bit of a snapback in the second half this year on the sort of the well directed business?

That has been weak. And that’s impacted some of our business as we haven’t quantified the benefit of that and we haven’t included any snapback and candidly in our thinking. It is seasonal, I think lot of that ordering for this part of the season is now underway and we are not forecasting significant impact in our business from there.

Alright, thank you. That’s it for me.

Very good, William. Well, we thank you all for your participation in our second quarter earnings call and good questions. And we look forward to talking with you soon and speaking with you in our third quarter call. Thanks again. Bye.

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation, and you may now disconnect. Have a good day.