Forum Energy Technologies, Inc. 17th Annual Midwest IDEAS Conference

Good afternoon, everyone. Thank you for attending. I'm John McNamara with Three Part Advisors. Our next presentation is Forum Energy Technologies. Forum is a global provider of value-added solutions that increase the efficiency of energy production. The stock trades on the New York under the symbol FET, and with us from management is Neal Lux, Chief Executive Officer. With that, I'll turn it over to Neal.

Thanks, John. Good afternoon, everyone. Great to be here and look forward to spending the next 30 minutes or so talking about the FET story. Again, quick beginning here, forward-looking, non-GAAP. I think everyone's well aware of that and how exciting that can be. Shooting over to Forum Energy Technologies at a glance. We are a global manufacturer. We make products that make energy production more efficient. We address the market really with two primary segments. Our artificial lift and downhole segment and our drilling and completion segment. Those two segments have really maybe different characteristics, and I'll talk a little bit about that. First, on our artificial lift and downhole, we sell directly to operators. These are the companies that own the hydrocarbons, own the land, produce the oil, produce the gas, companies like ExxonMobil, Canadian Natural Resources, Saudi Aramco.

In this segment, we provide products that help them produce more oil and do it at a lower cost. Our other segment, drilling completions there, which is about 60% of our revenue, we sell to the world's largest oilfield service companies like Halliburton, Schlumberger, Baker Hughes. The products that we sell there help them drill better, faster, frack faster, have more efficiency, as well as install subsea infrastructure with robotics. That's where our revenue lies in our segments. Looking at it regionally, about half of our sales are in the U.S., the other half are outside. Wherever energy's produced, we're selling. Again, our industry is a global one, so we need to go where the energy is produced. Then looking at our revenue by purchase cycle type, next little pie there. About 80% of our sales are what we call activity-based consumables.

If a rig is running and they're doing activity, they're going to consume product, and that's about 80% of our sales today. If you think about our consumables, these aren't nuts and bolts. These are usually big-ticket items that sell for tens of thousands or hundreds of thousands of dollars per unit. They wear out over time. In two, three, or four months, the product wears out, and the customer drives back to our facility, and we reload them with another activity-based consumable. That's about 80% of our sales. The rest on the capital side is equipment that we provide that helps our customers increase their efficiency. If you think about a drilling rig, we don't make the entire rig. What we do is provide equipment that makes that rig more efficient. We make Iron Roughneck, which is a tool that joins pipe together.

We have one that allows them to be quicker as they drill a hole, pulling pipe in and out of it. That is our kind of revenue at a glance. Thinking about our financial performance, in the dark blue is our revenue. Our growth from 2021 of just about $540 million in sales to the midpoint this year of 2026, about $890 million. Strong growth on the top line. Looking below that, the light blue, that strong revenue growth has translated to really good EBITDA. Going from about $20 million of EBITDA in 2021 to the midpoint guidance this year at $120 million. So 6X in about five years. Margins have also increased from about 4% to, again, the midpoint here would be 13%. Looking at FET at a glance, again, we are a manufacturer. We sell our products around the world.

We are more focused on consumables or activity-driven sales, and we have had, I think, really good financial performance. I think more importantly than who we are, it is why should you be interested? Why FET? Why are we a good company, but more importantly, why are we a good investment? First, it starts with our track record. We have a track record of outperformance. Second, we are an incredible value. Third, we have had significant capital returns and a very good capital allocation policy. Fourth, we are poised for growth. Over the next few minutes, I am going to hit each one of these, starting with our track record. As we think about our track record and our performance, comparing ourselves to the Russell 2000, again, the index that we are a part of.

Looking at the top line, we have had 10% compound annual growth versus only about 7% for the Russell 2000. However, where we really stand out is on the cash line. Our adjusted cash flow growth has grown at about a 46% compound annual growth rate, versus zero for the Russell. How have we done that? We have had great market share gains, and I will talk about that, as well as some acquisitions. We have high operating leverage, so when we grow the top line, we turn 25%-35% of that incremental revenue into EBITDA, and with our capital-light business model, we turn 60%-70% of that incremental EBITDA into free cash flow. We have had strong financial outperformance on key financial metrics. Again, I think that has led to our stock performance.

Again, if you look at our annualized stock performance versus the Russell over the last five years, 16% versus 6% on the Russell. Again, strong outperformance on a compound return. Last year, one year, 158% versus 39% for the Russell. Before you all get up and leave thinking there is nothing else to talk about, stay with me. We are going to talk about the value that we still have, but stay with me here. But how did we do this? Strong financial growth. Again, you saw the at-a-glance slide. We have grown our revenue. We have grown our EBITDA. We have grown our cash. We also have a fortified balance sheet, and we are very disciplined in how we allocate our capital. Finally, I think this is what really gets me going, gets my team going.

We have a great growth outlook, and at the end of this, we'll spend a lot of time there. I told you to stick with me on value, right? Because I think this is really important. The second is we are an incredible value. You're probably saying, how can you be after 136% increase? Well, if you look at some comps, if you look at manufacturing comps that we have in the Russell 2000, companies that make product, sell product like we do, and you look at some valuation metrics like adjusted cash flow yield or enterprise value to EBITDA price to sales, how do we compare? On a cash flow yield basis, you get about three times more free cash flow per share with FET than you would with our manufacturing comps. That seems like value, seems like advantage us.

Looking at enterprise to enterprise value to EBITDA as well as price to sales, again, we're about half of our manufacturing comps. Again, I think that's advantage FET. Importantly, how are we doing this? Are we doing this with a lot of financial leverage? No, we're not. We're about half the financial leverage of our manufacturing comps. Again, I think advantage FET. Strong cash generation, we've done it over the years. We've continued to do it. We are a compelling relative valuation, and our balance sheet gives us a lot of flexibility going forward. So incredible value, again, especially relative to other manufacturing companies. Third pillar of why FET is our capital returns, and really this begins with our capital allocation framework. Starting at the end of 2024, we received authorization for share repurchase program.

Since then, we've repurchased about 1 million of our shares, reduced our share count from 12.3 to 11.3 million shares. About 8% of our shares outstanding were repurchased. Also, we've continued to use our cash to drive net debt reduction that allows us to then look at strategic investments. So our leverage ratio from the end of 2019 to now has decreased from 3.9 times to 1.1 times. 67% reduction in net debt, and we've been able to have five accretive acquisitions at multiples well below our multiple. So we're able to add the accretive acquisition. Our capital allocation framework, I think, has been incredibly successful and has been a big part of our stock performance. Going forward, we need to have a growth plan. I think what's important to me as I stand here, as I think about this growth plan, is backed by my company.

It's backed at the lowest levels. We developed this plan from the bottoms up, and we said, "How do we grow over the next five years? Where do we want to be?" I think it starts with our markets, right? I think our belief is that we need to increase oil supply to meet demand. How much? Well, I think if we just follow history, historically, oil supply has grown about 1% a year. We think that's about right. We think another 1% a year in the future. Why do we think that? Well, I think global GDP is going to be bigger in five years than it is now. I think urbanization is going to continue. More people are going to live in cities, and when you live in a city, you consume a lot more energy.

And we're going to also need a lot more electricity for all the things we're making, right? Whether it's data centers, electric vehicles, or air conditioning in Europe, maybe. We'll see. But you need electricity. So we're going to have to invest to get there. We're going to have to add global rig counts, so we're going to have to have rigs drilling. But those rigs drilling have to be efficient. They have to be as efficient as the ones drilling now in order to get that supply. Maybe thinking more short term, what has the Middle East conflict done? Well, we know it's disrupted oil flow, right? We know we've had a drawdown of inventory. So as a manufacturer, look, I use inventory to balance supply and demand. If inventory is too low and you have demand, you're going to miss out. You're not going to have the supply.

The oil markets work very similarly. So over time, we're going to have to supply enough oil to meet demand and to refill inventory. So I think the industry fundamentals that are in place today are going to help us drive growth. So that's part one. But really the more important part is what do we do with the things that we can control? So we can control our Beat the Market strategy. We can control how do we gain share. So our strategy, we call it Beat the Market, really rests on four pillars. First is we compete in targeted markets where we have few competitors and where our customers value our differentiated products. So we're only going to compete where we think we can win. And in those markets, we're going to utilize our competitive advantages. So we have very high-tech manufacturing.