Q1 2022 Flotek Industries Inc Earnings Call
Greetings and welcome to Flotek Industries first quarter 2022 earnings conference call. At this time, all participants are in a listen only mode.
A question and answer session will follow management's prepared remarks.
If anyone should require operator assistance during the conference. Please press Star then zero on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce Bernie Colson, Senior Vice President corporate development and sustainability for Flotek. Thank you you may begin.
Thank you and good morning, everyone. We appreciate your participation joining me today are John Gibson, Chairman, Chief Executive Officer, and President Ryan Israel, Chief Operating Officer, Michael Morton, Chief Financial Officer, James Silas Senior Vice President of research and innovation and Nick Bigby General.
Counsel and Chief compliance officer.
On today's call. We will first provide prepared remarks concerning our business results for the quarter. Following that we will answer any questions you have.
We have now released our earnings announcement for first quarter 2022 results, which is available on our website today's call is being webcast and a replay will also be available on our website.
Please note that any comments, we make on today's call regarding projections or our 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 the risk factors discussed in our filings with the SEC.
Also please refer to our reconciliations provided in our earnings press release as management May discuss non-GAAP metrics on this call I will now turn it over to John Gibson, John well, Thank you and good morning, everyone.
Thank you for joining our discussion of our first quarter results for 2022 now first let me welcome Bernie Colson to the leadership team and introduce him to you you just heard each state I'm extremely excited at Barneys joined Flotek to lead our corporate development sustainability and Investor relation strategy. He is recognized as an experienced investment in ESG later in the energy.
Sector with more than two decades of experience as investment by <unk>.
Institutional asset managers, and our renewable energy holding company Bernie was most recently with Delaware Ivy investments, where he was the portfolio manager energy team late and helped develop the firm's first ESG light will fund focused on the energy transition, but it's exceptionally bright and the big thing and I believe you.
To help drive Flotek corporate strategy I'm extremely excited to have him here on the Flotek team.
Now before we cover the quarterly results. Let me say, we are thrilled that we conveyed in our call today, having closed the expanded non exclusive 10 year contract with program to deliver our full suite of downhole chemistry to a significant portion of its hydraulic fracturing fleets in North America disagree.
This agreement is truly transformational for Flotek and for the industry. There is disagreement e&ps now have a comprehensive vertically integrated completion solution that reduces emissions and deliver screen chemistry, thereby protecting air water land and people over the next decade, we anticipate this agreement.
Should create backlog of more than $2 billion in revenue for flotek, including anticipated revenues well in excess of $200 million in 2023, we're very excited that we've just completed the first full month of our partnership with broke right, which began on April 1st we're off to a very.
Strong start, which Ron will discuss in greater detail in his remarks.
We are on target to achieve positive adjusted EBITDA, excluding convertible note amortization before the end of the fourth quarter 2022.
With the initiation of our contract with progressive changes to our board of directors as you'll see in our proxy statement, Matt will stand for election to the board concurrent with the 2022 annual General meeting on June nine as chairman of the board of director for <unk> Holding Corp. Matt has been instrumental in pioneering our shared vision of Thompson.
Ratterree offerings and enable E&P more sustainably develop natural resources, while reducing total cost of ownership also of note <unk> recently completed its IPO raising $288 million, we asked for your support intellect and him to the board as he is a key strategic collaborator.
And driving the adoption of sustainable chemistry solutions throughout the industry. He is a champion of efficiency, but one of the best I've met I should note that with our contract pro Frac has the option to a 0.4 of our seven directors any additional director nominations will occur after our annual meeting until such time the board will.
Continue with six directors.
With this nomination Ted Brown, and Paul Hobby will not stand for reelection to the board.
Ted if Paul had been outstanding directors guiding the company through our transformation they've been personally supportive to me and it brought tremendous value to shaping our strategy and I'm extremely grateful for their time on the board I will Miss both Ted and Paul.
We discussed on last quarter's earning.
Earnings call just six weeks ago Flotek is now a very different company from the past and now that the expanded non exclusive 10 year contract with pro brackish closed I repeat closed we're focused on looking forward rather than backward and land with dish and as part of our future financial reporting beginning in the second quarter.
We will report on a consolidated basis, rather than by segment in light of the scale of our Chemistries technologies business. So today. After my remarks, you will hear from Ryan as Al and his official capacity is C. O O followed by Mike Morton, who will provide brief comments followed by my closing remarks, as I indicated on our last quarter call.
I was concerned about the challenging markets at the beginning of the year for Frac fleet activity levels dropped in January however activity slowly recovered in February and leveled off in March as a result March turned out to be the strongest months before the pandemic in the end our quarterly revenue improved 6% sequentially and our adjusted.
EBITDA also improved by 5% over Q4, 2021, now with that I'd like to turn the call over to Ryan Ryan. Thank.
Thank you John and good morning.
Let me first provide key highlights on our contract with pro Fracs before providing quarterly commentary.
In April we concluded the first month of our partnership with <unk> and I'm extremely pleased to report that we're off to a very strong start we ended the month of April supply downhole chemistry to eight pro Frac fleets across four major basins. Since the end of April we've gained two additional fleets, bringing the current total to 10.
With plans to further increase the number of fleets, we're supporting throughout the quarter.
In support of easily our team is providing prescriptive chemistry recommendations back conducting X ray diffraction analysis to evaluate the composition of well site cuttings billed water and crude testing flow loop in rheology profiling and bio SA testing in total we have delivered more than 17 million pounds.
A chemistry since the start of our relationship.
In addition, as part of our integrated approach to digital chemistry. We also have plans to deploy our <unk> analyzers on designated pro Frac fleets to evaluate build gas usage at the well site. We believe this will be a powerful use case to protect our customers' capital equipment as well as reduce greenhouse gas.
As admissions in the field.
As I highlighted last quarter. The pro Frac agreement is not exclusive and once the contract is fully operational we still have the ability to double our manufacturing capacity utilization levels without significant capital investment.
We look forward to continuing to build a strong partnership with pro frac over the coming months and years and we would be updating you on our progress in the future quarters.
Now looking at the quarterly performance of our chemistry technology segment, we continue to make steady progress in growing market share and outpacing industry activity levels as John mentioned, we saw hydraulic fracturing fleet activity levels decreased dramatically at the start of the year with unexpected disruption in January a flat market over activity over.
We're all in the quarter compared to the prior quarter. Despite that March was our best performing month in terms of revenue since January of 2020, and overall, our chemistry technologies revenue increased 2% sequentially outperforming the market.
In addition, I'm optimistic about the second quarter as the month of April shaped up to be significantly improved versus March with mace showing the same positive trend thus far.
As we look at organic growth I'm, particularly pleased that we're continuing to see customer portfolio expansion with both domestic and international E&P operators as well as service companies as we deliver on our continued commitment to diversify revenue stack and minimize risk of customer concentration.
In fact, 12% of our revenue in the quarter was attributed to new customers.
And when looking back over the last year, we've grown our customer base by more than 37% since Q1 of 2021, reducing our concentration of revenue and our risk.
Further we are simultaneously leveraging our in basin service delivery model to technically evaluate and deploy custom chemistry solutions in alignment with our value proposition delivering straight to the rig side and off rail Spurs. This model increases our efficiencies enabled us to aggressively pursue mark.
That expansion.
And in the spirit of continuing to minimize risk.
We will continue to leverage our increasing volumes with key suppliers to secure future purchase prices and material allocation volumes with our top product lines for 2022, as we focus on our accelerated growth.
And as we scale, our volume with our suppliers were able to reduce costs and expand margins.
That said, we're also feeling the impacts of inflation across our supply chain from rising freight and raw material cost to delivery delays due to port congestion as these are industry wide and typical global trends and we are adjusting our pricing accordingly, so that we can preserve our margins.
In summary, I'm very optimistic about the future and I'm excited about our mission to provide differentiated solutions that maximize value to our customers by elevating their ESG performance lowering operational costs and helping them achieve improved return on invested capital.
And before closing I would now like to welcome Ron Halsey as Vice President of data analytics.
Ron brings extensive analyzer automation and oil and gas experienced at Flotek as a global business leader with a proven history of business transformation, while increasing market share revenue and profit.
Most recently he served as vice president of artificial lift optimization.
And optimization that champion X, where he led transformation and growth of the global production optimization business.
In his new role at Flotek, Ron is responsible for developing and leading profitable growth through market penetration structured business optimization and process improvement.
I'm excited to welcome Ron to the team.
Now I'll turn the call back to Mike to provide key financial highlights.
Thank you Ryan.
Hi, Ryan mentioned earlier the structure of the pro Frac supply agreement is an industry first this.
This unique model of exchanging convertible notes for a long term supply agreement comes with some important GAAP accounting implications two of which I would like to explain.
First there will be a quarterly noncash entries to account with a mark to market adjustments to the convertible notes with a one year life of the notes.
You may have noticed a $3 9 million adjustment in Q1.
It plays to the Mark to market adjustment to the initial 10 million notes issue as of March 31.
I wanted to emphasize.
This was a noncash adjustment it was added back in the statement of cash flow.
You can expect to see similar noncash adjustments each quarter, but the magnitude is impossible to predict is just based on the share price and other variables.
Second there is a $50 million of additional notes, we issued associated the pro back contract expansion that closed earlier today.
The fair.
Those notes will be mark to market as of the contract close date, which is today may 17th.
Updated market value plus the original 10 million of notes will be amortized over the life of the program contract will be reflected as an offset to revenue and our GAAP financials again, this will be a non cash item, but certain GAAP dictates that.
The notes amortization be subtracted from revenue and our GAAP financial statements.
While we cannot predict the exact magnitude of the gap revenue offset at this time, we wanted to ensure that nobody has taken off guard with these items starting in the second quarter.
Now moving onto the income statement in Q1, the revenue was $12 9 million for the quarter up 9% from Q1, 2021 and 6% from Q2 2021.
SG&A in the first quarter of $4 9 million was significantly lower in Q4, 2021 a $5 8 million and $6 1 million in Q1, 2021 as with Flotek continues to focus on lowering corporate expenses, including third party fees for audit legal and it.
Use of outside consultants.
Okay.
Our adjusted EBITDA for the first quarter was a loss of $5 4 million, which continues the trend of improved EBITDA losses, improving over last quarters loss of $5, seven and really better than the first quarter 2021 loss of $6 6 million.
Now, let's move on to the balance sheet performance.
At the end of the first quarter, we had cash and equivalents of $24 8 million versus $11 5 million at year end.
The cash balance was favorably impacted by the pipe issuance in February .
Several improved working capital metrics.
Partially offset by the operating losses, which included fees for the closing of the pipe and the previously mentioned co pack supply agreement.
The company has $4 7 million.
Of loans associated with the PPP loan program.
It can be applied properly getting substantially all of the loan in late Q3, 2021 and we expect to hear back soon from the SBA.
As we look forward into 2022 or 'twenty 'twenty three our goal is to continue to leverage our improving working capital by celebrity growing top line revenues.
In April is probably the monetization of noncore assets Flotek sold the Waller, Texas facility.
But for $3 million.
In addition, our my Name's, Texas facility is in the late stages of executing the agreement was anticipated close in the coming quarters.
We continue our relationship with Piper Sandler on various additional cash generation activities.
To help in addressing our future working capital growth needs.
At this point I will pass back to call it to John for his final remarks.
Thank you very much Scott.
I'd like to close the call by announcing the departure of Mike Burton, who you just heard from and thanking him for his time and contributions to the company over the past two years Mike.
Mike joined the company at a time, when we really needed steady financial leadership.
And a critical evolution in our finance and accounting functions to overcome historical challenges to build a new foundation for success. When he joined he promised that he would place all of his effort into helping the company gain a stronger footing. He's accomplished this and today, we stand as a much stronger company with a brighter future.
Market somewhat I truly admire.
And for his unwavering principles and for his work ethic Porsche integrity for E. He's just as someone that all of us feel as a friend and we trust. He has been instrumental in rebuilding our finance team and new processes and as well as helping to build a productive relationship with our auditors, we gotta missed Mike and I were.
Wish him every success as we all do here as he transitioned back to the technology industry.
I'm also excited to announce that Sean Carson will become our controller and interim CFO . So I'm joined Flotek just over a year ago as head of internal audit and she has been an outstanding addition to the team she's responsible for strengthening our financial reporting and building fit for purpose Sox control for our business. She successfully manage the <unk>.
Transitioning of our auditors to KPMG last year, and it's been a trusted advisor to our board, especially our audit Committee, we are confident that as the harvest the right person to fill this critical role in the organization. At this time you will hear for her from her next quarter and I look forward, you're getting to know her in the meantime, Please help me welcome her.
And to her new role.
So thank you again shareholders for helping us unlock this incredible opportunity and secure the future of our business with appropriate contract. We're really excited about what lies ahead for us in the supporting all of our customers to include broker Act and we just want to encourage you to participate in the annual meeting and represent your interest bye bye rating there.
Early and voting your proxy. Thanks, so much for your continued support of Flotek and lets turn it into questions now.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Okay.
Okay.
Our first question comes from Eric Swergold with Firestorm capital. Please go ahead.
Good morning, guys and congratulations on closing the appropriate deal also welcomed Bernie to the team.
My first question is for Ryan for those of US who are generalists can you give us maybe a conservative Rev.
Revenue number per fleet per month.
For the chemicals Division.
And then for John I have a more general question in terms of.
Whether it's getting any easier to get into C suites.
Post pro Frac announcement, thank you.
Yeah.
Thanks, Eric for the question you know when we look at it we were really done quite a bit of analytics and we bake we base the revenue generation per fleet generically for the market based on the base and that it's operating in when you look at what we see in the in the northeast versus East, Texas versus West, Texas, South, Texas et cetera.
We see strong revenues typically from the east, Texas, because they typically run up either a slick water aimed a version of a hybrid or cross link system. So you could see anywhere from 450 to almost $600000. A month per fleet are on general chemistry usage without you know significant value add upsell.
West Texas runs in.
The Permian Basin is in the 400 to maybe $500000 of Mart, South, Texas around that 500, and the northeast kind of varies dependent on the type of produced water that we're looking at in the polymer package for the friction reduction and so you'd see any wherever that half a million a 600000 are in the northeast it depends.
And on that and that's the generic way, we look at it we're a little bit higher for those and and unlike in the Williston indoor stuff and then.
What I call the northern regions, but that gives you a kind of an idea on what we're looking at for an industry side on the I'll say ran we promote the most fleets on the generic slick water type package systems.
Got you. Thank you.
Yeah second question, Eric is a good one.
Having the appropriate contract, obviously help HR profile, but I would say that the C. Suites have opened up to us as we begin to talk about sustainability social license to operate and our environmental solutions and our intense focus on everything we're doing that we do providing them with an improvement in their sustainability and so.
We're getting access to the C suite and I think this only enhances it and in particular with service provider. So having this relationship with pro Frac will open us up to the other service providers C suites more so than it does even to the e&ps, but again this is about sustainability, it's about being a green chemistry.
We later and I think that's why the doors are open there is our customers are really embracing this and I think that's a future for the industry.
Thanks, guys.
Okay.
Our next question comes from Don Crist with Johnson Rice. Please go ahead.
Good morning, gentlemen, how are you all day.
Pretty good dogs.
So I missed the touch I'd call, but I just wanted to ask how the ramp up.
<unk> is taking place as you add additional pro Frac fleets and are you seeing any kind of growing pains throughout your we're just school.
Network that you have existing right now are there any growing pains there.
Yeah, that's a great question and I always say you know when we look at it while we were considered the initial contract that we signed for the 10 fleets. We've already achieved those numbers, we get to that at the end of April .
And for that ramp up you know, we we didn't see anything what I would consider to be significant growing pains. There is no doubt there is a there's a tight trucking market out there we've expanded our trucking capabilities significantly, which we were already planning and the ramp up so it wasn't a big a big adjustment for us on that aspect as.
We look at the newly.
<unk> signed expansion to get to the 30 fleets.
We're in the process now of collaborating with pro Frac and the introduction of those fleets in the coming weeks and they in the ramp ups that will do there. The good news is when you look at it the chemistry and trucking is available because theres chemistries own. These fleets today right, where we're taking share with this work a for US it is literally just.
Just kind of the startup of the initial buys of the supply into the market. We forecasted this to our key suppliers already in a in an outlay are rolling into age too and so I don't see in the near term any huge issues other than what are some of the typical I'll say global type issues that we're seeing right now with it but.
In my mind. The biggest problem. We've had is just been a lot of the trucking has been a little tight and that's to be expected that type of activity. We have in the market right now.
I happened to visit the planet Marlow here, just a few weeks ago and it was on a call with the Jason White, who runs that plant yesterday and I think one of the best anecdote that I've heard as Jason has been with us for almost 15 years or better and a quote from Jason. Yes. This is the busiest I've been since I've been with Flotek. So.
And they're moving it through up there we've got great loyalty fantastic team and as we ramp up I mean, there there right with it and are enjoying the the level of activity.
I appreciate that color and.
That's pretty exciting down when you think about the busiest he's ever seen it and he's seen it when it was a it was.
Billion dollar market cap, so I look at that and I go you know we've got a great route here.
Yes, exactly and just out of curiosity when do you think you'll get to that full 33.
31 fleets that they're running today.
The quarter before that.
It won't have we I don't I don't believe we'll get there in Q2, because we're half where I would say almost halfway through the quarter now I'm expecting this to get there and age to and we're still working through.
Those ramp ups right now to see because it's it's more about when you look at.
<unk> core fleet versus the newly acquired fleet did they picked up when they acquired M. P. S at and the Onboarding of those and looking at their schedule from that aspect, but we're pretty excited.
They've come as fast as we've been able to onboard them, so far and we're pretty excited about the rate right now that's a good way to look at it as a threat.
We only had the 10 fleet three year contract up until the time, we closed and on that 10 fleet three year contract in the first month, we had already gotten to approximately eight bleach with partial chemistry.
On each of those fleets and that that would tell you how aggressively theyre trying to get to that 10 number on the original contract I think there'll be equally as aggressive in rolling out that 30 fleets and so it'll be a great question to ask them on their conference calls how fast is it going to get there too so.
You can cross correlate here at all Yeah, I will I I appreciate all the color there and best of luck to you.
You don't need a lot much anymore, we just need to execute this within our control I feel like I'm out of that Lucky face.
It's feel blessed.
Our next question comes from Mike Heim with Noble capital markets. Please go ahead Sir.
Thanks, Thanks for taking my question I wanted to ask a little bit more about some of the supply cost issues, you're facing in the oil and 11% year over year jump in cost of goods or appreciate your comments about seeing you'll adjust the prices. Accordingly, I guess my question would be is it simply a matter that you've been a little bit behind on raising.
Prices or the competitive.
<unk> that prevent you from doing that and then finally is there anything on the pro Frac agreement that addresses your ability to raise prices.
So I'll I'll break them down a little bit into the three main categories. The way I understand the question. So the first one I would say is that there's no doubt the competitive landscape in the providing chemistry in the hydraulic fracturing world in the North American land is pretty tight. There's you know again, we were also working with just one the other day there were.
Almost 21 chemistry competitors I'll cite you know have a different chemistry use I would say part of the tendering phase and technical testing and so that's that's held.
Pricing through without you know tight through some of the inflationary aspects, but as you've seen theres pretty much the tightness on the I'll say the mechanical side of the pumping side business with equipment, we're starting to see that on some of that chemistry aspects as well and they had a lot of small molecule drivers. We're now into the point of being able to you know.
Translate that pricing over anti price increases because you have taken a consideration turn rates in regard to pricing.
Pricing pushout from your suppliers et cetera, and we're starting to see that catch up on us and the good news for US is if you look at the accelerated volumes that we have is helping us stave off some of the inflationary aspects and so I'm I'm, hoping you know and we're confident to start seeing some margin expansion happen in ace two due to a higher vol.
<unk> and our labors capabilities there.
You know when I look at it in terms of the pro Frac agreement itself. You know if you go back at some of our Investor calls, we actually have some of what I consider to be the.
The lowering of technology items move it at a cost plus things. So we're able to maintain a margin no matter what the inflationary aspects are on those and then we still have the capability to value add technologies.
So you know I would say that we're really excited at what our capabilities will be able to do in terms of <unk>.
Leveraging the volume to provide margin expansion stave off inflation and then also utilize the.
What we do with appropriate contract to push out some of this pricing aspect to the end user.
Yes.
Okay.
But we're still seeing gross losses right now and then.
John's comments, we're going to reach EBITDA positive by fourth quarter I guess, what makes you feel confident that we can do that.
Well I would say that you know for us when you look at the the the cost structure, where we are is going to be where basically the revenue. We're picking up is going to have minimal additional I'll say, hi, and like direct costs from a component to us and we're going to start to see incremental fall through to the larger volumes of products being sold.
And an improvement in value added technologies, which have a much greater margin of like some of the what I'll call core Chymistry that would move in terms of friction reducers that come with the picking up of the work and interaction with the E&P operator through our relationships are pro frac another direct companies like.
Mike.
The other way look at it is we were operating right at the boundary where.
A company that just barely had enough revenue to survive and we are using cash for survival through Covid. That's completely changed the show now we've got scale and scope. So the fall through grows as the revenue growth and we're pretty excited about that we're pretty disciplined about our approach to spending.
On the SG&A side and.
And we're seeing the scale or scope provides us better pricing from suppliers all of those things add up to margin expansion and that's why I'm really confident predicting that we'll get to a month free cash flow and then we will have sustainable.
Profitability after that.
Okay. So you would say that the since we started the contract in April where you're actually seeing higher margin business already.
The answer is I'm always trying to steer wife, Mark just too much but I would say on the margin side, we're gonna be reporting those as we go forward you'll see them.
And we do have margin expansion I mean.
We take a look at the customers, we're selling to and the great part about this business is we have that core business that that Ryan discussed and then after you get there, it's becoming a lot easier for us to explain why additional higher margin chemicals will improve the wells performance and so we've got a lot of opportunity for improving their.
<unk> performance in their product.
Production performance and show that we'll call that Upselling would.
Would you like for Ash with Ash is an excellent.
Example of how we're increasing the size of the sale fleet and with each customer and it's going well because we have real excellent documentation of what it is that we can do that improves their environmental performance or well performance their operational performance.
Okay, well keep a close eye on the June quarter. Thanks for your comment.
Thank you very much Matt.
Yeah, which we should probably go ahead and wrap it up.
Great.
This concludes our question and answer session I would like to turn the conference back over to John Gibson for any closing remarks.
Thanks, guys for joining today I mean, obviously this is the beginning of a great journey and so I'm excited about what we're going to report at the end of Q2. The end of Q3. The end of Q4. This year because we're just getting started.
I feel like were gaining momentum. This is a train has left the station fully ready to go the distance and we're building the team that she's going to be able to take us there.
We're seeing absolute concrete evidence of how strong the partnership can be with pro Frac, we're seeing how good the organic business can be and are the the good housekeeping seal of approval we've gotten through this contract with an industry. Later, we're excited about Matt joining the board because he is truly a visionary and.
And committed to the improved efficiency in this industry and how that impacts submissions.
Everything about where we're going feels incredibly positive right now and I'm more excited about reporting out next quarter. Then I'll watch. This one is we're just getting started and then and we're sort of having to look back at just one month gives us a chance to show you three months six months nine months and Youre going to see the real impact of the contract that you guys were so great.
And approving so thank you and please get out there and read and vote. The proxy here for the AGM and we'll talk to you soon.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.