Good morning, ladies and gentlemen, and welcome to the Forum Energy Technologies Third Quarter 2022 Earnings Conference Call. My name is Towanda, and I will be your coordinator for today’s call. [Operator Instructions] At this time, all participants are in a listen-only mode. And all lines have been place on mute to prevent any background noise. This conference call is being recorded for replay purposes and will be available on the Company’s website. I would now like to turn the conference over to Rob Kukla, Director of Investor Relations. Please proceed, sir.

Thank you, Towanda. Good morning, and welcome to FET’s third quarter 2022 earnings conference call. With me today are Neal Lux, our President and Chief Executive Officer; and Lyle Williams, our Chief Financial Officer. We issued our earnings release after the market closed yesterday and it is available on our website at ir.f-e-t.com. 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. During today’s call, all statements related to EBITDA will refer to adjusted EBITDA. And unless otherwise noted, all comparisons are third quarter 2022 to second quarter 2022. I will now turn the call over to Neal.

Thank you, Rob. And welcome to your first of many FET earnings calls. We are excited to have Rob joined the FET family. He has over 20 years of experience in the oil and gas industry. Over that time, he’s held numerous positions within finance and investor relations. Rob is going to help us tell the FET story to more investors. And we have a great story to tell. It begins with market fundamentals, propelling investment in energy production, revenue increasing global activity and higher capital equipment spend, margins expanding through operating leverage and portfolio optimization, and with our asset light business model, converting EBITDA into free cash flow. Putting it all together, we have a compelling opportunity for further growth in shareholder value. The future is exciting for FET. My confidence in FET’s outlook is rooted in our performance throughout the past two years and what we see today. In the third quarter, we grew backlog for the eighth consecutive quarter with bookings of $198 million. Demand for innovative products and solutions remains robust. After only three quarters, this year’s EBITDA is already twice that for all of 2021. Our team is on track to deliver results that will meet the upper end of an aggressive 2022 plan. Importantly, we turned EBITDA in over $17 million of free cash flow in the third quarter. This is a fundamental element to FET’s long-term success. And we remain confident in our $30 million to $40 million forecasts of free cash flow for the second half of this year. It is also important to note, this forecast includes a fourth quarter interest payment of $12 million. We just finished a great quarter and look forward to finishing the year strong. Now, I’d like to share some thoughts as we look ahead to…

Thank you, Neal. FET’s third quarter financial performance was strong. Revenue of $182 million exceeded expectations and EBITDA of $18 million fell in the middle of the guidance we provided. Comparing with third quarter of 2021, revenue is up 29% and EBITDA up 147%. Over that time, solid execution of our strategy by the FET team has yielded a $50 million increase in our backlog. Revenue growth in line with global drilling rig count and pricing increases in excess of cost inflation, improving our EBITDA margins from 5% to nearly 10%. For the fourth quarter, we are guiding revenue of $180 million to $190 million and EBITDA of $16 million to $20 million. We acknowledge that at the midpoint, this guidance range implies roughly flat performance with the third quarter and modest incremental margins. However, it is important to recognize that this guidance includes additional variable employee incentive compensation and healthcare benefit expense. Bottom line, even including this additional expense, our third and fourth quarter EBITDA results will put us at the top end of our full year guidance of $50 million to $60 million. We are pleased that our third quarter free cash flow was just over $17 million, keeping us on track to be within our previous expectation for back half 2022 free cash flow of $30 million to $40 million. Our EBITDA to free cash flow conversion of nearly 100% benefited from keeping accounts receivable and inventory balances relatively flat, despite increasing revenue and from the lack of a quarterly cash interest payment. We will look to drive working capital down in the fourth quarter to achieve another quarter of strong free cash flow. Let me take a few moments to update you on our share repurchase program and capital structure. After the end of the third…

Thanks, Lyle. Before closing, I want to acknowledge Veterans Day later this week, a very important day for the United States. On behalf of the entire FET family, we thank our veterans for their service. Also, I’d like to recognize the performance of the FET team. You have done an amazing job executing at a high-level and delivering for our customers. I am honored and thankful to be your colleague. Through this earning season, our customers have made it clear they expect further growth. While we don’t drill the holes or stimulate the wells, or produce the hydrocarbons, we at FET make it happen by providing innovative products and solutions. We’re critical to safer, cleaner and more efficient energy production. I’m going to end today’s prepared remarks with my message from last quarter. Our story is simple. Industry fundamentals are strong, backlog is growing, profitability is increasing, FET is a compelling company with a great future. Towanda, please take the first question.

[Operator Instructions] Our first question comes from the line of John Daniel with Daniel Energy Partners.

Hey guys. Good morning. Thank you for taking my call. Neal, my first question has to do with the ADIPEC event and your trip over there. Every -- all the feedback I’ve had from folks that were there talked about how positive it was and how well attended. And I’m curious as you look at some of the demand opportunities, was it just from Middle East customers or did you have other international potential customers there that you also were speaking to and just elaborate a little bit more on what you learned over there?

Yes. Thanks John.. It was really a fantastic show. It’s one I’ve attended many times over the years, and this was definitely one of the highest participation events that I’ve seen. I think the general focus for sure is within the Middle East at that show. And we really got a lot of great feedback from our customers who are looking to expand their fleets adequate and definitely are gearing up for a busy year, next year and beyond. So I think the focus is definitely in the Middle East for that show. But I think we expect a really good broad-based international year next year.

Okay, outperforming North America?

Yes. I think we see really good demand internationally with -- in the North American side. We do see good capital equipment orders and inquiries coming from service companies. So, I think we mentioned in our remarks, radiators as one example. But following that with aftermarket and other opportunities on the frac side. So, I think service intensity in the U.S. will keep us growing, will keep us busy. But we now will have an additional I think tailwind of adding on or reactivating capital equipment internationally as well.

Okay. Final question has to do with your comment on the radiators. As you are getting the orders from the existing frac companies rebuilding fleets, or are you also seeing POs coming from the packagers who might be sort of building equipment for potentially new entrants to the market? Any color there would be great.

Sure. I think the general feel is most of the units are existing fleets where they are upgrading to a DGB engine and they are also then upgrading their radiator. I think in some cases, we are providing radiators for power applications. I think that would be -- that would be for newer fleets, but that would be primarily on the e frac side.

Thank you. Please stand by for our next question. Our next question comes from the line of Eric Carlson. [Ph] Your line is open.

Hi, guys. Thanks for taking my question, and congrats again on another quarter. I think one follow-up on kind of the pro forma if and when that ends up converting. We are looking at basically $125 million of net debt, -- and also freeing up about $11 million of interest expense when that happens as well. But do you have like a target net debt-to-EBITDA in mind and maybe just looking forward, I mean, what do you see with now that we are at kind of that inflection point of positive free cash flow, like where does that cash flow get allocated on a go forward basis?

Great question, Eric. Thank you for that. We tried to give some good color on how that conversion would work, and you’re right, you picked that up. So $125 million of net debt post a conversion pro forma for Q3, and wanted to guide ahead to continue free cash flow generation, both in the fourth quarter here as well as into 2023. So, as we look ahead, our target -- historically we would have said that target kind of between 1 times and 2 times net debt-to-EBITDA. I think as we look at our business and where we stand, we want to be a conservative viewer of working capital. Our business does have a lot of operating leverage in it. So on the upside, that’s very positive. And to be cautious then, how do we think about net debt is more of a function maybe of our accounts receivable base, so that we keep that at a modest number. I think what that means is that post the conversion, we would be looking to continue reducing our net debt on a go forward basis. We have the ability with those notes being callable at this point to bring them in and availability under our revolver, should we choose to do that to be more aggressive.

Maybe shifting gears, I don’t know if you guys have thought about it at all, or what the implication is of kind of the Inflation Reduction Act and how that can maybe play into some of your products that support kind of the energy transition, so to speak. Is there any benefit to that as a producer of equipment?

There is, and I think, as Rob mentioned in his remarks and with our production equipment, generally, that product line is generally the most competitive one we face. What we are doing and we have done is made some investments in newer technologies that can handle methane emissions. And so, we have a few field trials today that are -- been ongoing, where we’re helping our customers continue to produce without emitting additional methane. So, I think that’s an exciting area. I think, in prior calls we have mentioned, our coiled line pipe been used for carbon capture, used in sequestration. I think that’s another area of positive growth, too. So overall, I think we can -- as an equipment manufacturer, we can skate to where the puck is going. And I think we’ll continue to look and talk to our customer base, and continue to put R&D into new products and solutions that help them again, ultimately reduce their emissions and take advantage of any benefits of the Inflation Reduction Act.

[Operator Instructions] Our next question comes from the line of Dan Pickering with Pickering Energy Partners.

So, a couple of questions here, bear with me. If I -- just checking the math, I want to make sure your comment about $30 million to $40 million of free cash in the second half. So we back off the $17 million that we printed in the third quarter. So, call it another $13 million to $23 million in Q4. That assumes all the working capital adjustments, et cetera. So, that’s net-net of everything, correct?

That’s right, Dan. And that does include our semiannual interest payment that’s over $12 million. That will be in the third quarter. So to get there with kind of our implied EBITDA guide does mean we’re going to pull working capital down in the fourth quarter.

And you would expect to see that in the inventory primarily or payables or just across the board?

Pretty across the board. Our team has done a good job on the receivables. We know there’s a history in the industry of holding some payments at the end of the year. So, we’re conscious of that. So, our big focus really is around inventory and having some good line of sight to how that is going to roll through with our revenue.

You talked about, Lyle, in the fourth quarter, continued sounds like revenue growth at the midpoint of your guidance range, flattish margins at the midpoint. Talk to us a little bit about this comp expense that you discussed. I mean, is this millions of dollars, is it a small number? I’m just trying to figure out how to think about how the business is performing apples-to-apples away from that that comp delta.

Yes. No. Happy to do that. Just to give a little more color on that, Dan. Our practice is to accrue incentive comp when it’s earned through the year. And as our performance has continued to accelerate here at the back end, we’re accruing a higher level of bonus expense than we would have been in previous quarters. If we normalize for those expenses, kind of what happened in the third where we took a little bit of extra, and in the fourth, incremental margins would be in the high-30s. So, kind of in the high-end of what we’d expect is a range to give you an idea there. So, pretty good incremental is ex -- those incremental costs.

I think the business -- there’s really no change in the underlying fundamental business. I think the team’s had a great year. Again, almost 3 times the amount of EBIT that we had last year. And our teams are delivering the results. So, we’re excited to have them earn that compensation.

Sure. So, I’m going to try to extrapolate a couple of things that you talked about. If we think about this Q4 revenue run rate and some growth on top of that as we go into ‘23, given the outlook for both international and domestic, when it feels like we’re knocking on $800 million plus of revenues for next year, Lyle, you talked about 25% to 40% incrementals. And so, I mean, it feels like we’ve got pretty strong free cash generation next year, even if working capital picks up with those higher revenues. So, I just want to confirm the 25% to 40% incrementals for next year, feel like they’re doable. And is that just operating leverage, are we getting some price there?

Yes. Great, great question. And I think you did pick up kind of what we did. Again, we don’t want to get too far ahead on guidance for next year with some of the uncertainty, but there are a lot of pluses that we see out there and feel comfortable that revenue is definitely up from here. And we hold with that long-term incremental margin concept of 25% to 40%, the low end is really our gross margin. So almost getting no leverage out of that. So higher than that would be some operating leverage. And at the high-end, Dan, is going to be a little more a function of gaining some net price, which we’ve been able to do through the year in certain product lines. So, I think you get there on the EBITDA line. And again, we are pretty bullish about the cash flow. If you knock out some of the fixed cash items that we have in the year, take those away from EBITDA, interest expense is $25 million. This year, our tax, cash taxes, call it 4. And this year, our CapEx was just under 10. So, if you kind of net those out, that’s about $40 million worth of cash that would go out the door. So, that gets us to a pretty bullish free cash flow -- cash flow number before change in working capital. And we could fund that pretty well and still be positive, significantly positive on a free cash flow number next year.

Yes. I mean, ballpark. I mean, it looks like $100 million EBITDA is in striking range. So that’s, I mean, what a difference a year or two make. Congratulations. You mentioned SCF repurchase -- share repurchase. So SCF is now totally out from all of their funds, and so they’re no longer shareholder in the business?

That’s right. We’re really pleased that they stuck around with us for 17 years. As you know, that’s a long hold period for a private equity investor, and they’ve been great partners for us through these years. So we’re pleased that they were part of the formation of FET.

Yes, absolutely. Well, and it’s been a bit of an overhang to have their selling pressure. So it’s good to see them out at this point. I think that’s the majority of my question. I would -- if you don’t mind to talk to just the mechanics, my expectation is you are going to hit your, whatever it was, $30 VWAP 20-day average sometime in the next, call it, couple of quarters. And what’s the actual mechanics? When that happens, then do you -- do you call that? You just issue a press release and mandatorily convert? What actually is the process, once that hurdle is reached, if you decide to do it and I assume you will.

Yes, good question. And the conversion feature there, Dan, is mandatory. So it’s not an optional or decision thing, like a call to be for example. So when we rolled across that, we would notify the trustee and the noteholders of the fact that the conversion threshold had been met and worked through the trustee to exchange roughly 48% of those outstanding notes for shares. So, we’d have a big delevering event and some new shareholders joined into the family.

Got you. Last question for me. As we think about this free cash generation, you talked about wanting to pay down debt as and when you can. You’ve also got a fairly inexpensive stock even after the performance year-to-date. How does share repurchase fit in the mix on a go forward basis?

Yes. Dan, we like to have the kind of the flexibility to repurchase shares or call that. And so, I think we are going to continue to look at that going forward. We have obviously our authorization from the Board to buy back another $8 million or so of shares, and again, have the callability of these convertible bonds. I think we will continue to look at it. I agree with you. Our share repurchases are compelling, but so is also reducing our debt to get the trading multiple up as well.

Sure. Great. Thank you, guys. Keep it up.

Thank you. All right. This concludes our call. We appreciate everyone’s time. Thank you very much.

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.