Good morning, ladies and gentlemen, and welcome to the Forum Energy Technologies Fourth Quarter and Full Year 2018 Earnings Conference Call. My name is Joelle, and I will be your coordinator for today's call. At this time, all participants are in a listen-only mode. And all lines have been placed on mute to prevent any background noise. We will be facilitating a question-and-answer session after the speakers' remarks. 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 Mark Traylor, Vice President of Investor Relations. Please proceed, sir.

Thank you, Joelle. Good morning, and welcome to Forum Energy Technologies fourth quarter and full year 2018 earnings conference call. With us today to present formal remarks are Cris Gaut, Forum's Chairman and Chief Executive Officer; as well as Pablo Mercado, our Chief Financial Officer; and Lyle Williams Senior Vice President of Operations. 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. These 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 two weeks following the call. I'm now pleased to turn the call over to Cris Gaut, our Chief Executive Officer.

Thanks Mark. Good morning, everyone. The Board recently asked me to lead the company once again, and I'm very committed and motivated to increase our stock price, unlocking Forum's untapped value. I have been focused on ensuring that Forum will manage our business to the existing market conditions and will consistently generate free cash flow through the market cycle. We will have a cost-efficient business model and an emphasis on our winning products and strongest brands. We are entering year five of the industry downturn from the 2014 peak activity levels. WTI oil is hovering around the low $50 per barrel price range, and the futures market is not much better. Based on our view that this lower industry operating environment is the new normal we have refreshed our strategy. Instead of positioning the company to take full advantage of a secular growth trend that has not materialized, our strategy will now be to position the company to generate free cash flow throughout the market cycle. I believe under the current market conditions, Forum could generate over $100 million of free cash flow annually through a combination of working capital reduction and EBITDA growth. Forum's balanced portfolio of well-positioned consumable products and strong brands for capital equipment serving global markets across the drilling, completion and production cycle positions us to generate free cash flow on a consistent and continuous basis at any market environment. For example, we have a strong portfolio of well intervention in artificial lift products including Global Tubing and full protection solution for electric submersible pumps which are attracting new customers globally and generating several cross-selling opportunities. These products benefit from completions and workover activities even on long-standing environmental. Forum has a complete package of hydraulic fracturing consumable equipment which covers the full suite between the frac…

Thank you, Cris. Good morning. For most of 2018, the U.S. Land Drilling and Completions market remained active and Forum generated almost 80% of our revenue in the domestic market. Our total revenue for the full year 2018 was $1,064 million, up 30% from 2017. Orders for the year were $1,116 million, a 28% increase from 2017, resulting in a book-to-bill ratio of 105%. Adjusted EBITDA for 2018 was $96 million or 9% of revenue, up significantly from $29 million in 2017. In the fourth quarter, total orders for the company were $271 million, down $4 million or 1% from the third quarter. The decrease resulted primarily from the deferral of new orders like some of our customers due to budget exhaustion as well as a slowdown in U.S. completions activity. This was partially offset by the additional orders of Global Heat Transfer which we acquired in the fourth quarter. The book-to-bill ratio for the company was 99%. Our fourth quarter revenue was $273 million, up $6 million or 2% sequentially despite the slowdown in completions activity. Our adjusted gross profit was $69 million in the fourth quarter or 25% of revenue, a sequential decrease of approximately 300 basis points from the third quarter. This margin compression resulted from lower volumes of high margin completions products as well as some pricing pressure in selected product areas and a greater impact of tariffs. The adjustments to our gross profit in the fourth quarter were primarily for inventory reserves and restructuring charges which I will discuss in more detail. Our adjusted EBITDA for the fourth quarter was $21 million or 8% of revenue, a sequential decline of 320 basis points. I will now summarize our segment results on a sequential basis. In our Completions segment, orders increased 16% to $133 million. Segment…

Thank you, Pablo. Good morning, everyone. In the fourth quarter, Forum's overall order flow remained strong except for some budget-driven seasonality in the Production & Infrastructure segment. I will share a bit of color about recent orders and how we expect booking patterns to unfold across our product lines. For Completions, even though we expect lower oil prices to slow orders for newbuild capital pressure pumping fleets, we did received nice orders for capital equipment in the fourth quarter, including power ends for new fleets and conventional and ICBM-styled manifold trailers. Outside of these capital items, demand for our other Completion products will continue to track more closely with U.S. drilling and completions activity. We also expect market share gains from our innovative artificial lift and well intervention product lines to continue. And international activity growth provides upside for our completions products. For example, we recently received an order from Asia for 25 coiled tubing pressure control equipment packages for delivery in 2019. Order for our Production & Infrastructure equipment now follow a more seasonal ordering pattern along with budget cycles from operators and inventory planning by major distributors. Fourth quarter bookings dipped from a strong third quarter and we expect an uptick in the first quarter following budget resets by our customers. Midstream and downstream capital projects continue to move forward and provide support to our overall order profile, despite any slowdown in U.S. upstream activity. The drilling rig count is a key indicator of our drilling order activity. In the U.S. land market, we expect some softening in the rig count in the face of upgrades. However, discussions with customers related to international land rig newbuild and upgrade activity continue. These are primarily focused in the Middle East, where we expect to receive our share of orders for…

Thanks Lyle. As we begin 2019, you can expect Forum to be focused on generating free cash flow on a consistent and continuous basis, growing EBITDA dollars, emphasizing our strong products and brands with market share opportunities, and managing the business for success in the current market environment. I would like to thank our employees for their hard work in 2018 and their support for the changes we have made for 2019. Thank you for the interest. And at this point, we will open the line for questions. Joelle, let's take the first question.

[Operator Instructions] Our first question comes from George O'Leary with Tudor, Pickering, Holt. Your line is now open.

Great quarter on the free cash flow generation front. Definitely what most folks were looking to see at you guys. I guess my first question would be as you look forward and anticipate getting to a point where you are generating $100 million in free cash flow on an annual basis, what are your priorities for the use of that free cash flow? Historically, you guys have been fairly acquisitive, but there is a good deal of that last year. Is it returning that to shareholders, paying down debt, are there attractive M&A opportunities out there? Just curious how you're thinking about that capital allocation going forward once you have that $100 million in annualized free cash flow on hand?

Right, George. So we made the GHT acquisition late in 2018. Our focus with our free cash flow will now be reducing our net debt improving our liquidity. And that's been our pattern as we do an acquisition, finance it with some debt, but then pay down that debt from free cash flow. And so that is our priority focus here at this point in time. Pablo?

Yes. So just to add to that, George, absolutely use of free cash flow pay down debt initially, we are though in the market talking to companies, those acquisitions that we tend to do generally take some time to build relationships and identify targets that we think we can be successful with as we integrate them into Forum. And so we are still out there building those relationships, building the pipeline. I think in this market, there is going to be a bit less M&A activity. So it's a good time to build those and not necessarily feel like you have to pull the trigger and miss something. It is a buyer's market because of the change in market conditions here.

But to be clear, we want to get our net debt down. It's above the level that we wanted to be at on a normalized basis.

And then you noted Q1 from an operating perspective in 2019 and not trying to be too myopic here, but just to think through the flow through of my model and how best to run those numbers modestly down. I guess, Cris, what would you kind of characterize and maybe you could provide a range or just some sense of what modestly lower in the first quarter be?

Yes, a bit softer, I think, is what I said. So, I think, what a bit softer means it doesn't mean about the same.

Got you.

But it doesn't mean significantly lower which to me would be significantly low would be more than 10% to 15% down. Is that helpful?

Yes. No, that's a helpful window to think through. And then I'll sneak in one more if I could. Inventory came up a number of times in your comments and just working capital generally seems like inventory is a decent lever to pull to draw down to generate some free cash flow especially in 2019. I guess, is there a - historically, you guys have laid out some targets on where you'd like inventory turns to go through time. As Cris now as you're kind of back at the helm, how would you frame a targeted either a level of inventory or inventory turns metric to think about going forward?

Yes, that's - a primary focus for us is good working capital management, and Lyle has been doing a lot of work on that.

This is a great question for us. Long term our objective for inventory turns is to be better than three times. We obviously had a lot of inventory now with our turns' levels where they are, and we have been in the past making some inventory bets counting on some uplift in the market. So, as Cris mentioned, we're going to manage the business for the market environments that we can see and expect in the near term. So that gives us some opportunity to pull those inventory levels down, which will come through reducing our inventory that we have for active orders and things that are moving really quickly, but that are planning but also looking at some areas where we have excess inventories and drawing those down. And I think Pablo mentioned that in his comments as well that we're going to be very aggressive about moving some of that extra inventory.

And our next question comes from John Watson with Simmons Energy. Your line is not open.

I want to follow up on George's question on inventory. I think the market clearly likes the focus on free cash flow. Can you give us some context on what working capital could look like in 2019? How much of a reduction we could see? Just any quantitative metric you could give there? And then also on the inventory reductions, any implications for your ability to increase revenue?

Yes. So, it's going to be a process to move from where we are now to the three turns that Lyle outlined. And we're going to do that in a smart way, but also do it in a way that it clearly adds to our cash flow. And we'll add EBITDA dollars. So we have set internal goals from a bottoms-up standpoint throughout the company and we have plans to accomplish that. And that is a high priority that we have internally.

That's right. And John, just I think things I would add is in addition to those detailed plans, we feel like we have ample inventory on hand to meet current demands. And as we look ahead, we've made a lot of planning improvements, and I think I talked about those on maybe some of our earlier calls, and we continued to work with our vendors on shortening lead times of our supply chain. All of that's going to allow us to be flexible, have lower inventory levels and continue to be responsive to needs of our customers in the market.

And then quick follow up on the completions margin. We got some good color on what drove the degradation quarter-over-quarter in 4Q. Thinking about 1Q and then more broadly in 2019, do you expect the pricing for some of the pressure pumping equipment to return? It seems like that hindered margins in Q4. Just curious about expectations in 2019?

Yes. So, completions, we did see a slowdown in the fourth quarter. What we expect in the first quarter is that slow start to the year to continue. There are less - it's primarily on the frac side and as you know there are less spreads working today. And also our customers' pricing has been a bit under pressure. And so for that reason we do expect some of that will impact us in the first quarter, but kind of cadence of that is a gradual improvement starting in the second quarter. So we don't expect the level of newbuilds that we saw over the past couple of years in the frac business. It's going to be a shift more to sustaining and replacement work. It is still very important for our customers that they have no non-productive time and deliver efficiencies for them. And so that's the emphasis in the products that we're emphasizing and delivering. But clearly, it's a soft spot for pressure pumping. Yes, it is such an important part of the process and delivering production. Now that we're on this faster treadmill in the unconventional place, we do expect that that activity will have to pick up later in the year.

So, one more from me. Lyle mentioned some initiatives to reduce G&A that I think are prudent. Is there a target for G&A as a percentage of revenue that Forum has internally and maybe we should be thinking about later in 2019 or into 2020?

Yes. We have - we do have those targets internally and we're working toward them in 2019. The difficulty with your question, George is, it's hard to say longer-term where revenue is going and how much further adjustments up or down we would need to make to SG&A. But we want the SG&A levels to be significantly lower as a percentage of revenue than they've been here recently. I think that is about as clear as we can be at this point in time. And let us get our work done and show you the results. And I think that's probably the best way for us to demonstrate what we're doing and the impact it's going to have.

And our next question comes from Chase Mulvehill with Bank of America Merrill Lynch. Your line is now open.

I guess the first question, I just wanted to confirm that you said '19 EBITDA you felt would be up year-over-year. You did say that right?

I did, indeed.

I guess maybe if you can kind of walk us through the road map of kind of how you get there? And how much market tailwinds you need or are you actually kind of cutting costs? Because one of your bigger competitors reported yesterday, and kind of talked about, a more or less kind of sloppy market for U.S. onshore and especially kind of relative to oilfield service CapEx. So kind of help us understand how much of that you can do on your own versus how much you need the market to kind of come back?

Yes. There are differences among companies. I think we're less oriented toward newbuild CapEx than the competitor you're referring to. And with our mix of businesses, with the opportunities we have in the well intervention side and the artificial lift side, we are seeing growth in the Drilling & Subsea business as we referred to before. And with the - on the production side, the midstream build out and the investment in process industries were expecting growth in that part of our business as well. I would agree with your implication that there is going to be less new land rigs built, less new coiled tubing units built and certainly not many offshore things built. But as I say, we're much less exposed to that part of the market than what you're referring to.

Is there a big cost cutting number that you can point to and you can think about it as it relates to kind of 2019 as you kind of been in there I guess a couple of months now and then potentially see an opportunity to cut costs?

Yes. We are very much have a focus internally on cutting our cost particularly on the SG&A side. I think you will see that over time realizing this is a kind of a show me market that we're in, let us demonstrate those savings to you and then review the results. But we have specific targets for cost efficiencies throughout the organization. And I think that's going to help contribute to the EBITDA growth that I was referring to.

I guess one last follow-up. Obviously, it seems like the number one, your top priority right now is to generate free cash. What would be your number two priority?

Yes. So, free cash, emphasizing our strong products and brands and cost efficiency, I think those are the top three things and the result is going to be the result of those initiatives, stronger liquidity and capital structure and more EBITDA dollars.

All right. That's all. Very helpful.

So I'm giving the three points of emphasis and the two results that we're looking for.

All right. Well, I appreciate it. And again, welcome back Cris. Look forward to working with you.

And our next question comes from J.B. Lowe with Citi. Your line is now open.

Let's see here. First question, what - if you stripped out the GHT acquisition in 4Q, what do you think your completion segment revenue did quarter-over-quarter?

Yes. So, thanks for the question. GHT was a contributor. You can see it in the tables. It's included in our S&A product line in the revenue there. So it did contribute to an increase in revenue, but that was partially offset by the slowdown that we talked about in completions activity. It was in for most of the quarter, but not all the quarter. That could be enough of a sense?

I was just wondering if you had a number, but if not that's fine. I guess just the outlook for - you guys didn't really mentioned too much on the outlook for GHT specifically. Can you just talk about how their innovation is going? What's the outlook for the business end markets there little bit more clearly?

Yes, sure. So we are - we continue to be very excited about GHT. It is a differentiated product that we've acquired there and they've been gaining a lot of traction particularly with the newbuild fleets that took place last year. What we see going forward is a great opportunity to retrofit the existing base of radiators that are out there in the installed fleet with this new more efficient product. And we also see significant potential for cross-selling opportunities and synergies both on the revenue and cost side with our other stimulation products.

Second question was, do you guys have an update on the Saudi valve initiatives? And if you could just remind me how much investment you've actually put into that so far?

We continued to make good progress in Saudi. And what we've been working on is gaining approvals for major customers. And we all know that that is a long process and a slow process. And while we are making really good progress with major customers, we are behind on that process from where we expected in our initial investment case and what we've been given direction to before. So we believe fundamentally in the long-term strategy there of being a local assembly and test provider to the Saudi market. And we believe that's going to continue to be a or will be a significant contributor to our valves business in the future. So our investment there J.B. is around $5 million. We feel very positive about what this is going to look like in years to come. But again, as I mentioned, we're in that phase of gaining acceptance with customers in the local market which will come just taking us a little time than we thought.

And then just one quick last one. Do you guys have a target net debt to EBITDA ratio that you want to kind of get back down to?

Yes. So, if you look longer-term, we have historically been at two times or better that's what we want to get back to. Obviously, we're not there today. Thus, the focus is on increasing EBITDA and reducing our net debt at this time. Liquidity example, but we do want to reduce debt level.

And our next question comes from Martin Malloy with Johnson Rice. Your line is now open.

The $100 million free cash flow number that you've mentioned at the beginning of the call. How much of that is coming from working capital reduction?

Yes. So we've got probably roughly equal contributions from EBITDA and working capital as a reference point here, Marty. Now how the year unfolds, clearly there's some uncertainty about that. If we do see a strengthening in the market then the waiting of EBITDA would increase as a cash generator. If there's softening in the market then the waiting from working capital would increase. So regardless that is our objective. But exactly what the pie, if you will, would look like, and the pie chart will depend on how the year unfolds and what the market looks like.

And then I just wanted to ask about the pricing on the Completions equipment. And with the pricing pressure that some of your customers are under, I would expect that they're looking to reduce their inventories in spares and parts, and other vendors like yourself are probably looking to reduce their inventory levels. What are you seeing in terms of pricing today out there for some of your equipment?

Yes, I'd say in that stimulation the product sold with pressure pumpers, the pricing index if you will for a number of those products is coming down at the current time, but still good positive margins. And as we said we expect that over the course of this year demand will increase and we'll see what impacts that would have on pricing later in the year?

Just going to add to that a little bit more color. I think we're getting better pricing in some of our new products that create efficiencies. So that goes a little bit to offset. Some of that is on the intervention side of that product line. And then I think that there is a sense of operators or service companies looking to reduce capital costs. So I think that's an important distinction Cris made about how we have exposure to activity. And often that reduction in capital investment does need a little bit higher maintenance cost as well.

And our next question comes from Edward Muztafago with Societe Generale. Your line is now open.

You're probably getting a little bit tired of talking about inventory here, but I want to maybe think about this in little bit a different way. It seems like what we're seeing among the larger players is a bit of a shift back toward focus on maintaining margin over maintaining market share that kind of dominated the last couple of downturns. And it sort of seems like that's what underpinning your focus around inventory. And there is some suggestion that this is a structural shift going forward. But there is always been a risk in up cycles as to not having enough inventory on hand and ultimately that leads to ceding market share sometimes to other players. Can you just talk about how you're thinking about inventory longer-term and inventory management in the up cycles and not just kind of the current soft period that we are in?

Yes, I think that's a good question in good time. And probably how we got in the situation that we are today is that there was an expectation that the market improvement would be much stronger and built inventory anticipation of that and got a bit over our SKUs. So going - so we're responding to that getting our working capital back in line. But I think the important point is the one that Lyle was talking about before is let's make sure we have a very strong process in place for what the demand is and what we are building to and shortening up the lead times. So we reduce the risk of getting over our SKUs and can manage the working capital in a strengthening market that are in line with that demand. Anything you want to add, Lyle?

No, I think generally if you look at our overall inventory levels at below two turns, we've got plenty of inventory right now. And if we could get that up to three or better turns, we'll be back in more of what a normalized level for an oilfield service manufacturer might look like which gives plenty of opportunity for us to service those customers and meet growth in the marketplace.

It gives us some thought process about how to manage our model working capital longer term. And then as a follow up, and I have been sort of back and forth between things I hope I'm not asking what someone else asked. But with a projection of higher EBITDA year-over-year, can you maybe walk us down a little bit through the segments. You sort of went through some of the outlook for orders on the segments, but what segment would lead in terms of EBITDA improvement? What segment would you see lagging? And should we see EBITDA up across the entire business as opposed to on a segment basis as opposed to a consolidated basis?

Yes, I think, we have plans as we focused on our stronger products and brands to improve EBITDA in each of the segments. And we did talk a bid about this before. We are seeing stronger demand in D&S as we mentioned a bit of the international improvement affecting the Drilling business and some market share opportunities there. Even in the Subsea, we are beginning to see some oil and gas orders coming back which is nice to see after their absence for quite a period of time. In the Completions business, I think our artificial lift and intervention businesses we expect to do well. And as we said before in the Production side with the ongoing investment trends, positive trends, in the midstream and in the process industries with that build-out there, those should be good drivers for us in our Production & Infrastructure segment.

I think we all expect sort of completion related stuff to rebound pretty shortly in the back half of the year, but certainly positive that there is good trends across the business overall.

Okay.

[Operator Instructions] Our next question comes from Connor Lynagh with Morgan Stanley. Your line is now open.

So I just wanted to clarify, Cris, the comment you made in response to George's question. The range you were kind of setting in terms of - down slightly, but not 10% to 15% down. Was that a comment related to revenue or EBITDA?

I think what I said was that we expected operating results to be a bit softer. So, I think...

So would that be EBITDA or EBIT? What's the...

Yes, I was trying - obviously, I think you folks are focused on EBITDA, right, most. So it would - although we are not trying to get away from giving specific numbers for EBITDA, I don't think that's a long-term best practice. We are trying to give you a good flavor there, and so when we say operating results that's not top line.

And then maybe just a higher level one. So, you've highlighted some of the international opportunities that you see out there. Can you just talk to how big these are relative to your business as it exist today when you would think that they would start to contribute meaningfully in a way that if the U.S. is little slower this year relative to last year that we would start to see that?

Yes. So, thanks for the question. Most of our exposure to the international market we face is in our Drilling & Subsea segment, which has really yet to benefit from the international recovery that is ahead of us. We are going into the year in Subsea with backlog, almost three times greater than what we had last year at this time. And also the Drilling product line has had some nice orders and continued momentum for the Middle East rig projects. So, I think it's significant for those businesses. We also have exposure to the international markets in our Completion segment. Historically, coiled tubing is 30% international. The BOP order that we received was for an international market that's in intervention. And the Davis-Lynch casing, it's a mining hardware, also sells quite a bit of product internationally. And then lastly, in P&I, there is more international exposure on the valve side than there has been historically where the business used to be mostly North America, we are doing more in Asia and of course the Middle East.

And I'm not trying to pin you down on the timing exactly, but just as an aspirational goal, if you did about $1 billion of revenue last year, I mean, let's say $100 million opportunity, $200 million, like what - how much can this be to the company?

So, I think, a good way to think about that is historically in the market where the industry was hitting kind of on both cylinders, we were more like 60-40. And I think we still have that type of product mix and that capability to be 60-40.

Cris, it's 75-25 where we are today.

Yes, or more like 80-20 here more recently like in North America.

Yes, including Canada.

Great. If we have no more questions, Joelle, let's wrap up.

I'm not showing any further questions at this time.

Thank you very much. Good interest and good questions. Enjoyed the discussion. Glad to be back with you and we will talk to you again next quarter. Thank you.

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