Q4 2023 Flotek Industries Inc Earnings Call

Operator: Good morning, ladies and gentlemen, and welcome to the Flotek Industries fourth quarter and year-end 2023 earnings conference call. At this time, please note that all participant lines are in a listen only mode.

Good morning, ladies and gentlemen, and welcome to the Flotek industries fourth quarter and year end 2023 earnings conference call. At this time note. That's all participant lines are in a listen only mode. Following the presentation. We will conduct a question and answer session and if at any time. During this call you require immediate assistance. Please press star two.

Ryan Gillis Ezell: We expect sustained growth in reservoir-centric and International Chemistry revenues that should help offset the headwinds of the slowing upstream completion environment. On a more macro level, the demand for oil and gas is expected to expand for the next decade, with further requirements needed through 2045. Long-term investments in both short and long barrel cycles will be necessary to maintain production and add the required incremental supply. Despite the near-term volatility in commodity prices, the Fundamentals for Energy Related Services remain strong.

Operator: Following the presentation, we will conduct a question and answer session. And if at any time during this call you require immediate assistance, please press star zero for the operator. Also, please note that this call is being recorded on Wednesday, March 13, 2024. And I would like to turn the conference over to Mike Critelli, Director of Finance at Flotek. Please go ahead.

Oh for the operator also note that this call is being recorded on Wednesday March 13, 2024, and I would like to turn the conference over to micro Tele director of finance at Flotek. Please go ahead Sir.

Mike Critelli: Thank you and good morning, everyone. We appreciate your participation in Flotek's fourth quarter and full year 2023 earnings conference call. Joining me on the call today are Ryan Ezell, Chief Executive Officer and Bond Clement, Chief Financial Officer. On today's call, we will first provide prepared remarks concerning our business and results for the fourth quarter, full year 2023. Following that, we will open up the call for any questions you have. Flotek's fourth quarter and full year 2023 earnings press release was issued yesterday afternoon. We also posted an updated corporate presentation we will reference on today's call. These can be found on the Investor Relations section of our website.

Thank you and good morning, everyone. We appreciate your participation in <unk> fourth quarter and full year 2023 earnings Conference call. Joining me on the call today are Brian <unk>, Chief Executive Officer, and Bob <unk>, Chief Financial Officer.

Bond Clement: The overall expansion of the global economy will continue to create substantial demand for all forms of energy, which will increase service intensity within the sector. As we look ahead to 2024, our efforts remain laser focused on revenue growth. Market Share Expansion and Cost Efficiency Gains as we are well positioned to capitalize on opportunities both domestically and internationally. The continued adoption of our prescriptive chemistry management for improved reservoir performance, along with the launch of the next-generation JP3 measurement system, unlocks significant upstream market opportunities, as the company expects the data analytics business to grow by 50% in 2024. We are confident that our expanding suite of services positions us to deliver unique and superior solutions to maximize our customers' value. Consistent with this outlook, we believe that the demand for our advanced chemistry and data solutions will continue to increase and will provide new opportunities in market verticals such as industrial, geothermal, agricultural, solar, and hydrogen. Now I'll turn the call over to Bond to provide key financial highlights. Thank you, Ryan, and thank you all for joining us this morning.

On today's call. We will first provide prepared remarks concerning our business and results for the fourth quarter.

Full year 2023.

Following that we will open up the call for any questions you have.

Low Tech's fourth quarter and full year 2023 earnings press release was issued yesterday afternoon.

Also posted an updated corporate presentation, we will reference on today's call. These can be found on the Investor Relations section of our website.

In addition, today's call is being webcast and a replay will be available on our website. Following the conclusion of this call.

Please note that the comments made on today's call regarding projections or 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 the earnings press release and corporate presentation is a management may as management may discuss non-GAAP metrics on this call with that I will turn the call over to our CEO Ryan as Alf. Thank you, Mike and good morning, we appreciate it.

Once interest in Flotek and for joining us today, as we discuss our fourth quarter and full year 2023 operational and financial results I'm.

Bond Clement: Our 2023 results were outstanding by almost any measure. We returned the company to profitability, delivering a significant improvement in all key financial metrics. I echo Ryan's comments on our exceptional results, and I know the entire Flotek team is proud of what has been accomplished, not only in 2023 but over the last two years. Flotek's turnaround execution has established a much stronger financial position than a year ago, and we expect to build on this momentum in 2024. Evidencing this improvement in financial position, I'm happy to report that our 2023 10-K filing will confirm that the going concern doubt that our auditors asserted in their 2022 audit has been resolved. In addition, we expect to report in our 2023 10-K that we have remediated the internal control weaknesses that were disclosed in last year's 10-K. Let's run through a handful of key financial items for the fourth quarter and full year 20 I will be referring to slides in the presentation we posted on the website yesterday.

I am extremely pleased with our results as 2023 was truly a transformational year and we.

Which will restore profitability in all key financial metrics enhanced our liquidity and strengthened our leadership team through the execution of our corporate strategy utilizing chemistry as the common value creation platform.

With a relentless focus on technology, we remain at the forefront of innovation and multidisciplinary advancements there continued to forge gains in market share through our differentiated chemistry and data analytic solutions.

Both carry an undeniable value proposition that 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 I'd touch on our key highlights for 2023.

Adam will discuss in detail in just a moment.

We delivered strong year over year growth in all key profitability metrics, including gross profit adjusted gross profit and adjusted EBITDA with the fourth quarter of 2023, adjusted EBITDA, representing the 10th consecutive quarter of improvement.

Full year 2023, marking our best year in nearly a decade.

The total company revenue was up 38% compared to 2022.

We executed the largest volume of products sold in the company's history.

Bond Clement: Slide seven highlights our accomplishments and the strong financial growth we delivered across the business. Headlining our results were annual improvements in revenue of $52 million, gross profit of $31 million, and adjusted EBITDA improving by $28 million year over year. As it relates to adjusted EBITDA, we reported another quarterly improvement during the fourth quarter. That represents two and a half years of sequential improvements in that metric.

Chemistry revenues from external customers grew each quarter during the year and were up over 21% compared to 2022.

As a result of a rapidly expanding customer base and the continued adoption of our prescriptive chemistry management business model.

Our customized engineering approach combined with our proprietary complex nano fluid technologies continues to deliver wells that outperform adjacent competitor wells in all basins.

Our data analytics revenue saw strong growth of 47% in 2023 versus 2022.

Bond Clement: More importantly, full year 2023 adjusted EBITDA was positive, as Ryan mentioned earlier, for the first time since 2017. Turning to the income statement, as shown on slide 8, we have achieved sustained growth in revenues since 2021, with our 2023 increases from both our chemistry and data analytics segments. Full year 2023 revenues grew 38% over 2022, despite lower North American land completion activities during the second half of the year. Our chemistry revenue from external customers increased by 21% during the year.

This segment has seen a 250% increase is subscription based revenue since 2022, which supports our strategy to evolve to a data as a service business model.

Subscription based services have had a 95% annualized retention rate.

We also expanded our global footprint with a successful commercial launch of our slick water fluid systems in the Kingdom of Saudi Arabia, and established a new interesting in Abu Dhabi to facilitate diverse market share growth and margin expansion internationally.

We also recently announced the addition of Amey Blake weight as the newest member of our senior leadership team as our senior Vice President and General Counsel.

There will be an asset to the organization. She brings extensive sector experienced enjoys at a pivotal time as we look to capitalize on both organic and inorganic growth opportunities.

Most importantly, all of these achievements were accomplished with zero recordable and lost time incidents in the field of operations, thus extending the current strict over 753 days without a recordable incident.

I'd like to take time to thank all of our employees for their commitment to safety and service quality and achieving these outstanding results.

Bond Clement: More impressively, though, comparing the fourth quarter of 2023 to the first quarter of 2023, revenue from external customers increased by 100%. In addition to our success growing our chemistry business, we generated strong growth from the data analytics segment, as revenues associated with JP3 grew 47% over 2022 and are up almost 90% since 2021. Turning to slide nine, fourth quarter gross profit increased for the fourth consecutive quarter as we continue to deliver efficiencies across all aspects of the business supply chain. Fourth quarter gross profit grew to over $9 million compared to a gross loss of $2 million in the comparable 2022 period.

Spect us to continue to build upon this momentum throughout 2024.

Now looking at the quarter in a bit more granularity revenue was slightly down sequentially. This decrease is attributable to the fact that overall market slowdown in upstream onshore activity that has been experienced this year as natural gas continues to face near term pricing pressure.

And despite this decline in overall drilling and completion activity the impact of Flotek has been much less given the execution of our strategy around our differentiator is a complementary chemistry and data technologies.

And we have continued to grow our external chemistry business revenues every quarter this year and they were up another 10% in the fourth quarter.

More importantly, we saw a 75% increase in our railroad reservoir centric technology sales related to complex nano fluids.

Furthermore, the chemistry purchase requirements contained in the long term supply agreement with <unk>, where does that mitigate the volatility of the market. It provides some insulation to flotek operations, we're maintaining economies of scale and stability.

Bond Clement: We reported gross profit of $24 million for the full year 2023, compared to a gross loss of $7 million last year, as the company benefited from the numerous cost improvements implemented throughout the year. Moving to slide 10, Adjusted EBITDA, a 17% sequential improvement from the third quarter of 2023, as that metric totaled $4 million. As noted earlier, this is the 10th consecutive quarter of improvement, a streak that goes back to the second quarter of 2021. Moving to SG&A, the fourth quarter totaled $6.6 million compared to $6.2 million for the fourth quarter of last year. For the full year 2023, SG&A totaled $27.9 million compared to $27.1 million for the full year 2022.

We expect sustained growth in reservoir centric and.

International Chemistry revenues that should help offset the headwinds of the soy upstream completion environment.

On a more macro level the demand for oil and gas is expected to expand for the next decade with further requirements needed through 2045.

Long term investments in both short and long barrels cycles.

Will be necessary to maintain production and add the required incremental supply despite the near term volatility in commodity pricing.

Fundamentals for energy related services remains strong.

Of all expansion of the global economy will continue to create substantial demand for all forms of energy, which will increase services tasty within the sector.

As we look ahead to 2024, our efforts remain laser focused on revenue growth.

Market share expansion.

Cost efficiency gains as we are well positioned to capitalize on opportunities both domestically and internationally.

The continued adoption of our prescriptive chemistry management for improved reservoir performance.

Bond Clement: On a percentage of revenue basis, 2023 SG&A was down by 500 basis points compared to 2022. It is worth noting that the fourth quarter and full year numbers of 2022 included a $1.9 million credit related to the reversal of a bonus accrual. Excluding the benefit of that credit, fourth quarter 23 and full year 23, SG&A were down 18% and 4%, respectively, from the 2022 period.

Along with the launch of the next generation J P. Three measurement system unlocks significant upstream market opportunities as the company expects the data analytics business to grow about 50% in 2024.

We are confident that our expanding suite of services positions us to deliver unique and superior solutions to maximize our customers' value chain.

Assistant with this outlook, we believe that the demand for our advanced chemistry and data solutions will continue to increase.

<unk>, new opportunities and market vertical such as industrial geothermal agricultural solar and hydrogen.

Bond Clement: Moving to the bottom line, we reported net income of $2.1 million in the fourth quarter of 2023 compared to a net loss of $19 million during the fourth quarter of 2022. Net income for the full year of 2023 was $24.7 million compared to a net loss of $42.3 million in 2022. Net income for 2023 did include a $30 million non-cash gain from the fair value measurement of our convertible notes. These notes matured during 2023, so we did not expect this type of volatility in our earnings going forward. Touching on the balance sheet, in October, we announced that our credit availability under the ABL was increased from $10 million to $13.8 million. As of year-end, we had $7.5 million drawn under the ABL. As of Monday, we had less than $1 million drawn.

Now I will turn the call over to Bob to provide key financial highlights. Thank you Ryan and thank you all for joining us this morning.

Our 2023 results were outstanding by almost any measurement.

We returned the company to profitability delivering significant improvement in all key financial metrics.

I Echo Ryan's comments on our exceptional results and I know the entire Flotek team is proud of what has been accomplished not only in 2023, but over the last two years.

Flotek turnaround execution has established a much stronger financial position than a year ago, and we expect to build on this momentum in 2024.

Evidence of this improvement in financial position I am happy to report that our 2023 10-K filing will confirm that the going concern doubt that our auditors asserted in their 2022 audit has been resolved. In addition, we expect to report in our 2023 10-K, we have remediated the internal control weaknesses.

Is that were disclosed in last year's 10-K.

Let's run through a handful of key financial items for the fourth quarter and full year 2023, I will be referring to slides in the presentation, we posted to the website yesterday.

Bond Clement: Lastly, we're planning to provide 2024 guidance with our first quarter results in May. This is consistent with last year's process when we also issued guidance with our first quarter 2023 results. While we're not providing formal guidance at this time, we do expect positive adjusted EBITDA each quarter in 2024, which we expect will result in another year of strong growth in that metric. In closing, Flotek continues to drive strong, repeatable performance with a focus on profitability. We anticipate further revenue growth in 2024, and we will maintain a sharp focus on reducing costs at every opportunity, particularly SG&A. I'll now turn the call back over to Ryan for closing comments.

Slide seven highlights our accomplishments and our strong financial growth, we delivered across the business.

Headline our results were annual improvements in revenue of $52 million gross profit of $31 million and adjusted EBITDA, improving by $28 million year over year.

As it relates to adjusted EBITDA, We reported another quarterly improvement during the fourth quarter that represents two and a half years of sequential improvements in that metric.

More importantly, full year 2023, adjusted EBITDA was positive as Ron mentioned earlier for the first time since 2017.

Turning to the income statement as shown on slide eight we have achieved sustained growth in revenues since 2021, with our 2023 increases from both our chemistry and data analytics segments.

Full year 2023 revenues grew 38% over 2022, despite lower North American land completion activities during the second half of the year.

Our chemistry revenue from external customers increased by 21% during the year more impressively, though is comparing fourth quarter of 2023 to the first quarter of 2023 revenue from external customers increased by 100%.

Ryan Gillis Ezell: Thanks, Mark. Turning to slide 17, we're extremely excited about 2024, as we have tremendous growth potential in both our chemistry and data analytics segments. And we believe that Flotek represents a compelling investment opportunity today. Our 2023 results delivered profitability, and we continue to be positioned for sustained growth as the collaborative partner of choice for sustainable chemistry and data solutions. I'm proud of the progress we made in 2023, and I am confident in our ability to execute going forward.

In addition to our success growing our chemistry business, we generated strong growth from the data analytics segment as revenues associated with J P. Three grew 47% over 2022 and are up almost 90% since 2021.

Turning to slide nine fourth quarter gross profit increased for the fourth consecutive quarter as we continued to deliver efficiencies across all aspects of the business supply chain.

Fourth quarter gross profit grew to over $9 million compared to a gross loss of $2 million in the comparable 2022 period.

We reported gross profit of $24 million for the full year 2023 compared to a gross loss of 7 million last year as the company benefited from the numerous cost improvements implemented throughout the year.

Operator: We appreciate all the continued support of our stakeholders, and we hope that you share our excitement regarding the future of Flotek. We look forward to reporting on further progress. Operator, we are now ready to take questions. Thank you. Ladies and gentlemen, should you have a question, please press star followed by one on your touchtone phone. You will hear a prompt that your hand has been raised. And if you would like to withdraw from the question queue, simply press star followed by. And if you're using your speakerphone, please lift the handset before pressing any key.

Moving to slide 10, adjusted EBITDA at 17% sequential improvement.

From the third quarter of 2023 is that metric totaled $4 million as noted earlier. This is the 10th consecutive quarter of improvement a streak that goes back to the second quarter of 2021.

Moving to SG&A fourth quarter totaled $6 6 million compared to $6 2 million for the fourth quarter of last year.

Full year 2023, SG&A totaled $27 9 million.

Import compared to $27 1 million for the full year 2022 on a percentage of revenue basis 2023, SG&A was down by 500 basis points compared to 2022.

It is worth noting that the fourth quarter and full year numbers for 2022 included a $1 9 million credit related to the reversal of a bonus accrual.

Operator: Please go ahead and press star 1 now if you have any questions. And your first question will be from Don Chris. At James and Rice, please go ahead. Ladies and gentlemen, how are you all today?

Excluding the benefit of that credit fourth quarter 'twenty three in full year 'twenty, three SG&A were down, 18% and 4% respectively from the 2022 periods.

Moving to the bottom line, we reported net income of $2 1 million in the fourth quarter of 2023 compared to a net loss of $19 million during the fourth quarter of 2022 net.

Donald Peter Crist: Morning, Don. Um, I wanted to touch on JP3. Obviously, you put a lot of language in both the presentation and the press release, but on those pilot projects, can you give us a kind of projected timeline as to when some of those may come to fruition and when we can expect that ramp up in revenue? I know you've highlighted 50% year over year, but when we think of a timeline for that, It was a Yeah, Don, this is Ryan.

Net income for the full year of 2023 was $24 7 million compared to a net loss of $42 3 million in 2022.

Net income for 2023 did include a $30 million noncash gain from the fair value measurement of our convertible notes.

These notes matured during 2023, so we do not expect this type of volatility in our earnings going forward.

Touching on the balance sheet in October we announced that our credit availability under the ABL was increased from 10 million to $13 8 million as of year end, we had $7 5 million drawn under the ABL as of Monday, we had less than 1 million strong.

Ryan Gillis Ezell: You know, when I look at it right now, the big gating factor that is is bringing the newer generation sensor online for commercial application, which we expect at the end of H1. So we'll be looking for a ramp-up in some of the revenue from these applications to come in line in H2 of 2024 and continue out in 2025 and beyond. A lot of that, when you look at the application of the Quad B and Quad C from the EPA on the flare gas and also some of the potential chain of custody measurements, a lot of those things are going to drive some unique opportunities for us to open up a 700 million dollar market, TAM, when we look at it in terms of the upstream market. Okay, and taking that just one step further, assuming you, you know, catch the bumper of the car here.

Lastly, we're planning to provide 2024 guidance with our first quarter results in May.

This is consistent with last year's process. When we also issued guidance with first quarter 2023 results.

While we're not providing formal guidance at this time, we do expect positive adjusted EBITDA each quarter in 2024, which we expect will result in another year of strong growth in that metric.

In closing Flotek continues to drive strong repeatable performance with a focus on profitability. We anticipate further revenue growth in 2024, and we will maintain a sharp focus on reducing cost at every opportunity, particularly SG&A.

Now I'll turn the call back over to Ryan for closing comments.

Thanks Barb.

Turning to slide 17, we were extremely excited about 2024, as we have tremendous growth potential in both our chemistry and data analytics segments, and we believe that flotek represents a compelling investment opportunity today.

Our 2023 results delivered profitability and we continue to be positioned for sustained growth as the collaborative partner of choice for sustainable chemistry and data solutions I'm.

Ryan Gillis Ezell: What kind of manufacturing capabilities do you have on the sensor side to keep up with potential demand? Yeah, that you know, that's a great question. And I think for us, that's what we're most excited about, you know, what our capabilities now will be moving up to probably about a 12x improvement in manufacturing velocity, in terms of you look at what we would have traditionally moved in volume last year. Now, we can move that in less than a month now with the improved manufacturing. So we've already got some pre-ordered, and we invested some capital upfront to go ahead and front load these units, particularly stuff that we'll be using in the upstream piece, which will be on a data as a service model for us. And we went ahead and made those capital investments up front. So we're really excited and confident that this manufacturing improvement, as well as the improvement in the analyzer performance, will be great for the company. Okay, which is one step further for me.

I am proud of the progress we made in 2023 and I am confident in our ability to execute going forward.

We appreciate all the continued support of our stakeholders and we hope that you share our excitement regarding the future of Flotek and we look forward to reporting all further progress operator, we are now ready to take questions.

Thank you ladies and gentlemen should you have a question. Please press star followed by one on you touched on something you will hear at prompts that your hand, that's been raised and if you would like to withdraw the question queue simply press star followed by two.

He was in your speaker phone please lift the handset before seeing any keys.

Please go ahead and press Star one now if you have any questions.

And your first question will be from Don Crist.

Johnson Rice. Please go ahead.

Good morning, gentlemen, how are you all day.

Good morning.

I wanted to touch on J P. Three obviously, you've put a lot of language and both the presentation and the press release, but.

On those pilot projects can you give us kind of projected timeline as to when some of those may come to fruition and when we can expect that ramp up in revenue I know you highlighted 50% year over year, but when we can kind of a timeline of that.

Ryan Gillis Ezell: In Saudi, the opportunity on the slickwater side, obviously, you just introduced that there. But given their shift towards gas drilling and more kind of traditional shale drilling versus what they have done in the past. What kind of opportunity set do you think that kind of offers you as you kind of move through 24 and they get more comfortable with the technology? So, holistically for us, you know, we've always had that presence in the international market, but I'd say it represented a not a material component of our overall revenue. But as part of our strategy of building what we call full-cycle chemistry sales, having a diverse business in international markets was very important to us, which is why we invested in the testing, which took about 18 months to get approved by Aramco, and then also what we did in Abu Dhabi.

Yes.

Yeah, Dan this is right.

I look at it right now.

The big gating factor that he is bringing the newer generation sensor alive to commercial application, which we expect at the end of each one so we will be looking at a ramp up with some of the revenue in these applications to come in line in <unk> 2024 continue out a 2025 and beyond.

Driving a lot of that and when you look at the.

The application of the Quad B and Quad C from the EPA on the flare gas and also some of the potential chain of custody measurements a lot of those things are going to drive subs unique opportunities for us it opens up a 700 plus million dollar.

Market Tam when we look at it in terms of the upstream markets.

Okay and taken that just one step further assuming you.

Catch the bumper of the car here, what kind of manufacturing capabilities do you have on the sensor side to keep up with the potential demand.

Ryan Gillis Ezell: When you look at the system there, the impact it'll have could potentially double the size of our international revenue, even on a conservative basis year-on-year. So, I still think when you look at the activity of what we'll see there in Saudi, it will be material to what we do on the international side of the business. I appreciate the color. I'll get back in queue.

Yes, that's a great question I think for US that's what we're most excited about.

Where our capabilities now will be moving out to a probably about 12 X improvement in manufacturing velocity in terms of you'd look at what we would've traditionally moved to volume.

Last year, we can we can move that in less than a month now with the improved manufacturing. So we've already got some preordered, we invested some capital upfront to go ahead and Frontload. These units, particularly stuff that we'll be using any upstream pieces will be on a data as a service model for US and went ahead and made those capital investments upfront. So we're really excited.

Jeff Robertson: Thank you. The next question will be from Jeff Robertson at Water Tower Research. Please go ahead. Thank you. Good morning, Ryan. On the JP3, can you talk about the margin?

Jeff Robertson: that you could realize with the data as a service uptake on that business. And then, secondly, when you're working with landowner groups on production allocation, how do you get landowner groups and producers on the same page to decide that JP3 is the best solution? So, you know, there's a couple of things on there. Looking first at the margin profiles, you know, we haven't, you know, fully disclosed just what the margin profile specifically for JP3 is.

And confident that this manufacturing improvement as well as the improvement in the.

Analyzer performance will be great for the company.

Okay, and just one further for me.

In Saudi the opportunity on the slick water side, obviously, you just introduced that there, but given there.

A shift towards gas drilling and more kind of traditional shale drilling.

Versus what they have done in the past what kind of opportunity set do you think that tunnel.

Ryan Gillis Ezell: What I will say is when we model it over onto the date of the service business, it does give us about a 15% improvement compared to the capital sale model over a three-year type period and the return on that. So it will boost for us, not only building our recurring revenue but also the overall profitability of the segment. When you look at what we do on the chain of custody side, that is a unique application because there are thousands of wells for this type of work, and we've done an extensive amount of analysis on that.

<unk> offers you as you kind of move through 'twenty, four and they get more comfortable with the technology.

So holistically for us.

We've always had that presence in the international market, but I'll say it represented eight eight not as material component of our overall revenue, but as part of our strategy ability and what we call.

Full cycle chemistry sales, having a diverse business in international markets was very important to us which is our investment into the testing, which took about 18 months to get approved with the <unk> and then also what we did in <unk>. When you look at the system there the impact it'll have could potentially double the size of our international revenue.

Even on a conservative basis year on year.

Ryan Gillis Ezell: So we're actually working with quite a few people, particularly if you take some of the trust, some of the legal components of that that actually handle the processing of the royalties, et cetera, as part of the chain of custody. Those have been some of the primary targets. What's also been unique for us is we've worked with the Texas Railroad Commission, the Bureau of Land Management, and the EPA, different governing bodies around how we manage this. Because make no mistake, when you look at how they measure quality now, they're using a composite sample taken once every six to nine months, and they'll be getting this data every 10 seconds. So it will make a significant change to the way royalties are allocated and how payments work.

So I still think when you look at the activity.

What we'll see there in Saudi it will be material to what we do on the international side of the business It will help significantly.

I appreciate the color I'll get back in queue.

Thank you.

Thank you.

Next question will be from Jeff.

What about <unk>.

Research. Please go ahead.

Thank you good morning, Ryan.

Brian or Jeff.

J P. Three can you talk about the margins that you could realize with the data as a service uptake on that business and then secondly.

When youre working with landowner groups on Alex on production allocations, how do you get landowner groups and producers on the same page to decide that the J P. Three is the best solution for measurement.

So there is a couple of things on there looking first around the margin profiles, we haven't fully disclosed around what the margin profile specifically for J P. Three years.

Ryan Gillis Ezell: And so I think, you know, there will be a little bit of movement about how this goes on and, particularly, at the gathering points and with the various trusts. I think that a lot of the royalty allocations will be where the first impact that we'll see will be. Yeah, Jeff, I'll just add something real quick. I think the operators and the mineral owners are clearly going to be aligned on this on one side, and then I think where the conflict's going to come into play would be how the gathering or the purchasers, the first purchasers, interpret the data that we're sharing and how do they reconcile those two between an instantaneous, continuous measurement point in terms of evaluating BTU quality versus, like Ryan said, you know, one sample point every 30, If they had if a midstream gatherer had a more accurate read on what the BTU content is headed their direction, wouldn't that make them more efficient in terms of how they process it?

What I will say is when we model it over all to the data as a service business. It does give us about.

About a 15% improvement.

Compared to the capital sale model over a three year type period and the return on that so it will bump for us not only building a recurring revenue, but also the overall profitability of the segment.

When you look at what we do on the chain of custody side that is a unique application because there are thousands of wells where for this type of work.

And we've done an extensive amount of analysis on that so we're actually working at with quite a few people, particularly if you take some of the trust some of the legal components of that that actually handle the processing of the royalties et cetera as part of the chain of custody. Those are this are the primary targets. What's also been unique for us as we work.

With the Texas Railroad Commission, the Bureau of land management and the EPA.

Governing bodies around how we how we manage this because make no mistake. When you look at how they measure quality now they are using a composite sample taken once every six to nine months and they'll be getting this data every 10 seconds. So it will make a significant change in the way.

The royalties are allocated and how the payments work. So I think you know.

There will be a little bit of movement about how this goes on in particular would be at the gathering points and with the various trusts that takes to do a lot of the royalty allocations, where the first impact that we'll see.

Yes, Jeff I'll, just add add something real quick I think the the operators and the mineral owners are clearly going to be aligned on this on one side and then I think where the conflict is going to come into play would be how the gathering or the purchasers of first purchasers.

Bond Clement: A hundred percent. A hundred percent. And when you combine that, you combine that with what our TransMix capabilities are, it's even better from that aspect. Ryan on chemistry, you've obviously had the Profac agreement in place for a while now. When you look at external chemistry, do you look at the opportunity to form?

Interpret the data that we're sharing and how how do they reconcile those two between an instantaneous continuous measurement point.

In terms of evaluating Btu quality versus like Ryan said, one sample point every 30 60 90 days whatever the situation is how do they reconcile those two and ensuring that all stakeholders are paid on the accurate amount for.

Jeff Robertson: to take that from a transactional business to more of a, You know, that's another good point. It's part of our overall strategy around that collaborative intimacy with these customers. So, as we've begun to really diversify our revenue stack, I would say we have a 50-50 split between service companies and EMP operators.

For the value of their product.

If they have if a midstream gatherer has a more accurate read on what the Btu content is headed that direction.

That makes them more efficient in terms of how they process.

Ryan Gillis Ezell: But to your point, those relationships with EMP operators become extremely important when we look at our chemistry management and the, what we call, the external transactional revenue stream. Because we do build long-term partnerships, and what we're starting to see is they're becoming much stickier in performance because they are starting to realize the gains on the return investment in the chemistry. And if you go out and look at a lot of public space, particularly some of the EMP operators, they are talking about chemistry being able to unlock additional barrels out of a reservoir on their different type curves.

100% kind of percent.

And when I don't buy that you combine that with what our trans mix capabilities are.

Even better from that aspect.

Ryan on chemistry.

You've obviously had the prophylactic agreement in place for a while now when you look at external chemistry do you look at the opportunity to form.

To take that from a transactional business to more of a any kind of a.

Strategic Alliance and May be just a basin centered alliance with any of the pressure pumper.

Yeah.

It's another another good point as part of our overall strategy is around that collaborative intimacy with these customers. So.

As we began to really diverse your diversify our revenue stack I would say we have a 50 50 split between service companies in the E&P operators, but to your point those relationships. The E&P operators becomes extremely important when we look at our Crystal chemistry management and the what we call the external of transactional revenue stream.

Ryan Gillis Ezell: And so, we play an essential component in that, and not only is it bringing sustainable green technology, but it also dramatically improves reservoir performance. And so, what they see is, to me, that gives us a great opportunity for less volatile and longer-standing relationships with the EMP operators. And lastly, Ryan, do you think your chemistry solutions, in terms of well performance, as companies do longer laterals, does that help the kind of chemistry solutions that Flotek provides in terms of driving demand, which can improve performance? Well, I think it all unlocks a huge opportunity because part of drilling these longer laterals, we look at well spacing, we look at overall fluid design, from even how they drill them, the actual completion that they All those things become extremely important, even from the look at the well bore cleaning before they do the actual frac. And so the further up the chain we get involved with our chemistry, we can match the clay control, the corrosion inhibition, the proper surfactant technologies, or any solvents that need to come in place for the multiplication.

Because we do build long term partnerships and what we're starting to see is theyre, becoming much stickier their performance because they are starting to realize the gains on our return on investment and the chemistry.

When I look at a lot of the public space with particular somebody E&P operators. They are talking about <unk> being able to unlock additional barrels out of a reservoir of the other different type curves and so we played a central component of that and not always bringing a sustainable green technology, but also that dramatically improves reservoir performance and so.

What they see is to me that gives us a great opportunity for less volatile a longer standing relationships with E&P operators.

Then lastly, Ryan to your Kimmitt do you think your chemistry solutions.

In terms of well performance as a company has drilled longer laterals does that put does that help the kind of temperature solutions that flotek provides in terms of driving demand, which can improve performance.

I think it all inland unlocks a huge opportunity because part of drilling these longer laterals, we look at well spacing. We look at overall fluids desire for me to have a drill down the actual completion that they do.

All those things become extremely important even if when they look at the world Wellbore cleaning before they do the actual frac.

The further up the chain we get.

Ryan Gillis Ezell: And so I think it's a huge opportunity. To me, as you get into the more difficult situations, a commoditized chemistry approach becomes, you know, not viable. You really have to look at, How do you customize this chemical solution?

We evolved with our chemistry, we can match the clay control the corrosion inhibition that proper surfactant technology is very solid survey to cover in place the multiplication and so I think there's a huge opportunity to me as you get into the more difficult situation, a commoditized chemistry approach becomes.

Not viable you really have to look at.

Ryan Gillis Ezell: And Flotek is the best in the business at doing that, and that's where I really think it opens up an additional opportunity for us. Thank you. Thanks, Jeff. As a reminder, ladies and gentlemen, if you would like to ask a question, please press star followed by one on your touchtone phone, and your next question will be from Eric Swergold at Firestorm Capital. Please go ahead.

How do you customize as chemical solution.

<unk> is the best in the business of doing that and that's where I really think it was about an additional opportunity for us.

Thank you.

Thanks, Jonathan.

As a reminder, ladies and gentlemen, if you would like to ask a question. Please press star followed by one on your Touchtone phone.

And your next question will be from Eric Sockol Firestorm capital. Please go ahead.

Eric Benjamin Swergold: Hi, good morning, gentlemen, and congratulations on navigating through a very difficult time with ProFrac. Can you talk a little bit more about your business away from ProFrac and what gating factors there are at this point, because you've done an admirable job growing your business away from ProFrac on the chemical side? What factors are holding you back at this point? Or is it really just a matter of how many salespeople you can get in front of how many customers?

Hi, good morning, gentlemen, and congratulations on navigating through a very difficult time.

<unk> could you talk a little bit more about your business away from pro fracking what gating factors. There are at this point because you've done an admirable job.

Growing your business away from pro Frac on the chemical side.

What factors are holding you back at this point or is it really just a matter of how many salespeople you can get in front of how many customers. Thanks.

Ryan Gillis Ezell: Hey, morning Eric. You know, number one, if we look at the non-PROFRAC related revenue, as a percentage in Q1, we were sitting in the 24-25%. As we've exited the year, we see it sitting at 45%. And we've seen growth in that chemistry segment of the business every quarter throughout the year. More importantly, Q1 to Q4 is almost a 200% growth.

Morning, Eric.

Number one if we look at.

The non pro Frac related revenue.

As a percentage in Q1, we were sitting in the 24%, 25% as we've exited the year, we see is sitting at 45% and we've seen growth in that.

<unk> segment of the business every quarter throughout the year more importantly, Q1 to Q4 is almost 200% growth.

Ryan Gillis Ezell: And so for us, we're continuing to push that in terms of market share gain. I think that is typically a little bit longer sales cycle because it's a lot of value-add technologies, and we are actually starting to see that, you know, continue to grow. We're seeing the complex benefit of sales grow, and I think we're going to continue to see that. I don't feel that it necessarily creates that discontinuity piece there, but there's a multitude of advantages to what we do on the transactional piece, and I think that's going to grow all the way through 2024. And then I think JP3 will continue to contribute to that significantly as we expect that 50% growth in 2024 as well. And I don't think there's much of it holding back when you look at it right now.

And so for US we're continuing to push on that in terms of market share gain I think that is typically a little bit longer sales cycle, because there's a lot of the value add technologies.

We are actually starting to see that continue to grow we're seeing the complex nano fluids sales grow.

And I think we're going to continue to see that I don't I don't feel that it is.

So that doesn't necessarily always create that discontinuity piece there, but there is a multitude of advantages of what we do all the transactional piece that I think is going to go all the way through 2024, and then I think JP three will continue to contribute with that significantly as we expect that 50%.

In 2024 as well.

I don't think it's as much a bit holding back when you look at it right now.

Ryan Gillis Ezell: You're going to see probably a flat to downturn in frack fleet activity in North America, and what you're starting to see is a reemergence of what we call tier one customers, where you see sustained plans that are long throughout the year, and that's the customers that we're pursuing right now to really get our chemistry in there and show the impact on some of these major basins. So we're actually really excited about this opportunity to meet these headwinds, offer great opportunities for good teams to navigate the wind appropriately, and really pick up some market share. Thank you. Thank you. The next question will be from Jeff Robertson at Watertower Research. Please go ahead. Thanks, just to follow up bond with the material weakness eliminated from the 10k and the expectation of positive adjusted EBITDA throughout 2024. Does that, a better financial position, and better liquidity, further your Flotek's commercial discussions with customers and potential partners as you look at the business opportunities in front of you? Absolutely, without a doubt. I mean, you're talking to folks, and you've got the go and concern language in your public filings. I think that creates some anxiety.

Youre going to see probably a flat to down Frac fleet activity in North America land and what Youre starting to see is a reemergence of we call like tier one customers, where you see a sustained plans that are long throughout the year.

And that's the customers that we're pursuing right now to really get our chemistry and there. It is show the impact of some of these major basis. So we're actually really excited about this opportunity and to meet these headwinds offer great opportunities for good teams to navigate the wind appropriately and it really pick up some market share.

Thank you.

Okay.

Thank you next.

Our next question will be from Jeff Robertson of water Tower Research. Please go ahead.

Thanks, just to follow up bond with the material weakness eliminated from the 10-K and the expectation.

Positive adjusted EBITDA throughout 2024.

Does that <unk>.

<unk> financial position and better liquidity does that fair.

Further your flotek commercial discussions with customers and potential partners as you look at the business opportunities in front of me.

Absolutely without a doubt I mean, now you're talking to folks and you've got the going concern language in your public filings I think.

I think that creates some anxiety so having the material the going concern I would say, it's more important we're certainly glad to put both of them behind us but.

Bond Clement: So having the material, you know, the go and concern, I would say, is more important. We're certainly glad to have put both of them behind us, but having the go and concern behind us and having our auditors agree that the financial outlook for the company is much more stable than this time last year will definitely be a benefit as we negotiate rebates and various items. Thank you. Thanks for taking my follow up. Thank you. Thank you. Once again, ladies and gentlemen, if you do have any questions at this time, please press the star followed by one. And your next question will be from Richard Rugley at Glenbrook, please go ahead. Hi guys, just a quick question really, given how strong your EBITDA is and your strategies are playing out, and you're obviously projecting optimism as I hear it. Obviously, at the same time, though, the stock really isn't being appreciated in the market. I mean, it's down, I'm not sure, maybe before today about 20% plus.

Having the going concern behind us and having our auditors agree that the financial outlook for the company is much more stable than this time last year will definitely be a benefit as we negotiate rebates and various items of suppliers and customers.

Thank you thanks for taking my follow up.

Thank you.

Thank you once again, ladies and gentlemen, if you do have any questions. At this time. Please press star followed by one.

And your next question will be from Richard directly at Glenbrook. Please go ahead.

Hi, guys.

Yeah, just a quick question really given how strongly.

Strong already mcdonalds.

Our strategy is playing out and Youre, obviously protecting optimism as I hear it.

Obviously at the same time.

The stock really isn't being appreciated in the market I mean, it's down maybe.

Maybe before today about 20% plus.

Richard Dearnley: And so you're below book. I just wondered if you'd consider or have been considering at least a modest stock buyback. Thank you. Thanks for the question, Richard. No, not at this time. I mean, when you look at what we've been doing with the company, at least for the last 12 months, you could argue for the last 24 months, it's really to stabilize the business and get it on a path to profitability, as we say.

And selling below book I, just wondered if you would consider or had been considering at least a modest stock buyback. Thank you.

Thanks for the question Richard No not at this time I mean, when you look at what we've been doing with the company at least for the last 12 months you could argue for the last 24 months is really to stabilize the business and get it on a path to profitability as we say.

Bond Clement: We feel like we've turned the corner certainly in that regard, but as it relates to buying back stock or other items to return cash to shareholders at this point in time, probably not at that cycle of maturity in terms of the company. Certainly something that we hope to get to in the near term, but as we sit here today, we don't have any plans to buy back shares. Okay, I understand. Thank you. Thank you. And at this time, Mr. Ezell, it appears we have no further questions. Please proceed, sir. Okay, I would like to remind you that Flotek will be participating in the 36th Annual Roth Conference at the Ritz-Carlton in Dana Point, California next week. I'll be participating in an oilfield service panel discussion on Monday, March 18 at 1pm Pacific Time, and we'll be joined by Bond in hosting one-on-one meetings with investors during the conference.

We feel like we've turned the corner certainly in that regard, but as it relates to buying back stock or other items to return cash to shareholders at this point in time.

Not at that cycle of maturity in terms of.

The company certainly something that we hope to get to in the near term, but as we sit here today, we don't have any plans to buy back shares.

Okay understood. Thank you.

Thank you and at this time Mr is al. It appears we have no further questions. Please proceed sir.

Okay, I would like to remind you that folks that will be participating in the 36 annual Roth conference at the Ritz Carlton in Dana point, California next week.

I'll be participating in an oilfield service panel discussion on Monday March 18th it won't be a specific time, but we've known about bond and hosting one on one meetings with investors. During the conference. We look forward to seeing you at the conference next week and thanks again for joining us today.

Bond Clement: We look forward to seeing you at the conference next week, and thanks again for joining us today. Thank you, sir. Ladies and gentlemen, this does indeed conclude the conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines. Have a good day.

Thank you, Sir ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending and at this time, we do ask that you. Please disconnect your lines have a good day.

[music].

Yeah.