Flotek Industries Q1 2024 Earnings Call Transcript

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May 8, 2024

There are 8 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Flotek Industries First Quarter 2024 Earnings Conference Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Wednesday, May 8, 2024. I would now like to turn the conference over to Michael Critelli, Director of Finance.

Operator

Please go ahead.

Speaker 1

Thank you, and good morning, everyone. We appreciate your participation in Flotek's Q1 2024 earnings conference call. Joining me on the call today are Ryan Ezell, Chief Executive Officer and Bon Clement, Chief Financial Officer. First, we will provide prepared remarks concerning our business operations and financial results for the first quarter 2024, as well as guidance for the full year 2024. Following that, we will open up the call for any questions you have.

Speaker 1

Flotek's Q1 2024 financial and operating results press release was issued yesterday afternoon. We also posted an updated Q1 earnings presentation that we will be referencing on today's call. These can all be found on the Investor Relations section of our website. In addition, today's call is being webcast and a replay will be available on our website following the conclusion of this call. Please note that the comments made on today's call regarding projections or expectations for future events are forward looking statements.

Speaker 1

Forward looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to review our earnings release and risk factors discussed in our filings with the SEC. Please refer to the reconciliations provided in the earnings press release and corporate presentation as management will be discussing non GAAP metrics on this call. With that, I will turn the call over to our CEO, Ryan Ezell.

Speaker 2

Thank you, Mike, and good morning. We appreciate everyone's interest in Flotek and for joining us today as we discuss our Q1 of 2024 operational and financial results. I'm pleased with the Q1 2024 performance and even more energized about what's to come this year. Without a doubt, 2023 was a transformative year for the organization. But 2024 will be the beginning of a revitalized Flotek that demonstrates consistent profitability and expansion in shareholder value as we accelerate into a new era of differentiated chemistry and data analytics solutions.

Speaker 2

There is no company better positioned to provide strategic solutions to a variety of our industry's most challenging problems, whether it's operators solving for complex completion challenges such as increased water production and reduced BOE, pumping companies looking to advance their differentiation through maximizing utilization, or oil and gas operators racing to meet the new EPA flare regulations with their unique real time measurement technologies. There's never been a more exciting time to be at Flotek. With that in mind, I'd like to turn to Slide 7 and touch on our key highlights for the quarter that Baum will discuss in detail in just a moment. We delivered significant year over year improvements in gross profit, adjusted gross profit and adjusted EBITDA leading to the 3rd consecutive quarter of net income and 11th consecutive quarter of improved adjusted EBITDA as a percentage of revenue. Notably, Q1 2024 adjusted EBITDA surpassed the total for the entire year of 2023.

Speaker 2

We realized gross profit margin and adjusted gross profit margin of 22% 25%, respectively. Our Q1 2024 external chemistry sales were the highest achieved in the Q1 since we began this turnaround over 3 years ago was up 27% year over year. And although down sequentially, this pattern is consistent with the Q1 in each of the last 3 years as well as average fleet counts in Q1 were down sequentially. Our data analytics segment saw 18% quarter over quarter revenue growth, thanks in part to our continued progress in data as a service revenues. In addition to this progress, we continue to push forward with the field testing of our new Cal X spectrometer, which is still on track for a mid year 2024 release.

Speaker 2

Most importantly, all of these achievements were accomplished with 0 recordable and lost time incidences in the field of operations, extending Flotek's current streak to over 8 43 days without a recordable incident. And I'd like to take the time to thank every single employee for their commitment to safety and service quality in achieving these outstanding results. I expect us to continue to build upon this momentum throughout 2024. Now looking at the quarter in a bit more granularity, revenue was slightly down sequentially. This decrease is mostly attributable to lower external chemistry sales versus Q4 2023.

Speaker 2

We have observed this consistent seasonality since the organization began its strategic turnaround over 3 years ago. At a detailed glance on Slide 9, Q1 2024 external chemistry revenues were up 27% versus Q1 of 2023. This was the largest Q1 revenue reported for our external chemistry sales during the last 3 years with the lowest average rec fleet counts in North America land during the same period. This indicates we are gaining market share through each annual cycle of fleet count stabilization by the execution of our corporate strategy, utilizing chemistry as the common value creation platform. We are seeing continued adoption of our prescriptive chemistry management business model that leverages our customized engineering approach combined with our proprietary complex nanofluis technologies to deliver wells that outperform adjacent competitor wells.

Speaker 2

Flotek will remain at the forefront of innovation and multidisciplinary advancements as we bring new technologies to the market, including AI driven reservoir modeling to address the impacts of water imbibition, drive preferential microfluidic behavior in nanopore environments and improve the ultimate recovery of hydrocarbons from each asset. We expect a substantial increase in our external customer chemistry sales during the Q2 and anticipate total annual external chemistry growth for 2024. To that note, April external chemistry sales already achieved over 70% of what we did in all of Q1 of 2024. We realized 19% sequential growth in our pro frac related revenue. The chemistry purchase requirements contained in the long term supply agreement with pro frac were designed to mitigate the volatility of the market and provide some insulation to Flotek operations for maintaining economies of scale and operational stability.

Speaker 2

Our partnership continues to evolve into a truly transformational offering for E and P operators in regards to efficiency and overall reservoir performance. Our data analytics segment revenues increased 18% from the Q4 of 2023. Our continued success in converting to a data as a service model, combined with the launch of the next generation JP3 measurement system continues to unlock significant upstream market opportunities as the company expects the data analytics business to grow by 50% in 2024. On a more macro level, the demand for oil and gas is expected to expand for the next decade with further requirements needed through 2,045. Long term investments in both short and long barrel cycles will be necessary to maintain production and add the required incremental supply.

Speaker 2

And despite near term volatility in commodity pricing, the fundamentals for energy related services remain strong. And for the first time in nearly 2 decades, the demand for electricity in the U. S. Will climb over 15% by 2,030 with natural gas providing over 40% of the current demand. The overall expansion of the global economy will continue to create substantial demand for all forms of energy, which will increase service intensity within our sector.

Speaker 2

As we look at the remainder of 2024, our efforts remain laser focused on revenue growth, market share expansion, cost efficiency gains and returns on shareholder value as we are well positioned to capitalize on opportunities both domestically and internationally. We are confident that our expanding suite of services positions us to provide unique and superior solutions to maximize our customers' value chains. Now I'll turn the call over to Bon to provide key financial highlights.

Speaker 3

Thanks, Ryan. Good morning, everyone. Our Q1 2024 results reflect solid performance despite relatively soft oil service demand related to natural gas direct to completions. While revenue was impacted by seasonality and lower frac fleet activity, we grew margins and continued the trend of improving financial results highlighted by another strong quarter of adjusted EBITDA. Let me run through a handful of key financial items for the Q1 of 2024.

Speaker 3

I'll be referring to slides in the presentation that we posted to our website yesterday. Slide 7 highlights our Q1 accomplishments and the strong financial improvement we delivered. Headlining year over year growth in net income of $11,000,000 when adjusting for non cash gains in the Q1 of 2023. Gross profit increased by $6,900,000 adjusted gross profit was higher by $7,400,000 and adjusted EBITDA improved by $7,900,000 Regarding revenue for the quarter, we reported total revenues of $40,000,000 which was down versus the Q1 of last year. This decline was attributable to lower related party activity associated with ProFrac that was partially offset by 27% increase in revenue from external chemistry customers.

Speaker 3

As Ryan mentioned earlier and showed on Slide 9, we've experienced a decline in Q1 external chemistry revenues in each of the past 3 years. Based on current projections and a strong start in April, we expect a significant jump in external customer chemistry revenues during the Q2. As a reminder, external chemistry revenue increased by 68% during the Q2 of last year as compared to the low point in the Q1 of 2023. With respect to data analytics, we generated strong growth in this segment as revenues associated with JP3 increased 18% sequentially. We expect growth in data analytics revenue to be weighted toward the second half of twenty twenty four, which is in line with our expectations for the timing of the commercial deployment of our new analyzer.

Speaker 3

Moving to Slide 10, 4th quarter gross profit increased for the 5th consecutive quarter. 1st quarter gross profit grew by 7,000,000 or nearly 400% compared to gross profit of just $1,900,000 in the comparable period of 2023. It's important to note that the minimum chemistry purchase requirements in our supply agreement were in effect during the Q1 of 2024, but not the Q1 of 2023 as the measurement of the minimum purchase requirements began on June 1 last year. The additional revenue from our supply agreement requirements combined with our continued focus on cost improvements allowed us to generate strong margins during the quarter. Touching on a few specific examples of how we are continuing to improve margins during the Q1, we reduced freight cost as a percentage of revenue by roughly 50% versus the same quarter of last year as a result of numerous initiatives executed over the past year included eliminating dedicated trucking and utilizing strategically placed staging yards to allow us to improve the efficiency and last mile deliveries.

Speaker 3

Over the past year, we have also made great improvements in how we purchase materials. We have consolidated vendors to leverage our spend to negotiate better pricing and rebates. We've also focused our efforts on buying direct in order to eliminate costly layers of middleman margins to reduce the highest spend on our P and L. Quickly on SG and A, our first quarter SG and A declined to $6,100,000 which was about a 6% improvement compared to the same quarter of last year and sequentially. This decline was a result of lower personnel cost and professional fees.

Speaker 3

Moving to Slide 11, adjusted EBITDA was positive for the 3rd consecutive quarter, an increase of $7,900,000 compared to the Q1 of last year. This is the 11th consecutive quarter of improvement in adjusted EBITDA, a streak that goes back to the Q2 of 2021. Going to the bottom line, reported net income of $1,600,000 in the Q1 compared to a net loss of 9 point $3,000,000 during the Q1 of 2023 when adjusting for $31,000,000 in non cash gains. Touching on the balance sheet, at March 31, we had $3,100,000 drawn under our ABL, which was $4,400,000 lower or a 58% reduction than we had at year end. As a result, our debt to trailing 12 month adjusted EBITDA moved down to 0.3 times as of March 31.

Speaker 3

Quickly commenting on our 2024 guidance, while we did not give specific revenue guidance for 2024 due to uncertainty around the timing of improved natural gas pricing and the corresponding impact on completion activity, we expect that 1st quarter revenues will mark the lowest quarter of the year and we believe that annual 2024 revenues will generally approximate last year. As a result of the positive impact of the numerous cost reductions implemented and a full year measurement period during 2024 related to the minimum chemistry purchase requirements, we anticipate a substantial increase in margins compared to 2023. Based on current projections, we expect our 2024 adjusted gross profit margin to range between 18% 22%, which compares very favorably to our 2023 adjusted gross profit margin of 15%. With higher margins expected, we anticipate 2024 adjusted EBITDA to range between $10,000,000 $16,000,000 which again is a significant increase over 2023 adjusted EBITDA of just $1,500,000 In closing, Flotek continues to drive strong repeatable performance focused on resilient profitability. Based on the current slope of the curve for natural gas pricing, we anticipate higher completion activity as we move into the back half of the year.

Speaker 3

However, in the event that activity levels remain flat throughout the year, our first quarter results demonstrate our resiliency as we achieved strong margins and bottom line growth in a quarter of relatively light activity. With that, I'll turn the call back over to Ryan to close it out.

Speaker 2

Thanks, Bon. Turning to Slide 19, we are extremely excited about 2024 as we have tremendous growth potential in both our chemistry and data analytics segments and we believe that Flotek represents a compelling investment opportunity to date. Our first quarter results delivered profitability, and we continue to be positioned for sustained growth as the collaborative partner of choice for sustainable chemistry and data solutions. I'm proud of the progress that we have made and I'm confident in our ability to execute going forward. We appreciate the continued support of all our stakeholders and we hope that you share our excitement regarding the future of Flotek and we look forward to reporting further progress.

Speaker 2

Operator, we are now ready to take questions.

Operator

Thank from Alliance Global Partners. Your line is now open. Please ask your question.

Speaker 4

Good morning, guys. First question on on JP3, specifically as it relates to the EPA regulatory approval you guys are working towards. Any kind of update on the timeline there or guesstimate as best you can provide today? And then, wondering what you guys are thinking or expecting in terms of the adoption curve or pace that you might expect from that, if and when you do get that approval?

Speaker 2

So right now, we're happy with our progress and continued interaction with the EPA. Tom and the team are doing a phenomenal job there. And right now, we're expecting the adoption of the EPA to come in line with regulations about the time that our production comes online about mid year. So I think we're making solid progress on both those fronts. And what's been really exciting is we're continuing to see massive adoption of our data as a service as a percentage of revenue.

Speaker 2

If you look back at Q1 of 2023, data as a service was about 23% of our revenue. In Q1 of 'twenty four, it was almost 50%. So significant opportunities there. And I think as our the Calix model, which is our new Gen 3 measurement unit comes online into production full steam by the middle of the year. I think where we are, the regulatory body with EPA will be right in line with that and it should give us a boost in the back half of the year.

Speaker 4

Great. Sounds good. I appreciate that. And for my follow-up, more of a capital allocation question. Given the modest debt you guys have and the capital light model and obviously transition to becoming a more meaningful kind of EBITDA cash generative company, how do you guys kind of think about kind of reinvesting that potentially in the business or looking at M and A or any other kind of options on the table you guys may be considering?

Speaker 2

So a couple of things that we're doing is, for the first time since I've been here, we've invested into some trucking capitalization components. We'll be bringing in quite a few of what we have some long haul trucking for our chemistry to deliver in basin, which will be some capital allocation. This will provide a significant amount of savings in our logistics costs. We're also continuing to spend some CapEx in JP3 at the advancement of building units to support the growth in the back half of the year, particularly on the data as a service model. And we're continuing to evaluate potential opportunities around M and A.

Speaker 2

I do believe that when you look at the fragmentation in the chemistry markets and opportunities there comparatively to the front end on the E and P side, there's potential opportunities to look at some consolidation mechanisms there. Or when we look at advancements in bringing us some new technologies on the JP3 data analytics side of the business. So we are continuing to evaluate opportunities there. The biggest thing on user proceeds there needs to be extremely accretive to the organization with most things that we put capital into.

Speaker 4

Absolutely. Great. Sounds good, guys. Thanks for the time.

Speaker 2

Yes. Hi, Jeff.

Operator

Your next question comes from the line of Don Crist from Johnson Rice. Your line is now open. Please ask your question.

Speaker 5

Good morning, guys. How are you?

Speaker 2

Good morning, Don.

Speaker 5

I wanted to ask about the pilot project. Have you had any other kind of field trips with other operators going out seeing the sensor and kind of seeing the progress that's being made there? And is there anything to extrapolate between other potential sales there versus just the company doing the pilot with?

Speaker 2

Yes. So we've had quite a bit of expansion in that, Don. And I can't necessarily drop the exact names of customer bases, but what I would tell you is, is we've seen expansion in monitoring field gas. We've seen an increase in the number of customers looking at monitoring flares in real time. We've also seen an exponential increase in the field trials and process validations we have around our chain of custody measurements in multiple field and geographic locations.

Speaker 2

So we're really excited. We've got in the double digit number of units deployed in these different areas, particularly running the CalX spectrometer through its paces and making sure that typically we got it in line with a former Barrax unit to make sure everything is lined out and running effectively. We're really excited about this and the opportunities continue to come to us and we're hard in pursuit of these.

Speaker 5

Okay. And as you look to ramp up, I mean, obviously the opportunity set is significant in front of you, assuming everything goes to plan. But as you look forward, any significant CapEx requirements or anything to build out the larger amount of sensors that you would need or is that kind of in place already?

Speaker 2

So in alignment right now where we're forecasting the growth just in say 2024, that 50% range, we've dedicated capital to front load a little over $2,000,000 to advance the build on units. Now that $2,000,000 goes further in building the Calix units because they have a much lower cost base than the original Barrax unit. So it's a solid improvement there. And then we're kind of going through the processes now with the adoptions that we're expecting with the EPA around how much additional capital we'll bring forward in the early parts of 2025 looking at the growth there.

Speaker 5

Okay. But it's not significant

Speaker 2

at this point though? Though? No. I would say it because we can like I say, when you have a substantial drop in the cost of units versus let's put $2,500,000 we can bring quite a few units on between now and the end of the year.

Speaker 3

Yes, Don, you'll remember that was the important thing about moving to this next generation of analyzer because the costs are roughly 50% to 60% less of the previous generation.

Speaker 5

Right, exactly. And I know in the past you've sold these units, but you're trying to shift over to more of a subscription model. Have you had any positive or negative influence or feedback from customers on either way? I mean, are people still wanting to buy these or they're more happy with the subscription model with you, making sure everything's running properly going forward?

Speaker 2

That's a great question. I think when we look at it, it depends on if you're in upstream, midstream or downstream application. What I would consider to be more the golden applications in the midstream part, a lot of the customers that we continue to expand business with prefer the capital purchase just because of how the unit is utilized. What we're seeing is the predominance in the upstream business to be 90% plus in terms of either 1, a data as a service model or a hybrid type service with a large subscription based model with a minimal capital investment upfront for the installation. So I think it kind of depends on the application, but pretty much the bifurcation is heavy on subscription base and upstream.

Speaker 2

There's still a little preference to the capital purchase in

Speaker 5

the midstream part. Yes, Don,

Speaker 2

Brian gave some stats on the percentage of revenue. Included

Speaker 3

in those percentages, when you look at just pure DAS revenue, including those percentages, when you look at just pure DAS revenue, quarter over quarter, it's up 30% Q1 of 'twenty four versus Q1 of 'twenty three. So people are migrating to the DAS model certainly.

Speaker 5

That's good to hear. It's much more sustainable and gets a higher multiple. I appreciate the color guys. I'll turn it back.

Speaker 3

All right. Thanks.

Operator

Your next question comes from the line of Erik Svergold from Firestorm Capital. Your line is now open. Please ask your question.

Speaker 6

Good morning and congratulations on your hard fought progress. There's been a number of industry pieces talking about the use of AI in the E and P space. Can you speak to how your data analytics and chemistry segments fit into this new AI framework for E and Ps? Thanks.

Speaker 2

Yes. This is actually a real, I would say, exciting frontier for us, Eric, is that initially most of the AI oriented activities that we're doing were around our chemometric modelings and things that we're doing on the JP3 side, leveraging that large database of crude samples that we've had over the last 5 to 7 years. And so there's a lot of advancements that we're making to accelerate the accuracy of the models, accelerate the group fits, particularly when you look at, I would say, these chain of custody and rebate for pressure measurements and stuff that we're doing there. And AI continues to be a large part of that. What's been really exciting is we took a step back and said, hey, if you've been an innovative chemistry company with 200 patents in the advanced reservoir technologies component when you look at some of these influences at the nanopore level and what goes on with surface interacts, subsurface interactions and things.

Speaker 2

We've completed over 20,000 wells and we have production data and chemistry modeling for these things. So we've gone in and now using AI to actually take these data sets, crunch them, create cubes of different data with that it advancing it how we look at the performance of our chemistry to make small formulation changes and actually advance where we're going to be in the future and what I consider to be improved or recovery for the total life of the asset. So I think it's playing an essential part for us to accelerate our technology and the thinking that we do on both the chemistry and the data side. And what it's starting to do is really create an amount of synergy and a unique platform, I think, to Flotek that we're going to be talking quite a bit about some of the upcoming events we have at the Louisiana Energy Conference and what we're going to talk about in intercom in Denver later in August, we're going to be presenting some of this work.

Speaker 6

Sounds good. Thanks very much guys. Keep it up.

Operator

Your next question comes from the line of BJ Kirk, an individual investor. Your line is now open. Please ask your question.

Speaker 7

Hey, guys. Thanks for taking my call. It's BJ Cook with Singular Research. You guys talked about external chemistry this year. I expect it to increase here, but I know it's determined on volume quite a bit.

Speaker 7

I'm just curious, you guys anticipate or are adding new external operators to your platform?

Speaker 2

Yes, 100%. I mean, the biggest part we look at on external chemistry is, we have we've seen since the tenure of being here, our seasonality shift a little bit from what used to be Q3 to Q4. Now with a little bit of opportunity to capital discipline, the way you look at plans and the ability to turn the spigot on and off here in the U. S. We've seen some of that seasonality shift into Q1 and has traditionally been probably our least active quarter on the external chemistry sales component of that.

Speaker 2

But comparatively speaking of the tenure that we've done this turnaround, you've seen average rec fleets in those quarters go down and our revenues continue to go up substantially. As you look at, say, for Q2 to Q4 through the rest of this year, we've got a substantial we've got a really healthy and robust pipeline and continued activity with a strong group of what we call our stickier customer base and quite a few new opportunities on the backside here. The adoption of our prescriptive chemistry management and our understanding of reservoir technologies are coming into prominence. As you're starting to see a lot of these operators moving infield well design and down spacing on how they do their completions.

Speaker 7

Great. Thanks. I appreciate that.

Operator

We don't have further questions at this time. Presenters, please continue.

Speaker 1

Thank you again for joining us today. Flotek's CEO, Ryan Ezell will be participating on a service industry panel at the Louisiana Energy Conference on May 29, 2024 at 4 pm. He will be joined by CFO, Bon Clement in hosting meetings with investors and a copy of the presentation will be used in the discussions with the investors will be available on the corporate website prior to the event. We look forward to meeting with you. Thanks again for joining us today.

Speaker 1

Please feel free to contact us if you have any additional questions. Have a great day.

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