ProFrac Q2 2023 Earnings Call Transcript

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August 10, 2023

There are 9 speakers on the call.

Operator

Greetings, and welcome to the ProFrac Holding Corp. 2nd Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded.

Operator

It is now my pleasure to introduce your host, Mr. Rick Black with Investor Relations. Thank you, Rick. You may begin.

Speaker 1

Thank you, operator, and good morning, everyone. We appreciate you joining us for Profrac Holding Corp. Conference call and webcast to review our Q2 2023 results. With me today are Matt Wilks, Executive Chairman Ladd Wilks, Chief Executive Officer And Lance Turner, Chief Financial Officer. Following my remarks, management will provide high level commentary on the financial highlights of the Q2 of 2023 as well as provide the business outlook before opening the call up to your questions.

Speaker 1

There will be a replay of today's call available by webcast on the company's website atpfholdingscorp. And therefore, you are advised that any time sensitive information may no longer be accurate as of the time of any replay listening or transcript reading. Also, comments on this call may contain forward looking statements within the meaning of the United States federal securities laws, management's expectations of future financial and business performance. The forward looking statements reflect the current views of Prophax Management and are not guarantees of future performance. Various risks and uncertainties and contingencies could cause actual results, Performance or achievements to differ materially from those expressed in management's forward looking statements.

Speaker 1

The listener or reader is encouraged to read ProFrec's Form 10Q and the other filings with the Securities and Exchange Commission, which can be found at sec.gov or on the company's Investor Relations website under the SEC Filings tab to understand those risks The comments made today also include certain non GAAP financial measures as well as other adjusted figures to exclude the contributions of Flotek. Additional details and reconciliations The most direct comparable consolidated and GAAP financial measures are included in the quarterly earnings press release, which can be found on the company's website. And now, I would like to turn the call over to ProFac's Executive Chairman, Matt Wilkes. Matt?

Speaker 2

Thanks, Rick, and good morning, everyone. Thanks for taking the time to join us on the call today. After my prepared remarks, Ladd will take a deeper dive into the performance of our subsidiaries and Lance We'll provide additional insight into our financial performance. Our second quarter results were challenged as a result of customer consolidation, Coordination with customer CapEx schedules and the impact of the recent banking crisis on private operators. Despite these external challenges, We generated $182,500,000 in adjusted EBITDA, reduced our debt by $86,000,000 and generated $56,000,000 of free cash flow.

Speaker 2

We have adjusted our cost structure to right size our organization through the acceleration of acquisition synergies and headcount reductions. Most of these reductions will be reflected in our Q3 results. As we move through the second half of our year, We expect to see our mining assets grow sales and expand customer footprint. We're pleased to see improving industry fundamentals disciplined behavior from our peers, which support a constructive outlook in the second half of twenty twenty three. I want to take a few minutes to discuss How we think about ProPrac Holdings and how we view the industry in relation to our subsidiaries.

Speaker 2

The first thing I want to emphasize is that we are a holding company And we are the premier vertically integrated energy services holding company, offering a modern suite of complementary services and technologies To the industry, while we started out as a frac company, we have expanded and transformed into 3 major segments stimulation services, Proppant Production and Manufacturing. The fastest growing of these segments has been our proppant segment, Both in terms of potential and in terms of value, it contributes to the pro frac platform as well as ACDC stakeholders. We have been focused on diversifying the customer base and signing contracts for the proppant production division. In Q2, we were pleased that sales reached 70% of revenue. We continue to pursue additional contracts that increase diversification and improve stability, And we expect to grow the customer base in total production at lower cost levels.

Speaker 2

Lastly, we believe the currently proposed Regulation by the Department of Interior and related to the DSL would have a minimal impact on our product production. This is because we believe that our West Texas assets are well outside of the high risk habitat zones. Our goal is to provide more certainty and less volatility to our proppant division, while boosting our utilization to a level that will optimize profitability. This segment has the potential to generate 2 to 3 times the EBITDA that we had in the Q2. We highlight this segment To illustrate the incredibly high cash conversion of proppant sales and to demonstrate the stability that a lean multi mine company can achieve.

Speaker 2

In terms of the overall market environment, we are optimistic and encouraged. We're optimistic because we are seeing pricing remain constructive. We're encouraged because we see multiple players idle capacity and remain steady on pricing. We see a number of smaller players that are aggressively bidding the spot work, but we view this as isolated and unsustainable. The number of fleets idled in the last 6 months are considerably higher than the number of staffed fleets that could go back to work in a responsive manner.

Speaker 2

In addition, natural gas pricing is constructive, which we believe will provide a built in catalyst as we look forward to the remainder of 2023. As we approach the back half of twenty twenty three, we believe we will see operators ramp activity as they prepare for their 2024 programs. I remain proud of what this team continues to accomplish and believe we are well positioned to capitalize on increasing industry activity. Our fundamental strategies haven't changed and neither have our primary goals for ProFrac. We continue to execute on our goals.

Speaker 2

Our pumping efficiencies are best in class. We offer a portfolio of Tier 4 dual fuel and electric fleets capable of simultaneously delivering cost savings Profitability and continue to adapt our cost structure to further improve our cash flow. As always, Industry discipline remains a welcome narrative. For ProFrac, we continue to believe that our disciplined approach With that, I'll turn the call over to Ladd.

Speaker 3

Thanks, Matt. As always, I'd like to thank our team for their hard work and dedication as they continue serving our customers. We firmly believe that great customer service distinguishes our company in the market and is a direct result of the strong culture within our team to continually serve our customers. Turning to the quarter, as many of you who closely follow our industry have seen, there were meaningful shifts in activity during the Q2 that resulted in white space And subsequent fleet reductions. That being said, Matt did a great job detailing how pricing remains constructive And industry discipline continues to support a positive outlook.

Speaker 3

ProFREX differentiated and vertically integrated service offering It's the cream of the crop in our industry. As we see activities levels rebound, we will purposely deploy our fleets Only where they can earn attractive returns and generate cash for us to return to our stakeholders. We don't want to get caught up in short term locations in a healthy industry. Customers want service providers with assets and technology that can reliably deliver efficiency and cost saving. We fit the bill hands down with some of the youngest and most advanced asset base in the industry.

Speaker 3

From a stimulation service standpoint, we continue to have strong interest in our fuel efficient fleets. We're seeing equipment type Drive utilization and diesel appears to be the swing capacity. We've also slowed our CapEx spend, reduced eFleet growth spend And lowered engine upgrade CapEx in response to activity levels. Light space accelerated in Q2, but appears to have bottomed out in May. After the past year of acquisitions, we're adjusting our commercial strategy to target a more diverse customer base with committed contracting approaches across the fleet.

Speaker 3

Our goal is to capture longer term dedicated work, reducing volatility in the business during short term market dislocations. Turning to our Proppant Production segment. As we guided to last quarter, the 2nd quarter represented the 1st full quarter contribution From all of our 8 mines, sand volumes were up as a result, yet constrained from what we believe is their full potential Due to lower industry wide utilization, the proppant segment continues to show signs of improvement. Our efforts to diversify the customer base reached an all time high for 3rd party sales and we continue to pursue additional contracts that increase We expect further growth in this segment as the customer base expands, Production increases and costs are lowered. As we've discussed before, our vertical integration strategy benefits both our customers and ProFrac throughout the cycle.

Speaker 3

Our ability to bundle fleets with internally produced sand, Logistics and Chemicals saves our customers significant cost. Looking to the back half of the year, We're positioning ourselves to reactivate fleets in Q4 and Q1 as customers solidify The 2024 budgets. The general trend suggests improved activity as we progress into next year. When pursuing commercial opportunities, ProFrac will always prioritize generating returns over winning market share. We are working diligently with our customers as they build out their calendars with the goal of minimizing gas and integrating more materials into our fleet.

Speaker 3

I'll now hand it over to Lance to provide more detail on our financial results.

Speaker 4

Thank you, Lad. As Matt mentioned, generated $183,000,000 in adjusted EBITDA, dollars 56,000,000 in free cash flow and we reduced our debt by approximately $86,000,000 during the quarter. On a consolidated basis, revenue for the Q2 totaled $709,000,000 a decrease driven primarily by lower activity levels As outlined by Matt and Ladd. Selling, general and administrative costs were $70,000,000 in the second quarter, down slightly from the 1st quarter. 2nd quarter SG and A included a number of one time items such as $9,000,000 in acquisition and litigation related costs.

Speaker 4

This was partially offset by $7,000,000 reduction in SG and A in our other business activities segment relating to Flotek. SG and A also included non cash stock based compensation of approximately 9,800,000 We believe our baseline SG and A was down approximately $1,000,000 from the prior quarter when excluding Flotek and these various items. Additional reductions are expected in the Q3 as a result of our cost reduction efforts. Turning to our business segments. The Stimulation Services segment generated revenues of $608,000,000 in the 2nd quarter, Down from the Q1 primarily due to lower fleet count and more white space on active fleets.

Speaker 4

Adjusted EBITDA for the segment $123,000,000 compared to $206,000,000 in the previous quarter. In response to the white space that we outlined, we reduced our fleet count Significant cost savings in the 3rd quarter and beyond. Segment generated revenues of $110,000,000 in the 2nd quarter, up approximately 34% sequentially. Adjusted EBITDA for the profit production segment totaled $58,000,000 up approximately 40% from the Q1. The revenue uplift was primarily driven by the full impact of all 8 mines during the quarter compared to approximately 5.5 active mines in the Q1.

Speaker 4

While we saw an uptick in total production, we are focused on getting total output higher and as we improve efficiencies at our plants, We expect to see a lower cost per ton. The Manufacturing segment generated revenues of $31,000,000 in the second quarter, 54% from the previous quarter. Approximately 73% of this was intercompany revenue for products and services Provided to the Stimulation Services segment. Adjusted EBITDA for the Manufacturing segment was $3,100,000 down from the 1st quarter. This segment was impacted by lower orders by our Stimulation Services segment as they reduced equipment related expenditures And focused on utilizing inventory on hand.

Speaker 4

Cash capital expenditures totaled $98,000,000 in the second quarter. As we focus on reducing our CapEx for the remainder of the year, we expect our total CapEx to be approximately $300,000,000 which reflects the deferral of our fleet upgrade program, including Tier 4 upgrades and electric fleet deployment. We will remain disciplined with our capital allocation plans and continue to look for areas to further reduce growth CapEx spend. Operating cash flow was $154,000,000 during the Q2. We continue to manage our receivables and payables to manage liquidity.

Speaker 4

In addition, we are focused on consuming the inventory that we have built over the last year, which we expect to start providing the working capital benefit to ProFrac in the back half of the year. Total cash and cash equivalents at the end of the quarter was $27,000,000 We have total liquidity of $164,000,000 consisting of a combination of cash and 137,000,000 availability under our asset based credit facility. At the end of the second quarter, we had approximately $1,200,000,000 of debt outstanding. As Matt mentioned, our focus for the remainder of 2023 is generating free cash flow for debt repayment. We illustrated this priority in the Q2 as we produced free cash flow of roughly 56,000,000 With that operator, please open the line for questions.

Operator

Thank you. We will now be conducting a question and answer session. Our first question comes from the line of Luc Lamoine with Piper Sandler. Please proceed with your question.

Speaker 5

Hey, good morning, guys. Good morning. I believe you should have had about 35 active fleets in 2Q. Can you provide some commentary on the magnitude of the fleets that you guys put on the sidelines in June and then in August?

Speaker 2

We're not going to provide any commentary on it. What we focus on is maximizing the utilization of every asset that we have And focusing on rightsizing the cost structure associated with that. What we've seen across the industry is a pullback And overall available active fleets and what we're really encouraged by seeing the A similar approach to reducing costs associated with inactive fleets. And so We believe that provides some sensitivity for activity levels picking up And what that means for pricing longer term and The sensitivity is really, really there on the upside. We're already seeing some green shoots here and believe that the second half of the year is going to be much more robust than people expect.

Speaker 5

Great. Maybe try a different one here, Matt, to the upside. Any Quantification, provide where you think or how many fleet reactivations for Pro Frac in 4Q or into 2024?

Speaker 2

We're not going to guide to fleet count, but we're paying very close attention to rig count. One thing I would point out too with these operators is that the DUC inventory and the way that the industry has really looked at Building DUC inventory has changed. It's completely changed. A high DUC count is A feature of low interest rates and with rates coming up the way that they have, the cost of capital associated With a partial spend on an unproductive asset is not the best it's not the Most efficient use of capital and we think that that's going to keep DUC inventories subdued And activity levels will more likely be closely related with rig count. When we look at rig count and the structure, Instead of just looking at it at a high level, we're seeing a lot of the private guys deploy rigs and get back to work with where the cost of capital is, Really excited to see how quickly following those rigs you'll see, frankly.

Speaker 5

Okay. And then with I'll try one more here. With the CapEx reduction, it sounded like the eFleet deployments were pushed to the right a bit. Can you just update us on what the eFleet deployment schedule looks like Over the next 12, 15 months?

Speaker 2

So we had some under construction that We've pushed into 2024 delivery, and we're focusing on generating cash, reducing CapEx And pairing down our overall leverage.

Speaker 5

Okay. Got it. Thanks so much, Matt.

Speaker 2

Thank you.

Operator

Thank you. Our next question comes from the line of Alex Schiefelhofer with Stifel. Please proceed with your question.

Speaker 6

Hi, good morning everyone. Thanks for taking my question.

Speaker 2

Thank you.

Speaker 6

So just to kick us off So we've seen some data points that spot pricing has been weaker in the Permian for proppant. I'm just curious, have you guys been seeing that as well? And can you talk about maybe what prices are doing in the Haynesville? And I guess by that effect also the Eagle Ford? And I guess also how ProFac plays in that market?

Speaker 2

Certainly. So in West Texas, there is There is some spot pricing that has come down from what has otherwise been a pretty narrow tight range. Contracting rates are well above the spot market and these are isolated situations. The other thing to include is Not all mines. This mine gate pricing and how you look at these basins, It's more of a logistics business than it is anything else.

Speaker 2

And if you look at the logistics differentials from mine to mine to customer to customer, there's huge gaps That, it's easy to miss and when you model it out. So what we do is we go in and we focus Really closely on where our logistics advantages are and if there's spot pricing or if there's a competitor out there That has a disadvantage on logistics. We just don't compete with them and worry about them. We don't have to be the right solution for everyone, but The customers that we work with, we're the right solution for them and we can earn a higher price per ton and still save them money.

Speaker 6

Understood. Thanks for the color there. And also as a follow-up, can you also talk to customer preferences Bundling frac sand and have you seen any changes with the pricing dynamic across the basins for sand?

Speaker 2

I think it's horses for courses. I think that there are different I think it's less so about the basin And more so about the individual customer and their format. It's difficult to get full bundle with an operator that's got a Full blown procurement team. And, but we love all our customers and we have a solution for each one and we do our best to work out a solution that works for them.

Speaker 6

Understood. Great. Thanks for the color and I'll turn it back.

Speaker 2

Thank you.

Operator

Our next question comes from the line of Don Crist with Johnson Rice. Please proceed with your question.

Speaker 7

Good morning, gentlemen. I wanted to continue on the sand discussion. I mean, it sounds like since you've closed The team has really gotten to work and optimized all 8 of the mines. Can you talk about kind of costs And how they've come down because it looks like your profitability kind of ticked up a couple of 100 basis points in the quarter.

Speaker 2

Certainly. So the way we think about these plants is your costs are almost fixed. I mean your labor costs are The variable that moves your COGS is utilization and volume. And We continue to see our utilization and the volumes that we're putting out climb. And at this point, all of our costs And as we continue to reach our nameplate capacity at each of these assets, you'll see a much stronger pull through.

Speaker 2

And What we love so much about that business is, 1, our costs are relatively fixed. So everything we do From here on, it has a very high cash conversion rate and the quality of the earnings on that business are They really stand out compared to a capital intensive business like frac services.

Speaker 7

I appreciate that color. And Lance, maybe one for you. As the business It slowed a little bit in the Q2. How should we think about working capital? Should it release into the Q3 and maybe possibly into the Q4 and generate some free cash flow there?

Speaker 4

Yes. So I think one of the things I mentioned was inventory, which Has been building over the past year, and so that's the biggest thing that we're focused on to provide that release. And then to the extent, as we as the fleets, removed, you'll also get that ARAP impact. So I think that's a fair assumption.

Speaker 7

And any kind of magnitude you'd like to give? Would that be $50,000,000 plus or so?

Speaker 4

I think that's feasible. We're targeting The majority of that on the inventory side, but all in, I think it's feasible.

Speaker 7

Yes. I appreciate the color guys. Thank you.

Speaker 2

Thank you. I think that's pretty bullish For Lance, he's a conservative type.

Operator

Our next question comes from the line of Dan Kutz with Morgan Stanley.

Speaker 8

So just looking at the press release, you guys had a comment in there that and I think you guys touched on this in your prepared remarks that As a result of kind of the actions you guys have taken to right size the cost structure and take out cost that That should help maintain the per fleet profitability metrics. I appreciate that there could be That could be downside versus what where you were in the second quarter, given the comment about some fleets coming off In August, but from a per fleet profitability perspective, should we interpret that comment as You guys feel pretty confident that looking at the Q2, per fleet profitability should kind of be at that level in the 3rd quarter or second half or how would you guys think about that?

Speaker 2

Yes. So when 1, we've gone in and we've harvested a lot of the synergies from the acquisitions that we've made over the last year. And we accelerated those, especially when you have a fleet count reduction, what would Normally be taken care of through turnover and natural attrition. It's been something that we took a more direct approach and brought that forward In a much quicker fashion. The other part is, we took our entire calendar and said, look, we need to compress this As much as possible, it's, there's no reduction to our calendar and how many hours we'll pump and how many services we'll provide.

Speaker 2

But we want to make sure that we optimize the assets that are working so that we increase utilization and maximize those assets As much as possible. How do we cover the same work with fewer resources and then focus on them with Everything that you need to maintain the highest level of pump hours per fleet And then cut all the unassociated costs. And by doing that, we return the business to a level of on a per fleet basis that we're known for.

Speaker 8

Got it. That's helpful. Understood. Right. I want to go back to the profit production comment.

Speaker 8

I think if I heard it correctly that You said that if we look at the Q2 EBITDA, the potential for that business could be 2x to 3x that level. And I was just wondering if you could kind of unpack what that might contemplate in terms of, Is it higher pricing or higher margins or higher utilization? I mean, you kind of answered this question Previously saying that volume and utilization is the name of the game, but I was just wondering if you could help us quantify what Might be contemplated in 2x or 3x EBITDA for that segment. Thanks.

Speaker 2

Yes. Certainly, the EBITDA that we produced With the utilization rate that we had in Q2 carried the full fixed cost and burden that We would have at a much higher utilization rate. And so when you start looking at lower utilization and And delivering results that exceed well exceed that fixed cost. When you look at the increase of activity and higher utilization rate with the same fixed cost, it converts And it gives you a nice levered result on your pull through. So it's I think that's a very attainable goal and our expectation is to be able to deliver that in a much Quicker fashion than

Speaker 8

mobilizing

Speaker 2

in a relative way on your frac services side.

Speaker 8

Got it. That's all helpful. Thanks a lot.

Speaker 4

I'll turn it back.

Speaker 2

Thank you.

Operator

Thank you. This concludes our question and answer session. I would like to turn the floor back over to management for closing comments.

Speaker 2

Thank you, operator. Profrac has purposely built a dynamic platform capable of delivering strong results through market cycles. Although the Q2 posed some challenges, We've already begun to see these headwinds subside, and we believe that we are incredibly well positioned to deliver meaningful shareholder value in the near term. Thank you for joining us today. We look forward to speaking with you again next quarter.

Operator

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.

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Key Takeaways

  • Q2 adjusted EBITDA of $182.5M, $56M of free cash flow and an $86M reduction in debt, underscoring strong cash generation and deleveraging.
  • Cost optimization through accelerated acquisition synergies and headcount cuts has “right‐sized” the fleet count to protect per‐fleet profitability amid softer activity.
  • Proppant segment delivered 34% sequential revenue growth and 40% EBITDA growth with all 8 mines in full operation, 70% of sales to third parties and potential for 2‐3x Q2 EBITDA at higher utilization.
  • Market outlook remains constructive as disciplined pricing, high idle capacity and supportive natural gas prices point to an expected activity ramp in H2 2023 and into 2024.
  • 2023 CapEx guidance cut to ~$300M by deferring Tier 4 engine upgrades and eFleet deployments, prioritizing free cash flow for further debt repayment.
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Earnings Conference Call
ProFrac Q2 2023
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