Q4 2024 Forum Energy Technologies Inc Earnings Call

Lyle Williams

Thank you, Neal. Good morning. I am pleased to provide details on our strong free cash flow performance and why we believe generating free cash flow in the future is sustainable.
For the full year 2024, we generated $105 million of free cash flow. This is the highest annual amount since 2015. And $35 million higher than the top end of our latest guidance. These results benefited from the real estate sale leaseback transaction we announced in mid-December and for meaningful networking capital reductions.
Inventories dropped by $34 million as key initiatives paid meaningful dividends. Also, our day’s sales outstanding decreased, generating $8 million of cash. Monetizing these assets allows us to redeploy capital for a better return. We remain confident in the foundation we have built to sustainably generate free cash flow. Our 2025 guidance of $40 million to $60 million is consistent with our 2024 result, excluding the large release of working capital and the sale lease back transaction.
Included in our guidance are interest and cash tax payments of about $35 million and capital expenditures of around $10 million. This guidance reflects another year of strong free cash flow, allowing us to further reduce net debt while simultaneously returning cash to shareholders. It is important to note that we are committed to maintaining conservative net leverage. And as Neal mentioned, 50% of our free cash flow would further reduce our net debt.
Our remaining free cash flow would be used for strategic investments that increase shareholder value. As we have said before, we believe our stock is undervalued, and it is hard to find a better investment than an FET. And shareholder returns have already begun. In January, we repurchased approximately 105,000 shares of our stock for an aggregate amount of $2 million.
At the time, we met the two conditions of our bonds that address repurchases. First, we can repurchase up to 50% of the previous fiscal year’s free cash flow, excluding the sale lease back proceeds. So for 2025, we have over $42 million of share repurchase capacity. Second, our net leverage ratio must be below 1.5 times pro forma for any repurchases. Going forward, this incurrence test will be the limiting factor for when and how large our repurchases can be.
Based on the seasonality of our free cash flow, we expect our repurchases to be weighted to the second half of this year. We fortified our balance sheet this year. With strong free cash flow, we retired $100 million of debt incurred in connection with the Variperm acquisition. To put that in perspective within a year of the closing, we retired two thirds of the debt added for this transformational acquisition. And with the bond refinancing completed in November, we have no debt maturities until 2028.
We ended this year with $45 million of cash on hand and $61 million available under our revolving credit facility with total liquidity of $106 million. Our net debt was $149 million down $50 million from last quarter for a year-ending net leverage ratio of 1.49 times. On the income statement, our consolidated fourth quarter revenue of $201 million and EBITDA of $22 million were within our guidance ranges.
The slowdown in US completions activity led to a sequential decrease in our revenue. And our EBITDA margin was negatively impacted by lower sales of quick turn, high profit products. In the fourth quarter, we recorded two unusual non-cash items that impact net income but not EBITDA.
First, we recorded a charge of $119 million to impair the intangible assets of our coil tubing product line. Based on market conditions, we performed an impairment test and determined the carrying value of these assets should be fully written down. Going forward, this will reduce our annual amortization expense by $15 million. Coil tubing remains a valuable contributor to FET with strong profitability and differentiated technology.
We also recorded an $11 million non-cash benefit to income tax expense by releasing the valuation allowance reserves that we held for Germany and Saudi Arabia. As our operation in each country have become more profitable, it is appropriate to release these reserves.
Turning to our segment results, the drilling and completion segment revenue decreased by 10% with lower US completions related activity, sales volumes for wire line cable, coiled tubing, and stimulation capital equipment were lower. Segment EBITDA decreased 34% due to lower sales volumes and unfavorable product mix.
Orders were $103 million down 20% relative to the third quarter, which included large orders of drilling equipment including iron roughnecks and Catwalks. The artificial lift and downhole segment revenue was up 7%, primarily related to increased sales of our refinery desulting technology and artificial lift products. Sales increases in these higher margin products led EBITDA growth of 11%, and orders in the quarter were up 14%, with increased demand across our production equipment and downhole product lines.
I will conclude my comments by providing modeling details and our forecasts for the first quarter 2025. For the full year 2025, we estimate corporate costs of $30 million. Depreciation and amortization expense of $35 million and tax expense of $13 million. We’re expecting around $17 million of interest expense, which assumes a reduction in our ABL balance through the year. We assume first quarter values to be roughly one fourth of these full year amounts.
From a guidance perspective, many of our customers have publicly indicated a slower first quarter with progressive improvements throughout the year. Therefore, we expect first quarter of 2025 revenue to be in the range of $185 million to $205 million and EBITDA in the range of $20 million to $24 million. Included in our quarterly and annual guidance or additional lease expenses from the sale lease back transaction of $1.7 million per year.
Our first quarter of free cash flow will be impacted by annual management incentive payments and property taxes. While we do not guide specific free cash flow on a quarterly basis, we do anticipate generating positive free cash flow in the first quarter.
Let me turn the call back to Neal for closing remarks, Neal?

Neal Lux

Thank you, Lyle. I want to know one more achievement from 2024. Safety is our number one core value, and over the years we have done an outstanding job keeping our employees safe. While we were pleased with our past results, we were not satisfied. Last year we challenged ourselves to radically improve our safety, performance, and culture. I am ecstatic to announce we exceeded our expectations.
The teams embraced our initiatives and significantly improved our key metrics to world class levels. This is a fantastic achievement, and I want to thank the employees of FET for their hard work and dedication. Job well done.
Gigi, please take the first question.

Operator

(Operator Instructions)
John Daniel, Daniel Energy Partners.

John Daniel

Hey, good morning guys. Neal, I was trying to take copious notes as you’re going through your prepared remarks. I think you mentioned something about a new product tied to mobile tower. Did I hear that correctly and so can you elaborate on what it is, what it’ll do, and the opportunity set?

Neal Lux

Yeah, good call. So — in the Power gen segment, we have a product called our Power Tron. This is our heat exchanger that we supply into that market. So it’s paired with a gas resip engine, it builds off our leading market share in the in the frac industry and so we’ve adopted this product to really to fit the Power Gen side, so you know we’ve had a kind of a good start to the year on the quotation side. It’s been pretty robust, and we’re looking forward to closing some orders there.

John Daniel

Okay, those would all be domestic?

Neal Lux

Yeah, it would be domestic. We — and I think, for us as well as we think about increasing power demand, I think another product that does apply there is our Coiled Line Pipe in bringing the gas to the data centers as well.

John Daniel

Okay, got it. And then just went on sort of the traditional sort of coil wire line completion stuff, as orders have moderated a tad, I mean, are you seeing a set up where you’re going to — three to four to five quarters and I don’t see a spike in those orders? Do you get the sense they’re working through their inventory? Just any thoughts there?

Neal Lux

Yeah, so I think you know on a consumable basis which you know, the wire line cables, coil tubing, those are getting consumed and turning well for US land are more capital type products, whether it’s power ends or radiators things like that. I think those are the items that are looking for a spike as you say maybe a few quarters out, right, whether it’s later this year or in the next year as that equipment ages.

John Daniel

Okay, got it. I’ll turn it over. Thank you, guys.

Neal Lux

Thank you.

Operator

Dave Storms, Stonegate.

Dave Storms

Good morning.

Lyle Williams

Morning, Dave.

Dave Storms

Morning. Just wanted to start with maybe some of the puts and takes on guidance. You mentioned that the beat the market strategy should help maintain the top line despite maybe, some overall market weakness, but it still looks like you’re EBITDA at midpoint guidance is about a [5%] decrease year every year. Just hoping you could speak to maybe some of the margin assumptions or price mix volume decisions that would drive that.

Neal Lux

Yeah, I think as we look out to 2025, we said the market could be down, 2% to 5%, so really the EBITDA guidance range we put in there is really how successful we are to either partially or fully offset that market decline. So I think at the midpoint, you could see market down a lot and down what’s called the 5%, but we gain a little more share or at the low end of the market, let’s say the down 2% and we don’t gain as much share. So we wanted to give kind of that range, ideally if the market stays flat and we add revenue, we’d be closer to the top end of that range.

Dave Storms

Understood that’s very helpful. And just kind of on that, with the general market, expected to decline to 2% to 5%, are you seeing any pockets of strength? I know international has been a bright spot, could be a little choppy for you guys, just curious as to if there’s any green shoots that you are seeing out there.

Neal Lux

I think — it really is more on the types of product side. I think our consumables, we’ve seen a nice nice start to the year. I think capital is still a little slower to start, as our customers get their get their budgets together. I think overall, international’s probably going to be — for the year is going to be a bright spot for us, whether I think it’s a good start in Canada to the year we’ll see if that can hold. And then, outside North America again, whether it’s Saudi, maybe a little lighter but Kuwait, Oman, Abu Dhabi, I think all are going to be pretty good for us this year.

Dave Storms

That’s very helpful. Thank you for taking my questions and good luck in the first quarter.

Lyle Williams

Thanks Dave.

Operator

Jeff Robertson, Water Tower Research.

Jeff Robertson

Thank you. Good morning, Neal. You talked about gaining market share in 2024 and over the last three years. As you look at the market conditions in 2025, are there areas where you think you still have room to grow market share? And are those — if so, are those product lines in ones that would have a favorable impact on margins versus maybe lower sales in other lines.

Neal Lux

Yeah, no, that’s a good great question. Our focus is we want to grow profitable market share, so we are putting the time to those key product lines that do have the higher margins, where we’ve incentivized our teams to gain that share. So I think the areas are artificial at a downhole, that segment, high margin it’s one that — We’ve added a lot of new products over the year, I’ve mentioned, the MagnaGuard, as well as our Pump Saver Plus, we continue to build out that product portfolio, so I think that’s an obvious area of growth.
I mentioned, coil line pipe, earlier on the Power Gen. We also are seeing, international projects that are offshore that could be a nice boost there as well so. I don’t think our gain share is done. I think we have a good runway on that, and I think over time, we are absolutely focused on beating market and executing that strategy.

Jeff Robertson

On the products you mentioned, the Unity remote control system for ROVs, has that been field tested to the point where you’re getting more interest in it from a broader group of customers?

Neal Lux

Yeah, we’re utilizing it today. We’re actually in the middle of testing those systems right now, we’re going to have them delivered here in in Q1. We had a little delay just to put in Q4 with one customer, so we pushed it in the Q1 here. But yeah, I think it’s still early, but it is an area where it’s — taking personnel of vessels, that’s a huge savings for our customers. So us executing that I think is a really a good deal. I think what’s so exciting too is we could upgrade our existing installed ROVs, and that’s a great opportunity for us.

Jeff Robertson

In the past with respect to returning cash to shareholders, you all have I guess broadly talked about the possibility of a dividend. Does the share repurchase plan, do you think just give you the most flexibility as you look at the options on the value of FET versus the evaluations that you’re seeing in the acquisition market?

Lyle Williams

Yeah, Jeff, I’ll take that one. At this point, we don’t have any specific dividend plans and do really feel like given the relative valuation of FET stock versus other things that we could invest capital in. It’s just such a screaming by that’s where we ought to be. So that’s our focus for now for that 50% of our cash flow. I think the other 50% will continue to go to our net debt reduction.
We feel like — just kind of if you use the midpoint of our guidance on cash of just 50%, take half of that is 25%, that’d be about 10% of our market cap. So if we achieve that in this year, that’s a very big amount. And at the same time we can pull our net leverage down to 1.25 times, 1.3 times something like that over the same period of time.

Jeff Robertson

Thank you, Lyle.

Operator

Steve Ferazani, Sidoti.

Steve Ferazani

Morning everyone. I appreciate you taking my question. I did want to follow up a couple of the earlier questions. In terms of your breakdown on seeing 2% to 5% decline in drilling and completions. I’m just trying to think about some of your individual markets. Variperm’s been really successful, that’s high margin.
In December we saw a pretty healthy guidance from the bigger oil producers, but that was pre tariff talk. You said that Canada started up healthy for you. Are you seeing any kind of impact at this point? Are you expecting any kind of impact?

Neal Lux

Yes, I think in Canada, it was a good fourth quarter, I think recount has been good here as well to start the first quarter. I haven’t seen an impact yet from tariffs. It’s something that, boy we do a lot of analysis. I think we could see a slowdown if if we did have that 10%, oil tariff come through on Canadian crude. That would be something that we’d have to adjust to for sure.

Steve Ferazani

Okay, and then then the other side of the border, and I don’t know how much exposure country to country, but Mexico obviously very soft. Could that hit you in the first half?

Neal Lux

Yeah, our exposure to Mexico is fairly limited. It’s a really small part of our business, so that — I’m not as concerned there. I think, North America for us is primarily Canada and the US.

Steve Ferazani

Okay.

Lyle Williams

And Steve, maybe I’ll touch in on — let me jump in on the tariff comment just to give a little more color there on how we’re thinking about as Neal mentioned, we don’t have any tariff impact included in the guidance we provided. It’s just too early to really understand. But we do have experience with what happened in prior tariff regimes and what that looked like, and our view is, we have probably a similar outcome and that is the first our given our market position with a lot of our product offerings, we have the ability to pass on tariff increases to our customers, and that would be our expectation.
However, the uncertainty and volatility that can come from that until the markets settle out definitely could be a near term, let’s call it choppiness or bumpiness in results. So we don’t have anything in there, but definitely something that we’re watching and our teams are monitoring really daily to make sure we take the appropriate actions.

Steve Ferazani

Excellent. If I get one more in, obviously your balance sheet, extremely strong. You noted that the outperformance of Variperm. If we end up in this sort of soft environment, flat to slightly down year, new opportunities might emerge given the balance sheet, I understand the better returns from share buybacks. Are you open and ready to jump if if the next Variperm comes up and not to say it would.

Neal Lux

Yeah, I think if we can get — I think in our comments we talked about looking at the relative value of our shares versus opportunities out there. So I think if we saw the relative value in an acquisition, I think we would absolutely, as you mentioned, Variperm fantastic acquisition, great team, would love to add another one.

Steve Ferazani

Excellent. Thanks everyone.

Operator

[Eric Carlson].

Eric Carlson

Hey, good morning, guys.

Lyle Williams

Morning Eric.

Eric Carlson

Morning. I was wondering if just maybe talk through a little bit of, I mean, clearly with the kind of the large impairment charge in Q4, the kind of the headline income and EPS numbers probably grab a lot of attention, but you have to forgive my quick math, but I mean, I think it was just over $100 million lost for the year, but a lot of that kind of attributed to the impairment charge and then FX and then a higher interest expense.
So it maybe just on a go forward basis if you just look at kind of the income statement, it feels like it’s set up to be a little bit more normalized instead of all these one offs from transaction expenses and so on and so forth so maybe just a few thoughts there would be interesting.

Lyle Williams

Sure, Eric, definitely and definitely a lot of noise in there so just draw your attention to the earnings release and our table in the back that would show a full year adjusted net income numbers and if you look at those, I want to spend a minute on those, if you look at those on a year over year basis, our adjusted net income is actually down from like negative 1.5% to negative 10%.
What is that? And that’s really driven by interest expense that we added for the be Variperm acquisition. About $12 million, but with our net debt now coming down and with our guidance, we expect a really meaningful improvement on a year over year basis, so 2025 should be better.
The other place that there was a year over year increase was on tax expense. Again, an increase due to Variperm and a little bit tied to this pillar two global minimum tax that’s out there. So through this year we’ve already restructured some of that, and we’ll be able to have a lower go forward tax guidance that we have. So, between those items, lower interest forward, lower taxes forward, lower amortization expense going forward, we’re set up for a much improved net income and EPS result in 2025 versus 2024.

Eric Carlson

Okay, that’s helpful. I guess and then just looking at kind of the cash flow numbers, so obviously finished very strong, but for the full year about 45% of current market cap in, cash generated and a good majority of that just from operations. So maybe I’m thinking of the context — I know some people have brought up — ways to return capital and kind of the relative value. I mean, I did kind of quick math, but it looks like kind of the median EBITDA on kind of the peer group at least stated in kind of the proxy statement for incentives is maybe it’s [6.5] and that’s excluding a few I couldn’t find information.
But you guys kind of trade that under [4, 3.75], so almost 50% discount to that. I mean when you think about deploying capital obviously a buyback makes a ton of sense, there’s a lot of kind of surety to what you’re getting there and maybe just when you think about the relative value like if I know I can buy 10% of my shares that increases my free cash flow per share by 10%, I can kind of put that on a flywheel and repeat it versus what is the relative value needed by a strategic acquisition on the outside, so maybe just thinking about the hurdle rate of different ways to do that obviously buying your stock seems like a no brainer, but if I can buy, if you can buy your stock at under 4 times EBITDA what’s the hurdle rate, like what do you need to be able to buy Variperm (inaudible) need to be 3 times or it doesn’t need to be — just maybe provide some context for that, I think that’d be really helpful.

Neal Lux

Yeah, I think we’d go back to what’s our acquisition guideline strategy, right. We want to get companies that have differentiated products in niche markets, we want to have an accretion to key multiples and cash flow per share I think would be one of those and you know we don’t want to put our ourselves in a tight, balance sheet by adding a lot of debt.
As far as a specific hurdle rate, I think we would just really stick with our guides there. I think we’d look at it on a case by case basis. I think, accretion would be a big point to that and so I think it would be — we gotta find the right — it would have to be the right deal at the right price and the really the right discount to where we sit to get it done.

Eric Carlson

Okay, that’s helpful. And then maybe in in deploying kind of buy back I know the comment already was probably weighted a little bit more heavily to have. Can you just provide some — I mean what are kind of your limitations on terms of daily volume and then in terms of maybe opportunities to source some larger blocks of shares just kind of looking at the filings. I mean there’s still at least one really large bondholder still holding, I mean 900,000 shares so I mean when you think about how you deploy that most effectively maybe just provide some context.

Lyle Williams

Sure, yeah, talked about in our prepared remarks really the limiting factor is going to be our 1.5 times net leverage ratio pro forma for the buybacks. So we ended fourth quarter just under that, opening the door for us to be able to get some things done, obviously as we buy back shares that kind of increases that pro forma number. So we’ll generate free cash flow through the year, probably lighter in Q1, well, like I said guided lighter in Q1. And then stronger in the later part of the year, which opens up opportunity for us.
I think the other thing we would do is, we look at open market purchases. We want to make sure we sit within the appropriate Safe Harbors, so we’re limited in terms of average daily trading volumes and what that would be for us. So that would be kind of an open market, kind of an opportunity.
So I think we look at those, there’s plenty of volume out there and in January when we did buy, we were able to get that done in a short amount of days. So I think when we’re in the market, we could do that, relatively quickly and be able to buy up some of those shares, but we’ll be focused on that 1.5 times measure as we get under that. That provides more opportunity for us.

Eric Carlson

Okay. And then you said so based on the math it’s $42 million would be kind of available but obviously with kind of cash flow projections it would come in under that —

Lyle Williams

That’s right.

Eric Carlson

And then maybe my last question would be, you have been able to do some things to take advantage of kind of generating one off cash flow like facilities back at the end of this year, you did it in previous years as well. Just wondering if there’s any other low hanging fruit out there to kind of generate kind of cash above and beyond operations.

Lyle Williams

Yeah, so if you look at our guidance and what we got is the $40 million to $60 million, really that doesn’t include any incremental cash from an asset monetization like to sell lease back. It also doesn’t include any working capital benefit or increase, right. So kind of assuming flat numbers and both of those were big contributors in 2024.
So we’ll continue to look at ways to do that, both on the working capital side. Our teams are very focused on inventory reduction. Given the kind of market condition here and what’s going on with potential tariffs, we’re being prudent around not getting too short on inventories these days. So I think that’ll be something we’ll have to balance through the course of the year.
And then clearly as we look at our portfolio, both what new product additions we want to make and where we might want to trim back on our portfolio, it’s all about returns and how do we improve the returns, cash returns that those portfolios can get. So we’ll be looking at those as well, but nothing specific included in our guidance at this point.

Eric Carlson

Okay. That’s helpful. Thanks guys. Good quarter. Good year.

Lyle Williams

Thanks Eric.

Operator

Thank you. I would not like to turn the conference back over to Neal Lux for closing remarks.

Neal Lux

Okay, well thank you for your support and participation in today’s call. We look forward to our next meeting in May to discuss our first-quarter of 2025 results.

Operator

This concludes today’s conference call. Thank you for participating. You may now disconnect.