• Revenue: Increased 11% year-over-year.

• EBITDA: Up 48% year-over-year with a 320 basis point improvement in margins.

• Free Cash Flow: Generated $21 million in the second quarter.

• Free Cash Flow Guidance: Raised to between $50 million and $70 million for full year 2024.

• International Revenue: Accounted for 50% of total revenue in the second quarter.

• Middle East Revenue Growth: Increased by 16% in the first half of 2024 compared to the first half of 2023.

• Net Debt: $225 million with a net leverage ratio of 2.2 times.

• Drilling and Completions Segment Revenue: Decreased 2% quarter-over-quarter.

• Artificial Lift and Downhole Segment Revenue: Increased 6% quarter-over-quarter.

• Interest Expense: Expected to be approximately $8 million in the third quarter.

• Warning! GuruFocus has detected 3 Warning Signs with FET.

Release Date: August 02, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Forum Energy Technologies Inc (NYSE:FET) reported strong free cash flow results, converting EBITDA into cash faster than planned, leading to an increase in full-year 2024 free cash flow guidance.

• The company is in the process of redeeming more than half of its 2025 notes, with plans to retire the balance by the end of the year, significantly improving its balance sheet.

• FET's international market penetration strategy is yielding results, with international sales accounting for 50% of total revenue in the second quarter.

• The Variperm acquisition has positively impacted financial results, contributing to a 50% year-over-year increase in EBITDA despite challenging market conditions.

• The company is seeing growth opportunities in the power generation sector with its JumboTron XL heat transfer unit, expanding its addressable market.

Negative Points

• FET experienced softer than expected US activity, with a decline in US rig count and hydraulic fracturing activity due to weak natural gas prices and E&P consolidation.

• The company reduced the top end of its 2024 EBITDA guidance by $10 million due to a revised market outlook.

• The Drilling and Completions segment saw a 2% revenue decrease, primarily due to lower sales of ROVs, cable management systems, and treating iron.

• Orders for drilling and stimulation-related capital equipment were lower during the quarter, impacting the company's order book.

• The US market is expected to remain soft, with a 15% decrease in rig count anticipated for the year, compared to an initial expectation of a 5% decrease.

Q & A Highlights

Q: Could you help us understand the factors that will influence whether you hit the higher or lower end of your cash flow guidance range? A: Neal Lux, President and CEO, explained that the company is seeing a good conversion of working capital into free cash flow, with teams focused on reducing DSOs and matching inventory to market demand. Lyle Williams, CFO, added that the key contributors will be fluctuations in EBITDA and working capital, which could net each other out depending on where they fall within the guidance range.

Q: Can you provide more color on the potential for returning capital to shareholders next year? A: Neal Lux stated that returning cash to shareholders is a key commitment for the company. They are evaluating all options, including share repurchases or dividends, to determine what makes the most sense for long-term value creation.

Q: How much of the international revenue growth is a catch-up versus a sustainable baseline? A: Lyle Williams noted that international revenues, which grew to 50% of total revenue, reflect both a catch-up in project shipments and market share growth outside the US. This includes gains in casing hardware and artificial lift products, as well as increased sales in unconventional plays in Latin America and the Middle East.

Q: What is the outlook for Variperm and Canadian activity in the second half of the year? A: Neal Lux indicated that the outlook for Variperm remains positive, with expectations for stronger second-half performance driven by oil sands activity. Despite some potential shifts in project timing, the overall outlook remains unchanged.

Q: Can you discuss the note redemption process and how it will be funded? A: Lyle Williams explained that the company plans to redeem $60 million of notes in mid-August, funded through a combination of cash flow and revolver usage. They have ample liquidity to execute this plan and expect to redeem the remaining notes by the end of the year.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

This article first appeared on GuruFocus.