Good morning, ladies and gentlemen, and welcome to the Flotek Industries' 2024 Q2 Earnings Conference Call. [Operator Instructions] This call is being recorded on Wednesday, August 7, 2024. I would now like to turn the conference over to Michael Critelli, Director of Finance and Investor Relations. Please go ahead.

Thank you, and good morning, everyone. We appreciate your participation in Flotek's second 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 second quarter 2024 as well as our updated guidance for the full year 2024. Following that, we will open up the call for any questions you may have. Flotek's second quarter 2024 financial and operating earnings press release was issued yesterday afternoon. We also posted to our website an updated Q2 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. Before we begin, I'd like to make some brief remarks about forward-looking statements and the use of non-GAAP financial measures. Except for historical information mentioned during the conference call, statements made by Flotek management on today's call are forward-looking statements that are pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. 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, certain non-GAAP financial measures as designed under SEC rules may be discussed on this call as required by applicable SEC rules. The company provides reconciliations of any such non-GAAP financial measures to the most directly comparable GAAP measures on its website. Please refer to the reconciliations provided in the earnings press release and corporate presentations posted on our website. With that, I will 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 second quarter 2024 operational and financial results. I'm extremely pleased with our performance during the first half of the year that continues our trend of delivering revenue and profitability growth. With that in mind, I'd like to turn to Slide 5 and touch on our key highlights for the quarter that Bond will discuss in detail in just a moment. Against the backdrop of slower North American oilfield service activity, we grew revenue 14% sequentially, highlighting our strong execution and the continued progress we've made in capturing market share. This is an impressive accomplishment when considering that the active rig and frac fleet counts declined sequentially during this same period. Our Q2 2024 external customer chemistry sales were up 40% from Q1 to 2024, and our Data Analytics segment saw a 22% quarter-over-quarter increase. We delivered significant year-over-year improvements in all profitability metrics, resulting in the fourth consecutive quarter of net income and seventh consecutive quarter of improvements in adjusted EBITDA. We also raised our full year adjusted EBITDA guidance by 23% at the midpoint. We've amended our ABL facility, resulting in a sizable increase to our loan commitment with a reduction in the interest rate. And in addition to this progress, we received approval from the Environmental Protection Agency for the JP3 analyzer system for utilization in flare emission monitoring, facilitating access to a new upstream market application with an estimated annual total addressable market of $220 million. And most importantly, all of these achievements were accomplished with zero recordable and lost time incidents. I'd like to take a moment to thank our employees for their hard work and commitment to safety and service quality and achieving these…

Thanks, Ryan. Good morning, everyone. There's obviously a lot to like about our release yesterday, and we're very excited about sharing our continued progress. During the quarter, we grew both chemistry and Data Analytics revenue, we increased our full year guidance, we reported an expansion of our loan agreement and we continued our quarterly streak of improved profitability. Our second quarter results continue the financial and operational momentum that began back in 2022 with the execution of our long-term supply agreement. In the face of softer oilfield service fundamentals, our ability to grow revenues, profitability and liquidity is a validation of our strategy to build resilient and complementary business that allows us to deliver impressive results through industry volatility. Moving to the specific results. I'll run through a handful of key financial items for the second quarter and refer to the slides in the presentation posted yesterday. Slide 5 highlights our second quarter achievements and growth and profitability. Headlining our results were year-over-year improvements in net income, gross profit and adjusted EBITDA compared to the second quarter of 2023. For the second quarter, we reported total revenues of $46 million, which was a sequential increase of 14%. As Ryan mentioned, this increase was driven by the strong growth in chemistry revenue from external customers. We indicated on last quarter's call that our first quarter results were impacted by seasonality, so we were excited to see the strong recovery in 2Q that we said we believed would occur. Gross profit during the quarter increased for the sixth consecutive quarter. Second quarter gross profit grew to $9.2 million or 136% increase compared to gross profit of $3.9 million in the comparable 2023 period. It's important to note that the minimum chemistry purchase requirements in our supply agreement were in effect during the…

Thanks, Bond. We are excited about the remainder of 2024 as we believe that Flotek continues to represent a compelling investment opportunity. Our second quarter results delivered revenue and profitability growth as part of our chemistry as a common value creation platform strategy. The approval of our JP3 analyzer provides a strong catalyst for revenue growth later in this year and into 2025. I'm quite proud of the progress we have made, and I'm confident in our ability to execute going forward. We continue to be an industry leader, driving innovation and delivering differentiated chemistry and data solutions that are tailored to our customers' needs. We strive to anticipate future challenges that will impact our industry, so we are at the forefront of delivering chemistry and data solutions before they are needed and creating measurable value for our customers. We appreciate the continued support of all of 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 of Alliance Global Partners. Please go ahead.

Good morning, guys. Thanks for the time. First on the Data Analytics side. And in particular, on your slide deck, you guys referenced you've already got orders for over 50 flare sites in just, I guess, the last few weeks with EPA approval. Can you touch on -- I'm curious, I guess, how many customers does that comprise? Are these new customers? Are these upstream? Any of those kind of details to share on those orders would be great.

Yes. So the majority of the customers are all in the upstream space. And I would say we're probably about a 50-50 blend of customers that we've traditionally done work in the midstream space and then some that are new. And when we look at that around receiving the orders of over 50 flare sites, and we're basically -- we've got a lead time of about four to six weeks on each cart because they're starting to come out. And these orders, most of them are going to be expected delivery in the -- into Q3, Q4 and the start of 2025 timeframe, and those orders are continuing to build. So it's quite an exciting time in terms of what we're going to be able to do with this -- the impact of the flare cart because it truly creates a single solution for monitoring flare emissions.

Great. I appreciate that, Ryan. And for my follow-up, the external customer growth was noteworthy, and I think you guys kind of alluded to seeing that even on last call. Industry activity, those headed the other way. So I'm curious, what's kind of the view in the back half of the year in terms of the sustainability of continuing to kind of buck that trend when the industry is kind of flat to down? You guys have obviously outperformed quite significantly. Can that continue? When does that start to become a bit of a headwind for you guys, if at all?

I mean, that's a great question, right? And what I would say is, as we mentioned on our call last time, we've typically seen post COVID a little bit of cyclical nature of the impact of activity in Q1 and we see a strong rebound in Q2. But what I would say is that when you look at our Q2 of '23 to the Q2 of '24, it's 10% better in '24. And you've seen a reduction in the average number of frac fleets in the quarter, which indicates a market share gain. When we look at what we're going to see in the back half of the year, we still believe we've got opportunities to grow our chemistry business, even though we're expecting to see about a - I would say, a 5% to 6% reduction in average frac fleet count. Because if you were just to compare the average of June and what the average of Q2 was, it's running a little over 6% decline in total activity. But I do think we're going to continue to see some slight growth. But there's no doubt, it won't be the percentage jump that we saw from Q1 to Q2. But I think it's going to still present solid performance of market share penetration as we see that growth -- the activity has been a little slow. And we expect H2 to kind of be a little bit of a low point in the activity of where we're at in this cycle.

Yes, that makes a lot of sense. I appreciate the time. Thank you.

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

Good morning, gentlemen. I wanted to start on the orders for the 50 orders that you received for the Calix sensor so far. Any breakdown as to how many were outright sales versus on subscription model? I know you were toying around with kind of shifting over to more of a subscription model. Just any color around that?

Current to date, all the ones that we've received now have been all subscription based which has been fantastic for us in terms of the strategy and moving towards that Data as a Service and service revenue model. It will be interesting to see as the market matures because there is substantial benefits to having these units monitoring continuously on a single well throughout the year as they can calculate a destruction number, which can actually improve the performance of the well potentially by 2% to 3%. But right now, 100% of the orders have been on a subscription model.

Okay. And taking that a step further, obviously in the presentation you talked about an addressable market of $220 million. How many sensors just roughly speaking would that take? Is that double or triple the orders that you've gotten already?

Yes, it's probably larger than that. I mean, the way we look at it is if you take those 55,000 wells, they have to be serviced essentially once every five years. So we look at -- it's a total market over that five years of a little over $1 billion, and so we see a recurring revenue space of about $220 million a year. As the growth and adoption takes place, we're targeting the upper teens to 20% market share of that piece. But that will probably take us 2.5-plus years to get there. But there's no doubt to address that kind of market, it's quite a bit more on a 2x to 3x of what we have currently in sale right now.

Okay. And on the other side of the measurement business, from the production side, any traction on sales there? I know you've added a bunch of salesmen over this year and gone from a small number to a very large number. Any follow-through on sales on the production side, not on just the flare side?

Yes. So the chain of custody piece is what I'm assuming you're referring to on the production component. We are seeing significant interest in that part. And we've actually deployed a series of units out on location taking the measurements. The measurements are -- it's coming in similar to what we were -- around our expectations on that. And that customer base is continuing to grow. I think our piece on that, that comes -- I wouldn't say it's a headwind, but it's a component of understanding who that final buyer is going to be in terms of the operator or if that's going to be the leaseholder, et cetera. Traditionally speaking, probably closer towards that leaseholder is going to get the larger benefit out of that. But we are seeing a significant amount of interest. The interesting part about that is the flare becomes such a hard push because it's regulated. And this is more of a growing interest. And I won't say proof of concept, we've kind of proven a proof of concept, but it's a matter of getting the understanding out there of how the chain of custody part, how big of an impact that's going to be. We just completed an advanced customer deck, I would say, on the solution case for how it works and the substantial impact looking at chain of custody monitoring can have. So we're pretty excited about that.

I agree. And once people understand that they can make more money from their production, that should take off. I appreciate the color, guys. I'll turn it back.

Thanks.

Your next question comes from the line of Gerry Sweeney of ROTH Capital. Please go ahead.

Hi, good morning, Ryan and Bond. Thanks for taking my call.

Hey, Gerry. How are you doing?

Good. Just wanted to follow up on the flare gas side. I think you just mentioned $220 million sort of addressable market, looking to get to upper teens, even 20% market share. Curious if you could give a little bit of detail, sort of maybe the road map as to how you achieve that over the next couple of years.

Yes. So there's no doubt, we haven't specifically given the public revenue guidance on that growth rate just yet. I will say that our expectation is on the growth. And what we'll see in '24 definitely comes towards the November-December timeframe because the operators are still in that late period of the 180 days from May. We are starting to receive numerous POs, but they're taking delivery in the November-December timeframe. Now we've had some customers. Like we mentioned earlier, we've got three on location now. They're starting to see the benefits of having it on location for full-time monitoring. But I do expect us to really start to see that accelerate in '25. And we are committed. We're spending another $1 million on advancing builds in the back half of this year to accelerate that growth. But I think in terms of -- we start some of that 18% to 20% share drive, that comes probably closer out into the 2026 timeframe probably before we can get all the capital deployment in place to address all of that market.

Got it. Sure. And then secondly, just a follow-up on external chemistry side. Obviously, great growth. Margins got hit by -- a little bit due to mix. But I'm just curious, is there an ability as you grow in the Permian and maybe even some other basins to maybe convince some customers to move to more of the higher-margin, more advanced chemistries that you're using? Is there sort of an upsell then?

Yes. We kind of bifurcate the way we look at our external chemistry sales into two different components, the first one being the E&P operators. And when we look at the E&P operators, we have a significant amount of success, once we get our chemistry technologies in the door that we are able to move into higher-end technology applications where you've seen that penetration improvement in our proprietary, not only in our Complex nano-Fluid sales, but all of our value-add chemistry, whether it be flowback additives, scale control and everything that really is the backbone of our Prescriptive Chemistry Management systems. But when you look at the other components and a lot of the E&P operators, they're still -- not E&P operators but the service companies that we sell to just being -- the horsepower companies, their big concern is controlling friction reduction and different components like that. So we still move a significant amount of friction reducer to that group of our business. And so there's not as much, I would say, opportunities to upsell those guys or technology sale them as they're just wanting the operation to exist on the baseline. However, what we are seeing, and we talked about this prior, is the consolidation of these E&P operators is really starting to push through. They're wanting more -- the better return and better production out of every well. So they are starting to listen to us in terms of well spacing, how tight they are, the need for specific chemistry as you down space and also the impact of where we see that interface between the natural frac and what we see those connected [indiscernible] in the back side. So that -- as we continue to pre-step message in that gospel out there, we'll be talking a lot about it at EnerCom, we're seeing a solid impact coming from the E&P side. And that's actually translating to some of the pressure pumping companies wanting to move those technologies as well.

Got it. I appreciate it. I'll jump back in line. Thanks.

Your next question comes from the line of Blake McLean of Daniel Energy Partners. Please go ahead.

Hi, good morning, guys. Thanks for taking my question here.

Hi, Blake. How are you doing?

I'm good. Thanks, man. So I wanted to dig a bit more on the Data Analytics piece. You guys have provided a ton of great information here on the flare gas opportunity. Could you maybe talk a bit more about some of the other applications and market penetration efforts that you guys have? We've hit upstream a bit, but maybe on the midstream and the downstream side, how are you guys prioritizing efforts there? Where do you see the biggest opportunities?

Yes, for sure. If it's all right, I'll kind of start with the upstream part the most because we feel internally that is some of our biggest opportunities not only for rapid growth, but it's where our technology is extremely differentiated. If you look at the flare gas monitoring, the competition out there is pretty much held to taking samples. Taking samples is very expensive, it's prone to error and service quality component problems. And so we definitely see not only a better cost-effective applications there for us but also better accuracy, which is why the EPA has been so highly touting our technologies in terms of the flare monitoring. We see the exact same thing in composite sampling versus our real-time measurement to chain of custody. So that -- in my opinion, we've got a pretty good-sized addressable market that we're highly differentiated on our cost and technical capabilities. As we move into the downstream piece, that's where a lot of our core business had existed in terms of trans mix, Reid vapor pressure monitoring and even as you move down into refined fuel blending, et cetera, and volume increases there. But I'll tell you, trans mix, definitely differentiated because we have autonomous real-time sampling. Reid vapor pressure, we do that very, very well. As you start to -- but that market is probably a little bit more of a limited CAGR as compared to what we see in the upstream side. And so -- and as you move further downstream, you move into more fixed installation or capital purchases, and we run head-to-head against gas chromatography and some of those other components that we start to lose a little bit of the differentiation. Because some of those GC units have auto samplings, et cetera, and the fixed installations. And so we prioritize our efforts more to the areas where we have significant price and/or technical differentiation and where we've got a rapid penetration rate into the addressable market, if that makes sense.

Yes, that's all really good color. Really appreciate the time this morning, guys.

Your next question comes from the line of [indiscernible] of Singular Research. Please go ahead.

Good morning, guys. Can you hear me?

Yes. Good morning.

Good morning. Given that you have -- can you provide a commentary on your capacity to accommodate external customers considering that you have close to $200 million in annual backlog with ProFrac? And maybe you can also give us some color on the background beyond the $2 billion?

Yes. So it's a great question for us. It's something we're actually pretty excited about. One of our strategic pillars has always been a capitalized business model. And this has been because of where our facility locations, particularly some of our manufacturing facilities, we have substantial runway to continue to grow revenue and output through those manufacturing facilities and actually gain efficiency costs in our blending of materials and products. If you were to take our -- one of our main facilities centrally located in Marlow, Oklahoma, just outside of Oklahoma City, we're only running a single day shift right now. And it's probably operating at about 37% capacity. So you look at -- we could probably look at 2.5 to 3x increase in throughput through that single facility alone and growing revenue on the chemistry side. So I think we have a great runway without -- to grow the business, improve profitability and gain efficiencies without having to spend a significant amount of capital on the chemistry side. And then we look at where we're going to try to grow the JP3 business, we spent a significant amount of time not only increasing the sourcing capacity of our proprietary analyzers, but also the rate at which we can manufacture them. And we've talked about that quite a bit in some of the prior earnings calls, where we're going to see about a 10x improvement in our manufacturing speed on the proprietary sensors. And we're going through a similar process on advancing the rate at which we can manufacture our carts for the flare monitoring. So I think we've got -- without having to spend a massive amount of capital intensity, we've got a great run rate to continue to grow the business.

And any color on the backlog beyond the $2 billion that you have with ProFrac?

So we consistently talk about it because there's no doubt that it's our longest-standing unique contract, and we're excited to have it and actually work with an advanced partner like ProFrac when you look at their commitment on technologies and service quality. But when we look at some of our other external customers, there's no doubt, we're a primary supplier on a multitude of other contracts. However, they do tend to be a little bit more transactional in nature and can often be penetrated by -- if you have a technical differentiation or they want a test trial something. So we think they're a little stickier than they used to be, but they don't nearly represent such a magnitude of backlog as what we see from ProFrac.

And maybe a little color for me on the Data Analytics side. I know it's not -- the revenue model is not purely a function of the number of units that are installed. It's more the services that you provide around it. Is there an opportunity to build on those services to become a meaningful top line driver for growth? I mean, do you have the capacity in terms of talent pool? Or would you have to -- would that be a hiring effort that you will have to undertake?

So I think that when we look at it now is that the strategy of the organization is to grow revenue, which we've been doing an increased percentage of recurring revenue or Data as a Service type revenue inside the model. In doing so, we've actually probably slowed the actual total revenue we could get versus capital sales. However, we've been consistently building that backlog of recurring revenue, which in the long run is going to be substantially more profitable for the organization. We also feel that it will have a significant impact on the valuation of the organization as most of the Data as a Service businesses trade at a much higher multiple than if we were just doing sensor capital sales and not supporting the service side or the total solution side. I don't feel right now that we're at a huge bottleneck on the acceptance at this point as we made some of these manufacturing changes. And we are pre-committing capital into the data -- into the JP3 or the Data Analytics side of the business at a much higher rate than what we may even been doing on the chemistry side to ensure that we have the analyzer stuff to grow the business. And we're not hindered by that aspect.

Okay. And as someone relatively new to the sector, maybe you could help me understand the economics between an oil-weighted basin and a gas-weighted basin. How does that -- specifically the economics vary between the increased activity between those basins? And can you discuss the difference in types of chemistry required across the various regions?

Yes. That's another great question. Traditionally speaking, and I'll use, for example, the Permian Basin versus the Haynesville, which is in the Ark-La-Tex region. The Haynesville, the hydraulic fracturing takes place, operates at higher pressures, significantly higher temperatures and requires a much more complex system, oftentimes a hybrid combination between slickwater and crosslink waters, which also carries more corrosion inhibition products, scale inhibition products, et cetera, just to the significant technical challenges that are taken in those basins. So typically, for us, we see better revenue per fleet activity in a lot of these gas-driven basins, particularly Haynesville, as in comparison to what we see in West Texas and just mostly because of the technology requirements, which also benefits us because we have unique and I say proprietary tech that works very well in those basins. And so when you look at it now, when we model it, we have a little bit different revenue per fleet. But you do see a difference in between where we're at, probably 30% maybe of total average monthly revenue per fleet between the Haynesville versus what you see in the Permian Basin and more of these oil-rich basins.

Your next question comes from the line of Richard Dearnley of Longport Partners. Please go ahead.

Good morning.

Good morning.

What was the minimum purchase payment for the quarter and the first quarter from ProFrac?

So in the second quarter, it was about $8 million -- right. You're talking about the shortfall calculation?

Yes, the make good payment.

Yes. So we'll be filing our 10-Q tomorrow and all those numbers will be in there. For the second quarter, it was about $8 million.

And the first quarter, I probably got that written down, what was that?

It was around $8.5 million.

Great. And as you account for it, I would guess those payments are very high gross margin. Is that correct?

Yes. Just to kind of review how this works, we accrue on a quarterly basis the shortfall, but the ultimate settle-up is calculated on an annual basis. So the cumulative amount of the shortfall can fluctuate based upon activity levels throughout the year. And at the end of the year, the shortfall is settled up in the first quarter of the following year. So as we accrue the 2024 shortfall, it could go up, it could go down based on activity. And then it settles up in the first quarter of 2025. So your AR balance -- or our AR balance will grow throughout the year based upon what that shortfall does.

Right. Good. Thank you.

[Operator Instructions] There are no further questions at this time. I'd now like to turn the call back over to Mike Critelli for final closing remarks. Please go ahead.

Thank you again for joining us today. I'd like to remind everyone that Ryan Ezell, Flotek's CEO, will be presenting at EnerCom Denver, the Energy Investment Conference on Monday, August 19 at 9:15 a.m. Mountain Time as well as the 2024 Gateway Conference in San Francisco, California on Wednesday, September 4, 2024. He will be joined by CFO, Bond Clement, in hosting meetings with investors. And a copy of the presentation that will be used in each discussion will be available on the corporate website prior to the event. We look forward to meeting with many of you at the conference. Thanks again for joining us today. Please feel free to contact us if you have any additional questions. Have a great day.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.