Earnings Call Transcript - ACDC Q3 2022

Rick Black, Investor Relations

Thank you, operator, and good morning, everyone. We appreciate you joining us for ProFrac Holding Corp's conference call and webcast to review third quarter 2022 results. With me today are Matt Wilks, Executive Chairman; Ladd Wilks, Chief Executive Officer; Lance Turner, Chief Financial Officer; and Coy Randle, Chief Operating Officer. Following my remarks, management will provide high-level commentary on the financial highlights of the third quarter and outlook. Before opening the call up to your questions, there will be a replay of today's call available by webcast on the company's website at pfholdingscorp.com, as well as the telephonic recording available until November 17, 2022. More information on how to access these replay features is included in the company's earnings release. Please note that information reported on this call speaks only as of today, November 11, 2022, and therefore you're advised that any time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading. Also comments on this call may contain forward-looking statements within the meaning of the United States Federal Securities laws, including management's expectations of future financial and business performance. These forward-looking statements reflect the current views of ProFrac's management and are not guarantees of performance. Various risks and uncertainties and contingencies could also cause actual results, performance, or achievements to differ materially from those expressed in management's forward-looking statements. The listener or reader is encouraged to read ProFrac's Form 10-Q and other filings with the Securities and Exchange Commission which can be found at sec.gov or on the company's Investor Relations website section under the SEC filings tab to understand those risks and uncertainties and contingencies. The comments today also include certain non-GAAP financial measures, as well as other adjusted figures to exclude the contribution of Flotek. Additional details and reconciliations to the most directly comparable consolidated and GAAP financial measures are included in the quarterly earnings press release that was issued yesterday, which can also be found on the company's website.

Ladd Wilks, Chief Executive Officer

Thank you, Rick. To begin, I'd like to say how excited I am having completed our acquisition of U.S. Well Services. I wanted to welcome their team to the ProFrac Family. We believe electric tracking represents the future of the industry, and we are excited to leverage our scale and capabilities along with the Clean Fleet technology as the largest provider of electric fracturing services in the world. Additionally, after changing our ticker symbol to ACDC after closing the U.S. Well Services acquisition, we wanted to communicate to investors that not only are we the market leader in e-fleets, but we also have a strong commitment to an ESG strategy of reducing fuel costs and minimizing emissions. We think the ticker is really cool. As of today, after factoring in the acquired fleets, we have 39 fleets active, 8 of which are electric. Included in this fleet count is the deployment of ProFrac's first internally manufactured electric fleet, which we are pleased to report performed extremely well in its initial customer field tests and was fully deployed this month. We continue to be impressed by the technical performance of these electric fleets. They have demonstrated the ability to pump at a high rate, high pressure consistently and reliably with very little fluctuation. Importantly, the economics are unmatched, given that e-fleets exclusively use cheaper and cleaner burning natural gas. We look forward to this first fleet generating significant revenue and profitability in the back half of the fourth quarter. Going forward, after U.S. Well Services fleets are brought closer to market rates, we expect to generate higher profitability on e-fleets due to their lower maintenance needs, smaller footprint, and tremendous value proposition to our customers. In the meantime, we are focused on bundling opportunities, efficiency improvements, cost synergies, and other select strategies that we believe will improve the profitability of the fleets in the near term. With the closing of the U.S. Well acquisition, we now have four e-fleets under construction, working to complete these additional e-fleets and expect full deployment by early 2023, at which time we expect to have 44 active fleets. Reoptimization remains a primary goal, meaning we aim not just to add fleets but to maximize throughput and profitability for our clients and for ProFrac. In addition to the electric fleets under construction, we've accelerated our Tier 4 dual fuel upgrade program as the year has progressed to meet customer demand. We believe that electric and Tier 4 dual fuel fleets offer incredible benefits to our customers and represent the future of our industry. Now I want to highlight several key metrics from the third quarter. I am extremely proud to report that we achieved 18% sequential growth in revenue, leading to a 22% sequential increase in adjusted EBITDA for the third quarter. Excluding other business activities, adjusted EBITDA increased from $218 million in Q2 to $267 million in Q3. Annualized adjusted EBITDA per fleet, excluding other business activities, rose 23% to $34 million from $28.1 million in the second quarter. We attribute these results to the best team in the industry, operating the best equipment while focusing on every aspect that makes our company, our customers, and our suppliers truly great.

Lance Turner, Chief Financial Officer

Thank you, Ladd. We're pleased to announce the improved results and progress we made during the third quarter. On a consolidated basis, revenue for the third quarter totaled $696 million, up nearly 20% compared to the second quarter. Fleet count remained constant at 31 fleets for the quarter. The increased revenue was driven by higher average pricing, higher material sales, and increased efficiencies of our fleets. We saw improvements in every area during the quarter. Net income was $143 million for the quarter compared to $70 million in the second quarter. Earnings per Class A share was $1.09. Adjusted EBITDA was $256 million or $267 million when excluding the EBITDA loss attributable to our other business activities or Flotek. This resulted in $34.5 million of adjusted EBITDA per fleet on an annualized basis, excluding Flotek, representing a 23% improvement from the prior quarter. Selling, general, and administrative costs totaled $70 million, which included approximately $12.9 million in stock-based compensation, $9.7 million related to Flotek, and $5.8 million in transaction-related expenses. Excluding these items, SG&A was relatively flat from the prior quarter. The increase in Flotek was primarily due to the third quarter having a full quarter of activity compared to a partial quarter of Flotek results in the second quarter. Turning to our business segments, the stimulation services segment generated revenues of $669 million in the third quarter, up 16% from the second quarter. Adjusted EBITDA for stimulation services was $250 million compared to $196 million in the prior quarter, driven by increased pricing, a greater amount of materials provided, and increased utilization of our equipment. The manufacturing segment generated revenues of $49 million in the third quarter, up 40% from the second quarter. About 95% of this segment was intercompany revenue for products and services provided to the stimulation services segment. Adjusted EBITDA for the manufacturing segment was $8.4 million, down slightly from $9.4 million in the second quarter, primarily due to continued cost pressures on underlying raw materials. The Proppant Production segment generated revenues of $25 million in the third quarter, up 41% from the second quarter, primarily driven by a partial quarter contribution from our newly acquired Monahans Sand Mine. Approximately 56% of this segment was intercompany compared to 66% in the previous quarter. Adjusted EBITDA for the Proppant Production segment was $9.2 million, down from $12.6 million in the second quarter due to lower utilization of our sand mines and a lower average selling price per ton. Other business activities represented by Flotek generated revenues of $47 million and negative $11 million in adjusted EBITDA. This represents the first full quarter of consolidated Flotek results. Capital expenditures were $123 million for the quarter, excluding acquisition-related CapEx, with about 75% of this quarter's CapEx related to various growth initiatives underway as we adapt our capital program to the current environment. We expect full-year CapEx to range between $330 million and $350 million, with 30% considered maintenance on our fleet. This increase in capital budget reflects an acceleration of growth-related initiatives previously outlined which we believe will continue to improve our pumping hours and profit-generating potential. We also continue to accelerate our engine upgrade program, converting more Tier 2 engines to Tier 4 DGB engines. After deploying the first fleet, we expect the construction cost of our first three electric fleets to be approximately $75 million. We are over 70% complete on these fleets and expect to deploy the second and third fleet in early 2023. The Lamesa sand plant is expected to be operational at the beginning of December and should come in at a construction cost of approximately $45 million. We are also investing roughly $30 million in reducing the number of fleets awaiting maintenance and establishing a robust swing program to ensure equipment returns to service quicker, helping us maintain operational efficiency.

Matt Wilks, Executive Chairman

Thank you, Lance. I'm extremely pleased with our company's commitment and hard work that continues to generate improved operational efficiencies and financial growth as we scale the business. I believe our employees are the best in the industry and the key to our success. Our macro view in oil field services remains bullish, and we believe we are extremely well positioned for the current U.S. frac market, where supply of pressure pumping horsepower is limited and incremental horsepower is bottlenecked. Our two-pronged growth strategy is to acquire, retire, and replace on the equipment side and enhance scale through vertical integration on the operation side. This has demonstrated significant momentum, showing its potential to generate strong and lasting returns for all stakeholders. The marketplace dynamics we have discussed since our IPO remain unchanged. Many competitors are sold out, with most needing upgrades due to their legacy footprints, and sustaining and upgrading existing fleets remains strained, with limited ability to build new capacity. Capital is also more expensive than just six months ago, further boosting our confidence that significant opportunities remain in this cycle, and margin expansion will continue. We've grown our business tremendously over the last six months by acquiring FTSI, the Monahans West Texas sand operations, and now U.S. Well Services. I want to reiterate how excited I am for the U.S. Well acquisition, not only for the company they built but what we can create together. Following past acquisitions, we immediately engage with each of U.S. Well's customers, and the feedback was overwhelmingly positive. I look forward to reporting results over the next few quarters as this acquisition starts to show its true potential. Our goal is to align U.S. Well fleets more closely with our fleet profitability within 2023. This includes working on pricing adjustments within existing contracts while enhancing profits through our in-house manufacturing advantages, best practices, and the bundling of materials. Regarding our capital expenditure outlook, we're allocating more capital to our equipment. Our equipment is pumping more and earning better than ever. Our top priority is reducing downtime for our customers, investing more capital to ensure we achieve that. Our maintenance group has been hard at work to speed up repair times and reduce equipment downtime from maintenance cycles.

Stephen Gengaro, Analyst

Thank you and good morning, everybody. I have two questions. The first is regarding the U.S. Well Service assets. I was one of the few covering the stock towards the end of its life as a separate company. The contract terms seemed under market, and they seemed to have a lot of under-absorption rates with overhead remaining for the e-fleets. Can you give us a sense of that drag, knowing it’s I think around seven active fleets? What are the assets generating EBITDA, and how should we think about their timing coming online?

Ladd Wilks, Chief Executive Officer

Yes, I think the best way to answer that is through individual KPIs. We expect about 10% to 15% dilution per fleet across our entire fleet for these assets. However, comparing legacy ProFrac with our new e-fleet deployed in Q4, the exit rate in Q3 was remarkable, and we expect this will continue along with additional bundled fleets. So Q4 is shaping up to be an excellent quarter, even though we need to acknowledge there's a slight dilution in our per-fleet metrics as we integrate U.S. Well, but we pride ourselves on our ability to integrate quickly and are excited about the opportunity with new customers.

Dan Kutz, Analyst

Hi, thanks, good morning, everyone. Just wanted to discuss shareholder returns. What’s your current strategy now? A dividend seems attractive, but with more float from the U.S. Well Services acquisition, are buybacks contemplated?

Ladd Wilks, Chief Executive Officer

We don't expect buybacks right now because we want to ensure we maintain a high-quality float, providing the liquidity our shareholders look for. Regarding shareholder returns, this is a controlled company, and our objective is to align interests, enabling quicker capital returns to stakeholders. Currently, we can't provide guidance, but we continue to expect exceptional performance and results, which should allow us to provide better guidance in the future.

Don Crist, Analyst

Good morning, gentlemen. Thank you for the lively hold music, very appropriate with your ticker change. I wanted to discuss maintenance, particularly the $30 million spent to streamline operations. Can you contrast that with what others in the pressure pumping industry are doing?

Ladd Wilks, Chief Executive Officer

Certainly, third-party repairs often take eight weeks or more, while we reduce the timeframe with in-house resources to around three to four weeks. With our new initiative, we can turn pumps back to service within 72 hours of a failure, reducing equipment downtime significantly. It's comparable to improving a pit stop in racing from 2 minutes and 40 seconds to 10 seconds, enabling us to keep equipment running and available, which reduces the horsepower waiting to be repaired.

Saurabh Pant, Analyst

Hi, good morning. I wanted to ask about your comment that the 2023 book of work is the strongest in 14 years. Can you explain that? What visibility do you have across E&Ps and majors currently?

Ladd Wilks, Chief Executive Officer

Our outlook is strong, as we see a robust backlog for 2023. This results from high demand for activity and our operational strengths in vertical integration, supply chain management, and next-gen fleets, which position us favorably in a fully sold-out market.

Lance Turner, Chief Financial Officer

We're in the process of finalizing 2023 CapEx, but we expect it to be similar to this year, with additional maintenance due to more fleets. We expect CapEx to be in the range of $275 million to $330 million, incorporating growth initiatives.

Ladd Wilks, Chief Executive Officer

Overall, the transition to fuel-efficient NextGen fleets is real, with the ongoing higher costs of diesel compared to natural gas, affecting customer decisions concerning budgets and vendor relationships, which we consider critical during this upgrade cycle. Q3 was incredible, but it's behind us now, and we're focused on Q4. We're excited about crew performance, equipment utilization, and the quality of our customer relationships. Looking forward to 2023, we anticipate delivering strong distributable cash flow for our stakeholders. Thank you to all veterans for their service.

Operator, Operator

Ladies and gentlemen, thank you for your participation. This concludes today's teleconference. You may disconnect your lines at this time. Have a great weekend.