Forum Energy Technologies Inc Q3 2024 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Dave Storms - Stonegate Capital Partners, Inc. - Analyst : Good morning. Just hoping we could start with maybe some of the puts and takes on the guidance range for free cash flow. Is that mostly just driven by enhanced profitability? Or is there more to that story that we should be aware of?

Question: Dave Storms - Stonegate Capital Partners, Inc. - Analyst : Understood. Thank you. And I know in both the release and on today's call, you mentioned that the new debt situation still gives you the ability to be strategically acquisitive. What's the kind of profile that would pique your interest? Would it look a lot like Variperm? Or would you go in a different direction?

Question: Dave Storms - Stonegate Capital Partners, Inc. - Analyst : Understood. Thank you. And then just one more for me, more of a macro question. The upcoming US election, a lot of the -- some of the rhetoric has been around potential tariff increases. How are you thinking about the potential impact to the international demand outlook should the US tariff rate increase? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 01, 2024 / 3:00PM, FET.N - Q3 2024 Forum Energy Technologies Inc Earnings Call

Question: Dave Storms - Stonegate Capital Partners, Inc. - Analyst : That's all. Very helpful. Thank you for taking my questions and good luck on the fourth quarter.

Question: John Daniel - Daniel Energy Partners - Analyst : Anyone team. I just want to follow up on one of the prior questions on M&A. I guess if you look at the call it, frac capital equipment market, which is hitting a little bit of an air pocket right now, do you look at that as an opportunity for where you might focus on acquisitions? Or would you rather stay more towards production related or drilling-related stuff?

Question: John Daniel - Daniel Energy Partners - Analyst : Okay. And then you cited Global Tubing. It seems like every time you look at LinkedIn, another one of the coil guys is doing some drill out on like 27,000, 28,000 plus feet. I'm curious, how is all of that impacting the demand? I mean I'm assuming it's positive, but if you could just elaborate a bit more on what you're seeing there. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 01, 2024 / 3:00PM, FET.N - Q3 2024 Forum Energy Technologies Inc Earnings Call

Question: John Daniel - Daniel Energy Partners - Analyst : Have you had to do any changes to the plant to accommodate the longer strings? Or was that -- are you good there?

Question: John Daniel - Daniel Energy Partners - Analyst : Got it. Okay. Well, thanks for including me guys.

Question: John Daniel - Daniel Energy Partners - Analyst : Bye.

Question: Dan Pickering - Pickering Energy Partners - Analyst : Morning, guys. Well, I want to make sure that I understood what you said around Variperm. Did I hear you say that Q3 was a 2% increase from Q2? Or was that a year over year number?

Question: Dan Pickering - Pickering Energy Partners - Analyst : Okay. Thanks. And so it sounds like we can look through your prior disclosure and the consolidation, et cetera. Are we kind of creating this coiled spring effect with some of these project delays in Canada? Do we think that we have kind of a snapback Q4 there? Or do we think we're pushing some of those projects out into '25?

Question: Dan Pickering - Pickering Energy Partners - Analyst : And does that -- as you look to Q4 for Variperm, is that kind of a flattish? It sounds like you're kind of running at a flat rate Q3 versus Q2. Do we hold that level in Q4 then?

Question: Dan Pickering - Pickering Energy Partners - Analyst : Okay. Got you. Thank you. I appreciate that. And then I just want to make sure I understand the kind of ebbs and flows here on the balance sheet. So while we're sitting at the end of Q3 with call it, $232 million of debt, we've got -- confirm these numbers for me, roughly $60 million of the convert outstanding and then the seller notes is another $60 million. So we paid down $120 million of debt with our new debt and your cash flow in Q4. And so basically, we end the year kind of at the same cash balance, maybe a little bit better than we said at the end of Q3. Is my math kind of tying there?

Question: Dan Pickering - Pickering Energy Partners - Analyst : Got you. And then I appreciate the outlook for '25 on the free cash side. It sounds like, I want to make sure the way you were describing cash is essentially in a flat revenues, flat EBITDA environment. Maybe, Neal, if you could take a couple of minutes and just talk about where you -- kind of what product lines or you feel best about as you go into '25, given kind of your order, your momentum, the things you're seeing from the customers?

Question: Dan Pickering - Pickering Energy Partners - Analyst : Yeah, sloppy. Sure.

Question: Dan Pickering - Pickering Energy Partners - Analyst : Okay. And if we think about the puts and takes as we go into '25, feels now like Variperm should have this kind of catch-up. It's obviously a higher-margin business. Do we -- in a flat revenue environment, do we -- how much margin expansion do you think you guys could potentially see just based on mix alone?

Question: Dan Pickering - Pickering Energy Partners - Analyst : Great. Last question, I think I ask it about every other quarter. I just want to check in again. If you look at the business mix, the things that you've rationalized your portfolio over the past couple of years, kind of the product lines that we see, you're -- right now, you're comfortable that that's where you want to be. So no meaningful divestitures from here?

Question: Dan Pickering - Pickering Energy Partners - Analyst : Okay. Thanks guys. Appreciate it.

Question: Jeff Robertson - Water Tower Research LLC - Analyst : Thank you. Good morning.

Question: Jeff Robertson - Water Tower Research LLC - Analyst : Neal, I think you mentioned in your thought process around 2025 that US drilling could be down about 5%. Did I hear that right? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 01, 2024 / 3:00PM, FET.N - Q3 2024 Forum Energy Technologies Inc Earnings Call

Question: Jeff Robertson - Water Tower Research LLC - Analyst : Does -- do you get any sense that there is an increased focus on optimizing production and spending for those types of products? And if that's the case, does that drive demand for FET to gain market share because some of your products are more efficient than maybe what else is out there in the market?

Question: Jeff Robertson - Water Tower Research LLC - Analyst : Do -- would an increase in natural gas related activity increase demand for some of your products and that could have effect on the margin mix?

Question: Jeff Robertson - Water Tower Research LLC - Analyst : And then just a question on the Unity system for the ROVs. Would that system increase the type of work those ROVs can do? Or it's just make it easier to operate them from like you said, remote locations?

Question: Jeff Robertson - Water Tower Research LLC - Analyst : Are those going to different operators?

Question: Jeff Robertson - Water Tower Research LLC - Analyst : And lastly, on the MagnaGuard, does that -- apart from increasing safety, does it also have any effect on the run times of ESPs?

Question: Jeff Robertson - Water Tower Research LLC - Analyst : Thank you.

Question: Erik Carlsson - - Analyst : Hey guys. Morning, how's it going?

Question: Erik Carlsson - - Analyst : Cash flow continues to be strong. I mean, when you produce 25% of your current market cap and cash over the first three quarters, it looks like it's starting to get to the point where it can open the door for opportunities. I guess when we just think about free cash flow durability and you kind of guided to this a little bit. Obviously, it helps that like year over year interest expense from '25 to '24 kind of based on what you said is you're probably down [a third], maybe a little bit more. And can you just -- I think you mentioned a 1.9 times net leverage ratio. Is that as of the kind of the close of the high-yield bonds upcoming --

Question: Erik Carlsson - - Analyst : Yes. So would the expectation be high-yield debt closes next week, I would assume you guys are going to try to issue a redemption notice for the existing long-term notes and then that's like a month long process. And then what is the process on the seller note? You can just pay that in cash whenever you'd like? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 01, 2024 / 3:00PM, FET.N - Q3 2024 Forum Energy Technologies Inc Earnings Call

Question: Erik Carlsson - - Analyst : Okay. And then -- so 1 point time -- 1.9 times net leverage, the new high-yield notes, you need to get to 1.5 times to be able to kind of do that 50-50 return cash to shareholders. That's correct, right?

Question: Erik Carlsson - - Analyst : Great. Yeah. So that kind of puts you towards, I mean, the next year when you can kind of think about getting to, I don't know, call it, [3.0] kind of fix the balance sheet, look good, then kind of take on the return of capital, whether that's buybacks, dividends, pay down debt or even go out and buy something. But I guess my last thought was, I mean, Variperm, I mean, has helped a lot. It's been kind of a home run. I think you bought that at 3.7 times trailing 12-month EBITDA, at least that was when it was announced.

Question: Erik Carlsson - - Analyst : And now FET as an entity, if you kind of did the pro forma number, looking at Variperm trades at probably 3.6 times at $14 a share and a 35% free cash flow yield plus. It seems like it would be hard to come up with something better to do with cash than buy more of what you already own, which is obviously buying back your shares. So I guess when you think about -- obviously, there's a difference between M&A because you kind of have the flexibility with the new high-yield notes. It seems like -- so if you could find something that could incrementally add to free cash flow without considerably overleveraging yourself? Obviously, like the hurdle rate is a little bit different there because you have more flexibility to do so. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 01, 2024 / 3:00PM, FET.N - Q3 2024 Forum Energy Technologies Inc Earnings Call But when you think about that, like what does something -- if you can buy your own stock for the value it is now versus going and buy somebody else for what -- I mean, I guess, are there things out in the market right now that you can find in the private markets or a carve-out from somebody else in the -- that you can find that kind of hurdle rate that makes an M&A transaction makes sense versus just being patient getting to the middle of next year, the first third of next year and then just saying, I'm going to buy my own stock and I'm going to take kind of my destiny into my own hands versus let the market do it for me?

Question: Erik Carlsson - - Analyst : That's helpful. Yeah, I don't think I have anything else. The only other thing I would say is I listened to the precision drilling call. I mean, they seem pretty bullish on Canada going into next year. And then I didn't see it in the release. I'm sure it will be in kind of your quarterly filing. But I know that the Middle East was kind of a revenue growth outlier relative to kind of activity growth kind of year-to-date through Q2. Is that still kind of holding true? And if you could just talk maybe a little bit more on the opportunity set there, it would be interesting because it feels like one of the markets that kind of could be a pretty big driver.

Question: Erik Carlsson - - Analyst : Great. That's all, all helpful. Another good quarter. Keep the cash coming. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 01, 2024 / 3:00PM, FET.N - Q3 2024 Forum Energy Technologies Inc Earnings Call