Q3 2025 Flowco Holdings Inc Earnings Call

Speaker #2: Good morning . Welcome to Flowco Holdings Inc. . S third Quarter 2025 Earnings Call . Today's call is being recorded and we have a lot of keyed in one hour for prepared remarks .

Speaker #2: And Q&A . At this time , I would like to turn the conference over to Andrew Leonpacher vice President , Finance , Corporate Development and Investor Relations at Floco .

Speaker #2: Thank you . You may begin .

Speaker #3: Good morning , everyone , and thanks for joining us to discuss third quarter results . Before we begin , we would like to remind you that this conference call may include forward looking statements .

Speaker #3: These statements , which are subject to various risks , uncertainties and assumptions , could cause our actual results to differ materially from these statements .

Speaker #3: These risks and uncertainties and assumptions are detailed in this morning's press release , as well as our filings with the SEC , which can be found on our website at .

Speaker #3: I . Com . We undertake no obligation to revise or update any forward looking statements or information except as required by law . During our call today , we will also reference certain non-GAAP financial information .

Speaker #3: We use non-GAAP measures as we believe they more accurately represent the true operational performance and underlying results of our business . The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP .

Speaker #3: Reconciliations of GAAP to non-GAAP measures can be found in this morning's press release and in our SEC filings . Joining me on the call today is our president and Chief Executive Officer , Joe Bob Edwards , and our Chief Financial officer , John Byers .

Speaker #3: Following our prepared remarks , we'll open the call for your questions . With that , I'll turn the call over to Joe . Bob .

Speaker #3: Thank you . Andrew .

Speaker #4: And good morning , everybody , and thank you for joining us today . I'll start today by reviewing our third quarter results . And operational performance , along with an update on the integration of the assets .

Speaker #4: We acquired in August . John will then provide additional detail on our financial and segment results . Our balance sheet , and thoughts on capital allocation .

Speaker #4: I'll wrap up with our perspective on the current market environment and our outlook for the remainder of the year . Before we open up the line for your questions .

Speaker #4: In the third quarter , Floco delivered another period of strong operational and financial execution . We generated adjusted EBITDA of $76.8 million , exceeding expectations , and we saw a 382 basis point expansion in our adjusted EBITDA margin quarter over quarter .

Speaker #4: Excluding the capital associated with our recent asset acquisition , we generated approximately $43 million in free cash flow , underscoring the durability of our cash flow generation and our disciplined execution across the business .

Speaker #4: Our performance reflects a shift toward our high margin rental portfolio , which is growing through targeted investment and incremental customer demand for high pressure gas lift and vapor recovery systems .

Speaker #4: On Hp-gl , our solutions are delivering measurable improvements in production efficiency , uptime and reliability , helping operators enhance recovery and returns customers continue to value the consistency and economic uplift these systems provide , particularly in an environment that rewards capital efficiency and sustained performance .

Speaker #4: On Vru , we are seeing continued momentum as operators recognize the financial and operational benefits of capturing and monetizing natural gas that would otherwise be vented or flared .

Speaker #4: Together , our Hp-gl and Vru fleets provide contracted , recurring cash flows that offer visibility and consistency across cycles . These technologies are strengthening flow , leadership in production optimization , and we believe there remains substantial runway ahead as customers broaden deployment across their assets and recognize the long term value of these solutions .

Speaker #4: Our high margin rental portfolio was further bolstered by the acquisition of 155 high pressure gas lift and vapor recovery systems , which we completed in August , and discussed on our second quarter call .

Speaker #4: The integration of these assets has gone extremely well and is now complete with the units performing in line with expectations and contributing to our enhanced margin profile .

Speaker #4: The acquired systems , all deployed in the Permian , have also enabled us to establish new relationships with several blue chip customers . While strengthening service to existing accounts .

Speaker #4: We will continue to evaluate inorganic opportunities within production optimization that complement our portfolio and align with our disciplined capital allocation framework . Spending a moment on sales and consistent with what we discussed in our second quarter call , revenues declined sequentially in both our production solutions and natural gas technology segments .

Speaker #4: John will expand on this in his remarks . But much of this impact was driven by our natural gas systems business unit , which is our lowest margin business .

Speaker #4: But remains a critical part of our internal supply chain . And it also provides us operational flexibility within production solutions , product sales were also impacted , but performance remained resilient considering the environment , and they exceeded our expectations for gross margin performance .

Speaker #4: This result underscores the sustained demand for our differentiated , high quality products and highlights the emphasis operators continue to place on reliability and performance in the current environment .

Speaker #4: Overall , I am pleased with our operational and financial performance in the third quarter . We continue to execute well across the organization , expanding margins , generating strong free cash flow and strengthening our high margin rental portfolio through both organic growth and the integration of our acquired assets .

Speaker #4: These results highlight the resiliency of our business model and consistency of our execution in a dynamic market environment . With that , I'll turn it over to John to provide more detail on the third quarter .

Speaker #4: John .

Speaker #5: Thanks , Joe . Bob . Before reviewing some of the key financial metrics and results for the third quarter , I'd like to provide a reminder on our historical financial information .

Speaker #5: Given the combination of Flowco Holdings Inc. and STC in June of 2024 , for clarity , note that any financial information presented prior to June 20th , 2024 Business combination such as the third quarter of 2024 financials , reflects only the historical performance for Estes financial information for the second and third quarters of 2025 reflects the financials for the consolidated entities .

Speaker #5: Turning to our financials , third quarter performance exceeded expectations , reflecting continued growth in our rental fleet and stronger than anticipated profitability within our sales business .

Speaker #5: Units . We reported adjusted net income of $37.3 million on revenue of 176.9 million , total revenue declined 8% sequentially , driven by lower product sales activity in both our production solutions and natural gas technology segment .

Speaker #5: Despite lower revenue . Adjusted EBITDA increased sequentially , supported by the continued growth of our rental portfolio and its higher margin profile . As a side note , rental revenue , most of which is recurring , increased to 107 million versus 102 million last quarter .

Speaker #5: Adjusted EBITDA margin expanded by 382 basis points quarter over quarter , reflecting the benefit of our portfolio mix shift in the operating leverage .

Speaker #5: We continue to capture across the business in our production solutions segment . Third quarter revenue decreased 2.1% to 126 million , while adjusted segment EBITDA increased 3.6% from the second quarter to 55 million .

Speaker #5: Adjusted segment EBITDA margin expanded 240 basis points quarter over quarter . The decline in revenue was primarily driven by lower downhole components , product sales , and partially offset by higher rental revenue from both our existing fleet and the recently acquired assets .

Speaker #5: The increase in adjusted EBITDA and margin was largely attributable to improved operating leverage within our surface equipment rental business , and an improvement in gross margin performance in downhole components in our natural gas technology segment .

Speaker #5: Third quarter revenue decreased 21% to 51 million compared with the second quarter , while adjusted EBITDA decreased 7.6% to 25 million over the same period , which were attributable to a decrease in natural gas systems and vapor recovery system sales in the quarter .

Speaker #5: Adjusted segment EBITDA margin increased by 714 basis points due to a favorable revenue mix shift towards vapor recovery from natural gas systems . Turning briefly to corporate costs , third quarter corporate expenses were 3.8 million , down from 4.3 million in the second quarter , primarily reflecting lower third party professional service costs during the period and a reduction in DNA overall .

Speaker #5: Consolidated third quarter adjusted EBITDA was 76.8 million . Since becoming a public company , we've delivered consistent EBITDA growth while expanding margins and sustaining top quartile profitability , even against a more challenging macro backdrop than when we entered the public markets in the third quarter , we deployed 39.7 million of organic capital , with the majority of capital allocated to expanding our surface equipment and vapor recovery rental fleet to support sustained customer demand at attractive returns .

Looking ahead, we expect our rental Fleet to continue delivering. Consistent predictable, performance supported by strong demand, and contracted cash flows. We also anticipate continued resilience and strong free, cash flow generation across our sales business units, our disciplined Capital deployment and differentiated business model. Give us confidence in our ability to continue delivering strong results. Back to you. Joe Bob.

Thanks John. Turning now to the Market Outlook as we noted last quarter, the North American Upstream landscape remains dynamic.

With operators, continuing to balance production growth with capital discipline in a lower commodity price environment.

Have generally stabilized. And customers are increasingly focused on maximizing returns from their existing production base.

We continue to see a shift toward prioritizing operating expenditures over Capital expenditures to sustain or grow production, an approach that aligns directly with flow Coast core strengths in production optimization.

Considering this Market backdrop, our growth expectations, for the remainder of the year are unchanged.

And this is reflected in our fourth quarter guidance.

In the fourth quarter, we expect adjusted ibida of 76 to 800 million.

This Outlook reflects continued, momentum and growth in our surface equipment and vapor recovery rental fleets inclusive of a full quarter contribution from the assets acquired in August.

Within Production Solutions we anticipate a small incremental, seasonal slowdown in product sales that will lead to an overall decrease in Revenue in the Production Solutions segment.

For the natural gas technology segment based on current visibility. We anticipate a rebound in sales across both natural, gas systems, and vapor recovery systems. Resulting in segment. Revenue slightly above second quarter levels.

Finally, we expect sgna to remain broadly consistent with the third quarter.

I am pleased with the solid performance of our business this quarter. And I want to thank all of our employees across flco for their continued dedication and disciplined execution.

While we are encouraged by our positioning, we remain focused on strengthening the business for the long term.

We are committed to continuously, improving our operations and advancing our strategic priorities.

Within natural gas Technologies. We are seeing positive early returns from the use of machine learning to improve efficiency, reduce maintenance expenditures and enhance margins through an internally developed proprietary system.

Across our manufacturing and operational footprint. We are evaluating opportunities to further, streamline, processes and increase profitability.

As we strengthen collaboration across the organization, we are identifying ways to more fully serviced customers through our complete Suite of products and solutions. And we continue to assess both organic and inorganic opportunities to enhance our technology and service offerings. Positioning flowco to further support our customers and maximizing their production and profitability.

2025 has reinforced the value of our strategic, focus on production optimization.

where advancing artificial lift Technologies, within Production Solutions, and improving vapor recovery performance across natural gas Technologies is creating meaningful value for our customers and for flco

We believe the next phase of value creation will be driven by technology enabled, efficiency.

Continued Innovation across our offerings.

and deeper collaboration with our customers, to unlock value over the life of the well,

Loco is well positioned to continue advancing our strategy and to deliver meaningful long-term value for our customers and shareholders. And with that, I'll turn it back over to the operator for Q&A.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2. If you would like to remove your question from the queue and for participate, using speaker equipment and may be necessary to pick up your handset. Before pressing the star Keys 1 moment, while we pull for questions.

Our first question is from Derek Pazer with Piper Sandler. Please proceed.

Hey, uh, Good morning. Joe Bob and John. Um, just wanted to start uh, with natural gas Technologies more specifically the progression of optimizing natural gas systems. Um, seems like that that drove some of the Topline decrease, but we've also saw a 700 bits margin expansion there. I know this was a a point of emphasis last quarter so maybe just update us on your progression, optimizing that business unit. Um because it seems like you made a lot of progress in the quarter and how we should think about it, moving forward, as you continue to optimize NGS.

Uh said, we we did take in the earlier part of this year, the step to optimize that part of our supply chain by consolidating 1 of our facilities into our center of excellence in El Reno. I think you've been there. It's a, um, it's a world-class, uh, manufacturing facility. Uh, very proud of that uh, facility. We we took the painful step to close down, um, 1 of our, um, sister facilities in Pampa Texas, um, and reallocate the capacity to El Reno Oklahoma. Um, 1 particular point that we're particularly proud of is the fact that with all of the redundancies that took place in Pampa, um, through various job placement, uh, exercises in career fairs that we hosted we placed, um, Almost 100% of those employees in neighboring, facilities in the Pamper region. So, um, even though it was a painful step, it was a necessary step, uh, for our shareholders but we did write by the community that we operate in every day.

And taking care of those employees. Um, there might be more to go there. Uh, we have additional capacity elsewhere in the system. Uh, we continue to evaluate it, um, as, uh, as we look at the demand profile going into 2026, um, but uh, but yeah, we're happy to happy to get that behind us this year and uh, move forward, um, in a, in a leaner way.

Got it. Okay, that that's helpful color. Um and then I guess just just on the rentals, right? Like we're up to 60% of Revenue. Now we were 50% in first quarter. Is this where you expect a run rate to kind of be going forward as we move into 2026? Or are you continuing to Target rentals of hpgl and and, you know, vruce that we could see something north of 60% as we move into next year.

It'll largely depend on the capital deployment Pace. Derek the the the uh, the the, the shift, from 50 to 60. This year is, is really due to the Capitol we've deployed as well as the, the, the, the, the software product sales. Okay? So it's a mixed shift coupled with growth capex, kind of phenomenon. Um, heading into next year, we see, uh, and and we'll talk on this. I think John will probably address this in a minute. Uh, we we see Capital deployment, roughly in line with what we're deploying, what we have deployed in 2025. Um, there will be some, you know, some mixed shift within the capital deployment, of course, depending on the demand profile. We see. Um, but we, we fully expect product sales, uh, to be largely consistent with where they are. In 2025, absence, some sort of Industry, um, uh activity boost, um, the uh, remember, the product sales are a function of both what happens downhole, as well as the surface equipment. And, uh, and we've seen particular weakness in the surface equipment sales business in 2025. So

Um, so yeah, it look hard to tell if 60 is going to be the new Norm or if it's going to go down, my guess is, it's probably going to go down a bit as sales recover heading into the end of the year and then and then going into 26 anything to add to that. No, I agree. I think, I mean, you know, 60% is, is almost a flip from a couple years ago, um, because of all the investment we've made in our rental Fleet but, you know, Q3 was, um, uh, you know, particularly low in terms of uh, product sales. We expect that to recover a little bit in the next quarter. So I think you'll see that kind of bump back down a little bit and, you know, overall that'll have an impact on on margins, as well as we sell more than we rent.

Got it very helpful. Great quarter guys. I'll turn it back.

Thanks.

Our next question.

John worth with BMO Capital markets, please proceed.

Uh thanks. Good morning, guys.

As as as you've operated the the the Arch Rock assets for the last couple months. Um, can you give them a bit more detail on the customer response and feedback today that they work with the flowco team? Um and is there any uh cross-selling potential or increased hpgl penetration, that can be done across the new Blue Chip customers?

Certainly, uh, to answer the second question first. Yes. Uh, we inherited a couple of accounts that, uh, we for a variety of reasons, had trouble, penetrating specifically with hpgl Phil and, uh, we think that the and it's, it's early, but we think that those accounts are going to be open to, uh, the broader commercial discussions that our teams can have

As as they progress through the wells progression from hpgl to another form of lift, most likely traditional gas lift. So those conversations are happening, we're starting to see some good early returns there. Um, and that's, that's just a daily part of the part of the battle on our commercial efforts. Um,

Into our into our Fleet it was seamless. Okay? The the, uh, the reception that we got from customers of us. Really the leader in the space and, and, and the and and you know, what we do is focus on production at the Wellhead. Um, customers were were, were very pleased to that. We were the buyer of these assets and are now, um, the custodian of of their early production efforts. So, um, I'd say, um, all around, uh, it was, uh, it was very positive. Um, I I certainly hope all future m&a is as seamless as this. This is a particularly unique 1 though I think. Uh but no it's uh it's gone really well.

Great, great to hear. And then, um, can you talk about recent Trends in VRU adoption across? Uh, maybe both upstream and Midstream. Um, and and just given that captured methane is put back into the sales pipeline. Um, I mean, 1 of the big themes we've seen is just the amount of Parian pipelines and construction FID, uh, in the last couple months. And and what the strips implying for waha post 2026, is this at all make you any more optimistic on, um, increased VRU. Adoption after you see higher, end base and gas prices,

No, no question. Uh, we are as optimistic, if not more based on the fundamentals of of the natural gas buildout. Um, you you mentioned pipeline capacity. It seems like anytime you have a new pipeline, uh, announcement. It, it just inevitably gets filled, um, with all of the associated gas, that's coming out of the Permian. Um, and then the, uh, the massive amount of, uh, of of of data center power buildout that's taking place, uh, a very large portion of that will be fueled by natural gas. So, I think the demand profile for natural gas. The fundamentals for for, for, for natural gas, coming out of the permanent in particular, um, it just continued to strengthen and vapor recovery. Um, is a is becoming ubiquitous with pad design. And with, uh, the, the undeniable economics, that it provides to an operator to deploy our systems. Um, we we remain confident in in additional system.

System deployment. We we really track a couple of key, uh, uh, kpis on a month-by-month basis and, uh, 1 of the 1 of the most critical ones is, uh, the number of units that we set every month, uh, net of those that come back to us in terms of returns. And, uh, and I'm, I'm pleased to say that. We just continue to see positive months, uh, as as we build more systems as customer demand improves, um, that uh, that net set number continues to

To, uh, to, to Trend in the right direction. So, um, we we, uh, we see no reason to back away from the capital deployment, that we plan for 2026 in VRU. Um, and, uh, and look forward to hopefully, uh, providing more positive data points, um, in the quarters to come,

Great. Thanks guys.

Our next question is from Sean Mitchell with Daniel Energy Partners, please proceed.

Good morning, guys. And thanks for taking my question. Uh, Joe Bob, you kind of mentioned technology in the opening comments, but just are you guys building out kind of proprietary software tools in-house, or are you partnering with kind of digital specialists to accelerate?

Kind of AI and automation capabilities.

Good question, Sean. We we actually have built out, uh, over the last 10 years. Uh, if you can believe it, um, in-house proprietary software systems that have helped.

Manage and operate our vapor recovery systems, uh, more efficiently more profitably than our competitors. Okay. So this is a legacy of of, uh, previous Investments we've made as as a private entity, uh, pre-ipo. Um, we're in the very early stages of leveraging that internal capability of, uh, of of software development specifically software development to help optimize surface equipment more.

The the I think the uh uh the ultimate end goal is to work with customers who who have more data than we do right to integrate what they see in their in their production information, with what we can provide with our with our, uh, lift and and VRU techniques to help optimize their, their production on a field-wide basis, not just well by wealth. But that's, that's the end goal. We're on the journey and, uh, look forward to hopefully, um, sharing more, good news over time.

Thank you for the color. I appreciate it. Congrats on the quarter.

Thanks, Sean.

As a reminder, this is star 1 on your telephone keypad if you would like to ask a question. Our next question is from Jeff LeBlanc with tph and Company, please proceed.

Uh, Good morning, Joe Bing team. Thank you for taking my question.

Uh, I wanted to see if you could help.

Sorry, I wanted to see if you could help frame the tailwinds for your HPGL and VRU businesses as operator starts at Target gas here at benches. I know you just talked about the tailwinds for natural gas demand, but it actually seems like, at least, you're starting to see the shift on phase windows, and then darker than the Eagle Ford, and then probably over time, you could also see it in the Permian.

So, I just appreciate any color there. Thank you.

For hpgo. What you're really? Um, what we're really looking at is oil production, right? So, um, as we look at, uh, you know, big picture production data, uh, for the country oil production continues to hang in there. And, uh, we haven't seen the meaningful decline in production that, uh, I think, uh, you know, folks feared earlier this year, might take place as commodity prices, corrected and activity, levels started to be curtailed. Um, so I think, you know, high pressure, gas lift, certainly plays a part of that. Um, and, uh, and, and we're going to continue to, to, to invest in in that, in that effort, uh, we we've really seen, no, uh, no change from customers, uh, demand for our systems, in particular in the Parian, which is our largest, you know, concentration of units in the US. Um, so, uh, we're we expect to continue to generate, you know, positive, uh, growth out of that specific product line over the next few quarters. And, uh, and really have not seen any kind of, of, of

Demand profile shift. Um,

so hopefully that answers your question. I I know it's there's not a ton of detail in there, but that's that's how we see it.

Thank you very much. I'll hand the call back to the operator.

Our next call is a follow-up from Derek. Kaya has there with Piper Sandler; please proceed.

Hey um wanted to ask about the buyback. Um nice to see 15 million uh for this quarter. Maybe just updated thoughts how you're thinking about that as far as your Capital allocation strategy? Obviously we have the we have the dividend for a couple quarters. Now, we have the buyback. I know you have an authorization out there, you're balancing your Capital deployment. Um, will this just be opportunistic? Will this be more formulaic? Um, you know, returning over 50% of free cash flow, which is really nice to see. Just maybe some more thoughts around uh, the buyback just giving that you just kicked it off.

Yeah, certainly Derek. Listen, we've been very uh, very careful to not be prescriptive uh in telegraphing to the market. Um, you know how our Capital allocation framework will be, you know, period, full stop. We've been uh, we've been much more, uh, opportunistic in in looking at ways to deploy the free cash flow that we generate every day. Um, as we as we looked during the quarter at our internal opportunities as well as every day, how we're valued. Um, it just became increasingly uh uh more clear um that we're undervalued.

And uh, and so we leaned into share repurchases during the quarter and uh and and we will continue to as long as we feel like we are not valued where we, we feel like we should be certainly that in, in relative terms against the opportunity set that we have to deploy capital in um in in our existing business and of course, in m&a. Um, so look, we we'll remain opportunistic. Uh, we were happy to to, to, to start the process during the quarter uh, to to to, to buy back stock opportunistically and we'll just continue to evaluate it as it as it as it hits the screen every day.

No, no, that that makes sense. Um, and then maybe just looking out to 2026, you know, appreciate that it that it's early. Uh, but how you start to think about that, um, you know, kind of where you're comfortable, where estimates are today for next year and just thinking about the progression of obviously, kind of these weaker, uh, product sales. Um, you know, we have some seasonal dip in 4 q but we have should have some recovery next year. So maybe just some early thoughts. And as you look out to 2026 and kind of our numbers are are shaking out right now.

Listen, we're, uh, We've, we're, we're a brand new public company, right? We're, uh, We've we've, uh, started to and, and, and I've been consistent in guiding quarter by quarter. I think we're going to continue that Cadence, Derek. Um, we, uh, we provided you some guidance for Q4. Um, we obviously have a view on 26, but we're going to see how the planning process goes between now and the end of the year. Um, what I can tell you is that the opportunity set that we are investing in today and, and remember, we're kind of a 6-month lead time kind of a organic capex organization. Um, the the the, uh, the opportunity set looks looks strong and and we are making Capital decisions out through June. And um, I'd say they're largely consistent with the, uh, the, the opportunity set that we've seen this year. So I I don't see any reason why we're going to curtail Capital spending. Certainly through mid-year next year, uh, that the form of the capital may be different. Um, and you know, moving from Electric to na natural, gas drive or or can

Conventional from hpgl, you know, they'll it'll move around within within the systems that we operate.

Um, but uh, I'd say it it, as we see it today, it's pretty. It's pretty steady. Um, the product sales as you point out are are uh, are are shorter cycle?

And um, and you, you tell me what, the what the price deck is for next year and we can pontificate on what the year could be, but but we're just not comfortable enough to give you, you know, any kind of full year guidance, uh, just yet. But, um, as we look into Q4, um, things look good. And, uh, we're, we're optimistic that we're going to deliver another another good quarter with some growth and, uh, and positive free cash flow, and and returning Capital to shareholders just as you pointed out.

Got it. All right, all sounds great. Thanks again, I'll turn it back.

This book is included. Our question and answer session. I would like to turn the conference back over to management for closing remarks.

Thank you everybody. Look forward to uh talking to you again in 90 days, hope everybody has a great Thanksgiving and good rest of the year. Thank you.

Thank you, this will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.