Forum Energy Technologies - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 came in within company guidance but missed Street on all three: revenue $193.3M vs $196.5M consensus*, adjusted EPS $0.04 vs $0.15*, and adjusted EBITDA $20.1M vs $23.0M*; GAAP EPS improved to $0.09 from $(0.85) YoY on lower interest and no impairments.
• Management maintained FY 2025 free cash flow guidance at $40–$60M and set Q2 2025 adjusted EBITDA guidance at $18–$22M, with Q2 revenue expected at $180–$200M.
• Subsea strength offset tariff-driven headwinds: subsea bookings up nearly 60% QoQ; valve product demand hit by buyer strike amid tariff uncertainty; $10M annualized cost cuts underway.
• Capital return/leverage remain central: seventh consecutive positive FCF ($7.2M before acquisitions), net debt $146M, liquidity $108M, and intra-quarter windows for buybacks subject to 1.5x leverage test.

What Went Well and What Went Wrong

What Went Well

• Subsea bookings accelerated ~60% QoQ on new product adoption (including Unity remote ROV ops), adding backlog support: “we sold about 8 more of those systems since the beginning of the year”.
• Drilling & Completions delivered revenue growth and margin mix improvement; segment adjusted EBITDA rose to $12.4M (+31% QoQ) with orders +28% to $132.1M.
• Sustained cash generation: seventh consecutive quarter of positive FCF; company reiterated FY FCF $40–$60M and intends to allocate ~50% to net debt reduction and buybacks.

What Went Wrong

• Tariff shock triggered a buyer strike in Valve Solutions, materially dampening orders/deliveries; management expects weakness “for a couple of quarters” until tariff levels wane or inventories deplete.
• Artificial Lift & Downhole revenue fell 13% QoQ on timing of international project shipments and reduced valve demand; segment adjusted EBITDA down 30%.
• Street misses across revenue, adjusted EPS, and adjusted EBITDA, reflecting tariff uncertainty and unfavorable mix in Variperm/Canada and valves.

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and welcome to the first quarter 2025 Forum Energy Technologies Inc earnings conference call. My name is Gigi, and I'll be your coordinator for today's call. There is a process for entering the question and answer queue. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. A link with instructions can also be found on the company's investor relations website under the events section. At this time, all participants are in listen-only mode, and all lines have been placed on mute to prevent any background noise. This conference call is being recorded for replay purposes and will be available on the company's website.

I will now turn the conference over to Rob Kukla, Director of Investor Relations. Please proceed, sir.

Rob Kukla (Director of Investor Relations)

Thank you, Gigi. Good morning, everyone, and welcome to FET's first quarter 2025 earnings conference call. With me today are Neal Lux, our President and Chief Executive Officer, and Lyle Williams, our Chief Financial Officer. Yesterday, we issued our earnings release, and it is available on our website. Please note that we are relying on the safe harbor protections afforded by federal law. Listeners are cautioned that our remarks today may contain information other than historical information. These remarks should be considered in the context of all factors that affect our business, including those disclosed in FET's Form 10-K and other SEC filings. Finally, management statements may include non-GAAP financial measures. For a reconciliation of these measures, you may refer to our earnings release. During today's call, all statements related to EBITDA refer to adjusted EBITDA, and unless otherwise noted, all comparisons are first quarter 2025 to fourth quarter 2024.

I will now turn the call over to Neal.

Neal Lux (President and CEO)

Thank you, Rob, and good morning, everyone. Since our earnings call in February, U.S. trade and tariff policies have undergone a radical upheaval. This has generated significant economic uncertainty and dampened the outlook for commodity demand. In addition, OPEC+ announced faster supply growth than previously anticipated. The combination of these events is putting pressure on commodity prices. Oil prices have declined dramatically and are hovering near four-year lows. While we have not seen a change in market activity, in our experience, rig count declines tend to lag commodity prices by three to six months. FET's activity-based sales are highly correlated to rig count, and unless oil and gas prices rebound, we could see a decline in revenue starting in the third quarter. Given this uncertainty, we are proactively mitigating tariffs, optimizing our supply chain, and reducing costs and inventory.

In March, we announced price increases to counter the cost impacts of tariffs. While we utilize U.S. source content for a majority of our raw materials, it is important to note that tariffs increase prices broadly, not just on imports. For example, one of the largest domestic U.S. steel producers has increased prices by over 30% since January. This is broad-based price inflation, and we must pass these costs on to our customers. Another way we are mitigating tariffs is by leveraging our global footprint. We are increasing assembly activities at our facilities in Saudi Arabia and Canada to efficiently serve global markets. In addition, over the past several years, we have strategically de-risked our supply chain to minimize dependence on a specific country and provide optionality in sourcing. Another area of focus is expense and inventory management.

We are aligning our cost structure to operate under potentially lower activity levels. Approximately 80%-85% of our cost base is variable, primarily materials and labor. We can efficiently manage these costs as activity declines. In addition, we are insourcing components to increase facility utilization, thereby improving efficiency and lowering expenses. Also, we initiated actions to eliminate $10 million of annualized costs. Inventory management also plays a key role. In 2024, we generated the highest level of free cash flow in nearly a decade by focusing on working capital management. Specifically, we generated approximately $40 million from inventory reductions. Given the softer outlook, we are actively managing inbound material orders and will carefully align the business with market conditions. Turning to our full-year outlook, at the outset of the year, we forecasted a modest 2%-5% decline in global drilling and completions activity.

We anticipated North America rig count would soften, while international activity would be generally flat. We also assumed a slower first quarter with progressive improvements as we moved through the year. As I discussed earlier, there is limited visibility beyond the second quarter. If commodity prices remain at current levels, it is reasonable to expect a reduction in global rig count in the second half of the year. In that scenario, we believe full-year EBITDA would be around $85 million. With this outlook, our focus on generating free cash flow is important. With the measures described earlier, especially our cost and inventory management efforts, we are confident in our previously announced guidance range of $40 million-$60 million in free cash flow. This result would allow us to execute meaningful share buybacks and significant debt reduction. I am going to turn the call over to Lyle.

Following his comments, I will conclude by discussing our long-term outlook.

Lyle Williams Jr. (EVP and CFO)

Thank you, Neal. Good morning. The team overcame tariff impacts to deliver positive financial results in the first quarter. These results met our expectations with revenue of $193 million and EBITDA of $20 million. Orders increased 6% to $201 million for a book-to-bill ratio of 104%. Stimulation and intervention product line orders returned to customary levels, and we received meaningful bookings for subsea projects in the quarter. Furthermore, in April, we have already booked another $8 million of subsea orders. Growing backlog in the subsea product line reflects the strength of the offshore market and will support overall revenue through the next few quarters. The drilling and completion segment performed well in the quarter. Revenue increased $5 million, driven by a rebound in sales of completions-related consumable and capital equipment.

Favorable product mix and overhead cost reduction initiatives supported 64% incremental EBITDA margins, and operating profitability benefited further from lower amortization expense. In contrast, our artificial lift and downhole segment revenues declined, and unfavorable product mix lowered margins. First-quarter results were impacted by the timing of shipments of project orders and softer demand for Variperm products. Given the strength of its fourth-quarter results, Variperm had a high performance bar to overcome. This product family experienced particular weakness in Canada, with unfavorable customer and product mix impacting results. However, our investment thesis for Variperm remains intact, and we anticipate positive progression through the year. In addition, we are experiencing negative headwinds in our valve solutions product line. On our fourth-quarter call, we stated that we may see short-term impacts and variability in our results as we pass through tariff impacts with increased pricing.

The magnitude of tariffs levied on Chinese imports has impacted demand for our valve product line, which, like our competitors, sources a large amount of product from China. With the uncertainty around these tariffs, our customers began a buyer strike, significantly reducing orders and delaying near-term deliveries. We believe these reduced purchase levels could continue for a couple of quarters until tariff levels wane or distributor inventories are depleted. In the meantime, for valve solutions and our other product lines, we are adjusting sourcing strategies and raising prices in response to specific tariff-driven impacts. Looking ahead to the second quarter, despite market uncertainty, we have not seen operators deviate materially from their plans. Some customers have indicated more white space on their calendars beginning late in the second quarter, but this could be offset by a pickup in natural gas activity.

Overall indications are that drilling and completions activity should remain relatively stable from first-quarter levels. Therefore, we expect flat quarter-over-quarter results, with second-quarter revenue to be in the range of $180 million-$200 million and EBITDA to be between $18 million-$22 million. We estimate corporate costs of $7 million, depreciation and amortization expense of $8 million, interest expense of $5 million, and tax expense of $3 million. With our focus on cash, we generated $7 million in free cash flow in the first quarter, up three times from the prior year first quarter. This marks our seventh consecutive quarter of positive free cash flow generation. As Neal mentioned, we remain confident in our full-year free cash flow guidance of $40 million-$60 million.

In the event that market activity declines and our EBITDA is closer to the $85 million, then we expect unwinding working capital to bridge the potential decrease in EBITDA. Our full-year confidence comes from more than just our ability to convert working capital. Over the past two years, we transformed our business systems and reinforced these improvements with key performance indicators and financial incentives aimed at strong, repeatable free cash flow generation. We envision FET being a cash flow engine that, regardless of market condition, yields $3.5-$5 of free cash flow per share this year. The balance sheet improvements we made over the past several years, including the debt conversion to equity, organic debt retirement, and refinancing, put FET in a solid financial position. We have $108 million of liquidity and no debt maturities until 2028.

At the end of the first quarter, our net debt was $146 million for a quarter-ending net leverage ratio of 1.56x. This strong balance sheet and continued free cash flow allow us to further reduce net debt and return cash to shareholders. We began our shareholder returns in the first quarter by repurchasing roughly 1% of our outstanding shares for $2 million. As we outlined last quarter, our plan is to utilize 50% of our free cash flow to further reduce our net debt. The remaining free cash flow would be used for strategic investments that increase shareholder value, including share repurchases. As a reminder, our net leverage ratio must be below 1.5x for us to repurchase shares. Given the market uncertainty and potential for slower activity, this incurrence test may impact the size and timing of our share repurchases.

However, with our forecasted free cash flow, we remain comfortable with our ability to both reduce net leverage and continue share repurchases this year. Let me turn the call back to Neal for closing comments. Neal?

Neal Lux (President and CEO)

Thank you, Lyle. Taking a step back, the market we find ourselves in today is uncertain. While we are eliminating expenses to adjust to potential market activity, we will not jeopardize our future. We have the resources to execute our beat-the-market strategy. We will continue to make commercial and engineering investments that will drive profitable market share growth through innovation. We believe strongly that the investment case for FET remains intact. This belief is based on our track record of significant outperformance, the incredible value of our stock, and our long-term growth potential. Since 2021, FET has grown revenue at a compound annual rate of 15%, three times faster than the Russell 2000 index, which we are a part of. We have grown EBITDA and cash flow over 70% annually, many, many, many times better than our index.

Simply put, we have delivered spectacular relative financial results, and yet we trade at a significant discount to the Russell 2000 and with our oil field service peers. Today, our forward free cash flow yield is north of 25%. Very few stocks trade at yields this high while also having FET's long-term growth potential. This unlocked value makes share buybacks extremely compelling. Since we announced our buyback authorization in December, we have outperformed the oil field service index, the Russell 2000, and the average of our peers by significant margins. This performance has confirmed our buyback thesis, and we will seek to buy as many shares as possible within our returns framework. There is uncertainty over the next 6-12 months. However, longer term, we envision strong growth for FET. The world needs energy.

Over the next decade, population growth, economic expansion, and full-scale implementation of artificial intelligence will drive energy demand. Investment will be required to supply the world's needs. It is only a matter of time before the headwinds we see today will turn into tailwinds, supercharging our growth. In the meantime, we are executing our beat-the-market strategy. We will deliver our products to customers around the world with our global footprint, and we will continue to innovate and develop new products and solutions that increase the safety and efficiency of energy production. Thank you for joining us today. Gigi, please take the first question.

Operator (participant)

Thank you. As a reminder to ask a question, please press star 11 on your telephone. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Joshua Jayne from Daniel Energy Partners.

Joshua Jayne (Managing Director)

Thanks. Good morning.

Neal Lux (President and CEO)

Hi, Josh.

Joshua Jayne (Managing Director)

First question, I wanted to hit on the subsea side. You talked about bookings were up 60% quarter-over-quarter due to the customer adoption of some new products, and then you also highlighted, I think, an additional order in April. Maybe you guys could talk more about that, given at least on the rig count side, we've seen a bit of a slowdown in rigs being contracted, but you seem to highlight some strength there. Talk about the products that are getting adopted and the outlook there a bit more.

Neal Lux (President and CEO)

Yeah. We're really excited about the progress we're making in subsea. We address, obviously, offshore oil and gas, offshore wind, and defense with that product line. Really, across all three areas, we're seeing good inbound inquiries as well as turning those inquiries into orders. We provide remote operated vehicles, ROVs, and launch and recovery systems for those markets. I think we've established over the years a position of strong market share, and we believe around 30% of the vehicles that are in use today or more were our brand. I think as those vehicles have aged and the work has increased, we're seeing a lot more demand for those vehicles.

With the Unity software system, operating system that we developed that allows for more remote operation capability, we've sold about eight more of those systems since the beginning of the year, and we'll be delivering those throughout the year. Excited about the activity we're seeing in subsea. I think it also shows really the breadth of our reach. Subsea is about 10% of our revenue, but offshore, we think, is around 15%-20% of our total revenue, whether it's done through our offshore pipelines or equipment we deliver with our drilling group.

Joshua Jayne (Managing Director)

Okay. Thanks for that. As my follow-up, another thing that sort of jumped out a little bit at release was part of the increase in orders for drilling completion was for stimulation-related equipment. Could you talk about what products there saw strength, given that completion crews aren't moving higher? Has a lot of inventory been exhausted, and could you see a similar level of orders, even if crew counts are sort of flat to down, given the uncertainty you talked about in the second half of the year?

Neal Lux (President and CEO)

Yes. I think we ended last year—when I say we, our industry—was really lean. The frac crews that were working really limited all purchases to a minimum as they finished Q4. In the quarter, I think we rebounded to what's a normal level to be at. What we are seeing is, as maybe there's fewer crews working, but they are doing more per day. They're pumping more stages per day. They're working more hours per day. We are seeing key items like our power ends, which is really the drive for frac pumps. Historically, we call it capital, but what we're seeing is that those power ends are being replaced or rebuilt significantly after 12 or 18 months. They are being replaced much more quickly than just a few years ago when those pieces of equipment would last three or four years.

I think that's part of it. Really view that as a rebound. We also saw a rebound in our wire line product line, which again serves the completion group. I think they get a rebound from Q4, but also our cables are going farther in the hole and are working more stages per day, so they're just going to wear out quicker. That's part of the cadence there as well.

Joshua Jayne (Managing Director)

Thanks a lot. I'll turn it back.

Neal Lux (President and CEO)

Thanks, Josh.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Dan Pickering from Pickering Energy Partners.

Dan Pickering (Founder and Chief Investment Officer)

Morning, guys.

Neal Lux (President and CEO)

Hey, Dan.

Dan Pickering (Founder and Chief Investment Officer)

Lyle, could you remind us? You indicated that you repurchased shares during the quarter, and you talked about that 1.5 leverage ratio, which sounds like you ended the quarter slightly above the metric, but you repurchased shares during the quarter. Does that mean you paid down the facility, or how did that work during the quarter? How do we think about that variability as we move into Q2 and 3?

Lyle Williams Jr. (EVP and CFO)

Yeah. That's a super question, Dan, and there's a good nuance there with how our metrics are done. We'll report to you and our other investors on a quarterly basis, both our EBITDA and our net debt, and hence we ended with that 1.56x. For the incurrence test ratio of 1.5x, we measure EBITDA quarterly, just like we do for our public filings here, but we measure net debt within 30 days of buying back our shares. Our bondholders wanted us to do that just so we kept a tighter reign maybe than quarter to quarter. Call it month to month or even week to week as far as how cash moves. That opens up windows for us to buy shares within a quarter, and that's what happened in the first quarter. We were able to take advantage of the market early and our leverage ratio there.

Similarly, as we think ahead to the second quarter we're in now, even the third quarter, those windows were open based on just the intra-quarter timing of how our cash flows in the quarter. Expect that and expect that those windows will open and we'll be able to take advantage of them here in the second and third quarter.

Dan Pickering (Founder and Chief Investment Officer)

Okay. That's helpful. Maybe can you spend a little bit of time talking about the cost efforts? You mentioned in the press release and the call sort of $10 million annualized. Just tell us a little bit about how we'll start to see that. Do we think we get some of it immediately, or is it longer dated? How do we expect to see it flow through?

Lyle Williams Jr. (EVP and CFO)

Yeah. We did see a little bit of benefit already in the first quarter with some of the activities and cost reduction measures that we put in place even before, kind of call it, the April noise that happened in the market. We have seen a little bit there. If we think about our cost structure, it is a really highly variable cost structure between material and labor and overhead being a significant portion of our overall cost structure. The good news is that makes it very variable. With activity coming down, we can manage those costs down very well. What we are specifically targeting with the $10 million is some of the more fixed costs. Those are ones that will not necessarily vary with revenue, and those could be embedded in cost of goods sold. It could also be within our SG&A.

We will be looking at efficiency gains, changes that we can make, and the like that will drive some cost out. Those are going on right now, and we would expect some benefit in the second quarter and more benefit to roll through into the third quarter as well.

Dan Pickering (Founder and Chief Investment Officer)

Okay. Thank you. Maybe as you indicated, we haven't seen any softness yet. There's risk. What specific business lines or is it order intake? What are you watching as your sort of canary in the coal mine around activity and any softness?

Neal Lux (President and CEO)

Yeah. Yes, Dan. We haven't seen that yet. I think a couple of things. About 80%-85% of our revenue is activity-based. These are consumables that are required to operate for our customers, whether it's coil tubing or wire line or our downhole tools. We're really close to that. What we wanted to do, though, is what we thought was prudent, is when you see oil prices come down to a level like they're at now, unless there's a rebound, we believe rig count or overall activity is going to follow with a lag. Part of our cost-saving effort, part of our material, let's call it slowdown of inbound material, that we wanted to get ahead of this thing. I think it's easier if you make the cut sooner. Let's say we work a little bit more overtime.

We use a little bit more inventory. If oil prices, let's say, rebound in the next couple of months or next couple of weeks, it won't hurt our long-term ability to respond to that. We are going to stay close to the customers. We are going to follow our inbound orders. The canary in the coal mine, if we see sea shipments drop off in a month, we will know our customers are pulling back. Right now, we have not heard any specific indications of that. We are operating business as usual, but we are keeping an eye out, and we are going to be proactive in how we respond.

Dan Pickering (Founder and Chief Investment Officer)

Good. I applaud you guys for being quick on the trigger here. Last question for me. You mentioned pushing price in certain areas related to rising costs. Is it holding? Is it sticking? Is that part of the buyer strike on the valve side, for instance, is they do not like the higher price and they are waiting to see if it will come down? Just what is the reaction to price?

Neal Lux (President and CEO)

We have just a lot of different advantages. We have a lot of different products. We address a lot of different markets. I think each of those are unique. To me, the valve story is it's China specifically where almost all valves that are imported in the U.S. originate. I think also our customers see the quick change, whether the tariffs start at 30%, then they go up to 145%. Are they going to come down in a week based on a tweet? I think that's part of the valve-specific story is unless you absolutely positively must have a valve, you are better off holding off in almost all cases. Now, we think that inventory is going to run out. Our customers are going to need it, and they're going to have to buy it.

That said, we are also looking at alternative strategies that could take away or radically improve our cost position and make us far more competitive. We are implementing those efforts. Not ready to get into those details yet today, but we want to find a way to take these lemons and make lemonade out of them.

Dan Pickering (Founder and Chief Investment Officer)

Thank you.

Lyle Williams Jr. (EVP and CFO)

Thanks, Dan.

Neal Lux (President and CEO)

Thanks, Dan.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Jeff Robertson from Water Tower Research.

Jeff Robertson (Managing Director)

Thanks. Good morning.

Neal Lux (President and CEO)

Morning, Jeff.

Jeff Robertson (Managing Director)

You all spoke about a little bit of turbulence in Canada in the first quarter. Can you elaborate on what's going on up there with Variperm and whether or not that's seasonal or temporary or anything more?

Neal Lux (President and CEO)

Yeah. I think it's definitely temporary, and I think we're also heading into what's typically a slower season in Canada overall. What we saw with Variperm is really a combination of customer and product mix. What we mean by customers is that there are certain oil sands operators where we have a higher market share. If more of those customers are working, obviously it's more share for us. I think our customer mix or the share of who was working or drilling in Q1 was unfavorable for Variperm. I think the other part was that for those that were working that we were selling to, they didn't utilize our flow control products as much as what other operators would. I think it was a product mix there as well. A little bit off there.

Overall, Variperm is still generating a ton of cash. I think they're still in the right position. They're still innovating. I think as we look to the back half of the year, I think we'll see some improvement with that business going forward. Still love it. Still have the type of margins we're impressed with. Just had a great fourth quarter. Maybe not quite as good in Q1. Don't see any long-term impact, though.

Jeff Robertson (Managing Director)

We're basically a month into a lower oil price, so your comments around the lag in activity is because your customers try to figure out their businesses. Can you share any color on recent conversations with customers about longer lead time items and how they're thinking about that?

Neal Lux (President and CEO)

Our longest lead time items tend to be with our capital businesses. For example, subsea, and we are seeing more activity there. On our consumable-based businesses, the conversations we are having with our customers really have not changed from where we have been. At the ops level, they are not seeing any changes. Again, our view is that we want to be prepared and get out in front of it, and that is why we are acting this way. We feel like the macro in many ways leads the activity. Unless oil prices rebound or gas activity really jumps, we just envision rig count coming down in the next three to six months.

Jeff Robertson (Managing Director)

If you do see over time a shift toward more gas-directed drilling where there can be higher temperatures and higher downhole pressures to deal with, does that affect the life of some of the consumables and maybe shorten the replacement cycle of certain products versus having them work in oil reservoirs?

Neal Lux (President and CEO)

You got it 100% right there, Jeff. Yeah, absolutely. Gas tends to be higher pressure, higher temperature. Items like wire line, coil tubing, even some of our downhole tools, they do wear out more quickly and need to be replaced more frequently. Yeah, actually, even surface items like pumps wear out more quickly under that higher pressure. All in all, a shift to more gas, I think, would help our consumable demand.

Jeff Robertson (Managing Director)

Thanks. Lastly, have you seen any change in any of the renewable type exposure that you have, whether it's data centers with, I think, your cooling units or ROV demand for offshore wind?

Neal Lux (President and CEO)

Yeah. Let me start with the offshore. I think our offshore business is really Eastern Hemisphere or, let's call it, South America focus. We have not seen a change. In fact, we've seen acceleration in the offshore. I think part of that is oil and gas. Part of that is defense. Part of that is also the offshore wind. No change there. On the power gen side, data centers, we are still adding and still booking our coolers that go into those applications. The Powertron, which is our radiator for power applications, you are still seeing a nice uptake there, and we expect that to continue through the year.

Jeff Robertson (Managing Director)

Thank you.

Neal Lux (President and CEO)

Thanks, Jeff.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Steve Ferazani from Sidoti.

Steve Ferazani (Senior Equity Analyst)

Morning, everyone. Appreciate all the detail on the call. I wanted to ask about how you can benefit from your geographical diversification in this environment. I mean, the expectation that you walk through it, that U.S. short cycle probably gets hit first. I mean, when you hear the calls, certain markets that you're in are likely to hold up better. Can you talk about is there any way to target the stronger markets? You can't completely replace what you'll lose in U.S. short cycle, but what you can do in that kind of environment?

Neal Lux (President and CEO)

Yeah. Great question. I think maybe first example is the subsea business, right? I think there have been times where the longer cycle or subsea just was out of favor and there was more focus on U.S. land. I think we're seeing really the opposite now. We're seeing really strong momentum. I think our bookings in subsea was that we had the best bookings quarter in five quarters or so. I think that was really encouraging. That is part of how we do it. Again, if you think about our subsea business, typically it's Eastern Hemisphere related or South America. That is going well. We are expanding our downhole business line into the Middle East. Those efforts started obviously a few years ago. They're continuing, and we still see good results there.

Lyle Williams Jr. (EVP and CFO)

Steve, I'll jump in. In addition to what we might see from the markets, I think there are cost and/or tariff advantages that we can take advantage of with our geographic footprint from a manufacturing perspective. Clearly, we have a lot of manufacturing footprint in the U.S. and for months have been working on an effort to insource product that previously had been outsourced. Through doing that, we increase manufacturing utilization, which is great at this potentially softer time, but also can avoid some of the tariff impact. Similarly, we can use our international facilities, like Neal mentioned on the call, in order to avoid U.S. facilities completely. That is shifting supply chain where maybe components come in from high tariff countries into the U.S. to then be re-exported for international markets. We just skip the U.S. step, whether that is leveraging our facility in Saudi Arabia or in Canada.

Product can head in there from international locations, be manufactured, assembled, tested, and then shipped out. That international footprint is really something we're able to take advantage of here in this time of tariff-related uncertainty.

Steve Ferazani (Senior Equity Analyst)

You never knew the flexibility was going to be this useful, I'm assuming, but very helpful right now, no doubt. Good to see you're ahead of it. Can I ask?

Neal Lux (President and CEO)

Yeah, go ahead.

Lyle Williams Jr. (EVP and CFO)

Go ahead.

Steve Ferazani (Senior Equity Analyst)

I was going to ask about, look, steel price has been the most obvious one. You can raise prices, but there's going to be a lag. Do you have any idea right now, based on your 2Q guidance, what the impact is from tariffs? Is there any way to quantify that? There's a lot of moving parts to that. What the impact to you is in 2Q based on your guidance from higher costs and tariffs?

Neal Lux (President and CEO)

Yeah. I think the biggest impact will be valves, right? We talked about the buyer strikes. I think that's in our number. That is concerning for us. We've put that in our forecast. The other areas where we've seen price increase, I think you're right on the price. You're going to have a lag when you raise price. We also have a lag on when the costs are going up because we do have some inventory. We do have some orders. I think we're hopeful that those balance and that any tariff impact that's out there, we're going to recoup with either price or change in our supply chain.

Steve Ferazani (Senior Equity Analyst)

Okay. That's helpful. Last one for me, and I guess maybe hopefully we don't run into this scenario. There is the event where you're building cash, but the window remains closed for an extended period. In that event, do you just build? Is the plan to build cash, or would you look for alternate usage?

Lyle Williams Jr. (EVP and CFO)

Great question. I think, as you recall, in our framework that we have laid out, the first half of our cash is going to go to net debt reduction. When we restructured our debt last year, Steve, you will remember that we left a decent chunk of cash on our revolver. The idea there is we not only reduce net debt, but we actually reduce absolute debt and save interest expense. That half will go to paying down our revolver. If there is a reason why we cannot buy back shares for some period of time, I think we continue to pile down the revolver. That will lower net debt and ultimately open the window back up.

Steve Ferazani (Senior Equity Analyst)

Open, right. Right.

Lyle Williams Jr. (EVP and CFO)

I think we'll get the benefit of reduced interest expense if that happens. Really, we believe we can get there with a leverage ratio on a more expedited basis.

Steve Ferazani (Senior Equity Analyst)

Perfect. Thanks, everyone. Appreciate it.

Neal Lux (President and CEO)

Thanks, Steve.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Dave Storms from Stonegate.

Dave Storms (Director of Equity Research)

Good morning, everyone. Appreciate you taking my questions.

Neal Lux (President and CEO)

Morning, Dave.

Dave Storms (Director of Equity Research)

Just want to start, and apologies if I missed this, but assuming the tariff levels do wane a little bit over the coming months, how much of the demand do you think could be made up, and how much of those orders are just kind of gone?

Lyle Williams Jr. (EVP and CFO)

No, that's a great question. I think a big feature of what we're talking about, remember, is our valves product line. We will look at the valves that we primarily manufacture and source from China. The major supply chain for our competitors is also from China. We feel that all of our competitors are seeing the same thing, and we hear about similar price increases and price actions. I think what that means is we really have this buyer strike where buyers just aren't buying product. At some point, the ultimate demand and end-use rebounds. Where things could be delayed more permanently is really, call it capital spend by end users. Whether that's in a refinery or a Petchem project or on a pipeline, if that's deferred, then that demand just gets deferred.

If it's maintenance or if it's depleting inventories, then I think we could see a rebound. A really positive move would be a decrease in those tariffs. I think as we look at the geopolitical macro and what's being said about trade policies, we're not expecting that. I think what we expect is a longer run with these tariffs. Maybe they come down some, but still see a pretty high number, which gets back to Neal's comment about us looking at alternate sourcing strategies, using other facilities to move in and mitigate the impact of tariffs and ultimately have a much lower cost basis.

Dave Storms (Director of Equity Research)

That's perfect. Thank you. Just kind of dovetailing off of that, what kind of competition are you seeing in finding those alternate sourcing of the supply lines? I got to imagine kind of everyone has the same plan.

Neal Lux (President and CEO)

We haven't seen, let's call it, much competition for that. I think we'd set up a lot of these supply lines earlier. If you go back in time, Trump really introduced tariffs and duties in 2017. We have been dealing with this for the last eight years or so. A big push on our side is to have supply chain resiliency. I think we've built that in there. Maybe what would be a little different would be the assembly activities that I think that both Lyle and I have both mentioned. That's a little new. That is more just to avoid the tariffs.

Again, which to me is ironic, is that we added these tariffs, and yet we're now pushing manufacturing outside the U.S. because of them. I think they're just a terrible trade policy, and hopefully we can fix that.

Dave Storms (Director of Equity Research)

That's great. One more from me, if I could. Just thinking about the customers and the buyer strike, any sense, finger in the wind, crystal ball question on how long they could hold out, kind of maybe how much track is in front of them before there would be capitulation? Could it be a quarter, two quarters, two years? Any thoughts?

Neal Lux (President and CEO)

Not really sure. They do not keep, I think over the last few years, they have been more lean with inventories. I could see it slowly move. If the price remains high, it is not going to be a full capitulation. They are just going to buy the minimum of what they need to get through. I think once there is certainty around where the tariffs are and that they are not moving, I think they need to get back to business as usual.

Dave Storms (Director of Equity Research)

That's great. Thank you very much, and good luck in Q2.

Neal Lux (President and CEO)

Thank you.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Eric Carlson.

Hey, guys. Good morning.

Neal Lux (President and CEO)

Morning, Eric.

I had a long list of questions that I kind of crossed off, most of them as we went here. I guess when I think about how you've kind of managed cash over the last few years and kind of the outlook here, going to generate close to 100% of current market cap in cash over 2024 and 2025. What did you say the net debt level is at currently or as of, I guess, 3/31?

It's about 150.

Lyle Williams Jr. (EVP and CFO)

148.

Neal Lux (President and CEO)

148, I think, is the number.

Okay. 148. So basically, the potential to get kind of that net debt down to $100 million-$115 million, depending on how the year plays out. So current market cap, sorry, I'm doing quick math. I mean, you're basically looking at trading by year-end 3.2x-3.5x EBITDA with an enterprise value under $300 million. Maybe a little context. In 2020, you had -$20 million of EBITDA and finished the year at $230 million of enterprise value. I'm doing quick math. In 2021, $20 million positive EBITDA, end of the year with $275 million enterprise value. So not far off what kind of year-end looks like and clearly significantly better. Maybe the question would be, how do you execute buybacks in a meaningful way without maybe pushing market price too much and taking advantage of this while it lasts?

Can you source directly from some of the other large shareholders or the bondholders that still exist? Maybe talk me through execution of the buyback and maybe how that has happened so far.

Lyle Williams Jr. (EVP and CFO)

Yeah, Eric, that's a great question, and it's something that we're definitely focused on. As we've seen since we announced our share buyback, our value has moved pretty materially in the market and being impacted recently by what's gone on with trade and tariff policies and OPEC+. I think as we think about the way to do that, clearly being in the market could have an upward pressure on our stock price. I think as we look at that, though, we're trading at a pretty significant discount. You highlighted some of those metrics that are out there. I think we feel the same way.

There is an opportunity to really move what is going on from a stock price perspective, move the amount of shares we buy back given the current stock price, and definitely something that we would love to take advantage of. There will be some carefulness in what we do, but I would expect us to try to get out of the market and be there, especially when those windows open for us related to our net leverage ratio.

Neal Lux (President and CEO)

Yeah. I mean, for our thinking, to be north of 25%, again, this is our forward free cash flow yield at kind of the midpoint of our guidance. That just seems like a ridiculous number. We think that there's a lot of value there. Even if the price were to double, there's still 12.5% free cash flow yield, it would probably put us in the top quartile of peers or higher. I think what's frustrated us is the undervalue. Again, we need to get our story out. We've been doing that. We're going to consistently do that. We think there's more and more people that interest. I think if you look at our track record of performance, we've done what we've said we should do. We've outperformed almost every index that we're a part of.

If you're an investment portfolio manager and you can compare us with the index like the Russell 2000, if that's where you're being measured, why wouldn't you be an FET? The value's there, the performance is there. Ultimately, I think what's really exciting for us is long-term, we think there's a lot of growth here as well. It's a great combination, and it's one that we're excited, and we're going to try to buy these shares as many as possible as we can, especially while the price is this cheap.

Yes. Agreed. Maybe the last thing is in the context of long-term, maybe obviously the cure for low prices is low prices and kind of a headwind turning into a tailwind ultimately. I mean, what have you guys learned? I know when we kind of came into 2023, built working capital a little bit in 2023. I mean, how have you guys changed from as headwinds turned to tailwinds and thinking about managing cash, really kind of hammering home this return of capital story, keeping leverage low? Maybe just walk me through kind of as we turn the corner, which will ultimately happen. I mean, how have you guys changed your mindset or as you plan for that and think about that? Maybe just some color would be helpful.

Yeah. No, I think if you go back to our origins where we began, I think as a small-cap company in a growing industry, we sought to grow EBITDA. That was the focus. That's been the focus of our careers for many years. I think as we got into this cycle and we saw changes, we want to be cash-focused. We ultimately want to generate free cash flow. If the cycle begins to turn and we start to see growth, we're going to have a high bar of returns for each of our businesses. We know we can achieve it, but we want to be turning our working capital very quickly. If we think about key measures, ones that we have internally, our incremental return on incremental working capital, we want to get that.

Whatever working capital we add in a year, we want to have that back in cash. That is going to be a focus on the turn. Our best businesses are going to get the capital. Our ones that do not achieve those results, they are not going to. We want to utilize our working capital, which again is our biggest use of cash. We want to do it in the most efficient way possible.

That's helpful. Maybe the last thing on cash would be, and my last question would be, I know we've seen a few of the set-lease-back transactions over the last few years. Is there anything out there potentially that could be a one-off cash generator, really set you below that leverage ratio and open up a big window or to be determined? Just curious if there's anything that you could see in the short term to generate kind of a one-time cash flow.

Lyle Williams Jr. (EVP and CFO)

Yeah, Eric, the teams have done a really good job over the last few years of turning our real estate, our dirt, into capital that we could redeploy and use. That's been very good. The amount of real estate that we have left is getting really pretty thin as far as what's available. That's good news. We've now gotten our cash redeployed, our capital redeployed. Definitely things that we look at is, are all of our assets generating appropriate returns? To the extent that they're not, it's a question that we ask ourselves, should we monetize that and be able to put that cash to a more high-return use? Definitely something we look at, and we'll keep you updated if something pops loose.

Good. Thank you, guys. Appreciate it.

Thanks, Eric.

Operator (participant)

Thank you. At this time, I would now like to turn the conference back over to Neal Lux for closing remarks.

Neal Lux (President and CEO)

Thanks, Gigi. Thank you, everyone, for your support and participation on today's call. We look forward to our next meeting at the end of July to discuss our second quarter 2025 results.

Operator (participant)

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