Flotek Industries Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 8, 2023

There are 6 speakers on the call.

Operator

Morning and welcome to Flotek International Third Quarter 2023 Earnings Call. All participants will be in listen only mode. After today's presentation, there will be opportunity to ask questions. Please note that this event is being recorded. I'd like to turn the conference over to Mr.

Operator

Larry Bosnardo, Investor Relations representative, please go ahead.

Speaker 1

Thank you and good morning. We appreciate your participation in Flotek's 3rd quarter earnings conference call. Joining me on the call today are Ryan Ezell, Chief Executive Officer and Bon Clement, Chief Financial Officer. We issued our earnings announcement for the Q3 of 2023 yesterday afternoon, which is available on the Investor Relations section of Flotek's website. We also filed an 8 ks with an updated corporate presentation that we will be referencing on today's call.

Speaker 1

This will also be posted to our website this morning. In addition, today's call is being webcast and a replay will be available on our website shortly following the conclusion of this call. Please note that the comments we make on today's call regarding projections or our expectations for future events are forward looking statements. Forward looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. These risks and uncertainties can actually can cause actual results differ materially from our current expectations and projections, we advise listeners to review our earnings release and the risk factors discussed in our filings with the SEC.

Speaker 1

Also, please refer to the reconciliations provided in our earnings press release as non GAAP financial metrics may be discussed on this call. With that, I will turn the call over to Ryan Gizelle. Ryan?

Speaker 2

Thank you, Larry, and good morning. We appreciate everyone's interest in Flotek and for joining us today as we discuss our Q3 2023 operational and financial results. I'm extremely pleased with our Q3 results As we continue to demonstrate significant progress in executing our corporate strategy, while improving our core business fundamentals, this is highlighted by the first Quarter of positive adjusted EBITDA in 5 years. Our results build upon the strong financial and operational momentum we established this year and reflect meaningful year over year improvement in all of our profitability metrics. Flotek's complementary and unique business segments Carrying undeniable value proposition that maximize our customers' asset performance, we will continue to leverage our differentiated technologies in both chemistry and data analytics solution platforms to positively impact our customers' value chain, while systematically gaining market share and margin expansion to generate an impactful return on investment for our shareholders.

Speaker 2

With that in mind, I'd like to turn to Slide 8 and touch on our Q3 highlights that Bahn will discuss in detail in just a moment. During the Q3, we reported positive adjusted EBITDA and the 9th consecutive quarter of EBITDA improvement. We achieved positive adjusted gross margin for the 3rd consecutive quarter with an associated margin of 22%. In addition, adjusted gross profit through the 1st 9 months is up nearly $20,000,000 from the same period in 2022. Transactional chemistry revenues have grown each quarter in 2023 due to our rapidly expanding customer base and the continued adoption of our proprietary complex nano fluids and over 2 50% growth annually.

Speaker 2

Our multidisciplinary approach to reservoir centric technologies has been proven to provide enhanced well productivity, while utilizing our chemistry applications on-site when all else is being equal. Our data analytics subscription based revenue was up 81% for the 1st 9 months 2023 versus the prior year. The segment has seen a 2 times increase in the number of subscription based services, which supports our segment strategy to evolve at a data as a service business model. These subscription based services have had a 98% annualized retention rate. Revenues not attributable to ProFrac totaled 38% during the Q3.

Speaker 2

This is a 58 percent increase from the Q1 of this year with further improvements expected in the 4th quarter. We strengthened our liquidity with the addition of a $10,000,000 ABL that was upsized to $13,800,000 in October. We successfully completed our corporate office move, providing ALI's $1,000,000 per year of savings. We expanded our global footprint with a new international entity in Abu Dhabi to facilitate market share growth and margin expansion As we strengthen our in country value add components, while lowering our operational cost base by approximately 30%, which would equate to greater than $1,000,000 in annual savings. Finally, we announced the promotion of 3 internal team members and 1 external hire to executive leadership roles.

Speaker 2

I'd like to congratulate Nathan Snoke on his promotion to Senior Vice President of Global Business Lines Shane Wise on his promotion to Senior Vice President of Operations Andrea Berry on our promotion to Vice President of People Operations and the addition of Tom Rettlinger as Vice President of our High Margin Data Analytics segment. These moves complete the transition of the company's executive leadership team as we have emerged as an employer of choice amongst chemistry and data services landscapes. Not only does the new team bring vastly more technical and operational experience, but when compared to the overhead cost of the previous team, It will save the company approximately $500,000 per year. These impressive results reflect the positive An impactful change that we have achieved within a short period of time. Most importantly, all of these milestones were achieved with 0 recordable and lost time incidents in the field of operations.

Speaker 2

I'd like to thank all of our employees for their commitment to safety and service quality In achieving these outstanding results, I expect us to continue to build upon this momentum throughout the remainder of the year. Looking at the quarter in a bit more granularity, revenue was slightly down sequentially. This decrease is directly attributable to the overall market slowdown in upstream onshore activity that has been experienced this year. And I'd also like to add an additional color here. The U.

Speaker 2

S. Land rig count is down 19% and total frac fleets are down 12% from the Q3 of 2022. And despite this decline in overall drilling and completion activity, the impact of Flotek has been much less given the execution of our strategy around our differentiated and complementary chemistry and data technologies. To that end, we have continued to grow our transactional chemistry business revenues Every quarter this year and they were up another 5% in the 3rd quarter, which has clearly mitigated the impact of the broader market slowdown. Furthermore, the chemistry purchase requirements contained in the long term supply agreement with Profrac were designed to mitigate the volatility in the market and provide some insulation to Flotek operations for maintaining economies of scale and stability.

Speaker 2

On a more macro level, the demand for oil and gas is expected to expand for the next decade with burning requirements needed through 2,045. Long term investments in both short and long cycle barrels will be necessary to maintain production and add required incremental supply. Consistent with this outlook, we expect continued demand for oilfield services in 2024 and beyond. We believe that the demand for our advanced chemistry data solutions will continue to increase and will provide new opportunities at other market verticals such as industrial, geothermal, Agricultural, Solar and Hydrogen. Now I'll turn the call over to Von to provide key financial highlights.

Speaker 3

Thanks, Ryan. It's great to be with you all this morning. I want to start by echoing what Ryan said in that we are all extremely pleased by our 3rd quarter results. Our corporate strategy is paying dividends and delivering impressive results as we achieved several important milestones during the quarter. As shown on Slide 8 of this morning's deck, we reported a solid quarter of results across the board, highlighted by strong growth in all year over year profitability metrics.

Speaker 3

We reached a significant milestone by reporting positive adjusted EBITDA for the first time since the Q3 of 2018, which also represented the 9th consecutive quarter of improvement. This is an important achievement that reflects the progress we've made maximizing Flotek's revenue stream from our diversified business segments and our continued initiatives to drive cost improvements across the business. Lastly, we strengthened our liquidity with the entry into an ABL in August, which we were able to upsize in October. Looking at the income statement, Slide 9 shows the growth in total revenues over the last few years, including our latest guidance range for 2023. 3rd Revenues were 4% higher compared to the year ago quarter, but were down 6% compared to the Q2 of this year.

Speaker 3

As Ryan mentioned, the sequential decrease is attributable to the overall market pullback in upstream drilling and completion activity. On a positive note, Flotek's transactional chemistry revenues were up almost 80% from the Q1 of this year. In addition, using the midpoint of our latest revenue Guidance, we would achieve annual revenue growth of 41% this year versus 2022, which certainly would be a tremendous achievement given the onshore market dynamics. As it relates to revenue, I'd like to briefly discuss Flotek's supply agreement with ProFrac. The agreement contains minimum requirements for annual repurchases by ProFrac.

Speaker 3

If purchases do not meet the contractual requirements, we are entitled to additional payments at the conclusion of the measurement period, which currently runs from June 1, 2023 through December 31, 2023. Based on recent activities, we do not The chemistry purchase requirements will be met during the measurement period. And accordingly, our Q3 9 month 2023 revenues include expected shortfall payments, which positively impacts our profitability. For more specifics regarding the supply agreement and the modifications and amendments that have been made to date, encourage you to review the 8 ks's we filed on February 6 this year and May 18, March 10 February 4 last year. Looking at Slide 10, 3rd quarter gross profit increased to $9,000,000 compared to a gross loss of $2,000,000 for the comparable period of 2022.

Speaker 3

Adjusted gross profit, which excludes certain non cash costs, totaled $10,000,000 compared to gross profit of only $150,000 for the comparable quarter. Gross profit margin and a gross adjusted gross profit margin during the quarter increased to 19% and 22%, respectively. The improvement in 3rd quarter gross profit was driven by the shortfall payments expected under the pro frac supply agreement, An increase in our transactional chemistry revenue and continued cost reductions to material and freight. Adjusted gross profit through the 1st time months 2023 is up $19,000,000 versus the comparable period of 2022. Based on the midpoints of our updated guidance, we now anticipate $27,000,000 improvement in full year 2023 adjusted gross profit compared to last year.

Speaker 3

Moving to Slide 11, 3rd quarter adjusted EBITDA was a positive $3,300,000 As shown on the chart, this is the 9th consecutive quarter of improvement in this metric. Touching on SG and A, 3rd quarter totaled $6,500,000 compared to $9,300,000 for the Q3 of last year. The 30% year over year decline and improvement was primarily the result of lower employee compensation expense as well as reduced legal and professional fees. In October, we settled the final matter of previously disclosed litigation that began in 2021. The cost of this litigation has been nearly $2,000,000 this year.

Speaker 3

So the resolution of this matter should be extremely beneficial As we begin to turn our focus to 2024 G and A costs. Going to the bottom line, we reported net income of $1,300,000 in the 3rd quarter Compared to a net loss of $19,000,000 in the comparable quarter of 2022, net loss for the Q3 of last year did include a $4,000,000 non Touching on the balance sheet, in August, we announced the completion of an asset based loan, which provided initial credit availability of $10,000,000 We were able to increase that to $13,800,000 in October through the pledging of certain real estate assets. Approximately $5,400,000 of borrowings are currently outstanding under the facility, which is subject to an 11% interest rate and we currently have about $6,400,000 of borrowings available under the ABL in addition to the roughly $3,000,000 of cash Currently on hand for total liquidity approaching $10,000,000 As it relates to our outlook on 4Q, have updated our full year guidance as follows. As a result of the slowdown that Ryan touched upon earlier in onshore activity, Total revenues are now expected to total $185,000,000 to $200,000,000 compared to a previous estimate of $210,000,000 to $230,000,000 But really more importantly, adjusted gross profit margin has been increased to a range of 12% to 14%, which is up from the previous range of 8% to 10%.

Speaker 3

So if you take the midpoint of the new guidance, it would imply a 30% improvement in gross profit versus the previous guidance. That concludes my remarks. I'll now turn the call back over to Ryan for closing comments.

Speaker 2

Thanks, Bhaj. In summary, Flotek delivered an Impressive 3rd quarter as we saw virtually every financial metric improve year over year and are reporting a positive adjusted EBITDA for the first time in 5 years. We have demonstrated a track record of delivering continuing improvement in our profitability that is not being reflected in our share price. The exploration and production as well as oilfield service markets have fundamentally changed. The current market is more consolidated With focus on returns and free cash flow generation, customers find value to technology and efficiency and the service industry is rewarded for returns and Profitability Enhancement.

Speaker 2

Flotek is well positioned within this space as a collaborative partner of choice For our customers that are seeing the importance of maximized production and rate of return for their assets move to the forefront of their operations. This plays right to the strength of our differentiated chemistry and data technologies that target improved recovery and maximize the value our customers' hydrocarbons. This value proposition is what differentiates Flotek from its peers. We believe that there is more work to be done, We are well positioned to capitalize on the significant opportunity we have for us as we build value for our shareholders. 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're now ready to take questions.

Speaker 1

Thank you.

Operator

First question will be from Corey Johnson, Apistro. Please go ahead.

Speaker 4

Good morning, guys. My question is about the fleet. Congratulations on a great quarter. Really impressive results and I have a question about the fleet and what's happened with deployments. How have you changed the fleet deployments themselves both in terms of numbers And the way you deploy them to add your gross margins.

Speaker 5

Hey, Corey, you got a

Speaker 3

lot of feedback Hynes, we're really not able to hear your question. Would you mind repeating that? Yes. I'll start one

Speaker 4

more time. Question about the fleets how you've changed the deployment to add to gross margin?

Speaker 2

Yes. So if I understand correctly, you're asking Where the fleets are being deployed, how this has impacted our gross margins. A couple of comments around that. So when we look at the fleet deployment, one is that We've actually seen obviously the total count itself was down, but really where we've seen the big impact is in those gas rich basins such as the Haynesville And we've seen some of these fleets transition to other areas in South Texas or West Texas, etcetera. And when you look at that, Changes in gross margins for us are impacted in terms of product mix and destination to delivery and how often we change the customers, in other words, the white space Changes of pad locations.

Speaker 2

And what we've seen is that, we've seen a slight impact to overall revenue, but in reality, the products that we're moving is quite more efficient For us, freight costs have gone down as a percentage of revenue and our material costs as a percentage of revenue are where we were Pre the pro frac contract, which means we've seen significant improvement in our overall material cost base. I hope this kind of adds a little bit of color around

Operator

Next question will be from Gerry Sweeney, ROTH Capital. Please go ahead.

Speaker 5

Hey, good morning, Ryan and Bob. Thanks for taking my call.

Speaker 2

Good morning.

Speaker 5

I did actually have a similar question on gross margins, I think that Corey just asked. I just want to dig in and understand not just what was driving gross margins, but Maybe some of the what's going to drive it in the future is that some of the prescription management, but I think you also described Location of where your work is. So I'm not sure if you can add to that. Obviously, I'm a little bit new to the story, but I was just curious if Maybe just dig in a touch further. Thanks.

Speaker 2

Yes. So just to build on the commentary I had to Cory. So when you look at overall Operational contribution to gross margin improvement, a lot of that has been driven by our improvement of our logistical networks and optimization that we've done there As we continue to see freight as a percentage of material costs go down every quarter this year, the second component that contributes to that is the types of materials that we're moving in the general Our material costs as a percentage of revenue are where we were prior to us ramping up our ProPRET contract. So as we have been predicting on our faster profitability there, we're starting to see those margins return to the strength that we would want to see. The other big component that we're extremely excited about and probably has had the most impact for us is that our prescriptive chemistry based sales are continuing to increase every quarter and we refer to those as the transactional business models.

Speaker 2

And what's more important there is the proprietary technologies that we see with our complex NanoFluids, those have grown 151% On quarter and are up over almost 2 50% year on year. And in Q3, they represented almost 40% of the sales In the transactional business component, which if you go back to our best years of profitability back in 2014 2015, It was those percentage of revenue. So we're continuing to see that evolve and that's really helping push our gross margin business. And you look at it in terms of why that revenues continue to grow, those are 12 to 18 month sales that we've been in place in long term pursuits on. And as you see, E and P operators look to wanting better performance out of every well drilled.

Speaker 2

This is becoming more and more and more important. That's why I think we're in a real good position to continue to improve our gross margin base.

Speaker 3

Hey, Jerry, it's Bond. I'll just add a little bit just to give you a framework Dollars Ryan is talking about. So our transactional, which we define as non pro frac chemistry business in Q3 did just over $16,000,000 of revenue. During the Q1 of this year, that was $9,200,000 of revenue.

Speaker 5

Got it. That's helpful. And again, A little bit newer, but, Ryan, I think you were just talking about 12 to 18 month sales cycle. Can you if you're comfortable with this, maybe just describing what your current sort of backlog or pipeline or How many entities you're talking with today and maybe even conversion rates or something along those lines, If you could or would. Thank you.

Speaker 2

Yes. That's a great question. I think in terms of details here, it provides quite a bit Not only the diversification of our revenue stack, but also the strength of Pursuit's play right now. If I was to refer back to say in 2021, Our revenue stack was represented by 2 customers that had over 90% of our revenue. If you were to go now on the transactional chemistry We don't have a single customer that represents more than 8%.

Speaker 2

And so we've seen a significant diversification in terms of who we're getting revenue from that change over there. And I would say that almost 50% of our revenue that came in Q3 was attributable to new customers, Which is fantastic. And then if I look at our pipeline, it starts through Q4 and rolled to the end of next year. We've got almost $400,000,000 worth of Opportunities identified in our domestic and international business. And so we're really excited about what some of these opportunities are.

Speaker 2

And again, as I look at it and I see these technologies that we have moving to the forefront for these E and P operators as well as helping and growing our relationship with Pressure Pumping Companies, we're in a really good position there.

Speaker 5

Great. I really appreciate it. Thanks for the color. Thank you.

Operator

Thank you. This concludes our question and answer session. I'd like to turn the conference back over to Mr. Larry Biznardo for closing remarks.

Speaker 1

Thank you again for joining us today on our call. We know it's a busy morning with other calls within the industry. So please feel free to reach out to Bond if you have any additional questions. Thanks again and have a good day.

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Earnings Conference Call
Flotek Industries Q3 2023
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