ProFrac Holding Corp. (NASDAQ:ACDC) Q1 2024 Earnings Call Transcript May 9, 2024
ProFrac Holding Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings, and welcome to the ProFrac Holding Corp. First Quarter 2024 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Mr. Michael Messina, Director of Finance for ProFrac Holding Corp. Thank you. You may begin.
Michael Messina: Thank you, operator. Good morning, everyone. We appreciate you joining us for ProFrac Holding Corp’s conference call and webcast to review our first quarter 2024 results. With me today are Matt Wilks, Executive Chairman; Ladd Wilks, Chief Executive Officer; and Lance Turner, Chief Financial Officer. Following my remarks, management will provide a high-level commentary on the operational and financial highlights of the first quarter, 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 May 16 2024. 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 May 9, 2024 and therefore, you are 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 future performance. Various risks, uncertainties and contingencies could 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-K 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, 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 release, which can be found on the company’s website. And now, I would like to turn the call over to ProFrac’s Executive Chairman Mr. Matt Wilks.
Matt Wilks: Thanks, Michael and good morning, everyone. After my prepared remarks, Ladd will comment further on the performance of our subsidiaries and Lance will go through our financial performance. We are very pleased with our first quarter results. We made progress on what we told you last quarter and are now seeing the results. We are focused on getting back to our foundations to provide an incredible customer experience, increased utilization throughout all of our subsidiaries and better cost control to ensure we are the lowest cost operator in the industry. In the first quarter, we generated $160 million of adjusted EBITDA and $582 million of revenue. Our costs were down and our efficiencies were up. We deployed nine fleets since our most recent low in the fourth quarter.
As we scale, we were able to absorb costs and deliver greater returns personally and we saw a benefit of that in the first quarter. In addition, ProFrac has expanded its portfolio of highly efficient customers. In the quarter, we generated substantial cash flow that we used to fund the growth of fleets and working capital. The underlying results demonstrate the earnings capabilities of our assets and our people. We believe our cash conversion is the best in the industry. Looking forward, we continue to see opportunity in this market. Our average lead count for the second quarter will grow based on the timing of activations during the first quarter. We continue to pursue opportunities to increase our fleet count in a disciplined manner. Similar to the activity outlook for the industry we also expect pricing to remain relatively stable.
Overall, we remain on track with what we laid out for pressure pumping last quarter and I am confident we will continue to have wins as the year progresses even in a flat rig count scenario. Turning to Alpine. Weakness in the gas markets and weather have impacted our results. However, we are seeing an uptick in volumes and anticipate demand increases starting later this year that should further boost output. We continue to expect the proppant division to achieve our 60% to 70% utilization target, but we recognize that we will likely need to see continued improvement in getting natural gas prices to get utilization where we want it. We view this as upside opportunity. And we believe that this inflection point is getting closer. Another one of our largest opportunities continues to be our e-fleet deployment.
Recently we completed a pad in the city limits of Midland, and demonstrated the versatility, reliability and quiet nature of our e-fleet which was actually our most efficient fleet in West Texas last month. These e-fleets are a meaningful component of our value proposition to our customers. Our ability to provide customers with significant fuel savings, maintain high reliability and demonstrate efficient operations has made our e-fleets highly thought after and a critical part of our service offerings. We are building our e-fleet backlog and expect to have all the e-fleets deployed later in 2024. I’m proud of the execution of our team, across the organization on the priorities we outlined during our last call. And I am proud of our momentum.
We are heading in the right direction on each of our initiatives. At the customer level, we have successfully acquired a diverse customer base with approximately 70% of fleets operating for large efficient customers on a dedicated basis. We also continue to fill new inbound requests for additional deployments with the highest demand being for electric and Tier-4 Dual Fuel technologies. Regarding utilization, we saw a significant step-up with our pressure pumping assets driven partly by our focus on working with highly efficient customers, but also the teams’ relentless focus on minimizing downtime at every opportunity. Finally, strengthened by our vertical integration our Firm Grip on Cost is yielding improved results and margin across the company.
This focus allowed us to achieve high incrementals quarter-over-quarter. As an example, in Q1 we made significant progress towards our goal. And by March, we were able to dilute, what we call controllable costs by 25% from our Q4 average. As a leader in the oilfield services industry we are maintaining these priorities front and center for all of our teams. We will continue to execute on our strategic goals and maintain focus on our key priorities to create long-term value for our stakeholders, provide best-in-class services to our customers. We believe the industry is on a solid footing. And we are well positioned to ensure that our standing within the market continues to improve. And with that, I’ll turn the call over to Ladd.
Ladd Wilks: Thank you, Matt. I’ll begin with an overview of our performance in each segment, starting with Pressure Pumping. I’m proud to report we achieved record efficiency levels in the first quarter for our Pressure Pumping segment. We generated roughly an 11% sequential improvement in pumping hours per fleet and that makes Q1 a most efficient quarter in ProFrac’s history. We continue to set numerous records for our customers. One of the most recent examples occurred in March, when one of our fleets hit an all-time record for a customer by pumping 675 hours. Efficiency across all our fleet was up nearly 30% in March, over Q1 of 2023. A large portion of this is a product of the focus on efficiency for the entire industry, but this really demonstrates the commercial strategy that we employed, by focusing on dedicated thru-cycle customers.
This also highlights how amazing our team is. We have the best crews in the industry and are consistently putting up the best numbers for our customers. In the first quarter, we activated nine fleets, increasing our scale considerably. I’d like to reiterate that, at scale, we believe we have the lowest cost in the industry. On our last call we laid out a path to generate mid-to-high-teens EBITDA per fleet, exclusive of the Proppant division. And we achieved that. More importantly, in Q2, we expect to continue at that level. And our average fleet count should be higher due to the full quarter impact of activated fleets. We believe this will lead to incremental improvement in adjusted EBITDA quarter-over-quarter. We have a unique vertically integrated business that benefits from lower cost of scale, yielding superior returns, and we will continue to demonstrate that in our results.
The Proppant segment is also making progress. We are a little behind schedule on the transformation our team has embarked on, primarily due to weakness in natural gas activity and the impact of weather. Overall, our objective remains the same. While our sales pipeline expanded rapidly in Q4 heading into Q1, weather and operational disruptions impacted results. To address this we have implemented a number of initiatives that will improve the utilization of our mines to ensure we can service the volumes we have in the pipeline. For example our plant improvement in La Mesa completed in mid-March has enabled us to double the output and achieve 70% utilization. In South Texas we are working on a similar plant improvement as demand there remains very strong.
This transformation has led to some minor growing pains that we quickly overcame and we are getting back on track. Despite the lower sequential results, we are seeing improved utilization each month in the second quarter. Based on current visibility, we expect total volumes to recover to be at or above fourth quarter levels. In summary, we are positioning Alpine to produce high throughput, high utilization, and lower cost per ton. Looking at our marketplace, we continue to believe our business segments are well-positioned to be the preferred providers for large multi-basin operators. These operators require service providers with sufficient scale to have custody over the supply chain of materials. This is exactly what we are built for at ProFrac.
We believe there is a massive growing need for natural gas for a variety and purposes both domestically and abroad. So, we continue to maintain a strong presence and reputation with customers in the gassier plays and we believe this will benefit us in the long run. I want to thank our outstanding team for their hard work, dedication, and commitment to safety. Throughout our organization our people are executing on the three areas of focus that Matt outlined in his remarks. We firmly believe we have the right plans and initiatives in place with the best team in the industry. I’ll now hand it over to Lance to provide more detail on our consolidated financial results.
Lance Turner: Thank you, Ladd. Our first quarter revenues of $582 million represent a 19% sequential increase. We generated $160 million of adjusted EBITDA in the first quarter for an overall EBITDA margin of 27%. First quarter EBITDA represents a 46% improvement sequentially and with incrementals of approximately 54%. The cash we generated in the quarter went primarily toward working capital and CapEx in conjunction with the scale-up of our fleets and mine improvements as well as to pay down approximately $23 million of outstanding debt. Simulation Services revenues were up 28% to $517 million in the first quarter, driven primarily by the higher number of active fleets and improved efficiencies, partially offset by a single-digit reduction in pricing as we migrated toward highly efficient three-cycle customers.
Adjusted EBITDA for the segment was $125 million, which was up approximately 116% sequentially. Margins also improved to the segment’s highest levels seen since the first quarter of last year. The results of the Simulation segment in particular stands as evidence that our strategy and cost structure are working for us with incrementals in excess of 50% demonstrated in the quarter. This segment was also impacted by approximately $5 million of reactivation costs and approximately $9 million in shortfall expense related to our supply agreement with Flotek. The profit production segment generated revenues of $78 million during the quarter. Total revenue was down sequentially due to lower tonnage sold on the heels of weaker natural gas activity and the impacts of weather and certain operational limitations.
Average pricing per ton also came down slightly but pricing appears to be stable going forward. Approximately 70% of the volumes in the profit segment were sold to third-party customers during the first quarter which is in line with our commercial strategy to focus on customers where we can add the most value. Adjusted EBITDA for the segment totaled $28 million. The lower EBITDA was driven by lower volume and prices, coupled with a predominantly fixed cost structure. The Manufacturing segment generated revenues of $43.5 million, up approximately 28% from the fourth quarter. Approximately 78% of this segment was intercompany. The increased sales in the first quarter were a result of increased fleet and hours pump at the Simulation Services segment, resulting in higher consumable usage.
Adjusted EBITDA for the Manufacturing segment was $4.4 million, which was up compared to $1.8 million in the fourth quarter. Margins improved in the first quarter largely due to the absorption of costs through higher output and lower cost per unit, as we start to see the benefits of our initiatives to reduce third-party reliance for certain production activities. Selling general and administrative costs were $51 million in the first quarter compared to $59 million last quarter. No one category spending drove the sequential decline, but rather our general focus on cost-conscious behavior is yielding results. Cash capital expenditures totaled $59.9 million in the first quarter, a sequential increase driven by our higher fleet count and other growth-related initiatives, related to fleet upgrades and mine improvements.
Approximately $22 million was incurred in prior periods and held in accounts payable, but later paid in the first quarter of this year. We continue to expect to incur between $150 million and $200 million in maintenance CapEx for the year along with approximately $100 million on growth-related CapEx. Despite the 23% increase in fleet count and 11% improvement in efficiencies, cash used for working capital was only $24 million. We continue our focus on rightsizing the inventory, which provided a $16 million benefit to working capital this quarter. In addition, we were able to reduce our DSOs by approximately four days to help offset the AR build required for the ramp-up in activity levels. Total cash and cash equivalents at March 31 was $28 million including $5 million attributable to Flotek.
Total liquidity, at quarter end was approximately $167 million and borrowings under the ABL ended the quarter, with $138 million. While the emphasis on our strategic initiatives has already begun to bear fruit in 2024, we see opportunity for improvement ahead. We remain focused on operational execution, efficiencies and providing best-in-class services to our customers. We believe we will continue to improve our relative positioning to drive shareholder value in 2024 and beyond. That concludes our formal remarks. Operator, please open the line for questions.
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Q&A Session
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Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Blake McLean with Daniel Energy Partners. Please proceed with your question.
Q – Blake McLean : Hi, good morning. Thank you for taking my call.
Matt Wilks: Good morning.
Ladd Wilks: Thank you.
Q – Blake McLean : Yes. I was hoping maybe you guys could just speak to, maybe some of the market dynamics on the frac side. I mean obviously you guys saw, a really nice sequential improvement in EBITDA per fleet. How do you see that progressing over the course of the year? Maybe any more color, you can provide on that increase in profitability and the split between cost cuts and absorption? Just any more color, you could share around that and on the market sort of generally.
Ladd Wilks: Definitely. So when you look at the — when the gas market was falling off. You had budgets reset on the early side. And so, we saw a nice migration there and a relatively stable fleet count for the industry, and we expect it to be relatively stable for the remaining part of the year, with the exception to that being a bounce back in natural gas prices. If we see that, then you’ll see fleet count grow.
Q – Blake McLean : Right. And then on the profitability side, the improvements there. You talked about absorption you talked about cost cuts. How should we think about the weight of each of those, and the additional opportunities for kind of Q2 Q3 and Q4 on that front?
Ladd Wilks: Definitely. Yes, most of it was through the absorbing the costs. The operating leverage that we have in this business is, tremendous. Vertical integration gives us a very more fixed nature to our cost structure relative to our peers, that — some of them have more variable cost structure. So when we put more efficient and we have more fleets out there running, we’re able to absorb those costs in a much broader way. And I think Q1 shows — showcases that.
Q – Blake McLean : Yes and then maybe. Thank you. And maybe just one more, I was hoping to ask, you guys have obviously, a lot of insight into the gas for basin. And I was wondering if you could share any color on conversations you have with operators, things are focused on things they’re looking at. Anything that might give us some more insight into how to think about the world in the back half of this year into 2025?
Ladd Wilks: Yeah, certainly. So there are several operators that we’re talking to where we see some opportunities in Q3, Q4. It’s still early on, but what we’re seeing on the forward curve is encouraging. But we’re remaining very conservative with it, sticking to our guns. And we don’t want to get overly bullish and lean into it too much or too soon. But we’re in constant communication with these operators and think that they’re doing a phenomenal job of being disciplined with the market that they have. and we look forward to their activity picking up towards the back half of this year.
Blake McLean: Okay. Thank you guys very much for the time morning.
Ladd Wilks: Thank you.
Operator: Thank you. Our next question comes from the line of Stephen Gengaro with Stifel. Please proceed with your question.
Stephen Gengaro: Thanks. Good morning, everybody. Just two things from me. One is on the fleet count. Are we right that it’s probably in the low to mid-30s right now? Is that approximately how many active fleet you have?
Ladd Wilks: Yeah.
Stephen Gengaro: Okay. Thanks. And when we look at the current makeup of your fleet between electric dual fuel and two older diesel. Can you give us a rough breakdown and maybe even sort of talk about, I assume it’s lower emission assets, which are basically close to fully utilized. Can you give us any details around that?
Ladd Wilks: We won’t get too detailed with it, but without a doubt, customers prefer fuel efficiency. I think that the value that’s provided by dual fuel fleets as well as e-fleets and the overall fuel savings. I mean, it just places a lot of diesel. And this is an area that we focused on because this allows us to lower the cost for our customers. But without having a detrimental impact to our financials. So, this is a trend that we expect to continue seeing. However, there are many customers that prefer people on diesel fleet. And that’s really driven by the associated gas associated with some of the lily basins and the costs of bringing these other options to fill. I think you really see that across the industry as well. This is where the majority of the growth capital in this space is going. And it’s almost all of it’s going to upgrading equipment to a more fuel-efficient configuration.
Stephen Gengaro: Great. And then just one final for me. You’ve been involved in this in the past but when we think about industry dynamics and potential for future consolidation, how do you think about allocating capital between building new assets to placeholder assets or potentially M&A?
Ladd Wilks: We’re in the market. We see things that are out there, and we’re interested in value, but that value is few and far between. And I think the best way to think about us is just we take a very patient approach to the market. And if we generally avoid a transaction unless we see a tremendous amount of value coming with it.
Stephen Gengaro: Great. Thanks for the color.
Ladd Wilks: Thank you.
Operator: Our next question comes from the line of Saurabh Pant with Bank of America. Please proceed with your question.
Saurabh Pant: Hi, Good morning, Matt, Ladd, and Lance. Maybe I’ll start with a follow-up. I think, Matt, you said in your prepared remarks, you expanded your portfolio with the highly efficient customers, which is obviously commendable and that’s what you should be doing. Can you give us a little color, Matt or Ladd, maybe on how much visibility do you have as we look forward for the next three to six months? I’m especially thinking in light of the completion deferrals that we are seeing in the gas basins. How much should we worry about the potential white space in the gas basins in the next three to six months?
Matt Wilks: Yes, there’s a lot to unpack there and good morning and thank you for joining our call. Yes, we’ve got some availability, but we look at the market in a very disciplined way and won’t put fleet to work unless it fits in our overall strategy. There’s certainly benefits to scale and our ability to absorb costs. And so when we look at opportunities, we want to make sure that when we deploy these, we deploy it in a very disciplined way. And one of the things that also comes with our vertical integration is that, if we get into a situation where there’s no fleets available, it becomes tight, really tight from gas markets coming back, we can respond to that quickly too and solve any issues and meet the needs of our customers even if that means that we end up with an undersupplied market in 2025.
