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spk04: Hello, and welcome to U.S. Wealth Services' second quarter earnings conference call and webcast. At this time, all participants are in listen-only mode. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Josh Shapiro, Vice President of Finance and Investor Relations. Please go ahead.
spk07: Thank you, Operator, and good morning, everyone. We appreciate you joining us for the U.S. Wealth Services conference call and webcast to review the second quarter 2021 results. Joining us on the call this morning are Joel Broussard, Chief Executive Officer, and Kyle O'Neill, Chief Financial Officer. Following their prepared remarks, the call will be open for Q&A. Yesterday afternoon, U.S. Wealth Services released its second quarter 2021 earnings. The earnings released can be found on the company's website at www.uswealthservices.com. The company also intends to file its Form 10-Q with the SEC this afternoon. Please note that the information reported on this call speaks only as of today, August 12, 2021, and therefore, time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading. In addition, the comments made by management during this conference call may contain forward-looking statements within the meeting of the United States Federal Securities Laws. These forward-looking statements reflect the current views of U.S. Wealth Services Management. Various risks, uncertainties, and contingencies could cause our actual results, performance, or achievements to differ materially from those expressed in the statements made by management. The listener is encouraged to review today's earnings release and the company's filings with the SEC to understand those risks, uncertainties, and contingencies. Also, during today's call, we will reference certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in our earnings release. And now I'd like to turn the call over to U.S. Wealth Services CEO, Mr. Joel Broussard.
spk01: Thanks, Josh, and good morning, everyone. I would like to thank the entire U.S. Wealth Services team for their dedication and focus during a period of great change. Because of them, we delivered strong results, generated adjusted EBITDA of $36.9 million. On a per-fleet basis, our annualized adjusted EBITDA from hydraulic fracturing grew by 39%, to $7.3 million. Kyle will provide additional detail on our financial performance in the second quarter. But first, I want to provide context around U.S. World Service's decision to exit the diesel market and become fully electric. Throughout the process to become a public company in 2018, we told the market that U.S. World Service's fleet would someday be all electric. Since then, our team has worked hard to make this goal a reality. We have been studying the market and monitoring the regulatory environment, all while developing innovative technology to meet the needs of our customers. Over the last several quarters, pressure on E&P companies to grow cash flow and reduce greenhouse gas emissions has intensified. And as a result, demand for next-generation fracturing solutions has surged. Meanwhile, the market for legacy conventional diesel fleet remains oversupplied with equipment and pricing has yet to recover to pre-COVID-19 levels. We believe these trends are not cyclical, but are permanent. Demand for older diesel equipment and higher emissions profiles is unlikely to recover. In response, we made the decision to accelerate our strategic transition to all electric frac services and technology company. And we continue to work tirelessly to execute this plan. In May, we announced the introduction of our newest clean fleet pump design, the Neeks. Neeks is a 6,000 horsepower dual pump trailer that represents the highest spec pump the market has ever seen. This design was informed by seven years of operating history and is custom tailored to deliver efficient, clean completions for our customers. We recently announced our plans to build four new Neeks clean fleets. Each fleet will consist of 10 dual-pump trailers tolling 60,000 horsepower. We expect to take delivery of the first NEEX fleet in mid-Q1 2022. In connection with our decision to exit the diesel frack business, U.S. Wealth Services is in the process of divesting of nine core assets, including conventional diesel-powered frack equipment and certain power generation assets. To date, we have completed over $21 million of asset sales using proceeds to repay borrowings on a senior secured term loan. We expect the pace of asset sales to pick up in the third quarter and that we will remain active in selling equipment throughout the remainder of the year. Our strategy from here is simple. We're going to continue to deploy the most advanced, cost-effective, and low-emissions fleets in the industry, deliver best-in-class service quality, and reduce our debt load as we sell legacy assets. Now, I would like to turn the call over to Kyle to review our second quarter financial performance.
spk03: Thanks, Joel, and good morning. U.S. Wealth Services averaged 9.3 active fleets during the quarter, with a utilization rate of 85%, resulting in 7.9 fully utilized fleets. Revenue for the second quarter was $78.8 million, up 3% sequentially. Not included in this number is the $22.5 million of income generated as Protrac converted its license-linked note purchased in our June 2021 offering into three $7.5 million options to license the clean fleet technology. Looking at our service and equipment revenue, we saw a 5% increase quarter over quarter on revenue per fully utilized fleet. Revenue from the sale of materials, including sand, chemicals, and trucking, and sand storage grew over 80% sequentially as a greater share of our customers opted to source materials through U.S. Well Services. Cost of sales for the quarter was $59.3 million, down 5% from the first quarter cost of sales of $62.6 million. While this sequential decrease was primarily related to lower fleet activity, I will note the repair and maintenance expense on a per pump hour basis declined 7% quarter over quarter as electric fleets made up a larger proportion of our total working fleet. During the second quarter, we continued to feel the impact of rising inflation across various points in our supply chain. Most notably were the increases in trucking costs, fuel, and lubricants. We're working with our suppliers to keep cost increase under control. In many cases, we'll pass some or all of the cost increase through to our customers. SG&A was $7.2 million for the second quarter, down 2% from the prior quarter. excluding stock-based compensation, SG&A was approximately $5.5 million as compared to $5.9 million in the first quarter. The sequential decrease was driven mostly by a reduction in professional fees. Adjusted EBITDA was $36.9 million for the second quarter. Included in this figure is $22.5 million of income attributable to the licensing of the CleanClete technologies and patents. Adjusted EBITDA from hydraulic fracturing operations was approximately $14.4 million for the second quarter, up 25% from the first quarter adjusted EBITDA of $11.5 million. Annualized adjusted EBITDA for fully utilized fleet was $7.3 million, up from $5.2 million in the previous quarter. Maintenance capital expenditures on an accrual basis were $4.8 million for the second quarter, On an annualized basis, our adjusted EBITDA, less maintenance capex per fleet, was approximately $4.4 million. Looking at our balance sheet, the company ended the quarter with total liquidity of $70.7 million, consisting of $12.6 million of availability under our ABL facility and $58.1 million of cash. I want to add some additional color on our plan to use asset sales to reduce our term loan balance. At the end of the second quarter, our total principal balance on the Senior Secured Term Loan was $233.7 million. So far in the third quarter, U.S. Wealth Services has completed $19.2 million of asset sales. After applicable prepayment penalties, our principal balance was reduced by $18.9 million. We expect to repay an additional $14 million of borrowings in the near term as pending transactions close. If we are successful in reducing our term loan balance to $110 million by the end of 2021, U.S. Wealth Services will pay 0% interest on our term loan for the first quarter of 2021 and 2% interest on the remaining three quarters of the year. Additionally, if the loan balance is less than $103 million by April 1st of 2022, our interest rate on the entire term loan will be 1% for Q2 through year end. Before Joel offers some final remarks, I'd like to provide details on the transaction we completed at the end of June and how we anticipate our capital structure will evolve over the next several quarters. In the initial transaction, we issued $125.5 million of 16% convertible senior secured third lien PIC notes and received $86.5 million of gross proceeds. $22.5 million of the notes were licensed link notes convertible into three $7.5 million licenses to build and operate clean fleets. Prior to the end of the quarter, the license-linked notes were converted in full, and U.S. Well Services recognized $22.5 million of income. $103 million of the notes are convertible into U.S. Well Services common stock at a weighted average price of $1.42 per share. $39 million of the $103 million of the equity-linked notes represents an exchange of our Series A convertible preferred stock into a convertible senior notes, reducing the outstanding balance of our preferred A's to $25.2 million from $62.2 million. Since the end of the quarter, U.S. Wealth Services has issued an additional $11 million of notes convertible into common stock at a weighted average price of $1.13. The convertible notes automatically convert to common equity once our preferred shares are converted or redeemed and our 20-day volume-weighted average share price exceeds $2 for 10 out of 20 consecutive trading days. This offering not only helps us fund our upcoming growth capital expenditures for our new clean fleets, but also, when combined with our asset sales discussed earlier, is a huge first step towards our goal of de-levering the balance sheet and simplifying our capital structure. With that, I'll turn the call back over to Joel.
spk01: Thanks, Kyle. U.S. Well Services has always been on the leading edge of hydraulic fraction technology and solutions. I'm excited for what this team will deliver over the next several quarters as we continue to execute our strategic plan and transition towards full electrification. Operator, please open up the call for questions and answers. Thank you.
spk04: Certainly. When I'll be conducting a question and answer session, if you'd like to be placed in the question queue, 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 star 1. One moment, please, while we poll for questions. Our first question today is coming from Ian McPherson from Piper Sandler. Your line is now live.
spk00: Thanks. Good morning, Joel, Kyle, Josh. It's great to see the value of your IP validated here and monetized in a really strong way, so congratulations on that. Thank you. When we cascade down from where you are to where you will be, call it three quarters from now, fully disposed from diesel and up and running with probably the first neeks. Can you help us think about the glide path of your EBITDA? In other words, was conventional horsepower a meaningful contributor to the EBITDA we saw in Q2? If so, how much of that do you need to sell away immediately, or can you accomplish some of your second half asset sale objectives without immediately selling away your remaining EBITDA contribution from your last maybe couple of working conventional fleets. Can you talk to that at all?
spk01: Yeah, sure. The EBITDA contribution from the diesel fleets for the first half of the year was minimal due to diesel pricing not recovering as quick as we thought. We currently, I think June we had one and a half diesel fleets working. We currently have one left today that is going to be finished on the 26th. So we'll be wrapped up diesel by the 26th of August. Okay. Josh, you want to elaborate on that a little bit?
spk07: Yeah, sure. I mean, I think what Joel said there is right, that the contribution from diesel diesel fleets was fairly minimal throughout the first half, and, you know, we would expect to see at least fleet-level profitability stay where it has been and then improve as we start, you know, deploying the NEX fleets and absorbing more overhead.
spk00: Okay.
spk01: Yes, the G&A would drag down the profitability until we get back to, you know, 10 electric fleets. Yeah, yeah, got that. We've been transforming the company, and that's just part of the transformation process.
spk00: Yeah, we have some transitional quarters ahead for sure with absorption. I get it. You've announced several new customer trials, and I know that you've got probably a pretty significant upgrade you're offering with Neeks. Can you talk about the perspective economics and performance really, the return objectives that you have for your next new builds and how they compare to the EBITDA per fleet you're earning on your earlier generation clean fleets today?
spk01: Yes. On the new fleets economics, we expect a 24-month payback on the first wood building, and that's on a cash basis. The trials that we've done, every Every person we trial for so far is interested in going electric, and we feel that the four fleets we're building will have more demand than equipment for our new generation electric fleet.
spk00: Not surprisingly. I have a few more I can take up with you guys offline. Thanks very much. Thank you. Thanks, Ian.
spk04: Thank you. Our next question today is coming from John Daniel from Daniel Energy Partners. Your line is now live.
spk06: Hey, guys. Thanks for including me. I guess the first one will go to you, Joel. Just clearly the demand for mission-friendly equipment is on the rise, but we're seeing sort of two paths, right? You've got people going electric and then some others opting for Tier 4 DGB. What do you think is driving the customer preference between the two at this point?
spk05: Josh, you want to take that one?
spk07: Yeah, sure. So, John, I think, you know, what we're seeing here is customers are gravitating towards next generation solutions, whether that's electric or Tier 4 DGB. And the reason is twofold. It's the fuel cost savings and then emission reductions. Right. And, you know, from our view, really, the Tier 4 DGB offers a partial solution on both of these. As far as fuel cost goes, the higher the rate of diesel substitution, the more cost savings customers will enjoy with the dual fuel. But no dual fuel fleet really eliminates diesel entirely, and most are using CNG when they are operating burning natural gas. And so there's some fuel cost savings versus a conventional diesel fleet, but not nearly to the same degree as a customer would enjoy if they're using one of our electric fleets and burning field gas. And really the same thing goes on emissions. a Tier IV DGB engine is a Tier IV engine. And those engines were not designed to reduce carbon dioxide emissions. They were really designed to reduce NOx, particulate matter, non-methane hydrocarbon type emissions. And so the performance of a Tier IV engine versus Tier II engine on CO2 emissions is pretty similar. And so while the Tier IV DGB engine will provide some benefit here, It does suffer from things like methane slip from incomplete combustion of the natural gas. And so the emissions might be better than a Tier 4 diesel, but not nearly to the same degree as our electric fleets. However, I think where customers prefer the DGB is they're more readily available. Today, electric fleets, we estimate that they're less than 10% of the active fleet. And so being able to access some portion of these benefits effectively will drive them towards a DGB over an electric. But I think the preference for electric is stronger, given the more complete benefit package.
spk06: And that's fair. I'm just curious more about it. It's like, you know, when you talk to that customer and say, hey, we're going another route, if it's because maybe, you know, you guys are looking for multi-year sort of backing for your project, whereas the other solutions might be less expensive, so that's less of a commitment. I don't know if you've seen any color like that. That's all.
spk01: We're actually looking for a 12-month commitment now, John. Okay. And also, you know, we operate a tier four engines. I know how much those cost on a CapEx basis to operate. And electric is just so much cheaper.
spk06: And that's the next question I want to dig into because you referenced the lower maintenance cost this quarter given sort of the transition away from conventional. Can you guys elaborate a little bit more on sort of
spk07: like for like the maintenance costs per fleet between the two now that you're just anything there would be helpful josh yeah sure i mean you know historically we've seen 35 to 40 all-in cost advantage for the electric versus the the diesel and i think you'll start to see more of that play out in the numbers as uh we're able to eliminate diesel operations from our financial results we report
spk06: All right, fair enough.
spk01: The final one. John, that really showed up in this quarter earnings when you look at our EBITDA versus maintenance capex, and we still had a few diesel fleets working, but that will continue to improve.
spk06: Well, Dan, I just remember from years ago when you were in public, that was something you guys talked about. It was hard to see, and now it feels like we're able to see it. So, okay.
spk01: We're really about to see it from September 1st October, November, we have no diesel equipment working. Okay.
spk06: And then the last one, guys, that hopefully you can answer, but, you know, we know that some of the equipment went to Alamo because that went out via AK. Not sure if you can name the buyers of what's been sold subsequent or what's on the docket, but can you describe for us the type of buyer, whether it's existing player, new player, just any color along those lines would be helpful.
spk05: Josh, you want to take that one? You've been handling most of the asset sales.
spk07: Yeah, sure. The interest has been kind of across the board. There have been service companies interested in buying some of the equipment, some resellers, some refurb shops. I'd say the interest has been pretty wide. The bulk of what we sold to date in the third quarter was to Albo in the transaction that we kind of publicly disclosed as well as a non-buyer, non-service company.
spk06: Non-service company. Okay. Thank you very much, guys.
spk04: Thank you. Thank you. Next question today is coming from Stephen Gingaro from Steeple. Your line is now live.
spk08: Thanks. Good morning, guys. Two things, if you don't mind. The first is you referenced the – the profitability in the quarter and not having a lot of diesel contribution in the EBITDA line. So just kind of back of the envelope, when we sort of do the math on how many clean fleets are out there in your current fleet, it looks like EBITDA per fleet is running like around $9 million in the quarter for the electric assets. Is that a ballpark reasonable number?
spk01: Kyle, you want to take that one?
spk03: Yeah. I mean, I think that's, you know, we don't report the electric versus the diesel, but the electric equipment is definitely at a substantial premium. So that's within the realm of kind of a reasonable range.
spk08: Okay. You're going to have to report just electric soon, Kyle. Okay. But that kind of step up is not a ridiculous thought process as you go into the next quarter, given the amount of fleets you plan to have working seem to be all electric.
spk03: Yeah, I mean, I'll caution you that as we drop from, you know, I think we had almost eight fleets running in Q2 down to we'll be, you know, around five, you're going to have the overhead really bite into that. So I think that, you know, nine plus million of evidopter fleet is kind of field level, results, and then that comes down with the absorption of overhead.
spk08: I understand that. That's fair. Thank you. The other one is I'm just trying to think how to ask the question, but when I look at your financial position, right, you've obviously you're working to repair the balance sheet, but you've also committed to a lot of CapEx, and it It feels aggressive from our perspective, but I was curious if you could walk us through your expectations for where the balance sheet is now, what the CapEx looks like in the back half of this year, 2022, and how you see the balance sheet evolving so you keep yourself in a reasonably safe position but still fund the growth that you have laid out for us? Kyle?
spk03: Sure. Sure. Right. So, in the June transaction, we raised, well, June and then the early part of July, we've raised approximately $97.5 million of cash proceeds. That's resulted in about $50 million after the SmartSense settlement fees and expenses and some required debt paydowns. So with our new funding, the cash requirements for these new build fleets will be around $100 to $115 million. Most of that will be due when the fleets are delivered in early to mid part of 2022. We're currently selling assets to reduce the term loan balance. We're targeting to get that below $110 million from a little over 230 at the end of the quarter. So we're looking at about $120 million of debt pay down. And then $50 to $60 million of additional funding is going to be needed to build out all four fleets, which we think we'll be able to source through. We're looking at several different options, including equity, equipment financing, et cetera. So we think it's a very achievable plan. you know, think that we really need to get to that, you know, get back to nine or ten active fleets to have the critical mass to really start to see the true economic benefits of our clean fleets.
spk01: Yeah, I'd like to add one thing to that. You know, we're going to do it between equity, debt, and also additional license and sales.
spk08: Okay, okay.
spk03: And just as you think about what we're building this for, what we're building these fleets for and what the economics are, I mean, this should be the new fleets combined with the debt paydown should be highly accretive for our shares.
spk08: Okay. Okay. And then 120 million of incremental debt paydown that you envision comes from what?
spk03: Primarily assets.
spk08: Excuse me?
spk03: From assets.
spk01: Sorry, Kyle.
spk08: Yeah, so those are asset sales in addition to the ones that you have already announced so far, right?
spk03: Correct. Well, it's all right. We've announced about $20 million of asset sales. That would be around $100 million will be through asset sales or scheduled amortization.
spk08: Okay. All right. That's a very good call. I appreciate you walking through that. Thanks.
spk04: Thank you. Our next question is coming from Daniel Burke from Johnson Rice & Company. Your line is now live.
spk02: Yeah. Hey, good morning, guys.
spk01: Hey, Daniel. Morning, Daniel.
spk02: Hey, Joel. When you mention additional license sales, do you mean to the party that already has the options to, I guess, acquire additional licenses, or would it be a second or multiple other parties than Profract?
spk01: We feel Profract and potentially others at this point.
spk02: Okay. All right. Fair enough. And then maybe just since we've talked a little bit about the asset sale plans, they seem pretty key to getting that debt level down by the end of this year. So asset sales have to proceed at a pretty good pace. I think you guys have put out a target of about $130 million today. in total asset sale proceeds, not to say that would all be completed by the end of this calendar year, but is that still a viable target?
spk03: Yeah, that's still in the range of what we're targeting.
spk02: Okay. All right, guys. And then maybe just one other one. When we think about the new fleets coming in on the electric side, can you talk a little bit about the PowerGen strategy you've got in mind for the fleets?
spk01: Yes, we're going to leave it up to the client on what they want, whether it be Whichever power generation asset they chose, we feel the turbines are the best now and the most environmental friendly. So whatever they recommend, whether it's grid power, whether it's reciprocating engine, whether it's turbine, we'll leave it up to the client.
spk02: Okay. Joel, I think the plan would be not to put those on the balance sheet, though. Is that fair?
spk01: Absolutely.
spk02: Okay. All right. Guys, I think that's probably about all I had left. I appreciate the chance to dial in.
spk04: Thank you, Daniel. Thank you. We have reached the end of our question and answer session. I'd like to turn the floor back over to management for any further or closing comments.
spk01: Thank you for your participation in the call. Have a great day.
spk04: Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.
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