Q1 2023 ProFrac Holding Corp Earnings Call
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Greetings welcome to profile holding Corp, first quarter earnings conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. As a reminder, this call is being recorded it is now my pleasure to introduce your host Rick Black Investor Relations. Thank you rescue may begin thank.
Thank you operator, and good morning, everyone. We appreciate you joining us for prophylactic holding Corp's conference call and webcast to review first quarter 2023 results.
With me today are Matt <unk> Executive Chairman, <unk>, Chief Executive Officer, and Lance Turner, Chief Financial Officer.
Following my remarks management will provide high level commentary on the financial highlights of the first quarter of 'twenty three as well as the business outlook before opening the call up to your questions. There will be a webcast of today's call available by webcast on the company's website at Pf Holdings Corp Dot com.
As well as the telephonic recording available until May 17, 2003.
More information on how to access. These financial features is included in the company's earnings press release.
Please note that the information reported on this call speaks only as of today May 10, 2023, and therefore, you're advised that any time sensitive information may no longer be accurate as of the time of any replay listening or transcript reading.
Also comments on this call may contain forward looking statements within the meaning of the United States.
Federal Securities law, including management's expectations on future financial and business performance.
These forward looking statements reflect the current views of <unk> management, and they're not guarantees of performance.
Various risks and uncertainties and contingencies could cause actual results to differ materially performance or achievements to differ from those expressed in management's forward looking statements.
The listener or reader is encouraged to read <unk> Form 10-Q, and other filings with the Securities and Exchange Commission, which can be found at SEC Gov or on the company's Investor Relations website section under the SEC to understand those risks and uncertainties and contingencies.
Rents today also includes certain non-GAAP financial measures as well as well as other adjustments.
Figures to exclude the contribution of Flotek additional details and reconciliations to the most directly comparable consolidated GAAP financial measures are included in the quarterly earnings press release, which can be found on the company's website.
Now I would like to turn the call over to <unk> Executive Chairman, Matt Wilkes.
Matt.
Thanks, Rick and good morning, everyone. We are pleased to report <unk> operational and financial results for the first quarter of 2023. Once again, we generated strong revenues and adjusted EBITDA as we continue to execute on our acquired retire replace and vertical integration strategies I am proud of what this team has accomplished and excited.
Added to realize the full potential of this business as we move forward.
Since the end of the third quarter of 2022, <unk> has closed five transactions, adding 12 fleets and six mines across multiple basins.
During the first quarter of 2023, we estimate that we absorbed over $20 million of costs associated with the conversion optimization and retirement of acquired assets to be clear. These costs were not added back to arrive at the $255 million of adjusted EBITDA for the quarter. However, it is important that we call. These <unk>.
Costs out and they are nonrecurring.
Those nonrecurring costs were associated with standardizing and upgrading acquired pumps as well as optimizing efficiencies of the mines we acquired.
We incurred these expenses so that all of our assets are capable of performing to our standards.
Additionally, as our asset base has expanded we have taken the opportunity to reposition frac fleets.
They would be in position to cross sell our sand and logistics as.
As a result of these initiatives, we believe our first quarter financial performance was not reflective of the true earnings power of our business.
Since becoming public we have worked aggressively to build out our platform with several key objectives in mind.
The goal remains to position pro Frac to do to one deliver the safe the safest highest and most consistent service quality for our customers to insulate the business from cyclicality as best as possible by vertically integrating the supply chain and three maximize and returning free cash.
Hello to our stakeholders.
Which we hope to update soon.
We believe we have successfully executed on the first two goals our operating efficiencies are best in class and we offer a portfolio of tier four dual fuel and electric fleets capable of delivering significant cost savings and emissions reductions for our customers and further separating us from our peers as such we were able to earn premium.
Margins, while still lowering our customers' completion costs per lateral foot.
Which we believe is the best measure of value for services.
On the supply chain side pro Fracs vertical integration strategy is delivering incredible results. We have the largest in basin sand footprint with approximately 23 million tons per year of production capacity.
This network of sand mines positions pro frac to capture value from them from the mine get all the way to the wellhead significantly improving the economics of our fleet.
Additionally, by manufacturing our own equipment pro Frac shortened cycle times and matches the cadence of inventory build in consumption with the activity levels of our customers. We believe this is a critical advantage that will result in improved cash flow throughout market cycles.
From here our mission is clear we are focused on demonstrating <unk> earnings power and cash flow generation.
In our two plus decades in the Frac business, we have never seen a better opportunity to generate free cash flow all of which we intend to use to pay down debt and return to our stakeholders. Our conviction is underpinned by several factors first the industry supply demand fundamentals are as good today as we've ever seen the majority of the work.
Capacity is held by a small group of disciplined players. We are very encouraged by the industry's reaction to the rapid attrition.
Legacy equipment, we believe new horsepower entering the market will serve as replacement capacity and that the measured pace of these replacements will prevent oversupply at pro Frac, we continuously evaluate our equipment to ensure we are allocating capital to assets that can generate our targeted rates of return are.
Decision to retire the equivalent horsepower of three fleets earlier this year demonstrates our commitment to this practice. We believe this process in one form or another is taking place throughout the industry also capital scarcity and supply chain tightness served as high barriers to entry that did not exist in the past.
<unk> <unk>.
Second today's commodity market drop backdrop.
It's constructive.
Crude market the combination of OPEC plus production restraint in U S shale producers capital discipline will continue to support the price of oil. Despite recent volatility even with the recent pullback our customers can generate very attractive returns at current price levels.
We believe these conditions will persist and that the demand for our services will remain strong for an extended period of time.
As for natural gas much has been made of the recent price decline, although gas prices have been a recent headwind. We anticipate that this situation will prove transitory. We are seeing a disconnect between the current price of gas and the underlying fundamentals for the commodity we believe the forward curve and the growth in the coming growth in L. A.
G export capacity reflects the reality that the world will be short natural gas.
For the foreseeable future global demand for power generation will continue to increase in natural gas is the best possible solution for meeting the world's energy needs. We believe U S. Natural gas represents a multi decade opportunity and for this reason we are committed to gas basins. Our continued presence and leadership in these markets will you.
All the myths benefits to probe frac and reinforced critical customer relationships Phi.
Finally, we are confident in <unk> ability to generate free cash in the current environment because of the strategic moves we have made over the last year pro <unk> identified materials integration as being key to enhancing free cash flow generation.
And capturing margin from selling sand logistics and providing chemicals.
Is it durable opportunity that can represent as much as $25 million of annualized gross profit per for every fleet supply.
Pro Frac is control and custody of key supply chains, we manufacturer fluid ends and power ends and high pressure iron and we build and refurbish our own pumps and pump unit and blenders the obvious benefit of vertically integrated manufacturing has reduced maintenance costs.
However, we believe the true power of our vertical integration comes from better asset management and cash flow management with shorter lead times more of our equipment is available to work and generate revenue.
Plus.
Lower exposure to outstanding purchase orders result in more discretionary cash flow and protects us in a market downturn.
Industry discipline has become a welcome narrative.
For pro Frac, we believe our disciplined approach will maximize free cash flow.
With that I.
I'll turn the call over to led.
Hey, Thanks, Matt.
First I want to thank our team for their hard work and dedication as they continue serving our customers so well.
In Q1, <unk> realized a 7% increase in sequential revenue endurance generated $255 million of adjusted EBITDA. Despite the significant one off costs incurred following our recent acquisition.
Our results for the quarter were impacted by business improvement initiatives associated with these acquisitions.
We are prepared to adjust our commercially available resources to respond to industry discipline.
During the quarter, we made moves that will enable us to fully execute our strategy of integrating materials and capturing the full earnings potential of our fleet moving forward.
We continue to see tightness in the market and stable service pricing.
This market backdrop is supportive of our business, we will remain disciplined in the same way that our customers behave and we will deploy our fleet, where they can earn an attractive return and generate cash for us to return to our stakeholders.
Following our recent acquisition, we went to work upgrading and standardizing these asset.
Additionally, as we added sand capacity.
Began relocating fleet to be better positioned to integrate our bundled services moving forward.
We have consistently seen significantly higher annualized gross profit generated from fleets that pump firsthand and use our logistics and cut chemicals.
This earnings potential is what drove our profit of acquisitions over the last year.
Since the end of the third quarter of 2022 Pro Frac added over 16 million ton per year capacity across key market.
Historically several of our legacy fleet and all of that acquired fleets were working on an equipment only basis.
Our strategic priority has been and will continue to be increasing increasing the number of fully integrated fleet we operate.
We are already seeing the benefits of this strategy.
As a reminder, during the fourth quarter of last year <unk> totaled approximately 33% of the standard pump.
Only four fleets, we're using sand produced by our mind.
We exited Q1, averaging 40% and more than tripled the number of fleets using sand mine by pro Pratt.
We look forward to building on this trend and continuing to grow our profits personally.
We continue to see a very tight.
The San market with a strong demand robust pricing across all of our markets.
However, our sand mining operations have yet to diminish demonstrate their full potential.
I will make the mine shipped its first load at the end of December and continues to ramp up its utilization.
When we closed on the performance acquisition in February the Sunny point mine was just beginning operation.
We expect to continue improving utilization across all mines throughout 2000 2030 with.
With 23 million tons per year production capacity, we believe our minds conserve as many as 46 fleet.
This is an immense opportunity there we're only beginning to tap into there's only a fraction of our fleets are currently pulling sand from alpine mine.
As such the cross sell opportunities are significant.
I had mentioned earlier.
Each fleet the wheat supply offers the potential to capture as much as $25 million in annualized gross profit.
Our position as the leading producer of in basin sand and one of the largest Frac service providers is unique and we look forward to demonstrating the earnings power of this combination.
Demand for our services remains robust the highest quality customers are seeking service providers with assets and technology that can reliably liver efficiency cost savings.
We have responded to this demand by upgrading much of our legacy tier two equipment to tier four dual fuel and building new electric fleet.
This strategy continues to pay dividend.
We recently deployed and easily with a top tier customer on a dedicated basis and we expect to deploy another in the near future as demand for this equipment is strong.
With our industry, leading portfolio of next generation equipment, <unk> is well positioned to deliver best in class performance and consistent fuel cost saving.
This creates a win win situation that differentiates us from competitors and will ultimately benefit profile and its customers.
Furthermore, <unk> shareholders stand to benefit as well as the increased demand for this next generation equipment translates into improved equipment utilization and superior pricing.
Looking forward into the second quarter, we expect continued sequential revenue growth activity in the natural gas basins has slowed versus what we saw throughout 2022 and as a result, we do expect some white space.
Persist.
However, we believe the depressed price of gas as a temporary phenomenon.
Pricing remains very attractive in today's market across all basins and.
In pursuing commercial opportunities pro Frac will always prioritize generating returns over winning market share. We continue to work alongside our customers as they update and refine their expected completion schedules with the goal of minimizing gaps in the calendar and integrating more materials into our fleet.
We expect to see an improved contribution from our proppant production segment during the second quarter and there will be the first quarter with full contribution from all eight mines operated by pro Frac.
This should allow us to further capitalize on the previously mentioned materials opportunity.
Furthermore, with the integration of the recently acquired pressure pumping companies behind US all of our fleets are using <unk> S O P.
Which should enhance efficiencies by reducing R&M expense.
These factors should boost profitability moving forward.
I'll now hand, it over to Lance to provide more detail on our financial results. Thank you.
On a consolidated basis revenue for the first quarter totaled $852 million, an increase of 7% the.
The revenue increase was driven primarily by an improved average active fleet count and an increase in the amount of proppant sold.
Adjusted EBITDA, excluding Flotek was $255 million, a decrease of 5% sequentially.
We incurred approximately $20 million of costs related to the conversion optimization and retirement of acquired assets during the quarter for which we did not make an adjustment to EBITDA.
These costs were comprised of $12 million related to upgrading acquired fleet pumps took pro Fracs latest technology 3 million for optimizing certain acquired assets and $5 million of direct costs associated with fleets that were retired and are no longer being marketed.
As expected our adjusted EBITDA per fleet on an annualized basis, excluding flotek decreased due to the diluted utilization along with an increase in costs associated with the company's work to standardize acquired fleets.
Selling general and administrative costs were $76 3 million in the first quarter, excluding stock based compensation and amounts attributable to flotek selling general and administrative costs totaled $51 8 million.
Turning to our business segment, the stimulation services segment generated revenues of $790 million in the first quarter up 3% sequentially adjusted EBITDA for the segment was $206 million compared to $252 million in the previous quarter.
Although revenues increased due to a higher average active fleet count it was offset by lower utilization and elevated costs, resulting from the recent acquisitions.
How do we expand our material integration, we may see profit shift amongst segments based on specific customer agreements and our commercial approach.
The profit production segment generated revenues of $82 million in the first quarter up 132% sequentially.
Adjusted EBITDA for the profit production segment totaled $41 million up 104% from the $20 million reported in the fourth quarter.
The improvement was primarily driven by a full quarter contribution from the number of mines in operation and the volume of proppant produced in the quarter.
Approximately 39% of this segments revenue with intercompany compared to 64% in the previous quarter driven by the newly acquired mines and third party customer mix.
During the quarter, we averaged approximately five mines operating and expect continued growth as we averaged eight mines in the second quarter. Additionally.
Additionally, as we improve the efficiencies at our plants, we expect to see a lower cost per ton and higher output at each mine.
The manufacturing segment generated revenues of 67 million in the first quarter up 31% from the previous quarter.
Approximately 95% of this segment was intercompany revenue for products and services provided to the stimulation services segment.
Adjusted EBITDA for the manufacturing segment was $8 million, a vast improvement from the fourth quarter.
In the first quarter. The other business activities segment, which represents Flotek generated revenue of 49 million and an adjusted EBITDA loss of $7 99.
Cash capital expenditures totaled $83 2 million in the first quarter, excluding acquisitions. While this is expected to accelerate over the next two quarters, given the anticipated timing of project completions.
Many of the project materials have already been paid for and are in inventory.
During the first quarter, we continued to pursue various growth initiatives specifically the construction of four E fleets and the previously announced engine upgrade program.
The remainder of our Capex is mainly used to perform necessary equipment maintenance.
We will remain disciplined with our capital allocation plans and expect to reduce capital spend based on total fleet activity levels to ensure that we earn our targeted rates of return on all capital investments.
Operating cash flow was $233 million during the first quarter, which was supported by a working capital tailwind of approximately $48 million.
However, we did experience an increase in inventory assumed from our recent acquisitions along with the additional inventory that is used to standardize the acquired equipment.
We expect that these recent inventory builds will reduce our cash requirements over the coming quarters and serve as a tailwind for cash flow generation.
At the end of the first quarter Pro Frac had approximately $1 2 billion of net debt as Matt mentioned, our focus for the remainder of 2023 is generating free cash flow in the first quarter, we produced free cash flow of roughly $150 million a significant increase from the $42 million achieved in the previous quarter.
We expect our net leverage to decline throughout the year as we pay down debt and continue to grow our earnings.
With that operator, please open the line for questions.
Thank you if you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue and for participants using speaker equipment. It may be necessary to pick up your handset before pressing.
The Star Keys.
Our first question is from Evan <unk> with J P. Morgan. Please proceed.
Good morning, gentlemen.
I was wondering if you could give us maybe some thoughts on how you think <unk> could kind of play out from a profitability standpoint allowed you mentioned you expect sequential growth.
In terms of the topline.
I was wondering if you could maybe give us a little bit more thoughts on maybe a stimulation services you expect you.
The sequential growth on the topline there and how do you think EBITDA could play out.
Assuming that the 20 million doesn't repeat on a sequential basis.
Yeah, we're not going to provide any guidance on on our path forward are just that sequentially, we expect to see a.
Consistent improvement as we digest these transactions.
And continue to bring each of the potential for these subsidiaries for appropriate.
Appropriately holdings is a holdings company representative amongst multiple.
Multiple service lines.
Our focus is maximizing the profitability across each of those service lines.
Okay fair enough fair enough.
And maybe for Lance I was wondering if he can just help us out on just thinking about how capex could trend over the next couple of quarters and for the full year.
And if you can just help us from a modeling standpoint on the timing.
For the for <unk>.
E fleets that will over the balance of the year that'd be helpful. Thanks.
Yeah I think.
I think that Q2 will probably be a little heavier weighted and and then Q3 will be a little heavier than Q4, I think that at a you know right now I think we're going to we're going to.
Hmm.
I adjust the Capex budget as we think about you know how many fleets we offer into the market.
And what the customer demand is for those fleets are but but I think that we're we're not revising the full year outlook at this point, but I think that where we're taking a disciplined approach to all capex, including maintenance and growth Capex as we look forward.
One thing that would that fall in that though is that the timing of capex and are in the capital outlay for that are not on the same timeline.
Much of the inventory that we carry now has already been paid for and so whenever we pull that into into Capex. It will already have been paid for so from a cash outlay standpoint, there's.
It doesn't it doesn't have a big impact.
Okay and are we still looking at Capex in call it the $350 million range for the full year.
Yeah.
That would be the high end, we are we expected to be a lot lower.
But we're not looking to provide any visibility into that at this time.
Okay. Thanks, a lot.
Our next question is from Rob <unk> with Bank of America. Please proceed.
So Rob please to see if your line is muted.
Hi, Good morning, guys, sorry, I was on mute so good morning, Matt a lot of that.
Good morning, Mike.
Oh, I guess, but I'll, maybe start with if you can just walk us through the different base and obviously the gas basin by basin. The underlying dynamics that are a little different at this point in time. If you can just walk us through what you see.
In the gas basins versus the oil basins and how you are you are repositioning that asset and maybe talk to your strategy a little bit in the near term that caused these pieces.
Yes, so we're seeing a very disciplined approach from our customers.
You know just really operators as a whole and and so we've seen.
Relatively consistent.
Capital deployed by each one of them they didnt ramp up a whole lot whenever whenever oil was at 120 and gas was pushing $10. So it hasn't really pulled back a whole lot from from.
Now that you have a lower price point.
When you look at the forward curve on the gassy markets.
You've got a very very constructive curve.
And with your larger players with a with good hedges they've maintained a a.
Steady Capex program, so we're seeing.
Pretty good a pretty good outlook, we like we like where we sit we like how are how the overall services space is also remaining disciplined.
And I think it's that disciplined approach that that says go in and make sure that you maximize the profitability of every asset that you have working well, we're not going to go in and and.
Focusing in on on each basin I think I think from a.
For the most part the industry remained sold out.
And as we put the digesting these transactions in Q1 behind US I think that that will be back on the past that everyone knows and expect from <unk>.
And if we had had a chance to do it again, we would do it again we.
We liked.
The the opportunities that exist for the business and like the path that we're on and we'll continue down that path generating cash flow for our stakeholders.
Yeah.
Okay perfect I appreciate that answer I had a quick follow up to walk I ruined without getting worse.
Trying to dig into the second quarter I. Appreciate you can't provide greater guidance right now, but this will make us you'll be thinking about the starting point right should we add back the $20 million through the <unk> EBITDA and then think about that as a starting point for for second quarter or does that not that I would really look at it.
Yes, that's it.
Way I look at it those were non recurring items associated with these.
These acquisitions and as well as upgrading.
The equipment to standardized format.
And so when we look at that we look at that as being an inclusive so what does that put us at 275.
And then from there we see this see Q2 as being sequentially stronger.
And I look forward to delivering on those results.
Okay. Okay perfect. Thanks for that clarification, Okay, guys. Thank you I've done it back.
Our next question is from Don Crist with Johnson Rice. Please proceed.
Good morning, gentlemen.
Wanted to ask about the electric fleets as they are built in kind of rollout.
Are they done a displaced tier two or kind of lesser quality fleets I E are you going to keep your fleet count roughly stable with the first quarter as those rollout.
So we certainly believe that they will displace the tier two equipment.
And in general across the entire space. We also believe that the.
Next Gen.
Equipment, that's out there from anything.
Anything from dual fuel to easily to direct drive will continue to displace.
The tier two equipment that is that is.
As a high degree of consumption of diesel.
And with that excess of costs. So we are you.
You know as we look forward. This is this is continuing to be a a.
A very concentrated market.
That's a very very healthy and we believe that it's going to do a great job all the way through the cycle and as we see that.
Hum.
That consolidation in the space.
It's going to continue to push more and more towards technology. Because this isn't just that there's fewer players that represent the market is that it's fewer players with technology and lower operating costs because ultimately the number one thing for our customers is reducing their overall cost per lateral foot.
And so.
Technology allows two things a number of things to exist at the same time, you know higher stage rates for your equipment products.
While also reducing the overall net cost from the reduction of fuel.
Fuel costs.
Okay, and just one more for me I guess for Lance on the on the balance sheet as you see free cash flow coming across the transom shall we assume that you keep some minimum level of cash and then the rest kind of gets sweep swept over to either the term loan or the revolver going forward.
You know I think I think our goal is to kind of minimize the revolver as opposed to carry I mean, we will have some minimum level of cash, but it's going to be pretty small I think what you see in March 31 is really kind of just the timing of it.
Collections or payments in the in the 24 hours following and so I think we want to minimize interest cost and just keep that a b L.
Kind of going with cash generation.
Or the term loan and in the case of the quarterly payments of sweeps.
Yeah.
He'd been done to jump on this.
So as we look at our our.
Discretionary cash going forward, we're going to be paying down paying.
Paying down our debt and we're also going to be going.
Presenting to our board for approval a return of capital program.
And in.
This.
This proposal will be go into our board and are in the very near future in the next couple of weeks.
We outline what we'll be doing with our discretionary cash.
Either a dividend or a buyback.
So.
We'll get that over to them and we'll be updating our shareholders as possible.
And.
Along with that one thing I would highlight is that whenever we look at our float here.
Our inventory is higher than our float.
Our capex budget is higher than our flu our ABL is higher than our flu our quarterly EBITDA is higher than our float.
I honestly don't understand why.
Any energy company out there it would want to be a public company.
So we'll be looking at what we do with our discretionary cash is a very focused effort to.
Two to make sure that that all stakeholders get.
Their proportional.
Share of those discretionary cash flows.
I appreciate all the color I'll turn it back.
We have reached the end of our question and answer session I would like to turn the conference back over to management for closing comments.
Those were my closing comments.
Okay. Thank you to everyone for joining.
Thank you. This will conclude today's conference you may disconnect at this time and thank you for your participation.
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