ProFrac Holding Corp.

Greetings and welcome to the ProFrac Holding Corp Conference Call. Excuse me one second. Welcome to the ProFrac Holding Corp Second Quarter Earnings Conference Call. My apologies. At this time, all participants are on a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Rick Black. Thank you. You may begin.

Thank you, operator, and good morning, everyone. We appreciate you joining us for ProFrac Holding Corps Conference Call and Webcast to review second quarter 2022 results. With me today are Matt Wilkes, Executive Chairman, Ladd Wilkes, Chief Executive Officer, Lance Turner, Chief Financial Officer, and Corey Randall, Chief Operating Officer. Following my remarks, management will provide a high-level commentary on the company, the financial details of the second quarter, and outlook before opening the call up for your questions. There will be a replay of today's call that will be available by webcast on the company's website at www.pfholdingscorp.com, as well as a telephonic recording available until August 19, 2022. For more information on how to access these replay features, is included in the company's earnings press release. Please note that the information reported on this call speaks only as of today, August 12, 2022, 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, including management's expectations of future financial and business performance. These forward-looking statements reflect the current views of Profract's management and are not guarantees of 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. The listener or reader is encouraged to read Profract's prospectus Form 10-Q and 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, uncertainties, and contingencies. The comments today also include certain non-GAAP measures as well as other adjusted figures to exclude the contributions of Flowtech. Additional details and reconciliations to the most direct, comparable, consolidated, and GAAP financial measures are included in the quarterly earnings press release issued yesterday, which can also be found on the company's website. And now, I'd like to turn the call over to Mr. Matt Wilkes. Matt?

Thank you, Rick. I'd like to begin by stating how pleased we are to report exceptional results for the second quarter, to which Ladd and Lance will speak more about in their remarks. I will highlight that we outperformed what we said we were going to do once again. I'm extremely proud of our $28 million of annualized EBITDA, adjusted EBITDA per fleet, and more excited about the future opportunity than ever. Our view of the macro environment and oil field services has not changed, and we are extremely well positioned for the current U.S. frack market, where supply of pressure-pumping horsepower is limited and incremental horsepower is bottlenecked. With many of our competitors completely sold out and having legacy footprints that need to be upgraded, the supply chain is extremely strained for maintaining and upgrading the existing fleets with a limited ability to build new capacity. And as we all know, capital is more expensive. Taken together, these dynamics strengthen our belief that there is a great deal of length left in this cycle and margin expansion will continue through this cycle. We believe this is the best backdrop that we've seen since we started in the Shell industry over 20 years ago, and we see this lasting for quite some time. In terms of the path forward, I see opportunity for growth in multiple areas in pressure pumping that Ladd will discuss, but I also see opportunities for continued execution on our growth strategy. As I've mentioned before, we have a two-pronged growth strategy, acquire, retire, replace on the equipment side, and a desire to scale our vertical integration on the supply chain. It is important to state that our M&A strategy is and will continue to be based on a very strict criteria for what is considered an accretive transaction and to maximize cash generation. We will continue to put all potential acquisitions under the same technical and financial microscope, and although we believe the market is ripe for consolidating the space and expanding our vertical integration, We will not sacrifice the strength of our balance sheet for any deal. We remain extremely thoughtful about our overall leverage and believe that we are on track to maintain our target of below one turn of debt to EBITDA so that we can continue to enhance our ability to return cash to shareholders. We expect that the excess cash flow we generate after interest and maintenance capex will be sufficient to fund growth capex, delever the balance sheet, and return cash to shareholders. All three of those are priorities to us. To continue illustrating our strategy, I am very excited that we closed our acquisition of the Monaghan's West Texas Sand Operations in late July and that our pending acquisition of U.S. Wealth Services is on track to close in the fourth quarter. As you have heard and seen from us already, we are constantly thinking about strategic efficiencies, enhancing value of the supply chain and vertical integration for our company to maximize profitability and returns for our stakeholders. Our vertical integration reduces overall cost of services and cost of maintenance to a level that is unmatched in the industry. From designing and manufacturing fluid ends, power ends, high-pressure iron to our sand, chemicals, logistics, refurbishment, and new fleet construction, we see the impacts on margins, cost structure, and capex savings. Our vertical integration provides Profract with more control over the timing and amount of critical inputs into our business, and it uniquely distinguishes us with a cost advantage compared to our peers. Specifically, in this environment, where supply chain interruption is a challenge for pretty much everyone, we're in a better position than our peers to capitalize because we have our own sand mines, we have our own iron, our own machine shops, and we design, engineer, and assemble our own equipment, from frack pumps to blenders to E-fleets. With the Monaghan's mine, which combined with our La Mesa plant and Kermit mines, ProFrac has close proximity sand supply to almost every well in West Texas, which is far superior to any asset base in the region. The pull-through profit from logistics and our frac fleets are considerable in this environment and helps to ensure that our pumping is not interrupted. This increases pro-fracts efficiency in the region by ensuring a reliable, uninterrupted supply of high-quality sand, as well as our ability to reduce truck traffic, fuel consumption, and emissions, which helps mitigate our costs in this inflationary environment. To provide some perspective, prior to the Monaghan's purchase, we were only producing sand for three of our fleets while purchasing the rest from third parties at current market rates. After all three mines are producing sand, We will have the capacity to supply up to 15 fleets worth of sand in West Texas when operating at an optimal capacity. While we expect to continue to supply a mix of third-party sand to our customers, we believe there is a tremendous value in procuring more materials on behalf of our customers. These are exactly the kinds of opportunities we continue to look at to consolidate within our sand and chemical markets. The margin contribution that comes from these types of opportunities will provide continued growth on top of any quarter-over-quarter price increases on our fleet pricing, which we continue to see today. I cannot stress this enough. Having custody and control of our supply chain is one of the biggest drivers of utilization on our fleets. We are bullish on the future of our industry and our company, and as we continue to execute on our acquire, retire, replace strategy, and vertical integration strategy, we plan to continue to redefine what is possible for an oil field services company. I will now hand the call over to Ladd to provide additional comments about our operations.

Thanks, Matt. And good morning, everyone. Our business and our teams performed extremely well during the second quarter. We had 31 total fleets active during the quarter, and we're currently deploying our first electric fleet into the field. During the quarter, we experienced significant price increases as all fleets were brought up to the current market pricing, and we continue to see additional pricing power. More importantly, we see continued growth in profit per fleet as we incorporate our electric fleet, our vertical integration enhancements, and provide more materials to our customers. We expect to exit the third quarter at 32 fleets as we deploy our first electric fleet late in the third quarter. We plan to deploy two additional electric fleets during the fourth quarter, and we do not expect to deploy any incremental conventional fleets. We plan to focus our labor and our available supply chain on supporting existing fleets and our electric fleet deployments margins and cash flow. While pricing continues to move higher, we see further incremental expansion from additional bundling. When we acquired FTS, they had effectively debundled all their fleets. ProFrac has always aimed to provide sand, chemicals, storage, and logistics as it lowers the NPT on pad and lowers the overall cost to our customers while adding incremental EBITDA to our fleets. In the second quarter, we provided more sand and chemicals on an absolute basis, but we only provided approximately 30% of sand that we pumped compared to 40% in the first quarter. As we look forward, we believe we have the supply, the proximity, and cost to become the primary choice for our customers. This dynamic will allow Profract to continue growing profitability per fleet in the current environment beyond just pricing power of the fleets, but also through additional product offerings and creating incremental value for our customers. I cannot help but think back to when we started in the industry. And at that time, pressure pumping companies provided every bit of sand and chemicals used in the completions process. In 2011, our customer base was paying nearly two times as high rate as they are paying now. And more importantly, it was taking them three times longer to complete a well and take that production to market. When compared to the last cycle of 2018, we are still charging a 30% lower rate and delivering wells in 60% less time. We have come a long way as an industry in becoming more efficient. But more efficiency means more wear and tear and more attrition. as we continue to pump more hours using more equipment and charging less than we did previously, at a time when we're helping our customers generate record levels of cash. It's this perspective that makes me bullish on the path forward. Moving on to the most exciting development, our first electric flight fleet is in the process of being deployed for a customer. We are very happy with the performance so far and are testing the equipment out under various conditions, The economics are unmatched, and the power of these pumps are incredible. We have just scratched the surface of defining what is possible with these new electric pumps. We look forward to that fleet generating a full quarter of revenue and profitability during Q4, which we expect to return higher profitability due to the lower repairs, simpler design, and the higher value add to our customers. Another operational update that I'm very proud of the team for is the speed at which we've been able to integrate FTSI. Operationally, we are fully integrated with one team and one process, from sales to procurement to maintenance to operations. Customers have commented on how engaged our crews are on both sides. Another huge win is having all our equipment running on a single software that is interchangeable. As one company, we're bringing together culture, ideas, and collaboration to improve the company all along the way. We've been able to accomplish this with very little one-time cost and are seeing the synergy benefits in real time. Before turning the call over to Lance to review the quarterly results in more detail, I'd like to restate our commitment to Profract's mission, which never changes for us, which is, one, to be the best and safest company to work for in the oilfield service industry. And two, to amaze our customers with elite products and services utilizing the most cost-effective and environmentally friendly solutions. And three, to achieve superior returns for our shareholders. With that, I'm going to hand the call over to Lance.

Lance? Thank you, Ladd. Good morning, everyone. We're pleased to announce our second quarter 2022 results. On a consolidated basis, revenue for the second quarter totaled $589.8 million compared to the first quarter of $345 million as reported and $421.6 million on a pro forma basis adjusted for the FTS acquisition. The increase was due to higher average pricing on equipment and on materials, providing more materials for our customers, and to a lesser extent, higher efficiency on our fleets as measured by pumping hours per fleet. Net income was $70.1 million for the quarter. Net income excluding the stock compensation with a deemed contribution from a related party would have been $108.9 million compared to $24.1 million in the first quarter. Adjusted EBITDA was $210.6 million or $218 million when excluding the amount attributable to Flowtech's results. This resulted in $28.1 million of EBITDA per fleet on an annualized basis excluding the impact from Flowtech. This quarter included a couple of new developments that I would like to highlight as this will impact the comparability of our results to the first quarter. You will notice that we now have an other business activities in our business segment information. This is new in the second quarter and relates to the results attributable to Flowtech. In May, we expanded our supply agreement with Flowtech in exchange for an additional $50 million in convertible notes. We also received the ability to designate four of seven directors to Flowtech's board. Because of our right to appoint directors to the board without a direct equity interest in Flowtech, we determined the proper accounting treatment is to consolidate their results. As a result, subsequent to May 17th, we have accounted for this transaction as a business combination and Flowtech's financial results have been consolidated into our financial statements for the second quarter after May 17th. We will refer to certain measures excluding flow tech that will make these measures more comparable to the first quarter and more representative of our underlying operations. You will also see $38.8 million in stock compensation related to a deemed contribution from a related party. This stock compensation relates to shares sold by Dan and Ferris Wilkes to Matt and Ladd Wilkes. This transfer was completed in conjunction with the IPO and was structured as a purchase. However, the accounting treatment resulted in stock-based compensation funded directly by the Wilkes. I want to highlight that this was a transaction between the family members and did not result in any additional shares issued and therefore did not have a dilutive impact on other shareholders. The accounting treatment is nuanced because it is a related party transaction with an executive and therefore was deemed to be considered stock compensation reflected in the company's financial statements. During the quarter, and resulting from the IPO proceeds, we also had an $8.8 million loss on debt extinguishment, $5.9 million of which was non-cash. Selling general administrative costs increased to $87.5 million, which included $40.3 million in total stock compensation expense, $4.2 million related to flow tech during the quarter, and $4.1 million in acquisition-related costs. The second quarter costs increased beyond these three items due to having a full quarter impact of the FTS-related expenses, as well as higher incentive compensation costs driven by outperformance of the business during the quarter. Looking at the third quarter of this year, we expect continued improvement in our profitability per fleet. Pricing discussions preceding the third quarter went well with customers and remain constructive at this point in time. In addition, as Ladd mentioned, we believe there is more profit to be captured by providing more materials for more of our customers. We believe this bundling has the opportunity to exceed that of price increases over the next 12 months. Turning to our business segments, the Stimulation Services segment generated revenues of $576.6 million in the second quarter, up 72% from the first quarter. Adjusted EBITDA for the segment was $196.1 million. The increase from the prior quarter was driven by FTS contributing to the full quarter compared to one month of contribution in the first quarter, as well as increased pricing and a higher amount of materials provided during the quarter. The manufacturing segment generated revenues of $34.9 million in the second quarter, up 8.9% from the first quarter. Approximately 88% of this segment was intercompany revenue compared to 84% in the prior quarter. Adjusted EBITDA for manufacturing was $9.4 million in the second quarter, down slightly from $10 million in the first quarter. This segment experienced slightly higher manufacturing costs due to increased cost of production as well as a less profitable product mix, which we think should normalize in the third quarter. Profit production segment generated revenues of $17.5 million during the quarter, up 41% from the first quarter. Approximately 66% of this segment was intercompany revenue compared to 69% in the previous quarter. Adjusted EBITDA for the profit segment was $12.6 million, up from $7.9 million last quarter. The improved operating results were due to higher production levels with a higher average selling price, slightly offset by increased production costs. Other business activities, which solely included flow tech, generated revenues of $15.4 million and negative $7.5 million in EBITDA. This represents a partial quarter of activity and eliminates activity between FLOTEC and PROFRAC. Turning over to CapEx, we continue to adapt our capital program to the current environment. We expect the full year CapEx to come in at the high end of the range that we previously provided, that is between $265 million and $290 million. The increase primarily relates to a higher quantity of engine replacements and upgrades in the back half of the year. The budget for our electric fleets remains the same, between $65 and $70 million for all three fleets, which excludes the cost of the licenses that were paid in 2021. In addition, we expect our La Mesa plant to be completed and operational in the fourth quarter and estimate the total cost to be approximately $30 million. Looking at the capital structure and cash flow, Excluding the amounts attributable to Flowtech, we ended the second quarter with $477.5 million in outstanding principal and $88 million in liquidity. When we talk about liquidity, we exclude the liquidity attributable to Flowtech because while we do consolidate their results, we do not have the ability to use their cash or liquidity in our operations. Subsequent to the second quarter, we announced an upsize of our term loan and we closed the acquisition of our Monaghan Sand Plant. Including these subsequent events, our debt, excluding flow tech, would have been $627.5 million with approximately $131 million in liquidity. Operating cash flow was $39.5 million during the quarter, which was impacted by a large working capital build due to higher fleets, higher pricing, and higher efficiency. We expect this to normalize in the back half of the year and are focused on working capital initiatives to help offset future working capital builds driven by improved operating results. With the improved financial results, we expect cash flow to accelerate meaningfully as these results convert to cash in the third quarter. As the U.S. Wells Service acquisition progresses, we will assess our liquidity needs to ensure a successful closing and integration. And with that, I'll now turn the call to the operator to take your questions.

Thank you. We will now be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from Dan Cutts with Morgan Stanley. Please proceed with your question.

Hey, thanks. Good morning. Good morning, Dan. I wanted to ask, Lance, it might have been you that mentioned that you saw that kind of the Earnings uplift from bundling of materials could be a bigger opportunity relative to price. I guess I just wanted to dig into that a little bit more and see if you guys can kind of stack rank where you see the most kind of per-fleet profitability growth opportunities from here as it relates to pricing, efficiencies, you know, adding fleets or, you versus kind of the vertical integration benefits and the bundling of materials. Just wondering if you could expand on that comment a little bit.

Yeah, so, you know, I think my comment on the bundling is when we look forward over the next 12 months, I think the point is we see accretion, we see improved performance, not just through increasing prices, particularly as you look out into next year. And I think that, as we said, we're only about 30% bundled on the SANS side, and we think there's a lot of opportunity there. As it relates to the short term, we do continue to see pricing discussions and pricing improvement. We do intend to improve the bundling in the short term. But it's really a longer-term picture when you look into next year that we really want to increase the percent of materials that we provide materially.

Yeah, and as we continue to expand our supply chain, we're having greater and greater success in bundling services. And I think that, you know, for example, with Flowtech, in Q3 we expect to average around 16 fleets with the Flowtech chemistry supply. and expect to be at full contracted volumes early in 2023. On sand, we're really excited about bringing the bundling on there and continuing to see more and more fleets. We're further ahead on sand than we are on the chemistry. And just as an example, FRAX fleet on average will consume about half a million tons per year per fleet. And so if you look at getting a gross margin of $20 a ton, that's a $10 million contribution margin per fleet. And so it very quickly becomes a substantial contribution across the platform. And, of course, on the equipment, we are seeing very, very constructive conversations. The market continues to tighten, and we expect to see that tightening continue on through 2023. As of now, what we're looking at is a very healthy uplift in double-digit percentage quarter over quarter from Q2 to Q3.

Great. Thanks, guys. It's really helpful. And then just wanted to ask about capital allocation priorities. So I know that you guys have some electric track fleet. new builds that you're doing, you're kind of, you still have the upgrade program for some of the legacy conventional fleets. I know that, you know, managing debt and hitting the leverage target that you pointed to is obviously up there and, you know, wanted to ask, I guess, how shareholder returns fits into that as well as potentially any incremental M&A. Just wondering what your kind of capital allocation priorities are. Looking forward.

Definitely. So I'll touch on this and then hand it over to Lance. But our number one priority is for the equipment that we have today to be as good or in better shape at the end of the year compared to the beginning of the year. And so we want to make sure that we take good care of our equipment. But we're also in an upgrade cycle because of diesel, where the old Tier 2, old diesel fleets are considerably expensive for our end customer. So as we look to Tier 4 DGB or dual fuel systems to reduce our overall diesel consumption, we see substantially higher margins on that equipment, on those fleets, as well as we're really excited about the E-Fleet program. But beyond that, we prioritize our equipment, and then it's shareholder returns, and then behind that is our growth initiatives. And so we want to make sure that We take the lead on returning capital to stakeholders. We think that this is very important for the entire oilfield services space to make it a priority that this isn't just a sector that you trade, that this isn't a sector you can invest in. And when you prioritize profitability, it becomes investable. And we believe in that. And this is why we're in this business. And, you know, we think that this is an incredible industry to invest in. And taking the lead on returning capital to stakeholders is exactly how you deliver an investment rather than a trade.

Got it.

All right, great.

That's really helpful. Thanks a lot, guys. I'll turn it back. Thank you. Our next question comes from John Daniel with Daniel Energy Partners. Please proceed with your question.

Hey, good morning, guys. Really impressive numbers. Matt, big picture question for you guys, just your view on power generation, who owns it, the best approach to generating it, just any color there would be helpful.

Definitely. Good morning, John. Yeah, as we look forward, we think that right now there's a lot of power producers out there that are providing power providing equipment. But as we look forward, we're taking a wait and see approach. We're not quite at a spot where we would like to outline our specific plans. But just like everything else that we do, we have a very focused effort on making sure that the reliability of our equipment and the supply chain is in our custody so that we can control the moving pieces, control the lead times, control the timeframes, and I wouldn't expect this part of our business to be any different.

Okay. Fair enough. And then the last one for me, just on the sand side, I think you noted, if I heard correctly, capacity to cover 15 fleets in the Permian. I think that's About where you guys are, 1315 Fleets, I'm curious, you have a big presence in other markets like the Eagleford and Haynesville. Does the logic apply to having vertical integration on sand in those markets? Just your thoughts.

Yeah, I think each market is a, you know, you evaluate whether it makes sense. What can you purchase it for locally? compared to what your costs would be owning it. And so we continue to evaluate, but we have nothing to report, any expectations or intentions at this time.

Okay. I'll queue up again if no one else has questions. Thank you for your time.

Thank you.

Our next question comes from Chase Malthill with Bank of America. Please proceed with your question.

Hi guys, this is Saurabh on the change. Good morning. Good morning. So just quickly following up on John's question on sand, I think you said 15 fleets. I'm just trying to do the math, half a million ton per annum per fleet, right? So it sounds like you can pretty much produce at all of that 8 million ton nameplate capacity, right? So for you, nameplate is basically the same as actually marketable or the amount of sand that you can produce just to clarify on that front.

Yeah, I mean, The way that these are built physically, they can each produce over, you know, just right at or just above 3 million tons each. Our La Mesa plant is permitted for 2 million, but the equipment is rated for more than that. So once it's up and operational, we expect to go in and look to expand that permit so that it'll gain us an additional million tons of nameplate capacity.

Okay. Okay. No, that makes sense because we tend to think about nameplate and marketability a little differently. So that makes sense. Thanks for that clarification. And then in addition to the clarification, I think the first question you said you expect, I think I heard the word profitability to go up double digits, 2Q to 3Q, right? But I wanted to clarify, does that mean you've adapted to go up double digits, 2Q to 3Q? So we're talking 28 going to 31 kind of a number? Is that what you meant?

Yeah, I don't want to nail it down to a specific, you know, number of, you know, EBITDA per fleet, but I'm very comfortable saying that we expect to see a three handle on the EBITDA per fleet.

Okay. Okay. That makes sense. And obviously you've got DSP Monahan's acquisition that closed in July. So that's going to be helpful. Yeah.

Just on that real quick, I'd like to comment on a few things there and that As we look at that type of performance, there's several things that are really driving that, that I think it's important to highlight. One is our maintenance rotation is phenomenal. We've got an incredible pit crew that allows our equipment to be out on location longer. And when it does come in for a tire change or to get topped off on fuel, like a race car would in pit row, we're able to get it back out working. And so when you've got a really good pit crew, your R&M expenses tend to run pretty consistently otherwise. But what you end up with is that race car is on the track longer running. And I think that's one of the main things that drives our superior performance and allows us to get the industry-leading EBITDA per fleet. Whereas Having uniform components is a big part of that. The supply chain is incredibly tight, and it's creating situations where many in the industry are having to go in and get fluid ends wherever they can. When you have different fluid ends from different manufacturers, you end up with a very complicated SKU with your parts room, the training with your personnel on location, swapping out fluid ends, changing valves and seats. it gets really complicated. And if they put the wrong valve and seat in, or if they put the wrong part in, you have a higher number of failures. So it stresses your overall supply chain even further when you don't have uniformity. And so when you look at this tight supply chain, we really see this as a driving factor in our standout performance relative to our peer class. And this is also what we believe is going to keep this from really becoming a new build cycle too quickly. So we're really excited where we're positioned, how we've built this company, and very, very proud of our vertical integration that allows us to consistently generate these results, not just in Q2, Q3, but we're really excited about how this advantage will drive material results in 2023 as well.

Right, right. No, all of that makes sense. And then just quickly, last one for me on the E-Fleet side. In the press release, you did say you're doing trials on the first E-Fleet on the field right now and you expect commercial deployment before the end of the third quarter, right? I quickly wanted to check on that. What are you seeing in the trials? How happy you are, not happy you are with the trials? How are they going? And just as a follow-up on that, how are you thinking about new building on the eFleet site for 2023, especially now that you are acquiring USL?

Yeah, with the eFleet program, these are commercial platforms. And so, you know, we're really excited to get these out there. The reason we call this one is, you know, really getting out there on its first location. It's just running through diagnostics, making sure that we understand all the error codes that are kicked out by the controls and making sure that everything is is communicating appropriately. So we're just going through getting that knocked out and this is a much faster process than what you would see anywhere else because this is a proven commercial platform. So we're really excited to have this thing fully available for all of Q4 and very delighted to see what kind of be able to share with our stakeholders what kind of results these provide relative to conventional fleets.

Yeah, and Chase, I would just add to that. We have two of our pumps out there on location now, and they're pumping today. So I want to be clear that this isn't something that we're planning to put out. They're out today. Okay.

Okay, cool. And thoughts on 2023? Do you think you want to build more easily, especially now that you're getting a lot more on the U.S. well side?

Yeah, we'd rather not discuss at this time our growth plans for 2023, but very excited, looking forward to closing the U.S. well transaction early in Q4. and bringing in and integrating that business very similar to what you saw from us with the FTSI integration and how phenomenally well that has gone. We expect the U.S. well transaction and integration process to go equally as successful. And this is with our vertical integration, the different components that we've built in specifically for these types of processes have shown incredible results so far, and we're getting better at it as we go. So as we look at the U.S. well integration, we expect to see those types of results carry forward. So, yeah, it's an exciting time for us. Looking forward to getting that taken care of. But it's too early to tell and would rather not get into that at this point on any further growth initiatives for 2023.

Okay, no, guys, that's all good. I'll turn it back. Thank you.

Thank you.

Thank you. Our next question is from Steven Gengaro with Stifel. Please proceed with your question.

Thanks and good afternoon or good morning, everybody. So I guess two things for me, if I could start with, we've heard from some of your peers about equipment demand for 2023 and your customers trying to lock up capacity for 23. What are you seeing on that front and how do you think about that balance when you're looking at pricing?

Yeah, we're seeing a great deal of early looks from and it seems like the RFQ season has started earlier than usual typically that that that means better margins and continued expansion of pricing we like what we're seeing on the capex budgets and there is a shortage of horsepower in the market and With the complexity and the mismatch, as you see more of our peers adding mismatching fluid ends and mismatching components, when you look at the amount of horsepower that's in a maintenance cycle at any given point, 20 to 25% usually, when you start mismatching parts and having different types of fluid ends, different types of iron, you start seeing more frequent failures and more stress on that supply chain. So as we look at the market going forward, I think that this does not ease up. It actually tightens further. But what we're really proud of is the customers that we have know about the reliability that we bring and the consistency that we bring. And that reliability and consistency is a value proposition that's easy to take up. So we think our peer class is going to continue to struggle with supply chain and many price improvements with these competitors. likely will be going to a more and more complicated R&M and supply chain.

Great. Thank you. And when we think about U.S. World Services, they recently announced numbers. They've clearly been hurt by sort of a lack of overhead absorption as they roll out new assets. But I think they ran the last quarter EBITDA per fleet like $5.5 million on an annualized basis. How long do you think it takes to based on what you know about the contracts that they have in place to get their assets up to your level of profitability?

Yeah, I'd really rather not comment or speculate on where their contracts are or anything like that. What we really look at is what we're capable of with the same assets. And then going back and looking at what we've been able to accomplish with the FTS integration and quickly being able to get in and see material commercial results as well as operational operational results and so we're really looking at this rather than how do we get from where they are really looking at it from the perspective of what can we do with it and we you know typically these things would take you know, nine to 12 months. We take a conservative approach. What feels like to us a conservative approach of around six months, but that's also what we put out for FTSI, and we were able to realize that within a very short order of being able to get their profitability up. So given it some bookends, I'd say an outside day would be six months, and our own internal expectations for ourselves would be you know, in a very similar timeline to what we did with FDSI. Great.

And if I could throw one other quick one, I don't know if you can comment on this or not. Can you give us a sense for Flowtech's revenue per fleet per year?

Yeah, I don't want to put an indication there. But what we do like is that the contracts that we have with them is – is going according to plan. They continue to scale operations and not just with us, but also with true third-party customers on their end. So we're really excited to see that business continue to scale and really look forward to the early part of 2023 to get this to fully contracted volumes that we've you know, mutually negotiated. And, of course, as that, you know, does get to scale, we're really excited to see what that does with their financials in bringing this to profitability. We're also outside of that agreement. We're very excited about the JP3 agreement that we have in place that gives us confidence in the quality of the gas that we're pumping with. And being able to monitor BTUs in near real time allows us to protect our equipment and provide reliable service for not just the dual fuel systems, but also for the turbines providing, or for the power gen on location that runs on the gas. So making sure that we have good high quality gas on location is a very important thing. We're also excited about what that means for Flowtech and the JP3 team Because being able to monitor BTUs for gas has far-reaching consequences, has far-reaching impacts across the entire oil and gas industry, and especially for the midstream side for these operators as they look to make sure that they capture every dollar for the gas that they sell down the line. Great. Thank you for all the color.

Definitely.

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

Good morning, gentlemen. How are you doing this morning? Doing well. I wanted to touch, a couple people have asked about sand, but given the significant impact to the potential financials next year, it could be 10 or 15% of your total EBITDA. I just wanted to ask, um about number one volumes um do you think you can you can get up to that call it seven and a half or so million tons per year um and number two what your thoughts are around pricing i know it i know it spiked in in the first quarter of this year to you know upwards of 80 to 100 a ton but didn't know what kind of long-term price that you were kind of expecting going forward

Yeah, I mean, there was a point early in the year where it was $8,200 a ton at the mine gate. It hasn't, you know, I think occasionally you'll see it get there depending on whether it's a spot pad or not. But for the most part, we've got contracted volumes that are, you know, much lower than that. You know, really would prefer not to go into specifically where. for obvious reasons. But what we can say is that this is, one, on utilization, we definitely believe we can get our utilization where it needs to be to provide a minimum of 7 to 7.5 million tons on an annual basis. But when you look at the pricing on that end, I think that you wouldn't see spot pricing across the board. But I'm trying not to box myself in. You know, I like you guys and everything.

I like you guys. I love how you are.

You're going to do that next quarter, and I don't want you to do that to me.

Well, I mean, is it between, call it, 35 and 50? Is that a good enough range to kind of not box you in? That's a good range. Okay. And then two kind of cleanups for me. Lance, can you tell us what the share count was in the second quarter? It wasn't in the press release.

Yeah, so it'll still be about $142.4 million. When you get the financials, because the IPO happened mid-quarter, EPS will be a little nuanced given the upsee structure. But that share count at the IPO and forward is about $142.4. Okay.

And then just one final one for me. SG&A was a little bit crazy this quarter with the shares going to the Wilkes Brothers, obviously. Going forward, do you think it's going to be in that, call it $40 to $45 million, or do you think it's going to be closer to what it was in the first quarter?

You're exactly right. If you back out those three items I called out, that kind of gets you into the $40 to $45 million. And that's probably our best estimate at this point. The first quarter. You know, you had a lot of things going on with the companies coming together and not having been together previously, the IPO, et cetera. And so I think Q2 is going to be a better measure than Q1. And then, you know, $4 million of that was acquisition-related expenses. Obviously, with you as well, I'm sure we'll have some of those that will elevate it in future quarters as well, but we'll be sure to call those out.

Yeah, and that anomaly that you see on there is related to, you know, the gap requirements that we put that in the SG&A. The share count pre and post is exactly the same, that those shares were private transaction paid for, you know, by the individuals receiving that.

Understood. I appreciate the call, and I'll turn it back.

Our next question is from Tom Curran with Seaport Research. Please proceed with your question.

Good morning. Good morning, Tom. I just wanted to pick up where Stephen left off with Flowtech. So, you know, I know it was a profitability drag in the quarter with adjusted EBITDA loss of $7 million. In Flowtech's release, they emphasized that as chemical deliveries ramp to your contract's full scope, margins should expand toward or into positive territory and operating leverage in economies of scale. What are your own expectations for when Flowtech should get there? You've referenced it twice, I believe, so far in the call. It sounds like it should be around early 2023 maybe. And just, you know, what sort of potential run rate EBITDA contribution do you see there longer term? How collaborative is the relationship at this point when it comes to Flowtech's broader company revival plans?

Yeah, I mean, as we look at that, it's early 2023 for getting to full contracted volumes. What we're excited about is as they ramp and they get to a higher utilization, they'll be able to absorb a lot of the early costs that you saw in Q2. Our procurement and their commercial team is working very, very constructively to bring these volumes up and to get things in line. We're also, as we bring these volumes on, we're excited to see that they're able to get their economies of scale and a greater purchasing power to bring their overall cost structure lower. So not only do they gain on the top line as we scale to full contracted volumes, but those economies of scale will drive their per unit costs lower on every product that they have and continue to expand further. not just profitability associated with our contracted volumes, but also with the third-party customer base that they have. They'll also benefit from the economies of scale that these types of volumes drive.

Makes sense. And when it comes to your conventional and dual spread reactivation situation, is it a scenario in which You know, you could already definitely get the pricing and terms you'd want, really, you know, the return on that incremental deployment, but are holding back as part of your fleet growth discipline and strategy. And if you were to ink a reactivation contract, what sort of lead time advantages would you expect to have over the industry norm at this point?

So right now we have no intentions of activating any fleets that are on the sidelines. But what I would like to touch on is through the upgrade program of upgrading Tier 2 conventional fleets to dual fuel fleets, it's giving us additional engines that we have at our disposal to use as swing units. And these swing units have an incredible ability to – you know, really shift and change the way that our RNM program is currently operated so that if you have a hard down engine, we don't have to bring it all the way back to here in Aledo or out into Cisco where we'll do an engine rebuild or a transmission rebuild. Instead of having the pumping trailer sitting there waiting for the rebuild to be completed, these excess engines allows us to swing them in the district where we can get a 48-hour turn and have them back out in the field pumping. So when you look at the R&M expense associated with that, our engine rebuild and transmission rebuild are going to pretty much fix the same number of engines and the same number of transmissions in a given period of time. But by having this swing program, it doesn't keep the actual trailer itself tied up while those repairs are being completed. Instead, those trailers stay in the field longer, generating revenue. And so, just kind of looking at prior to the FTS transaction, we had 17 out of 20 fleets active. Those other three fleets were supporting a lengthy R&M cycle. And so now that we've brought in the engine repair and transmission repair in-house, and we also continue to see expansion of our swing unit program for engines and transmissions that we can do in the district, as we see that come to scale, what you'll see is we'll get those three fleets, back, and rather than supporting an R&M cycle, they'll be available to generate revenue out in the field. So I wouldn't necessarily call those activations or reactivations. They're already active. They're just not generating revenue. They're supporting an R&M cycle. And so these are high-value fleets and a very low-cost way of getting them back out there, generating revenue for equipment that is already active. It just doesn't generate the same revenue. And the R&M cycle and the cost of that R&M should relatively remain the same. So those three fleets would come at a higher profitability because we're already paying for the R&M.

Got it. And just to clarify, as it stands today, do you have any horsepower, and if so, how much left, that is neither participating in the swing program nor being cannibalized or used as a source for parts and components, but is solely idle, parked against the fence, and you're still deciding what to eventually do with it? Is there any horsepower that would fall into that category still?

There is no equipment that is in a yard anywhere in this company that we anticipate bringing back. And just going back to the swing program, what I like to look at on it just as an example, just to highlight just how material it is. You know, if you can get a, you know... a trailer that has a hard down engine or a hard down transmission, if you can get it back out in the field generating revenue in 48 hours as opposed to, you know, close to, you know, 20 days or three weeks, it's kind of like seeing a race car go into pit row and get a new set of tires and topping off the fuel in 10 seconds instead of 100 seconds. And it's, it's, It's incredible the cumulative effect that that type of cycle time has on your overall performance across your entire company. And so those are the types of improvements we like to focus on. And those are the immediate opportunities that we see to continue improving the profitability of Profract. Looking at the demand side and we like what we see there, but rather than responding to it with adding capacity to the market, what we're looking at is that busted old equipment that's on a fence or in a yard somewhere needs to stay there.

Yeah, and Tom, you're kind of hitting around just EBITDA per fleet and how we think about all of our fleets. And that's how we talk about it, EBITDA per fleet. But, you know, a fleet isn't... Like, they're not all the same. And even though we kind of talk like they are, you know, and they haven't – they're not what they used to be either. Like, if you think back to 2018, a fleet was closer to 45,000 horsepower. And today, our fleets are around 62,000 horsepower that we have out in the – With the equipment that we have, that we're maintenancing, in that maintenance rotation, it's close to that 62,000 right now. And that equipment that's coming back in that Matt's talking about, We're going to use that to support the fleets that we have out in the field and get better utilization. And when you look at other people's fleets, it's similar for them as well. And when you think about new build economics, it's actually a lot higher than what people talk about. With inflation, but also just the larger, with these jobs that are more intense, you have to have more horsepower to support them.

Yeah, when you look at the strength of your supply chain and your R&M cycles, being able to really focus on your efficiencies and your utilization there keeps you from having to really reach out into a boneyard and activate fleets that... you know, that you wouldn't have otherwise. I think reviving these zombie fleets is definitely not something that ProFrac is going to do or has to do to continue providing the top quality service that we're known for. And so I think that, you know, we are in the same industry as everybody else, but when you look at the vertical integration, the capabilities that we have, I think that what you see is, you know, a better utilization, better performance delivered because of the quick cycle times that we have. And it's not everybody is positioned to replicate those results.

We have reached the end of the question and answer session. I'd now like to turn the call back over to management for closing comments.

Well, we definitely appreciate everybody for their questions and look forward to the days ahead, the quarters ahead and to 2023 as we continue to expand our overall platform, continue to execute on our commitment to our stakeholders of delivering incredible results and continued expansion and on our acquire, retire, replace and consolidation within the supply chain. Our commitment is to profitability over growth, and we look forward in the months ahead of providing further guidance on exactly what we mean by that with specifics, and we're very excited to look forward to the opportunity to pay dividends. With that, we want to thank everybody, thank our stakeholders. Have a good day. Thanks.

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