Participants

Mike Critelli; Director of Finance; Flotek Industries Inc

Ryan Ezell; President, Chief Executive Officer, Director; Flotek Industries Inc

J. Bond Clement; Chief Financial Officer; Flotek Industries Inc

Jeff Grampp; Analyst; Alliance Global Partners

Don Crist; Analyst; Johnson Rice & Company L.L.C.

Eric Swergold; Analyst; Firestorm Capital

BJ Cook; Analyst; Singular Research

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the Flotek Industries First Quarter 2024 earnings conference call. At this time, all lines are in a listen only mode following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Wednesday, May eighth, 2024.
I would now like to turn the conference over to Michael Christelis, Director Finance. Please go ahead.

Mike Critelli

Thank you, and good morning, everyone. We appreciate your participation in Flotek's First Quarter 2024 earnings conference call. Joining me on the call today are Ryan as our 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 to, 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, as well.

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 to demonstrates consistent profitability and expansion and shareholder value as we accelerate into a new era of differentiated chemistry and data analytics solutions.
There is no company better positioned to provide strategic solutions to a variety of our industry's most challenging problems where there is operators solving for complex completion challenges such as increased water production and reduce BOE pumping companies looking to advance their differentiation through maximizing utilization for oil and gas operators racing to meet the new EPA flare regulations were there 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. I'd 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 and 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 Q1 2020 for external chemistry sales were the highest achieved in the first quarter since we began this turnaround over three years ago and was up 27% year over year. And although down sequentially, this pattern is consistent with the first quarter in each of the last three years as well as average fleet count in Q1 were down sequentially.
Our data analytics segment saw 18% quarter over quarter revenue growth. Thanks in part to our continued progress in data service revenues. In addition to this progress, we continue to push forward with the field testing of our new Calix spectrometer, which is still on track for a midyear 2024 release. And most importantly, all of these achievements were accomplished with zero recordable and lost time incidences in the field of operations extending Flotek's current street over 843 days without a recordable incident.
Now I'd like to take the time to thank every single employee for their commitment to safety and service quality. In achieving these outstanding results. I expect us to continue to build upon this momentum throughout 2024.
Now looking at the quarter in a bit more granularity revenue was slightly down sequentially. This decrease is mostly attributable to lower external chemistry sales versus Q4 2023. We have observed this consistent seasonality since the organization began a strategic turnaround over three years ago.
At a detailed glance on slide 9, Q1 2024 external chemistry, revenues were up 27% versus Q1 of 2023. This was the largest Q1 revenue reported for extra chemistry sales during the last three years with the lowest average directly counts in North American land during the same period. This indicates we are gaining market share through each annual cycle of fleet count, stabilization by the execution of our corporate strategy, utilizing chemistry as the common value creation platform. We are seeing continued adoption of our Prescriptive Chemistry Management business model that leverages our customized engineering approach, combined with our proprietary Complex nano-Fluid technologies to deliver wells that outperform adjacent competitor wells.
Flotek will remain at the forefront of innovation and multidisciplinary advancements as we bring new technologies to the market, including AR driven reservoir modeling to address the impacts of water inhibition, drive preferential microfluidic behavior in nanopore environments and improve the ultimate recovery of hydrocarbons from each asset. We expect a substantial increase in our external customer chemistry sales during the second quarter and anticipate total annual external chemistry growth for 2024.
On that note, April external Kim's yourselves have already achieved over 70% of what we did in all of Q1 of 2024. We realized 19% sequential growth in our project related revenue. The chemistry permit requirements contained in the long term supply agreement with projects. We're designed to mitigate the volatility of the market and provide some insulation to Flotek operations for maintaining economies of scale and operational stability.
Our partnership continues to evolve into a truly transformational offering for E&P operators in regards to efficiency and overall reservoir performance. Our data analytics segment revenues increased 18% from the fourth quarter of 2023. Our continued success in converting to a data as a service model combined with the launch of the next-generation JP3 measurement system continues to unlock significant upstream market opportunities as the Company expects the data analytics business to grow by 50% in 2024.
On a more macro level, the demand for oil and gas is expected to expand for the next decade with further requirements needed through 2045 long-term investments in both short and long barrel cycles will be necessary to maintain production and add the required incremental supply.
And despite near-term volatility in commodity prices, the fundamentals for energy related services remain strong. And for the first time in nearly two decades, the demand for electricity in the US will climb over 15% by 2030 with natural gas providing over 40% of the current demand. The overall expansion of the global economy will continue to create substantial demand for all forms of energy, which will increase service intensity within our sector.
As we look at the remainder of 2024, our efforts remain laser focused on revenue growth, market share expansion, cost efficiency gains and returns on shareholder value as we are well positioned to capitalize on opportunities both domestically and internationally. We are confident that our expanding suite of services positions us to provide unique and superior solutions to maximize our customers' value chains.
Now I'll turn the call over to Bob to review our key financial highlights.

J. Bond Clement

Thank you, Roy, and good morning, everyone. Our first quarter 2024 results reflect solid performance despite relatively soft ore full 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 for year over year growth in 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 and 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 Pro frac. That was partially offset by 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 three 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 in this segment as revenues associated with JP. three increased 18% sequentially. We expect growth in data analytics revenue to be weighted toward the second half of 2024, which is in line with our expectations for the timing of the commercial deployment of our new analyzer.
Moving to Slide 10. Fourth-quarter gross profit increased for the fifth consecutive quarter first quarter gross profit grew by $7 million or nearly 400% compared to gross profit of just $1.9 million in the comparable period of 2023. It's important to note that the minimum cash chemistry purchase requirements in our supply agreement were in effect during the first quarter of 2024, but not the first quarter of 2023. As the measurement of the minimum purchase requirements began on June 1st of last year. The additional revenue from our supply agreement requirements, combined with our continued focus on cost improvements, allowed us to generate strong margins during the quarter.
Touching on a few specific examples of how we are continuing to improve margins. During the first quarter, we reduced freight costs as a percentage of revenue by roughly 50% versus the same quarter of last year as a result of numerous initiatives executed over the past year included eliminating dedicated trucking and utilizing strategically placed staging yards to allow us to improve the efficiency and last-mile deliveries over the past year. We have also made great improvements in how we purchase materials.
We have consolidated vendors to leverage our spend to negotiate better pricing and rebates. We've also focused our efforts on buying direct in order to eliminate costly layers of middleman margins to reduce the highest spend on our P&L. Quickly on SG&A, our first quarter SG&A declined to $6.1 million, which was about a 6% improvement compared to the same quarter of last year and sequentially, this decline was a result of lower personnel cost and professional fees.
Moving to Slide 11. Adjusted EBITDA was positive for the third consecutive quarter, an increase of $7.9 million compared to the first quarter of last year. This is the 11th consecutive quarter of improvement in adjusted EBITDA, a streak that goes back to the second quarter of 2021.
Going to the bottom line, reported negative net income of $1.6 million in the first quarter compared to a net loss of $9.3 million during the first quarter of 2023 when adjusting for $31 million in noncash gains.
Touching on the balance sheet at March 31st, we had 3.1 million drawn under our ABL., which was 4.4 million lower for a 58% reduction than we had at year end. As a result, our debt to trailing 12 month adjusted EBITDA moved down to [0.3 times] as of March 31st.
Quickly commenting on our 2024 guidance. While we did not give specific revenue guidance for 2024 due to uncertainty around the timing of improved natural gas pricing and the corresponding impact on completion activity. We expect that first quarter revenues will mark the lowest quarter of the year. And we believe that annual 2024 revenues will generally approximate last year. As a result of the positive impact of the numerous cost reductions implemented in a full year measurement period during 2024 related to the minimum chemistry purchase requirements, we anticipate a substantial increase in margins compared to 2023.
Based on current projections, we expect our 2024 adjusted gross profit margin to range between 18% and 22%, which compares very favorably to our 2023 adjusted gross profit margin of 15% with higher margins expected. We anticipate 2024 adjusted EBITDA to range between $10 million and $16 million dollars, which again, is a significant increase over 2023 adjusted EBITDA of just $1.5 million.
In closing, Flotek continues to drive strong, repeatable performance focused on resilient profitability based on the current slope of the curve for natural gas pricing, we anticipate higher completion activity as we move into the back half of the year. However, in the event that activity levels remain flat throughout the year, our first quarter results demonstrate our resiliency as we achieve strong margins and bottom line growth in a quarter of relatively light activity.
With that, I'll turn the call back over to Ryan to close it out.

Ryan Ezell

Thanks, Bob. For Turning to Slide 19. We are extremely excited about 2024 as we have tremendous growth potential in both our chemistry and data analytics segments. And we believe that Flotek represents a compelling investment opportunity.
Today, our first quarter results delivered profitability, and we continue to be positioned for sustained growth as a collaborative partner of choice for sustainable chemistry and data solutions. I'm proud of the progress that we have made and are confident in our ability to execute going forward. We appreciate the continued support of all our stakeholders, and we hope 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.

Question and Answer Session

Operator

Jeff Grampp from Alliance Global Partners. Your line is now open.

Jeff Grampp

Please ask your question to one, I guess for your question on the And a question on JP. three. 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 I'm 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?

Ryan Ezell

So right now, we're happy with our progress of continuing to actually the EPA Tom and the team are doing a phenomenal job there. Right now, we're expecting the adoption of the EPA to come in line with regulations about the time that our production comes online about 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 a significant opportunity there. And I think as of as our you know, the Calix model, which is our new Gen3 measurement unit, comes online into production of all seen by the middle of the year update where we are 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.

Jeff Grampp

Great. That sounds good, and I appreciate that. And I'm for my follow-up more of a capital allocation question. And given the modest debt, you guys have and the capital-light model and obviously 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?

Ryan Ezell

So a couple of things that we're doing is for that for the first time since I've been here, we've invested into some trucking capitalization components will be bringing in quite a view where we have some long haul 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 JP. three 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 and on the E&P side, there's potential opportunities to look at some consolidation mechanism there or when we look at advancements in bringing in some new technologies on the JB. three i. data are excited business. So we are we are continuing to evaluate opportunities there. The biggest single use of proceeds there is these will be extremely accretive to the organization. I would mostly that we put capital into.

Jeff Grampp

Absolutely. Great. Sounds good, guys. Thanks for that.

Ryan Ezell

Yes, hi, Jim.

Operator

Your next question comes from the line of Don Crist from Johnson Rice. Your line is now open. Please ask your question Morning, guys.

Don Crist

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

Ryan Ezell

Yes.So we've had quite a bit of expansion that Dan and I can't I can't necessarily drop the exact names of the customer bases. The what I would tell you is we've seen expansion in monetary build 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 validations. We have rental chain of custody measurements in multiple and build the geographic location.
So we're really excited. We've got in the double digit number of units deployed in these different areas, particularly running the Calix spectrometer through its paces and making sure that typically we've got in line with our former Veridex unit to make sure everything's lined out run effectively. We're really excited about this and the opportunities continue to come to us, and we're hard in pursuing these.

Don Crist

Okay. And on 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 any significant CapEx requirements or anything to to build out the larger amount of centers that you would need or is that kind of in place already?

Ryan Ezell

So we in alignment right now where we're forecasting the growth just in, say, 2024, that that 50% range we've dedicated capital to front load a little over $2 million to advance billing units. Now that $2 million goes further and building the Calix use because they have a much lower cost base than the original Veridex 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 the EPA around how much additional capital will bring forward in the early parts of 2025, look at the growth there.

Don Crist

Okay. But it's not significant at this point?

Ryan Ezell

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

J. Bond Clement

Yes, Dan, 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 than the previous generation.

Ryan Ezell

Right. Exactly.

Don Crist

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

Ryan Ezell

That's a great question. An update when we look at it, it depends on if you're an upstream midstream or downstream application, what I would guess it would be more 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 year is utilized.
And what we're seeing is the predominance in the upstream business to be 90% plus percent in terms of a either one data as a service model or a hybrid type service with a large subscription based model with a minimal capital investment upfront for the installation so I think it kind of depends on the application, but you know, pretty much the bifurcation is heavy on subscription base and upstream, there's still a preference to the capital purchase and administering CAR.

J. Bond Clement

Yes, Dan Ryan gave some stats on the percentage of revenue from DAS versus capital sales 1Q versus 1Q are included in those percentages. When you look at just pure DAS revenue quarter over quarter, it's up 30% first quarter 24 versus first quarter 23. So people are migrating to the DAS model. Certainly.

Don Crist

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

J. Bond Clement

Thanks.

Operator

But your next question comes from the line of Eric Swergold from Firestorm Capital. Your line is now open. Please ask your question.

Eric Swergold

Good morning and congratulations on your hard fought progress.
There's per day there number. 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&P's? Thanks.

Ryan Ezell

Yes, this is this is actually a real, I would say, exciting frontier for us, Eric, is that initially most of the AAR oriented activity that we're doing around our Kim, a metric modelings and things that we're doing in the JD. three side, leveraging that large database of crude samples that we've had over the last five to seven years. So there's a lot of advancements that we're making to accelerate the accuracy of the models accelerate of the group.
This particularly when you look at, I will say these chain of custody and Reid vapor pressure measurements, stuff that we're doing there and AR continues to be a large part of that on what's been really exciting is we took a step back and said, Hey, you've been an innovative chemistry company with over 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 service center access service interactions as they've we've completed over 20,000 wells.
And we have production data in chemistry modeling for these things. So we've gone in and now using AI to actually take these datasets chromium create cubes of different datas without it advancing it, 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 or recovery for the total life of the asset. So I think it's playing a central part for us to accelerate our technology and the thinking that we do on both the chemistry and the data side.
And what is 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 we're going to talk about Entercom and Denver later in August. We're going to be presenting some of this work.

Eric Swergold

Sounds good. Thanks very much, guys. Keep it up.

Operator

Your next question comes from the line of Vijay kirk, an individual investor. Your line is now open. Please ask your question.

BJ Cook

Yes, hey, guys. Thanks for taking my call, BJ Cook with Singular Research. you had talked about external chemistry this year. Tom, maybe expected to it increased here, but I know it's determined on fine quite a bit I'm just curious, do you guys anticipate or are adding new Nextra operators to your platform?

Ryan Ezell

Yes, 100%. I mean the biggest part we look at electrochemistry is we have we've seen the tenure of being here. Our seasonality shift a little bit will be used to be Q3 to Q4 now with a little bit Oxy RB, the capital discipline, the way we look at brand plans than that ability to turn the spigot on and off here in the U.S., we've seen some of that seasonality shift into Q1 and has traditionally been probably our least active quarter on the on the external chemistry sales component of that.
But comparatively speaking, over the tenure that we've done this turnaround, you've seen average directly to 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 got a substantial we got to a really healthy and robust pipeline at a continued activity with a strong group of what we call it, 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 reservoir technologies are coming into prominence. As you're starting to see allies operators move an infill well design a downspacing on of how they do their completions.

BJ Cook

Great. Thanks. I appreciate that.

Operator

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

Mike Critelli

Thank you again for joining us today, Flotek CEO, Ryan, as I will be participating on a service industry panel at the Louisiana Energy Conference on May 29th, 2024 at 4 p.m. He will be joined by CFO. Bob implement 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.

Operator

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