Flotek Industries, Inc. (NYSE:FTK) Q4 2023 Earnings Call Transcript
Flotek Industries, Inc. (NYSE:FTK) Q4 2023 Earnings Call Transcript March 13, 2024
Flotek Industries, Inc. misses on earnings expectations. Reported EPS is $0.07 EPS, expectations were $0.09. FTK isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Welcome to the Flotek Industries Fourth Quarter and Year-End 2023 Earnings Conference Call. At this time, note that all participant lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] Also note that this call is being recorded on Wednesday, March 13, 2024. And I would like to turn the conference over to Mike Critelli, Director of Finance at Flotek. Please go ahead, sir.
Mike Critelli: Thank you, and good morning, everyone. We appreciate your participation in Flotek’s fourth quarter and full-year 2023 earnings conference call. Joining me on the call today are Ryan Ezell, Chief Executive Officer; and Bond Clement, Chief Financial Officer. On today’s call, we will first provide prepared remarks concerning our business and results for the fourth quarter and full-year 2023. Following that, we will open up the call for any questions you have. Flotek’s fourth quarter and full-year 2023 earnings press release was issued yesterday afternoon. We also posted an updated corporate presentation we will reference on today’s call. This can 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 the risk factors discussed in our filings with the SEC. In addition, please refer to the reconciliations provided in the earnings press release and corporate presentation as management may discuss non-GAAP metrics on this call. With that, I will turn the call over to our CEO, Ryan Ezell.
Ryan Ezell: Thank you, Mike, and good morning. We appreciate everyone’s interest in Flotek and for joining us today as we discuss our fourth quarter and full-year 2023 operational and financial results. I’m extremely pleased with our results as 2023 was truly a transformational year, in which, we restored profitability in all key financial metrics, enhanced our liquidity, and strengthened our leadership team through the execution of our corporate strategy utilizing chemistry as the common value creation platform. With a relentless focus on technology, we remain at the forefront of innovation and multidisciplinary advancements that continue to forge gains in market share through our differentiated chemistry and data analytic solutions.
Both carry an undeniable value proposition that maximize our customer’s value chain, while generating a meaningful return on investment for our shareholders. With that in mind, I would like to turn to slide seven and touch on our key highlights for 2023 that Bond will discuss in detail in just a moment. We delivered strong year-over-year growth in all key profitability metrics, including gross profit, adjusted gross profit, and adjusted EBITDA, with the fourth quarter of 2023 adjusted EBITDA representing the 10th consecutive quarter improvement, and full-year 2023 marking our best year in nearly a decade. The total company revenue was up 38% compared to 2022, as we executed the largest volume of product sold in the company’s history. Chemistry revenues from external customers grew each quarter during the year, and were up over 21% compared to 2022.
As a result of our rapidly-expanding customer base and then continued adoption of our prescriptive chemistry management business model, our customized engineering approach combined with our proprietary complex nano-fluid technologies continues to deliver wells that outperform adjacent competitor wells in all basins. Our data analytics revenue saw strong growth of 47% in 2023 versus 2022. The segment has seen a 250% increase in subscription-based revenue since 2022, which supports our strategy to evolve to a data-as-a-service business model. These subscription-based services have had a 95% annualized retention rate. We also expanded our global footprint with the successful commercial launch of our slickwater fluid systems in the Kingdom of Saudi Arabia, and established a new entity in Abu Dhabi to facilitate diverse market share growth and margin expansion internationally.
We also recently announced the addition of Amy Blakeway as the newest member of our senior leadership team as our Senior Vice President and General Counsel. She will be an asset to the organization as she brings extensive sector experience, and joins at a pivotal time as we look to capitalize on both organic and inorganic growth opportunities. Most importantly, all of these achievements were accomplished with zero recordable and lost time incidents in the field of operations, thus extending the current streak to over 753 days without a recordable incident. I would like to take time to thank all of our employees for their commitment to safety and service quality in achieving these outstanding results. And 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 attributable to the fact that overall markets slowed down in upstream onshore activity that has been experienced this year as natural gas continues to face near-term pricing pressure. And despite this decline in overall drilling and completion activity, the impact on Flotek has been much less given the execution of our strategy around our differentiated and complementary chemistry and data technologies. To that end, we have continued to grow our external chemistry business revenues every quarter this year, and they were up another 10% in the fourth quarter. More importantly, we saw a 75% increase in our reservoir-centric technology sales related to complex nano-fluids.
Furthermore, the chemistry purchase requirements contained in the long-term supply agreement with ProFrac were designed to mitigate the volatility of the market and provide some insulation to Flotek operations for maintaining economies of scale and stability. We expect sustained growth in reservoir-centric and international chemistry revenues that should help offset the headwinds of the slowing upstream completion environment. 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. Despite the near-term volatility in commodity pricing, the fundamentals for energy-related services remain strong.
The overall expansion of the global economy will continue to create substantial demand for all forms of energy which will increase service intensity within the sector. As we look ahead to 2024, our efforts remain laser focused on revenue growth, market share expansion, and cost efficiency gains as we are well-positioned to capitalize on opportunities both domestically and internationally. The continued adoption of our prescriptive chemistry management for improved reservoir performance, along with the launch of the next-generation JP3 measurement system, unlocks significant upstream market opportunities as the company expects the data analytics business to grow by 50% in 2024. We are confident that our expanding suite of services positions us to deliver unique and superior solutions to maximize our customers' value chain.
Consistent with this outlook, we believe that the demand for our advanced chemistry and data solutions will continue to increase and will provide new opportunities in market verticals such as industrial, geothermal, agricultural, solar, and hydrogen. Now, I'll turn the call over to Bond to provide key financial highlights.
Bond Clement: Thank you, Ryan, and thank you all for joining us this morning. Our 2023 results were outstanding by almost any measurement. We returned the company to profitability, delivering significant improvement in all key financial metrics. I echo Ryan's comments on our exceptional results, and I know the entire Flotek team is proud of what has been accomplished, not only in 2023, but over the last two years. Flotek's turnaround execution has established a much stronger financial position than a year ago, and we expect to build on this momentum in 2024. Evidencing this improvement in financial position, I'm happy to report that our 2023 10-K filing will confirm that the going concern doubt that our auditors asserted in their 2022 audit has been resolved.
In addition, we expect to report in our 2023 10-K that we have remediated the internal control weaknesses that were disclosed in last year's 10-K. Let's run through a handful of key financial items for the fourth quarter and full-year of 2023. I will be referring to slides in the presentation we posted to the website yesterday. Slide seven highlights our accomplishments and the strong financial growth we delivered across the business. Headlining our results were annual improvements in revenue of $52 million, gross profit of $31 million, and adjusted EBITDA improving by $28 million year-over-year. As it relates to adjusted EBITDA, we reported another quarterly improvement during the fourth quarter. That represents two and a half years of sequential improvements in that metric.
More importantly, full-year 2023 adjusted EBITDA was positive, as Ryan mentioned earlier, for the first time since 2017. Turning to the income statement, as shown on slide eight, we have achieved sustained growth in revenues since 2021, with our 2023 increases from both our chemistry and data analytics segments. Full-year 2023 revenues grew 38% over 2022, despite lower North American land completion activities during the second-half of the year. Our chemistry revenue from external customers increased by 21% during the year. More impressively, though, is comparing the fourth quarter of 2023 to the first quarter of 2023, revenue from external customers increased by 100%. In addition to our success growing our chemistry business, we generated strong growth from the data analytics segment as revenues associated with JP3 grew 47% over 2022 and are up almost 90% since 2021.
Turning to slide nine, fourth quarter gross profit increased for the fourth consecutive quarter as we continue to deliver efficiencies across all aspects of the business supply chain. Fourth quarter gross profit grew to over $9 million compared to a gross loss of $2 million in the comparable 2022 period. We reported gross profit of $24 million for the full-year 2023 compared to a gross loss of $7 million last year, as the company benefited from the numerous cost improvements implemented throughout the year. Moving to slide 10, adjusted EBITDA of 17% sequential improvement from the third quarter of 2023, as that metric totaled $4 million. As noted earlier, this is the 10th consecutive quarter of improvement, a streak that goes back to the second quarter of 2021.
Moving to SG&A, fourth quarter totaled $6.6 million compared to $6.2 million for the fourth quarter of last year. Full-year 2023 SG&A totaled $27.9 million compared to $27.1 million for the full-year 2022. On a percentage of revenue basis, 2023 SG&A was down by 500 basis points compared to 2022. It is worth noting that the fourth quarter and full-year numbers of 2022 included a $1.9 million credit related to the reversal of a bonus accrual. Excluding the benefit of that credit, fourth quarter '23 and full-year '23, SG&A were down 18% and 4% respectively from the 2022 periods. Moving to the bottom line, we reported net income of $2.1 million in the fourth quarter of 2023 compared to a net loss of $19 million during the fourth quarter of 2022.
Net income for the full-year of 2023 was $24.7 million compared to a net loss of $42.3 million in 2022. Net income for 2023 did include a $30 million non-cash gain from the fair value measurement of our convertible notes. These notes matured during 2023, so we did not expect this type of volatility in our earnings going forward. Touching on the balance sheet, in October we announced that our credit availability under the ABL was increased from $10 million to $13.8 million. As of year-end, we had $7.5 million drawn under the ABL. As of Monday, we had less than $1 million drawn. Lastly, we're planning to provide 2024 guidance with our first quarter results in May. This is consistent with last year's process when we also issued guidance with first quarter 2023 results.
While we're not providing formal guidance at this time, we do expect positive adjusted EBITDA each quarter in 2024, which we expect will result in another year of strong growth in that metric. In closing, Flotek continues to drive strong, repeatable performance with a focus on profitability. We anticipate further revenue growth in 2024, and we will maintain a sharp focus on reducing costs at every opportunity, particularly SG&A. I'll now turn the call back over to Ryan for closing comments.
Ryan Ezell: Thanks, Bond. Turning to slide 17, we're 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 2023 results delivered profitability and we continue to be positioned for sustained growth as the collaborative partner of choice for sustainable chemistry and data solutions. I'm proud of the progress we made in 2023 and I'm confident in our ability to execute going forward. We appreciate all the continued support of our stakeholders and we hope that you share our excitement regarding the future of Flotek and we look forward to reporting on further progress. Operator, we are now ready to take questions.
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