Q2 2023 Flotek Industries Inc Earnings Call
Greetings and welcome to the Flotek Industries second quarter 2023 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 zero on your telephone keypad.
As a result this conference is being recorded it is now my pleasure to turn the call over to Larry.
That's nardo Investor Relations representative for Flotek.
Thank you you may begin.
Thank you Dave and good morning, we appreciate your participation in <unk> second quarter 2023 earnings Conference call.
Joining me on the call today are Ryan Israel, Chief Executive Officer, and Bond Clement Chief Financial Officer on.
On today's call. We will first provide prepared remarks concerning our business and results for the quarter. Following that we will open up the call for any questions you have.
We issued our earnings announcement for the second quarter of 2023 yesterday afternoon, which is available on the Investor Relations section of <unk> website.
We have also posted an updated and enhanced corporate presentation that we will be referencing on today's call.
We encourage you to take the time to review it.
In addition, today's call is being webcast and a replay will be available on our website. Shortly following the conclusion of this call.
Please note that the 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.
In addition, please refer to the reconciliations provided.
In our earnings release as management May discuss non-GAAP financial metrics on this call.
With that I will turn the call over to Ryan who is our Chief Executive Officer Ryan.
Thank you Larry and good morning.
We appreciate everyone's interest in Flotek and for joining US today as we discuss our second quarter 2023 operational and financial results.
As most of you know this is my first earnings call as CEO of Flotek and I'm honored to be in this role is such a transformational time in the organization.
I'd like to take a moment to thank harsha for his tenure as interim CEO and congratulate him on his return to Flotek board of directors as chairman.
Now turning to the quarter, our second quarter performance demonstrates the meaningful progress we've made in improving flotek business fundamentals as we execute our corporate strategy.
This in turn has resulted in a significant increase in the profitability of Flotek is complementary and unique business segments.
Furthermore, I expect the organization to continuous trajectory of improving results for the remainder of the year.
Let's make no mistake, our efforts are laser focused on revenue growth market share expansion and cost efficiency gains via our differentiated technologies and both chemistry and data analytics solution platforms.
Both carry an undeniable value proposition and maximize our customers' value chain, while generating a meaningful return on investment for our shareholders.
With that in mind, I'd like to turn to slide seven and touch on our second quarter highlights.
I'm pleased with the overall results as we delivered a 72% increase in total revenues in the second quarter of 2022.
We also had strong growth in gross profit, which more than doubled from the first quarter of 2023 we've.
We reported positive adjusted gross profit for the second consecutive quarter and showed an improvement in adjusted EBITDA for the eighth consecutive quarter and are now forecasting positive adjusted EBITDA before year end.
Our transactional <unk> business revenues increased 68% from the first quarter of 2023.
This is due to our rapidly expanding customer base and continued adoption of our prescriptive chemistry management business model, which has exhibited 171% growth in applications of our proprietary complex nano fluids compared to the second quarter of 2022.
Also our data analytics revenues have continued to gain momentum as the first half of 2023 revenues have approximately equal we had in all of 2022.
These improved results reflect a positive and impactful changes we have achieved during a very short period of time most.
Most importantly, all of these milestones were achieved with zero recordable and lost time incidents in the field of operations.
I'd like to thank all of our employees for their commitment to safety and service quality and achieving these outstanding results.
Now as highlighted on slide 12, Flotek continues to differentiate itself as the collaborative partner of choice in the industry for sustainable optimized chemistry, and data solutions for E&P operators and oilfield service providers.
With truly distinguishes flotek from its peers is our global presence in over 15 countries, including all major U S shale basins, and our extensive expertise providing sustainable chemical and data solutions on over 20000 completed wells worldwide.
A recent example of this differentiation is the approval of Flotek slick water system Biram coat. Our <unk> solution is now one of only two approved hydraulic fracturing systems currently being utilized in Saudi Arabia.
This competitive advantage not only relates to being technologically advanced but also being operationally efficient and reducing cost and environmental impact while improving the overall performance of <unk>.
Our customers' assets.
Another important aspect of Flotek <unk> competitive advantage is our producer customers reporting enhanced well productivity, while utilizing our chemistry applications.
Slide 16 depicts a comparative production analysis of wells utilizing Flotek prescriptive chemistry management for wells in the Permian basin versus wells from non Flotek west.
As shown in the graph wells and employed our prescriptive chemistry management exhibited a 26% average uplift in performance or accumulative increase of 75000 barrels of oil equivalent after 24 months compared to wells that did not have flotek chemistry.
This highlights how powerful flow takes commercial solutions are and delivering improved asset performance. While this only represents a sample of results from the Permian basin.
We are also seeing similar results in all other shale basins.
Turning to slide 17, we continue to leverage our expertise into emerging and existing market verticals. This positions flotek to capitalize on our proprietary patents technology advancements and collaborative partnerships that have proven commercial applications in other industry sub sectors, providing six significant.
<unk> future growth opportunities, while diversifying our revenue stack.
We believe that the demand for our sustainable chemistry solutions will continue to increase and will provide opportunities in other international and domestic market verticals, such as industrial geothermal agricultural solar and hydrogen.
Turning now to slide 18.
As discussed last quarter, our data analytics segment received the first prototype of the next generation of spectrometer for field testing and validation, which is shown on the slide.
The proprietary <unk> analyzer can monitor the quality of hydrocarbons and real time versus traditional sampling practices.
When operational this next generation <unk> unit will represent a massive step change in our manufacturing capabilities and operational calls for the data analytics segment as we make the important transition to a more subscription based service model.
As outlined on slide 19 extensive industry applications exist throughout the upstream midstream and downstream segments.
We believe the next generation model will have the scale ability to further penetrate what we believe will be any myths upstream market opportunity.
I would now like to turn the call over to Bob to discuss the detailed financial highlights.
Thanks, Ryan it's great to be with you all this morning.
Want to start by saying that everyone here at Flotek is extremely excited about the results we announced yesterday.
Yesterday's release checks a lot of the boxes regarding items that we've been working hard to achieve and its shareholders had been wanting to see.
Moving back to slide seven for a bit we reported a huge growth in gross profit we generated strong revenue contribution from our transactional Kimberly free business, we provided visibility on reaching positive adjusted EBITDA before year end and we updated you on significant progress towards securing an a b L.
Our success in execution during the first half of the year gives us confidence in achieving our full year guidance, which calls for total revenues of between 210 and $230 million, which equates to more than 60% growth in annual revenue versus last year and achieving the 8% to 10% adjusted gross profit margin hitting.
Hitting the midpoint of these two metrics would represent a nearly 22 million annual improvement in adjusted gross margin versus the results we achieved last year.
Obviously quite a turnaround in an accomplishment that we're proud of.
Moving to the income statement sequentially revenues were up 5% in spite of a well documented pullback in upstream land activity during the quarter.
As Ryan discussed our transactional chemistry revenues jumped by more than $6 million during the quarter and ended up making up over 30% of total revenue, which is up from only 19% in the first quarter.
This is a significant accomplishment as it provides a revenue source diversity in terms of reducing our customer concentration.
Turning to slide 10, our second quarter gross profit was up 108% from the first quarter and our adjusted gross profit, which excludes certain noncash costs achieved a 92% jump from the first quarter.
Gross profit margin and adjusted gross profit margin during the quarter increased two eight and 10% respectively.
With back to back quarters of positive gross profit our cumulative gross profit through the first two quarters of 2023 is running nearly nine and $10 million higher than the cumulative gross profit for the preceding two final quarters of last year.
Contributing to positive margins during the quarter were $1 2 million of revenue related to the pro Frac contract modification that we announced earlier this year along with a 13% sequential reduction in our freight costs. This marks the second consecutive quarter of double digit reduction in freight costs in terms of dollars second quarter freight costs were about a half of.
Less than first quarter, 2023, and about $1.3 million less than the fourth quarter of 2022, and that's that's in spite of revenues being 5% higher for for for the second quarter.
Moving to slide 11 second quarter, adjusted EBITDA improved another 48% sequentially.
As noted in yesterday's release, we are now forecasting reporting positive adjusted EBITDA before the end of this year.
And I'm sure. Many of you are very excited about the prospect of no longer having to discuss the relative improvement in negative numbers.
Moving to SG&A as a reminder for everyone. The first quarter of 2023 did benefit from a $1 1 million credit for noncash stock comp that was associated with head count reductions that we implemented in the first quarter, excluding stock comp SG&A during the second quarter increased by about half a million dollars and included.
Legal fees related to the settlement of a portion of our legacy litigation and it also included the final costs associated with our CEO transition.
We have now settled two of the three components in our legacy litigation. So we're encouraged that this can be wrapped up before the end of the year.
Accordingly, we expect G&A costs to trend back down during the third quarter.
Quickly touching on the severance expense credit during the quarter, we had previously accrued certain severance costs associated with the legacy litigation just discussed.
In connection with that settlement of this portion of the litigation, we were able to reverse that accrual during the second quarter.
Moving to the bottom line, we reported a slight net loss this quarter versus 21 million of net income during the first quarter net income for the first quarter did benefit from a $26 million noncash gain associated with the fair value change of our convertible notes as well as a four and a half million dollars gain associated with our PPP loan forgiveness.
Final tranche of the convertible notes converted in May to $63 5 million shares. So we will no longer had the earnings volatility associated with the fair value measurement of the notes going forward.
Touching on the balance sheet in connection with the conversion of that final tranche of convertible notes to equity. Our June 30 balance sheet is now almost completely de levered with only about 300000 of total debt reflected.
Moving to slide 21 real quickly I am very pleased to report considerable progress has been made towards securing an ABL facility.
The fact that alone like this was simply unavailable to Flotek a year ago highlights the substantial financial improvements made by the company over the last few quarters.
The ABL is expected to be secured by certain of our receivables inventory as well as our Marlow, Oklahoma blending facility.
We recently received credit approval from the prospective lender and we are reviewing our loan documents currently and completing some final administrative items prior to closing.
We're very excited about the expectation of announcing the results of this process well before the end of the month.
Quickly touching on the NYSE sub $1 listing issue, we're obviously going to monitor how the stock trades over the next few weeks.
As we've mentioned before our strong preference would be to cure the deficiency organically by leveraging the potential benefits from the very positive financial results, we reported yesterday additional.
Additional updates on our progress regarding an ABL as well as our participation at the Intercom conference next week or.
Our compliance deadline is October 12, so we have some time before we have to decide.
As a reminder, and as we mentioned last quarter, we already have shareholder approval to enact up to a one for six reverse split if necessary.
Touching upon our special shareholder meeting scheduled for September 5th we have filed the definitive proxy statement and shareholders should be receiving voting materials. We have engaged a proxy solicitor conducting outreach campaign to ensure that we get maximum participation from shareholders.
Our board unanimously recommends a vote for both proposals as a reminder, everyone shareholder approval of the June 2020, 2022 pre funded warrants Hello, Brian Pro Frac provides flotek the opportunity to receive $4 5 million in cash proceeds upon the conversion of those warrants to shares obviously.
That's something that would benefit all shareholders.
There's a lot to be proud of in terms of what we've accomplished at the midway point of the year.
Through June we've reported a nearly $10 million improvement in adjusted gross margin and nearly 7 million improvement in adjusted EBITDA as compared to the first six months of last year.
We expect to see gross margins continue to rise over the coming quarters, and we will keep attacking SG&A at every opportunity.
As it relates to SG&A cuts, we recently executed a new lease for our corporate headquarters.
We expect to complete the move over the next two weeks with a significantly reduced footprint, our new office lease will Brian will provide annual savings of over $500000 versus the current office location, we were exiting <unk>.
That concludes my remarks, I'll now I'll turn the call back over to Ryan for closing comments.
Thanks Bond.
Now turning to slide 22.
In summary, Flotek is a compelling investment opportunity today as a turnaround momentum we've gained in right sizing our business and improving our profitability is not currently reflected in our share price and I am confident in our ability to execute our corporate strategy going forward.
Well it takes new leadership team has deep industry experience to lead Flotek forward and execute on our next phase of growth.
We have a complementary business segments and will continue to drive revenue expansion and a sustained improvement of profitability as we anticipate delivering greater than 60% growth in annual revenues and greater than $20 million in annual gross margin improvement.
We maintain a $2 billion backlog of future revenue over the next decade is supported by our long term <unk> partnership and.
In addition, we expect ongoing domestic and international growth in our high margin transactional chemistry and data analytics businesses as we continue to gain market share in both areas.
We also continue to benefit from our cost control initiatives that enhance profitability and underpin a transition to positive adjusted EBITDA by year end.
And finally, we maintain a strong balance sheet with very little debt that is can be augmented with the additional liquidity from the proposed ABL facility. We are working to put in place in the near term.
We realized that there is more work to be done, but we're all positioned to capitalize on the significant opportunity set we have before us as we build value for our shareholders. We appreciate the continued support of all our stakeholders and we hope that you share our excitement regarding the future of Flotek.
Operator, we're now ready to take 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 you're using a speaker phone. Please pick up your handset before pressing the keys to.
To withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
The first question comes from Don Crist with Johnson Rice. Please go ahead.
Good morning, guys. How are you all this morning.
Hey, Don.
Ryan I wanted to start on slide 16, obviously haven't seen this data before but the 26% uplift in.
And well performance number one how widespread or how many wells is that covering and number two you know.
Is this really kind of.
Getting some traction for your transactional business.
Out there in the Permian.
Yes, Don when you look at this data we were very meticulous about how we were doing this analysis and we looked at over 1800 wells in the Permian Basin more importantly, we set strict guidelines on when we looked at it lateral length completion designs proppant intensity and fluid system choice, which we got from the publicly available.
<unk> data and you're 100% correct that we are starting to see significant traction in our transactional business driven by the value proposition around our customized chemistry technologies.
What's unique about this is we went down this pursuit has kind of been a longtime pursuit for us in that we started these EUR type interactions with our customers almost 18 months ago, and you're really starting to see them come to fruition.
As you can see what's coming out of this data.
It's very exciting data in one one other question on the cost side, you know you call out freight and logistics cost coming down I know you've been working on that for quite a while what where are we in that progress and do you see additional cost savings going forward.
Yes, so if we look at freight when you look at say, where we ended the year in Q4 'twenty two versus this current quarter, our freight costs were down about $1.3 million.
When we had an increase of almost 500000 in revenue.
And more importantly, we saw it just from Q1 to Q2, we saw a 500000 dollar drop in freight cost with increasing revenue. So you can you can start to imagine that we are gaining significant efficiencies in terms of how we look at our long term short hauls and also when we look at it and field delivery.
Okay, and Bob just one for you now.
Now that the convertible notes are all converted.
Can we get a clean share count I mean, obviously, there's the warrants that are still out there, but what's the clean share count today.
Yeah, assuming both of the items in the special meeting passed theirs to two tranches of pre funded warrants that need to be approved by shareholders. The final share count is going to be somewhere around 190 million shares.
Alright, I appreciate the color guys good quarter I'll turn it back.
Thanks, Tom Thank you.
Our next question comes from Richard Darnley with long point partners. Please go ahead.
Good morning.
Doing the math on your comment about.
Transactional business.
30% of revenue.
15 $2 million versus 9.1 in the first quarter.
Correctly.
That's correct it was up about $6 million Q1 to Q2 right.
So then your your pro Frac business would be down about 11% quarter to quarter.
Yeah, it's off about 10% from the first quarter, that's correct as well.
And what were the dynamics there.
So theres a couple of things to look at and so a lot of this has been spoken about in the public market is that what we've seen is a little bit of disruption in activity, where the E&P operators, who were transacting the business for pressure pumping activities in completions, we've started to see what I would call white space in beta.
Lean activities traditionally speaking, we would see one to two days, maybe three days transitioning pad to pad et cetera, but we're seeing a lot of customers buying in the spot market and we're seeing bigger delays between pads, sometimes five to seven days. So although your average fleet count is staying relatively the same quarter on quarter the.
Amount of activity are pumping days went down a little bit and so with some of that we would look at our total fleet count we've moved chemistry on a similar number of fleets, but when you average out the volume it was down a little bit, particularly in what we saw in may but we've seen that come back strong in July and coming into August .
Right I see.
And one slide six come back to the productivity question.
How much of that improvement.
Uh huh.
Yes kind of answer but how much of that is.
Due to analytics and how much is due to nano fluids.
How much is due to the rest of everything.
So that's a great question and something that we have kind of combined in our overall approach.
You heard me mention that we have 20000 wells under the belt of applications of our chemistry. So you in combination with what our data analytics group does with the chemistry, we've done a lot of I'll say machine learning all the applications of our proprietary chemistries in the various basins and target zones, and we brought that into the into the discussions were.
Our customers, how we choose our chemistry and what's even more important is we look at our overall engineering process that we call prescriptive chemistry management, where we look at the X Ray diffraction other coatings and core samples we look at the produced water and its composition, we looked at the compositional analysis of the potential crude in.
That are coming out of the reservoir and we also look at other potential opportunities around the biocide selections et cetera, and we give them a holistic customized approach, which is choosing the right friction reducer clay control corrosion components as well as when we can have an application of a surfactant enhanced possibility, which you look at it.
Flowback aid or a complex nano fluids, because what we see is sometimes a traditionally when it's just look at pure complex nano fluids, it's a little bit higher but we look at holistic approach of the chemistry management side, and that's where we get there.
26% number and I'll say, it varies well to well depending on the formation type and completion design.
So.
You're saying that it's not possible to break out.
Nano fluids and the analytics and so on it's just a bit.
Pat.
I think it is in terms of weekend look at it just where we have specific to just complex nano fluids being applied we have those analytics, but we.
Like to prefer to look at our holistic engineering approach for the full design of the slick water system that we're utilizing but we do have that data and there's some I think some of the more detailed presentations that we'll be doing it some of the upcoming investor conferences, we will talk specifically around impacts of complex nano fluids versus the full engineering and scope design.
Okay. Thank you.
Again, if you have a question. Please press Star then one.
At this time there are no more questions.
Yep.
Hi.
Your next question comes from Don.
Just with Johnson Rice. Please go ahead.
Thanks for letting me back in again.
Again guys.
Ryan I just wanted to ask about J P. Three obviously you had some field tests going on with the new with the new design, where are we in that and are you seeing some interest in more widespread adoption of J P. J.
Yeah, Dennis that's another good question is that as I mentioned, we have the the new.
Generation model in the field testing, we've got two units the testing has grown a golf phenomenal and.
We're expecting scale up of that business coming to the latter part of Q4 and going into 2024 for having the new units on the production side coming out.
And that's opened up we recently went over with our board kind of strategic applications to this new technology into the field and we see significant opportunities in the upstream segment by looking at the quality and energy count in beta use of natural gas. We look at flare gas operations. We also look at power generation overall, whether you're powering rigs frac.
Please electrical turbines et cetera. So we're really excited about J P. Threep and when you look at what JP, turning chemistry do together.
We see not only applications in domestically in North America land, but we see significant applications for these internationally.
For both units and then particularly even offshore for a chemistry. So it's really exciting about what synergies being created between data and chemistry alone could because data is the monitoring of the actual chemistry at the well site.
Right. That's that's very exciting going forward and bond if I can ask just one more of you as well.
Obviously, there were some moving parts in G&A. This quarter are you still pretty confident that you can get it close to that $5 million a quarter run rate or below by year end.
Yes, we're working hard that's the goal internally, we just we had a few <unk>.
Items that we mentioned here some higher legal costs, where we're trying to get to this litigation wrapped up we were able to knock out two of the three components. We have one piece left.
We've got the CEO transition cost behind us So, yes, I mean, Dan that's a that's the goal internally and that's what we're working towards.
I'm looking forward to seeing positive EBITDA going forward I appreciate it guys good call. Thanks.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Larry <unk> for any closing remarks.
Thank you again for joining us today I would like to remind you that flotek CEO , Ryan Israel will be presenting next Tuesday August 15th.
At Entercom Denver, the energy investment conference in Denver at 850, a M Mountain time, he will be joined by CFO bond climate and hosting meetings with investors throughout the day.
A copy of the presentation that will be posted to the website a copy of the presentation will be posted to the website. Prior to the start of the presentation. Dr. <unk> Zhao will also be participating in a service industry panel discussion at.
At the same conference on August 16th at $9 50, a M. Both events will be webcast and we look forward to seeing many of you next week. Thank you again for joining US today. Please feel free to contact the company. If you have any additional questions have a good day.
Okay.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.