Q3 2024 Flotek Industries Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the FlowTech Industry 3rd Quarter 2020 for earning a conference call. At this time, all lines are in listen only mode.
While we're in the presentation, we'll look and conduct a question in after a session.
Speaker Change: If at any time during this call you require me to assist a police press star zero for the operator. This call has been recorded on Tuesday, November 5, 2024. I would now like to on the conference over to Mike Critelli, Director of Finance and Investor Relations. Please go ahead.
Mike Critelli: Thank you and good morning everyone. We appreciate your participation in the Flow Text 3rd quarter 2024 earnings conference call. Joining me on the call today are Ryan Ezell, Chief Executive Officer and Bon Applement, Chief Financial Officer.
Mike Critelli: First we will provide prepared remarks concerning our business operations and financial results for the third quarter of 2020. As well as our updated guidance for fully year 2020.
Mike Critelli: Following that, we will open up the call for any questions you have.
Mike Critelli: Float text 3rd quarter 2024 financial and operating results press release was issued yesterday afternoon. We also posted an updated Q3 earnings presentation that we will be referencing on today's call. If you can all be found on the Investor Relations section of our website.
Mike Critelli: In addition, today's call is being webcast and it replay will be available on our website following the conclusion of this call.
Mike Critelli: Please note that the comments made on today's call regarding projections or expectations for future events are forward-looking statements.
Mike Critelli: Board-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.
Mike Critelli: We advise listeners to review our rings release and risk factors discussed in our findings with SEC.
Mike Critelli: Please refer to the reconciliation provided in the earnings press release and corporate presentation as management will be discussing non-gap metrics on this call.
Speaker Change: with that I'll turn the call over to our CEO, Ryan Ezell.
Ryan Ezell: Thank you, Mike, and good morning. We appreciate everyone's interest in flow tech and for joining us today as we discuss our third quarter of 2024 operational and financial results.
Ryan Ezell: I'm pleased with our overall strategy execution during this quarter, but we remain laser-focused on elevating our performance to the increased market share and profitability growth and both of our complementary business segments as we challenge the organization to close out our strongest years since 2017.
Mike Critelli: These final months of the year are going to be our joyous work. We are confident in our team's ability to execute in the face of market headwinds and continue to turn to delivering strong results and result in value creation for Plotex shareholders.
Mike Critelli: with that in mind, I'd like to turn this slide five and touch on our key highlights for the quarter that bomb with a scuff in detail in just a moment.
Mike Critelli: with a backdrop of weaker North American All-Fill services activity.
Mike Critelli: We were able to grow total revenue 5% compared to the third quarter of 2023 and 8% sequentially over the second quarter of 2024. Highlighting our strong execution and the continued progress we have made in capturing market share.
Mike Critelli: This is quite an accomplishment when considering the fact that the active-wrecked leak counts have declined over 14% from the peak of the first quarter of 2024.
Mike Critelli: Our data analytics segment revenues group 30% and third quarter as shown on slide 7 with data at the service revenue growth of 40% sequentially.
Mike Critelli: Following the EPA's approval of our JP3 analyzer in mid July of 2024, we recognize our first revenues from a flare monitoring at August and September, which comprises 25% of total core segment revenues.
Mike Critelli: Revenue from our Chemistry Technology segment increased 7% in the third quarter. Our persistent revenue growth in this segment, despite a declining fractal heat market, is clear evidence that we are gaining market share throughout differentiated chemistry technology solutions.
Mike Critelli: We delivered significant year-over-year improvements in virtually all profitability metrics, resulting in net income of $2.5 million and adjusted even to a $4.8 million representing a year-over-year increase of 97% and 43% respectively.
Mike Critelli: This marks FloTech's 5th consecutive quarter of net income and 8th consecutive quarter of improvement and adjusted EBITDA.
Mike Critelli: As a result, we are increasing our adjusted EBITDA guidance for the second time this year.
Mike Critelli: On a trailing 12-month basis, as is shown in slide 8, Flowtech has delivered almost $25 million of improvement in adjusted EBITDA.
Mike Critelli: Finally, we reduced borrowings outstanding under the asset-based loans by 81%, or $6.1 million, when compared to year-end of 2023.
Mike Critelli: And most importantly, all of these achievements were accomplished with zero recordable and lost time incidents.
Mike Critelli: I'd like to take a moment to thank all of our employees for their hard work and commitment to safety and service quality in achieving these outstanding results.
Mike Critelli: And I continue to be excited about the future of Flowtech and believe we are well positioned to capture further market share. We continue to be an industry leader, driving innovation and delivering differentiated chemistry and data solutions that are tailored to our customers' needs.
Mike Critelli: We strive to create solutions for the future challenges that will impact our industry before they are needed by leveraging chemistry as the common value creation platform.
Speaker Change: Bluetech will remain at the forefront of innovation and multidisciplinary advancements as we bring new technologies to the market.
Mike Critelli: Through the convergence of data and chemistry solutions, FloTech is creating AI-driven reservoir modeling to address the impacts of water imbibition, drive pressure-ventral microfluidic behavior in nanopore environments, and improve the ultimate recovery of hydrocarbons from each asset.
Mike Critelli: Through the utilization of real-time data measurements, we are unlocking the potential to apply predictive analytics to holistically manage our customers' assets and maximize their return on invested capital.
Mike Critelli: We expect the continued expansion of our data-as-a-service model with the launch of our next-generation near-infrared, Raman, and aqueous environment measurement systems, unlocking significant upstream and downstream market opportunities if we expect the business to see continued growth going forward.
Mike Critelli: As part of our commitment to being at the forefront of innovation, we announced in July the EPA approval of our JP3 system with respect to recently enacted FLARE regulations.
Mike Critelli: A picture of our new flare monitoring cart that is currently on location can be seen on slide 10.
Mike Critelli: This state-of-the-art optical instrument is designed for the precise measurement of net heating values in flare gases.
Mike Critelli: and is the first to be approved as an alternative method under the new regulations.
Mike Critelli: According to the EPA, there are over 55,000 existing players in the United States and are expected to be subject to monitoring regulations by 2028.
Mike Critelli: And this approval positions Flowtech for growth in this new upstream space.
Mike Critelli: We have already received numerous orders with 11 units already being delivered, which is up from three we mentioned on our call in August.
Mike Critelli: The majority of FLAIR application revenues to date have been through rental and service contracts, which imply a recurring revenue stream.
Mike Critelli: Furthermore, our upstream custody transfer use cases continue to expand in the field trials with a total of three active units in the third quarter and additional eight committed units added thus far in the fourth quarter.
Mike Critelli: We're on track to receive full certification for field utilization by year end.
Mike Critelli: Our ability to monitor hydrocarbon composition and quality in real time, with measurements taken every five seconds, will create an emerging market for Flowtech to enter into 2025 and beyond.
Mike Critelli: This revolutionary application creates an elevated level of transparency and enterprise risk minimization for producing wells that's never been achieved in the oil and gas industry to date.
Mike Critelli: As we look forward, we see the demand for oil and gas is expected to expand for the next decade, with further requirements needed through 2045.
Mike Critelli: For the first time in nearly two decades, the demand for electricity in the U.S. is expected to climb 15% by 2030, with natural gas expected to provide the bulk of the incremental demand.
Mike Critelli: We expect the overall expansion of the global economy to continue to create substantial demand for all forms of energy, which will increase service intensity within the sector.
Mike Critelli: As we look at the remainder of 2024, our efforts remain focused on revenue growth, market share expansion, cost efficiency gains, and creating value for our shareholders as we are well positioned to capitalize on opportunities both domestically and internationally.
Mike Critelli: We are confident that our expanding suite of services positions us to deliver unique and superior solutions to a variety of our industry's most challenging problems while maximizing our customer's value chain.
Mike Critelli: Now I'll turn the call over to Bob to provide key financial highlights. Thanks, Ryan. Thank you, everyone, for joining us this morning.
Bob: Yesterday afternoon we reported strong results for the third quarter.
Bob: On the income statement side, we posted sequential increases in revenue, net income, and adjusted EBITDA, even though industry fundamentals were weaker.
Bob: On the balance sheet side, we increased working capital and paid down debt. Our ABL balance at September 30th was down 75% from the end of the second quarter, as we utilized the 12% improvement in DSOs during the quarter and $5 million in cash flow from operations to pay down the line.
Bob: Quickly touching on a few specific results, I'll be referring to the slides and the presentation posted to our website yesterday afternoon.
Mike Critelli: Slide five summarizes certain of our third quarter achievements. Revenues, net income, adjusted EBITDA were all up compared to the third quarter of last year. Net income nearly doubled. Adjusted EBITDA jumped over 40% versus the year ago quarter.
Mike Critelli: Regarding revenue for the quarter, we reported total revenues of $49.7 million, which was a sequential increase of 8%. This increase was highlighted by strong growth in revenue from our data analytics segment, as well as a 19% increase in related party chemistry revenue.
Mike Critelli: While external customer chemistry revenues were down sequentially, they're still up 3% through the first nine months versus last year.
Mike Critelli: It's worth noting that we had three large customers experience operational delays in September, which caused certain external chemistry sales to be pushed to the fourth quarter. We fully expect external chemistry revenues to bounce back strong in the fourth quarter.
Mike Critelli: Third quarter gross profit was flat as compared to the second quarter.
Mike Critelli: On a percentage basis, gross profit margin was down around 150 basis points sequentially, stemming from lower external chemistry revenues, which impact our product mix.
Mike Critelli: as well as lower revenue attributable to the order shortfall penalty under our long-term supply agreement, which is the result of the sequential growth in our related party business.
Mike Critelli: Partially offsetting these items was our data analytics segment, which provided a meaningful contribution to gross profit during the third quarter.
Mike Critelli: As shown on slide 7, gross profit from data analytics totaled $1.2 million during the third quarter of this year, an 88% increase compared to the second quarter. Data analytics gross margin came in at 44% during the quarter, a 47% improvement sequentially as we grew recurring revenue during the quarter.
Speaker Change: These strong margins are why we are so excited about the outlook for continued revenue growth in this segment that Ryan touched upon earlier.
Speaker Change: Moving down the income statement, we had an outstanding quarter as it relates to reducing overhead. Third quarter SG&A costs declined to $5.7 million, a 12% improvement compared to the third quarter of last year, and a 9% sequential improvement.
Speaker Change: SG&A costs through the first nine months are now down 15% from last year, resulting in over three million dollars in savings or roughly half of the year to date net income. This is an area we will continue to apply maximum focus on improvement.
Speaker Change: Moving to slide 8, adjusted EBITDA for the quarter increased to $4.8 million. Keep in mind, we grew adjusted EBITDA 9% sequentially despite revenue from the order shortfall penalty under our supply agreement declining by 19% or $1.6 million from the second quarter.
Speaker Change: Touching on the ballot sheet in September 30th, we had 1.4 million drawn under the ABL. Our September 30th debt to trailing 12-month adjusted EBITDA was less than 0.1 times.
Speaker Change: With respect to our updated 2024 guidance, for the second time this year, we're raising our guidance based on the strong operational performance we've delivered to date and our outlook for the fourth quarter.
Mike Critelli: We now expect Adjusted EBITDA to be in the range of $16.5 to $18.5 million, which is an increase of 35% at the midpoint compared to our initial 2024 guidance range of $10 to $16 million.
Mike Critelli: Put another way, the floor of our current guidance range now exceeds the ceiling of the original guidance range.
Mike Critelli: Based on current projections, we expect our 2024 Adjusted Gross Profit Margin to be between 20 and 22 percent, which compares very favorably to our 2023 Adjusted Gross Profit Margin of 15 percent.
Mike Critelli: In closing, we posted solid third quarter numbers that build upon several consecutive quarters of financial and operational momentum.
Mike Critelli: We're excited about our results in the first three quarters, and we anticipate closing 2024 out in strong fashion.
Speaker Change: If we're able to hit the midpoint of our updated guidance, we would achieve a $16 million improvement in adjusted EBITDA versus 2023 and a $26 million improvement versus 2022. With that, I'll turn the call back over to Ryan for closing comments.
Ryan Ezell: Thanks, Boggs.
Ryan Ezell: We're excited about the remainder of 2024, as we have tremendous growth potential in both our chemistry and data analytics segments, despite the ongoing market headwinds.
Mike Critelli: We believe that Flowtech continues to represent a compelling investment opportunity. The expanding opportunities within our data analytics segment provides a strong catalyst for future revenue and profitability growth.
Mike Critelli: Our third quarter results deliver profitability, and we continue to be positioned for sustained growth as a collaborative partner of choice for chemistry and data solutions. I'm proud of the progress we've made, and I'm confident in our ability to continue to execute going forward.
Mike Critelli: We appreciate the continued support of all of our stakeholders, and we hope that you share our excitement regarding the future of Flowtech, and we look forward to reporting further progress. Operator, we're now ready to take questions.
Speaker Change: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the one on your touchtone phone. You will hear a prompt that your hand has been raised.
Speaker Change: Should you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question.
Speaker Change: Your first question comes from Jeff Gramp with Alliance Global Partners. Your line is now open.
Speaker Change: Hey Jeff, how you doing buddy?
Jeff Gramp: Good, good. Thanks. Wanted to start on the flair market. Some nice updates there. First, I'm curious if you guys can touch on kind of the preferred sales model that you're seeing from upstream customers, kind of lease versus buy, and then also kind of curious on the customer concentration there. Are you guys seeing maybe a few customers really kind of going all in on this, or is it a few, a broader set of customers that are maybe kind of dipping their toe in the water with some potential for increased adoption later? If you could touch on both those points, that'd be great. Thanks.
Speaker Change: Yeah, I think when we look at the commercial model, obviously the preferential for us is more on the rental service agreement type, and that's where, as we mentioned in the notes earlier, that we push the majority.
Speaker Change: There are a few customers who are looking at what we would consider to be full-time flare monitoring where they don't just come and monitor for the two-week period as set out by the EPA regulations.
Jeff Gramp: In doing so, they're looking at a potential capital purchase for those in the long-term where we have a long-term agreement in place for the monitoring software, etc. with it. But I would say currently we are pushing in the preferential area of a full rental service model, whether we're doing it multiple wells at each time or single testing wells going forward.
Mike Critelli: In terms of customer concentration, I think that, you know, initially we had, I would say, five to ten customers who were really pushing forward. Those are customers that really are focused on sustainability side and overall environmental performance, and we've made great progress. But I'll tell you,
Mike Critelli: The diversification of the customer base is quickly expanding.
Mike Critelli: I suspect if you look at what's going on today with the current political environment
Mike Critelli: A few people slowed down in terms of just wanting to see what happened. I don't think it's going to negate the fact that the testing is going to be ongoing. We've had recent conversations with the EPA and their expectations is that the regulatory and regulations will continue moving forward as is.
Mike Critelli: So we're probably, we're expecting a little bit more of an acceleration, you know, at the end of this week from where we are, but we've had great customer diversity so far.
Jeff Gramp: Great. Appreciate those details, Ryan. For my follow-up, on the cost side, you guys have continued to have, you know, really nice performance there, particularly with SG&A.
Speaker Change: Hey Jeff Spahn, thanks for the question. Yeah, we're looking at potentially adding some people relative to
Speaker Change: We would expect SG&A to continue to trend down. And I think an additional color for mine on that, Jeff, is we started to look at it from an SG&A side.
Speaker Change: It's more than likely not a significant expansion, it will be more on the direct call side for field delivery as we evolve in that service model.
Speaker Change: And there's no doubt that we're looking at probably a good bit of a CapEx going into the data as a service business to stay in front of the demand curve that we're going to see coming in 2025.
Speaker Change: Understood. Those are great details. I'll let someone else hop in. Thanks, guys.
Speaker Change: Thanks. Your next question comes from Jerry Sweeney with Roth Capital. Your line is now open.
Jerry Sweeney: Good morning, Bond and Ryan. Thanks for taking my call.
Speaker Change: Morning, Jerry. Hey, Jerry.
Jerry Sweeney: I wanted to stay on the data side. I'm just interested in the pipeline.
Speaker Change: How do you see the sales cycle? How long will it take to...
Speaker Change: take hold, how that would impact.
Speaker Change: cycle as well, especially at
Speaker Change: You know, it's some great things to have some color around, Jerry, to be honest with you, because when we look at...
Jerry Sweeney: Our data as a service business on the data analytics side, we really look at the opportunities in the pipeline. We kind of bifurcate those into what we have with our traditional core business around read vapor pressure monitoring, transmix, crude monitoring, etc.
Speaker Change: and the Kager from the market in those areas, those typically have a longer sale cycle. We're looking anywhere from 9 to 12 months and they follow
Speaker Change: CAPEX plans as part of OPEX expense usually.
Speaker Change: As we've started to create, I would basically, these emerging markets in monitoring flared gas, our chain of custody that I mentioned, which is an exciting new area, these markets and the size of them are continuing to expand, and they offer intriguing opportunities for the growth of the company because
Speaker Change: The sales cycles, obviously, in a government-regulated area are much faster. People are going to have to start to meet the requirements. And so we're seeing, you know, these go from
Speaker Change: 9-12 months down to weeks at a time on the pursuit, sometimes less than a month.
Speaker Change: And so that's adding a great opportunity for a market that we're still starting to understand the actual size of it, which, you know, if you just start doing some rough math on 55,000 active wells and
Speaker Change: If we look on the chain of custody side, probably over 100,000 wells to monitor, you can start to see the potential there. But back to the pipeline, I think on our core business, we've seen about a
Speaker Change: a 15 or 20 percent growth in opportunities for 25. It's expanding, you know, double-digit percentages every month on the on the upstream pieces when you look at the size of what's coming on with FLARE and Chain of Custody side. And as we look forward going into 25 and 26,
Speaker Change: We're kind of doing a low, medium, and high range on the potentials of the size of these markets, how we look at ensuring that we reinvest the proper cap bags to make sure that we we capture all the growth potential there.
Bond: Hey, Jerry, it's Bond. Just a quick follow-up. Just to think about the velocity of the sales on the flare monitoring. You know, we got the EPA regulations in, call it mid-July. We got the approval. August, we did about $100,000 of revenue. September, we did about $600,000. So, it's really starting to gain some traction.
Speaker Change: On that front, and that's what I wanted to get to next, was I think you said you had, and there was a lot of information given out there, so I apologize if I have this wrong.
Bond: Three units, I think, in the quarter, and you're looking to go to 11 units.
Speaker Change: No, we... Okay.
Speaker Change: Thank you.
Speaker Change: No, I'm sorry. I'm sorry. Yeah, I'll finish the question and then I'll finish up. Oh, no, no. I just wanted to make sure that is for the flare gas monitoring, the three-unit tool.
Speaker Change: and the numbers Bond just gave sort of implies that.
Bond: The flare gas is starting to take off and is having a meaningful impact in fourth quarter. Should see a meaningful impact as more and more units come in onboard.
Bond: Now, I know there's probably some new ones, the rental versus capital sale.
Bond: Maybe we can discuss that.
Speaker Change: Yeah, so just to clarify on the numbers, so the three we mentioned were on our earnings call we had in August for Q2, they were in location, that number grew from 3 to 11.
Speaker Change: and that will actually be 12 by Friday of this week. Active in flare monitoring and we expect continued growth in that area throughout the quarter.
Bond: We also discussed our chain of custody applications, a completely different piece where we're looking at hydrocarbon composition and flowing. That one was, we had three field trials running. We will add an additional eight units.
Bond: here in Q4 and pushing that number up so.
Bond: It's quite an exciting story, you know. I would say three quarters ago, we talked about monitoring field gas, flare monitoring, chain of custody, and now those use cases are in effect and growing. So, a lot of potential there in those areas.
Speaker Change: A little bit of a nuanced question. You had flare monitoring and chain of custody.
Speaker Change: Are they on track or growing faster than you maybe anticipated six months ago?
Speaker Change: You know.
Speaker Change: I would say that I would, I would call the chain, I meant the flare monitoring is relatively on track Considering how everybody would feel with the geopolitical issues around November 5th, right? I look for those things to as we had mentioned to you earlier that we expect them to Kick back in even a higher gear on the back half of the year
Speaker Change: on deliveries and on flare. And I would say that the chain of custody piece is probably a little ahead of what we're thinking because there's a lot of pieces around that in terms of
Bond: What people do with it, the transparency of that data and how it comes across in terms of, you know, whether they're looking at the price or paying for the composition of that crude, et cetera, compared to a composite sample. So, that's the reason why we're also talking about the certification of the measurement in terms of, you know, how the market looks at it.
Bond: But obviously, it's ahead of schedule right now.
Speaker Change: Yeah, I, obviously with the election and everything, I think some of the changes to the regs, yeah, I felt like Flare Gas Monitoring is doing really well with some, you know, some nuances in the market and different things going on. It feels like it's
Bond: Actually stronger than I anticipated.
Bond: Yeah, and again, we're excited about it because of the, you know, great success in the field. We're able to hook up, monitor, and we've gone up to three wells in one day with some of the testing. So it's run really well so far.
Speaker Change: All right, I'll jump back in line. Thanks guys
Bond: Yep.
Speaker Change: Ladies and gentlemen, as a reminder, should you have a question, please press star one. Your next question comes from Josh Jane with Daniel Energy Partners. Your line is now open.
Josh Jane: continued week, frack count, and rig count. You gave some thoughts about electricity demand out to 2030, and I'm not going to ask you for a forecast out that far, but maybe you could just talk about
Josh Jane: where we are in the U.S. land cycle today, what you're hearing from your customers over the next couple of quarters, and if you think that you can, or reasons you may be able to outperform as you have been over the last sort of 9 to 12 months on the chemistry side.
Speaker Change: Yeah, you know, I think it's a, you know, it's...
Speaker Change: It's still a little bit of a crystal ball for us, right? I would say, you know, we're in a spot where we are in Q4.
Speaker Change: I would think the Q4 is going to be relatively, I would say for the market itself, is going to be relatively soft.
Speaker Change: I think that we've had some really good, sticky, transactional business with our customer base. And I expect to see an acceleration in our international chemistry markets. And so I think we will have a strong quarter in the chemistry side.
Josh Jane: When I look at 2025...
Josh Jane: Our customers are telling us over the coming quarters, particularly as you get towards the mid-year, that we're going to see
Josh Jane: strength in the operational intensity, a little bit of an increase there, but
Josh Jane: But I think that, I'm hoping, and what we're reading the tea leaves is that the Q4 is going to be the slower spot. You'll start to see a little bit of an increase when we roll into 2025, is how we're looking at it right now.
Josh Jane: and I think the diversification of supplementing some of the North American activity, what we're doing international markets in Latin America in the Middle East is going to give us a little bit extra wind on their wings in terms of being able to outperform.
Speaker Change: Okay, thanks, that's helpful. And then maybe just one on the on the income statement, or sorry, on the cash flow statement for bond, working capitals built a little bit over the last
Speaker Change: Call it nine months thoughts on converting some of the AR to cash just as we as we move forward over the next couple of quarters and reasons we may be able to convert more cash
Speaker Change: than you've been generating so far. Thanks.
Speaker Change: Yeah, just just remember, Josh, a big component of that building working capital is related to the order shortfall penalty. That order shortfall penalty settles on an annual basis. So that that receivable just grows throughout the year to the extent.
Speaker Change: Profrag doesn't purchase the requisite amount of chemistry.
Speaker Change: So, that's one that we don't have a lot of control over, but if you back out the OSP...
Speaker Change: from the change in working capital. AR was actually down during the second quarter. So we're doing a pretty good job. As I mentioned, DSOs were improved by 12% during the quarter. When you exclude that order shortfall penalty, which is kind of on a different pay terms than the rest of our standard business.
Speaker Change: Okay, thank you for clarifying that. I'll turn it back.
Speaker Change: There are no further questions at this time. I will now turn the call over to Ryan Ezell, CEO, for closing remarks.
Ryan Ezell: Thanks everyone for joining the call. Again, we continue to be excited about the future of Flowtex. The evolution of our business is how we bring together the synergies of our unique and innovative chemistry technologies group with our emerging markets and data analytics. And look forward to our call here in Q4. Thank you for your time today.
Speaker Change: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.