Good afternoon, everyone. I'm Steve Ferazani, analyst at Sidoti. Welcome back to the Sidoti's May Virtual Investor Conference. Still seeing people filtering into our virtual room, so I'll let that fill in. But before we get started, I do wanna remind everyone, I know you've heard it before, we will have some time remaining after the presentation. So if you have questions, you press that Q and A button at the bottom of your screen. You type in the question, and we're gonna get to as many as we can. Hopefully, we're gonna get to all of them in the 30 minutes allotted. So I don't wanna take up too much time because I know there's a lot to cover. And what I think is a pretty informative presentation. We're joined by Forum Energy Technologies, the ticker is FET.
We have CEO, Neal Lux, and CFO, Lyle Williams, with us. With that, gentlemen, let me turn it over to you.
Hey, Steve. Thanks, and hello, and good morning, everyone. So, again, my name is Neal Lux, I'm President and CEO of Forum Energy Technologies. And, over the next 20 minutes or so, plus questions, myself and Lyle Williams, our CFO, are gonna present the FET story, and I think we have a great story to tell. Before jumping in, just a quick look at our forward-looking non-GAAP caution slide. Okay? All right, let's get started with the overview. You know, so, you know, at FET, you know, we don't drill the holes, but we do sell critical capital equipment to industry leaders that do.
We don't stimulate wells either, but we manufacture consumable products that enable the world's largest service companies to frack and pressure pump. And we don't produce hydrocarbons, but we do engineer and deliver, you know, processing and pressure control equipment for our blue-chip customer base to produce oil and gas. So, you know, we make it happen by manufacturing value-added products and solutions. So we're a global manufacturer. Almost all of our revenues derive from selling new products and solutions, along with the aftermarket parts and service. You know, we have a wide range of differentiated products in our portfolio. We have a deep base of industry knowledge.
In many of our brands, we've been at this for decades or more, and this allows us to continue to develop new solutions and separate ourselves from our competition. So, we make it happen in the United States, and as we said, we're a global manufacturer, so we make it happen around the world. Thinking about you know why FET? You know, we are. I believe we are a great company, and but I do think we're a better investment. You know, beginning with energy needs. You know, the world needs energy. It is the fundamental building block of economic growth, and we believe that this demand will propel you know strong investment in energy production for many years. It'll be a great tailwind.
This is gonna be a tailwind for us to grow our revenue profitably by executing our strategy of beat the market, and I'll talk a little bit about that in a few minutes. And then we combine that with our operating leverage, which will drive our margin expansion. So, you know, over long periods of time, we would expect that for every $100 increase in revenue, $30 million-$40 million of that will drop to the bottom line, will drop to EBITDA. And we feel like those are really strong incremental margins and show the value of our scale. And then finally, you know, we have a capital-light business model, so much of that EBITDA will, especially the incremental EBITDA, will convert into free cash flow. So putting it all together, you know, we're gonna.
We're gonna maintain a healthy balance sheet. And I think with our low capital intensity, we're gonna remain disciplined going forward. So again, putting it together, world needs energy. We're gonna grow our revenue, we're gonna expand our margins, and we're gonna generate significant free cash flow, and we're gonna have a lot of optionality on what we wanna do going forward. So let's talk a little bit about our strategy to beat the market. You know, again, we're strong believers in energy. We think that's a long-term tailwind. It's a great industry to be a part of, and we see demand for our products growing, you know, over many years. You know, but for us, if we wanna deliver exceptional value, we need to beat the market.
We need to grow faster and more profitably than our industry. And so our strategy is really based on four pillars. The first is to grow profitable market share. I'll talk a little bit about how we do that next. We're gonna develop differentiated products and technologies. We're gonna utilize our global footprint and manufacturing and distribution footprint. And then we're gonna expand our participation in energy transition. You know, again, we believe strongly that hydrocarbons are gonna be a big part of the energy mix going forward. But non-hydrocarbon, non-oil and gas energy demand, energy supply is growing. And as a manufacturing company, we're gonna participate in that. So let's step ahead, and we'll cover each pillar in a little bit more detail.
So first, as we think about growing our market share profitably, the first thing we've done is we've aligned our product portfolio with activity. So it's clear, you can see on the pie chart on the right, from our Q1 sales, that nearly 75% of our sales are activity-based. So as activity grows, we grow with it, and our activity-based consumable items are usually priced in the thousands, if not hundreds of thousands of dollars in a unit price, so in unit prices. So these items are much bigger. They're not just nuts and bolts, they're high-value consumables. And generally, we have higher margins with our consumable business, so that's a win-win. Next part of our strategy is we're gonna focus on niche markets.
So these are markets where we have meaningful share, also where we have fewer competitors, and where we can differentiate with either intellectual property or manufacturing know-how, so that expanding our share here is incredibly, incredibly profitable. And then finally, we're gonna leverage our brands and experts, and which we have in these niches, where we have decades or more of experience, where our people are trusted, and where our people understand our customers' businesses. That's gonna give us additional opportunities to grow our market. A great example of this is in our Artificial Lift segment. For many years, we've provided a specialized offshore cable protection system. It was an incredibly important one. It's one that is relied on by operators to in the harshest environments to protect their cables, and something they have to do.
Our brand is a name people trust, and especially when performance is required. This same system worked onshore. It would work onshore well, however, we just didn't really get a lot of traction there. Then, a few years ago, we purchased another artificial lift tool company, and this one was focused on onshore and sand protection, and their products extend the life of downhole pumps. And so the purchase of this downhole artificial lift tool company did. It gave us the opportunity to utilize our experts onshore and our offshore experts to cross-sell our products. So today, we've substantially increased our market share for both, both products in a very, very profitable way. That's one good example, and we hope to do that again with our Variperm acquisition. Another way we will beat the market is through new product development.
So operators are demanding greater efficiencies. They want lower well cost. They want increased safety, and so that puts pressure on our customers, who are service companies, to remain relevant. They have to upgrade their equipment. And so by innovating together and working together, we, we can provide the, the tools and solutions that allow them to be safer and more efficient, and this gives us an opportunity to increase our total addressable market and gives us room to grow profitably. Your left side, got a few good pictures, good examples of, of products we provide. You know, the first one is our, our FR120 iron roughneck. This tool is critical for efficiently drilling long lateral wells, which these are the, these are the types of wells that are used in today's unconventional U.S. and Canadian environment.
This tool quickly joins drill pipe without damaging it, and it's incredibly reliable, especially compared to older 80 and 100 series models. To its right is a Pump Saver Plus. This is a relatively new product, but it prevents older wells from failure due to sand and gas lockup, so it saves operators a lot of money per year by avoiding costly remediation work, and it keeps their wells producing. The bottom left is our Enviro-Lite greaseless cable, and this cable can run in any other well much faster than traditional cables, so this means it eliminates wasted time and allows our customers to pump more. Finally, our newest product, on the bottom right of that, of that square, is FASTConnect. This is another tool that is critical for long, lateral multi-well pads.
This tool allows pressure pumpers to quickly move from well one to well two and eliminate downtime. It also eliminates grease from the well site. A typical tool that we're replacing, the incumbent, uses between 70,000-80,000 lbs of grease a year, where our tool uses zero. So it's a much more environmentally friendly product that increases efficiency. So at FET, we're gonna beat the market by providing products and that make efficiencies happen, and we're doing it around the world. So I think as we began, we talked about our extensive global reach. We have many sites, you know, manufacturing sites located around the world. Our largest sites are in the U.S., obviously, but in Canada as well, United Kingdom, Germany, and Saudi Arabia.
But we do ship our products around the world, so every shade of blue on this map is where our products go. We go where energy's produced. About 45% of our sales were outside the United States in Q1, and to meet growing demand, if investment's not in the U.S., if it's outside the U.S., to meet that growing demand, what's really unique about our company as a manufacturer is we do not need to expand our roof line or invest additional capital for growth. We can service the world from our existing manufacturing service hubs that are already in place. So this is a great feature of our business model: global reach with capital light scalability. And finally, the final leg of our beat-the-market strategy is energy transition.
You know, as a manufacturer of engineered products, we have many ways of participating in the energy transition. We have valves that are utilized for biogas facilities, that are utilized for hydrogen facilities. We have casing hardware that is sold into geothermal applications, again, harsh environments that we've designed for. We also produce units that capture methane emissions on well sites. We actively follow these markets. Demand is still relatively low to our existing businesses, but it is growing, and growing quickly. Another area where we've seen meaningful demand growth is offshore wind. So the products that we use there are specialized vehicles called remotely operated vehicles, or ROVs, and what's really unique about these is they have a dual use. They can be utilized for oil and gas support or for the development of offshore wind farms.
What works well for us is these applications share the same client, so the client will work both for oil and gas, and will work for offshore wind. So as offshore demand for hydrocarbon production has increased, so has offshore wind as well. And so what we're seeing is higher utilization of our customers and their vehicles and their vessels, and we're seeing increased demand for our ROVs. And we think this story is just really beginning, so the offshore wind cycle has a long look ahead of it, as it is critical for the electricity grid. Putting it all together, I think we have a unique strategy to beat the market, and we think this strategy's paying off today, and will pay off even more in the future.
I think this strategy, plus our acquisitions, the one we just completed, are driving EBITDA and free cash flow.
And I'll pick it up here, Neal. I'm happy to update you all on our financial and balance sheet outlook. Specifically for 2024, we've guided EBITDA of between $100 million and $120 million, and free cash flow of between $40 million and $60 million. The charts on the slide here highlight the significant improvements in these numbers over our past results. For EBITDA, the 2024 estimates midpoint of $110 million is over 5x our 2021 EBITDA. Over that period, our margins have improved by 920 basis points when comparing 2021 with our first quarter of 2024 EBITDA margins, which were about 13%.
This improvement, significant as it is, results from optimization of our product portfolio undertaken and mostly completed in 2021, our top-line growth strategy that Neal just highlighted, and the acquisition of Variperm Energy Services at the beginning of 2024. As a product manufacturer, very importantly, the FET model has considerable operating leverage, so growth in our top line comes at healthy contribution margins. We see that impact in our improving EBITDA margins, which we are confident we can achieve mid-teens EBITDA margins over time. Structurally, the FET operating model also benefits our free cash flow results. As Neal mentioned, we are a capital-light business model, meaning we can grow our revenue meaningfully with minimal capital expenditures. Our biggest investments to fund our growth come from net working capital.
During the past few years, our net working capital, inventory, and accounts receivable increased along with our top-line growth. For 2024, we don't expect to build or release any net working capital. Therefore, our free cash flow guidance of $40 million-$60 million results from EBITDA, less interest in taxes, capital expenditures, which we estimate to be $10 million this year, and some deal expenses that were associated with the Variperm acquisition. Let's turn over to our balance sheet. As of the end of the first quarter, we are a well-capitalized company with relatively low net leverage at 2.3 x annualized first quarter EBITDA. Our liquidity was $121 million, coming from our cash on hand and availability under our $250 million senior secured asset-backed revolving facility.
Our long-term debt includes borrowings on our ABL and long-term debt of a $60 million seller's note that's associated with the acquisition we made this year, and $134 million remaining of our 9% senior secured notes that we issued in 2020. Looking ahead, we have a very clear path to retire our long-term debt and put the company in position to return cash to shareholders. Let me walk you through our plan. Between our starting liquidity and expected 2024 free cash flow, we expect to retire the $134 million of senior secured notes by the end of this year. Likewise, we will utilize 2025 free cash flow to retire the seller's notes somewhere around the middle of 2025.
At that point, so in about five to six quarters, we would have no long-term debt, with ABL borrowings resulting in about a 1x net leverage and a very flexible and low-cost capital structure that could allow the return of cash to shareholders through dividends or share repurchases. In conclusion, and to put a point on that potential, a return of 50% of our guided 2024 free cash flow would amount to between $20-$30 million, or around a 10% yield on our current market capitalization. Let me turn the call back to Neal for closing comments.
Yeah. Yeah, thanks, Lyle. So why, again, why FET? You know, the world needs energy. Our blue-chip customers are gonna deliver it with FET's products and solutions that beat the market, drive revenue growth, expand our margins, generate free cash flow, and ultimately, as Lyle just laid out, we are gonna unlock a lot of unrealized shareholder value here. The pieces are in place for a great run, and I'm confident that the employees of FET will deliver. So thanks for your time this afternoon, and I'm gonna turn it back over to Steve for some Q&A.
Perfect. Thanks so much, Neal, Lyle. Extremely informative. We have about 10 minutes remaining, so plenty of time for some questions here. If you have questions, press that Q&A button at the bottom of your screen, type them in, and again, we'll get to as many as we can. You know, discuss a little bit the 2024 guidance. We know it's a little bit of a mixed market. U.S. land is challenged this year. We are seeing growth internationally and certainly offshore. Can you give us a sense of your mix of business and where you're getting the growth beyond the acquisition?
Yeah. So, you know, we expect a relatively flat market outlook. So, I think the best way to view our business, the best near-term indicator is global rigs.
Not just U.S. rig count, but global rig count. Our expectation heading into this year is that U.S. would be down a little bit, Canada would be flat, and then international would be up. So thinking about it regionally, as we go through the year, we expect, you know, more sales outside the U.S. to kind of make up for any weakness in the United States. And one thing we did, post our call or with our earnings release, we did reaffirm our full year guidance, where we expect EBITDA to be between $100 million and $120 million, and then, again, as Lyle mentioned, our free cash flow between $40 million and $60 million. So, after Q1, we still feel good about our outlook on the market, and we do feel good about our outlook going forward.
When we think about some of these new products you roll out, like FASTConnect, I guess, was one-
Mm-hmm.
T he more recent one, how do you drive customer adoption of a new product that probably saves time, saves money, but still, you have to get users to actually adopt it? How does that work?
Yeah, it always takes longer than I would like, Steve. I wish they operated on my timeline, but you do—you need to get trust, right? You need to operate in the field. I think that was where we spent a lot of time last year is we rolled out FASTConnect, and we ran it in the field. And what's happened is it worked fantastic. You know, it had no downtime, it worked at high operating pressures, it moved 170 MMlbs of sand through it, and it got between well one and well two very quickly, much faster than normal.
So you got to prove yourself in the field and with your customers, and so we've done that, and that's why we feel really excited about FASTConnect on a go-forward basis. And that's understanding your customers and understanding your market, and then having the field people, the salespeople, the engineers, who can then quickly design and then work with our manufacturing supply chain teams in order to fill that demand as quickly as possible.
When I think of, d o you want to typically target larger operators? Because if it works in one location, you then get the potential for significant adoption, right? If you save them one place-
Yeah.
T ypically, they're gonna-
Yeah, it's a great way to get scale, too, right? That if you can convince one operator that is drilling a lot of wells and has a lot of pads that are being fracked, you can then quickly, you know, roll it out. So that is part of our strategy, to pick and find, you know, sponsors with operators or with big service companies who can help us drive that across their organization.
Got several questions in already. Why don't I start with the first one? If you can break down your expectations for business, both near term and long term, oil and gas versus alternative energy, as you know, we sort of talk about the ongoing energy transition.
Yeah, maybe I'll start, and Lyle can add into it. You know, I think near term, we see you see some weakness in natural gas in the United States. So I think that'll—that's part of why we think, you know, U.S. will be down a little bit this year, is 'cause of the softness in natural gas.
What's exciting to me, though, is looking ahead, and maybe it's a 2025, 2026, to the back half of the decade, is we are going to - we're adding a lot of capacity with data centers, artificial intelligence, and as I go out and speak with industry leaders, what I'm hearing is we need to utilize reliable and cheap gas to make that power, to make that electricity. So I think if you go back to maybe a year ago, the AI kind of build-out and data center boom wasn't really on our radar.
And now, I think many of you, and I'm sure your callers and participants here, are seeing the kind of the AI stories, and whether it's The Wall Street Journal or Financial Times, that they're there. And so I think for the back half of the decade, between AI and LNG, excuse me, I think we have a nice tailwind for an area that's been relatively weak here for the last few years.
I'll just jump in, Steve, and share a bit there. Non-oil and gas revenues represent a relatively small piece of our revenue. As Neal mentioned, a big piece of our subsea tools are used for offshore wind, and we see those. We do see that growing. We're cautious about our investments in alternative energy. That's a new, and call it, cutting edge field, and so we want to partner with people who have proven and economic business models to make money there so that we can do that. And from an oil and gas perspective, globally, our long-term view is that demand, or supply of oil and gas is gonna continue to grow along with demand.
The EIA recently put out a new report that showed, by the end of 2050, their downside case is that, energy use produced from oil and gas is flat with today, and that was their downside scenario. Their upside is clearly high. So we're bulls on the long-term oil and gas, demand and what our customers will be able to do there.
Great. Another question coming in in terms of, you talk about focusing on niche markets, can you give us any sense on your market share in some of these niche markets? And, a question about what could go wrong in 2024 and 2025?
Okay.
I didn't ask it.
So generally in the niche markets that we operate in, we have higher market share, let's call it, you know, 30%-40%, because we'll have fewer competitors. You know, and those are the areas where we try to have a big focus. So, you know, a good example, Variperm, they, y ou know, that acquisition, they operate in niche markets, and they've done really well in having a great market share position. So, that, that's kind of the there. I think the downside, you know, is always in our business could be, you know, economic growth and commodity price decline, and not, you know, not remaining in span.
So for us, it goes back to if the market craters, and then that would be a problem. Now, I think if there's any sort of softness, and going back to Lyle's comments on looking long term, that I think we could look through those, and we'd want to, you know, be in position to do well. And then maybe a final note on that, if our revenue were to come down, what's typically happened is we'll generate a lot of free cash flow as we turn our working capital into cash. So I think, you know, it would be a good cash tailwind, and it's kind of a hedge for us.
Good. We'll combine a couple of the next questions in terms of: what's the biggest growth potential for you in terms of international markets, and also your views on the Middle East gas market?
Mm-hmm. Yeah, I think Middle East, Argentina, Latin, y ou know, Brazil, Latin America have a long runway to them. You know, we talk to our customers there, and we see them making the investments. So that's exciting. And I think on specifically the Middle East, I think there's a great opportunity there, for example, for Saudi Aramco to, you know, stop using oil to produce electricity, but then use that for, use their internal natural gas for that.
Yeah.
So I think there's a lot of opportunity there. And for us, what's exciting is that nat gas—that natural gas development in country is very similar to how we would develop it in the United States. It's unconventional, it's service intensive, and it's equipment intensive, so it's good for us, and we're supplying equipment there today.
And Steve-
So-
I'm excited about, about the Middle East. Several years ago, we opened a manufacturing facility, wholly owned by Forum, in the Kingdom, in Saudi Arabia. Primarily focused initially was downstream valves, looking at their build-out of petrochemical, in the Middle East. That's shifted now to a focus where we can leverage across our broad product portfolio with value-added products sold, manufactured, assembled in the Middle East. And, and so that's really helped us drive adoption of FET products, across the Middle East. And so as that market continues to be steady and invest and grow, I think that puts us in a really great spot.
Fantastic. I think we have time for one more. I just want this question. It's a bit of a follow-up to your commentary, Lyle, on the expectation for a five to six quarter debt pay down. What could, I mean, if you have some good M&A opportunities, does that shift? Could you shift the strategy there, and how you're thinking about that versus think about M&A versus returning cash to shareholders versus the debt pay down, the buckets, I guess?
That, that's a great, that's a great question, and it's something that we do, wrestle with internally. So our, our commitment when we closed the Variperm acquisition earlier this year was a return of our, our net leverage back to levels they were before the acquisition, which at that time was 1.3x trailing leverage. So, we feel like we can, we can still do that. There are a number of opportunities for, I'll call it, inorganic or acquisitive growth in the market. I think with our broad portfolio, we have many shots on goal. The question is, and, and our commitment is to be capital disciplined.
So we'll be cautious in what we do, if we make that move, but definitely a focus to return our leverage to where it was on a pre-acquisition basis, and our commitment to get to a situation where we can return cash to shareholders. That means the right construct of leverage on our balance sheet. I think you'll see us be cautious with that, but also opportunistic if the right kind of opportunity came down the road for another deal similar to Variperm. That was a home run for us, and another one like that would be exciting.
Excellent. We did, and I know we didn't get to every question, we got to a lot of them. Leave it up to you, Neal and Lyle, how you want to wrap this up.
Well, appreciate the time today. I thought it was a great, great session. Appreciate all the questions, and we look forward to talking with you again, Steve.
Great. Forum Energy Technologies, t hanks so much, Neal, Lyle. And hope everyone has a great remainder of the day. Thanks, everyone.
Thank you.