Earnings Labs

Forum Energy Technologies, Inc. (FET)

Q1 2022 Earnings Call· Fri, May 6, 2022

$63.32

-0.14%

Key Takeaways · AI generated
AI summary not yet generated for this transcript. Generation in progress for older transcripts; check back soon, or browse the full transcript below.

Same-Day

-6.44%

1 Week

-8.00%

1 Month

+4.09%

vs S&P

Transcript

Operator

Operator

Good morning, ladies and gentlemen, and welcome to the Forum Energy Technologies First Quarter 2022 Earnings Conference Call. My name is Kirby, and I will be your coordinator for today’s call. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes. [Operator Instructions] I will now turn the conference over to Lyle Williams, Chief Financial Officer. Please proceed, sir.

Lyle Williams

Analyst

Thank you, Kirby. Good morning, and welcome to FET’s first quarter 2022 earnings conference call. With me today is Neal Lux, our President and Chief Executive Officer. We issued our earnings release after the market closed yesterday and it is available on our website. Before we begin, we would like to caution listeners regarding forward-looking statements. Our remarks today may contain information other than historical information. Please note that we are relying on the Safe Harbor protections afforded by federal law. All such remarks should be considered in the context of the many factors that affect our business, including those disclosed in our Form 10-K along with other SEC filings. Management’s statements may include non-GAAP financial measures. For a reconciliation of these measures, refer to our earnings release. This call is being recorded, and a replay of the call will be available on our website for two weeks. I will now turn the call over to Neal.

Neal Lux

Analyst

Thank you, Lyle. During our last call, I listed many reasons why FET is a great company and investment: our employees, strong industry fundamentals, Forum’s innovative products and solutions, access to growing markets outside oil and gas and opportunity for significant margin expansion. Since that call, our foundation has only grown stronger. We continue to recruit and retain entrepreneurial, dedicated and customer-focused employees. Our teams make a remarkable impact for the company and our greatest differentiator. We are thankful to have such wonderful colleagues. And I am thankful for the position we are in today. From all indications, we are at the beginning of a prolonged energy investment cycle. The unfortunate conflict in Ukraine has highlighted a trend already underway, but somewhat invisible to the general public. The world needs energy. And more importantly, the world needs to invest heavily in secure energy supply. Commodity prices are trending near multiyear highs. And exploration and production companies are generating very strong free cash flows. The table is set for increases in traditional oil and gas investment. Despite favorable market conditions, we have only seen a modest increase in oilfield service activity. Compared to the 2000 to 2018 cycle, U.S. rig count has grown 33% slower since the 2020 trough. Capital discipline by E&P operators has starved service companies and caused them to run their equipment as hard as possible for as little money as possible. Obsolescence, cannibalization and human capital challenges have significantly constrained the capacity of the oilfield services industry. So what does that mean for today? New components are needed to maintain current levels of activity. I toured the Permian Basin a few weeks ago and saw stacked equipment parked near front line across many yards. It is hard to believe this equipment can be mobilized in its current…

Lyle Williams

Analyst

Thank you, Neal. Our first quarter 2022 results demonstrate the strong market demand for our products and operating leverage for our businesses. We grew our backlog again for the sixth quarter in a row with a 3% increase in bookings. Excluding a decrease in lumpy production equipment product line, FET bookings grew by over 11% this quarter. Revenues of $155 million fell in the middle of our previous guided range and EBITDA of $9 million exceeded the high end of our guidance by $2 million. On a sequential basis, revenue and EBITDA grew by $7 million and $5 million, respectively, representing a 68% incremental EBITDA margin. This strong incremental margin performance includes a sequential reduction in employee medical and annual incentive compensation expenses. So on a normalized basis, incremental EBITDA margins exceeded 30%, which is well above our gross margins, reflecting the benefits of operating leverage and the fact that we began to see net price increases flow through the income statement. We expect this pricing trend to accelerate in future quarters. Let me share a few highlights from our segment results for the first quarter. Our Drilling & Downhole segment revenue of $71 million represented approximately 46% of total company revenues. Segment revenues increased by 7% sequentially and 46% on a year-over-year basis. Orders for the Drilling & Downhole segment grew by 17%, outpacing the 8% growth in global rig count. The strong booking and revenue growth were driven by increased demand for our land and offshore drilling and well construction equipment with particular strength coming from international markets. For example, in the drilling product line, we recognized revenue of $3 million for handling tool packages for four new land rigs to be utilized in Asia. And we booked another $4 million for handling tool packages for new rigs…

Neal Lux

Analyst

Thanks, Lyle. Today is a great day to be an employee and investor in FET. Industry fundamentals are fantastic. Oil and gas operators have cash to fund energy supply growth. Service company pricing has returned to levels that support reinvestment in new equipment and FET is poised to benefit in the near term top line growth, higher margins and EBITDA multiple expansion. Kirby, we’d like to take the first question, please.

Operator

Operator

First question comes from the line of Dan Pickering of Pickering Energy Partners. Dan, your line is now open.

Dan Pickering

Analyst

Great. Thanks. Good morning gentlemen.

Neal Lux

Analyst

Good morning Dan.

Dan Pickering

Analyst

So as I look here, I mean just help us a little bit. You did beat your guidance for the first quarter, and we can obviously see how the segment results stacked up. But when you think about what you were expecting versus what happened, where were the upsides for you in the quarter?

Neal Lux

Analyst

Yes. I mean I think it was – Dan, I think it was a broad kind of broad across our product lines, but especially our drilling and downhole product lines saw really good bookings and then delivery of those bookings during the quarter.

Dan Pickering

Analyst

Got you. And then as we think about the improvement as we continue into the second quarter, drilling drives that as well. Is that going to be the leader in Q2 on an incremental basis?

Neal Lux

Analyst

I think drilling will continue to grow. But we did see our Completions segment pick up momentum in March, and that’s continued. So we think completions will be strong as well. I think overall, we’re just – the breadth of our portfolio, we are seeing really good momentum just across the board.

Lyle Williams

Analyst

Dan, I would chip in. Just not only on the specifics of the product line, but where we’re seeing that growth come from. We wanted to highlight a bit about what’s going on internationally as well for our businesses and seeing that growth come through really well with shipments of backlog in our Drilling & Downhole product lines and then really finally starting to see some uptake on the valves business as well. That’s been a project we’ve been working on for a while here. And it’s encouraging to see that take off not only in the first quarter but also what we expect through the next few quarters.

Dan Pickering

Analyst

Do we think that, that turns our production business to kind of a positive EBITDA as the Saudi facility and the international shipments start to happen?

Lyle Williams

Analyst

Yes. Dan, that’s what we’re looking for. As we talked about on some previous calls, the valves – we did a lot of restructuring of our valves business through 2021, really ending that at the end of last year. And now it’s a volume play. We’ve got the cost structure right. And as we see activity picking up globally, but in particular in the Middle East, we’re looking for better times ahead for that segment.

Dan Pickering

Analyst

Great. Thank you. And then if I could, just – you talked, Neal, at the end of your remarks around supply chains – or maybe Lyle, I think you discussed it, this kind of supply chains adding inventory. So when you think about – when we hear things like supply chain and inventory builds and their risks, I assume that everything you talked about is built into how you’re guiding for your Q2 results as well as your full year EBITDA. So supply chain is still a pain, but it sounds like that’s been incorporated in your thinking, in your guidance?

Neal Lux

Analyst

That’s right, Dan. We took some steps to mitigate the issues we were having that we experienced in the back half of 2021. We feel like we’ve gotten ahead. But I think it’s something we’re always concerned about, especially with further lockdowns in China.

Dan Pickering

Analyst

Yes, sure. And then – okay. Lyle, sorry, go ahead.

Lyle Williams

Analyst

Yes. No, no, that’s okay. If you look at our kind of Q1 results and see what we’ve seen, our EBITDA margin in Q1 basically came back to where we were in the second quarter or so of last year. And so what that says is we’re starting to see the net price improve, net price gains that we got to get our EBITDA margin back and recover from the inflationary cost impact that we had at late last year. And then as we progress forward, thinking about the progression on that, continuing to gain those net price improvements helps to drive up the margin, applying some incremental EBITDA margins that are higher maybe than our traditionals have been over the last few quarters. So we’re starting to see that come through. Last quarter, Neal talked about having some equilibrium in inflation, where, okay, we don’t necessarily need costs to decrease but it would sure be nice to see a decrease in the rate of inflation. And we felt that in the first quarter, and we’re able to gain that net price. And that is the probably one assumption we have thinking ahead that costs will maintain at a reasonable inflation rate, and we won’t see the same kind of spikes that we saw in late 2021.

Dan Pickering

Analyst

Lyle, does that mean we might – I mean, we might see a double-digit margin at the EBITDA line kind of on an exit basis by Q4? Or is that more a 2023 event?

Lyle Williams

Analyst

I do think, Dan, we could get there. And really, that comes from volume. Activity is up. And we think that, that activity growth continues maybe at a modest rate through the year given some of the industry supply chain constraints. But in addition to that, we’ve grown our backlog pretty handily. It’s now over $200 million. It’s been a long time since we’ve had that much backlog and that begins to turn in the third quarter and fourth quarter of this year. So that will provide top line boost. So we’ll get some operating leverage on that top line boost, which helps our margins plus any incremental net price that we can push through gives us those incrementals that could get us above double digits. And that’s where we’re headed.

Dan Pickering

Analyst

Sounds constructive. Thank you guys.

Lyle Williams

Analyst

Thank you, Dan.

Neal Lux

Analyst

Next question?

Operator

Operator

[Operator Instructions] Next question comes from the line of John Daniel of Daniel Energy. John, your line is now open.

John Daniel

Analyst

.:

Neal Lux

Analyst

Yes. Thanks, John. We look at our acquisitions kind of in really two lenses. One, where we are adding a new technology or potentially disruptive technology. We did that in the fourth quarter with our acquisition of Reach Production Solutions. And then we also think about consolidation. And in the fourth quarter, we had another tuck-in acquisition with Hawker Well Works and we like doing that. So I think for now, with our – we’re going to keep the deals, I think, relatively small, but we’re always on the look. But as – we are definitely proponents of consolidation in the industry because I think it’s there. And I think we’re an ideal consolidator as we get our balance sheet in the right position.

John Daniel

Analyst

Fair enough. Are you guys – can you say if you’re being shopped a lot of deals right now? And then just a follow-on, if you could, as you decide to look at more opportunities whenever that time might be, do you focus more on traditional oil and gas type businesses? Or do you focus more on energy transition? And then I’ve got one follow-up.

Neal Lux

Analyst

Yes. I think when we look at the technology, we see the – we want to add that in the energy transition phase. So for example, Reach was an energy transition. But I think as we consolidate, that would be more in the traditional oil and gas where we can get the scale, take out the cost and have good operating leverage.

John Daniel

Analyst

Fair enough. And then the last one for me perhaps...

Lyle Williams

Analyst

John, I’ll dig in really quickly on your question about are we being shopped to a lot of deals now. And I’d say that the activity around smaller deals, mostly private – small private businesses, either owned by an entrepreneurial founder or owned by a private equity group. That volume of activity has picked up dramatically in the last four or five months. I think as enthusiasm for the cycle has come in and owners are seeing that this is an opportunity to monetize some of their investment.

John Daniel

Analyst

Fair enough. And then final one for me. Thanks Lyle. And perhaps a dumb question so I apologize. But on the supply chain front, can you talk about how much of the steel or forgings that you guys procure for your operation, like how much of that comes from international markets versus domestically sourced?

Neal Lux

Analyst

Yes. Maybe I’ll talk a little bit more in general about what our strategy there is that we want to have multiple avenues to secure supply. So if it’s international, we want to have multiple countries where we have supply – where we procure from. Or ideally, we’ll have a domestic source and an international source. So I think we haven’t seen any real major delays with the raw materials that we need, so we’re going to continue to follow. But we hope to have – we hope our diversified supply chain will allow us to avoid the worst of those.

John Daniel

Analyst

Okay, fair enough. Thank you gentlemen.

Neal Lux

Analyst

Thank you. All right, we thank you for joining our call, and we look forward to talking to you in three months.

Operator

Operator

Thank you so much to our presenters and to everyone who participated. This concludes today’s conference call. You may now disconnect. Have a great day.