Flotek Industries Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
March 13, 2024

There are 8 speakers on the call.

Operator

Welcome to the Flotek Industries 4th Quarter and Year End 2023 Earnings Conference Call. At this time, note that all participant lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. Also note that this call is being recorded on Wednesday, March 13, 2024.

Operator

And I would like to turn the conference over to Mike Critelli, Director of Finance at Flotek. Please go ahead, sir.

Speaker 1

Thank you, and good morning, everyone. We appreciate your participation in Flotek's 4th quarter and full year 2023 earnings conference call. Joining me on the call today are Ryan Ezell, Chief Executive Officer and Bon Clement, Chief Financial Officer. On today's call, we will first provide prepared remarks concerning our business and results for the Q4 and full year 2023. Following that, we will open up the call for any questions you have.

Speaker 1

Flotek's 4th quarter and full year 2023 earnings press release was issued yesterday afternoon. We also posted an updated corporate presentation we will reference on today's call. These can 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 the risk factors discussed in our filings the SEC. In addition, please refer to the reconciliations provided in the earnings press release and corporate presentation as management may discuss 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 Q4 full year 2023 operational and financial results. I'm extremely pleased with our results as 2023 was truly a transformational year in which we restored profitability in all key financial metrics, enhanced our liquidity and strengthened our leadership team due to execution of our corporate strategy, utilizing chemistry as the common value creation platform. With a relentless focus on technology, we remain at the forefront of innovation and multidisciplinary advancements that continue to forge gains in market share through our differentiated chemistry and data analytics solutions. Both carry an undeniable value proposition that maximize our customers' value chain, while generating a meaningful return on investment for our shareholders.

Speaker 2

With that in mind, I'd like to turn to Slide 7 and touch on our key highlights for 2023 that Bahn will discuss in detail in just a moment. We delivered strong year over year growth in all key profitability metrics, including gross profit, adjusted gross profit and adjusted EBITDA with the Q4 of 2023 adjusted EBITDA representing the 10th consecutive quarter of improvement and full year 2023 marking our best year in nearly a decade. The total company revenue was up 38% compared to 2022 as we executed the largest volume of products sold in the company's history. Chemistry revenues from external customers grew each quarter during the year and were up over 21% compared to 2022, as a result of our rapidly expanding customer base and the continued adoption of our prescriptive chemistry management business model. Our customized engineering approach combined with our proprietary complex NanoFluid technologies continues to deliver wells that outperform adjacent competitor wells in all basins.

Speaker 2

Our data analytics revenue saw strong growth of 47% in 2023 versus 20 22. The segment has seen a 2 50% increase in subscription based revenue since 2022, which supports our strategy to evolve to a data as a service business model. These subscription based services have had a 95% annualized retention rate. We also expanded our global footprint with the successful commercial launch of our slickwater fluid systems in the Kingdom of Saudi Arabia and established a new entity in Abu Dhabi to facilitate diverse market share growth and margin expansion internationally. We also recently announced the addition of Amy Blakely as the newest member of our senior leadership team as our Senior Vice President and General Counsel.

Speaker 2

She will be an asset to the organization as she brings extensive sector experience and joins at a pivotal time as we look to capitalize on both organic and inorganic growth opportunities. Most importantly, all of these achievements were accomplished with 0 recordable and lost time incidents in the field of operations, thus extending the current streak to over 7 53 days without a recordable incident. I'd like to take time to thank all of our employees their commitment to safety and service quality in achieving these outstanding results. And 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.

Speaker 2

This decrease is attributable to the fact that overall market slowdown in upstream onshore activity that has been experienced this year as natural gas continues to face near term pricing pressure. And despite this decline in overall drilling and completion activity, the impact on 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 external chemistry business revenues every quarter this year and they were up another 10% in the 4th quarter. More importantly, we saw a 75% increase in our reservoir centric technology sales related to complex nanofluids. Furthermore, the chemistry purchase requirements contained in the long term supply agreement with ProFrac were designed to mitigate the volatility of the market and provide some insulation to Flotek operations for maintaining economies of scale and stability.

Speaker 2

We expect sustained growth in reservoir centric and international chemistry revenues that should help offset the headwinds of the slowing upstream completion environment. 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. Despite the near term volatility in commodity pricing, the fundamentals for energy related services remains strong. The overall expansion of the global economy will continue to create substantial demand for all forms of energy, which will increase service intensity within the sector.

Speaker 2

As we look ahead to 2024, our efforts remain laser focused on revenue growth, market share expansion and cost efficiency gains as we are well positioned to capitalize on opportunities both domestically and internationally. The continued adoption of our prescriptive chemistry management for improved reservoir performance, along with the launch of the next generation JP3 measurement system unlocks significant upstream market opportunities as the company expects the data analytics business to grow by 50% in 2024. We are confident that our expanding suite of services positions us to deliver unique and superior solutions to maximize our customers' value chain. Consistent with this outlook, we believe that the demand for our advanced chemistry and data solutions will continue to increase and will provide new opportunities in market verticals such as industrial, geothermal, agricultural, solar and hydrogen. Now I'll turn the call over to Bob to provide key financial highlights.

Speaker 3

Thank you, Ryan, and thank you all for joining us this morning. Our 2023 results were outstanding by almost any measurement. We returned the company to profitability, delivering significant improvement in all key financial metrics. I echo Ryan's comments on our exceptional results, and I know the entire Flotek team is proud of what has been accomplished not only in 2023 but over the last 2 years. Flotek's turnaround execution has established a much stronger financial position than a year ago, and we expect to build on this momentum in 2024.

Speaker 3

Evidencing this improvement in financial position, I'm happy to report that our 2023 10 ks filing will confirm that the going concern doubt that our auditors asserted in their 2022 audit has been resolved. In addition, we expect to report in our 2023 10 ks that we have remediated the internal control weaknesses that were disclosed in last year's 10 ks. Let's run through a handful of key financial items for the Q4 and full year 2023. I will be referring to slides in the presentation we posted to the website yesterday. Slide 7 highlights our accomplishments and the strong financial growth we delivered across the business.

Speaker 3

Headlining our results were annual improvements in revenue of $52,000,000 gross profit of $31,000,000 and adjusted EBITDA improving by $28,000,000 year over year. As it relates to adjusted EBITDA, we reported another quarterly improvement during the Q4 that represents 2.5 years of sequential improvements in that metric. More importantly, full year 2023 adjusted EBITDA was positive, as Ryan mentioned earlier, for the first time since 2017. Turning to the income statement, as shown on Slide 8, we have achieved sustained growth in revenues since 2021 with our 2023 increases from both our chemistry and data analytics segments. Full year 2023 revenues grew 38% over 2022 despite lower North American land completion activities during the second half of the year.

Speaker 3

Our chemistry revenue from external customers increased by 21% during the year. More impressively though, as comparing Q4 of 2023 to the Q1 of 2023, revenue from external customers increased by 100%. In addition to our success growing our chemistry business, we generated strong growth from the data analytics segment as revenues associated with JP3 grew 47% over 2022 and are up almost 90% since 2021. Turning to Slide 9, 4th quarter gross profit increased for the 4th consecutive quarter as we continue to deliver efficiencies across all aspects of the business supply chain. 4th quarter gross profit grew to over $9,000,000 compared to a gross loss of $2,000,000 in the comparable 2022 period.

Speaker 3

We reported gross profit of $24,000,000 for the full year 2023 compared to a gross loss of $7,000,000 last year as the company benefited from the numerous cost improvements implemented throughout the year. Moving to Slide 10, adjusted EBITDA at 17% sequential improvement from the Q3 of 2023 as that metric totaled $4,000,000 As noted earlier, this is the 10th consecutive quarter of improvement, a streak that goes back to the Q2 of 2021. Moving to SG and A, 4th quarter totaled $6,600,000 compared to $6,200,000 Q4 of last year. Full year 2023 SG and A totaled $27,900,000 compared to $27,100,000 for the full year 2022. On a percentage of revenue basis, 2023 SG and A was down by 500 basis points compared to 2022.

Speaker 3

It is worth noting that the Q4 and full year numbers of 2022 included a $1,900,000 credit related to the reversal of a bonus accrual. Excluding the benefit of that credit, Q4 'twenty three and full year 'twenty three SG and A were down 18% and 4% respectively from the 2022 periods. Moving to the bottom line, we reported net income of $2,100,000 in the Q4 of 2023 compared to a net loss of $19,000,000 during the Q4 of 2022. Net income for the full year of 2023 was $24,700,000 compared to a net loss of $42,300,000 in 2022. Net income for 2023 did include a $30,000,000 non cash gain from the fair value measurement of our convertible notes.

Speaker 3

These notes matured during 2023, so we do not expect this type of volatility in our earnings going forward. Touching on the balance sheet in October we announced that our credit availability under the ABL was increased from $10,000,000 to $13,800,000 As of year end, we had $7,500,000 drawn under the ABL. As of Monday, we had less than $1,000,000 drawn. Lastly, we're planning to provide 2024 guidance with our Q1 results in May. This is consistent with last year's process when we also issued guidance with Q1 2023 results.

Speaker 3

While we're not providing formal guidance at this time, we do expect positive adjusted EBITDA each quarter in 2024, which we expect will result in another year of strong growth in that metric. In closing, Flotek continues to drive strong repeatable performance with a focus on profitability. We anticipate further revenue growth in 2024 and we will maintain a sharp focus on reducing costs at every opportunity, particularly SG and A. I'll now turn the call back over to Ryan for closing comments.

Speaker 2

Thanks, Barb. Turning to Slide 17, 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 today. Our 2 down to 23 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 we made in 2023 and I'm confident in our ability to execute going forward.

Speaker 2

We appreciate all the continued support of our stakeholders and we hope that you share our excitement regarding the future of Flotek and we look forward to reporting on further progress. Operator, we are now ready to take questions.

Operator

Thank And your first question will be from Don Crist at Johnson Rice. Please go ahead.

Speaker 4

Good morning, gentlemen. How are you all today? Good morning, Don.

Speaker 2

Good morning, Don.

Speaker 4

I wanted to touch on JP III. Obviously, you put a lot of language in both the presentation and the press release. But on those pilot projects, can you give us a kind of projected timeline as to when some of those may come to fruition and when we could expect that ramp up in revenue? I know you've highlighted 50% year over year, but when we can kind of

Speaker 5

a timeline of that those events?

Speaker 2

Yes, Don, this is Ryan. When I look at it right now, the big gating factor that is bringing the newer generation sensor aligned to commercial application, which we expect at the end of H1. So we'll be looking at a ramp up in some of the revenue in these applications to come in line in H2 of 2024 and continue out at 2025 and beyond. Driving a lot of that and when you look at the application of the Quad B and Quad C from the EPA on the flare gas and also some of the potential chain of custody measurements. A lot of those things are going to drive some unique opportunities for us that open up a $700 plus 1,000,000 market TAM when we look at it in terms of the upstream markets.

Speaker 4

Okay. And taking that just one step further, assuming you catch the bumper of the car here, what kind of manufacturing capabilities do you have on the sensor side to keep up with potential demand?

Speaker 2

Yes, that's a great question. And I think for us, that's what we're most excited about. Our capabilities now will be moving up to a probably about a 12x improvement in manufacturing velocity in terms of you look at what we would have traditionally moved in volume last year, we can move that less than a month now with the improved manufacturing. So we've already got some pre ordered. We invested some capital upfront to go ahead and front load these units, particularly the stuff that we'll be using in the upstream piece, which will be on a data as a service model for us.

Speaker 2

And went ahead and made those capital investments upfront. So we're really excited and confident that this manufacturing improvement as well as the improvement in the analyzer performance will be great for the company.

Speaker 4

Okay. And just one further from me. In Saudi, the opportunity on the slickwater side, obviously, you just introduced that there. But given their shift towards gas drilling and more kind of traditional shale drilling versus what they have done in the past, what kind of opportunity set do you think that kind of offers you as you kind of move through 2024 and they get more comfortable with the technology?

Speaker 2

So holistically for us, we've always had that presence in the international market. But I'd say it represented a not as material component of our overall revenue, but as part of our strategy of building what we call full cycle chemistry sales, having a diverse business in international markets was very important to us, which is our investment into the testing, which took about 18 months to get approved with Aramco. And then also what we did in Abu Dhabi. When you look at the system there, the impact it will have could potentially double the size of our international revenue, even on a conservative basis year on year. So I still think when you look at the activity of what we'll see there in Saudi, it will be material to what we do on the international side of the business.

Speaker 2

It will help significantly.

Speaker 4

I appreciate the color. I'll get back in queue.

Speaker 2

Thank you.

Operator

Thank you. Next question will be from Jeff Robertson at Water Tower Research. Please go ahead.

Speaker 1

Thank you. Good morning.

Speaker 5

Good morning, Joe.

Speaker 6

Ryan, on the JP3, can you talk about the margins that you could realize with the data as a service uptake on that business? And then secondly, when you're working with landowner groups on production allocations, how do you get landowner groups and producers on the same page to decide that the JP3 is the best solution for measurement?

Speaker 2

So there's a couple of things on there. Looking first around the margin profiles, we haven't fully disclosed around what the margin profile specifically for JP III is. What I will say is when we model it over onto the data as a service business, it does give us about a 15% improvement compared to the capital sale model over a 3 year type period and the return on that. So it will bump for us not only building our recurring revenue, but also the overall profitability of the segment. When you look at what we do on the chain of custody side, that is a unique application because there are thousands of wells for this type of work.

Speaker 2

And we've done an extensive amount of analysis on that. And so we're actually working at with quite a few people, particularly if you take some of the trust, some of the legal components of that, that actually handle the processing of the royalties, etcetera, as part of the chain of custody. Those have been some of the primary targets. What's also been unique for us is we worked with the Texas Railroad Commission, the Bureau of Land Management and the EPA different governing bodies around how we manage this. Because make no mistake, when you look at how they measure quality now, they're using the composite sample taken once every 6 to 9 months and they'll be getting this data every 10 seconds.

Speaker 2

So it will make a significant change in the way the royalties are allocated and how the payments work. And so I think there will be a little bit of movement about how this goes on and particularly be at the gathering points and with the various trusts, I think to do a lot of the royalty allocations is where the first impact that we'll see will be.

Speaker 3

Yes, Jeff, I'll just add something real quick. I think the operators and the mineral owners are clearly going to be aligned on this on one side. And then I think where the conflict is going to come into play would be how the gathering or the purchasers, first purchasers interpret the data that we're sharing and how do they reconcile those 2 between an instantaneous continuous measurement point in terms of evaluating BTU quality versus, like Ryan said, one sample point every 30, 60, 90 days whatever the situation is, how do they reconcile those 2 and ensuring that all stakeholders are paid on the accurate amount for the value of their product.

Speaker 6

If they have if a midstream gatherer has a more accurate read on what the BTU content is headed their direction, wouldn't that make them more efficient in terms of how they process?

Speaker 4

100%.

Speaker 2

And when you combine that with what our trans mix capabilities are, it's even better from that aspect.

Speaker 6

Ryan, on chemistry, you've obviously had the ProFac agreement in place for a while now. When you look at external chemistry, do you look at the opportunity to form to take that from a transactional business to more of a any kind of a strategic alliance and maybe just a basin centered alliance with any of the pressure pumpers?

Speaker 2

That's another good point. As part of our overall strategy is around that collaborative intimacy with these customers. So as we began to really diversify our revenue stack, I would say we have a fifty-fifty split between service companies and E and P operators. But to your point, those relationships with E and P operators becomes extremely important when we look at our chemistry management and the what we call the external or transactional revenue stream, because we do build long term partnerships. And what we're starting to see is they're becoming much stickier in performance because they are starting to realize the gains on the return investment in the chemistry.

Speaker 2

And if you go out and look at a lot of the public space with particularly some of the E and P operators, they are talking about chemistry being able to unlock additional barrels out of a reservoir on the different type curves. And so we play an essential component in that and not only bring a sustainable green technology, but also that dramatically improves reservoir performance. And so what they see is, to me that gives us a great opportunity for less volatile and longer standing relationships with the E and P operators.

Speaker 6

And lastly, Ryan, do you think your chemistry solutions, in terms of well performance as companies do a longer laterals, does that put does that help the kind of chemistry solutions that Flotek provides in terms of driving demand, which can improve performance?

Speaker 2

Well, I think it all in line locks a huge opportunity because part of drilling these longer laterals, we look at well spacing, we look at overall fluids design from even how they drill them, the actual completion that they do. All those things become extremely important even when they look at the wellbore cleaning before they do the actual frac. And so the further up the chain we get involved with our chemistry, we can match the clay control, the corrosion inhibition, the proper surfactant technologies or any solvents that need to come in place, demultification. So I think it's a huge opportunity. To me, as you get into the more difficult situation, a commoditized chemistry approach becomes not viable.

Speaker 2

You really have to look at how do you customize this chemical solution and Flotek is the best in the business at doing that. And that's where I really think it opens an additional opportunity for us.

Speaker 6

Thank you. Thanks,

Operator

Jim. And your next question will be from Eric Zurgold at Firestorm Capital. Please go ahead.

Speaker 7

Hi, good morning, gentlemen, and congratulations on navigating through a very difficult time with ProFrac. Could you talk a little bit more about your business away from ProFrac and what gating factors there are at this point, because you've done an admirable job growing your business away from pro frac on the chemical side. What factors are holding you back at this point or is it really just a matter of how many sales people you can get in front of how many customers? Thanks.

Speaker 2

Hey, good morning, Eric. I think, number 1, if we look at the non pro frac related revenue as a percentage in Q1, we were sitting in the 24%, 25%. As we've exited the year, we see it sitting at 45%. And we've seen growth in that chemistry segment of the business every quarter throughout the year. More importantly, Q1 to Q4 is almost a 200% growth.

Speaker 2

And so for us, we're continuing to push in that terms of market share gain. I think that is typically a little bit longer sales cycle because it's a lot of the value add technologies and we are actually starting to see that continue to grow. We're seeing the complex Nataplu sales grow. And I think we're going to continue to see that. I don't feel that it's not necessarily always create that discontinuity piece there, but there's a multitude of advantages of what we do on the transactional piece.

Speaker 2

And I think that's going to grow all the way through 20 24. And then I think JP3 will continue to contribute with that significantly as we expect that 50% growth in 2024 as well. And I don't think there's much of it holding back. When you look at it right now, you're going to see probably a flat to down frac fleet activity in North America land. And what you're starting to see is the emergence of what we call like Tier 1 customers where you see sustained plans that are long throughout the year.

Speaker 2

And that's the customers that we're pursuing right now to really get our chemistry in there and show the impact on some of these major bases. So we're actually really excited about this opportunity to meet these headwinds, offer great opportunities for good teams to navigate the wind appropriately and really pick up some market share.

Speaker 7

Thank you.

Operator

Thank you. Next question will be from Jeff Robertson at Water Tower Research. Please go ahead.

Speaker 6

Thanks. Just a follow-up. Bon, with the material weakness, eliminated from the 10 ks and the expectation of positive adjusted EBITDA throughout 2024, does that better financial position and better liquidities, does that further your Flotek's commercial discussions with customers and potential partners as you look at the business opportunities in front of you?

Speaker 3

Absolutely, without a doubt. I mean, you're talking to folks and you've got the going concern language in your public filings. I think that creates some anxiety. So having the material the going concern, I would say, is more important. We're certainly glad to put both of them behind us.

Speaker 3

But having the going concern behind us and having our auditors agree that the financial outlook for the company is much more stable than this time last year will definitely be a benefit as we negotiate rebates and various items with suppliers and customers.

Speaker 6

Thank you. Thanks for taking my follow-up.

Speaker 2

Thank you.

Operator

Thank you. And your next question will be from Richard Rudley at Glenbrook. Please go ahead.

Speaker 5

Hi, guys. Just a quick question really, given how strong your EBITDA is and your strategy is playing out and you're obviously projecting optimism as I hear it. Obviously, at the same time, though, the stock really isn't being appreciated in the market. I mean, it's down, I don't know, sure, maybe before today about 20% plus. And so below book, I just wondered if you'd consider or have been considering at least a modest stock buyback?

Speaker 5

Thank you.

Speaker 3

Thanks for the question, Richard. No, not at this time. I mean, when you look at what we've been doing with the company at least for the 12 months, you could argue for the last 24 months is really to stabilize the business and get it on a path to profitability as we say. We feel like we've turned the corner certainly in that regard, but as it relates to buying back stock or other items to return cash to shareholder at this point in time, probably not at that cycle of maturity in terms of the company. Certainly something that we hope to get to in the near term.

Speaker 3

But as we sit here today, we don't have any plans to buy back shares.

Speaker 5

Okay, understood. Thank you.

Operator

Thank you. And at this time, Mr. Azal, it appears we have no further questions. Please proceed, sir.

Speaker 2

Okay. I would like to remind you that Flotek will be participating in the 36th Annual ROTH Conference at the Ritz Carlton in Dana Point, California next week. I'll be participating in an oilfield service panel discussion on Monday, March 18, at 1 p. M. Pacific Time.

Speaker 2

We've joined Bob Bond hosting 1 on 1 meetings with investors during the conference. We look forward to seeing you at the conference next week. And thanks again for joining us today.

Operator

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines. Have a good day.

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Key Takeaways

  • Flotek delivered a transformational year in 2023, achieving 38% revenue growth, positive adjusted EBITDA for the first time since 2017, and its 10th consecutive quarter of EBITDA improvement.
  • The chemistry segment grew 21% year-over-year, with external chemistry revenues up each quarter and a 75% increase in reservoir-centric nanofluid sales in Q4.
  • The data analytics business expanded 47% in 2023, boosted subscription-based revenue by 250% since 2022 with a 95% retention rate, and is expected to grow another 50% in 2024 under a data-as-a-service model.
  • Flotek expanded internationally by launching slickwater fluid systems in Saudi Arabia and establishing a new entity in Abu Dhabi, efforts that could potentially double its international chemistry revenues.
  • During 2023 the company resolved its going concern auditor qualification, remediated internal control weaknesses, and reported a net income of $24.7 million versus a $42.3 million loss in 2022.
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Earnings Conference Call
Flotek Industries Q4 2023
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