Good morning, ladies and gentlemen, and welcome to the Flotek Industries First Quarter 2024 Earnings Conference Call. [Operator Instructions]. This call is being recorded on Wednesday, May 8, 2024. I would now like to turn the conference over to Michael Critelli, Director of Finance. Please go ahead.

Thank you, and good morning. We appreciate your participation in Flotek's First Quarter 2024 Earnings Conference Call. Joining me on the call today are Ryan Ezell, Chief Executive Officer; and Bond Clement, Chief Financial Officer. First, we will provide prepared remarks concerning our business operations and financial results for the first quarter of 2024 as well as guidance for the full year 2024. Following that, we will open up the call for any questions you have. Flotek's first quarter 2024 financial and operating results press release was issued yesterday afternoon. We also posted an updated Q1 earnings presentation that we will be referencing on today's call. These can all 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 risk factors discussed in our filings with the SEC. Please refer to the reconciliations provided in the earnings press release and corporate presentation as management will be discussing non-GAAP metrics on this call. With that, I'll turn the call over to our CEO, Ryan Ezell.

Thank you, Mike, and good morning. We appreciate everyone's interest in Flotek and for joining us today as we discuss our first quarter of 2024 operational and financial results. I'm pleased with our first quarter 2024 performance and even more energized about what's to come this year. Without a doubt, 2023 was a transformative year for the organization, but 2024 will be the beginning of a revitalized Flotek that demonstrates consistent profitability and expansion in shareholder value as we accelerate into a new era, a differentiated chemistry and data analytic solutions. There is no company better positioned to provide strategic solutions to a variety of our industry's most challenging problems. Whether it's operators solving for complex completion challenges such as increased water production and reduced BOE, pumping companies looking to advance their differentiation through maximizing utilization or oil and gas operators racing to meet the new EPA flare regulations were their unique real-time measurement technologies. There's never been a more exciting time to be at Flotek. With that in mind, I'd like to turn to Slide 7 and touch on our key highlights for the quarter that Bob will discuss in detail in just a moment. We delivered significant year-over-year improvements in gross profit, adjusted gross profit and adjusted EBITDA, leading to the third consecutive quarter of net income, an 11th consecutive quarter of improved adjusted EBITDA as a percentage of revenue. Notably, Q1 2024 adjusted EBITDA surpassed the total for the entire year of 2023. We realized gross profit margin and adjusted gross profit margin of 22% and 25%, respectively. Our 2024 external chemistry sales were the highest achieved in the first quarter in this turnaround over 3 years ago and was up 27% year-over-year. And although down sequentially, this pattern is consistent with the first quarter in each…

Thanks, Ryan. Good morning, everyone. Our first quarter 2024 results reflect solid performance despite relatively soft oil service demand related to natural gas directed completions. While revenue was impacted by seasonality and lower frac fleet activity, we grew margins and continued the trend of improving financial results, highlighted by another strong quarter of adjusted EBITDA. Let me run through a handful of key financial items for the first quarter of 2024. I'll be referring to slides in the presentation that we posted to our website yesterday. Slide 7 highlights our first quarter accomplishments and the strong financial improvement we delivered. Headlining our results were year-over-year growth and net income of $11 million when adjusting for noncash gains in the first quarter of 2023. Gross profit increased by $6.9 million, adjusted gross profit was higher by $7.4 million adjusted EBITDA improved by $7.9 million. Regarding revenue for the quarter, we reported total revenues of $40 million, which was down versus the first quarter of last year. This decline was attributable to lower related party activity associated with ProFrac that was partially offset by a 27% increase in revenue from external chemistry customers. As Ryan mentioned earlier and showed on Slide 9, we've experienced a decline in first quarter external chemistry revenues in each of the past 3 years. Based on current projections and a strong start in April, we expect a significant jump in external customer chemistry revenues during the second quarter. As a reminder, external chemistry revenue increased by 68% during the second quarter of last year as compared to the low point in the first quarter of 2023. With respect to data analytics, we generated strong growth from this segment as revenues associated with JP3 increased 18% sequentially. We expect growth in data analytics revenue to be weighted toward…

Thanks, Bond. Turning to Slide 19. 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 to date. Our first quarter 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 that we have made, and I'm confident in our ability to execute going forward. We appreciate the continued support of all our stakeholders, and we hope that you share our excitement regarding the future of Flotek and we look forward to reporting further progress. Operator, we are now ready to take questions.

[Operator Instructions]. Your first question comes from the line of Jeff Grampp from Alliance Global Partners.

Question on JP3, specifically as it relates to the EPA regulatory approval you guys are working towards. Any kind of update on the time line there or guesstimate as best you can provide today. And then wondering what you guys are thinking or expecting in terms of the adoption curve or pace that you might expect from that if and when you do get that approval?

So right now, we're happy with our progress and continued interaction with the EPA. Tom and the team are doing a phenomenal job there. And right now, we're expecting the adoption of EPA to come in line with regulations about the time that our production comes online by midyear. So I think we're making solid progress on both those fronts. And what's been really exciting is we're continuing to see massive adoption of our Data as a Service as a percentage of revenue. If you look back at Q1 of '23, Data as a Service was about 23% of our revenue. In Q1 of '24, it was almost 50%. So significant opportunities there. And I think as our the Cal-X model, which is our new Gen 3 measurement unit comes online into production full seen by the middle of the year. I think where we are in the regulatory body with EPA will be right in line with that. And it should give us a boost in the back half of the year.

Great. Sounds good. I appreciate that. And for my follow-up, more of a capital allocation question. Given the modest debt you guys have and the capital-light model, and obviously, the transition to becoming a more meaningful kind of EBITDA cash generative company. How do you guys kind of think about kind of reinvesting that potential in the business or looking at M&A or any other kind of options on the table you guys may be considering?

So a couple of things that we're doing is for the first time since I've been here, we've invested into some trucking capitalization components. We'll be bringing in quite a few but we have some long-haul trucking for our chemistry to deliver in basin, which would be some capital allocation. This will provide a significant amount of savings in our logistics costs. We're also continuing to spend some CapEx in JP3 at the advancement of building units to support the growth in the back half of the year, particularly on the Data as a Service model. And we're continuing to evaluate potential opportunities around M&A. I do believe that when you look at the fragmentation in the chemistry markets and opportunities there, comparatively to the front end on the E&P side, there's potential opportunities to look at some consolidation mechanism there or when we look at advancements and bringing in some new technologies on the JP3 data on excited business. So we are continuing to evaluate opportunities there. The biggest thing on use of proceeds there needs to be extremely accretive to the organization with most things that we put capital into.

Your next question comes from the line of Don Crist from Johnson Rice.

I wanted to ask about the pilot project. Obviously, it's been going for a while now, and it appears that, that customer is pretty pleased with the process so far. But have you had any other kind of field trips with other operators going out seeing the sensor and kind of seeing the progress that's being made there? And is there anything to extrapolate between other potential sales there versus just the company doing a pilot with?

Yes. So we've had quite a bit of expansion in that, Don. And I can't necessarily drop the exact names of the customer base. But what I would tell you is we've seen expansion in monitoring field gas, we've seen an increase in the number of customers looking at monitoring flares in real time. We've also seen an exponential increase in the field trials and process foundations we have around on chain of custody measurements and multiple field and geographic locations. So we're really excited. We've got in the double-digit number of units deployed in these different areas. Particularly running the Cal-X spectrometer through its paces and making sure that -- and typically, we got in line with the former direction unit to make sure everything is lined out run effectively. We're really excited about this. And the opportunities continue to come to us, and we're hard at pursuing these.

Okay. And as you look to ramp up? I mean obviously, the opportunity set is significant in front of you, I assume everything goes to plan. But as you look forward, any significant CapEx requirements or anything to build out the larger amount of sensors that you would need? Or is that kind of in place already?

So we -- in alignment right now where we're forecasting the growth just in, say, 2024, that 50% range. We dedicated capital to front load a little over $2 million to advance the build on units. Now that $2 million goes further in building the Cal-X units because they have a much lower cost base than the original Varex unit. So it's a solid improvement there. And then we're kind of going through the processes now with the adoptions that we're expecting with around how much additional capital we'll bring forward in the early parts of 2025, looking at the growth there.

Okay. But it's not significant at this point, though.

No, I would say it because we could -- like I say, when you have a substantial drop in the cost of the units, let's put $2.5 million, we can bring quite a few units on between now and the end of the year.

Yes. Don, you'll remember, that was the important thing about moving to this next generation of analyzer because the costs are roughly 50% to 60% less of the best generation.

Right. Exactly. And I know in the past, you've sold these units, but you're trying to shift over to more of a subscription model. Have you had any positive or negative in influence or feedback from customers on either way? I mean, are people still wanting to buy these? Or are they more happy with the subscription model with you making sure everything's running properly going forward.

That's a great question. I think when we look at it, it depends on if you're in upstream, midstream or downstream application. What I would consider to be more of the golden applications in the midstream part. A lot of the customers that we continue to expand business with prefer the capital purchase just because of how the unit is utilized. What we're seeing is the predominance in the upstream business to be 90-plus percent in terms of either, one, a Data as a Service model or a hybrid type service with a large subscription-based model with the minimal capital investment upfront for the installation. So I think it kind of depends on the application, but pretty much the bifurcation is heavy on subscription based and upstream, there's still a little preference to the capital purchase in the midstream part.

Yes. Don, Ryan gave some stats on the percentage of revenue from DaaS versus capital sales, 1Q versus 1Q. Included in those percentages when you look at just pure DaaS revenue quarter-over-quarter, it's up 30% in first quarter, '24 versus first quarter '23. So people are migrating to the DaaS model, certainly.

That's good to hear. It's much more sustainable and gets a higher multiple. I appreciate the color, guys. I'll turn it back.

Your next question comes from the line of Eric Swergold from Firestorm Capital.

Congratulations on your hard thought progress. There's been a number of industry pieces talking about the use of AI in the E&P space. Can you speak to how your data analytics and chemistry segments fit into this new AI framework for E&Ps?

Yes. This is actually a real, I would say, exciting frontier for us, Eric, is that initially, most of the AI-oriented activities that we're doing were around our chemometric modelings and things that we're doing on the JP3 side, leveraging that large database of crude samples that we've had over the last 5 to 7 years. And so there's a lot of advancements that we're making to accelerate the accuracy, the models, accelerate the group fits particularly when you look at I would say, the chain of custody and rebate for pressure measurement, and stuff that we're doing there. And AI continues to be a large part of that. What's been really exciting is we took a step back and said, hey, if you've been an innovative chemistry company with 200 patents in the advanced reservoir technologies component when you look at some of these influences at the nanopore level and what goes on with surface interaction space interactions and things. We've completed over 20,000 wells, and we have production data and chemistry modeling for these things. So we've gone in and now using AI to actually take these data sets, crunch them create cubes of different data with that. In advancing how we look at the performance of our chemistry to make small formulation changes and actually advance where we're going to be in the future and what I consider to be improved oil recovery for the total life of the asset. So I think it's playing an essential part for us to accelerate our technology and the thinking that we do on both the chemistry and the data side. And what it's starting to do is really create an amount of synergy and a unique platform, I think, to Flotek that we're going to be talking quite a bit about some of the upcoming events we have at the Louisiana Energy Conference, and what we're going to talk about Intercom and Denver later in August, we're going to be presenting some of this work.

Your next question comes from the line of B.J. Kirk and individual investor.

B.J. Kirk with Singular Research. You guys talked about external chemistry this year. I expect it to increase here, but I know it's determined on volume quite a bit. I'm just curious, you guys anticipate or are adding new external operators to your platform.

Yes, 100%. I mean the biggest part we look at on external chemistry is we have -- we've seen the tenure being here, our seasonality shift a little bit. What used to be Q3 to Q4 now with a little bit [indiscernible] be the capital discipline the way to look at plans and the ability to turn to [ Spigit ] on and off here in the U.S. We've seen some of that seasonality shift in the Q1, and has traditionally been probably our least active quarter on the external chemistry sales component of that. But compared to be speaking over the tenure that we've done this turnaround, you've seen average frac fleet in those quarters go down, and our revenues continue to go up substantially. As you look at, say, for Q2 to Q4 through the rest of this year, we've got a substantial. We've got a really healthy and robust pipeline at continued activity with a strong group of what we call our stickier customer base and quite a few new opportunities on the backside here is the adoption of our prescriptive chemistry management and our understanding of the reservoir technologies are coming into prominence. As you're starting to see a lot of these operators moving infield well design and downspacing on how they do their completions.

We don't have further questions at this time. Presenters, please continue.

Thank you again for joining us today. Flotek's CEO, Ryan Ezell, will be participating on a service industry panel at the Louisiana Energy Conference on May 29, 2024 at 4:00 p.m. He will be joined by CFO, Bond Clement, in hosting meetings with investors and a copy of the presentation will be used in the discussions with the investors will be available on the corporate website prior to the event. We look forward to meeting with you. Thanks again for joining us today. Please feel free to contact us if you have any additional questions. Have a great day.

This concludes today's conference call. Thank you for your participation. You may now disconnect.