Thank you for joining this session of the Water Tower Research Virtual Insights Conference. I am pleased to welcome Forum Energy Technologies. We are joined today by CEO Neal Lux and CFO Lyle Williams I am Jeff Robertson, managing director for natural resources here at Water Tower. Before we begin, I would like to note that FET's safe harbor disclosures regarding forward-looking statements can be found under the investor relations tab of the company's homepage. Investors can submit questions through the conference portal, which we will seek to answer in the follow-up management series report, and investors can indicate interest in meeting with management can be submitted through the portal, and our team will work to coordinate meetings following the conference.
By way of introduction, FET is a global manufacturer of value-added products and technology solutions for the upstream oil and gas industry, operating through two segments, artificial lift and downhole drilling and completions. The company solutions are highly engineered to enable customers to develop their resources safely and efficiently to maximize their returns on investment. FET manufactures products in several countries and sells to the global market, with about half of revenue generated in the U.S. and half generated from international markets. FET's business model is capital light, requiring CapEx equating to about 1% of revenue, which results in a high free cash flow conversion. Management has been executing a beat the market strategy, which is geared toward maintaining market share in leadership markets and gaining share in growth markets, with the goal of quadrupling adjusted EBITDA and tripling free cash flow by 2030 from a 2025 base.
Neal, Lyle, with that bit of introduction out of the way, I want to thank you so much for taking the time to join us.
Jeff, great to be here. Looking forward to our fireside chat.
Neal, let's start with the top. Execution of the beat the market strategy, as I mentioned earlier, has contributed to FET's ability to increase revenue per rig by about 34% since 2022, despite a global rig count, which has been flat to down during that period. For someone who's new to the company and what you all do, can you describe the FET strategy to compete in the global oilfield services industry?
Yeah, for sure, Jeff. It really starts out with who we are. We are a manufacturer. We provide solutions that make energy production safer, more efficient, more economical. If you think about our types of sales, about 80% of our revenue is activity-based, so we're creating recurring demand for our products, especially as activity moves. As we look at our strategy, we call it beat the market, and we really want to beat the market when it goes up, and if the market goes down, we want it to decline less. Our strategy really is based on four pillars. The first being we want to compete in targeted markets with few competitors and where our customers value the products and solutions that we deliver. Essentially, we want to compete where we can win. Second, when we do compete, we want to utilize our competitive advantages.
We have very high-tech manufacturing. We have a lot of know-how, a lot of intellectual property, and we have brands that have been around for decades, and key employees that understand how our products are used in the field and how we can make them better. The third part of our beat the market strategy is our continuous new product development. We want to continue to make new and differentiated products that separate us from our competition. We have continuous innovation that protects our existing market positions, and then we also have innovation that expands the addressable markets that we can touch, which is always really exciting for me. The final pillar is we have a global manufacturing and distribution footprint that allows us to respond to customer demand wherever it is around the world.
If you think about the energy industry, it is a global industry. We can deliver our products wherever the energy industry needs them. Putting it together, the objective, again, of our beat the market strategy is to grow faster than our markets through share gains, innovation, and geographic expansion. As you've mentioned, we have been incredibly successful growing our revenue per rig by about 34% since we implemented the strategy.
Can you characterize how much of that growth in terms of revenue per rig is attributable to product mix and pricing, and how much is attributable to some of the innovative solutions that FET brings to the market?
The primary driver of our growth has been new product development and geographic expansion. Really, very little price add. I think this was really evident in the first half of this year, where we increased our revenue by about 11%, while global rig count was broadly flat. If you think about profitability, if you think about the second quarter that we just completed, we did know we had favorable product mix, so that helped us increase profitability, especially with our higher value product line of our downhole products. In that product line, we saw really good activity in Canada, as well as increased penetration of some of the new products that we developed. Overall, I think innovation, geographic expansion, that is how we capture market share and grow the top line, while mix and operating leverage is how we strengthen the margin impact.
You all have defined leadership markets as those where you hold about roughly a mid-30s percentage to market share with an approximate $1.5 billion addressable market, and growth markets as those where the share is below 10%, but the total addressable market is much larger at roughly $3 billion in market. What product lines, Neal, do you put in leadership markets, and how do you maintain and potentially even grow your market share in those types of markets?
Great question. Just to level set, our leadership markets are roughly two thirds of our revenue in 2025 last year. In those markets, in aggregate, we believe we hold about 36% share. So our products are really fully adopted, and they are broadly adopted geographically, so up and down the industry chain and geography. Couple examples there, coiled tubing, one of three global manufacturers of quench and temper coiled tubing, cased hole wireline, again, one of three manufacturers of high pressure wireline for frac applications, subsea ROVs, again, remote operated vehicles for offshore applications, and then sand and flow control solutions for thermal oil sands. Again, so we have some really good products. I think our position for the 2030 objective is we want to sustain our leadership. As those markets grow, we want to sustain our share and grow with them.
Again, we're going to have to continue to innovate. We're going to have to continue to deliver value for our customers. But we are in a great position to do that because we're leaders. We're leaders in that. As we grow through innovation, aftermarket penetration, and again, keep expanding where we are in proven geographies. As our markets get bigger, we're going to get bigger with it.
It probably holds true for the growth markets, which we're going to touch on in a minute, but operators, especially in the U.S. unconventional shale basins, are increasing the intensity of the wells they drill with longer laterals, which require bigger stimulations. Is that part of what you're talking about when you say as the leadership markets grow, because of that intensity, you all expect to maintain your share as the industry evolves?
Yeah, Jeff, you're hitting right on it. Service intensity, right? To produce the same barrel of oil today and into the future, compared to the past, operators are going to have to put a lot more effort into getting that barrel out, and that's what we consider service intensity. That intensity drives demand for our recurrable consumable products. We're going to have recurring sales on our consumables and more of them. You used the example of longer laterals. If a lateral is longer, we're going to have to deliver longer coiled tubing in order to get to the end of that lateral, or we're going to have to deliver longer cased hole wireline to get to the end of that lateral. As you look at that intensity growing, that's a great tailwind for us to increase.
We expect our markets over the next five years or so to grow at about a 9% rate, and that's going to because of that intensity. When that growth happens, we're going to continue to grow with it.
Turning to growth markets, how do you expect to gain share from where you stand? I think you have said in the past maybe 8% in what is a much larger market. How do you think about growing market share in those types of markets?
Yeah. We believe we have about 8% in our growth market. So those are again, a growth market. Products are about 1/3 of our 2025 revenue. These products, though, they have very similar characteristics to our growth and leadership, excuse me, our leadership products. Very similar characteristics. Again, they are differentiated. We have customers that value them, but we are generally earlier on the adoption cycle or maybe more limited in geography. So we believe we can acquire new customers and expand geographically to grow. A great example, in the U.S., we provide solutions that extend the life of our customers' downhole pumps. When these pumps fail, our customers lose oil production and money. So our value proposition is pretty simple. Use our pump protection products to produce more oil at a lower cost. We have been incredibly successful in the United States and have very strong market share.
Internationally, where the market is four times larger, our potential customers there choose not to protect their pumps. So our mission is to convince them to produce more oil at a lower cost by using our product. Very simple, but it is a tremendous opportunity for growth. Another example comes from our defense product family. Here, we are able to leverage decades of subsea engineering and vehicle expertise in applications that are adjacent to what we do. A good example is rescue submarines. We booked a large order last year and have a number of potential opportunities in our sales funnel. So I think given the geopolitical backdrop, I really like the potential of that. Then the last example, just want to really touch on where I think we have good opportunity to grow our growth markets is in power generation.
As data centers utilize gas reciprocating engines from manufacturers like Caterpillar to generate off-grid power, this creates a magnificent market opportunity for our Global Heat Transfer unit. The technology is stuff that we developed originally for demanding frac applications, but we have now evolved it for use in stationary data centers. So we received our first order last quarter, and we have a very strong commercial funnel. So summing it up, within our growth markets, we have a lot of shots on goal to generate revenue growth.
I think you talked earlier this year about your new or the coiled tubing line that's applicable to sour reservoirs or sour downhole conditions. Is that one of the products that you think has application both here in the U.S. as well as abroad?
Absolutely. In fact, international applications is really what drove that technology and where we found in, for example, in the Middle East, the reservoirs there generally have more corrosive environment, so they need to get the work done in an environment that could degrade the tubing. So we developed a special grade that's quench and tempered, yet is able to perform in a corrosive or sour environment. I think that's a great opportunity, again, for us to grow internationally. Again, product development driving revenue growth.
Speaking of product development, is that an example of how FET works with its customers to help and to identify the problems they have and develop the solutions that are needed so they can develop their reservoirs?
Yeah, I think we have a great advantage, right? If you go back to the very beginning of our conversation, about 80% of our revenue is consumables or recurring revenue. So we're able to get really quick feedback from our customers as to how our products perform. Also, the people that we have, our sales and engineering teams are really experts in their very specific applications that we're targeting. In fact, in many cases, we've hired our employees that used to work with our customers or for our customers, and now they've come to us. So we're able to understand the field challenges they're having and solve for them. Another good example comes from our Variperm product line. This is a product family that we purchased about three years ago, and they are doing incredibly well for us. Really excited about how well they've done.
But part of the secret of their success is they do work closely with their customers. Their customers will actually send them samples from their reservoir, core samples, and the Variperm engineering team has the equipment and the knowledge to design the sand and flow control solutions that we're going to provide that optimize their production. We're helping our customers, who are some of the largest and well-capitalized oil companies in the world, we're helping them design tools that get more oil out of their reservoir. I think that's a great example there, Jeff.
You've talked about some of the international growth opportunities, Neal. I think international revenue per rig is about $300,000-$350,000 per rig compared to the U.S., where it's about $700,000. Can you narrow it in? Are there certain specific international growth opportunities or countries where you see the abilities to start chipping away at that gap versus what FET does in the U.S.?
Yeah, absolutely. I think of that gap as really opportunity, right? Because if we close that gap, if we bring our international revenue per rig up to our U.S. level, we would increase our revenue 50%. That's a huge opportunity. I think to get there, our goal or our playbook really is we're going to export the technologies that we've proven in the U.S. unconventional basins to customers who are seeking similar efficiencies internationally. If you think about the U.S., North American oil companies, they are some of the most efficient in the world. They've got there by utilizing the tools and the products that FET provides. Now, international oil companies, they're very competitive people, too. They want to be more efficient. That's an opportunity for us to export our success into those regions.
For example, in the Middle East, we have significant number of opportunities there in our downhole product line, along with the broader adoption of our drilling and completion technology. I think the Middle East, even with all the challenges they've had, it will be a growth driver for us for sure. Another area is Argentina. Again, this is one where they have a large unconventional base, and they are adopting, excuse me, the most advanced technology that we've developed in the U.S. If you think about U.S. unconventional, that started in 2002, 2003, and we've spent the last 24 years or so developing and making our products better and better over time. Argentina is getting the very best of our products today. They're not starting at ground zero. They're starting with the latest and greatest.
So that includes our DuraLine manifolds, our greaseless wireline cable, and our quench and temper coiled tubing. Again, the latest and best products that we've developed. Another couple areas that I think could also grow, I think Canada is, again, it has a long growth targeted because they've added pipeline capacity. They have a tremendous resource. They have very good access to U.S. technology. I think North Africa, Asia are also emerging unconventional ones. And I think what's really important for us, again, we are a manufacturer. We can enter these markets very efficiently without having to build a full local service structure.
Going back to something we talked about earlier with respect to growth markets, Neal, it sounds like a big part of the opportunity in growth markets, as you alluded to, is taking technologies that are proven and expanding the geographic adoption and the customer base that wants to use those products to jumpstart what they're doing.
Yeah, absolutely. I think taking the success that we've had in the U.S. and then exporting, I think that's a great example. I think also if you think about our people, we are very close to our customers. We have teams around the world, so we're able to understand where those products work well, and we're able to do that. So think about our growth. You mentioned earlier closing that gap between U.S. revenue per rig and international. If we just get that gap closer, that's a huge revenue increase. So exporting technology, staying close to the customer, utilizing our geographic footprint, and again, we'll continue to innovate. So ton of opportunities for us there.
Venezuela's been in the headlines a lot lately with companies talking about going in. I think ExxonMobil has talked recently about it. Chevron's expanding. I saw the other day that Continental has a MOU for a big block of acreage. How does returning capital to the Venezuelan oil and gas industry, how does that potentially impact FET?
Yeah, I think it's a fantastic opportunity. The country itself has had years of underinvestment. I think there's definitely a need to restore and invest there. I think you've hit on a few good examples. For us, after getting regulatory approval earlier this year, we've already delivered a number of coiled tubing strings into the country. Those deliveries have helped generate interest in other products that we have, like Pressure Control and coiled line pipe. Our full product suite, whether it's drilling, completions, production infrastructure applications, they all apply there. I think we're early on this. I think we're more focused today on, let's say, consumables. As that investment ramps up, we have a really good opportunity, and I think it could be meaningfully accretive for long-term growth.
Lyle, when you all laid out the FET 2030 earlier this year, was Venezuela even on the bingo card at that point, or would that be incremental to the type of opportunity set that you were envisioning?
No, it's a great question, Jeff, and definitely Venezuela's been a favorable surprise for us this year. When we really think about the geographic expansion that Neal has referred to and talked about, we're looking at that on a very broad set. It's a big piece of our long-term growth strategy, and obviously, the incremental barrels coming from Venezuela will be a good market. I won't say it's incremental to our overall plan, but definitely something that's closer to home. With the customers you mentioned, ExxonMobil, Chevron, Continental, who are all great customers, an opportunity for us to accelerate and hit those targets sooner.
Neal, you touched on the data center opportunity set. I know products in your Global Heat Transfer unit have power generation applications that were developed really for frac equipment and probably some other uses. Can you describe FET's exposure in the power generation business for mobile and stationary, and how it translates into data center operation for someone who may not be familiar with it?
Yeah, great question. Our Global Heat Transfer unit has decades of experience. Their products cool engines and cool pumps, originally started in hydraulic fracturing fleets. What's great, though, is that core technology was able to be expanded and utilized into mobile power generation. That was our Powertron product, and it was very similar to our frac. Now, as we're shifting to the data centers are now looking at utilizing, let's call it gas reciprocating engines, that are going to be the power driver for their electricity generation. Every engine needs to be cooled. We had to develop a stationary cooling solution. We took, it's an evolution, right? We started frac, we went to mobile power, and now we've evolved into stationary cooling.
Just about every engine that is being sold into a data center application, as we looked at internal estimates, we think it could be 5,000-6,000 engines over the next five or six years. Each one of those engines is going to need to be cooled. It's a huge opportunity for us, and it's a great way for us to participate, I think, in the AI data center application, while also remaining within our core manufacturing expertise.
As we see headlines about data centers needing to generate and supply their own power as opposed to the grid, could investors take that as a sign that that part of the business plays into some of the FET product line?
That's where we're targeting. Yeah, absolutely. The data centers that choose to not hook up to the grid or not hook up to a nuclear power plant or something that's already in place, but to build new and then to put localized power generation on-site, in many applications, that's really well-suited for us. Yeah, I think as your investors look at a company like Caterpillar, who I think has had incredible growth, in stock for sure, but also financial, looking out at their potential for delivering engines over the next three, five, six years, many of those engines are going to go in the data center applications. They're also going to need to be cooled. That is an end-use market for our Global Heat Transfer unit.
You said earlier you booked an order for a stationary unit in the second quarter. Can you share any perspective on what that market could look like for FET over the next however many years?
Yeah, I would say we're still really early. This first booking was a small initial order, so we're still feeling our way. We were really encouraged that it appeared that we met all technical specifications as well as the commercial ones. I think that's great. If we do think about our TAM, as engines that are being delivered requiring cooling, if it's 5,000-6,000 over the next three to five years, that's hundreds of millions of dollars of market potential for us. We're still early. I hope we have the right solution, and if we don't, we'll continue to modify, but early sounds like we're in a good spot now, and I think if this comes to fruition, I think it's a great growth opportunity for us.
I want to come back to FET 2030. Maybe Lyle, how should investors think about the adjusted EBITDA and free cash flow conversion in the flat and growth market scenarios that you all have laid out in some of your materials?
Yeah, Jeff, I think a great question. Just to frame it up a little bit, what we've talked about is that with the share gains that you and Neal talked about, gaining 8 percentage points of share in our growth markets, we think that could take our revenue to nearly $1 billion by 2030. That's in a flat market, and our base case is that the markets will grow. The service intensity that Neal talked about will drive our revenue. Under that scenario, then our revenue jumps to $1.6 billion or doubles over the timeframe from 2025 to 2030. What's really exciting as a manufacturer, then we should drop through quite a bit of incremental EBITDA. We're guiding incremental EBITDA expectations of 25%-35%, in that range. That's really supported by our gross margin. It's about 30%, so that makes a lot of sense.
The products that we're delivering that are new, that Neal talked about, generally have higher contribution for us, plus operating leverage that allows us to increase even further. Strong incremental EBITDA growth. As a manufacturer, we don't take a lot of CapEx to grow our business. Cash flow expectations should be 60%-70% of every dollar of incremental EBITDA becomes cash. Massive cash flow generation. When you think about the big picture in the growth market scenario, we double our revenue, and we would quadruple our EBITDA and triple our free cash flow. That's a really exciting set of financial metrics.
Lyle, am I hearing it right that it's increasing the capacity utilization of your manufacturing footprint is what really drives the much higher margins through to the bottom line?
Yeah. You might think that our gross margin drops through straight away, and that would make a lot of sense. But we can obviously leverage the operational footprint and have more operating leverage, even in our gross margin, by producing more. Same manufacturing footprint. We can put on a lot more hours of product, and have better contribution margin through that.
You mentioned margins in some of the growth markets, Lyle. Are there certain product lines where you see big opportunities that have higher margins than others?
We talked about product mix earlier in the call. For example, in our downhole product line, the technology there and the market dynamics have good product mix. There are some differential. Typically, when we target new product development and these new technologies, we are looking for those that meet the market conditions that Neal talked about. Concentrated markets, very differentiated product technology that we offer, and that comes along with good contribution margin for us.
Neal, I would like to come back with the time we have remaining and have you talk about how you really position FET's value proposition for investors today, just in light of the execution that you have delivered, which has in turn driven strong share price performance over the past year.
Yeah. As I think about the share price increase, we have increased the guidance this year to $120 million would be the midpoint of our EBITDA. Last year we were at $86 million, so huge increase right there. As I think about the run-up that we have had, I think that feels fairly justified based on the performance we have had. I think even after that performance, though, we are really trading at roughly half peer valuation on enterprise value to EBITDA and price to sales measures when you look at other manufacturing comparables within the Russell 2000. From a free cash flow per share, investors receive about three times more free cash flow per share with FET than, again, those other manufacturing comparables. I think we have low net leverage, especially compared to those comparables. I think we have had great capital returns, right?
We have had share repurchases, debt reduction, and we have made disciplined acquisitions again. We are growing our free cash flow per share. I think the investment proposition that we have talked about over the time is still there. Again, we have had outperformance. We are an incredible value. We have had disciplined capital returns. But I think really more importantly, we spent a lot of time on it today, is we have a great growth plan for the next five years. We are going to earn our way into better performance.
Well, it sounds like the execution plus what you see in front of you has the company very well positioned to deliver, and we'll see, maybe exceed those goals when you look out to 2030.
Looking forward to it, Jeff.
Neal and Lyle, I want to thank you so much for taking the time to join our conference today. As a reminder for the participants, you can enter questions in the portal and also enter meeting requests for management, in the portal. We'll work toward coordinating responses to questions and also coordinating meetings. Our next presentation will begin shortly. Neal, Lyle, thank you so much.
Thank you, Jeff.