Good morning, ladies and gentlemen, and welcome to the Forum Energy Technologies Second Quarter 2024 Earnings Conference Call. My name is Gigi, and I'll 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 placed 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 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 second quarter 2024 earnings conference call. With me today are Neal Lux, our President and Chief Executive Officer; and Lyle Williams, our Chief Financial Officer. Yesterday, we issued our earnings release, and it is available on our website. Please note that we are relying on the safe harbor protection 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 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 second quarter 2024 to first quarter 2024. I will now turn the call over to Neal.

Thank you, Rob, and good morning, everyone. Now that we are halfway through the year, it is a good time to take stock of our progress, and I am pleased with our direction. Free cash flow results have been strong, and we have converted EBITDA into cash faster than our plan. This performance has provided confidence to raise our free cash flow guidance for full year 2024. Also, we are in the process of redeeming more than half of our 2025 notes prior to the end of the third quarter, and it is our intention to retire the balance around the end of the year. At that point, the remainder of our debt will be fully prepayable without penalty and will not mature until December 2026. This is a big step for our balance sheet. In addition, we are executing our beat the market strategy through new product development and international market penetration. These results are evident in our market share gains and increased sales outside of the United States, which were 50% of FET's total in the second quarter. Finally, our financial results demonstrate the positive benefits of the Variperm acquisition. We have increased EBITDA nearly 50% year-over-year despite a more challenging market. The combination of our companies has successfully increased our scale and margins. As a management team, we have a strong focus on free cash flow. And this quarter, we generated $21 million through consistent profitability and improved working capital management. This allowed us to repurchase $13 million of our 2025 notes and announced the redemption of another $60 million. In addition, we are raising our full year 2024 free cash flow guidance to between $50 million and $70 million. The team continues to execute at a high level, and I am proud of their efforts. Putting…

Thank you, Neal. Good morning, everyone. I will begin my comments providing more color on our strong cash flow and our balance sheet. We generated free cash flow of $21 million in the second quarter. This represents an 81% EBITDA to free cash flow conversion, a decrease in net working capital driven by inventory management and good collections contributed to the strong free cash flow results. Reductions in inventory have generated significant cash flow so far this year. Our teams continue to drive down inventory by tightening our supply chain. We are reducing the flow of inbound raw material to match market conditions while still meeting customer demand. We have the ability to drive inventory lower and will push for increased inventory turns. Our efforts to achieve more timely collections are also paying off. We have achieved significant improvement in our days sales outstanding since the beginning of 2023. In fact, excluding the impact of Variperm, our second quarter DSOs decreased by nine days year-over-year. Net-net, we have reduced working capital by $11 million this year, which boosted our free cash flow results. Recall that our prior free cash flow guidance assumed no reduction in net working capital. With the net working capital reduction already achieved and our plans for the remainder of the year, I want to reiterate the guidance Neal discussed earlier. We are raising our full year free cash flow guidance to $10 million, with working capital benefit driving the overperformance. We ended the quarter with $32 million of cash on hand and $103 million of availability under our revolving credit facility with total liquidity of $135 million. Our net debt was $225 million. Utilizing annualized first half EBITDA, net leverage ratio was 2.2 times, a slight improvement from the previous result. Last quarter, we laid out…

Thank you, Lyle. Looking ahead, we expect the U.S. market to remain soft and down from our original estimate earlier this year. However, our outlook for Canada and the international markets remains intact and will help mitigate this additional softness. We will continue to execute and deliver financial results that support our long-term strategy. Our focus on cash generation is paying off. We raised our guidance and expect to generate strong free cash flow this year. Our plan remains on track to retire both the 2025 notes and sellers term loan around the middle of next year. This will provide greater flexibility and optionality for returning cash to shareholders. To conclude, I would like to thank our global team for their hard work and dedication, especially our Houston area employees impacted by Hurricane Beryl, despite having limited or no power, self-service or Internet, they found a way to get the job done. Again, thank you. Gigi, please take the first question.

Thank you. [Operator Instructions] Our first question comes from the line of Dave Storms from Stonegate.

Good morning.

Good morning, Dave.

Good morning. Just hoping we could start with cash flow guidance. Great to see it take a step up. Could you help us understand just kind of some of the puts and takes that will put you on either the higher or lower end of that guidance range?

Maybe I'll start and let Lyle jump in. I think in general, we're seeing a good conversion of working capital into free cash flow. So our teams are focused on reducing DSOs and really matching the inventory that we're receiving to market demand. So I think with the guidance that we laid out for EBITDA, we feel really confident in the free cash flow range that we've provided.

I'll give a little bit of detail there. If you think about the key contributors, that's going to be maybe a swing plus or minus in EBITDA given our full year EBITDA range. And then the free cash flow range is a little bit wider and that's the flux is going to be plus or minus on working capital that Neal talked about. So if we're closer to the top end of our EBITDA range, I think we'll get a little bit less juice out of the working capital, just based on higher accounts receivable. But if we're at the bottom end, I think we get the opposite. And so they've kind of net each other out.

Understood. That’s very helpful. Thank you. And then, I know there's a lot of anticipation around returning capital to shareholders middle of next year. Is there any more color you can give us on what that may look like? I know you mentioned repurchases or dividends. Maybe just any variables that would sway your decision or is the decision one way or another?

It's something that we're obviously thinking about a lot. We have some time. But I think to us, the key is we are going to return cash to shareholders, something we really want to do. And so we're going to really evaluate all the options and see what makes sense for long term. So we think it's a commitment that we need to be consistent with, and that's where we want to be as a long-term company.

Understood. And if I could ask one for international. I know coming out of the first quarter, the international markets may be a little slow to release their budgets, so that 50% number in 2Q. How much of that may be a catch-up? And how much of that maybe is a really good baseline for FET Co.?

Yeah, Dave. The 50% of our revenue that's international is really a shift from what was 35% last year. So as we've grown international, we've added Variperm, which is another contributor there, and U.S. is a little softer as a percentage of our revenue, it's larger. Also, if you think about the sequential increase, overall international revenues were up 13%. So we do experience some pluses or minuses around project shipments. So we mentioned some of the valves in coiled tubing catch up maybe sequentially. But I think very importantly is the market share growth that we've seen outside the U.S., whether that's around our casing hardware business, we mentioned artificial lift products, and some of that incremental frac power in sales that we had were aimed specifically at unconventional plays in Latin America and the Middle East. So we've had some market pickup -- market share gain there as well.

Yeah. Very helpful. And if I could just ask one more question. You mentioned, you've brought on a customer in Drilling and Completions, pretty sizable customer. Just curious as to what the overall customer acquisition environment is like, especially given all the pickup in market share internationally.

Yeah. We’ve -- for us, one of our core values is to remain customer-focused and we look at the markets where we participate, and we want to find customers where we can solve their problem. And for many of our products, they last longer. They allow our customers to go deeper, they've reduced their overall OpEx. And so we want to get that value proposition in front of as many customers as possible in markets where we have good scale and can generate more margins. And I think we're seeing a kind of a, let's call it, a secular trend is the exportation of let's call it, technology that we've utilized in unconventional resources in the U.S., exporting that technology overseas. We've seen it in coiled tubing, we've seen in stimulation intervention. We've seen it in other drilling. And so that's where we're able to take advantage as we've helped this industry the productivity gains this industry has achieved come from products that we provide. We've seen that productivity in the U.S., and we're helping grow that productivity internationally with those -- that same technology.

That’s all. Very helpful. Thank you for taking my questions. Good luck on the third quarter.

Thank you, Dave.

Thank you. Our next question comes from the line of Dan Pickering from Pickering Energy Partners.

Good morning, gentlemen.

Good morning, Dan.

Canada, impressive performance there. I want to make sure I heard -- I think I heard flat quarter-to-quarter for Canada revenues overall, and then also think I heard flat Variperm quarter-to-quarter revenues. Is that right?

Canada was 5% up. So I think what we wanted to say is our casing hardware and artificial lift solutions, we grew our share there a little bit, so about 5%. But Variperm was essentially flat quarter-to-quarter. Despite obviously, spring breakup.

Okay. Right. And that, I guess, certainly caught my eye because it's a pretty substantial difference relative to kind of your thought it could be down as much as half. Is there -- was there a customer win? Was it just steadier business than you expected? What's the -- or is it just getting to know Variperm and the volatility in that business and it surprised you a little bit?

I think the steady (ph) is part of it. The other part is the share we gain by utilizing Variperm's contact distribution network. I mean they -- that team up there has done a fantastic job with their customer base and they've opened a lot of doors for us. And again, we're early on in that revenue synergies, but we're excited about that potential.

Yeah. That's awesome. Earlier in the year, you talked about sort of second half being stronger for Variperm oil, sands activity, etc. Is that still the outlook? Is there any update, given the fluctuations we've seen in crude price?

We don't really see a change in that outlook. It's something we'll monitor. I think with those big -- those projects there and the drilling schedule could something shift from Q4 into Q1. I think that's possible. But right now, really no change in our outlook for oil, sands development.

Okay. So second half better than first half, and the first half here has been a little bit better than you thought.

Correct.

Good. That's a nice start for that acquisition. I wanted to shift over if we could, to the balance sheet. And so while I think I heard you saying what's -- can you just walk us through the note redemption process. It's -- we know its $60 million but you've said August several times. Is there a specific date here? And then how do we fund that? Do we fund it? Do we pull cash balances down a little bit more? Do we bump the revolver up? How do you see kind of processing that paydown?

No. Thanks for the question, Dan. Basically, we're a little bit ahead of our process and that we did retire, we did redeem or buyback, sorry, $13 million worth of notes in the second quarter, did that with cash on hand in our revolver. The $60 million specifically in mid-August, we -- our indenture of the notes requires a 30-day notice period to redeem notes. So on July 17, we issued that redemption notice for $60 million. We'll redeem those in August -- on August 16 for that other -- that first $60 million. When we think about where the funding is going to come from that, it's going to come a little bit out of cash flow in the third quarter and a little bit with addition on to our revolver. And importantly, we ended the second quarter with $135 million of total liquidity, and that's cash plus availability of our revolver. So we've got a lot of dry powder there and would be able to redeem those notes with that, do a similar process in the fourth quarter to get the rest of those '25 million notes redeemed by the end of the year.

And Lyle, is there a similar redemption notice process. So you issued a press release saying, hey, we're going to redeem the remainder. And so we will follow the same process? We'll see something in October, November and that redemption that would follow 30 days later.

It would, Dan. That would be the similar process.

Okay. Good. That’s helpful. And then my last question and it's one more focused on operations. Your valve business, you had a nice bump. Can you talk a little bit was that. Is that a restocking by distributors? Was it the Middle East growth that drove that? I'm just curious if we're seeing a change in business dynamics.

No change in business dynamics, no restocking by distributors. This is more project deliveries in both the U.S. and in Arabia. So, pleased with the kind of trend we're seeing in Saudi, I think it's gone well. And so we'll keep that up. But no real change in the valve industry dynamics there.

Thanks. And I said it was my last question. I do have one more. Kind of every other quarter I asked you about the environment for bolt-on acquisitions and opportunities. Variperm, obviously, you're early in that process still, but things seem to be going well. What's the overall environment for things like another Variperm or opportunities? And as you're answering that question, I guess, North America is sloppy right now. Would you stay away from North American exposure or do you think about North America as an opportunity?

Yeah. Good. So I think obviously, Variperm for us was a home run right value margin. I’d love to find another one. Those will be hard to find. We’ll continue to look. I think that the overall environment though, there are opportunities out there. I think activity is robust. The deals seem to be getting done. And with our kind of breadth of product lines and our geography diversity, we’ll – we can kind of hit both the U.S. and international. We’re not running away from the U.S. I think ideally would want to find a business that would have both a U.S. and an international presence. And so we’ll continue to look for that. But really, our criteria, though, is we want to find the strong industrial logic, where it fits in our portfolio, and we’re going to be conservative with the leverage on our balance sheet going forward.

Okay. Thanks so much. Well done.

Thank you, Dan.

Thanks, Dan.

Thank you. Our next question comes from the line of Jeff Robertson from Water Tower Research.

Thanks. Good morning. Neal, you spoke a little bit about revenue per rig. And I'm wondering if you can talk both between the U.S. and international markets.? Where do you see further gains in the type of sales mix that will offset the weakness you see in the rig count? And then secondly, are those gains pretty sticky if you start to see some sort of improvement in rig count in 2025?

Yes. Good question. So yeah, I think in the U.S., we have methodically increased our revenue, let's call it, U.S. revenue per U.S. rig. If we were to estimate, we're probably up 4% or so year-over-year, and that would truly be market share gains. I think on the -- with about 75% of our sales being activity-based driven in my experience, our experience with the business we have that once you get in with that customer and you deliver, you do have some stickiness, right? And you understand their needs, what they value and you can have the product ready for them and you can deliver on time. And those are really key points. So yeah, I think our expectation and the challenge we're going to put to our teams is not only do we need to hold those customers, we do need to grow it as the market rebounds.

Are some of those gains driven by the service providers wanting FET's products or is it a mix of that plus the E&P operator or the well owners saying if you're going to drill our well, we want these types of products on site for that FET supplies?

Yeah. I think it's a good combination of both. So we do see pull-through from the E&P to the service company for certain products we have that helped the service company increase their productivity. We also -- about half of our sales are directly to E&P operators already. So we're able to put that value proposition directly to them. So combination of both our strategy is we want to differentiate. We want to deliver technology and solutions that make our customers more efficient. So the better we are at laying out that value proposition, the more often we're going to grow that share.

And on renewables or energy transition, you mentioned power generation as a potential new revenue opportunity in your JumboTron XL system. Is that because you're seeing requests for bids and people doing fabrication studies? Or are you actually starting to see orders for products to be -- to build out these types of systems around the world?

Yeah. So we have delivered these sales already last year and this year. But what's exciting to us is the pipeline does seem to be expanding really rapidly. And I think just as maybe more of an industry comment that as these data centers are being built out, and there just seems to be a lot of concern about where the power is going to come from. So we're seeing more of that, let's call it, mobile power gen being utilized in different applications. So we're seeing that bid activity directly, and we've seen a really big spike. Again, these projects do take time, but we see that as a long-term growth driver for us.

And then to follow on that, do those types of projects create aftermarket business through servicing and replacement cycles?

They do. Our units are really robust. So they do last a long time. And so I think it's a longer service cycle for us. But once that unit is in place, it will run for a decade. And so we'll have a tail to that. It will start to -- it will be a couple of years before we see any aftermarket from it. But once that's installed, we got a long tail there.

And then a last question. On the Middle East and your revenue growth in the second quarter, are you seeing projects or big-scale projects that you see that continuing in not necessarily the quarterly growth, but are you seeing continued exposure for increased sales as you look out into 2025 and maybe even 2026?

Yeah. I was actually just sitting with one of our Middle East sales leaders yesterday and talking with him and just see -- he sees a good pipeline, and I agree into '25 really no change to the trend. And so we'll continue to benefit from that. And I still think there's a lot of opportunity there for us to, again, keep exporting not only the unconventional technology, but our downhole technology as well.

Just on margins, Neal or Lyle, with the 12.5% to 13% margins in the first two quarters of this year. Do you think the product mix as you think about 2025 will be similar to 2024 can lead to the similar type margins or do you think there’s room for expansion?

Yeah. I’ll work on that Jeff. If you look at our overall margins, they’ve been relatively flat post the acquisition, post the integration of Variperm, which gave us a really nice boost and you mentioned mix. But clearly, in my comments, we talked a lot about mix being the driver. And so that is something that we’re looking at. I think where we can control mix and influence mix is with our market share gains that we have. So take, for example, artificial lift and downhole sequentially, incremental EBITDA margins were about 37%. We talked a little bit earlier about Variperm. Their revenue was down just slightly. So call it roughly flat, but their overall profitability was up quarter-on-quarter. We also talked about our other downhole products being stronger. Those come at a nice healthy margin, offset a little bit by softer margins with valves. So as we continue to grow downhole product line with share gains, I think that will be a boost and a tailwind to our margins. The other tailwind that would come is through operating leverage. So our revenues have been decently flat with the market activity coming down. But if we get that turn and we can see a run up in revenues, we could benefit -- our margins will benefit from operating leverage as well. So a couple of levers that would make those go higher in the future.

Thanks very much.

Thank you, Jeff.

Thanks, Jeff.

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

Hey, guys. Good morning.

Good morning, Eric.

Hi, Eric.

Another great quarter. I mean it's hard to complain when you can almost generate 25% of your market cap in cash in a whole year, which I think the international markets are probably a little bit underappreciated by the market currently, but maybe just a little bit more on Canada and when you think about activity there. I guess Baker Hughes 144 oil-specific rigs currently, which is, I mean, maybe 20-plus percent above last year. And could you maybe just share a little bit on when you think about Canadian activity, obviously, am I correct in thinking that being more oil-weighted is a benefit to Variperm specifically?

Yeah, absolutely. There's a certain percentage of those rigs that you mentioned that work in the oil sands. And so it's timing of those wells that are being drilled. And so I think Variperm, we-- when we did the acquisition, we felt had a long-term run rate there, not only with new projects, but as the fields would be, let's call it, infill drill, just to keep up with the decline rate just to stay flat, they would need to keep utilizing their product. And then the other -- maybe the other part of that is the newer wells today typically have longer laterals and require more units of Variperm product per well. So I think that's another secular trend that we're pleased to see. So you have more oil rigs in Canada should absolutely help Variperm.

Great. And then maybe just on that longer lateral comment in the industry broadly. I mean, obviously, when you think about kind of the business lines you have, if you look in to any of the E&P calls, you hear basically longer laterals, more stages completed per day. And when you think about like a 4 mile lateral versus a 2 mile lateral, obviously, you need less rigs to complete that work, but the intensity of those rigs and the materials are there. So when you think about just building product mix for the future as technology continues to improve. I mean, do you think about how do we benefit from more stages complete or, call it, lateral miles drilled or whatever that may be. And we'll get less on kind of the pure rig count number? Can you just provide some thoughts around that?

Yeah. No, that's -- you hit it right on the kind of the trends that we see. I think we generally refer to rig because it's published weekly. It's something everyone has access to. We internally track -- we track stages, we track wells. There's a little bit of a lag in the data. So it makes it hard to be forward-looking. But we all -- our focus is really the service intensity. So as you made a mention of longer laterals. So that would be the lateral gets longer, the coiled tubing string is longer. So that's more revenue per string. The wireline string is longer. So that's more revenue per cable. As you pump more stages per day, you're going to wear out your power ends, you're going to wear out your flexible hoses more quickly this year than you did the year before. So you're going to see increased replacement cycle. So all that will be will benefit us. So yes, you're right, rig count maybe isn't the best view of our business. But over time, we're going to increase our U.S. revenue per U.S. rig. And I think we have -- we said about 4% or so already, and we'll continue to improve on that as time goes forward.

And then maybe you can just share a little bit more info on kind of the Middle East specifically. Obviously, you see a lot of unconventional gas announcements and looking into kind of the other service providers, they expect to deliver rigs into the Middle East? And maybe just, I don't know, like what is the market opportunity there? And I even saw like the announcement, I think there was a post somewhere where you guys kind of are going to manufacture the radiators within the Saudi Arabian facility now maybe correct me if I'm wrong. Just -- can you provide some content to the market opportunity there? I mean obviously, numbers are way above pre COVID, so you guys are kind of executing there. But does that become I mean, is that the biggest growth potential and then all incremental U.S. activity that becomes a ton of torque to the outsider? How do you -- I guess how do you think about the product mix geographically going forward?

I think your last comment there was really real spot on that we do see, let's say, long-term growth in the Middle East. If the U.S. and Can were to return -- the U.S. were to return back to, let's call it, more normal levels, we would see a ton of torque. Historically, in Middle East was maybe less service-intensive, so you didn't see the types of sales per rig that maybe you would see in the United States. However, that is changing, and that's -- you mentioned our radiator manufacturing that we're looking to conduct -- we are conducting in Saudi. They are starting to drill unconventional wells in a big way, that's going to use a lot of coil. It's going to use a lot of wireline. It's going to consume a lot of power ends, and they're going to require new radiators to -- the newest types of radiators for their frac fleets there.

Eric, we are bullish about the Middle East. We're also bullish about the offshore markets and our subsea business. So if you think about that business and one of the big drivers that everyone watches is subsea wellheads or subsea tree orders and subsea tree orders have been up and strong. We mentioned last quarter, we're seeing higher and higher utilization of the existing ROV fleets which is a big driver for us initially, that's driving spare parts. Our pipeline of new inquiries for incremental ROVs to add to our customers' fleets is meaningful. So we're excited about that as well as opportunities in the defense sector. So while we do see a lot of excitement around the Middle East, we also see opportunities coming on the subsea side as well into next year.

Okay. Great. That’s all. Very helpful.. And then, I guess this is my last question, last comments and just kind of one of your thoughts. I mean we're a little bit ways away, but it's getting closer. And when you think about kind of the potential to return capital, I guess I would just encourage you, if you're trading at a 25% free cash flow yield and a 50% discount to your peers on an EBITDA multiple basis to put every dollar possible to buying shares. Now obviously, if the market reprices you, dividends are great and then using share repurchases to either increase free cash flow per share or the ability to pay dividend per share without increasing the cash outlay. That's great. But at current valuation, I would pound the table on buying factor shares. And if that reduces liquidity or whatever it may be, it's kind of irrelevant from a long-term shareholder standpoint. So I just kind of like your internal comments of where your kind of valuation sits relative to peers. I mean, obviously, this is hypothetical because you can't do it at this point in time. But if you could return capital to shareholders, like what are your guys have thoughts once you get to that point?

Great question. And as Neal mentioned earlier, we're working through that process, but we see the same thing that you do. With our free cash flow yield that we have is tremendous. There's not many companies that have that as an opportunity. And our -- and part of that is because our multiple -- our valuation on a multiple basis is less than a lot of similarly situated companies. So I think either way, either that multiple recovers, and we're pleased with that and/or we have an opportunity to retire shares, buy back shares that would be really strong. So things that we would definitely look at, like you mentioned, we'll come up with that plan and share that when we get closer.

Great. Well great quarter. Thanks, guys. Appreciate you taking the question.

Thanks, Eric.

Thank you, Eric.

Thank you. At this time, I would now like to turn the conference back over to Neal Lux for closing remarks.

Thank you again, Gigi, and thank you for your support and participation on today's call. We look forward to talking to you all again in early November to discuss FET's third quarter 2024 results.

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