ProFrac Holding Corp.

Greetings. Welcome to Profact Holding Corp. First 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this call is being recorded. It is now my pleasure to introduce your host, Rick Black, Investor Relations. Thank you, Rick. You may begin.

Thank you, Operator, and good morning, everyone. We appreciate you joining us for ProFrac Holding Corp's conference call and webcast to review first quarter 2023 results. With me today are Matt Wilkes, Executive Chairman, Ladd Wilkes, Chief Executive Officer, and Lance Turner, Chief Financial Officer. Following my remarks, management will provide high-level commentary on the financial highlights of the first quarter of 23, as well as the business outlook before opening the call up to your questions. There will be a webcast of today's call available by webcast on the company's website at pfholdingscorp.com, as well as a telephonic recording available until May 17, 2023. More information on how to access these financial features is included in the company's earnings press release. Please note that the information reported on this call speaks only as of today, May 10, 2023, 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 Security's law, including management's expectations on future financial and business performance. These forward-looking statements reflect the current views of Profact management, and they're not guarantees of performance. Various risks and uncertainties and contingencies could cause actual results to differ materially, performance or achievements to differ from those expressed in management's forward-looking statements. The listener or reader is encouraged to read Profax Form 10Q and other filings with the Securities and Exchange Commission, which can be found at sec.gov or on the company's investor relations website section under the SEC tab to understand those risks and uncertainties and contingencies. The comments today also include certain non-GAAP financial measures, as well as other adjustments and figures to exclude the contribution of Flowtech. Additional details and reconciliations to the most directly 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 Profact's Executive Chairman, Matt Wilkes. Matt?

Thanks, Rick, and good morning, everyone. We are pleased to report Profract's operational and financial results for the first quarter of 2023. Once again, we generated strong revenues and adjusted EBITDA as we continue to execute on our acquire, retire, replace, and vertical integration strategies. I am proud of what this team has accomplished and excited to realize the full potential of this business as we move forward. Since the end of the third quarter of 2022, Profract has closed five transactions, adding 12 fleets and 6 mines across multiple basins. During the first quarter of 2023, we estimate that we absorbed over $20 million of costs associated with the conversion, optimization, and retirement of acquired assets. To be clear, these costs were not added back to arrive at the $255 million of adjusted EBITDA for the quarter. However, it is important that we call these costs out as they are non-recurring. Those non-recurring costs were associated with standardizing and upgrading acquired pumps, as well as optimizing efficiencies of the mines we have acquired. We incurred these expenses so that all of our assets are capable of performing to our standards. Additionally, as our asset base has expanded, we have taken the opportunity to reposition frac fleets so that they would be in position to cross-sell our sand and logistics. As a result of these initiatives, we believe our first quarter financial performance was not reflective of the true earning power of our business. Since becoming public, we have worked aggressively to build out our platform with several key objectives in mind. The goal remains to position Profrac to, one, deliver the safest, highest, and most consistent service quality for our customers. Two, insulate the business from cyclicality as best as possible by vertically integrating the supply chain, and three, maximize and return free cash flow to our stakeholders, which we hope to update soon. We believe we have successfully executed on the first two goals. Our operating efficiencies are best in class, and we offer a portfolio of Tier 4 dual fuel and electric fleets capable of delivering significant cost savings and emissions reductions for our customers and further separating us from our peers. As such, we were able to earn premium margins while still lowering our customers' completion costs per lateral foot, which we believe is the best measure of value for services. On the supply chain side, Profract's vertical integration strategy is delivering incredible results. We have the largest in-basin sand footprint with approximately 23 million tons per year of production capacity. This network of sand mines positions Profract to capture value from the from the mine gate all the way to the wellhead, significantly improving the economics of our fleet. Additionally, by manufacturing our own equipment, Profract shortens cycle times and matches the cadence of inventory build and consumption with the activity levels of our customers. We believe this is a critical advantage that will result in improved cash flow throughout market cycles. From here, our mission is clear. We are focused on demonstrating Profract's earnings power and cash flow generation. In our two-plus decades in the FRAC business, we have never seen a better opportunity to generate free cash flow, all of which we intend to use to pay down debt and return to our stakeholders. Our conviction is underpinned by several factors. First, the industry's supply and demand fundamentals are as good today as we have ever seen. The majority of workable capacity is held by a small group of disciplined players. We are very encouraged by the industry's reaction to the rapid attrition of legacy equipment. We believe new horsepower entering the market will serve as replacement capacity and that the measured pace of these replacements will prevent oversupply. At ProFrac, we continuously evaluate our equipment to ensure we are allocating capital to assets that can generate our targeted rates of return. Our decision to retire the equivalent horsepower of three fleets earlier this year demonstrates our commitment to this practice. We believe this process in one form or another is taking place throughout the industry. Also, capital scarcity and supply chain tightness serve as high barriers to entry that did not exist in past cycles. Second, today's commodity backdrop is constructive. In the crude market, the combination of OPEC Plus production restraint and U.S. shale producers' capital discipline will continue to support the price of oil despite recent volatilities. Even with the recent pullback, our customers can generate very attractive returns at current price levels. We believe these conditions will persist and that the demand for our services will remain strong for an extended period of time. As for natural gas, much has been made of the recent price decline. Although gas prices have been a recent headwind, we anticipate that this situation will prove transitory. We are seeing a disconnect between the current price of gas and the underlying fundamentals for the commodity. We believe the forward curve and the coming growth in LNG export capacity reflects the reality that the world will be short natural gas for the foreseeable future. Global demand for power generation will continue to increase, and natural gas is the best possible solution for meeting the world's energy needs. We believe U.S. natural gas represents a multi-decade opportunity, and for this reason we are committed to gas basins. Our continued presence and leadership in these markets will yield immense benefits to ProFrac and reinforce critical customer relationships. Finally, we are confident in ProFrac's ability to generate free cash in the current environment because of the strategic moves we have made over the last year. ProFrac identified materials integration as being key to enhancing free cash flow generation and capturing margin from selling sand with logistics and providing chemicals. is a durable opportunity that can represent as much as $25 million of annualized gross profit for every fleet supplied. ProFrac has control and custody of key supply chains. We manufacture fluid ends, power ends, and high-pressure iron, and we build and refurbish our own pumps, pump units, and blenders. The obvious benefit of vertically integrated manufacturing is reduced maintenance costs. However, we believe the true power of our vertical integration comes from better asset management and cash flow management. With shorter lead times, more of our equipment is available to work and generate revenue. Plus, lower exposure to outstanding purchase orders results in more discretionary cash flow and protects us in a market downturn. Industry discipline has become a welcome narrative. For Profract, we believe our disciplined approach will maximize free cash flow. With that, I'll turn the call over to Ladd.