ProFrac Holding Corp.

Ladies and gentlemen, thank you for your patience. Please remain on the line. Your conference will begin momentarily. Again, we do appreciate your patience. Please remain on the line. Your Thank you. Thank you. Thank you. Good day, ladies and gentlemen, and welcome to the Profact Holding Corp. Second Quarter Earnings Conference Call. All lines have been placed on a listen-only mode, and the floor will be open for questions and comments following the presentation. If you should require assistance throughout the conference, please press star zero on your telephone keypad to reach a live operator. At this time, it is my pleasure to turn the floor over to your host, Michael Messina, Director of Finance. Sir, the floor is yours.

Thank you, Operator. Good morning, everyone. We appreciate you joining us for ProFrac Holding Corp's conference call and webcast to review our second quarter 2024 results. With me today are Matt Wilkes, Executive Chairman, Ladd Wilkes, Chief Executive Officer, and Austin Harbour, Chief Financial Officer. Following my remarks, Management will provide high-level commentary on the operational and financial highlights of the second quarter before opening the call up to your questions. There will be a replay of today's call available by webcast on the company's website at pfholdingscorp.com, as well as a telephonic recording available until August 15, 2024. More information on how to access these replay features is included in the company's earnings release. Please note that information reported on this call speaks only as of today, August 8, 2024, 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 Profrex management and are not guarantees of future performance. Various risks, 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 Form 10-K 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 Filings tab to understand those risks, uncertainties, and contingencies. The comments today also include certain non-GAAP financial measures, as well as other adjusted 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 Profract's Executive Chairman, Mr. Matt Wilkes.

Thank you, Michael, and good morning, everyone. After my prepared remarks, Ladd will comment further on the performance of our subsidiaries, and Austin will walk through our financial performance. In the second quarter, we continued to set operating efficiency records, delivering strong performance for our customers. We were able to achieve this performance despite the rollover of multiple fleets to new customers during the quarter, resulting in additional calendar white space. Overall, the market for our services has been challenged by operators having reduced drilling and completion activity, particularly in natural gas regions. However, we successfully executed our commercial strategy to partner with customers that value integrated solutions. As we've conveyed in prior quarters, we firmly believe that consolidation by upstream operators will benefit Profract. Larger operators driving consolidation prefer to collaborate with service companies that deliver efficiency at scale. Given Profract's leading position throughout the completion's value chain, we were able to take advantage of opportunities in a rapidly evolving marketplace. For example, the majority of our customers have completed a transaction in the last two years. Additionally, we successfully increased market share in our largest operating region, West Texas, which has witnessed material operator consolidation post-COVID and is the leading U.S. land market for unconventional completions activity and spending. In the second quarter, we generated $136 million of adjusted EBITDA, on $579 million of revenue. Of note, we generated $74 million in free cash flow in the second quarter. These results illustrate that at scale, ProFrac is built to navigate market headwinds while generating free cash flow. Furthermore, our recent efforts to align with customers that prefer integrated offerings should enable ProFrac to continue to take advantage of opportunities through the cycle. Our performance in the second quarter is underpinned by record-setting efficiency per active fleet, a direct result of our team's successful execution in the field. Additionally, Profract's internal manufacturing and service capabilities enable us to rapidly repair, maintain, upgrade, and redeploy fleets. We believe that in basin scale, particularly in the most active basins, is a critical differentiating factor for Profract. We not only continued to invest in oil-weighted regions, but also purposely maintained our positions in gas-weighted markets. This strategy enables us to strengthen our customer relationships with operators based on a track record of delivering service quality and operational performance. Further, we believe we will benefit from increased levels of activity as recovery in natural gas basins materializes. In mid-June, we executed on an opportunity to strategically add scale at an attractive entry point through the acquisition of Advanced Stimulation Technologies, or AST. Importantly, AST enhances Profract's earnings profile and improves our market position in the most active region in the lower 48. AST's core values of best-in-class service and efficiency align extremely well with Profract's culture. Looking forward, We will continue to invest in next-generation equipment that enables diesel substitution, utilizing natural gas as the primary fuel source. Demand for our E-Fleets and our dual-fuel or dynamic gas blending assets remains strong, and we continue to make progress on fleet deployments. Today, 70% of our active fleets include E-Fleet or natural gas-capable equipment. Our ability to provide customers with significant fuel savings, high reliability, and efficient operations have made our next-generation assets highly sought after and a critical part of our service offerings. In line with our vertically integrated customer-centric strategy, we are actively evaluating alternatives related to power generation. there has been a significant surge in demand for power generation across a number of end markets, driven at least in part by grid constraints and failures, AI-driven computing power requirements, and broader industrial-scale electrification trends. In particular, our customers are increasingly requiring solutions that enable diesel substitution coupled with on-demand power generation at the wellhead, As a leader in next-generation E-fleets and diesel substitution solutions, we are well-positioned to organically diversify to provide power generation. Turning to Alpine, weakness in natural gas regions and general activity softness impacted our results. Although volumes and pricing were negatively impacted during the second quarter and into the third quarter, We are encouraged by the recent uptick in commercial opportunities and potential additional volumes that could materialize as we move through Q3. As a company, we continue to make progress on our priorities, and I'm proud of our team's execution and commitment to excellence. In summary, we continue to field new inbound requests for additional integrated fleet deployments with the highest demand for electric and Tier IV dual fuel, or DGB, technologies, As of today, approximately 70% of our active fleets utilize next-generation technology. We achieved a new record for efficiencies based on pump hours per active fleet, a testament to best-in-class execution by our employees in the field and in our repair and maintenance and manufacturing capabilities. Although we witnessed a slight decrease in overall utilization during the second quarter, we expect continued improvement in efficiencies as we progress through the third quarter. Strengthened by our vertically integrated model, we generated $74 million of free cash flow despite market headwinds. We increased in-basin scale in the most active region for completions in the lower 48, West Texas, through both organic and inorganic investments. We improved alignment with operators, driving consolidation. The majority of our customers have executed M&A. We've positioned Profract to deliver long-term value for our stakeholders by delivering the most efficient solutions through vertically integrated in-basin scaled offerings, best-in-class service, and the relentless focus on free cash flow generation through the cycle. With that, I'll turn the call over to Ladd.

Thanks, Matt.

I'll begin with an overview of our performance in each segment, starting with pressure pumping. I'm proud to report we achieved another record quarter for efficiency despite a challenging market, making this once again the most efficient quarter in Profract's history. This is the second consecutive quarter in which Profract achieved records for pumping hours, pumping hours per fleet, and pumping hours per day for active fleets. Profract's best-performing fleets exceeded 600 hours per month. Our ability to provide best-in-class service is a direct result of the operational improvements we've made internally and the emphasis we've placed on our commercial strategy. In particular, we are strategically invested both organically and inorganically to expand in-basin scale in West Texas, our largest region and the most active region for completions in U.S. land. Due to weakness in natural gas prices and the completion of several programs early in the quarter, we experienced an average active leak count that was relatively in line with the first quarter and lower than our expectations. These delays were felt across the industry as operators re-evaluated planned activity and spending as evidenced by the 6% decline in the horizontal rig count during the quarter. Our profit segment was also impacted by weaker than anticipated natural gas related activity. However, we took action to manage our costs and worked to replace volumes with spot opportunities. Prolonged headwinds in natural gas regions have continued into early Q3, but we believe that volumes have now troughed and anticipate a recovery as we progress through the quarter. In recent months, we have implemented a number of initiatives aimed at improving utilization and profitability of our mines. These include idling our mine in Maryville, Louisiana, making targeted reductions in headcount, and continuing to deploy automation across our mines with a goal of increasing operating leverage. In summary, Alpine is positioned to produce higher throughput, higher utilization, and lower cost per ton as market fundamentals improve. I'd like to reiterate that at scale, we believe we have the lowest cost in the industry. We have a bespoke vertically integrated platform that benefits from higher absorption as we increase activity. Leveraging in-basin scale and integrated offerings coupled with best-in-class service, enables us to drive higher operating leverage and to partner with operators to deliver efficiencies while generating free cash flow. This is precisely what ProFrac is built for. I want to thank our outstanding team for their hard work, dedication, and commitment to safety. We have the best team in the industry, and their focus on executing our differentiated strategy makes it possible for Profract to succeed every day. I'll now hand the call over to our new CFO, Austin Harbor, to cover financial results in more detail. We're excited to have Austin join the team at Profract. His extensive knowledge of the industry and financial expertise have strengthened Profract's team. We look forward to his contributions as we execute our strategy and capitalize on future opportunities. Austin, take it away.

Thank you for the kind words, Ladd. It's an honor to join the team. I believe the potential for value creation is significant at ProFrac. I look forward to contributing to the team while maximizing value for stakeholders. With respect to our second quarter results, revenues were flat sequentially at $579 million. We generated $136 million of adjusted EBITDA with an adjusted EBITDA margin of 23%. Second quarter adjusted EBITDA represents a 15% decline relative to the first quarter. Margins were negatively impacted by a decrease in average active fleets, weaker pricing, and lower relative cost absorption. Although adjusted EBITDA declined, Profract generated free cash flow of $74 million. demonstrating our ability to successfully navigate ebbs and flows and activity. We utilized cash to invest in our fleet, particularly next-generation technologies, sandmine improvements, strategic acquisitions, and for debt service obligations. Turning to our segments, stimulation services revenues were $506 million in the second quarter, in line with the first quarter. Average active fleet count and pricing on equipment and materials witnessed marginal decreases versus the first quarter due to intra-quarter rollover of customers and increased white space. Adjusted EBITDA was $107 million for the second quarter, a decline of approximately 14% versus Q1. Margins declined by approximately 300 basis points as prudent cost management partially offset the impact of reduced pricing and activity. This segment was impacted by approximately $8 million in shortfall expense related to our supply agreement with Flowtech, in line with the prior quarter. Despite the sequential decline in stimulation services results, our commercial and operational strategies, coupled with our cost structure, enabled us to generate free cash flow. Of note, we achieved mid-teens EBITDA per fleet and allocated capital to maintain and upgrade our fleet. The profit production segment generated $70 million of revenue in the second quarter, inclusive of the amortization of acquired contract liabilities of $11 million, representing an 11% sequential decline. Revenue was negatively impacted by a decrease in pricing coupled with a minimal reduction in volumes. Activity in natural gas basins remains subdued, and the market in West Texas remains highly competitive. We executed on initiatives to reduce both capital expenditures and fixed operating costs, including the idling of one mine. Our rapid cost reduction initiatives enabled us to partially mitigate the impact of lower cost absorption. Approximately 75% of volumes were sold to third-party customers during the second quarter as we executed on our strategy to diversify exposure. Adjusted EBITDA for the profit production segment totaled $26 million for the second quarter, representing a 10% sequential decrease. Adjusted EBITDA margins were flat quarter over quarter at approximately 37%. Activity declines witnessed in late second quarter subsisted into early third quarter. We are beginning to see improved commercial opportunities and anticipate that this segment will witness a recovery in volumes as we progress through the quarter, although pricing remains competitive. The manufacturing segment generated second quarter revenues of $56 million, up approximately 29% from the first quarter. Approximately 74% of segment revenues were generated via intercompany sales. The increase in sales in the second quarter was a result of hours pumped and engine upgrades at Stimulation Services. Adjusted EBITDA for the manufacturing segment was approximately $100,000 for the second quarter, a sequential decline of $4.3 million. Lower pricing enacted early in the second quarter coupled with flat production costs from legacy inventory drove the majority of the decline in adjusted EBITDA. Selling, general, and administrative expenses were $54 million in the second quarter compared to $51 million in the first quarter. The increase was primarily driven by stock-based compensation. Cash capital expenditures totaled approximately $62 million in the second quarter, approximately flat from the prior quarter. In addition to activity-driven maintenance, we invested in next-generation equipment, including but not limited to dual-fuel engines, E-fleets, and mine upgrades at Alpine. Just as we acted swiftly to right-size our spending levels in recent quarters to more accurately reflect demand, we are actively evaluating capital expenditure and capital allocation plans. As a result, we now expect to incur total capital expenditures during 2024 that are closer to the lower end of our previous guidance. We anticipate spending between $150 and $200 million in maintenance capital expenditures for the year, along with approximately $100 million on growth-related CapEx. Additionally, we are executing on cost reduction initiatives with the goal of decreasing operating expenses at our subsidiaries as well as at the corporate level. Total cash and cash equivalents as of June 30th were $24 million. including $5 million attributable to FlowTech. Total liquidity at quarter end was approximately $161 million, including $142 million available under the ABL. Borrowings under the ABL credit facility ended the quarter at $150 million, up approximately $12 million from the prior quarter. At the end of the second quarter, we had approximately $1.2 billion of debt outstanding, an increase sequentially related to the senior secured floating rate notes issued in connection with the acquisition of AST in June. The majority of our debt does not mature until January 2029. We intend to utilize free cash flow in future periods to deleverage. We look forward to continuing to execute on our strategic priorities partnering with customers to provide best-in-class integrated solutions, increasing efficiencies across the organization, and generating free cash flow through the cycle. That concludes our formal remarks. Operator, please open the line for questions.

Thank you. The lines are now open for questions. Please press star 1 on your telephone keypad at this time. If your question has been answered, you can remove yourself from the queue by pressing 1. Again, ladies and gentlemen, it's star one. And our first question comes from Stephen Gigaro from Seifel. Go ahead, Stephen.

Thanks. Good morning, everybody. Good morning. Two questions for me. One's a bigger picture. One's probably more specific. But the first one I had was, when you think about your competitive advantage and kind of what drives competitive advantage at the well sites, I mean, one of them, I think, is the assets, right? One of them is the integration. But as the industry kind of evolves into more people having similar type assets, at least, how do you hold the competitive advantage, you know, two, three years out as sort of equipment normalizes, if that's a reasonable assumption?

Yeah.

Yeah, there's a lot to that question. So, I mean, essentially, your next-gen fuel-efficient fleets are in high demand, and that definitely provides a huge competitive advantage. But when we look at the competitive landscape and who can participate with those equipment types, it's a smaller and smaller group, while we are seeing a little bit of a lot more people with those types of assets. or more of those assets out there, it's all consolidated within a smaller and smaller group. It's difficult to go from tier two diesel and upgrade in this environment. So we're not too concerned. We love competition. We're happy with a smaller group having the same similar assets. But I think if I think it reinforces our overall strategy and, you know, what we really focus on is, you know, I don't think it's good for the industry to have a competitor come in and fail with a new technology. It really diminishes the entire category and it can take a little bit to get that customer to try the technology again. um i i like the fact that that our largest you know three or four competitors uh are doing a relatively good job with newer technologies great thank you but as far as our competitive advantage i think the competitive advantage really comes from not just overall technology offerings but the fully integrated approach from controls and and really focusing on providing solutions and making it as easy as possible for our customers to complete wells.

Okay. Thank you. And then when we think about the second half of this year, can you give us any color on how we should be thinking about pricing and profitability per fleet as we just think about the back half of this year?

You know, we –

We expect it to be relatively flat. Of course, we watch the overall market. Our main focus is on what we can control, the overall macro environment, geopolitical risks, things like that. Those are always an element, but you can't plan a business around any of those items. We're managing this business in a flat profile and focusing on the things that we can control from a cost structure, inventory management, and really managing the market we have now. And that's along with the cyclical nature throughout the year that we're faced with.

Okay. Thank you for the color.

Thank you. And our next question comes from Dan Cutts from Morgan Stanley. Go ahead.

Hey, thanks. Good morning. Maybe if I could just put a, or come at this second half and third quarter question from a different angle. If we kind of think about some of the puts and takes that you guys disclosed and the prepared remarks and then the press release, you know, kind of flat stimulation services, pricing, some room for, you know, kind of cost-based profitability per fleet improvement, some inbound for additional integrated fleet deployments, and then, you know, kind of some puts and takes and profit and production, but that sounds like that might be down a little bit in the third quarter. But if we think about the second quarter result, my takeaway from those comments would be that the third quarter EBITDA can be growing. Do you think that's fair? And if so, is there anything you could share on the magnitude of potential growth in the third quarter? Thanks.

Yeah, there's certainly the potential, but what we're focused on right now is going in and executing on the integrated model, growing that side of the portfolio, and working with a relatively flat market, managing costs, managing working capital and inventory. And I think we can generate some respectable results. But we're also looking at the overall customer mix and making sure that we provide all of our customers with credible service. But I definitely think that there's a tremendous opportunity to grow it. But what we're looking at and managing around is a flat market with, you know, growth and opportunity coming from the things we can control.

Yep, understood. That makes a lot of sense. And then if I could just ask on the AST acquisition, so, and you guys already kind of elaborated on the strategic rationale and the prepared remarks, but I guess you guys have consistently communicated the acquire, retire, replace strategy. This fits into that strategy, but You know, more recently, I guess, presumably you have some idle fleets and, you know, delevering has moved up on the capital allocation priority list. So just, you know, in light of those two factors, just wondering if you could expand on the strategic rationale for the AST acquisition. Thank you.

Certainly, this was an asset that came at a great value, a great price, and and credible asset base and workforce and a great reputation in West Texas. I think it complements our portfolio out there really, really well with really high-quality customers attached to it. The quality of the fleet was certainly of high quality. It does complement our acquire, retire, replace. It's not particularly reflected in our Q2 numbers to the level that we would want it to be, as we only had just over a couple weeks in June that our numbers were complemented by. So I look forward to having a full quarter with it. you know, many years beyond having that package added to our profile.

Great. Thanks a lot. Appreciate that color. I'll turn it back. Thank you.

Again, ladies and gentlemen, to ask a question, it's star one. Our next question comes from Bank of America. Go ahead.

Hi, good morning, Matt and Ladd. Maybe I'll start with a question on the gas side of things. I know you guys have an outsized exposure relative to your peers on the gas side of things. Maybe you can talk a little bit to your outlook for the balance of the year on the gas activity side. Do things get worse before they get better? Because listening to the E&P calls this season, it sounds like there's some risk of more activity curtailment in the very near term.

Yeah, I mean, we're cautiously optimistic about the gas markets going into the back half of the year. But, look, we're not guiding towards it. We're in constant conversations with customers, and we're seeing opportunities coming with it. But in Q2, we certainly had an impact from gas markets slowing down faster than we expected them to. Rather than getting all bulled up and overly excited about a bounce back, we're planning our business for a flat environment from here, working with customers that seem to be readying for some additional activity. But we're letting them manage the macro environment, and we're managing our costs, managing our business in a very disciplined way. And And what I will say is when we do see a recovery in the gas markets and activity pick up with it, you're going to see a very substantial impact on our performance. And so we're really looking to those gas markets to come back and activity to come with it. And we'll be in a position to show the full effect of our integrated model.

Right. No, absolutely, Matt. I know you got more leverage to the gas markets than many of your peers. So that makes sense. And then one clarification, I know you don't talk about absolute fleet count, but I think Austin, you had in your prepared remarks that I think you said annualized EBITDA per fleet in the quarter was around mid-teen. So if I try to do that math, it sounds like you would have had maybe 30 or slightly less than 30 fleets in the second quarter. First thing, am I roughly doing that math right? And then Just on that fleet count side of things, how should we think about where things go in the back half of the year?

Yeah, I think you're thinking about it kind of in between the right and the fairway on that. I think as we look going forward, right, we're managing to the things that we can control. As you think about fleet count and you think about the opportunities that we have, You know, I think there are absolutely opportunities for us to improve on the numbers that you laid out. I think equally as importantly, there are more opportunities for us to focus on efficiencies from the cost perspective in addition to efficiencies with specific customers that we have in the portfolio today. And so I think going forward, you know, that kind of mid-teens EBITDA number should ring true.

Okay, fantastic. No, I know the RFP season is coming up, so you would have more opportunities to get volumes, but again, it's more about profitability, so I appreciate that. Okay, guys, thank you. I'll turn it back.

Thank you.

Thank you. And our next question comes from John Daniel from Daniel Energy Partners. Go ahead, John. Your line is open.

Thanks. Thank you for including me. Matt, I know the market is tough right now, but it seems like pumping hours per day keep grinding higher each quarter. And at the same time, E&P companies often, well, they don't often, it's like almost always reciting the virtues of their DNC efficiency gains. It just makes you wonder, like, if you looked at your very best fleets today, and maybe as you approach 25 during RFP season, do you think you could raise rates on those fleets today? Do you think the customers would take it to maintain that efficiency, or would they risk that efficiency and go lower price?

Yeah, I think that's a difficult question for a lot of reasons. You know, we would always love to get, you know, paid more, but I think focusing on the overall relationship with the customers is the most important thing. When we look at Our ability to get higher and higher efficiencies, that comes from a partnership and a customer who's focused on his efficiencies as much as you are. And, you know, in good markets, you know, a rising tide lifts all boats. But in markets like this, we get our margin from efficiencies and stability and a great relationship and partnership with the customers you're working with. So that's really where we're looking for margin expansion is through things we can control from cost rationalization, inventory rationalization, and cost. and grinding out the value from operating leverage. And so that's what we're focused on. If a better market comes along and lifts all boats, then ours will be lifted with it.

Fair enough. And then as you look at, like, the mines that were idled or the mine that was idled and try to fast-forward four to five quarters from now in the hopes of higher activity, do you – would you be inclined to reactivate it in anticipation of higher activity or would you wait until your other stuff is sold out? Pricing's gone up to reactivate, just any thoughts on how you would go about that process?

Yeah, the, the, the mind that we idled was, was, uh, you know, was, uh, Logistically, a little bit out of pretty good ways outside of really the outer bounds of the Haynesville. There was one customer that was in close enough proximity to it. One of the things we like about that particular asset is that it has some industrial opportunities. So regardless of what gas markets do, On that particular mine, we may find some industrial opportunities that would warrant us to kick that back on. And that's probably the most likely outcome, even if we did see a gas recovery. That's just a better use case for that asset. But the other three mines that we have in that basin have tremendous logistics advantages. And that's why, even in this environment, we've been able to keep those.

Perfect. Okay. That's all I've got. Thank you for letting me ask some questions.

Definitely. Thank you.

Thank you. This does conclude our question and answer session today. I would now like to turn it back to Matt Wilkes for any closing remarks.

Definitely.

We thank everybody for joining this morning. We look forward to Q3 and the remainder of the year. We've got a lot of great things going on at ProFrac. Really proud of our team. As we look forward, we're really excited to be focusing on our operating leverage, our integrated model, and the managing of cost controls and inventory management. We're excited about what we'll be able to do with that. And with the market recovery, maybe we'll get some top-line growth. But right now, this is all about cost rationalization and expansion of margin through execution. We appreciate everybody joining our call today. And thank you.

Thank you. This does conclude today's conference. We thank you for your participation. You may disconnect your lines at this time and have a wonderful day.