Good morning, ladies and gentlemen, and welcome to the Forum Energy Technologies Fourth Quarter 2022 Earnings Conference Call. My name is Gigi, and I will be your coordinator for today's call. [Operator Instructions] This conference call is being recorded for replay purposes and will be available on the company's website. I will now turn the conference over to Rob Kukla, Director of Investor Relations. Please proceed, sir.

Thank you, Gigi. Good morning, everyone, and welcome to FET's fourth 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 yesterday, and it is available on our website. Please note that we are relying on the safe harbor protections afforded by federal law. Listeners are cautioned that our remarks today may contain information other than historical information. These remarks should be considered in the context of all factors that affect our business, including those disclosed in FET's Form 10-K and our other SEC filings. Finally, management's statements may include non-GAAP financial measures. For a reconciliation of these measures, you may refer to our earnings release. During today's call, all statements related to EBITDA refer to adjusted EBITDA. And unless otherwise noted, all comparisons are fourth quarter 2022 to third quarter 2022. I will now turn the call over to Neal.

Thank you, Rob, and good morning, everyone. Reflecting on our 2022 achievement, I am pleased to say that we exceeded expectations. And as we will discuss during today's call, I think FET is just getting started. Let's begin with some key highlights from our annual and fourth quarter results and our debt conversion. Our teams delivered strong 2022 financial results. We ended the year with the highest backlog since 2018. Revenue and EBITDA grew by 29% and 194%, respectively, on a year-over-year basis. Also during the year, we increased our gross margins by 230 basis points and doubled our EBITDA margin to over 8%. This growth reflects our operating leverage and differentiated product portfolio. In the fourth quarter, we had robust bookings and revenue growth of 35% and 29%, respectively, year-over-year. Demand for our products and solutions remained strong. EBITDA of $17 million was within our quarterly guidance range and up nearly 300% versus fourth quarter 2021. Finally, and most importantly, for the company's future performance, we were able to significantly improve our balance sheet during the quarter with the conversion of our long-term debt to common stock. The conversion marks a significant milestone for a number of reasons. First, pro forma for the conversion, our year-end net debt was approximately $83 million or 1.4x full year 2022 adjusted EBITDA, FET's credit rating was upgraded as a result of our significantly reduced leverage. Second, the conversion nearly doubled our market capitalization, and our daily trading volume has increased substantially. Both of these factors have improved our investment profile. Third, the reduction in debt decreases FET's annual cash interest payments by roughly $11 million, enhancing our free cash flow conversion. And finally, the balance of our long-term debt is now significantly below year-ending liquidity. This achievement opens up several strategic options,…

Thank you, Neal. Good morning, everyone. Overall, FET's fourth quarter financial performance met or exceeded our expectations. Revenue of $191 million beat the top end of our guidance. At 5% growth, we outpaced the U.S. rig count as demand for our products and services remained strong. EBITDA of $17 million fell within our guidance, although our incremental profitability did not meet our expectations. During the quarter, two projects, one in our Subsea Technologies and one in our coil tubing product lines, generated unfavorable cost variances totaling over $2 million. Shifting to our operations. Each of our business segments posted increased revenue for the fourth quarter. Drilling and downhole segment revenue was $81 million, up 7%, led by higher demand for drilling handling tools and capital equipment. Our drilling, downhole and subsea product lines all increased revenue. Drilling and downhole segment orders increased by 19%, with a book-to-bill of 108%, driven by strong demand for drilling capital, handling tools and bearings. This momentum should continue as global rig count grows, particularly outside the U.S. The segment currently generates roughly 50% of its revenue from international sales. Despite the revenue growth, segment EBITDA decreased $2 million compared with a strong third quarter. Subsea project costs and increased freight expenses partially offset the revenue growth. Unfavorable product mix and year-end production variances also impacted performance. Completions segment revenue was $74 million, a 3% increase with higher demand for pressure control equipment as well as radiators and power ends supporting pressure pumping activity. Quality wireline revenue grew 7%, breaking the revenue record set last quarter. Bookings for the Completions segment were $81 million, up 3%, resulting in a book-to-bill ratio of 110%. We secured a number of Jumbotron radiator orders that will be paired with environmentally friendly dual gas blend engines for frac fleet…

Thank you, Lyle. 2022 was a transformative year for FET. We executed at a high level and achieved what we set out to do. So to the FET team, thank you, and job well done. The markets remain tight, equipment utilization and service intensity are at high levels and significant investment will be needed over the coming years. FET will be there to provide our customers with the technology and solutions they need to operate in this up cycle. Similar to last year, we have set high expectations that I am confident our people will deliver on. We are excited about what we can do in 2023. Gigi, please take the first question.

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

Good morning. Thank you for squeezing me in. Just two questions for you. The first is on your prepared remarks, you talked about opportunities with conversions, and I missed part of this, so I apologize. But is that just the radiators or is there other content that you all are participating in? And then is it - color around whether it's accelerating, steady, just near-term thoughts.

Sure. Good question, John. Good morning. On the upgrades that we're seeing, the radiators are a big part of that. Just nearly every new engine will put a new radiator. And generally, they're choosing to go with the GHT Jumbotron option, which is, again, one of the best radiators in the business. In addition to that, there's opportunities for power ends that we are supplying as well. And then finally, as the upgrades continue, we are seeing more and more customers utilize our flexible hose and manifold solutions. So those are going hand in hand. I think our acceleration or speed is really dependent on upstream of what's going on in supply chain of us from deliveries of engines to the packagers that put everything together. So bookings are there, and I think it will just go through the year to see how well the supply chain delivers. But we're prepared, we're ready on that side to deliver.

Okay. And then one final one for me, and I'll let others in. On the M&A, would you characterize your looking - are these tuck-in opportunities? Or would you look to do something more transformative? And then are you casting a wide net, if you will? Or are you trying to - is there certain one or two product services that you're keen on bringing in the portfolio? Just a little bit more color on that.

Yes. Great question. I'll start, and I'm sure Lyle will add in. For those who followed FET, we've always been an M&A company. We've always looked at different opportunities. And we're open to both a tuck-in acquisition or a transformative acquisition if it can meet our criteria. And really the key there is, it has to be accretive and be a good strategic fit. So areas that we really like are those in artificial lift or areas where we can consolidate with existing product lines like controlling our completions. Also, we want to have acquisitions that improve our financial metrics, improve our EBITDA margins, free cash flow profile. And then finally, we want to maintain and reduce our net leverage. So if we can get the right deal done with cash or look to an appropriate mix of cash and stock. And again, we're open to using equity. We think our stock is undervalued, but we need to have a partner that sees the same value as well.

Okay, fair enough. Thank you all very much.

Thanks, John.

Thank you One moment for our next question. Our next question comes from the line of [Erik Carlson].

Good morning, Eric.

Good morning. Congrats on another good quarter. Just a couple of quick questions. So are the sale leaseback proceeds required to go to the debt similar to what happened on 12/31/2020 with the valves business?

Good. Okay. I understand your question. Good question. And no, they're not. There are carve-outs within the indenture that allow us to use that cash kind of on a per transaction basis. So we've got some good cover there, and we do not have a requirement to return that cash back to bondholders.

Okay. That's helpful. And then just when you think about the debt a little bit, I mean, what is kind of your ideal level? And then, I mean, are there opportunities in the market? I mean, I know rates have increased, but the current rate on the debt isn't - I mean, phenomenal by any means. Are there opportunities to refinance that, reissue, stuff with - I mean, gets less restrictive covenants? Or I mean, have you looked into that at all?

We have, Erik. And I think probably the first highlight is - or first comment would be looking back, leverage on a pro forma basis at the end of the year would have been 1.4x, so down to a reasonable level. I think as we think long term, we want to make sure that we think about our debt in relation to our working capital, specifically things like receivables. In the event that there's ever a market slowdown, we want the ability to have those receivables monetize and be able to manage our debt load. So we feel like we're at that level now and have a comfortable level of debt. And clearly, with our liquidity on hand, we're in really great shape. I think on the positive note, the debt markets for our industry have improved dramatically. In the last - end of last year and beginning of this year, we saw some debt deals get done in the public markets on the high-yield side, in particular and see - and so we've seen debt capital come back into the space. I think that being said, our quantum of debt is still relatively small. And so that makes it challenging to find alternatives that might be out there. We've got plenty of runway on our indenture. The debt is not due until 2025. So there's no burning platform that says we need to resolve that today. So we'll keep our eyes open and watch the markets and see if there is an opportunity to, as you say, reduce our interest load or find less restrictive debt. But I think as today, what we have feels like a pretty good piece of paper.

Okay. Great. I guess my last question would be, I mean, just - I mean, you guys kind of touched on kind of the relative value of the equity to peers. And when you see - and I guess you kind of answered my question already by saying there's only so much you can actually put equity buybacks at this point. But the convertible debt holders now becoming equity holders, I'm not sure that they're necessarily long-term equity holders, but there's been a few filings with a few of those debt holders that now own approximately 10% a piece. So there's - I think there's two holders out there that probably own 20% equity. It's just an interesting dynamic given the fact that the equity seems incredibly cheap and there's probably people willing to let it go at what probably long-term equity holders wouldn't let it go. Mostly a comment rather than looking for your remarks, but I mean it would be great to be able to find some liquidity to take those guys off the table.

Definitely agree with that, Erik. One of the things that we have seen is the change - marked change in our average daily trading volume. If we go back to the fourth quarter, we traded about 30,000 shares a day. And so far in the first quarter, we traded 3x that, over 90,000 shares a day. So we've seen a marked increase in that and that came about the time of our debt conversion. So there's clearly more activity. That's a good thing we believe for our stock to get more liquidity for investors in. Also, I think if you think about our new shareholders, any of those who want to move out of the stock, the market is more liquid than it was before. So that should provide some opportunity to be able to do that.

Well, I appreciate it. Thanks guys.

Thanks Eric.

Thank you. One moment for our next question. Our next question comes from the line of Dan Pickering from Pickering Energy Partners.

Good morning, guys. Thanks for doing the call today. I guess I want to come back, Neal, your comment around sort of M&A. You indicated - and Neal and Lyle, I think you both talked about this, but you indicated accretive as one of your measures. Is that accretive to - is it EBITDA margin? Is it net income? How - what metric are you thinking about there just so we can kind of gauge as you move ahead?

Accretive to EBITDA margins, Dan.

Got it. Okay. And I -

A good strategic fit, that's the key. We're not - we wouldn't look to do M&A just to get bigger, but we want to have the right strategic fit and obviously improve our financial metrics.

Sure. And so accretive to EBITDA margins, I assume that also means you'd look for things if you're granted, you're trading at cheap valuations, but you'd look for something that would be accretive on an EV to EBITDA basis as well?

Correct. Yes.

Okay. You talked a little bit about the areas that you'd focus in terms of your product lines. Do you think - I mean maybe cast for us, while you said the markets are better, if you think about sort of your chalkboard of things that you're evaluating in terms of potential acquisitions, do they skew more international versus domestic? And are the numbers - I mean the number of opportunities, is it up notably or flattish? Just kind of give us some color there.

Sure. So I think generally, the opportunities we've seen have been more U.S. focused. However, with the age of the companies that we're looking at, they would be ideal to ramp up and utilize our international footprint to expand sales. So I think that would be a key business logic and synergy we would look for there. And Lyle looks at the deals every day and maybe can comment on the rate of change we've seen.

Yes. Dan, I'd say we've seen activity level pick up pretty meaningfully here over the last several months, more private companies looking to find an opportunity here in this market. We've talked about it before, but there are number of private equity firms who've been in their deals for quite a while, and they're starting to see this as a market where maybe they should do something. When we think kind of types and areas of focus, kind of a couple areas there. One, we feel like we've proven and could be a very logical consolidator of space. So about this time last year, we announced our acquisition of Hawker Well Works, relatively small business but fit within our drilling products and allow us to consolidate a really neat niche in the well services market. Another example of what we might look for is things that have technology. And we've mentioned before, but a key way we think we drive margins higher in the future is through the deployment of new technology in our products. So couple of areas, whether that's a consolidation of space or new technology. And the last criteria, I would say, is looking at things that would be more attractive to us, are more well count driven rather than aimed at the more capital end of our specter that, that would be another criteria to look at.

That's helpful. And then just to try and understand expectations or set expectations. So we've got - the balance sheet is much better. We've got cash. We've got a lot of liquidity, but wrap this all together in terms of your comfort, we can - I guess, we can use some debt for acquisitions if you wanted equities on the table. But roll that all together, what do you think your size-wise, if you exited '23 with - is it $100 million worth of deals is a good year? Is it $200 million? I mean I'm just trying to understand kind of sizing comfort level with leverage, comfort level with using equity. It all rolls into kind of how much do you think you can do?

Yes. I think there's - Dan, we have - we're looking at a lot of target today, but we want to have the right deal. And as we look, we have to find a partner that sees value in our equity as well. And so that's a kind of, that's a key kind of a key screen there is they have to understand that we're undervalued and they have to see that the value in that if we're to do a deal. Yes.

Yes. And I think the other way to think about this use of the capital, Dan, is to focus on returns. A floor of returns would be just retiring our long-term debt. As Erik asked earlier, we've got a 9% coupon on that. So we get an okay return, but our job is to find better returns. And so how much capital can we deploy that's really going to move the needle on returns, on margins and things like that. So I don't think we want to get bigger just to get bigger. We want to get bigger to get better and that will be our focus.

Right.

And I think going back to the good strategic fit being accretive, improving our financial metrics, we're open to tuck-in deals, multiple tuck-in deals or potentially a transformative one.

Thank you. And it's a great opportunity to be thinking about playing offense as opposed to playing defense where the whole industry has been for a while. I want to come back to the kind of forward look in terms of - you've guided us to $80 million to $100 million of EBITDA for 2023. Some of us may have more optimistic expectations around rig count or whatever it is. When we think about incremental margins, is that 30% target still the right target given some of the things you're seeing on cost supply chain, et cetera?

Yes, Dan, just as a reminder, we've talked about kind of incremental margins being north of gross margins and kind of in net 30% to 40% with the high end of that coming with a lot of incremental price. I think as we look at this year, I would guide us towards the lower end of that range. Really, we see not as many opportunities for price increases with the market being a little softer, primarily in the U.S. And I think our big push for incremental margins could come from our newer and more innovative products where we provide a lot more value to our customers and could capture more of that in terms of margin. So out of the gate for this year, I think it's probably more in that low end range, 30% is definitely achievable on a full year basis, and we would look to do that or better.

Okay. And while you indicated the cost - the freight expediting, et cetera, would moderate as we move through 2023, do you think we'll still see some impact to that in Q1?

I do. I do. I think we'll see that in Q1. And really, if we think about the length of some of our supply chains or like our - some of our costing on an average cost basis, it takes a little while to get that steel inflation that we saw heavily in 2022 out through the back end of the snake year in 2023.

Got you. And so net-net, rolling all this together, I think I heard, although we're going to burn cash in Q1, remind me again, I heard $20 million to $40 million for 2023 in aggregate, your expectation, including cash taxes, working capital, all of the dynamics that you see so far?

That is correct, yes.

So it was $20 million to $40 million? I was looking at my notes and I…

Yes, $20 million to $40 million free cash flow for 2023.

And again, on our current valuation, a really good cash flow yield for the year.

Yes, absolutely. Well, good luck finding those opportunities and congrats on the debt conversion, that was really important, and the balance sheet looks in great shape. I appreciate it very much. Thanks.

Thank you, Dan.

Thanks Dan.

Thank you. I would now like to turn the conference back to Neal Lux for closing remarks.

Thank you for joining the call today. We are excited about FET's future and look forward to even better days to come.

This concludes today's conference call. Thank you for participating. You may now disconnect.