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Forum Energy Technologies Inc (NYSE:FET)
Q4 2019 Earnings Call
Feb 13, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Forum Energy Technologies' Fourth Quarter and Full Year 2019 Earnings Conference Call. My name is Annie, and I will be your coordinator for today's call. [Operator Instructions] I will now turn the conference call over to Bill Austin, Vice President of Corporate Development and Investor Relations. Please proceed, sir.

Bill Austin -- Vice President of Corporate Development and Investor Relations

Thank you, Annie. Good morning, and welcome to Forum Energy Technologies' Fourth Quarter 2019 Earnings Conference Call. With us today to present formal remarks are Cris Gaut, Forum's Chairman and Chief Executive Officer; as well as Pablo Mercado, our Chief Financial Officer; and Lyle Williams, Senior Vice President of Operations. We issued our earnings release last night and it is available on our website. The statements made during this conference call, including the answers to your questions, may include forward-looking statements. These statements involve risks and uncertainties that may cause actual results or events to differ materially from those expressed or implied in such statements. Those risks include, among other things, matters that we have described 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 the live call. Management statements may include non-GAAP financial measures. For a reconciliation of these measures, refer to our earnings release. This call is being recorded. A replay of the call will be available on our website for two weeks following the call.

I'm now pleased to turn the call over to Cris Gaut, our Chief Executive Officer.

C. Christopher Gaut -- Chief Executive Officer

Thanks, Bill. And by the way, we are welcoming Bill Austin back to Forum. He is now our VP of Corporate Development and Investor Relations. Good morning, everyone. When I assumed the role of CEO a little over one year ago, I laid out a plan that would focus on three things, and those are: generating strong free cash flow to reduce net debt; emphasizing our winning products to improve on our market position; and third, improving operating and cost efficiency. 2019 was certainly a challenging year for our industry and for the oilfield equipment sector. However, I believe our team has done an admirable job on these objectives. I would like to report on our 2019 progress in each of these areas. Forum generated $90 million of free cash flow during the year, representing a greater than 70% annualized free cash flow yield on our current equity market capitalization and a greater than 120% conversion rate of EBITDA to cash.

Over the year, we reduced our net debt by $130 million through a combination of strong free cash flow and divestitures of noncore assets. We ended the year with net debt of $342 million, $58 million of cash from the balance sheet and an undrawn revolver. The second objective is focusing on our winning products, which are those that provide critical value to our customers and remain in high demand, even in a constrained spending environment and secondly, have strong brand recognition and margin potential. Now, more than ever, our customers are demanding products that enable them to achieve greater efficiencies. We expect this trend to continue as the industry focuses on improving returns. As a result, we are expanding and improving our highly engineered products that outperform the competition in areas like artificial lift, intervention and hydraulic fracturing.

These products create value for our customers by reducing the cost of setup and cycle time at the well site, increasing the effectiveness of our customers' assets and even increasing the oil production rate. We fully expect market interest for these products to be high during 2020 despite reluctance by our customers to spend. Let me give you an example of how this focus on winning products is working for us. We have developed a suite of products in the artificial lift area that significantly improve the operating life of downhole electric submersible pumps by addressing problems with solids and gas in the production stream. These high-margin products we have developed deliver real value for the operator in terms of reduced lease operating expense, less downtime and better production rates. Sales of these artificial lift products increased each quarter during 2019 and are now up over 50% since the fourth quarter of 2018. Regarding the third objective, improving operating and cost efficiency, we made significant strides in 2019 by reducing our cost structure.

Some examples include consolidating facilities, removing layers of management, reducing professional fees and generally, limiting discretionary spending. This has resulted in a 20% reduction in SG&A in the fourth quarter of 2019 compared to the prior year. In addition, we have implemented process efficiencies that have reduced our direct costs which Lyle will be talking about in a few minutes. Continued progress on these three objectives will set the company up for long-term success. As we look ahead, we expect a low level of customer activity and great reluctance to spend that we saw in the fourth quarter to continue in the first quarter of 2020. In addition, concerns about the coronavirus and its potential impact on the Chinese and global economy are creating uncertainty about the demand for oil, which would have implications for the demand of Forum's products. As a result, for the first quarter of 2020, we expect our EBITDA to be approximately flat compared to the fourth quarter of 2019 but with some downside exposure to this forecast, if there is not a fairly swift recovery in China from the coronavirus.

Oilfield activity is off to a slow start in 2020 due to low oil and gas prices and constrained spending budgets. In subsequent quarters, we expect international activity to accelerate and cannibalization and destocking in North American market to run its course, as drilling and completion activity stabilizes. This will drive improved orders and revenue for Forum over the course of the year. Again, this forecast is subject to a recovery of the Chinese economy fairly soon. On that basis, we expect our full year 2020 EBITDA to be in the range of $60 million to $70 million. Given our capital-light business model and continued conversion of excess inventory into cash, we expect a very high rate of conversion of EBITDA to cash to continue in 2020. Regardless to the environment, we will manage Forum for the market as it exists, and focus on our key objectives.

Now let me ask Pablo to take you through our results and financial position. Pablo?

Pablo G. Mercado -- Senior Vice President and Chief Financial Officer

Thank you, Cris. Good morning. As Cris mentioned, 2019 was marked by a significant decrease in drilling and completions activity and a reluctance to spend by our customers, particularly in the fourth quarter. Our total revenue for the year was $957 million, down 10% from 2018. Adjusted EBITDA was $73 million or 8% of revenue, down $24 million from 2018. Despite the declining activity throughout the year, Forum generated strong free cash flow of $90 million in 2019 and exceeded our target of reaching a $100 million free cash flow run rate in the second half of the year. Our fourth quarter revenue was $200 million, down $40 million sequentially due to the reduced capital and operating spend as being by our customers, resulting from budget exhaustion and their mandate to preserve cash. However, we did see an inflection in our bookings, driven by new orders for international projects. Our book-to-bill ratio was above one for the first time in several quarters, with improvement in all three segments. Our adjusted EBITDA for the fourth quarter was $11 million or 5% of revenue, down $11 million from the third quarter.

This was in line with our expectations despite the lower revenue, as we continue to reduce our costs throughout the organization. I would also note that our adjusted EBITDA does not add back $4 million of noncash equity-based compensation. Net loss for the quarter was $12 million or $0.11 per diluted share. Excluding $3 million or $0.02 per share of special items, adjusted net loss was $0.09 per diluted share. Special items for the quarter on a pre-tax basis included: a gain on disposition of assets of $2 million; other charges, primarily for discontinued products of $4 million; and an $8 million foreign exchange loss. We provided a reconciliation table of these special items in our earnings release for your reference. I will now summarize our segment results on a sequential basis. In our Drilling & Downhole segment, orders were $74 million, an 8% decrease from the third quarter, resulting from significantly constrained customer spending, particularly for drilling and well construction consumable products in the U.S. market.

Segment revenue was $78 million, a $10 million or 11% sequential decrease due to deferrals of the equipment receipts by our customers for the first quarter and a lower demand for consumable products. Adjusted EBITDA for the segment was $9 million in the fourth quarter, a sequential decrease of $3 million. Approximately half of the decrease was related to the third quarter divestiture of our equity interest in Ashtead. In our Completions segment, orders decreased 10% to $58 million. Segment revenue was also $58 million, a sequential decrease of $12 million or 17% due to the severe slowdown in the U.S. onshore completions market. In addition, our pressure pumping customers continued to cannibalize our idle fleet and destock their consumables. Several also retired assets, which will be healthy for utilization levels and ultimately for equipment buying patterns. Adjusted EBITDA for the segment was $5 million, a $6 million sequential decrease, resulting from the loss of operating leverage due to lower volumes and lower cost recovery compared to the third quarter.

Production segment orders were $70 million, a sequential increase of 26%, primarily due to two large international orders for desalinization equipment and significant orders for well site production equipment for deliveries throughout 2020. These strong orders were partially offset by a decrease in orders for valves, as distribution customers continue to destock their inventories to reduce working capital at year-end. Segment revenue was $65 million, a 20% decrease, primarily due to lower sales of valves and, to a lesser extent, lower deliveries of surface production equipment as exploration and production budgets were exhausted. Adjusted EBITDA for the segment was $3 million, down $3 million sequentially due to the loss of operating leverage, despite cost reductions, and unfavorable sales mix. I will now discuss some additional details about our financial results and financial position at the Forum level. Our free cash flow after net capital expenditures in the fourth quarter was very strong at $26 million, aided by strong collections of receivables.

The $90 million of free cash flow that we generated in 2019 represents a conversion of EBITDA to cash in excess of 120%. We expect to continue to deliver a high conversion of EBITDA to cash in 2020. As in 2019, cash flow will be lower in the first quarter due to the timing of annual payments on higher material receipts. Our program to reduce excess inventory yielded meaningful results in both the fourth quarter and throughout 2019. We decreased our inventory position by $29 million in the fourth quarter and $64 million for the year. We expect the monetization of excess inventory to continue in 2020 and beyond. Also in the fourth quarter, we closed on a small noncore asset divestiture, which generated $4 million of cash proceeds. As a result, and in combination with our free cash flow, we reduced net debt by $29 million in the fourth quarter. We ended the year with $58 million of cash from the balance sheet and undrawn revolver and liquidity of $287 million.

Our primary use of free cash flow in 2020 will be to continue to reduce net debt. We're also working to address the maturity of our $400 million of bonds due in the fourth quarter of 2021. Potential solutions could include arrangements with existing bondholders and/or raising new money. Due to the sensitive nature of these discussions, we cannot say more on this topic at this time. Our net capital expenditures in the fourth quarter were $3 million, bringing our total capital expenditures for the year to $15 million. We're a capital-light business and we expect our total capital expenditures for 2020 to be around the same maintenance level as in 2019. Our reported diluted share count for the quarter was 110 million shares. Interest and depreciation and amortization were $7 million and $15 million, respectively, in the fourth quarter.

We expect these expenses to remain at similar levels in the first quarter. Adjusted corporate expenses were $6 million in the fourth quarter, and we expect them to be approximately $7 million in the first quarter due to higher payroll tax and full accruals for incentive compensation and medical insurance. Both our corporate expenses and total SG&A were down more than the 10% revenue decline in 2019. We will continue to have some tax expense despite an overall net loss, as we're not recognizing tax benefits in loss-making jurisdictions, but continue to recognize tax expense for some international jurisdictions with income. Once we turn profitable in the loss-making jurisdictions, we will have a relatively low tax rate, as we begin to use our net operating losses. For more information about our financial results, please review the earnings release on our website.

Now let me turn the call over to Lyle to discuss some key operating initiatives.

D. Lyle Williams Jr. -- Senior Vice President-Operations

Thank you, Pablo. Hello, everyone. In the fourth quarter, we saw another significant reduction in inventory of $29 million, following the $26 million reduction in the third quarter. For the year, we decreased our inventory by $64 million or 13%, which is a very good movement in the right direction. As Cris mentioned, inventory monetization remains an opportunity and focus area for generating incremental cash flow. We will improve our inventory turns by following the strategies that helped us reduce inventory in 2019. These include improve improving inventory planning, partnering with our suppliers on consigned inventory and streamlining our operations using lean techniques. We are also liquidating slower-moving inventories and discontinuing some margin-dilutive, subproduct areas. In addition to monetizing inventory, these actions will improve customer responsiveness by reducing our manufacturing lead times. For example, our Drilling & Downhole team has improved plant operations by leveraging lean techniques to virtually connect distribution locations back to our vendors and by implementing metrics to quickly adjust their performance.

On the cost management front, we also made progress in the fourth quarter. Despite a 16% sequential decline in revenue, our gross margins remained fairly constant. Because of our variable cost structure, operations management was able to flex cost downward quickly to match reductions in activity, while retaining ample capacity to serve future customer demands. We will continue our focus on managing cost, controlling what we can, in this volatile market. We're not only focused on managing cost but also, on growing our revenues through a number of avenues. Revenues from outside the U.S. continued to grow in importance, with roughly 1/3 of total revenue in the fourth quarter coming from outside the U.S. We expect non-U.S. revenues to continue growth into 2020, as our large service company customers pull through our well construction and intervention products, including casing hardware, coil tubing and wireline and related pressure control equipment. In the fourth quarter, we received a large order for EDGE, electrostatic desalting equipment, from the Middle East, and we have recently trained local Forum employees for recertification of our drilling and intervention capital equipment in that region. We also expect market share gains from some of our new, differentiated products.

Cris has already discussed our growing artificial lift offerings. In addition, our new pressure pumping products are garnering attention. Earlier this month at the SPE, Hydraulic Fracturing Technology Conference, we launched our 3,300-horsepower frac power end and our innovative high-pressure hose. Both of these products work with our full offering of pressure pumping hardware to address some of our customers' biggest challenges, while simplifying setup and increasing safety at the job site. A very topical subject is the coronavirus and its potential impact. Let me address that for Forum. We currently source components and finished products for a number of our product lines directly from China. China is also an increasingly important sales market for our products, and we have recently expanded sales of our well intervention products into the country. Forum, many of our suppliers and even financial institutions closed operations in response to regulations imposed by the Chinese government.

Furthermore, these government-mandated shutdowns have also impacted seaports and airports, which may cause transportation delay. The situation on the ground is changing daily, so we will continue to monitor these events as they unfold. I am thankful to be able to report that our China-based employees are all healthy and taking proper precautions to protect themselves and their families. In the past year, tariffs and now the coronavirus have been headwinds to our supply chain efforts in China. We are pleased with how our Chinese supply chain partners have worked with us to overcome these challenges.

Let me turn the call back over to Cris for closing remarks.

C. Christopher Gaut -- Chief Executive Officer

Thanks, Lyle. We are proud of our team's hard work in achieving fourth quarter results. Overall, business remains tough and we appreciate all the efforts. We continue to believe that under-investment, deferred maintenance and cannibalization of equipment by our customers in the U.S. onshore market is not sustainable. Having said that, Forum's balanced portfolio in international and offshore markets, as well as our exposure to non-upstream markets, is a positive for Forum. And we expect the percentage of our revenue coming from those markets to grow going forward. We will continue to focus on the things we can control, which include working capital and managing our costs in order to drive free cash flow. We will also continue to focus on our winning products, which we can grow even in challenging markets.

Thank you for your interest, and at this point, we will open the line for questions. Annie, let's take the first question.

Questions and Answers:

Operator

[Operator Instructions] We have a question from the line of Sean Meakim from JPMorgan. Your line is open.

Sean Meakim -- JPMorgan -- Analyst

Hi, good morning.

C. Christopher Gaut -- Chief Executive Officer

Hi, Sean.

Sean Meakim -- JPMorgan -- Analyst

So could we maybe just start with your expectations for free cash in 2020 and maybe try to characterize the range of outcomes? I recognize some of the uncertainty in China. So let's just say that the $60 million to $70 million EBITDA range holds. Do you expect working capital, especially inventory, to be a source of cash again? How would you bracket the outcomes on free cash, maybe in dollar terms or conversion rates or relative to what you generated in 2019? Just looking to get your range of outcomes on free cash.

C. Christopher Gaut -- Chief Executive Officer

Yes. So the biggest driver of our ability to reduce our inventory is the level of cost of goods sold, what we can sell. So if we see a pickup in demand, we have the goods on the shelf, and we can turn them to cash. So to the extent our revenue or cost of goods sold is lower, that is more difficult. To the extent, things pick up and we continue to build orders from here, that will be a positive. Relative to our conversion of EBITDA to cash, we expect that to continue to be at a very high rate, and our goal is 100% conversion of EBITDA to cash.

Sean Meakim -- JPMorgan -- Analyst

Okay, got it. That's helpful, Thank you. And then looking at the success you're having with the artificial lift products, could we talk about how much of that is North American-driven versus international opportunities, just given the applications can be quite different? And then just on the other tangential products that you could develop to solve similar problems for E&Ps related to ESP? And are there other ways in which we can drive related type of revenue growth?

C. Christopher Gaut -- Chief Executive Officer

Yes. So I mean, to be clear, particularly for those who aren't as familiar with Forum's product line, we're selling accessories around artificial lift and electric submersible pump and rod lifts, etc. So we sell downhole products that help prevent sand from clogging up ESPs, our gas guard product that breaks up gas slugs, which are very difficult on all types of artificial lift pumps. To your question, Sean, to date, we have seen tremendous demand and acceptance of these products with more and more customers for the U.S. land market. We're at the early stages of expanding those products to international markets. We are seeing good interest and beginning to see good orders internationally, particularly in the Middle East, where ESPs are used quite a bit and in Latin America. And so again, we see that as a source of the international growth that we were talking about.

Another area of the accessories we have for artificial lift products are the variety of the protectors that we offer, that go on the production liner to protect the cables, power cables and injection lines. And that is another high-margin, high-demand product offering. And as we're seeing more offshore products I'm sorry, offshore activity and more high-value wells drilled, for example, in the Gulf of Mexico, we're seeing uptake there, too. So yes, to date, it's been primarily a U.S. market but as offshore and international grows, it's not just our other drilling and legacy downhole products where we're seeing an increase in demand, but in these artificial lift products as well.

D. Lyle Williams Jr. -- Senior Vice President-Operations

Sean, we're also participating a little more on the gas lift side as well through the coiled line pipe product that we developed as part of our coiled tubing product offering and diversifying into that part of the market. So these are kind of gas injection lines going back to the well from the gathering stations.

C. Christopher Gaut -- Chief Executive Officer

And the depression stations, yes.

Sean Meakim -- JPMorgan -- Analyst

Got it. Great, thank you very much.

C. Christopher Gaut -- Chief Executive Officer

Thanks.

Operator

We have another question from the line of George O'Leary from TPH Corporation. Your line is open.

George O'Leary -- TPH Corporation -- Analyst

Morning, guys.

C. Christopher Gaut -- Chief Executive Officer

Morning.

George O'Leary -- TPH Corporation -- Analyst

Congrats on the free cash flow, and I think the goal of 100% conversion of EBITDA was nice to hear as well. As you think about 2020 and the incremental leverage you have to reduce net debt, is there anything left to do on the divestiture front? And just, how does that market look today? Or bid asks really wide? Or are there incremental opportunities for you to go the divestiture out to reduce net debt?

Pablo G. Mercado -- Senior Vice President and Chief Financial Officer

George, it's Pablo. So yes, we did move the needle a bit through divestitures in 2019 of $40 million-plus of sale proceeds of really some products that didn't generate a lot in the way of EBITDA or cash flow for us. So while we were successful doing that and continuing to look at the portfolio for opportunities to turn noncash flow generating assets into cash. The M&A market is difficult. There are not a lot of buyers out there. So I wouldn't put yes, I wouldn't say we have a goal out there of doing that but continue to evaluate opportunities.

George O'Leary -- TPH Corporation -- Analyst

Great. That's helpful. And then you've mentioned some products or sub product that you guys will no longer be looking to sell moving forward. I wonder if you guys could provide some examples of those and what business unit those may be associated with?

D. Lyle Williams Jr. -- Senior Vice President-Operations

George, this is Lyle. So one of the things that we did in the fourth quarter, particularly in our valves business, was evaluate some minor product offerings that we had that, as Pablo mentioned, weren't cash contributing. And we ceased those just ceased operations of selling those. We're able to divert the resources that we had dedicated those to some of our higher-margin and our better performing products in the valves business.

Pablo G. Mercado -- Senior Vice President and Chief Financial Officer

So we out some of the things that we were offering there and some of the other areas as well. But as we look to move more toward the winning products and things that got good customer demand and a bit more differentiated, that's where we're putting more of the resources.

George O'Leary -- TPH Corporation -- Analyst

Okay, great. That's helpful. And then just one more from me. Just on the trajectory of free cash flow in the 2020 time frame. I think Pablo, you mentioned that cash flow would be lower in the first quarter, which is one, seasonally normal; and then two, just starting off at a very low level of activity in North America in particular. So that makes some sense. Is it any way you could frame the magnitude of kind of free cash flow compression sequentially quarter-on-quarter? You still think you could convert 100% of that EBITDA to free cash flow in the first? or should we look for free cash flow conversion to be better in the second and third quarters of the year?

Pablo G. Mercado -- Senior Vice President and Chief Financial Officer

Yes, George, that's a reasonable expectation, what you described as kind of that one times conversion, kind of throughout the year. Obviously, there'll be some variability but that's reasonable for the first quarter. The reason, as you mentioned, a little bit seasonal. If you look at the first quarter last year, it was lower than the ramp-up we had in the back half of the year, for the reasons I mentioned on the prepared remarks. We also have pretty good collections. We had some payments that came a bit early in the fourth quarter. So therefore, they're not there in the first quarter.

George O'Leary -- TPH Corporation -- Analyst

Right, Great. Thanks, guys. I'll turn it back over.

C. Christopher Gaut -- Chief Executive Officer

Thanks, George.

Operator

[Operator Instructions] We do have another question from the line of Chase Mulvehill from the Bank of America. Your line is open.

Chase Mulvehill -- Bank of America -- Analyst

Hi, Good morning.

C. Christopher Gaut -- Chief Executive Officer

Hi, Chase.

Chase Mulvehill -- Bank of America -- Analyst

Hi, I guess I want to come back to the guidance, the annual guidance for $60 million to $70 million of EBITDA for this year. Could you maybe just, kind of, help us understand just, kind of, the framework behind that? And especially kind of when we think about U.S. activity, maybe it's E&P capex that you want to talk to or something like that.

D. Lyle Williams Jr. -- Senior Vice President-Operations

Yes. I think the bigger the macro, obviously, we can talk about oil price, supply demand. But the drivers for us that are key, the direction in the rig count, the rig count is going up and we're putting more rigs to work. They need to be reoutfitted and that's a positive. On the frac side, we feel that at this point, there's been a lot of destocking of consumable products and although there may be more frac units that go into attrition or are retired, our view is largely, those are not in operating condition at any rate. And in order if one were to try to put those back, there would need to be money spent on those. And we're at a point now with the destocking of consumable products, that it's more hand to mouth. We've seen it leveling off, I think, in demand there. But as there's a need to continue to maintain that equipment, keep it working.

And if there's any increase in units going back to work, those would be positives for demand, for our products. So those would be some of the main some macro or drivers for our business. The increasing use of artificial lift, we've already addressed. International, 30% of our revenue is international and we expect that to be a growing portion over time. The offshore and subsea market is another positive. We're seeing more discussions and bids going on there that we're working hard to turn into orders. And also, while mentioned, the process industry projects that we won in the fourth quarter, we're seeing an increase in a number of those that projects that are being talked about. Very good margin, lumpier, bigger projects, and we're hoping of landing more of those as well.

Chase Mulvehill -- Bank of America -- Analyst

Okay. All right. And on the Completions side, if I looked at margins and decrementals there in the fourth quarter, realizing that revenues were down a decent chunk. You had some pretty hefty decrementals. As we kind of move forward, I don't know if you want to kind of talk a little bit about incrementals, as you start revenues improve or maybe kind of, over the next few quarters, where you think absolute level of margins can go for this segment?

C. Christopher Gaut -- Chief Executive Officer

Yes. I mean, that's it's a good margin segment for us. We were hurt in the transition from Q3 to Q4 by some cost recovery issues but we don't see that being a factor from fourth quarter to first quarter. So the gross margin contribution on an incremental basis is high in our Completions business. So they have increase in sales there would clearly be accretive to our overall results. Some of our intervention products that are doing well since as our e-line, our wireline cable, we've got some very good technology there. Some new products coming out, great margins, of course a coiled tubing coiled tubing pipe that we sell, very good product line, very good margins. And as completions are done in the particularly in the first half of the year as E&P companies want to kind of get ahead on their production goals for the year, that should be good for those product lines.

Chase Mulvehill -- Bank of America -- Analyst

Okay, understood. If I squeeze one more in. If we look out for 2020, and it kind of looks like maybe revenues have kind of stabilized and you might kind of work them higher from here. But on the cost side, could you talk about what you're doing to kind of focus on cost and to take more cost out of the business.

C. Christopher Gaut -- Chief Executive Officer

We've worked hard on SG&A in recent periods. And I think we've made great progress there and really thinned out the organization. Another step that we're doing is in improving our direct costs and our manufacturing costs. And maybe Lyle, you can talk about some of the things we're doing in that regard.

D. Lyle Williams Jr. -- Senior Vice President-Operations

Sure. Sure, we talked a little bit in prepared remarks about the efficiency of our focus on lean operations and what those do as far as not just reducing cost but also improving our responsiveness to our customers. We've got a good, solid organization working on supply chain. So working on material cost. Materials are a large component of our cost of goods sold, so continuing that focus of developing our supply chain and increasing those. I think as we think about footprint and what we have from an operational perspective, Cris mentioned SG&A, we've also done a good job of optimizing that footprint in getting production into the right operating places, right operating locations and manufacturing locations to be as efficient as we can. So some really good progress that's been made there. More ground to cover but the team and the team has done a great job of implementing those while being responsive to the change in market demand.

C. Christopher Gaut -- Chief Executive Officer

The tariffs have also been a burden for us, Chase, and that seems to be not getting worse at this point. They feel a little bit better but we're also making progress on our remediation efforts in that regard. But those are a burden. But we're doing a better job of addressing those, which goes right to our costs.

Chase Mulvehill -- Bank of America -- Analyst

All right, understood. All right, Thanks, Chris. Thanks, Lyle. I'll turn it back over.

C. Christopher Gaut -- Chief Executive Officer

Thanks very much. Well, we appreciate your attention and interest in Forum, and we'll talk to everybody next quarter. Thanks very much. Goodbye.

Operator

[Operator Closing Remarks]

Duration: 41 minutes

Call participants:

Bill Austin -- Vice President of Corporate Development and Investor Relations

C. Christopher Gaut -- Chief Executive Officer

Pablo G. Mercado -- Senior Vice President and Chief Financial Officer

D. Lyle Williams Jr. -- Senior Vice President-Operations

Sean Meakim -- JPMorgan -- Analyst

George O'Leary -- TPH Corporation -- Analyst

Chase Mulvehill -- Bank of America -- Analyst

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