Welcome to the Flotek Industries Third Quarter 2024 Earnings Conference Call. I would now like to turn the conference over to Mike Critelli, Director of Finance and Investor Relations. Please proceed.

Thank you, and good morning everyone. We appreciate your participation in Flotek’s third 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 third quarter of 2024 as well as our updated guidance for the full year 2024. Following that, we will open up the call for any questions you have. Flotek’s third quarter 2024 financial and operating results press release was issued yesterday afternoon. We also posted an updated Q3 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 reconciliation 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 third quarter of 2024 operational and financial results. I'm pleased with our overall strategy execution during this quarter, but we remain laser-focused on elevating our performance to increase market share and profitability growth in both of our complementary business segments, as we challenge the organization to close out our strongest year since 2017. These final months of the year are going to require arduous work. We are confident in our team's ability to execute in the face of market headwinds and continue the trend of delivering strong results and resultant value creation for Flotek shareholders. 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. With the backdrop of weaker North American Oil Field Services activity, we were able to grow total revenue by 5% compared to the third quarter of 2023 and 8% sequentially over the second quarter of 2024, highlighting our strong execution and the continued progress we have made in capturing market share. This is quite an accomplishment when considering the fact that the active frac fleet counts have declined over 14% from the peak of the first quarter of 2024. Our data analytics segment revenues grew 30% in the third quarter, as shown on slide 7, with data as a service revenue growth of 40% sequentially. Following the EPA’s approval of our JP3 analyzer in mid-July 2024, we recognized our first revenues for flare monitoring in August and September, which comprised 25% of total quarterly segment revenues. Revenue from our chemistry technology segment increased by 7% in the third quarter. Our persistent revenue growth in this segment despite a declining frac fleet market is clear evidence that we are gaining market share through our differentiated chemistry technology solutions. We delivered significant year-over-year improvements in virtually all profitability metrics, resulting in net income of $2.5 million and adjusted EBITDA of $4.8 million, representing a year-over-year increase of 97% and 43% respectively. This marks Flotek’s fifth consecutive quarter of net income and eighth consecutive quarter of improvement in adjusted EBITDA. As a result, we are increasing our adjusted EBITDA guidance for the second time this year. On a trailing 12-month basis, as is shown in slide 8, Flotek has delivered almost $25 million of improvement in adjusted EBITDA. Finally, we reduced borrowings outstanding under the asset-based loan by 81% or $6.1 million compared to the year-end of 2023, 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 all of our employees for their hard work and commitment to safety and service quality in achieving these outstanding results. I continue to be excited about the future of Flotek and believe we are well-positioned to capture further market share. 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 create solutions for future challenges that will impact our industry before they are needed by leveraging chemistry as the common value creation platform. Flotek will remain at the forefront of innovation and multi-disciplinary advancements as we bring new technologies to the market through the convergence of data and chemistry solutions. Flotek is creating AI-driven reservoir modeling to address the impacts of water inhibition, drive preferential microfluid behavior in nanopore environments, and improve the ultimate recovery of hydrocarbons from each asset. Through the utilization of real-time data measurements, we are unlocking the potential to apply predictive analytics to holistically manage our customers' assets and maximize their return on invested capital. We expect the continued expansion of our data as a service model with the launch of our next generation near infrared Raman and aqueous environment measurement systems, unlocking significant upstream and downstream market opportunities. We expect the business to see continued growth going forward. As part of our commitment to being at the forefront of innovation, we announced in July the EPA approval of our JP3 system concerning recently enacted flare regulations. A picture of our new flare monitoring cart that is currently on location can be seen on slide 10. This state-of-the-art optical instrument is designed for the precise measurement of net heating values and flare gases and is the first to be approved as an alternative method under the new regulations. According to the EPA, there are over 55,000 existing players in the United States, which are expected to be subject to monitoring regulations by 2028, and this approval positions Flotek for growth in this new upstream space. We have already received numerous orders, with 11 units already being delivered, which is up from three mentioned on our call in August. The majority of flare application revenues to date have been through rental and service contracts, which imply a recurring revenue stream. Furthermore, our upstream custody transfer use cases continue to expand into field trials, with a total of three active units in the third quarter and an additional eight committed units added thus far in the fourth quarter. We are on track to receive full certification for field utilization by year-end. Our ability to monitor hydrocarbon composition and quality in real-time, with measurements taken every five seconds, will create an emerging market for Flotek to enter into 2025 and beyond. This revolutionary application creates an elevated level of transparency and enterprise risk minimization for producing wells that's never been achieved in the oil and gas industry to date. As we look forward, we see the demand for oil and gas is expected to expand for the next decade, with further requirements needed through 2045. For the first time in nearly two decades, the demand for electricity in the U.S. is expected to climb by 15% by 2030, with natural gas expected to provide the bulk of the incremental demand. We expect the overall expansion of the global economy to continue to create substantial demand for all forms of energy, which will increase service intensity within the sector. As we look at the remainder of 2024, our efforts remain focused on revenue growth, market share expansion, cost efficiency gains, and creating value for our shareholders, 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 deliver unique and superior solutions to a variety of our industry's most challenging problems, while maximizing our customers' value chain. Now I'll turn the call over to Bond to provide key financial highlights.

Thanks, Ryan. Thank you everyone for joining us this morning. Yesterday afternoon, we reported strong results for the third quarter. On the income statement side, we posted sequential increases in revenue, net income, and adjusted EBITDA, even though industry fundamentals were weaker. On the balance sheet side, we increased working capital and paid down debt. Our ABL balance at September 30th was down 75% from the end of the second quarter as we utilized the 12% improvement in DSOs during the quarter and $5 million in cash flow from operations to pay down the line. Quickly touching on a few specific results, I'll be referring to the slides in the presentation posted to our website yesterday afternoon. Slide 5 summarizes some of our third quarter achievements. Revenues, net income, and adjusted EBITDA were all up compared to the third quarter of last year. Net income nearly doubled, and adjusted EBITDA jumped over 40% versus the year-ago quarter. Regarding revenue for the quarter, we reported total revenues of $49.7 million, which was a sequential increase of 8%. This increase was highlighted by strong growth in revenue from our data analytics segment, as well as a 19% increase in related party chemistry revenue. While external customer chemistry revenues were down sequentially, they're still up 3% through the first nine months versus last year. It's worth noting that we had three large customers experience operational delays in September, which caused certain external chemistry sales to be pushed to the fourth quarter. We fully expect external chemistry revenues to bounce back strongly in the fourth quarter. The third quarter gross profit was flat compared to the second quarter. On a percentage basis, gross profit margin was down around 150 basis points sequentially stemming from lower external chemistry revenues, which impacted our product mix, as well as lower revenue attributable to the order shortfall penalty under our long-term supply agreement, which is the result of the sequential growth in our related party business. Partially offsetting these items was our data analytics segment, which provided a meaningful contribution to gross profit during the third quarter. As shown on slide 7, gross profit from data analytics totaled $1.2 million during the third quarter of this year, an 88% increase compared to the second quarter. Data analytics gross margin came in at 44% during the quarter, a 47% improvement sequentially as we grew recurring revenue during the quarter. These strong margins are why we are so excited about the outlook for continued revenue growth in this segment that Ryan touched upon earlier. Moving down the income statement, we had an outstanding quarter as it relates to reducing overhead. The third quarter SG&A costs declined to $5.7 million, a 12% improvement compared to the third quarter of last year, and a 9% sequential improvement. SG&A costs through the first nine months are now down 15% from last year, resulting in over $3 million in savings, or roughly half of the year-to-date net income. This is an area we will continue to apply maximum focus on improvement. Moving to slide 8, adjusted EBITDA for the quarter increased to $4.8 million. Keep in mind, we grew adjusted EBITDA by 9% sequentially despite revenue from the order shortfall penalty under our supply agreement declining by 19% or $1.6 million from the second quarter. Touching on the balance sheet, at September 30th, we had $1.4 million drawn under the ABL. Our September 30th debt to trailing 12-month adjusted EBITDA was less than 0.1 times. With respect to our updated 2024 guidance for the second time this year, we're raising our guidance based on the strong operational performance we delivered to date and our outlook for the fourth quarter. We now expect adjusted EBITDA to be in the range of $16.5 million and $18.5 million, which is an increase of 35% at the midpoint compared to our initial 2024 guidance range of $10 million to $16 million. Put another way, the floor of our current guidance range now exceeds the ceiling of the original guidance range. Based on current projections, we expect our 2024 adjusted gross profit margin to be between 20% and 22%, which compares very favorably to our 2023 adjusted gross profit margin of 15%. In closing, we posted solid third-quarter numbers that build upon several consecutive quarters of financial and operational momentum. We're excited about our results for the first three quarters, and we anticipate closing 2024 out in strong fashion. If we're able to hit the midpoint of our updated guidance, we would achieve a $16 million improvement in adjusted EBITDA versus 2023 and a $26 million improvement versus 2022. With that, I'll turn the call back over to Ryan for closing comments.

Thanks, Bond. We're excited about the remainder of 2024 as we have tremendous growth potential in both our chemistry and data analytics segments, despite the ongoing market headwinds. We believe that Flotek continues to represent a compelling investment opportunity. The expanding opportunities within our data analytics segment provide a strong catalyst for future revenue and profitability growth. Our third-quarter results deliver profitability, and we continue to be positioned for sustained growth as a collaborative partner of choice for chemistry and data solutions. I'm proud of the progress we've made, and I'm confident in our ability to continue 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're now ready to take questions.

Your first question comes from Jeff Grampp with Alliance Global Partners.

I wanted to start on the flare market, since some nice updates there. First, I'm curious if you guys can touch on kind of the preferred sales model that you're seeing from upstream customers, kind of lease versus buy. And then also, kind of curious on the customer concentration there. Are you guys seeing maybe a few customers really kind of going all in on this? Or is it a few, a broader set of customers that are maybe kind of dipping their toe in the water with some potential for increased adoption later? If you could touch on both those points, that'd be great. Thanks.

Yes, I think when we look at the commercial model, obviously the preference for us is more on the rental service agreement type, and that's where, as we mentioned in the notes earlier, the majority of our revenue is coming from. There are a few customers who are looking at what we would consider to be full-time flare monitoring, where they don't just come and monitor for the two-week period as set out by the EPA regulations. They are looking at a potential capital purchase for those in the long term, where we have a long-term agreement in place for the monitoring software, etc. Currently, we are focusing on the rental service model, whether we're doing it multiple wells at a time or single testing well moving forward. In terms of customer concentration, initially we had about 5 to 10 customers who were really pushing forward. Those are your customers that are focused on sustainability and overall environmental performance, and we've made great progress. However, the diversification of our customer base is quickly expanding. Given the current political environment, a few people slowed down just to see what happens. I don't think this will negate the fact that testing is ongoing. We've had recent conversations with the EPA, and their expectation is that the regulatory requirements will continue moving forward as is. Therefore, we expect a bit more of an acceleration by the end of this week from our current position, but we’ve had great customer diversity so far.

Great appreciate those details, Ryan. For my follow-up on the cost side, you guys have continued to have really nice performance there, particularly with SG&A. I'm wondering, does there come a point where it makes sense to start to grow that line? You know, given the EBITDA margins are growing and should continue to grow, it seems like. And the growth opportunities you have with things like JP3, like, how do you guys think about, you know, continuing the impressive results you've had on the cost side versus kind of reinvesting in the growth of the company?

Hey, Jeff, it’s Bond, thanks for the question. Yes, we're looking at potentially adding some personnel relative to the demand we are seeing on the flare marketing side. So, these would be JP3 professionals that would most likely show up in the cost of goods sold portion of the income statement versus SG&A, but nothing is in the works yet right now. We're just monitoring the demand to see how we can operate with our existing employee group. Likely, headcount might increase a little bit next year. However, given the expected growth in revenue, we would expect SG&A costs to continue trending down.

Yeah. And to add to that, Jeff, regarding SG&A, it's more than likely not a significant expansion. It will be more on the direct cost side for field delivery as we evolve in that service model. There’s no doubt that we are likely looking at a good amount of CapEx going into the data as a service business to stay ahead of the demand curve we expect to see coming in 2025.

Your next question comes from Gerry Sweeney with ROTH Capital.

I wanted to focus on the data aspect and inquire about the sales pipeline. How do you view the sales cycle? How long do you anticipate it will take to finalize deals? I believe Ryan provided some details on this, particularly concerning the election, but I’m curious in general. Additionally, how will regulations influence the sales cycle, especially as they become more established in the coming years?

Great questions, Gerry. When we look at our data-as-a-service business, particularly on the data analytics side, we divide our opportunities in the pipeline into our traditional core business around Reid vapor pressure monitoring and transmix, crude monitoring, etc. The CAGR in those areas typically has a longer sales cycle, ranging from 9 to 12 months, as they align with CapEx plans as part of OpEx expenses. As we've started to create emerging markets in monitoring flare gas and custody transfer that I mentioned, these markets are continuing to expand and offer intriguing opportunities for growth. The sales cycles in these government-regulated areas are much faster, going from 9 to 12 months down to just weeks, sometimes less than a month. This presents a great opportunity for us to tap into. Regarding the pipeline, for our core business, we’ve seen about a 15% to 20% growth in opportunities for 2025, expanding double digits every month in the upstream segments. We're also monitoring the flare and custody transfer side, ensuring we reinvest the proper CapEx to capture all the growth potential there.

Hey, Gerry, it’s Bond. Just a quick follow-up regarding the velocity of sales on flare monitoring. We received EPA regulations approval in mid-July. In August, we generated about $100,000 in revenue, and in September, that increased to about $600,000, so the traction is really starting to grow.

On that front, I think you mentioned you had three units in the quarter, and you're looking to go to 11 units?

To clarify on the numbers, the three we mentioned during our earnings call in August for Q2 were in location, and that number grew from three to eleven, which will actually be twelve by Friday of this week, actively in flare monitoring. We expect continued growth in that area throughout the quarter. We also discussed our chain of custody applications, which is a different aspect where we're examining hydrocarbon composition. Initially, we had three field trials running, and now we'll be adding another eight units here in Q4. It’s quite an exciting story. Three quarters ago, we talked about monitoring flare gas and custody transfer, and now those use cases are in effect and expanding. Lots of potential in these areas.

A nuanced question: You have flare monitoring and chain of custody. Are they on track or growing faster than you expected six months ago?

I would say that the flare monitoring is relatively on track considering the geopolitical issues around November 5. I look for those factors to kick back into a higher gear on the back half of the year regarding deliveries and flare. I would say the chain of custody piece is probably a little ahead of our expectations due to the transparency of the data and its applications in relation to pricing versus compositions. This is also why we're discussing the certification of our measurements in terms of how the market perceives them. Overall, it’s obviously ahead of schedule right now.

With the election and other changes in the rigs, it feels like flare gas monitoring is doing really well despite some market nuances.

Yes, and we are excited about it because of the success in the field. We've been able to hook up and monitor up to three wells in one day with some of the testing. Everything has been running very well so far.

Your next question comes from Josh Jayne with Daniel Energy Partners.

First question I had is just on the chemistry side, up 7% quarter-over-quarter in the face of continued weak frac counts and rig counts. You provided some thoughts about electricity demand out to 2030. I’m not going to ask for a forecast, but could you just discuss where we are in the U.S. land cycle today, what you're hearing from your customers over the next couple of quarters, and if you think that there are reasons you could outperform as you have been over the last 9 to 12 months on the chemistry side?

Yes, I think we're still a bit in a crystal ball situation. As we look to Q4, I anticipate it will be relatively soft for the market overall. We have had great, sticky transactional business with our customer base, and I expect to see an acceleration in our international chemistry markets. Customers have informed us that over the coming quarters, and particularly toward mid-year, we should witness increased operational intensity in the market. However, much of this still hinges on the quality of commodity pricing, notably natural gas, and how the geopolitical environment impacts oil demand. In conclusion, while I expect Q4 to be a slower period, I am optimistic about seeing a rebound in 2025, especially as we diversify our international activities in regions like Latin America and the Middle East, providing us with a competitive advantage.

Thanks, that's helpful. And then one more question on the cash flow statement for Bond. Working capital has built a little bit over the last nine months. Can you share your thoughts on converting some of the accounts receivable to cash as we move forward over the next couple of quarters and the reasons we may be able to generate more cash than we have been so far?

Yes, Josh. Just remember, a significant part of the working capital build stems from the order shortfall penalty. This penalty will settle on an annual basis, so that receivable grows throughout the year if ProFrac doesn't purchase the requisite amount of chemistry. Thus, we don't have much control over it. If you exclude the order shortfall penalty from the change in working capital, accounts receivable actually decreased during the second quarter, so we're doing a good job in managing it. I also noted that DSOs improved by 12% during the quarter, excluding that order shortfall penalty, which is subject to different payment terms than our standard business.

There are no further questions at this time. I will now turn the call over to Ryan Ezell, CEO for closing remarks.

Thanks everyone for joining the call again. We continue to be excited about the future of Flotek. The evolution of our business is focused on bringing together the synergies of our unique and innovative chemistry technologies group with our emerging markets and data analytics. We look forward to our call here in Q4. Thank you for your time today.

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