Q2 2023 ProFrac Holding Corp Earnings Call

Greetings and welcome to the profile holding Corp, second 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.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Mr. Rick Black with Investor Relations.

You may begin thank.

Thank you operator, and good morning, everyone.

We appreciate you joining us for pro Frac, holding Corp's conference call and webcast to review our second quarter 2023 results with me today are Matt Wilkes Executive Chairman Lad, Wilks, Chief Executive Officer, and Lance Turner Chief Financial Officer.

Following my remarks management will provide high level commentary on the financial highlights of the second quarter of 2023.

As well as provide the business outlook before opening the call up to your questions. There will be a replay of today's call available by webcast on the company's web site at P. F Holdings Corp, Dot com as well as the telephonic recording available until August 17 2023.

More information on how to access. These replay features is included in the company's earnings release.

Please note that information reported on this call speaks only as of today August 10, 2023 and.

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 laws, including management's expectations for future financial and business performance.

We're looking statements reflect the current views of <unk> management and are not guarantees of future performance.

These risks and uncertainties and contingencies could cause actual results performance or achievements to differ materially from those expressed in.

In management's forward looking statements.

The listener or reader is encouraged to read pro Fracs Form 10-Q.

And the other filings with the Securities and Exchange Commission, which can be found at SEC Gov or on the company's Investor Relations website under the SEC filings tab to understand those risks and uncertainties and contingencies. The comments made today also include certain non-GAAP financial measures as well as other adjusted.

Figures to exclude the contributions of Flotek.

<unk> details and reconciliations to the most direct comparable consolidated and GAAP financial measures are included in the quarterly earnings press release, which can be found on the company's website and now I would like to turn the call. It would've <unk> executive Chairman, Matt Wilkes Matt.

Thanks, Rick and good morning, everyone. Thanks for taking the time to join us on the call today.

My prepared remarks, we will take a deeper dive into the performance of our subsidiaries and Lance will provide additional insight into our financial performance our.

Our second quarter results were challenged as a result of customer consolidation coordination with customer capex schedules and the impact of the recent banking crisis on private operators.

Despite these external challenges, we generated $182 5 million and adjusted EBITDA reduced our debt by 86 million and generated 56 million of free cash flow.

We have adjusted our cost structure to rightsize, our organization through the acceleration of acquisition synergies and head count reductions most of these reductions will be reflected in our third quarter results.

As we move through the second half of our year, we expect to see our mining assets grow sales and expand customer footprint.

We're pleased to see improving industry fundamentals and disciplined behavior from our peers, which support a constructive outlook in the second half of 'twenty three.

I wanted to take a few minutes to discuss how we think about pro Frac holdings, and how we view the industry in relation to our subsidiaries.

The first thing I want to emphasize is that we are a holding company.

We are the premier vertically integrated energy services holding company offering a modern suite of complementary services and technologies to the industry.

Well, we started out as a frac company, we've expanded and transformed into three major segments stimulation services.

Production and manufacturing.

Yeah.

The fastest growing of these segments has been our proppant segment, which is the largest in basin proppant producer in the country.

We believe this business is underappreciated, both in terms of potential and in terms of value. It contributes to the pro frac platform as well as ACDC stakeholders.

We've been focused on diversifying the customer base and signing contracts for the proppant production division in.

In Q2, we were pleased that third party sales reached 70% of revenue we continue to pursue additional contracts that increased diversification and improve stability and we expect to grow the customer base and total production at lower cost levels.

Lastly, we believe the currently proposed regulation by the department of interior and related to the D. S. L.

It had a minimal impact on our proppant production. This is because we have we believe that our west Texas assets are well outside of the high risk habitats.

Our goal is to provide more certainty and less volatility to our proppant division, while boosting our utilization to a level that will optimize profitability.

This segment has the potential to generate two to three times. The EBITDA that we had in the second quarter. We highlight the segment to illustrate the incredibly high cash conversion.

<unk> sales and to demonstrate the stability that it lean multi mine company can achieve.

In terms of the overall market environment, we are optimistic and encouraged we're optimistic because we are seeing pricing remain constructive while lower asset utilization impacted second quarter earnings. We are confident that pricing remains constructive levels and market fundamentals continue to be supported for a stronger second half of the year.

Sure.

We're encouraged because we see multiple players idle capacity and remain steady on pricing, we see a number of smaller players that are aggressively bidding the spot work.

But we view this is isolated and unsustainable.

Number of fleets idled in the last six months are considerably higher than the number of stacked fleets. They could go back to work in a responsive manner.

In addition, natural gas pricing is constructive, which we believe will provide a built in catalyst as we look forward to the remainder of 2023 as.

As we approach the back half of 'twenty three we believe we will see operators ramp activity as they prepare for their 2024 programs.

I remain proud of what this team continues to accomplish and believe we are well positioned to capitalize on increasing industry activity.

Our fundamental strategies haven't changed and neither has our primary goals for pro Frac.

We continue to execute on our goals are pumping efficiencies are best in class, we offer a portfolio of tier four dual fuel and electric fleets capable of simultaneously delivering cost savings and emissions reductions for our customers helping to further separate us from our peers.

We are focused on maximizing utilization and profitability and continue to adapt our cost structure to further improve our cash flow.

As always industry discipline remains a welcomed nerd.

For <unk>, we continue to believe that our disciplined approach will produce meaningful shareholder value.

With that I'll turn the call over to Lat.

Thanks, Matt.

As always I'd like to thank our team for their hard work and dedication as they continue serving our customers.

We firmly believe the great customer service distinguishes our company in the market and is the direct result of the strong culture within our teams to continually serve our customers.

Turning to the quarter as many of you who closely follow our industry has seen their meaningful shifts in activity during the second quarter that resulted in white space and subsequent fleet reduction.

That being said, Matt did a great job detailing how pricing remains constructive and industry discipline continues to support a positive outlook.

<unk> differentiated and vertically integrated service offering is the cream of the crop in our industry.

As we see activities level read levels rebound.

We will purposely deploy our fleets only where they can earn attractive returns and generate cash for us to return to our stakeholders.

We don't want to get caught up in short term dislocations in a healthy industry.

Customers want and service providers with assets and technologies that can reliably deliver efficiency and cost saving.

We fit the bill hands down.

One of the youngest and most advanced asset base in the industry.

From a stimulation services standpoint, we continue to have strong interest in our fuel efficient fleet.

We're seeing equipment type drive utilization and diesel appears to be the swing capacity.

We've also slowed down our capex spend reduced the fleet growth spend and lowered engine upgrade capex in response to activity levels.

White space accelerated in Q2, but it appears to have bottomed out in may.

After the past year of acquisition, we are adjusting our commercial strategy to target a more diverse customer base with committed contracting approaches across the fleet.

Our goal is to capture longer term dedicated work reducing volatility in the business during the short term market dislocations.

Turning to our proppant production segment.

As we guided to last quarter. The second quarter represented the first full quarter contribution from all of our eight mines sand volumes were up as a result, you are constrained from what we believe is their full potential.

Due to lower industry wide utilization.

The proppant segment continues to show signs of improvement our.

Efforts to diversify the customer base reached an all time high for third party sales and we continue to pursue additional contracts that increased diversification and improved stability.

We expect further growth in this segment as the customer base expands production increases and costs are lowered.

As we've discussed before our vertical integration strategy significantly benefits, both our customers and pro frac throughout the cycles.

Our ability to bundle fleets with internally produced sand logistics and chemicals saves our customers significant cost.

Looking to the back half of the year, we're positioning ourselves to reactivate fleets in Q4, and Q1 as customers to solidify their 2024 budgets.

The general trend suggest improved activity as we progress into next year.

When pursuing commercial opportunities pro Frac will always prioritize generating returns over winning market share we are working diligently.

With our customers as they build out their calendars with the goal of minimizing gets and integrating more materials into our fleets.

Now I'll hand, it over to Lance to provide more detail on our financial results.

Thank you, Matt as Matt mentioned, we generated 183 million and adjusted EBITDA $56 million of free cash flow and we reduced our debt by approximately $86 million during the quarter.

On a consolidated basis revenue for the second quarter totaled 709 million a decrease strive driven primarily by lower activity levels as outlined by Matt and land.

Selling general and administrative costs were 70 million in the second quarter down slightly from the first quarter.

Second quarter SG&A included a number of onetime items, such as 9 million acquisition and litigation related costs.

This was partially offset by 7 million reduction in SG&A and our other business activities segment relating to Flotek.

SG&A also included noncash stock based compensation of approximately $9 8 million.

We believe our baseline SG&A was down approximately $1 million from the prior quarter, when excluding flotek and these various items.

Additional reductions are expected in the third quarter as a result of our cost reduction efforts.

Turning to our business segments. The stimulation services segment generated revenues of $608 million in the second quarter.

One from the first quarter, primarily due to lower fleet count and more white space on active fleets.

Adjusted EBITDA for the segment was 123 million compared to 206 million in the previous quarter.

In response to the white space that we outline we reduced our fleet count at the end of the second quarter and reduce fleet count again in the first half of August .

We believe this calendar optimization will allow us to capture.

Significant cost savings in the third quarter and beyond.

Profit production segment generated revenues of $110 million in the second quarter up approximately 34% sequentially.

Adjusted EBITDA for the profit production segment totaled $58 million up approximately 40% from first quarter.

The revenue uplift was primarily driven by the full impact of all eight mines during the quarter compared to approximately $5 five active mines in the first quarter.

While we saw an uptick in total production, we are focused on getting total output higher and as we improve efficiencies at our plants, we expect to see a lower cost per ton.

The manufacturing segment generated revenues of 31 million in the second quarter down approximately 54% from the previous quarter.

Approximately 73% of this with intercompany revenue for products and services provided to the stimulation services segment.

Adjusted EBITDA for the manufacturing segment was $3 1 million down from the first quarter.

This segment was impacted by lower orders by our stimulation services segment as they reduced equipment related expenditures and focused on utilizing inventory on hand.

Cash capital expenditures totaled 98 million in the second quarter.

As we focus on reducing our capex for the remainder of the year, we expect our total capex to be approximately 300 million, which reflects the deferral of our fleet upgrade program, including tier four upgrades and electric fleet deployment.

We will remain disciplined with our capital allocation plans and continue to look for areas to further reduce growth capex spend.

Operating cash flow was 154 million during the second quarter, we continue to manage our receivables and payables to manage liquidity. In addition, we are focused on consuming the inventory that we have built over the last year, which we expect to start providing a working capital benefit to pro frac in the back half of the year.

Yeah.

Total cash and cash equivalents.

At the end of the quarter.

It was $27 million.

We had a total liquidity of 164 million consisting of a combination of cash and $137 million of availability under our asset based credit facility.

Yeah.

At the end of the second quarter, we had approximately $1 2 billion of debt outstanding ads.

As Matt mentioned, our focus for the remainder of 2023 is generating free cash flow for debt repayment.

We illustrated this priority in the second quarter as we produced free cash flow of roughly $56 million, which we used in combination with cash on the balance sheet to pay down approximately 86 million of outstanding debt.

With that operator, please open the line for questions.

Thank you we will now be conducting a question and answer session.

If you would like to ask a question. Please press star one on your telephone keypad.

<unk> tone will indicate that your line is in the question Kim you.

You May press Star two if you would like to remove your question from the queue.

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One moment, please while we poll for questions.

Thank you. Our first question comes from the line of Luke Lemoine with Piper Sandler. Please proceed with your question.

Hey, good morning, guys.

Good morning.

Believe you should've had about 35 active fleets into Q2.

Can you provide some commentary around the magnitude of the fleets that you guys are on the sidelines Jan and then in August .

Yeah, we're not going to provide any commentary on it while we focus on is maximizing the utilization of every asset that we have and focusing on right sizing the cost structure associated with that.

What we've seen across the industry as a pullback in overall available active fleets.

And what we're really encouraged by seeing the.

A similar approach to reducing cost associated with inactive fleets.

And so we we believe that provide some sensitivity for ACA.

Activity levels picking up.

And what that means for for.

Pricing longer term.

It's the sensitivity is really really there on on on the upside we're already seeing some green shoots here and believe that the second half of the year is going to be much more robust than people expect.

Alright, maybe try it differently or Matt to the upside any quantification right, where do you think.

Or how many fleet reactivation is for Frac and for Qunar into 'twenty four.

We're not going to we're not going to guide to a fleet count.

But we're paying very close attention to rig count, but one thing I would point out to with these with these operators is dead.

The DUC inventory in the way that the industry has really looked at building DUC inventory is it.

It has changed it has completely changed.

Our high DUC count is a feature of low interest rates and with rates coming up the way that they have the cost of capital associated with with a partial spin.

And unproductive asset is not the best it's not it's not the most efficient use of capital and we think that that's going to keep.

DUC inventories.

Subdued.

And activity levels will more likely be closely related with with rig count when we look at rig count and the structure.

Just looking at it at a high level, we're seeing a lot of the private guys deploy rigs and get back to work with it where the cost of capital is really excited to see how quickly following those rigs youll see frac fleets.

Yeah.

Okay, and then I'll try one more here, what's the capex reduction it sounded like the equally deployments were pushed to the right but can.

Can you just update us on what the equally deployment schedule it looks like probably over the next 12 to 15 months.

So we had some under construction that the we've we've.

Pushed into 2020 for delivery.

And we're focusing on generating cash, reducing capex and paring down our overall leverage.

Okay got it thanks, so much Matt.

<unk>.

Thank you. Our next question comes from the line of Alex <unk> with Stifel. Please proceed with your question.

Hi, Good morning, everyone. Thanks for taking my question.

Thank you.

So just to kick us off here. So we've seen some data points that spot price excuse me spot pricing has been a week or in the Permian for profit I'm. Just curious have you guys haven't seen that as well and can you talk about maybe what prices are doing in the haynesville and I guess by that affect also the Eagle Ford and I guess also how a perfect place in that market.

Certainly so in West Texas.

There is some spot pricing that is that has come down from.

What has otherwise been a pretty narrow tight range.

Contracting rates are well above the spot market and these are isolated situations. The other thing did include as not all mines mine gate pricing.

And how you look at these basins.

That's more of a logistics business than it is anything else and if you look at the logistics differentials from mine to mine to customer to customer.

There's there's huge gaps that.

It's easy to Miss when you model it out so.

What we do is we go in and we focused really closely on where our logistics advantages are and if there are spot pricing or if there's a competitor out there that.

It has a disadvantage on logistics, we just don't compete with them and worry about them. We don't we don't have to be the right solution for everyone, but the customers that we work with we're the right solution for them and we can earn a higher price per ton and still save them money.

Understood. Thanks for the color there and also as a follow up can you also talk to customer preferences for bundling frac sand and have you seen any changes with the pricing dynamic across the basin for sand.

Okay.

I think it's horses for courses I think that there are different I think it's less so about the basin and more so about the individual customer and their their format.

It's difficult to get full bundle with a with an operator, that's got a full blown procurement team.

And but you know we love all our customers and we have a solution for each one and we do our best to work out a solution that works for them.

Understood great. Thanks for the color and I'll turn it back.

<unk>.

Okay.

Thank you. Our next question comes from the line of Don Crist with Johnson Rice. Please proceed with your question.

Good morning, gentlemen, I wanted to continue on the sand discussion I mean, it sounds like since.

You closed performance the team has really gotten to work in an optimized all eight of the mines can you talk about kind of costs and how they've come down because it looks like your profitability kind of ticked up a couple of hundred basis points in the quarter.

Yes, certainly so the way we think about these plants as your costs are almost fixed I mean, your labor costs are going to be pretty consistent gas electricity everything is relatively consistent on these on these businesses.

The variable that moves your Cogs is utilization and volume.

And we continue to see our utilization and the volumes that that word.

Putting out climb.

And at this point all of our costs are essentially covered and so we've we're in a really good spot to continue our growth and profitability.

And as we as we continue to reach our nameplate capacity at each of these assets, you'll see a much stronger pull through.

Well, we love so much about that business as you know one our costs are relatively fixed so everything we do from here on is.

It's very high cash conversion rate and the quality of the earnings on that business are.

Today, they really stand out compared to a capital intensive business like Frac services.

Alright, I appreciate that color and Lance maybe one for you.

As the business has slowed a little bit in the second quarter, how should we think about working capital.

Should it releasing into the third quarter, and maybe possibly into the fourth quarter and generate some free cash flow there.

Yes, so I think.

I think one of the things I mentioned was inventory which has.

<unk> has been building over the past year and so that's the biggest thing that we're focused on to provide that relief.

And then to the extent you know as we as the fleets renew you'll also get that impact.

Impacts so I think that's I think that's a fair assumption.

And any kind of magnitude you'd like to give would that be 50 plus million or so.

I think that's I think that's feasible.

We're targeting are the.

The majority of that on on the inventory side, but that all in.

I think it's it's feasible.

Okay I appreciate the color guys. Thank you.

Thank you.

Pretty bullish.

For for land C U E.

The conservative Conservative Titan.

Yeah.

Thank you.

Next question comes from the line of Dan Kutz with Morgan Stanley . Please proceed with your question.

Hey, Thanks, good morning, guys.

Good morning.

So.

Just looking at the press release, you guys had a comment in there that.

You guys touched on this.

What's that.

As a result of kind of the actions you guys are taking.

How does the cost structure and taking out costs that that's somehow being cleaned up our key profitability metrics.

I appreciate that there you know to be.

Some could be downside.

Just what where you were in in the second quarter, given the comment about about completes coming often in August , but but from a per fleet profitability perspective should we interpret that comment as you guys feel pretty confident that.

Looking at the second quarter.

Profitability should kind of be at that level and.

Third quarter or second half.

How would you guys think about that.

Yeah, so when.

One we've gone ahead, and we've harvested a lot of the synergies from the acquisitions that we've made over the last year.

And we.

We accelerated those especially when you when you have a fleet count reduction.

Normally be taken care of through turnover.

Natural attrition has been something that we took a more direct approach and.

Brought that forward at a much quicker fashion.

The other part is is.

We took our entire calendar and said look we need to compress this.

As much as possible.

There is no reduction to our calendar and how many hours will pump and how many services will provide but we want to make sure that we optimize the assets that are working so that we increase the utilization and maximize.

Those assets as much as possible how do we cover the same work.

With fewer resources.

And then focus on them with.

Everything that that that you need to to maintain the highest level of pump hours per fleet.

And then cut all day on associated costs.

And by doing that we returned the business to a level of profitability on a per fleet basis that we're known for.

Yeah.

Got it.

Understood.

I want to go back to.

Pop up are not some comment.

When I heard it correctly you bet.

And you said that.

If we look at the second quarter EBITDA that the potential for that business could be two to three X that level and and I was just wondering if you could you could kind of unpack.

What that might contemplate in terms of you know is it is it higher pricing or higher margins or higher utilization.

You kind of answered the question.

Previously, saying that.

Oh, you mean utilization is the name of the game, but I was just wondering if you could you could help us quantify what.

It might be possible in you know two or three <unk> EBITDA.

Yes, certainly the EBITDA that we produced with at the utilization rate that we had in Q2.

Carried the full fixed cost and burden that we would have at a much higher utilization rate.

So.

When you start looking at a lower utilization than in.

Delivering results that that.

Seed well exceed that fixed cost.

You look at the increase of activity and higher utilization rate with the same fixed cost it converts.

And it gives you a nice lever.

The result on on your pull through.

I think that's a very very attainable.

Our goal and our expectation is to be able to deliver that in a much quicker fashion than.

Mobilizing a.

Mobilizing in a relative way on your Frac services side.

Got it that's all helpful. Thanks, a lot I'll turn it back.

Thank you.

Thank you.

This concludes our question and answer session I would like to turn the floor back over to management for closing comments.

Thank you operator.

<unk> is purposely built a dynamic platform capable of delivering strong results through market cycles, although the second quarter posed some challenges we've already begun to see these headwinds subside and we believe that we are incredibly well positioned to deliver meaningful shareholder value in the near term.

Thank you for joining us today, we look forward to speaking with you again next quarter.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.

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