Q3 2022 Flotek Industries Inc Earnings Call
[music].
Greetings and welcome to the Flotek Industries third quarter 2022 earnings Conference call.
At this time all participants are in listen only mode. A question answer session will follow management's prepared remarks.
One should require operator assistance during the Cochran. Please press star zero on your telephone keypad.
As a reminder conference is being recorded.
It is now my pleasure to turn the call over to your Mr. Bernie Colson.
He is president of corporate development and sustainability for Flotek.
You may begin.
Thank you and good morning, everyone. We appreciate your participation.
Joining me today and participating on the call are John Gibson, Chairman, Chief Executive Officer and President.
Brian <unk> Zhao Chief operating officer.
The Ham Carson interim Chief Financial Officer, James Silas Senior Vice President of research and innovation and Nick <unk> Senior Vice President General Counsel and Chief compliance Officer.
Today's call, we will first provide prepared remarks concerning our business and results for the quarter. Following that we will answer any questions. You have we have now released our earnings announcement for the third quarter of 2022, which is available on our website. In addition, we posted an updated investor presentation that you are welcome to download and referred to.
During this call as a reminder, today's call is being webcast and a replay will 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 .
Thank you and good morning, everyone. Thank you for joining the discussion of our third quarter results for 2022, we've been looking forward to reporting our results today as well as providing some color what's transpired since quarter end.
Third quarter 2022 marks the second full quarter Flotek has operated with the <unk> supply agreement, which we have described in detail in the past quarters rapid to report another quarter of strong revenue growth with 55% sequential revenue growth, which is up four five X year over year.
To echo what other large energy companies had been saying in their recent earnings press releases and conference call. We believe strongly that we are in the early years of a tight supply cycle triggered by Underinvestment in infrastructure and new sources of oil and gas production, while shorter demand cycles will come and go depending upon the fluctuating.
Ill make backdrop, we believe that tight supply cycle is durable and will provide underlying support oil prices for multiple years.
My knowledge in the absence of significant demand destruction. There is only one way to solve for supply driven price increases that is to increase investment across the entire value chain in order to increase production. However, complicating the fundamental laws of supply and demand is that operators are displaying a level of capital discipline.
That we've rarely seen and there is significant tightness across the supply chain. Despite healthy oil prices e&ps are still focused on growing production, but rather on maintaining production with the least amount of capital investment by developing only the highest return wells. This returns focus has resulted in record cash.
Flow generation and oil and gas producers with much of the excess cash being returned to shareholders in the form of dividends and share repurchases.
We believe the industry's returns focus and capital discipline plays well to our strategy of being the collaborative partner of choice to producers as our chemical solutions solve for maximizing well value not simply better masking.
Our producers customers report, achieving better well performance with Flotek chemistry, all else being equal.
Now let me walk you through the adjusted EBITDA number we reported in the quarter.
Clearly it is a $1.9 million bonus accrual, while we hadn't previously accrued for bonus payments in the first half of 2022. It is critical that we pay competitive compensation to retain our highly talented and motivated colleagues. So we're able to achieve the full scope of our business model, we've had a fantastic year.
Our employees need to be recognized.
We are pleased that Q3 adjusted EBITDA as a percentage of revenue was significantly improved again going to negative 18% negative 25% in Q2 and negative 42% in Q1 Q3 was the fifth consecutive quarter of improving adjusted EBITDA margin.
Providing evidence that our business transformation is truly taking oh, Ron will provide greater detail on revenue and expense drivers in his commentary, but in summary, we are.
Our ability to continue to increase fall through to the bottom line going forward.
In the Investor deck that we posted to our website yesterday. We included a slide illustrating the steady improvement in adjusted EBITDA margin has taken place over the previous five quarters. We expect this trend to continue through the end of 'twenty two and through 2023.
Lastly, I'd like to address the cash balance before it.
It goes into details in her remarks, I want to stress that we believe we have the necessary cash to execute our business model revenue. We reported in Q3 exceeded what we reported for the entire year in 2021.
Growing our business at this pace requires working capital.
As a result, we continue to use all the resources at our disposal to ensure adequate liquidity in order to achieve the full scope of our business.
We're optimizing for all sources of cash we recently engaged a third party to help us improve the order to cash collection process and we're starting to see benefit from that effort.
And we expect that to continue into Q4 and beyond into 2023. In addition, we continue to explore options to raise capital we had an opportunity to secure an ABL during Q3, but decided to pass as the term facility Werent really acceptable we're being disciplined in the face of a lower cash balance because work.
The terms, we will be able to secure after the company crosses into positive adjusted EBITDA territory will be significantly better than those we were offered during Q3.
Therefore weighting is a more prudent option considering how close we are to crossing that line.
Lastly, I want to emphasize that we're focused on the asset based lending markets rather than equity markets in order to prevent further dilution for our shareholders.
Our future success hinges on our ability to support for success of our customers' customers, where see the oil and gas producers that rely on our products to maximize production, while minimizing costs and environmental impact we sense a change in the market here, where customers focused exclusively on cost are starting to give way to customers more concerned.
About maximizing the value of each well.
They intend to get the best initial production rates they want to enhance their total ultimate recovery.
And they are trying to avoid reservoir damage caused by careless chemistry and all of these are at the top of their mind. This trend strongly favors our core capabilities and market position. We're excited to see how much market share we can gain in the coming years as a result that I'd like to turn the call over to Ryan Ryan.
Thank you John and good morning. This quarter represents another positive step for Flotek as revenue growth continues to rapidly expand further exemplifying that our strategy to be the collaborative partner of choice for sustainable optimized chemistry and data solutions is gaining momentum let's.
Let's get right to the operational highlights as John mentioned total company revenue increased by 55% sequentially and more than $4 five X over the same period in 2021.
We doubled the average number of pro Frac fleets serviced in Q3 with further growth continue into Q4 of 2022.
Our transactional chemistry technologies revenue grew over 10% sequentially outpacing the hydraulic fracturing fleet market growth for the fifth straight quarter further, indicating that we are gaining market share with our customized chemistry solutions.
All in all Flotek served approximately eight 4% of active U S. Frac fleets in the third quarter, representing an order of magnitude increase over 2021, our data analytics segment revenue grew 138% versus the prior quarter as our focus on core applications continue to gain traction helped.
With the momentum gained from the successful monitoring of field gas quality by our <unk> analyzers.
We recently announced an agreement with <unk> to supply them with 20 of J P. Threes <unk> analyzers to be utilized in the field to enable displacement of diesel fuel fuel gas.
Our <unk> analyzers have been deployed our sixth pro Frac fleets, thus far and the initial feedback is positive.
Our industry research shows and maximizing the use of fuel gas and result in the reduction of diesel fuel consumption and resultant greenhouse gas emissions by over 50%. Most importantly, the growth milestones presented above were achieved with zero recordable and lost time incidents and field operations.
I am pleased with the solid performance Flotek delivered in the third quarter of this year and I think all flotek employees for their hard work and contribution to these outstanding results and dedication to collaboration safety and service quality transitioning into a few of the key details for the quarter I'd like to discuss the status of our mutually beneficial partnership with <unk>.
As a reminder, our contract with <unk> was effective as of April one.
<unk> 10 years and covers an equivalent volume of our full suite of downhole Chemistries to serve 30 of their frac fleets are 70% of their total frac fleets whichever is greater as of Q3, we have passed the halfway mark of the original ramp serving an average of 16 fleets and we remain confident that we will achieve.
The full contract scope over the coming quarters. We also have no reason to expect that our relationship is bounded by this 30 fleets or 70% numbers as.
As we continue to provide exemplary service pro Frac has the incentive to maximize chemical deliveries for flotek due to the structure of our arrangement.
In Q2, <unk> announced the acquisition of U S well services, which closed last week as a result, they expect to be operating 44 active frac fleets by the end of the year. We fully expect that we can win that incremental business as the goal is for <unk> to desire to purchase chemistry from us for its entire fleet.
As we've been saying this agreement has proven to be transformational for flotek and the industry.
As a result of this agreement E&ps now have a comprehensive vertically integrated completion solution that reduces emissions and delivers greener chemistries, thereby protecting air water land and people.
Over the next decade, we anticipate the agreement should create backlog of more than $2 billion in revenue low tech, including anticipated revenues in excess of $200 million in 2023 for the pro Frac contract alone.
And this number does not include any of the impact of our <unk> announced the acquisition of U S well services.
I will also continue to stress that the contract is not exclusive allowing us to add new customers and continue to grow sales volumes to the rest of our energy chemistry customers, which we've successfully done for five consecutive quarters.
We are laser focused on growing this higher margin higher value add portion of our business.
Now looking at the quarterly performance, we continue to make steady progress in growing market share and outpacing industry activity levels.
I'm, particularly pleased that we are experiencing 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 our revenue stack and minimize risk of customer concentration.
We previously stated that we have the ability to double our manufacturing capacity utilization levels without significant capital investment we are confident in our ability to satisfy further significant growth without needing to build additional facilities, which will conserve cash and minimize direct cost.
In the spirit of reducing costs and improving margins. We are also achieving operational efficiencies and economies of scale, while rapidly increasing revenue each quarter. As a result, our improved leverage from increased volumes is not only aided in the securitization of material allocations volumes with our top product lines has also provided.
The realization of tiered volume pricing structures raw material cost savings.
Additionally, the challenging logistics environment experienced in Q2 exhibitor improvement in Q3 with the free spin as a percentage of revenue declining as the journey towards improving cost trends and more efficient operations continued.
We are actively executing direct actions to minimize freight related efficiencies and drive a world class delivery network for products to our invasive customers.
Finally, we made a strategic decision to discontinue FDA regulated and sanitizer product line within our professional chemistries portfolio.
This resulted in a $1 million write down of related raw materials and packaging.
However, our professional <unk> portfolio, which includes specialty chemical products to address the long term challenges of the janitorial sanitation food services in adjacent markets. We will continue to be in the central part of our growth portfolio is it shares similar raw materials the capabilities of our EPA regulated Chemistries and energy.
Sector. This allows more focus on core business activities and reduces overall regulatory costs going forward.
In summary, I continue to be optimistic about the future I am excited about our mission to provide differentiated solutions that maximize value to our customers simply speaking we are focused on protecting water quality minimizing formation damage and improving the estimated ultimate recovery of every completion, while maintaining our commitment.
<unk> two corporate responsibility market share growth and SG&A discipline now I will turn the call over just to have to provide key financial highlights.
Ryan I would like to begin by reminding everyone of several accounting considerations related to our convertible notes and supply agreement with <unk>, which proved to be meaningful again in the third quarter first there will be quarterly noncash entries to account for mark to market adjustment to the value of the convertible notes over the one year life.
Nope.
In Q3, 2022, we swung back to a noncash loss of $4 million to $5 million compared to last quarter noncash gain of $17 2 million, let me elaborate a bit as these numbers are significant and will continue to add quarterly volatility to our financial result.
Q2, 2022 noncash gain of $17 2 million resulted primarily from a significantly lower stock price on June 30 of 2022 compared to March 31, 2022 and.
In contrast, the Q3 noncash loss of $4 5 million reflected a similar stock price on September 32022, compared to June 32022.
But we experienced a change in the discount rate assumption methodology that resulted in a lower discount rate higher note fair value and therefore, a noncash loss for Flotek.
Just as a reminder, we will only book these fair value adjustments to Q2 2023 at the latest which is the one year anniversary of issuance of the second tranche of convertible notes are convertible notes had a one year mandatory conversion feature secondly, during the third quarter. There was a $1 2 million noncash reduction to revenue.
We recorded related to the amortization of our pro Frac contract asset, which compares to the 737000 revenue reduction we recorded in Q2.
Our contract as it represents the value of the convertible notes issued as consideration for the initial pro Frac supply agreement in Q1, and the amendment to the.
The cumulative fair value of these notes as of the closing date of the two tranches with approximately 83 million and recorded as a contract asset which will be amortized over the 10 year life of the pro Frac supply agreement and be reflected as a noncash reduction to revenue in our financial statements prepared in accordance with.
U S GAAP.
Again I want to emphasize these are noncash adjustments and that we can expect to see additional noncash adjustment each quarter, but the magnitude is difficult to predict as it is based on the share price and other variable if you're interested in getting into the detail of how the convertible notes are valued please refer to our SEC filings for the methodologies.
And underlying assumptions.
Now moving onto the income statement in Q3 consolidated revenue of $45 6 million for the quarter with 55% compared to Q2, 2022 and up 347% compared to the third quarter last year.
Revenue included a $1 2 million noncash reduction associated with the pro Frac contract asset.
Consolidated cost of goods sold of $47 5 million was up 50% compared to last year.
The increase was primarily attributable to ramp up expenses associated with the preferred supply agreement.
In addition, we booked a $1 million write down of inventory related to our decision to discontinue our FBA regulated hand sanitizer product.
Gross margin during Q3, 2022 was negative $1 8 million.
Negative $2 3 million in Q2 and positive $6 2 million in Q3 2021.
However, this gross margin number included the $1 two noncash reduction associated with the appropriate contract asset and the 1 million write down of inventory.
Third quarter SG&A of $9 million was up 22% Q2, 2020, 274 million and up a 121% compared to Q3 of 2021. However, this number included total bonus accrual of $1 9 million.
Our non-GAAP adjusted EBITDA for the second quarter was a loss of $8 4 million, which declined $1 2 million compared to last quarter's loss of $7 2 million.
Adjusted EBITDA included a $1 nine bonus accrual adjusted Scott, let's move onto the balance sheet at the end of the third quarter, we had cash and cash equivalents of $8 6 million versus $33 1 million at the end of the second quarter and $24 9 million at the end of the first quarter. The decrease in cash was due to increases in inventory.
And accounts receivable necessary to grow the top line at 55% sequentially and operating losses.
Today, we have $11 1 million of cash on hand also a great finish in billing in October as a result of process and system improvements recently implemented which will continue to accelerate the time it takes to bill our customers, resulting in reduced collection periods, including some early payment incentives as we look forward to the fourth quarter of 2010.
Q1, 2023, our goal is to leverage our liquidity to continued significant revenue growth and we drive toward getting positive adjusted EBITDA and an organically growing cash balance. In addition, we continue to evaluate options for Monahan, Texas facility and expect to provide an update in the coming quarters at this point our path.
The call back to John for his final remarks.
Thank you I would like to again, thank our shareholders for helping us unlock an incredible opportunity and secure the future of our business. This is the first time in my career have been at a company with such a robust backlog and I am optimistic about our ability to convert revenue growth into earnings going forward.
And I do wish to thank our employees in.
In the presence of this incredible growth rate and ramp up have done an outstanding job in helping us flawlessly execute and ensure that our customers are receiving the products. They need on time safely with a focus on the environment as well I just thank all of our employees for the great job they've done I. Just appreciate you joining the call and I am.
Appreciate your continued support.
<unk>.
Back to you operator for questions.
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 I choose to.
To withdraw your question. Please press Star then two.
At this time I will pause momentarily to assemble our roster.
It looks like our first question here comes from Don Crist from Johnson Rice. Please go ahead.
Good morning, how are you all doing this morning.
Pretty good darn dependant on the question.
[laughter] us where I'll be nice I wanted to start on the chemicals business, obviously, we're going into the fourth quarter. There could be some are some weather impacts in such that normally hit in the fourth quarter and the first quarter is there any.
Thing that you can see right now that would slow the ramp up in supplied pro frac fleets out there from maybe a weather perspective or any other kind of supply chain initiatives.
Go ahead.
Good morning.
At this point in time, we always have to be cognizant of potential weather impacts in Q4.
Potential changes in activity and when we look at our forecast we have taken those considerations.
Into account I do believe when I when I look at <unk>, specifically and we look at the locations, where the fleets are growing which particularly the west, Texas, South, Texas and East, Texas areas I feel like we have less exposure in terms of weather. Then we would just say we were in the Williston or further to the northeast, but we always do take those potential.
Accounts into consideration I'd also expect any major.
Disruptions in.
Our ability to deliver chemicals indoor updates and activity in <unk>.
<unk> unique is that I would say in this quarter at this period in the fourth quarter, considering the typical seasonality is still quite a bit of momentum as we get ready to finish of the year.
Yes.
Okay. So we should still expect a ramp up of seven or eight fleets are so on that same path that you've been for the past couple of quarter.
Yes, we're looking I would say if I was going to say I will say the five to seven on average is what we're looking at.
And as you know like I say not taking into consideration anything that we might would pick up from the U S Wells acquisition, which closed last week, so low to mid twenties frac as well looking at dawn and it's a good question too on activity seasonality, usually dolls activity back in Q4, and we're not seeing any of that right now during COVID-19.
<unk> home at Thanksgiving came back in January right now it looks like due to equipment availability, they're going to run it right up until the new year.
Okay and switching over to J P. Three.
Your supply and six fleets right now the profile fleets right now under that contract for 'twenty, what does the ramp up schedule, there and I know you were a little bit hesitant last quarter to give any kind of revenue.
Our profitability metrics around that but are you willing to give anything now that you've got you know several system support.
Well, we're still rolling them out.
We got it.
Well I think we had six deployed already all pro Frac fleets, we've got a ramp up of another 14 to we're continuing to work with them to get the installs and get them out to the field.
Very excited about that the great part about that one is it's a proof of concept that demonstrates the robustness of it on a trailer the ruggedized <unk> of it is outstanding so that this works not just like a sensor that you bolt onto a stationary side. So working with pro Frac spent outstanding there to really prove the technology.
So I'm reluctant to give out the growth rate on it.
Though it's picking up and I'd say, we had the best quarter.
Quarter, we've had in a long time in Q3 and don't anticipate that backing off for a while I mean, we are we got a really strong pipeline and we're beginning to get the traction that we need there as we go forward.
It's just not large enough revenue that would have your modeling in the margins from that yet I am looking forward to the point, where I've got too to get out and be more forthcoming on that because the margins are a big contributor but not yet.
Okay.
So from competitors.
Right and just sticking with J P. Three when we were in your offices a couple months ago, you had talked about third party potential.
How are those conversations going and how is that marketing effort going to bring J P. Three unit, the more chemical industries or industries outside of the oilfields in general.
Yes.
Well oilfield related I mean, it has a big opportunity in the midstream side, but we're also in the power generation side, where people are using gas and the quality of gas is important and so we're seeing some some big ramp ups.
In power generation, and <unk> been using field gas or compressed natural gas in and the people in that sector are pretty excited about it so.
It's still gas related and so anytime I look at it I know, it's still sort of oil and gas industry. Because it is connected directly to natural gas and fuel gas.
So the power industry the compression industry, the midstream industry downstream all of those are really core to J P. III and we have good conversations going on in all four.
I appreciate the color I'll get back in queue. Thanks.
Greg.
Our next question comes from Jeff Robertson of Watertown Research. Please go ahead.
Thank you good morning, John and Brian .
You talked about increasing market share and.
Flotek chemistry, improving well performance are there certain reservoirs that chemistry has a.
More significant impact than others.
And give you an opportunity in certain basins than to increase.
Sure.
That's a that's a great question and I think that is the <unk>. The million dollar question really advancements of how we're targeting to increase our value set value add sales and improve margin as we roll into 2023.
Typically what we see in a strengthening market like we have now when that'll be sustainable is that the focus on the maximum ultimate recoveries as they can get from the reservoir really comes into play and if you were to take the chemistry that we have for particularly our prescriptive chemistry management service, which looks at cuttings produced water.
The types of crude formation impacts and the whole chemical systems are applied with customers, particularly E&P operators that we work directly with we see as high as a 15% to 25% improvement in the initial flow back and when we see you on the overall tight curves and those are the types of customers. When we say we want to hear.
The customers customer being that we work with our service companies and you see E&P operators that choosing the proper chymistry does overall improve the overall well before so we are looking at the completions that we see and it doesn't matter for us we see them in mid Con we see them.
Permian Basin, we see the same thing in East, Texas, So I definitely think that the choice of the proper chemistry is an overall better return on the investment when you look at it that way.
Brian does that give you an opportunity to sell higher margin products. When you work with producers on the prescriptive chemistry aspect of there.
Completions.
That's 100% correct. So when you look at part of our strategy was to be.
Be able to get volume through working with service companies delivering.
Flawless execution and minimizing any impacts of safety in MPT at the well site and this gives us a direct contact with those asset owners E&P operators that allows us a pathway to utilize our laboratory capabilities and our differentiated chemistries that improve the overall completion and that's 100% of the pathway that we will be executing.
As we finish this year 2023.
Jeff If you think about it we have.
Radically drone grown our core chemistry business and that allows us to be doing the value sell loans with each one of those producers and that's where I think we're going to see margin expansion as we move from sort of core chemistry to value add chemistry, but to be there you have to have the core chemistry in place and that gives you that opportunity sit in their office and <unk>.
Explain how you're going to improve production youre going to approved recovery you got to prove.
Prove that the day rates on those wells and so we now have that opportunity and we'll be working very closely with them because thats part of our margin expansion story.
John on the cost side are there certain levers that you can address that are more impactful on your progress to pause to getting to a positive EBIT.
EBITDA situation than others.
There are there's things as simple as reducing our cost of facilities and we are working on that and hopefully we'll have an announcement here in the next quarter or so as we look at.
Changing.
Office space et cetera, always trying to lower our cost, but theres a lot of things, we can do more dynamic associated with the products and how we deliver and I'll, let Brian jump in yeah. I mean, when we look at the overall cost base. There is there is two big things that play a big role in delivery and our margin enhancement. One is our overall raw material have been good cost of goods.
And what we do on the delivery side on the freight and if you look at what we're doing from the if you really break the numbers down in terms of where we're seeing material cost of goods improvement. We are now in Q2, we were starting to establish our ability to have these economies of scale, which moved into a full delivery in Q3.
We've been able to move into tiered pricing structures.
<unk> cost savings that we see on the overall material spend and if you were to go back and look at our days inventory outstanding we've seen that improve significantly from Q2 to Q3, which means we're turning the products faster, but in reality. What we saw was about a 70 day delay in the map improvement so it's kind of.
That full.
Impact from the material pricing hasnt going to hit us to start at Q4, and what we'll see going into 2023, because they are significant as they're starting to move in and we're going to see margin improvement on the overall material costs.
The second Big impact forces, we're moving millions of pounds of chemistry every month, so us being able to maximize the efficiency of freight is a huge deal.
We exited Q2 with freight as a percentage of revenue at almost 11%, we exited Q3 back down at almost 8% and we target to get that down to 6% range as we come out of Q4 into 2023 and when you look at it. These are big drivers that give profitability straightforward through to the bottom line.
So we're executing as we achieve the economies of scale and efficiency. Once we once the ramp starts to stabilize a bit.
Brian some of those freight savings from some of the things you've talked about in the past, which is in basin delivery and just less return.
Chemistry.
It is a synergy of three major impacts one is because we've got such a scale of volume moving we were able to go back out and tinder, our inbound outbound and in basin delivery services, which gave us better spot prices and better contracted freight rates number one.
Number two we've increased our efficiency, we track on a weekly basis, what we call non value add moves or moves that do not relate directly to revenue generation and we have kpis that drive where we want to be improving week on week until we get to the steady state driver there.
Okay and the final component is hailing returns our ability to do well to wheel transfer in basin now versus having to return to the main facility that we operated out of in Marlow, Oklahoma is a significant savings because youre looking at to move two moves there over long distances that didn't generate any revenue and so those three driving factors of what we're doing to improve.
The freight efficiency and I'm very happy with the progress that we're starting to see there.
Lastly on the.
Follow up on the J P. Three it sounds like that's moved more from a proof of concept in terms of the impact that you all that you're analyzers are having.
With Flotek to a an adoption at least with them are you seeing or can you talk about any inquiries you're getting from other potential customers to deploy those analyzers and is there a capacity limitation on your ability to build them and put them out into the field.
So those are all excellent questions I'm, a little reticent to talk about the customers, where we haven't got any yet but were getting closer because I don't want to give a competitor any insight into where to go in and look for.
Soon to close opportunities are almost supply chain when that's a great question.
Much like any other industry when you take a look at chips electronics technology.
Blockchain issues, but we're working very closely with our suppliers.
Currently we have enough.
Sensors that are in the queue coming in to cover off all of next year unless it's unbelievably good.
It would be great with the number of sensors, we have it would have to be outstanding for us to need more and then we've got a plan going into 2024 that gives us more than we need and we're working on the price point of that as well so.
If anytime you are in the tech business, you've got to constantly be after the cost curve and reducing the cost of the device in order to stay competitive and so we're doing both of those we also brought on the later named Ron Halsey and Ron is just outstanding his connections in this sector relationships to the big customer follow up is producing some some great opportunities.
For the pipeline so.
We get those will press release, those as we go forward and hopefully.
Q4 will have one or two of those said it and I think early next year. We've got a lot that are in the pipeline that are closing where pilots are underway.
Thank you very much for taking my questions.
No problems.
And as a final reminder, if you have a question. Please press Star then one our next question comes from Eric Swergold with Firestorm capital. Please go ahead.
Good morning, your team sure has come a long way from this time last year.
Ryan, perhaps you could talk a little bit about pricing your oss customers have been actively raising prices in the field given there they are constraints.
Given the amount that they've raised prices does that leave some room for you to raise prices to them.
<unk>.
Yes, Eric that's a great question and I will say, 100% of our focus.
John discussed this at length, and particularly following to overall oilfield services versus the chemistry component oilfield services and typically when we see a strengthening market, particularly what we're seeing now where the capital is pretty tight in terms of the availability of hydraulic fracturing fleets and the hydraulic horsepower.
They took a lot of the bigger stick on the pricing component <unk> been able to push spot pricing and contract pricing up significantly from what it would have been the end of last year.
And what we see what chemistry is chemistry is starting to if we're selling to the.
So the service companies, we have started to be able to push the pricing through and for E&ps were starting to see price relief and increased pricing as well, but it moves out of sync with what we've seen traditionally we'd like the horsepower in the IR. That's already reached a good solid peak and where it is and we're starting just now to really start to see our ability to push prices up coming.
To play in Q4, what we're going to see a 2023 and that's not unlike the past cycles is that ive had experience with over the past 20 years, where the the chemistry of chemicals typically move a little bit out of sync and what we're seeing is a potential impact on near term margin because we're absorbing a little bit of raw material cost increase until we can transfer that churn rate.
Pricing out turning these customers, but we have a we have started doing that aggressively across the board on all accounts.
Okay and then my next question is this looks like it's the first the bonus accrual and some time can you give us a little more color on that.
Certainly do that.
As we take a look at the year.
Q1, we really didnt have an opportunity to earn a bonus in Q1 in fact I think we were we're at that point, where I've said the year would have been zero had it not been for the contract with profile, even though we have been growing we wouldn't have hit.
The numbers that were needed. So in Q1, we didn't accrue any of Q2, we started to contract up with pro fracking up I'll talk a little more about that at the end of the call and.
We took a look at it was a little bit hard to understand exactly how rapidly would ramp up and so it was in a gray area and we chose not to accrue in Q2, when we get to Q3, we had to catch up Q1, two three in accounting would say you need to take a look and do at least three fourths of it if you're going to do that based on what you think your payout is going to be and we.
Did that so so a bit the bullet so one of the things I'd say about Q3 as.
We needed to do these things we.
We need to be normalized in 2023 and not have large.
Pick up it is not a cash item because until we complete the year and we actually have the success, we won't theres still discretion from the board as to how much of the bonuses are paid out and so we will it'll be probably February March before we get.
Fleet understanding what percentage of that one point that is paid out.
I'm, hoping that we achieve such that a large portion of this and we are looking at a market where retention is critical and we have a team.
To kill for here.
This team I mean, we've had very little increase in head count and yet we've grown the company to a point, where we're doing things that the company has never done in its history and so with a lot fewer people.
Then it's had in the past and so I'm very pleased with the team.
Really about retention everything about Q3 is let's get the write offs for sanitizers through let's get the bonus accruals done correctly, let's make sure that what we're doing is setting up for 2023 everything we did in Q3, as saying that where we're focused on 2023 and what can happen there.
Okay and then my next question is the related party receivable jumped quite a bit this quarter I presume that's pro Frac and this is just a timing issue in terms of it becoming a related party receivable out of cash.
That's right Joe Youre talking about that the increase in NAR and with the increase in activity and the ramp up we've really looked at our processes to try to speed. This up and I think we will see some of the benefits of the enhancements we've made in systems and manual processes at the end of this year.
Okay, Great and then my final question is any updates for us on new U S customers Middle East customers.
We're even with a recovery in deepwater starting any any updates on deepwater.
Yes, I would say that overall, we are continuing to see the growth of our business in the middle East now compare to speaking when you look at the total.
Total volume of revenue increases, we're seeing in the U S hydraulic fracturing businesses not of that magnitude, but we're seeing a ton of value add sales going on there with our complex nano fluids.
Emulation services et cetera, there were careful to choose our customer base there just because of the particular.
Our return on cash on how fast the payment term DSO is there because it's a little more challenging some of those areas, but the growth of the middle East as there.
We're super excited about what we're doing in the market share gains that we're pushing into double digit range on the stimulation business in North America land.
And we're also seeing some other national growth in Latin America, when you look at the chemistry business.
In terms of the deepwater.
We're still seeing activity roll through our plant in race in Louisiana.
A lot of trains mix and loading for deepwater operations related to some mid teen.
Movements et cetera, but I wouldn't say that we've seen it were significant enough to be a material difference in comparison to our growth in the north American stimulation business.
Alright, that's all for me thanks, very much thanks.
Thanks, Eric.
Alex. Thank you Bruce currently have no further questions from our turn it back over to John Gibson for any final commentary.
Well. Thank you very much I appreciate everybody staying on the call.
I just wanted to cover two things here in the end and then we'll move will catch up with you here on calls afterwards, those that call in first thing two things to think about one is cash and the other one is margin those are the two most important things we think about here on the cash side.
You can be confident that forgoing ABL in Q3, and waiting for an opportune time to take cash with lower rates and lower restrictions.
It would be indicative of how confident we are in our cash position while it may be low we do not project that we have any issue in terms of working capital here as we go through Q4, and that's why we were able to pass on that look for better terms. Also tells you for certain this next thing is that our margins are improving and we do have.
Projection of getting to the point, where we are we are in the positive adjusted EBITDA.
Very soon.
Not saying exactly when and we're not going to give guidance on that but we definitely have that projected or we would not have walked away from the cash and with the confidence that we did so be confident in our cash position being okay. We are and be confident in our ability to handle the growth in our margins that are needed to be a profitable company.
<unk>.
Mind, you, we're only five months into the contract with pro Frac that yet.
The hardest thing in my career is to grow revenue and then when you get the revenue it is a blocking and tackling exercise in order to get your cost in labs. So that you are a profitable company. We are now in the blocking and tackling component of this where we've got a lot of work to do but Ryan and the team.
I am Nick James Barney, they're all on top of that and we're confident that we are the right company to take a look at in 2023, and we're excited about what the future holds and we appreciate your gas and we look forward to talking to you again soon.
Yeah.
The conference has now cleared thank you for attending today's presentation you may now disconnect.
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Right.
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