Flotek Industries, Inc.

Good morning, ladies and gentlemen, and welcome to the Flowtech Industries' first quarter 2024 earnings conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Wednesday, May 8, 2024. I would now like to turn the conference over to Michael Critelli, Director of Finance. Please go ahead.

Thank you and good morning everyone. We appreciate your participation in Float Tech's first quarter 2024 earnings conference call. Joining me on the call today are Ryan Ezell, Chief Executive Officer, and Bon Clement, Chief Financial Officer. First, we will provide prepared remarks concerning our business operations and financial results for the first quarter 2024, as well as guidance for the full year 2024. following that we will open up the call for any questions you have flow tech's first quarter 2024 financial and operating results press release was issued yesterday afternoon we also posted an updated q1 earnings presentation that we will be referencing on today's call these can all be found on the investor relations section of our website In addition, today's call is being webcast and a replay will be available on our website following the conclusion of this call. Please note that the comments made on today's call regarding projections or expectations for future events are forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to review our earnings release and risk factors discussed in our filings with SEC. Please refer to the reconciliations provided in the earnings press release and corporate presentation as management will be discussing non-GAAP metrics on this call. With that, I will turn the call over to our CEO, Ryan Azell.

Thank you, Mike, and good morning. We appreciate everyone's interest in Flowtech and for joining us today as we discuss our first quarter of 2024 operational and financial results. I'm pleased with our first quarter of 2024 performance and even more energized about what's to come this year. Without a doubt, 2023 was a transformative year for the organization. But 2024 will be the beginning of a revitalized flow tech that demonstrates consistent profitability and expansion in shareholder value as we accelerate into a new era of differentiated chemistry and data analytics solutions. There is no company better positioned to provide strategic solutions to a variety of our industry's most challenging problems, whether it's operators solving for complex completion challenges such as increased water production and reduced BOE, Pumping companies looking to advance their differentiation through maximizing utilization, or oil and gas operators racing to meet the new EPA flare regulations with their unique real-time measurement technologies. There's never been a more exciting time to be at Flowtech. With that in mind, I'd like to turn to slide seven and touch on our key highlights for the quarter that Bob will discuss in detail in just a moment. We delivered significant year-over-year improvements in gross profit, adjusted gross profit, and adjusted EBITDA, leading to the third consecutive quarter of net income and 11th consecutive quarter of improved adjusted EBITDA as a percentage of revenue. Notably, Q1 2024 adjusted EBITDA surpassed the total for the entire year of 2023. We realized gross profit margin and adjusted gross profit margin of 22% and 25% respectively. Our Q1 2024 external chemistry sales were the highest achieved in the first quarter since we began this turnaround over three years ago and was up 27% year over year. And although down sequentially, this pattern is consistent with the first quarter in each of the last three years, as well as average fleet counts in Q1 were down sequentially. Our data analytics segment saw 18% quarter-over-quarter revenue growth, thanks in part to our continued progress in data-as-a-service revenues, In addition to this progress, we continue to push forward with the field testing of our new CalX spectrometer, which is still on track for a mid-year 2024 release. Most importantly, all of these achievements were accomplished with zero recordable and lost time incidences in the field of operations, extending Flowtech's current streak to over 843 days without a recordable incident. And I'd like to take the time to thank every single employee for their commitment to safety and service quality in achieving these outstanding results. I expect us to continue to build upon this momentum throughout 2024. Now, looking at the quarter in a bit more granularity, revenue was slightly down sequentially. This decrease is mostly attributable to lower external chemistry sales versus Q4 2023. We have observed this consistent seasonality since the organization began its strategic turnaround over three years ago. At a detailed glance on slide 9, Q1 2024 external chemistry revenues were up 27% versus Q1 of 2023. This was the largest Q1 revenue reported for our external chemistry cells during the last three years with the lowest average RAC fleet counts in North American land during the same period. This indicates we are gaining market share through each annual cycle of fleet count stabilization by the execution of our corporate strategy utilizing chemistry as the common value creation platform. We are seeing continued adoption of our prescriptive chemistry management business model that leverages our customized engineering approach combined with our proprietary complex nanofluids technologies to deliver wells that outperform adjacent competitor wells. Flowtech will remain at the forefront of innovation and multidisciplinary advancements as we bring new technologies to the market, including AI-driven reservoir modeling to address the impacts of water imbibition, drive preferential microfluidic behavior in nanopore environments, and improve the ultimate recovery of hydrocarbons from each asset. We expect a substantial increase in our external customer chemistry sales during the second quarter and anticipate total annual external chemistry growth for 2024. To that note, April external chemistry sales have already achieved over 70% of what we did in all of Q1 of 2024. We realized 19% sequential growth in our ProFrac-related revenue. The chemistry purchase requirements contained in the long-term supply agreement with ProFrac were designed to mitigate the volatility of the market and provide some insulation to Flowtech operations for maintaining economies of scale and operational stability. Our partnership continues to evolve into a truly transformational offering for EMP operators in regards to efficiency and overall reservoir performance. Our data analytics segment revenues increased 18% from the fourth quarter of 2023, Our continued success in converting to a data-as-a-service model combined with the launch of the next-generation JP3 measurement system continues to unlock significant upstream market opportunities as the company expects the data analytics business to grow by 50% in 2024. On a more macro level, the demand for oil and gas is expected to expand for the next decade with further requirements needed through 2045. Long-term investments in both short and long barrel cycles will be necessary to maintain production and add the required incremental supply. And despite near-term volatility in commodity pricing, the fundamentals for energy-related services remain strong. And for the first time in nearly two decades, the demand for electricity in the U.S. will climb over 15% by 2030, with natural gas providing over 40% of the current demand. The overall expansion of the global economy will continue to create substantial demand for all forms of energy, which will increase service intensity within our sector. As we look at the remainder of 2024, our efforts remain laser focused on revenue growth, market share expansion, cost efficiency gains, and returns on shareholder value, as we are well positioned to capitalize on opportunities both domestically and internationally. We're confident that our expanding suite of services positions us to provide unique and superior solutions to maximize our customers' value chains. Now I'll turn the call over to Bond to provide key financial highlights.

Thanks, Ryan. Good morning, everyone. Our first quarter 2024 results reflect solid performance despite relatively soft oil service demand related to natural gas directed completions. While revenue was impacted by seasonality and lower frack fleet activity, We grew margins and continued the trend of improving financial results highlighted by another strong quarter of adjusted EBITDA. Let me run through a handful of key financial items for the first quarter of 2024. I'll be referring to slides in the presentation that we posted to our website yesterday. Slide seven highlights our first quarter accomplishments and the strong financial improvement we delivered. Headlining our results were year-over-year growth and net income of $11 million when adjusting for non-cash gains in the first quarter of 2023. Gross profit increased by $6.9 million, adjusted gross profit was higher by $7.4 million, and adjusted EBITDA improved by $7.9 million. Regarding revenue for the quarter, we reported total revenues of $40 million, which was down versus the first quarter of last year. This decline was attributable to lower related party activity associated with Profract that was partially offset by a 27% increase in revenue from external chemistry customers. As Ryan mentioned earlier and showed on slide nine, we've experienced a decline in first quarter external chemistry revenues in each of the past three years. Based on current projections and a strong start in April, we expect a significant jump in external customer chemistry revenues during the second quarter. As a reminder, external chemistry revenue increased by 68% during the second quarter of last year as compared to the low point in the first quarter of 2023. With respect to data analytics, we generated strong growth from this segment as revenues associated with JP3 increased 18% sequentially. We expect growth in data analytics revenue to be weighted toward the second half of 2024, which is in line with our expectations for the timing of the commercial deployment of our new analyzer. Moving to slide 10, fourth quarter gross profit increased for the fifth consecutive quarter. First quarter gross profit grew by $7 million. are nearly 400% compared to gross profit of just $1.9 million in the comparable period of 2023. It's important to note that the minimum chemistry purchase requirements in our supply agreement were in effect during the first quarter of 2024, but not the first quarter of 2023 as the measurement of the minimum purchase requirements began on June 1st of last year. The additional revenue from our supply agreement requirements combined with our continued focus on cost improvements allowed us to generate strong margins during the quarter. Touching on a few specific examples of how we are continuing to improve margins during the first quarter, we reduced freight costs as a percentage of revenue by roughly 50% versus the same quarter of last year as a result of numerous initiatives executed over the past year, including Eliminating dedicated trucking and utilizing strategically placed staging yards to allow us to improve the efficiency in last mile deliveries. Over the past year, we have also made great improvements in how we purchase materials. We've consolidated vendors to leverage our spend to negotiate better pricing and rebates. We've also focused our efforts on buying direct in order to eliminate costly layers of middleman margins to reduce the highest spend on our P&L. Quickly on SG&A, our first quarter SG&A declined to $6.1 million, which was about a 6% improvement compared to the same quarter of last year and sequentially. This decline was a result of lower personnel costs and professional fees. Moving to slide 11, adjusted EBITDA was positive for the third consecutive quarter, an increase of $7.9 million compared to the first quarter of last year. This is the 11th consecutive quarter of improvement in adjusted EBITDA, a streak that goes back to the second quarter of 2021. Going to the bottom line, reported net income of $1.6 million in the first quarter, compared to a net loss of $9.3 million during the first quarter of 2023, when adjusting for $31 million in non-cash gains. Touching on the balance sheet, at March 31st, we had $3.1 million drawn under our ABL, which was $4.4 million lower, or a 58% reduction than we had at year end. As a result, our debt to trailing 12-month adjusted EBITDA moved down to 0.3 times, as of March 31st. Quickly commenting on our 2024 guidance, while we did not give specific revenue guidance for 2024 due to uncertainty around the timing of improved natural gas pricing and the corresponding impact on completion activity, we expect that first quarter revenues will mark the lowest quarter of the year, and we believe that annual 2024 revenues will generally approximate last year. As a result of the positive impact of the numerous cost reductions implemented, In a full-year measurement period during 2024 related to the minimum chemistry purchase requirements, we anticipate a substantial increase in margins compared to 2023. Based on current projections, we expect our 2024 adjusted gross profit margin to range between 18% and 22%, which compares very favorably to our 2023 adjusted gross profit margin of 15%. With higher margins expected, we anticipate 2024 adjusted EBITDA to range between $10 million and $16 million, which again is a significant increase over 2023 adjusted EBITDA of just $1.5 million. In closing, Flowtech continues to drive strong, repeatable performance focused on resilient profitability. Based on the current slope of the curve for natural gas pricing, we anticipate higher completion activity as we move into the back half of the year. However, in the event that activity levels remain flat throughout the year, our first quarter results demonstrate our resiliency as we achieve strong margins and bottom line growth in a quarter of relatively light activity. With that, I'll turn the call back over to Ryan to close it out.

Thanks, Vaughn. Turning to slide 19, we were extremely excited about 2024 as we have tremendous growth potential in both our chemistry and data analytics segments. and we believe that Flowtech represents a compelling investment opportunity today. Our first quarter results deliver profitability, and we continue to be positioned for sustained growth as the collaborative partner of choice for sustainable chemistry and data solutions. I'm proud of the progress that we have made, and I'm confident in our ability to execute going forward. We appreciate the continued support of all our stakeholders, and we hope that you share our excitement regarding the future of Flowtech, and we look forward to reporting further progress.

Operator, we are now ready to take questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by number one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by number two. If you are using a speakerphone, please leave the handset before pressing any keys.

One moment, please, for your first question.

Your first question comes from the line of Jeff Gramp from Alliance Global Partners. Your line is now open. Please ask your question.

Good morning, guys. First, a question on JP3 specifically as it relates to the EPA regulatory approval you guys are working towards. Any kind of update on the timeline there or guesstimate as best you can provide today? And then wondering what you guys are thinking or expecting in terms of the adoption curve or pace that you might expect from that if and when you do get that approval.

So right now, we're happy with our progress and continued interaction with the EPA. Tom and the team are doing a phenomenal job there. And right now, we're expecting the adoption of the EPA to come in line with regulations about the time that our production comes online about mid-year. So I think we're making solid progress on both those fronts. And what's been really exciting is we're continuing to see massive adoption of our data as a service as a percentage of revenue. If you look back at Q1 of 23, data as a service was about 23% of our revenue. In Q1 of 24, it was almost 50%. so significant opportunities there and i think as uh as our you know the calx model which is our new gender measurement unit comes online into production uh full steam by the mid middle of the year i think where we are the regulatory body with epa will be right in line with that and it should give us a boost in the back half of the year great sounds good i appreciate that and um for my follow-up more of a capital allocation question um given the the modest debt you guys have and the capital light model

and obviously transition to becoming a more meaningful kind of EBITDA cash generative company. How do you guys kind of think about, you know, kind of reinvesting that potentially in the business or looking at M&A or any other kind of options on the table you guys may be considering?

So a couple of things that we're doing is For the first time since I've been here, we've invested into some trucking capitalization components. We'll be bringing in quite a few. We have some long haul trucking for our chemistry to deliver in basin, which would be some capital allocation. This will provide a significant amount of savings in our logistics costs. We're also continuing to spend some capex in JP3 at the advancement of building units to support the growth in the back half of the year, particularly on the data as a service model. And, you know, we're continuing to evaluate potential opportunities around M&A. I do believe that, you know, when you look at the fragmentation in the chemistry markets and opportunities there, comparatively to the front end on the E&P side, there's potential opportunities to look at some consolidation mechanisms there. Or when we look at advancements in bringing in some new technologies on the JP3, the data analytics side of the business. So we are continuing to evaluate opportunities there. The biggest thing on user proceeds there is it needs to be extremely accretive to the organization with most things that we put capital into.

Absolutely.

Great. Sounds good, guys. Thanks for the time. Yep. All right, Jeff.

Your next question comes from the line of Don Crist from Johnson Rice. Your line is now open. Please ask your question.

Morning, guys. How are you? Morning, Don.

I wanted to ask about the pilot project. Obviously, it's been going for a while now, and it appears that that customer is pretty pleased with the process so far. But have you had any other kind of field trips with other operators going out, seeing the sensor and kind of seeing the progress that's being made there? And is there anything to extrapolate between other potential sales there versus just the company you're doing a pilot with?

Yeah, so we've had quite a bit of expansion in that, Don, and I can't necessarily drop the exact names of the customer bases, but what I will tell you is we've seen expansion in monitoring field gas. We've seen an increase in the number of customers looking at monitoring flares in real time. We've also seen an exponential increase in the field trials and process validations we have around on chain of custody measurements in multiple fields and geographic locations. So we're really excited. We've got in the double digit number of units deployed in these different areas. particularly running the CalX spectrometer through its faces and making sure that typically we've got it in line with a former Varix unit to make sure everything's lined out and running effectively. We're really excited about this, and the opportunities continue to come to us.

And we're hard at pursuing these. Okay.

And as you look to ramp up, I mean, obviously the opportunity set is It's significant in front of you, assuming everything goes to plan. But as you look forward, any significant CapEx requirements or anything to build out the larger amount of sensors that you would need? Or is that kind of in place already?

So in alignment right now where we're forecasting the growth just in, say, 2024, that 50% range, we've dedicated capital to front load a little over $2 million to advance the building units. Now, that $2 million goes further forward. and building the CalX units because they have a much lower cost base than the original Varex unit. So it's a solid improvement there. And then we're kind of going through the processes now with the adoptions that we're expecting with the EPA around how much additional capital we'll bring forward in the early parts of 2025, looking at the growth there.

Okay, but it's not significant at this point, though.

No, I would say it because we can, like I say, when you have a a substantial drop in the cost of units versus, you know, let's put two and a half million, we can bring quite a few, quite a few units on between now and the end of the year.

Yeah. Don, you'll remember that was the important thing about moving to this next generation of analyzer because the costs are roughly 50 to 60% less of the previous generation.

Right. Exactly. And I know in the past you've, you've sold these units, but you're, you know, trying to shift over to more of a, of a subscription model is, have you had any, you know, positive or negative influence or, you know, feedback from customers on, on either way? I mean, are people still wanting to buy these or are they more happy with, with a subscription model with you making sure everything's running properly going forward?

That's a great question. I think when we look at it, it depends on if you're in upstream, midstream or downstream applications. What I would consider to be more of the golden applications in the midstream part, a lot of the customers that we continue to expand business with prefer uh the capital purchase just because of how the unit is utilized um what we're seeing is the predominance in the upstream business to be 90 plus percent um in terms of a either one a data as a service model or a hybrid type service uh with a large subscription based model with the minimal capital investment up front for the installation so i i think it kind of depends on the application uh but you know Pretty much the bifurcation is heavy on subscription-based and upstream. There's still a little preference to the capital purchase and the midstream part.

Yeah, Don, Ryan gave some stats on the percentage of revenue from DAS versus capital sales, 1Q versus 1Q. Included in those percentages, when you look at just pure DAS revenue, quarter over quarter, it's up 30% first quarter of 24 versus first quarter of 23. So people are migrating to the DAS model, certainly.

That's good to hear. It's much more sustainable and gets a higher multiple. I appreciate the color, guys. I'll turn it back.

All right. Thanks.

Your next question comes from the line of Eric Swergold from Firestorm Capital. Your line is now open. Please ask your question.

Good morning, and congratulations on your hard-fought progress. Appreciate it, Eric. There's been a number of industry pieces talking about the use of AI in the EMP space. Can you speak to how your data analytics and chemistry segments fit into this new AI framework for EMPs? Thanks.

Yeah, you know, this is actually a real, I would say, exciting frontier for us, Eric, is that initially most of the AI-oriented activities that we're doing were around our chemometric modelings and things that we're doing on the JP3 side. leveraging that large database of crew samples that we've had over the last five to seven years. And so there's a lot of advancements that we're making to accelerate the accuracy of the models, accelerate the group fits, particularly when you look at, I would say, these chain of custody and read vapor pressure measurements and stuff that we're doing there. And AI continues to be a large part of that. What's been real exciting is we took a step back and said, hey, If you've been an innovative chemistry company with 200 patents in the advanced reservoir technologies component, when you look at some of these influences at the nanopore level and what goes on with subsurface interactions and things, We've completed over 20,000 wells, and we have production data and chemistry modeling for these things. So we've gone in and now using AI to actually take these data sets, crunch them, create cubes of different data with that, and advancing it how we look at the performance of our chemistry to make small formulation changes and actually advance where we're going to be in the future and what I consider to be improved oil recovery for the total life of the asset. So I think it's playing an essential part for us to accelerate our technology and the thinking that we do on both the chemistry and the data side. And what it's starting to do is really create an amount of synergy and a unique platform, I think, to flow tech that we're going to be talking quite a bit about in some of the upcoming events we have at the Louisiana Energy Conference and what we're going to talk about at Intercom in Denver later in August.

We're going to be presenting some of this work.

Sounds good. Thanks very much, guys. Keep it up.

Your next question comes from the line of BJ Cook, an individual investor. If your line is now open, please ask your question.

Hey, guys. Thanks for taking my call. It's BJ Cook with Singular Research. You guys talked about external chemistry this year. I expected to increase here, but I know it's determined on volume quite a bit. I'm just curious if you guys anticipate or are adding new external operators to your platform?

Yeah, 100%. I mean, the biggest part we look at on external chemistry is we have, we've seen since the tenure of being here, our seasonality shift a little bit from what used to be Q3 to Q4. Now with a little bit, I consider it to be the capital discipline, the way you look at plans and the ability to turn the spigot on and off here in the U.S. We've seen some of that seasonality shift into Q1, and that's traditionally been probably our least active quarter on the external chemistry sales component of that. But compared to speaking over the 10 years that we've done this turnaround, you've seen average RAC leads in those quarters go down, and our revenues continue to go up substantially. As you look at, say, for Q2 to Q4 through the rest of this year, we've got a substantial, we've got a really healthy and robust pipeline and continued activity with a strong group of what we call, you know, our stickier customer base and quite a few new opportunities on the backside here. the adoption of our prescriptive chemistry management and our understanding of reservoir technologies are coming into prominence as you're starting to see a lot of these operators moving in-field, well-designed, and downspacing on how they do their completions.

Great. Thanks. I appreciate that. Yep. We don't have further questions at this time. Presenters, please continue. Thank you again for joining us today.

Flow Tech CEO Ryan Azel will be participating on a service industry panel at the Louisiana Energy Conference on May 29th, 2024 at 4 PM. He will be joined by CFO Bon Clement in hosting meetings with investors and a copy of the presentation will be used in the discussions with the investors will be available on the corporate website prior to the event. We look forward to meeting with you. Thanks again for joining us today. Please feel free to contact us if you have any additional questions. Have a great day.

This concludes today's conference call. Thank you for your participation. You may now