Flowco Holdings Inc. Class A

Good morning, and welcome to FloCo Holdings, Inc.' 's second quarter 2025 results conference call. Today's call is being recorded, and we have allocated one hour for prepared remarks and Q&A. At this time, I'd like to turn the conference over to Andrew Leanpacker, Vice President, Finance, Corporate Development, and Investor Relations at FloCo. Thank you. You may begin.

Good morning, everyone, and thanks for joining us for FloCo's first quarter results. Before we begin, we would like to remind you that this conference call may include forward-looking statements. These statements, which are subject to various risks, uncertainties, and assumptions, could cause our actual results to differ materially from these statements. These risks, uncertainties, assumptions are detailed in this morning's press release, as well as our filings with the SEC, which can be found on our website at ir.floco-inc.com. We undertake no obligation to revise or update any forward-looking statements or information except as required by law. During our call today, we will also reference certain non-GAAP financial information. We use non-GAAP measures as we believe they more accurately represent the true operational performance and underlying results of our business. The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP. Reconciliations of GAAP to non-GAAP measures can be found in this morning's press release and in our SEC filings. Joining me on the call today is our President and Chief Executive Officer, Joe Bob Edwards, and our Chief Financial Officer, John Byers. Following our prepared remarks, we'll open the call for your questions. With that, I'll turn the call over to Joe Bob.

Thank you, Andrew, and good morning, everyone. Before discussing our solid first quarter results, I want to take a moment to address the macro environment currently impacting our industry. Over the past several weeks, the United States upstream outlook has come under pressure from evolving tariff policies, OPEC plus commentary suggesting accelerated production, and broader economic uncertainty. Given this backdrop, I want to take a few moments to reiterate what we talked about during our IPO roadshow and on our fourth quarter call several weeks ago, and that is FloCo's differentiated business model in the context of the broader oil services sector. First and foremost, FloCo's performance is driven by our customers' non-discretionary OPEX rather than their CAPEX. Our results are tied to absolute levels of oil and gas production in the United States, not the number of active drilling rigs or frack spreads. At current commodity price levels, many of our customers have announced plans to modestly reduce capital spending. However, most have reiterated or only slightly reduced their production expectations. In fact, despite these market concerns, the EIA recently projected that the United States crude oil production as a whole will average an all-time high of 13.4 million barrels per day in 2025, up from the 13.1 million barrels per day average in January of this year. Clearly this is our second quarter call, not our first quarter call. So apologies about that, everyone. We're going to do this old school way and we're going to go live. So Andrew, you want to kick us off?

Yeah, I think that the statement that I previously made about the first quarter, you know, the first quarter metrics and with regard to forward-looking statements and other metrics, just refer you back to our first quarter statements around forward-looking statements and non-gap reconciliations. We posted our press release this morning. and encourage you to review those risk statements that are stated in our first quarter and the end of the year. Joe, Bob, over to you.

Great. Well, again, apologies, everyone. Sorry for that snafu, but we're going to go through what we actually prerecorded yesterday, but we'll just do it in real time. So we will begin by walking you through our second quarter results and operational performance, as well as our recent acquisition that we announced yesterday of HPGL and VRU assets from ArchRock. After that, John will provide a more detailed review of our financial performance, our balance sheet, including some impressive efforts improving our working capital position. And then finally, we'll give you some thoughts on capital allocation. I'll then close by sharing our perspectives on the current market environment and how we see things shaping up for the third quarter and the remainder of the year. And then finally, we'll open the call to your questions. In the second quarter, FloCo delivered strong financial performance, generating adjusted EBITDA of 76.5 million, while expanding margins by 65 basis points quarter over quarter. We also generated approximately 46 million in free cash flow, underscoring our disciplined execution and progress in working capital efficiency across the organization. This performance was achieved despite the challenges we face in today's difficult macroeconomic environment, which I will touch on a bit later. Our improved EBITDA and margin performance was largely driven by strong sequential growth in our high-margin rental fleets, particularly within our high-pressure gas lift and vapor recovery businesses. Adoption of our HPGL solutions continues to grow as customers move away from legacy optimization methods and gain confidence in our technologies, which deliver greater uptime and accelerate production earlier in the well's lifecycle. At the same time, demand for our VRU offerings remains strong, supported by favorable natural gas market dynamics, including rising LNG exports and increased gas fired power generation. As operators place greater emphasis on generating cash flow in the current environment, rather than growth, these technologies help enhance near-term returns and maximize the long-term value of existing assets. HPGL by improving recovery and operational efficiency, and VRU by capturing and monetizing incremental natural gas that would otherwise be vented or flared. Both our HPGL and VRU solutions are supported by our U.S.-based supply chain and vertically integrated manufacturing footprint, which have seen minimal impact from the recently enacted tariffs. This vertically integrated platform strengthens our ability to deliver reliably and cost-effectively, while reducing exposure to current and potential tariffs that may affect competing technologies. Subsequent to the quarter, and in support of accelerating growth in our high-margin rental fleets, we completed the acquisition of 155 HPGL and DRU systems from ArchRock, which they originally acquired as part of their acquisition of TOPS in June of 2024. 100% of these systems are electric drive, and the large majority are HPGL units supported by contracts with new and existing blue chip customers in the Permian Basin. We are actively integrating these systems into our fleet and look forward to a seamless transition of operations delivered through our existing field service network. This transaction marks our first acquisition post-IPO and reflects our disciplined approach to M&A. targeting production optimization opportunities at attractive valuations that align with our long-term strategy. Overall, I am very pleased with our operational and financial performance in the second quarter. Despite a challenging macroeconomic environment, we again delivered top quartile returns on capital employed while expanding margins and driving strong free cash flow generation. This performance underscores the clear differentiation of our business and reinforces the resilience of our strategic positioning as a market leader exclusively focused on production optimization. With that, I'm going to turn it over to John to provide more detail on the second quarter.

Thanks, Joe Bob. Before reviewing some of the key financial metrics and results for the second quarter, I'd like to provide a reminder on our historical financial information given the combination of FloCo, Logistics, and Estes in June of 2024. For clarity, note that any financial information presented prior to June 2024 business combination, such as the second quarter 2024 financials, reflects only the historical performance for Estes. Financial information for the first and second quarters of 2025 reflects the financials for the consolidated entities. Turning now to our financials, second quarter performance was in line with our expectations, driven by strong execution across segments and bolstered, as Joe Bob mentioned, by the returns we're realizing in our rental fleet investments. In fact, our quarterly rental revenues exceeded $100 million in the second quarter for the first time ever. We delivered adjusted net income of $33 million on revenues of $193.2 million. Revenue grew minimally while adjusted EBITDA was up 2.1% quarter over quarter as higher margin rental revenue increased our profitability, even with the decrease in product sales revenue. Adjusted EBITDA margins were up 65 basis points as rental revenue represented an increased portion of our revenue mix. In our production solutions segment, second quarter revenue was $128 million, with adjusted segment EBITDA of $53 million, an increase of 10.6% and 5.4% respectively from the first quarter of 2025. Adjusted segment EBITDA margins decreased quarter over quarter by 202 basis points. The increases in production solutions revenue and adjusted EBITDA were the result of growth and higher operating leverage in our surface equipment rental business unit and strong sales in the downhole components. Adjusted segment EBITDA margin was down quarter over quarter due to increased sales in our lower margin downhole components business unit. In our natural gas technology segment, second quarter revenue decreased 14.9% to 65 million compared with the first quarter, while adjusted EBITDA decreased 4.4% over the same period. The decrease in revenue and adjusted EBITDA are attributable to a decrease in natural gas system sales in the quarter. Adjusted segment EBITDA margins increased by 463 basis points due to favorable revenue mix shift towards vapor recovery from natural gas systems. With regards to the midstream opportunities we've highlighted in prior quarters within our natural gas technology segment, we successfully executed a few sales of smaller vapor recovery units designed to capture emissions in midstream operations. We continue to engage in constructive discussions with large midstream operators and remain optimistic about the growing adoption of vapor recovery solutions in this vertical. Overall, consolidated second quarter adjusted EBITDA was 76.5 million, an increase of 2.1% from the first quarter of 2025. Our top quartile EBITDA margins and sequential growth illustrate the sustained demand for our differentiated solutions and the ongoing focus on efficiency throughout our organization. In the second quarter, the majority of our 35.8 million capital investment was focused on expanding our surface equipment and vapor recovery fleet, driven by sustained demand and attractive expected returns on capital employed. Our annualized adjusted return on capital employed for the quarter was approximately 18%. Based on the quarter outlook, we anticipate only minor adjustments to the organic capital expenditure program discussed last quarter for the remainder of 2025, but we're monitoring the market outlook for CapEx investments that will impact 2026. Subsequent to the quarter, as Joe Bob mentioned, we invested approximately $71 million in cash drawn from a revolving credit facility to acquire 155 HPGL and VRU systems from ArchRock. We executed this transaction at an attractive valuation, and it's expected to be immediately creative to both free cash flow per share and earnings per share. We're actively integrating these assets and anticipate realizing a full quarter of benefit from them in the fourth quarter of this year. We expect to lower our 2026 capital expenditures as a result of this transaction. We will continue to invest in growth while maintaining capital discipline, targeting high return opportunities aligned with our capital return framework. For our organic growth opportunities, our typical investment lead time is approximately six months. These shorter cycle investments combined with our vertically integrated manufacturing platform provide the flexibility to scale capital deployment up or down as we respond to potential shifts in customer demand and market conditions. Turning briefly to corporate costs, in the second quarter we reported $4.3 million of corporate expenses in line with the $4.4 million of costs in the first quarter. We anticipate a slight increase in corporate costs in the second half of the year as we complete the build-out of our public corporate functions. Subsequent to the quarter on July 4th, the one big beautiful bill was signed into law. We're continuing to assess the potential impacts of this legislation, but we anticipate that we will benefit from the restoration of 100% bonus depreciation for certain fixed assets. Separately, following the expiration of the IPO lockup period on July 23, 2025, we entered into an amendment with our two largest shareholders, GEC and White Deer, to revise the prior requirement that the company file a shelf registration statement within 180 days of the IPO. While GEC and White Deer retain the right to request such filing in the future, the company does not currently have a shelf registration statement on file. Turning to our balance sheet and liquidity, we ended the quarter in a strong financial position using free cash flow generated during the period to reduce outstanding borrowings under our revolving credit facility. As of August 1st, 2025, total borrowing on the facility stood at $226.6 million, including approximately $71 million drawn related to the ArchRock acquisition. With a borrowing base of $723 million, we had about $497 million of availability under the facility. On August 1st, PloCo declared its second consecutive quarterly dividend of $0.08 per share payable on August 29th. This action reflects the board's continued confidence in the strength of our business model and the overall health of our balance sheet. It also highlights our balanced capital allocation strategy, returning capital to shareholders while continuing to invest in disciplined high return growth. In summary, we delivered another solid quarter, meeting our outlook with adjusted EBITDA within our guidance range. We executed effectively despite the challenging upstream market environment that negatively impacted product sales, a trend we anticipate will continue into the third quarter. Joe Bob will share additional insights on our market outlook shortly. Looking ahead, our emphasis on production optimization combined with the resilience of our solutions and strong customer relationships positions us well to navigate a more uncertain operating environment. Back to you, Joe Bob.

Thanks, John. Turning now to our view of the upstream market and expectations for the remainder of 2025. As we noted during our first quarter call, evolving tariff policy, increased oil supplies from OPEC Plus, and broader macroeconomic uncertainty have continued to weigh on commodity prices as well as North American production outlook more broadly. And these headwinds have persisted and in some areas have worsened. leading to lower activity levels across our North American customer base as operators respond to a more uncertain outlook. While our business is not directly tied to rig count or completion activity, the sustained moderation exhibited by our customers over the last several months is beginning to impact production trends more broadly. The EIA has recently revised its outlook for U.S. crude oil production downward, now expecting production to be flat in 2026 versus 2025. Furthermore, cost-cutting and reorganization efforts have slowed our customers' decision-making, impacting the pace of spending, even in the areas of production optimization. We remain well-positioned as our production-oriented solutions are OpEx-oriented, non-discretionary services that help our customers maintain cash flow. That said, the current market environment has modestly tempered our near-term growth expectations for the second half of the year. In particular, we now anticipate a sequential decline in product sales in the third quarter, most notably in the sale of vapor recovery units and conventional gas lift compression packages. Downhole component sales are also expected to be flat to slightly down. Importantly, we continue to benefit from the strength of our high-margin rental fleet, which delivers visible free cash flow and helps to offset softness in these equipment sales. Given the current market environment, we're taking proactive steps to further optimize our operations. During the second quarter, we consolidated a portion of our manufacturing capacity within our natural gas technology segment, a decision which will reduce overhead and drive improvements in working capital efficiency. We will continue to evaluate additional opportunities to streamline our operations while maintaining our commitments to service quality. So what does all this mean in terms of guidance? We think adjusted EBITDA for the third quarter will be somewhere in the range of $72 to $76 million. This range accounts for the current market uncertainty, the near-term weakness in equipment sales that I described earlier, as well as two months' contribution of the recently acquired assets from our truck. Speaking more broadly about the back half of the year and our full-year expectations, we anticipate a better Q4, finishing the year close to the EBITDA growth range communicated on the first quarter call. During the fourth quarter, we will benefit from a full quarter of earnings contribution from the R truck assets, as well as some equipment sales that are expected to occur before the end of the year. We believe our performance in 2025, particularly our sector leading growth and ability to generate attractive returns on capital in such a challenging market, reflects the resilience of our production focused business and the market share capture story for HPGL and VRU. So with that, I'll turn it back over to the operator for Q&A.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing these star keys. One will be pleased while we poll for questions. Our first question comes from the line of Arun Jaram with JP Morgan. Please proceed with your question.

Yeah, good morning, gentlemen. I was wondering if you could provide maybe some additional details and color around the acquisition from ArchRock. Is this a deal that improves, call it the competitive dynamics of the HPGL VRU kind of segments? And just maybe just general thoughts in the back half of the year. You mentioned two months is in your outlook for 3Q and obviously full quarter contribution in 4Q?

Yeah, Arun, thanks for the question. Good to hear from you. So as you know, this is a technique that we pioneered. We invented the high pressure gas lift technique, you know, six, seven years ago. And we maintain the market leader in this space. ArchRock ended up with these assets, as I said, through their acquisition of TOPS last year. And, you know, it took them some time to figure out that these assets require different operating characteristics and different, you know, customer service intensity. And so through a series of discussions, we ultimately, I think, arrived at a very good outcome, which is, you know, a consolidation of those assets into our fleet. The electrification theme is a very positive one. You know, 100% of these assets are electric. which is great. We're picking up some new customers, some customers that we've been working on both converting to the method as well as using us for quite some time, so that's positive. And we're filling in more market share with existing clients as well. Very importantly, we're getting some idle units. There were a handful of units that We're not deployed, but built and ready to go. So that's good. That helps us with some available capacity to satisfy some existing customer demand. And given kind of what's going on in the market, we obviously saw this acquisition coming, so we have moderated our forward capital spend appropriately. So as John mentioned, this is going to really pull forward CapEx from 26, which is a good thing. And I think absent any rebound in the market condition will likely temper 2026 capital ambition for us. So all in all, a good deal. We think about value on this transaction really in a couple of different pieces. Obviously, you've got contracted assets with immediately generating free cash flow the minute you buy them. So, you know, we allocate some purchase price allocation to the value of the existing contracts. And then, obviously, we know what it costs to build these things because we have a lot of them in our fleet. So it's a good deal. It's immediately accretive, as we said. What do you think, John? Kind of, you know, low single-digit earnings accretion kind of thing? Yeah, that's right. Yep. And I think some room to grow in 26 with the deployment of the idle units that we acquired.

Great. And maybe my follow-up, Joe Bob, I was wondering if you could highlight some of the thoughts around midstream and your entry with some of the smaller vapor recovery units and potential to grow with this midstream customer base kind of over time.

Yeah, we've been making progress with I'd say half a dozen to a dozen customers in the midstream space are ruined. And these are the large guys that would be household names that could potentially deploy hundreds of these systems through their nationwide networks. We're at the early stages of this. We have sold, I think, cumulatively less than 50, but it's on the order of a few dozen units, far more than a trial basis. This is much more of a customer's deploying systems to get comfortable with the way that they operate, to get comfortable with the operating efficiencies that we claim as we sell these units to them. And we've been led to believe that that was the first step toward a much larger demand profile coming our way. Now, we'll see. We've been working on this for a few quarters now, and again, well beyond trial phase. but it could be something that is pretty exciting to talk about in the coming quarters.

Great. Thanks a lot.

You bet.

Thank you. Our next question comes from the line of Philip Junkworth with BMO Capital Markets. Please proceed with your question.

Thanks. Good morning. Just on the reduction in Permian spending during the quarter, it looks to us like the activity declines have been broad-based across EMPs, but wondering how you're viewing it in terms of public versus private, Delaware versus Midland, and what that means for FloCo customers and overall market share.

Yeah, Philip, thanks for the question. You know, private's You know this, right? Privates definitely respond more aggressively than publics, whether it's private equity-owned or family-owned, family office-owned private companies. So you're seeing rig count declines, frack spread declines from privates much more aggressively. The consolidation that has taken place in the Permian has moderated the response from the publics. And you're seeing customers that are taking a much more long-term view to field development. The very largest super majors are, in the case of one very, very large company, they're still growing, right? They're still anticipating a doubling of production over the next five years or so. But it's definitely having an impact. You just see it in the production data. We're flattening out, projecting to stay roughly flat in 2026 based on latest estimates. And as I said in our prepared remarks, it's starting to show up in demand for services, even in our wheelhouse. Now, that being said, without our services and without the maintenance of existing production, their production declines rapidly, right? So we feel like we're better off than most in places like the Permian to help maintain and grow production when customers want it. So in a challenging market, we feel like we're in pretty good shape.

Great. And then you mentioned the moderating growth capital in 2026, it's given market conditions and the ArchRock acquisition. Can you remind us how you view maintenance capex and then uh as far as the growth capital component is there any good way to think about that in terms of sensitivity to overall production growth outlooks or as a percent of sales look the good news is and john will give you a little bit more of a nuanced answer but the good news is we don't have to make decisions on that right now we've got

We control our own destiny with our vertically integrated supply chain or vertically integrated manufacturing capability as well as domestic supply chains. Lead times for critical components are about six months out, so we obviously keep an eye on that. But based on where we are today, we just think next year is going to be less growth capex compared to this year. The last several years, we've spent pretty consistently $100 million to $150 million in of growth capex to grow our business. The R truck acquisition helps offset some of that expected growth in 26. And unless the market gets a lot better, we just anticipate a more moderate spending level next year.

Yeah, I agree. I think, you know, we had indicated around $110 million of growth capital this year. I think we'll come inside that, particularly with the R truck acquisition. And then as we get into Q4, we'll start to make, you know, kind of more long-term decisions on 2026 capital spend. But I do expect it would come down relative to the numbers Joe Bob was talking about. On maintenance capital, we've run in that $20 million range. As our fleet grows, we expect that to grow a little bit, but not significantly. So I think, you know, somewhere slightly north of 20 is what we'd see in 2026. Thank you.

And as a reminder, if anyone has any questions, you may press star 1 on your telephone keypad to join the queue. Our next question comes from the line of Derek Butthazer with Piper Sandler. please proceed with your question.

Hey, good morning, guys. Wanted to ask a question about rentals. It was up 5% quarter over quarter. Maybe if you could just pull that apart for us a little bit. Is this a sign of accelerated adoption you're seeing from HPGL? Just taking over the legacy ESPs, just given a lot of the tariff-related weaknesses that we've heard from some of the providers over the last few weeks. And with now rentals representing 53% of the company, how should we start thinking about where this could trend for the remainder of the year and as we start thinking about 2026?

Hey, Derek. Thanks for the question. The rental increase has been pretty consistent over the last several years, and you've nailed it. It has to do with market adoption of HPGL, displacing legacy production techniques, most notably ESPs, as well as BRUs becoming you know, standard equipment on, in particular, large Permian pads that get brought online. So you'll see a continued increase in rental revenue as a percentage of total FloCo revenue, certainly as our product sales businesses are reasonably flat, right? So just from a mixed standpoint, you'll see rental revenues trending higher. You'll see our overall EBITDA margins continue to grind higher. and our return metrics hopefully improving as we invest more growth capital in higher returning assets. So that's how we think about it. We think that growth story, that market adoption story is very much intact and is healthy even in this challenging market. So that's, I think, evidenced by the fact that we had the confidence to buy assets you know, $71 million worth of equipment from our truck. So we're going to continue to talk about the virtues of HPGL and VRU and continue to invest as the market dictates.

That's helpful. I guess just, you know, on the acquisition, I know you already answered questions on it, but maybe, you know, help us understand the remaining competitive landscape there. I mean, as my understanding is during the IPO period, So there was not that many players in HPGL and you have a commanding market share position. Obviously, you just grew that with this acquisition. But can you give us any sense as far as the remaining landscape out there and how you're viewing that and where market share could ultimately grow for HPGL?

market is pretty small when you get right down to it, Derek, we, we have a commanding market position, but if you think about who we compete with, it's not just the handful of players that are also offering high pressure gas lift. It's the vast big, uh, market for ESPs, right? So it's still a, uh, a billion, billion and a half dollar market, even in today's environment. And our penetration is higher than it was at IPO, but it's still not anywhere close to fully saturated. So we really view our competitors as the inferior technology, and so we will continue to extol the virtues of the method. I know that's not really the answer to the question you asked, but that's how we think about it.

That's helpful. And if I could just squeeze one more in. It seems like you can seamlessly integrate these assets. Is any capital required to fold them in and integrate into your fleet?

The beauty of really our market position in the Permian is these are as close to seamless plug and play as you can get. I think we hired a grand total of three people associated with these new assets. So it's very efficient in the integration.

Got it. Great. Appreciate all the color. I'll turn it back.

You bet. Thank you. Our next question comes from the line of David Smith with Pickering Energy Partners. Please proceed with your question.

Hey, good morning. Thank you for taking my question. Most of the acquisition ones have been hit, so I just wanted to circle back and double check if I caught the Q3 guidance correctly. for a range of 72 to 76. And sorry if I missed it, but wanted to ask if you could help with just some broad guardrails around the moving items. But particularly, especially excluding the acquisition announced yesterday. Should we think about rental as being roughly flat sequentially with more of the impact on lower product sales and maybe a little bit higher corporate cost?

Yeah, Dave, thanks for the question. Listen, rental will continue to go to bleed higher as a percentage of our revenue, as well as on a quarter over quarter basis. I anticipate it being up somewhat in Q3 as opposed to Q2. What's really happening is a couple of things, right? And I said it, but let's just drill in on it a little bit. Our product sales are made up of a couple of different things, right? It's the sale of packages that we build in our manufacturing facility for VRU or compressor packages, right? And so those are weak in Q3. And this is a backlog business. We've got a lot of visibility. We know the delivery schedules. And as we look at Q3, that business is going to be off sequentially, as I said. Okay, so now what does that mean, right? That's among our lowest profit margin business. It's also business that we are de-emphasizing over time in favor of focusing more on our rental fleet. So that's a line item that's just going to be down quarter over quarter, somewhere in the order of 10%. The larger sales item in our gap financials is the sale of downhole products, namely gas lift valves, mandrels, plunger lift systems. We just anticipate that to be reasonably flat in the quarter. So more broadly, sales of downhole components, flattish, sales of packaged equipment to third parties, which are in backlog today, down. Now, again, the backlog business, we're looking into Q4. It looks better in Q4, so we think it's transitory somewhat. We think that when you look at growth rates on a year-over-year basis from 24 to 25, again, I want to make sure everybody has their numbers right on 24 in particular. Our 24 financials are not fully burdened. for the full cost of being a public company. And when you make that adjustment and you look at where we're going this year versus last year, we're still confident in that previous guide from last quarter of roughly low double-digit growth year over year, okay? So I just want to make sure we're talking about the same comparisons. So that's kind of where we see it in Q3, more broadly into the end of Q4, Dave, and hopefully that's clear.

Very helpful. Thank you very much. You bet.

Thank you. We have reached the end of the question and answer session. I'll now turn the call back over to management for closing remarks.

Excellent. Well, thank you, everyone. I hope you appreciated this live performance and look forward to following up with you in the coming weeks. I hope everybody's enjoying summer, and we'll talk to you soon. Thanks.

Thank you, and this concludes today's conference, and you may disconnect your line at this time. Thank you for your participation.