Good morning and welcome to Flowco Holdings Inc.'s conference call to discuss its acquisition of Lifting Solutions Energy Services Inc. Today's call is being recorded, and we have allocated one hour for prepared remarks and Q&A. Now I'd like to turn the conference call over to Andrew Leonpacher, Vice President of Finance, Corporate Development, and Investor Relations at Flowco. Please go ahead.
Good morning, everyone, and thank you for joining us to discuss Flowco's acquisition of Lifting Solutions. Before we begin, I'd like to remind you that today's call will include forward-looking statements. These statements are based on management's current expectations and assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied. These risks include risks described in the press release we issued this morning announcing the transaction, the investor presentation that is available on our website, and our SEC filings, which are also available on our website. We undertake no obligation to update these forward-looking statements except as required by law, and we caution you not to place undue reliance on them. We will also reference certain non-GAAP financial measures during today's call.
These measures should not be considered alternatives to or more meaningful indicators of financial performance as determined in accordance with GAAP. Our methods of determining these measures may differ from the methods used by other companies and may not be comparable. Additional information regarding these non-GAAP measures is included in the investor presentation that accompanies today's webcast. For those joining by phone or via the live webcast, the presentation is available on the webcast and for download from our website, and you can reference it throughout the discussion. Joining me on the call today are our President and Chief Executive Officer, Joe Bob Edwards, and our Chief Financial Officer, Jon Byers. Following our prepared remarks, we'll open the call for questions. With that, I'll turn the call over to our President and Chief Executive Officer, Joe Bob Edwards.
Thank you, Andrew, and thank you to everybody for joining us this morning. Earlier this morning, we announced our acquisition of Lifting Solutions Energy Services, a vertically integrated manufacturer of artificial lift technologies based in Edmonton, Alberta. This transaction is an important step forward in our strategy to build a differentiated production optimization platform. Today, we'll walk through the details of the transaction, the strategic rationale for making the acquisition, and why we believe Lifting Solutions is the right fit for Flowco. Let's start on slide three with an overview. We acquired Lifting Solutions for approximately $113 million, which we expect to fund with borrowings under our existing ABL. At approximately 5x Lifting Solutions' expected 2027 adjusted EBITDA, we expect the acquisition to be accretive to earnings and free cash flow.
Following the acquisition, we expect net leverage to remain conservative at approximately a turn of EBITDA, which is consistent with our disciplined approach to capital allocation. Importantly, Lifting Solutions' management team will remain with Flowco, providing continuity and retaining the expertise and entrepreneurial spirit that has helped drive the company's success. The transaction also includes a small potential future contingent payment tied to 2027 financial performance, further aligning management's incentives with Lifting Solutions' continued growth.
Today, we are going to walk through the merits of the transaction throughout this presentation, but strategically, the rationale is straightforward and compelling. Earlier this year, we acquired Valiant, expanding our portfolio and creating a meaningful cross-selling opportunity across our customer base. Lifting Solutions builds upon that strategy by adding differentiated rod lift and progressing cavity pump technologies and further expanding the range of artificial lift solutions we can provide our growing customer base.
Additionally, Lifting Solutions' presence in Canada and other international markets extends our reach into attractive new geographies outside the U.S. Let's turn to slide four and talk about the company and what attracted us to this opportunity. Lifting Solutions is a leading provider of two artificial lift technologies, continuous rod and progressing cavity pumps, or PCPs. I will explain more about these technologies in a minute, but one of the most compelling qualities of this opportunity is the fact that Lifting Solutions is vertically integrated, with research and development, engineering, manufacturing, and field services all performed in-house.
This investment in being a solutions provider has driven continued innovation across the portfolio, including proprietary coated rod technologies designed to improve performance in demanding environments, as well as differentiated PCP designs engineered for greater reliability and longer run life. The company's manufacturing footprint spans two critical geographies: Canada and the Middle East.
Additionally, Lifting Solutions maintains an expansive service network throughout Canada, the U.S., and Oman, allowing it to provide an integrated offering from product selection through installation and ongoing field service. That combination of technology, manufacturing, and service capabilities has helped Lifting Solutions build longstanding relationships with blue-chip operators and establish strong positions across its core markets. Approximately 77% of Lifting Solutions' 2025 revenue was generated outside the U.S., providing Flowco with added geographical diversity to our largely U.S. onshore business today. Financially, we expect Lifting Solutions to generate approximately $23 million of adjusted EBITDA in 2027. Importantly, this is a highly cash-generative business with free cash flow conversion rates similar to our own.
With that background, let's turn to slide five, where I want to spend a little more time on the core technologies that Lifting Solutions provides. The first is known in the industry as continuous rod, which is a continuous single rod string installed inside of production tubing that can be used in both reciprocating rod lift and PCP applications. Continuous rod, or the Lifting Solutions branded product known as Endless Rod, is truly a differentiated form of rod lift technology.
Its jointless design reduces common failure points in jointed rod applications, such as excessive friction, which often leads to tubing failures, downtime, and costly well interventions. The company's Endless Rod designs can be installed more quickly, operated more efficiently, and can provide the company's customers with an overall lower cost of ownership for their producing wells when compared to wells produced via the competitive technology of jointed sucker rod strings.
The second core technology that we are acquiring is PCP, which is particularly well-suited in heavy, viscous, and solids-laden production applications. PCP is the leading artificial lift technology in Canada, where Lifting Solutions has built a strong position through differentiated pump designs and proprietary elastomer technology. PCPs are also widely adopted in other heavy oil markets such as Venezuela, where Lifting Solutions has a presence through local distribution partners. Together, these technologies broaden our production optimization portfolio, giving us a wider range of solutions to address the specific production requirements and reservoir conditions of each well for our customers. In addition to technology, Lifting Solutions brings an established international footprint in markets where Flowco has significant room to grow. That starts with Western Canada, which we will detail on slide six.
The company gives us an immediate and scaled entry into Western Canada, which is North America's second most prolific oil-producing region behind only the Permian Basin, producing approximately 5 million barrels a day of crude oil. With crude oil egress being solved through infrastructure build-out, industry analysts predict Western Canada to grow crude oil production by as much as 1 million-2 million barrels a day over the next decade. From its Edmonton headquarters and 11 service bases, Lifting Solutions has the ability to provide broad coverage across every major Western Canadian oil play, serving more than 100 active customers last year alone. Importantly, this is a market where the use of ESPs, gas lift, and rod lift is already well established.
With a dedicated team, field service infrastructure, and customer relationships already in place, Lifting Solutions provides a natural platform to introduce Flowco's broader portfolio, including HPGL, ESP, gas lift, plunger lift, and VRU to Canadian clients that we do not currently service. The geographic opportunity with Lifting Solutions extends well beyond Canada. Let us turn to slide seven, and we will look at the company's already established international footprint. Today, Lifting Solutions provides its solutions across 16 countries, supported by an established distributor network and manufacturing presence, not only in Canada, but also in Oman. For Flowco, that footprint and customer base provide an established network of relationships and infrastructure that we can build on over time as we introduce our broader artificial lift portfolio internationally.
We have been quite open about our efforts to increase our international exposure as we believe the artificial lift opportunity outside the U.S. is comparable in size to the U.S. market. This transaction represents a meaningful step in that direction. Following the combination with Lifting Solutions, we expect that Flowco will generate approximately 10% of our revenue outside the U.S., a significant step forward for our company. Turning to slide eight, I will conclude with the key strategic benefits of the transaction. To state again, Lifting Solutions is a highly strategic addition for Flowco and builds upon the portfolio expansion that we began earlier this year with the acquisition of Valiant. The transaction adds differentiated continuous rod and PCP technologies, and it enhances our ability to participate more fully across a well's producing life, and it increases our addressable market at the same time.
This deal establishes a scaled presence in Western Canada and adds a meaningful international footprint that we can build upon over time. We see extensive opportunities to cross-sell across both customer bases and pair our technologies to provide customers with the right solution in each well every time. We are also gaining an experienced entrepreneurial management team that will remain with Flowco and who share our focus on technology, service, and growth. Importantly, we are accomplishing all of this at an attractive valuation, underscoring our disciplined approach to inorganic growth within production optimization. We believe Lifting Solutions makes Flowco a broader, more diversified production optimization company with enhanced growth opportunities ahead. We are pleased to welcome the Lifting Solutions team to the Flowco family and look forward to what we can accomplish together. With that, I will turn it to the operator for Q&A.
Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Phillip Jungwirth with BMO Capital Markets. Please proceed with your question.
Thanks. Good morning.
Hi, Phillip.
Just focusing on Lifting Solutions' core market in Canada, the map on slide six is pretty helpful. Could you help us understand just the company's revenue weighting across light, heavy oil developments, also conventional versus unconventional? Maybe also just touch on specifics as it relates to Venezuela and the opportunity there, leveraging any heavy oil capabilities.
Phillip, thanks for the question. I want to credit you, the Canadian analyst, for asking such a detailed question right out of the box. Candidly, I do not have that level of detail for you today. What I can tell you is that the Lifting Solutions team has done a great job penetrating really every specific geography within the Western Canadian market that is applicable for their product lines.
It is a good mix of both light and heavy, given the products that they offer. It is an extensive customer list led by some of the brand names that you would know. We are really excited about the footprint that they provide. We also think that some of the forms of, we know that some of the forms of lift that we provide that they do not can be distributed, installed, maintained through their extensive Western Canadian service network.
On the Venezuelan side, listen, like Canada, Venezuela is a good mix of light and heavy oil production. Through their historical presence in Venezuela, as well as newly recreated local distribution partners, the product name is well-known in the Venezuelan market. At Flowco, even before the Lifting Solutions acquisition, we are making baby steps down there ourselves. We are very excited about how this is going to help us penetrate the Venezuelan market now that it is open for business for U.S. customers. No, excited about this, Phillip, and thanks for the question.
Thanks. No, that is helpful. Was also just hoping you could talk about the Middle East presence here and maybe provide some history or background as to how that was established. I mean, looks like there is a large facility in Oman that manufactures Endless Rod. Is the benefit here you think more leveraging assets on the ground like that? Or is it having a more just an established workforce in place, customer relationships that can really accelerate the company's international ambitions?
Yeah, it's both. Listen, they did a great job under previous ownership establishing presence in the country, building the facility and the reputation, the customer base that you see in the presentation, and we're going to benefit from that previous legwork. Look, the Omani market has a handful of customers, several of whom are household names. They tend to bid out work on multi-year contracts. The company is well-positioned with an existing contract that they are continuing to service. The Omani market, for those of you following along, is extremely robust at the moment given everything that's going on in the neighborhood and the competitive pricing that Omani crude is trading for on the open market. We're excited about the footprint, about the local exposure, and about the customer relationships that are brought to the table for Flowco.
Think we can do more there. So yeah, stay tuned there. We hope to do more over the coming quarters in that region.
Great. No, nice acquisition and appreciate all the detail here.
Thank you, Phillip.
Thank you. Our next question comes from the line of Arun Jayaram with JPMorgan. Please proceed with your question.
Yeah, good morning, gentlemen. Joe Bob, I was wondering if you could talk a little bit about the moat that you see in the technologies that you are acquiring today relative to offerings that are in the market today in terms of continuous rods and PCP.
Yeah, certainly, Arun. Listen, this management team, this company, they have got extensive history in both of these products, dating back to previous lives and certainly under the current construct of what we are buying. The entire reason to start the business was a belief that these existing legacy products could be improved upon, could be incrementalized, and could actually, through technology and importantly, field service quality, they could develop a moat in the Canadian market first and extend from there. They are very proud of, and we are very fortunate to now be the owners of the number one market share in each of those products in Canada. That was done organically, one customer at a time over the last 10 years under this management's quite capable leadership. So we are thrilled to have that now part of Flowco.
It fits from a DNA standpoint, Arun, it fits quite nicely with the way that our business was built over the last 10- 15 years as well. Specifically in terms of competitive edge and moats built around the technology, the business does have a robust IP portfolio around key components within both PCP as well as within continuous rod. On the continuous rod front specifically, they have developed a very unique coating capability that improves the efficiency of continuous rod as it is operating, enables it to be installed in harsh environment wells that would suffer from failure rates that increase the cost of ownership for certain wells. That coatings technology, I think is important not just in Canada, but also in certain markets within the U.S. where the company has done more than just experiment.
They've actually penetrated nicely a couple of accounts in the Bakken, as well as starting to make great progress in the Permian, which we hope to accelerate. I'd say really, the coatings that are inherent to the manufacturer of the coated rod, excuse me, of the coiled rod is probably far and away the biggest moat that the company has been able to build. On the PCP side, listen, the machining capability to actually make a PCP is in and of itself quite specialized, quite unique. It requires a lot of tribal knowledge to understand how to not only design, but manufacture a functional, efficient PCP. Not to get too far into how it works, but there are multiple pieces of a PCP, the two most important one being the rotor and the stator.
But the elastomer technology that makes up the critical interface between the functional parts of the pump is really the most important incremental technology development that the company has made. Again, we're going to be the beneficiaries of that. Customers have voted with their wallet that they like this company's technology development, and we hope to leverage it going forward.
Great. Just to follow up, can you help us think about. We appreciate the outlook comments on 2027 with the EBITDA forecast. What type of growth rate, Joe Bob, has this business historically been able to achieve? Obviously, a lot of the market is in Canada. Then just along that side, I'm just getting a couple questions on the U.S. lower 48 opportunity for growth. Alongside that, are there any impacts from some of the tariffs between the U.S. and Canada, given the vertical integration in Canada?
Yeah, look, taking them in reverse order, Arun, as you would expect, we've done a deep dive on the company's tariff exposure. We're very comfortable that not only is the historical impact minimal, but even the prospective impact going forward is minimal. That's really a result of the way that they've diversified their supply chain, the way that they can source raw material from various suppliers, and the specifics around not only where they source raw material, but where they sell finished goods. So feel really good about the tariff exposure or specifically lack thereof. On the growth that this company has experienced, listen, they've gone from a dead cold startup 10 years ago to where they are today. Just done an amazing job at building the business and then taking share from those that were in the business before.
The business itself, as you know, the Canadian market has grown nicely, but this company has grown at a faster pace than the market. If you look historically, low double-digit growth has been the norm for this business. We hope to continue that trajectory. Obviously, as the business gets bigger, it is harder to compound at that level, but we think with the pull-through that we can provide into this market, I think Canada is going to be a nice growth market for Flowco.
Great. Sounds like a great deal. Really appreciate the time this morning.
Thanks, Arun.
Thank you. As a reminder, if you would like to join the question queue, please press star one on your telephone keypad. Our next question comes from the line of Keith Beckmann with Pickering Energy Partners. Please proceed with your question.
Hey. Thanks for taking my question this morning.
Hey, Keith.
I just wanted to ask a little bit around, we saw the Valiant acquisition. We now have this acquisition. Do you guys feel at this point that a lot of the product portfolio, as far as an offering standpoint, is relatively rounded out, or do you think there's anything else to do? Obviously early into this one, but just trying to see if this fills out a lot of the product portfolio that you guys have been looking to build or not, mostly in totality.
Yeah, Keith, this goes a long way toward getting us exposure to forms of lift that we were not in before. Yeah, excited about not just the product extension that it provides us, but also the geographic expansion opportunity. Look, there's more to do, certainly. There are more interesting pieces within the production phase of a well's life cycle that I think could be additive to what Flowco does well today. We call those product adjacencies. We look at them all the time. We've got a nice M&A pipeline that we evaluate, but you know as well as I do that you've got to have the stars aligned to make these things happen. We're going to continue to evaluate these things and be very selective just because that's sort of in our nature.
This acquisition goes a long way toward getting us exposure specifically to wells that either require a specialized type of lifting solution, no pun intended, like PCPs. Wells that are flowing on PCP cannot flow or cannot flow optimally on any other form of lift. We think the continuous rod business is just very unique. It is a very specialized, candidly high impact, high returning part of a rod lift installation. We think we have picked our spot within the rod lift business that provides us a lot of confidence getting into that market. We are really pleased with the deal.
That is really helpful. My second question, we have talked a decent amount about obviously expanding the geographic footprint. I noticed in there that you guys are talking about 11 countries and development or tender discussions. I was just wondering, maybe what are some of the ones that are potentially further along and could add good value? I guess on the flip side of that, what potentially from North America that you guys have right now, do you think product-wise could make the most sense moving into some of these markets internationally?
Yeah. When you look at the lift market, and you dissect it, Keith, by form of lift. Listen, the single largest form of lift, in the world is ESP. There is a lot of ESP opportunity that we can pursue outside the Permian Basin, where we have a wonderful start with our Valiant product line. Not only in other markets within the U.S. but now Canada. You have a growing ESP market for U.S. companies in Venezuela. You have a very large market in the Middle East. These geographies are now unlocked for Flowco.
We now have the ability to leverage existing, not only footprint and customer relationships, but people that have experience in these markets. Customers that have comfort and familiarity with a newly acquired business. That just helps with the extension of a product line like ESP into some of these other international markets.
Gas lift also, in each of those geographies is going to have a big part to play. We are having some great early conversations and hope to put some wins on the board in the coming quarters.
Awesome. Thanks, y'all. Appreciate it. I'll turn it back.
Thank you. Our next question comes from the line of Derek Podhaizer with Piper Sandler. Please proceed with your question.
Good morning. I guess I wanted to just continue on that last question, because I think before the deal, I think you were targeting the international expansion, talked Latin America, Middle East. I think you mentioned that you need these agents or sponsors to really get into those countries. It would be just a very modest growth into the very disciplined. Does now, with Lifting Solutions, just given their footprint in these international markets that you're targeting, really accelerate that as far as how they've been qualified in those regions, and it just really opens the doors a lot quicker for you? I just want to make sure that's the right read, and that's one of the things that Lifting helps you at least pull through some of those gas lifts and then obviously the ESP market as well.
Yeah. Derek, you hit the nail on the head. Absolutely. Look, Canada is obviously the largest of their markets and one that we are best positioned to sell into, given their history with operators in the Western Canadian market. The Middle East footprint is not to be taken lightly either. I do want to highlight one potential opportunity in the Middle East. There's been a lot of discussion about the Jafurah Field in Saudi. Rightfully so. It's a very exciting unconventional development by Aramco in Saudi. Flowco has an historic relationship in Saudi with a local partner known as Sawafi. We've announced this publicly that we are, through our plunger lift offering, partnered with Sawafi, and very well-positioned in the country to help with the artificial lift technology selection for Aramco in that development.
The benefit of being partnered with Sawafi and now having purchased Lifting Solutions is that the Lifting Solutions coiled rod product has also been selected by Sawafi and by Aramco, importantly, as one of the preferred vendors for the Jafurah Field artificial lift selection. We now have two of the methods of lift that Aramco has said to the market that they would like to embrace as they bring online wells in the Jafurah Field. I think this really positions us well in Saudi specifically, in particular given that we have in-region manufacturing capability now, right across a couple of borders in Oman. Look, again, it is early, but we are continuing to position ourselves into that market for continued growth. Yeah, we could go around the world, Derek, and talk about other spots as well.
Canada, Middle East, those are the two, I think, nearest term, exciting potential pull-through opportunities for us.
Great. No, that is super helpful, and it does sound very exciting. Maybe just shifting a little bit more towards the numbers, if you could maybe expand and talk towards the free cash flow conversion of Lifting Solutions, maybe their capital intensity versus yours. Talk about the EBITDA margins, how they compare with legacy Flowco. Also maybe what their model is, I do not know, I am sorry if you mentioned, but as far as rental versus sales for the Lifting Solutions versus what you have on the legacy business as well, it would be great.
Yeah. Derek, this is all going to fall under our downhole components business within our production solutions segment. That is where it will show up. It is 100% product sales. It comes at a margin profile that is similar to, almost right on top of, the margin profile for other downhole products that we sell into the market. The capital intensity here is about the same of Flowco as a company. Call it a roughly 50% free cash flow conversion from EBITDA to free cash flow. The capital profile here largely goes into the service installation requirement that the business needs to help customers actually install Endless Rod products into their wells. If you think about it, when you install a jointed rod string, you have a workover rig do that work for you. To install continuous rod, it requires a specialized installation capability.
You cannot handle that installation or the maintenance of the installed product with a traditional workover rig. You have to have a specialized piece of equipment. We have a fleet of those in Western Canada as well as throughout the U.S., and that is really where most of the capital goes in this business to help maintain that field service capability.
Great. Thanks again. Congrats on the deal. I will turn it back.
Thanks, Derek.
Thank you. Our next question comes from the line of Jeff LeBlanc with TPH&Co. Equity Research. Please proceed with your question.
Good morning, Joe Bob and team. Thank you for taking my question.
Hey, Jeff.
Can you talk about the repeatability of revenue related to the Endless Rod? Is the expectation that it is a service, or does the rod string still need to be replaced at some point in the well's life? Thank you.
Yeah, the joy of owning a well for 20 years, as you know, is that it requires maintenance. It requires replacing equipment as it wears out, and from an equipment provider, it is the gift that keeps giving. There is really no difference here with PCP and continuous rod. The benefits of these products is they last longer, they operate more efficiently. They provide, as we said earlier, a lower total cost of ownership for the operator. But they definitely have an aftermarket component to them because operating in such harsh conditions, equipment does wear out. It needs to be replaced. It needs to be optimized. As a well matures, the production profile changes, as you know, so what is right in year five is not right in year 10.
This later life solution that coiled rod provides us, I think gives us that sort of razor blade business model that we are used to having in the rest of Flowco, and it fits really hand in glove. Yeah, it is a little bit of both, based on the way you phrased your question.
Okay. Thank you very much. I will hand the call back to the operator.
Thanks.
\Thank you. Ladies and gentlemen, that concludes our question and answer session. I will turn the floor back to Mr. Edwards for final comments.
Well, thank you all for dialing in and appreciate this, and we will be back to you in roughly a month with Q3 earnings. Thank you all.
Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.