Forum Energy Technologies Inc (FET) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2012 Forum Energy Technologies, Inc. Earnings Conference Call. My name is Janeda, and I will be your operator for today. At this time all participants are in listen-only mode. Later, we will conduct a question and answer session.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Patrick Connelly, Vice President-Strategic Development. Please proceed.

Thank you, Janeda. And good morning, and welcome to Forum Energy Technologies First Quarterly Earnings Conference Call for the first quarter of 2012. With us today to present formal remarks is Cris Gaut, Forum's Chairman, President, and Chief Executive Officer, as well as Jim Harris, Senior Vice President and Chief Financial Officer. Also with us today are Forum's two division presidents, Charlie Jones, President of Drilling and Subsea Division, and Wendell Brooks, President of our Production and Infrastructure Division.

We issued our earnings release this morning and it is available on our website at www.f-e-t.com. The statements made during this conference call, including the answers to your questions, include information that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Forward-looking statements involve risks and uncertainties that may cause actual results or events to differ materially from those expressed or implied by such statements. Those risks include, among other things, matters that we describe in our earnings release and in our filings with the Securities and Exchange Commission. We do not undertake any ongoing obligation, other than that imposed by law to publicly update or revise any forward-looking statements to reflect future events, information, or circumstances that arise after this call.

In addition this conference call contains time-sensitive information that reflects management's best judgment only as of the date of this live call. This call is being recorded and will be available online for replay from May 4, 2012. Management statements may include non-GAAP financial measures. For reconciliation of these measures, please refer to our earnings news release available on our website.

I am now very pleased to turn over the call to Cris Gaut, our CEO.

Thanks, Patrick, and good morning. We recently closed our initial public offering, and I want to begin by welcoming our new shareholders, who have placed their trust in the management, and employees at Forum. I especially want to thank our employees for their tireless efforts that made the IPO possible, and made Forum the good place to work that it is today.

With me today is our CFO, Jim Harris, as well as the presidents of our two operating divisions, Charlie Jones, and Wendell Brooks. I'll start with some highlights from the quarter, offer a few thoughts on the outlook for our business, and then turn it over to Jim, who will provide greater detail on our financial performance.

As this is our first earnings conference call, allow me to take a minute and orient you to how we manage Forum. We're organized in two divisions, Drilling and Subsea, managed by Charlie, and Production and Infrastructure run by Wendell. Drilling and Subsea focuses on products and technologies from the reservoir to the well head on the drilling rig and below the surface. Production and Infrastructure provides products from the well head to the refinery.

Each division has three product lines oriented on their respective markets. The product lines within Drilling and Subsea included subsea technologies, drilling technologies, and down hole tools. Production and Infrastructure includes drill equipment, production equipment, and valve solutions.

We had a good first quarter of the year with strong, organic revenue growth, continued improvement in our margins, and increased order levels across our two divisions. I am pleased to report that in the first quarter, we generated $82 million of EBITDA on $363 million of revenue. We generated EBITDA margins of 22.6% in the first quarter of 2012.

Diluted earnings per share in the first quarter of 2012 were $0.57 up significantly from the 2011 first quarter diluted earnings per share of $0.20. This also represented a 33% sequential increase over fourth quarter 2011 earnings per share of $0.43. But please keep in mind, our share count increased after the end of the first quarter with the completion of our IPO, and concurrent private placements. So, our earnings per share over the rest of 2012 will not be directly comparable to this first quarter.

Our subsea technologies business was one of our top performers this quarter, generating the highest sequential revenue growth rate among our six product lines. Subsea technologies benefited from strong demand for our Perry work-class remote operating vehicles, or ROVs that we design, manufacture, and sell.

The growth in deep-water oil and gas development was what has increased demand for our ROVs, and other subsea tooling and equipment that we sell. Additionally, demand has increased for large specialty vehicles, which support subsea pipeline installation, and offshore wind farm projects in northern Europe.

We recently began final testing on a large, 1,200-horse power specialty trenching vehicle that our customer intends to deploy into these markets. It is the largest such vehicle we have ever produced, and demonstrate the strength of our subsea design and engineering talent.

Our flow-equipment product line had an exception quarter, and generated strong, sequential top line growth, and produced the highest operating margins in the company. This activity-based consumable product business benefited from the growing service intensity in North America.

With a sharp drop of North American natural gas prices, many of our customers have redirected their assets to the liquids rich and oily basins. And these basins tend to be drilled with longer laterals, and stimulated with more fracturing stages per well.

We believe about 80% of our flow-equipment revenue is related to field consumable and replacement components. The remaining 20% is flow iron we sell for new frac spreads, and this is the portion of our business that would be more exposed to a decline in orders for new capital equipment.

We also saw excellent performance from our drilling technologies product line, where drilling activity in North America created strong demand for our consumable products and handling tools. We have also experienced continued strength and demand for our well intervention pressure control equipment, such as blowout preventers that we manufacture for coil tubing operations.

In addition to the new products we discussed earlier in our subsea business, other new product development efforts continue. Our valve solutions product line introduced new products to serve the upstream infrastructure market, while our drilling technologies product line recently began commercial production of the Wrangler Roughneck, a fully-automated make up and break out tool.

We have other product development efforts underway, and several of our product lines that we expect to be growth drivers for us in the coming years.

Looking forward, we are encouraged by the order level this quarter. Our level of order intake was $409 million for the first quarter of 2012, and all-time high, and a sequential increase of 14% over the fourth quarter of 2011.

Our CFO, Jim Harris, will now discuss our financial results in greater detail. Jim.

Thank you, Cris, and good morning. We continued our strong growth trend in the first quarter with revenues of $353 million, up 79% from last year, and representing an 8% increase sequentially. On a pro forma basis, organic revenue growth for the first quarter was 38% over last year.

References to pro forma get full effect for the eight acquisitions we completed last year as if they had occurred at the beginning of 2011.

Our earnings for the quarter were $0.57 per diluted share, compared to $0.20 for the first quarter 2011, an increase of 185%, and up from $0.43 in the fourth quarter 2011. These earnings are based on the shares outstanding in the first quarter, and do not include shares issued in the offering, or in the concurrent private placement.

Our consolidated EBITDA margins for the quarter improved to 22.5%, up from 19.1% for the fourth quarter 2011, which was burdened by a $6.3 million charge for marking to market contingent consideration issued in two acquisitions.

EBITDA for the quarter was approximately $82 million, up 169% over the same period last year, and up 27% sequentially.

I will now review our segment results, comparing the first quarter of 2012 sequentially with the fourth quarter of 2011.

Both of our segments contributed to revenue growth with Drilling and Subsea up 10.1%, and Production and Infrastructure up 5.2%. As Chris mentioned, the highest revenue growth in the quarter was achieved by our subsea technologies product line, up almost 25%, generating record revenue for the business, and for large, work-class ROVs specifically.

We also had a particularly successful quarter in terms of new subsea orders with contracts for 10 additional work-class ROVs signed during the quarter.

In the Production and Infrastructure division, our flow-equipment product line led with 16% revenue growth on strong demand for our flow-iron products that are consumed in the well stimulation completion process.

Both segments also achieved higher EBITDA margins for the quarter with Drilling and Subsea posting 25.6% margins, and Production and Infrastructure reaching 21.8%. Our drilling technologies product line achieved the most improvement with margins almost 600 basis points better, approaching 27% on record shipments. The higher margins reflect the benefits of continuing engineering and manufacturing process improvement initiatives occurring throughout the business.

I will now explain our expectations for the second quarter, and provide guidance for the full year results.

Based on continuing strong demand across our product lines, we expect operating income for the second quarter to come in between $68 million and $73 million, and for the year in the range $275 million and $300 million. This includes depreciation and amortization charges of approximately $12.5 million for the second quarter, and $50 million for the year.

The company projects net income for the second quarter to be between $40 million and $45 million, and for the year between $175 million to $185 million.

In the first quarter, Drilling and Subsea contributed approximately 59% of revenue, and on the year is expected to approach 60%.

Corporate G&A costs should be approximately $25 million for the year.

Net debt at the end of the first quarter was approximately $640 million, and interest expect for the quarter was $5.8 million. Subsequent to the quarter, net debt was reduced by approximately $308 million with the proceeds from the IPO and concurrent private placement.

Interest expense for the year, excluding any additional debt incurred for possible acquisitions, should be approximately $50 million.

Our tax rate for the quarter was 34%, and we think this rate is a reasonable estimate for the year.

Our diluted share count for the first quarter was approximately 74.7 million shares. Adjusting for the 16.6 million shares issued in the IPO and the private placement, we anticipated our diluted share count for the second quarter 2012 to be approximately 92.3 million shares, while diluted shares for the full year should be approximately 87.5 million.

Cash flow from operations was $21 million for the quarter, which included a continued investment in net working capital. We expect to see operating cash flows improve for the rest of the year, as incremental investments in inventories globally are expected to decline going forward, and as our credit and collection initiatives to reduce days sales outstanding yield the anticipated results.

We expect CAPEX for the year will be approximately $60 million with about two-thirds designated as growth CAPEX, as we are investing in capacity expansion in both segments.

For more information about our financial results, please review the earnings release on our website. We expect to issue our full Form 10-Q next week.

We would like to welcome our new investors in the company, and affirm to each of you that we take seriously our commitment to be good steward of our shareholder's capital.

I'll now turn the call back over to Cris for concluding remarks and to moderate any Q&A.

Thanks, Jim. We met with many of our new shareholders earlier this month during our IPO marketing effort, and we discussed our intent to build and operate a world-class organization. We will remain focused on operational execution, serving our customers' needs, and building Forum for the long term.

For those of you attending the OTC Technology Conference in Houston next week, please stop by Forum's booth and check out some of our new products, including the Tomahawk ROV, and our new subsea intervention tool used for closing a subsea POV powered only with an ROV.

I'm pleased with the progress Forum has made, and look forward to reporting to you on our progress in the future.

Thanks for you attention, and at this point we'll open the line for questions. Janeda, please begin the Q&A session.

Thank you.

(Operator Instructions)

Your first question comes from David Anderson with JPMorgan. Please proceed.

Good morning, Cris, and welcome back. I'm sure it's probably these earnings calls you probably miss the most, I would assume.

Right, David. Good morning.

So, I guess it's just a question overall in terms of looking at your 2012 guidance, and then thinking about revenue progression as it goes through 2013. I was wondering maybe it should probably be a good time to give us, perhaps, you can give us some guideposts for what we should be tracking. In other words, you've got a bunch of different businesses in here within your two segments, each of which has fairly distinct drivers. Maybe you could -- perhaps you could help us kind of understand, what are kind of the two or three most important industry trends we should be paying attention to that you [can look in to] touch your top line the most?

Thanks, David. Some of the drivers that we would look to, and refer people to would be on our subsea business the number of new project awards related to these trees are a forward indicator. Obviously, there's a long time the award of those trees and projects to the actual construction work commences. But it does give that longer term indicator of, and certainly directional indicator there. And I think the activity, in general, that one sees in the subsea construction and installation of these manifolds and flow lines, as well as trees.

On the onshore side, the upgrade in spending by the drilling contractors on their rigs, both onshore and offshore, and the level of completions for onshore activity would be a good indicator for more production and completions oriented businesses.

As you're kind of thinking about kinds of the longer-term goals and aspirations of your company, obviously, you've done a number of acquisitions over the last couple of years. Can you help us understand how you're thinking about that incremental growth? Is there a sense of kind of what that split is going to look like in between M&A and organic growth, and I guess, obviously without tipping your hand too much, what does Forum look for in an acquisition? Is there like an ideal size? How are you thinking about it? Is it kind of product lines? Is it technology plays? What's the best fit for your company as you look at acquisitions.

I keep the key driver for our growth going forward will be the organic growth, and we think we can continue to grow in the 15% to 20% organic growth rate. And on top of that is the acquisitions.

And the things that we look for in acquisitions are, first, strategic fit with our six existing product lines so we're looking to add and deepen our product offering within those six product lines. We look for businesses that have good brand names, that also have the ability for us to grow the businesses once we own them. But again, these businesses need to have good exposure to the three primary drivers that we're looking for for our businesses, the deep water development activity, well complexity, and service intensity.

In terms of scope, size of acquisitions, most of our deals will be in the, probably, $30 million to $150 million acquisition cost range. That's not exclusive. Occasionally, we will look at things that are larger. But that would be, really, the sweet spot for us in that size category.

Okay. And one last question. You mentioned the -- a little more than $400 million in orders this quarter. Would it be possible to break that down a little bit for us in terms of how that breaks down in terms of the segments and business lines? And I guess, second, if you could help us understand a little bit of the dynamics of orders. How that flows into revenue? In other words, how long is that cycle time, and roughly how much of your revenue, on a quarterly basis, flows out of backlog.

Our cycle time from order to revenue recognition is fairly quick, certainly within side 12 months on an average, probably about 6 months. And we are not a backlog driven business, which is why we're not emphasizing that, but rather the order flow.

Right.

Relative between our two segments, or two divisions, both are up sequentially. The Drilling and Subsea division was up more this quarter, particularly driven by some very strong orders we had in the subsea side. And, of course, that orders, as we all know, the subsea side can be lumpy, but very good order flow there.

Thank you very much, Chris.

Your next question comes from John Lawrence of Tudor, Pickering, & Holt. Please proceed.

Good morning, guys.

Hi, John.

Just a question on the ROV side. A lot of positive commentary there. Could you just remind us what your production capacity is per year? And then, are you guys mostly sold out in the 2012, and what's the visibility in the 2013?

We do have additional capacity to deliver units in 2012, so we're not sold out. We have, I think, a good idea of what our production slots are, and not all of them are sold at this point, although there are good discussions underway.

The level of these big, specialty vehicles that we build do impact that a bit because they absorb a disproportional amount of capacity. Of course they're more expensive in terms of the price that we charge customers, but they do absorb more capacity. So, the mix there between those specialty vehicles and other work-class vehicles is a factor.

But, John, we do have -- we can take on some more units than we have currently in orders for today. And we have, on the other hand, some orders that go out to early part of 2013 at this point too.

Okay. That's helpful. Thank you. And then just a question on the iron roughneck. What's realistic as far as installing it in the next 12 to 18 months?

Charlie.

The -- how are you doing? We figure that the market we're targeting with this iron roughneck is primarily the land market. We think there's more than 1,000 in service that are getting kind of old, and we think there is quite an opportunity for replacement. So, we think our ability to sell is really going to be based on our ability to produce, and we are gearing up to be able to produce quite a few. But we do think the opportunity in the market is quite substantial.

Okay. Great. Thanks. And I guess just the last one, just maybe touching the valve business. It seems like a pretty big opportunity in Brazil and Australia. Could you just touch on that as well?

We're seeing good global demand for the valves on global scale. We do have a valve sales representative located in Brazil, so that is a market that we're specifically addressing, and in Australia. So, those are markets that we expect to expand in.

At this point in Australia, it gives us some exposure, not only to the upstream side, but also to the mining side. We also have some exposure to the mining business in Africa. But back to Brazil, it's not just the upstream side there either. It's also the industrial market, too.

Having said that, though, still the majority of what we're seeing orders for in our valve business are in North America, mid-stream pipeline installations and terminals, as well as the natural gas pipeline replacements market. Heavy oil in Canada, we're seeing is very strong. And serving the upstream market valve business as well.

Okay. Great. Thanks for taking my questions.

Sure, John.

Your next question comes from Blake Hutchinson with Howard Weil. Please proceed.

Good morning, guys.

Hi, Blake.

First off, congratulations on completing the offering. I know that's a tough road when it gets to the end of that -- end of the line there. First question, just, can you take us back in good sequential comparison here within flow control, obviously, the leader here? Can you take us back through kind of your capacity expansion in that business, when you kind of reach max capacity, and then, maybe kind of qualify the growth sequentially as Forum getting up to capacity versus, is this more just driven by the fact that the fleet out there is larger, and that's the type of growth that's, more or less, just organic? Kind of trying to get a handle around capacity expansion utilization versus just you're having a larger fleet out there to service?

Right, so, we entered the flow equipment business through acquisition, acquired a series of companies last year, and we saw that this was a rapidly growing market. So, as we acquired these companies, we also implemented plans to increase their capacity. And each of our facilities has seen a significant increase in people, employees, in equipment, in the roof line, and we have further plans to expand that as well.

So, the throughput that we've been able to deliver has obviously grown a great deal, but that's been in anticipation of the demand that we've seen from our growing list of customers, because of the larger installed based out there, the higher level of activity. And what we do try to do in our -- in how we manage the business is look out 12 to 18 months at what we see the demand will be for our products and equipment. And then look at what our ability to deliver is, and how we need to further allocate resources to meet that potential demand.

I guess maybe put another way, even given the success for the quarter, had you had more capacity, could you have done even more with the quarter, given the fleet size?

I'm sure there are areas where we were constrained, and one of our issues in this business over the past few quarters, has been the order intake has been -- has outstripped from time-to-time our ability to deliver, and has caused some deferrals. We're working hard to catch up on that, wouldn't you say Wendell?

Yes. I think our capacity is in line with the demand we see now. There are spots where we -- you'll have orders to fill, but as Cris said, the activity level is very high, and we see a continued demand, particularly as people focus more on the utilization of the equipment.

And we're now having an opportunity to expand our customer base as well. And that's part of our planning for the future.

Great. And then, I guess, for the oil service landscape as a whole right now, a lot of it -- the inter basin navigation in the US is kind of at the forefront of questioning, and understanding as more of a capital equipment and consumable provider, you probably don't have as much rearrangement to do. But is there anything system-wide that you guys need to do some catch up on as we see this kind of inter basin shift in activity, or you feel pretty good about where you're positioned today?

Blake, there are opportunities for us there. Although we have -- I think a key to our flow equipment business, for instance, is the service we offer our customers, and our ability to go out and re-certify their equipment, and have the spare parts located in real close proximity that we can supply, when the company -- when the customer needs it.

So, we have these service bases in a number of key basins, in most of the key basins, but there are areas that we want to expand into, and I think Wendell and the team, for instance, are going to make -- be making a trip in that regard up to the Bakken here, shortly, so that we can have more direct involvement in that market in a -- with a bigger -- with our own facility. Of course, Charlie, you've got -- on the drilling side, you've got a facility there now, and we'll be looking to leverage across our businesses. So that's an example of an area where we see greater potential.

Great. And then, again, because it's been highlighted, I just wanted to touch on your key [auks] and metrics here, as we explore -- form as a public company that the ROV, being a new equipment orders versus consumables, is that roughly usually kind of the same relationship in terms of cap equipment to consumables as overall, and do new unit margins -- are new unit margins more or less in line, typically, with the rest of the segment, or is it new units that are lower than the consumables within that segment?

The subsea technologies product line is one, for us, one of probably only two of the six that is more capital equipment oriented. So, our subsea business, our ROVs, is more capital equipment oriented. We sell the units. We sell the tooling. We sell the software that users -- our customers use in association with that. Yes, we sell some replacement parts there, but we do pride ourselves in reliability. So, we're not dependent upon the replacement part business there for sure.

But across Forum as a whole, the majority of our revenue is from consumable and after-market products. That is not true for the subsea product line, and it's not true for surface production equipment business over in Production and Infrastructure side.

Okay. And then just one follow up, and I'm sorry I'm taking up a lot of time here. Maybe for Charlie, just because we haven't had really an ROV manufacturers in a publicly here, is it your position that, perhaps, to offer a construction industry as under replaced, under ordered, or is there a new generational kind of replacement cycle going on? Is that something that fanatically we need to be thinking about here, or is the new order really just in line with kind of expansion in capacity in that industry?

I think the first -- the customer that are buying these vehicles are doing the installation and construction work, and their visibility to future work coming at them next year and year after, has increased dramatically in the last year. We've seen orders associated with that. They had not been buying for a number of years, and we're selling a lot of equipment now as replacements going on existing vehicles, but also technical upgrades. There's been a lot of technology brought to the market in the past five years that is now starting to flow out as these orders are being placed, and are hitting the market.

In addition to that, we are seeing, and Cris mentioned, some work associating some very highly specialized [to gear] as well as the ROV. And the outlook for that seems even more buoyant today than it was six months ago. So, I think there's very complicated work anticipated to be done in the future, and our customers are trying to position themselves to be able to execute that work. I think the key thing is that they have to be able to show when they bid the business that they have the ability to perform the work in an efficient manner, and they're relying on us to help them do that with their customers if they bid jobs.

Got it. Thanks. That's good color. Thanks, I've taken up enough time, I'll turn it back, guys. Thank you.

Thanks, Blake.

(Operator Instructions). Your next question comes from David Smith with Johnson Rice. Please proceed.

Good morning, guys.

Hi, David.

Want to really relate the congratulations for the successful IPO.

Thanks very much.

Wanted to follow up on the flow equipment side, and I'm sorry if you addressed this and I missed it. Noting that it more than doubled the 1Q 2011 pro forma revenue. Effecting by the horizontal road count as a proxy to that demand, service in the active base of pressure pumping capacity, that number was up less than 20% year-over-year. If I'm correct in understanding the growth [of your report is off the] pro forma, which it is, could you help us understand the revenue growth for that business year-over-year, being so far above? It seems like a lot of market share gain.

Yes, I think that's right. We have significantly increased our capacity, our ability to meet customer requirements, and taken on new customers, and as we brought these companies together that we acquired, and integrate them, we're now able to offer a comprehensive solution to the flow equipment side, and the flow iron. And work with these customers on inspecting and re-certifying their flow iron, and then providing a full range of replacement parts.

So, now we're able to fully participate in the growing service intensity there. But it was really over the course of the year, and we're still working, I would say, Wendell, and bringing together these companies in realizing the full benefits of the integration.

That's exactly right. We had some holes, initially, when we put the three companies together from a product offering standpoint, and we spent a lot of 2011 filling in the holes, and expanding the distribution network. We were really limited in how many clients we could serve in the beginning as we put the companies together. Because our capacity expanded, we've now got a pretty broad range of clients. And as we add more services we think we're able to serve a larger market with the complete product offering, and the after-market services and repair we offer, we think plays into a very important aspect of this year's business.

So, the growth has really been based on how fast we could fill out the product line, fill out the distribution network, and I think we've done a pretty good job so far.

David Smith. Good color. Thank you. Are you close to where you'd like to be in terms of market share, or do you have a target in mind for market share gains that would make you satisfied a year from now?

This is a big market, and we see a lot of potential in run way, not just in flow equipment, but in each of our markets. So, we see good growth potential across the board, including in the flow equipment space.

Okay. Appreciate it. And the follow up is just, with something you could provide me, maybe, some broader detail color on the US onshore switch from gas to liquids is effecting your overall business?

The switch, certainly something I think anyone in the service side space has to be very conscious and proactive about. And I'll ask Wendell and Charlie to comment. But many of our businesses are kind of indifferent, as is our rate business, and the flow equipment side has managed the conversion. A business that actually benefited quite nicely is our valve business. We've seen a significant increase in valves for the petrochemical industry, and we see that potential in the order flow from petrochemical plants coming back on stream due to low natural gas prices, looks quite favorable.

And then, Wendell, too, the production equipment business, well head separation equipment that we manufacture, I know that's something you have been watching and managing for very closely. You might talk a bit about how the switch has affected that business.

It's actually quite interesting. The amount of equipment around a well head for surface production is more for oil than it is for gas, and that really is a result of the additional fluid handling. On a per well basis, the revenue we're able to generate on an oil well is higher than a gas well, and we've moved quite quickly with the rotation. For us, the supply of equipment is not so much based on where the location is, it's closest to where our plants are.

So, we're positioned in all the major basins, except North Dakota, and I think we are seeing a good growth in our service production equipment business because of the fluid volume, which requires more separation, more storage tanks, more freeloading [arc out] equipment. So, it's a bigger product offering around an oil well than a gas well.

Good color. Thanks, guys, I'll turn it back.

David, thanks very much. Well, we want to thank you all for your attention and your questions this quarter. And we look forward to talking you again for our second quarter earnings conference call in July. Thanks very much.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.