Q4 2023 Flotek Industries Inc Earnings Call
Participants
Mike Critelli; Director of Finance; Flotek Industries, Inc.
Ryan Ezell; CEO & Director; Flotek Industries, Inc.
J. Bond Clement; Chief Financial Officer; Flotek Industries Inc
Don Crist; Analyst; Johnson Rice
Jeff Robertson; Analyst; Water Tower Research LLC.
Eric Swergold; Analyst; Firestorm Capital
Richard Rudgley; Analyst; Glenbrook Capital
Presentation
Operator
All participants are now muted. Welcome to the Flotek Industries fourth quarter and year-end 2023 earnings conference call. (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. It 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 a management may as management may discuss non-GAAP metrics on this call. And with that, I will 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 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 restore profitability in all key financial metrics. Enhanced our liquidity has 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 analytics solutions. Both carry an undeniable value proposition that maximize our customers' value chain while generating a meaningful return on investment for our shareholders.
With that in mind, I'd like to turn to slide 7 and touch on our key highlights for 2023 that Bob 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 of improvement in full year 2023, marking our best year in nearly a decade, total company revenue was up 38% compared to 2022 as we executed the largest volume of products sold in the Company's history. Chemistry revenues from external customers grew each quarter during the year, and we're up over 21% compared to 2022 as a result of our rapidly expanding customer base and the 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 a successful commercial launch of our slick water 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 Blakely as the newest member of our senior leadership team as our Senior Vice President General Counsel two will be an asset to the organization as she brings extensive sector experience, as always 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 strip to over 753 days without a recordable incident. I'd 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 2020.
For Milligan in the quarter, a bit more granularity, revenue was slightly down sequentially. This decrease is attributable to the fact that overall market slowdown 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 of 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 revenue reservoir centric technology sales related to complex data fluids. Furthermore, the chemistry purchase requirements contained in the long term supply agreement with pre-frac were designed to mitigate the volatility of the market and provides some insulation to Flotek operations for maintaining an 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. It 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 remains strong. The overall expansion of the global economy will continue to create substantial demand for all forms of energy, which will increased 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 Mediabistro 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.
And I'll turn the call over to Bob to provide key financial highlights.
J. 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 by Echo Ryan's comments on our exceptional results, and I know the entire Flotek team is proud of what has been accomplished, not only 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 and 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 plus run through a handful of key financial items for the fourth quarter and full year 2023.
I will be referring to slides in the presentation we posted to the website yesterday, Slide 7 highlights our accomplishments and the strong financial growth we delivered across the business. Headlined by 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 2.5 years of sequential improvements in that metric. More importantly, full year 2023 adjusted EBITDA was positive, as Ron mentioned earlier for the first time since 2017.
Turning to the income statement.
As shown on slide 8, 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 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 9. Fourth-quarter gross profit increased for the fourth consecutive quarter as we continued 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, 17% sequential improvement from the third quarter of 2023. As that metric totaled $4 million, as noted earlier, 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 do 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 from.
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, but 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
Turning to Slide 17. 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 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 of a 2023, and I'm confident in our ability to execute going forward. We appreciate all of 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.
Question and Answer Session
Operator
(Operator Instructions)
Don Crist, Johnson Rice.
Don Crist
Gentlemen, Ariol, the onboarding of, um, I wanted to touch on JP3. Obviously, you've put a lot of language in both the presentation and the press release. But on those pilot projects, can you give us a kind of projected time line as to when some of those may come to fruition and when we can expect that ramp up in revenue, I know you highlighted 50% year over year, but when we can kind of a time-line that that goes with that.
Ryan Ezell
Yes, Dan, this is Ryan. When I look at it right now, the big gating factor that is bringing the the newer generation sensor alliance to commercial application, which we expect at the end of H1. So we'll be looking at a ramp up of some of the revenue these applications to come in line in H2 2024 and continue out to 2025 and beyond of driving a lot of that. And when you look at the application of the Quad be acquired C from the EPA or the flare gas and also some of the potential kit chain of custody measurements. A lot of those things are going to drive some unique opportunities for us. It opens up a $700 million-plus market. And Tim, when we look at it in terms of the upstream markets.
Don Crist
Okay. And taking that just one step further, assuming, you know, catch the bumper of the car here, what kind of manufacturing capabilities do you have on the sensor side to keep up with potential demand.
Ryan Ezell
Yeah, that's a great question. And I think for us, that's what we're most excited about. You know, where our capabilities now will be moving out to a probably about a 12 x improvement in manufacturing velocity. In terms of you look at what we would have traditionally moved and call you last year, we can move that less than a month now with the improved manufacturing. So we've already got some preordered. We invested some capital upfront to go ahead and front-load these units, particularly some that we'll be using in the upstream piece, which will be on a Data as a Service model for us and would have made those capital investments upfront. So we're really excited and confident that this manufacturing improvement as well as the improvement in the analyzer performance will be great for the Company.
Don Crist
Okay. We are just one further for me, in Saudi, the opportunity on the slick water side, obviously you just introduced that there. But given their shift towards gas drilling and more kind of traditional shale drilling versus what they have done in the past, what kind of opportunity set do you think that kind of offers you as you kind of move through '24 and they get more comfortable with the technology.
Ryan Ezell
So holistically for us, you know, we've always had that presence in the international market, but I'd say it represented a not a material component of our overall revenue. But as part of our strategy of building what we call a full cycle chemistry sales, having a diverse business in international markets was very important to us, which is our investment into the testing, which took about 18 months to get approved with Ramco and then also we did Abu Dhabi. When you look at the system there, the impact it will have good could potentially double the size of our international revenue, even on a conservative basis year on year. So I still think when you look at the activity of what we'll see there, Saudi will be material to what we do on the international side of the business, it will help significantly.
Don Crist
I appreciate the color of the magnitude of what you think.
Operator
Jeff Robertson, Water Tower research.
Jeff Robertson
Thank you. Good morning, Ryan on the JP3, can you talk about the margins that you could realize with the Data as a Service uptake on that business?
And then secondly, when you're working with landowner groups on Alec on production allocations, how do you get landowner groups and producers on the same page to decide that the JP. three is the best solution for measurement.
Ryan Ezell
So there's a couple of things on there. Looking first around the margin profiles, we haven't fully disclosed around what the margin profile specifically for JP. three years. And what I will say is we model over onto the Data as a Service business, it does give us a 15% improvement compared to the capital sale model over a three year time period and the return on that. So it will evolve for us not only building our recurring revenue, but also the overall profitability of the segment and when you look at what we do on the chain of custody, so that is a unique applications because there are thousands of wells where for this type of work and we've done an extensive amount of analysis on that.
So we're actually working at with quite a few people, particularly if you take some of the trust, some of the legal components of that that actually handle the processing of the royalties, et cetera. As part of the chain of custody, those have been some of the primary targets. What's also been unique for us is we worked with the Texas Railroad Commission, the Bureau of Land Management and the EPA different governing bodies around how we how we manage this because Make no mistake when you look at how they measure quality now they're using a composite sample taken once every six to nine months and then begin this data every ten seconds.
So it will make a significant change in the way the royalties are allocated, how payments work. So I think, you know, there will be a little bit of movement about how this goes on in particular, be it the gathering points. And with the various trusts, I think to do a lot of royalty allocations is where the first impact that we'll see will be.
J. Bond Clement
Yes, Jeff, I'll just add something real quick. I think the operators and the mineral owners are clearly going to be aligned on this on one side. And then I think where the conflict is going to come into play would be how the gathering or the purchaser first purchasers interpret the data that we're sharing and how how they reconcile those two between an instantaneous continuous measurement point in terms of evaluating BTU quality versus like Ryan said, you know, one sample point every 30, 60, 90 days, whatever the situation is, how do they reconcile those two in ensuring that all stakeholders are paid on the accurate amount for the value of their product.
Jeff Robertson
That they have a midstream gather has a more accurate read on what the BTU content is headed, their direction, wouldn't that make them more efficient in terms of how they process?
Ryan Ezell
100%, 100% and you combine that with what our transmix capabilities are it's even better from that aspect.
Jeff Robertson
Ryan. On chemistry, and you've obviously had the program agreement in place for a while now when you look at external chemistry, do you look at the opportunity to form to take that from a transactional business to more of a any kind of a strategic alliance and maybe just a basin-centered alliance with any of the pressure pumpers?
Ryan Ezell
Yes, that's another good point. It is part of our overall strategy is around that collaborative intimacy with these customers. So as we began to really diversify diversify our revenue stack. I would say we have a 50 50 split between service companies and E&P operators. But to your point, those relationships with E&P operators becomes extremely important.
And we look at our Prescriptive Chemistry Management and the what we call the external IT transactional revenue stream because we do build long-term partnerships and what we're starting to see is they're becoming much stickier and performance because they are starting to realize the gains or the return investment in chemistry and you go out and look at a lot of the public space with particular, some E&P operators.
They are talking about chemistry being able to unlock additional barrels out of a reservoir on the other different type curves and so we play an essential component in that and not only bring a sustainable green technology, but also that dramatically improves reservoir performance. And so what they see is it gives us a great opportunity for less volatile and longer-standing relationships with E&P operators.
Jeff Robertson
Then lastly, Ryan, do you ultimately think your chemistry solutions in terms of well performance as companies drill longer laterals. Does that help the kind of chemistry solutions that Flotek provides in terms of driving demand, which can improve performance for having it all in line?
Ryan Ezell
Lots of huge opportunity because part of drilling these longer laterals, we look at well spacing. We look at overall fluids desire for me to how they drill down the actual completion and they do all those things become extremely important even when they look at the world wellbore clean before they do the actual frac. So the further up the chain we get involved with our chemistry, we can match the clay control, the corrosion inhibition. The proper surfactant technology is very solid at 80, Kevin place the multiplication.
So I think is a huge opportunity to me, as you get into the more difficult situation, a commoditized chemistry approach becomes not viable. You really have to look at how do you customize this chemical solution. And Flotek is the best in the business of doing that. And that's where I really think it opens up additional opportunity for us.
Jeff Robertson
Thank you.
Ryan Ezell
Thanks, gentlemen.
Operator
(Operator Instructions)
Eric Swergold, Firestorm Capital.
Eric Swergold
Hi, good morning, gentlemen, and congratulations on navigating through a very difficult time with Pro frac. Can you talk a little bit more about your business away from Pro frac and what gating factors there are at this point because you've done an admirable job growing your business away from Pro frac on the chemical side, what factors are holding you back at this point or is it really just a matter of how many salespeople you can get in front of how many customers thinks and more generic?
Ryan Ezell
I think number one, if we look at you know, the non-pro frac related revenue as a percentage in Q one, we were sitting in the 24%, 25%. As we exited the year. We see it sitting at 45%. And we've seen growth in the Chemistry segment of the business every quarter throughout the year. More importantly, Q1 to Q4 is almost 200% growth and so for us, we're continuing to push in that terms of market share gain. I think that is a typically a little bit longer sales cycle because it's a lot of the value add technologies. And we are actually starting to see that continue to grow. We're seeing the complex that I believe the sales growth, I think we're going to continue to see I don't feel that it is up.
That doesn't necessarily always create that this continuity piece there, but there's a multitude of advantages of what we do all the transactional piece. And I think that's going to grow all the way through 2024. And then I think JP. three will continue to contribute as significantly as we expect that 50% growth and 2024 as well of our outages have been holding back. When you look at it right now, you're going to see probably a flat to down frankly, the activity in North America land.
And what you're starting to see is the reemergence of we call like Tier one customers where you see a sustained plans that are long throughout the EU and massive customers that we're pursuing right now to really get our chemistry in there to show the impact of some of these major bases. So we're actually really excited about this opportunity to meet these headwinds, offer great opportunities for good teams to navigate that wind appropriately, and it really picked up some market share.
Eric Swergold
Thank you.
Operator
Jeff Robertson, Water Tower Research.
Jeff Robertson
Thanks. Just to follow up bond, with the material weakness eliminated from the 10 K and the expectation positive adjusted EBITDA throughout 2024. Is that better financial position and better liquidities? Does that further your Flotek's commercial discussions with customers and potential partners?
J. Bond Clement
As you look at the business opportunities in front of you. So really, without a doubt, I mean, maybe talking to folks and you've got the going concern language in your public filings. I think I think that creates some anxiety. So having the material the going concern, I would say it's more important. We're certainly glad to have put both of them behind us, but having the going concern behind us and having our auditors agree that to the financial outlook for the Company is much more stable than this time last year will definitely be a benefit as we negotiate rebates and various items of suppliers and customers.
Jeff Robertson
Thank you. Thanks for taking my follow-up.
Operator
(Operator Instructions)
Richard Rudgley, Glenbrook.
Richard Rudgley
Hi, guys. And just a quick question really given how strong your EBITDA is and your strategies playing out and you're obviously protecting optimism as I hear it from. Obviously, at the same time, though, the stock really isn't being appreciated in the market I mean, it's down at offshore, maybe before today about 20% plus and sell it below book. I just wondered if you'd consider or have been considering at least a modest stock buyback? Thank you.
J. Bond Clement
Thanks for the question, Richard. No, not at this time. I mean when you look at what we've been doing with the Company, at least the last 12 months. You could argue the last 24 months is really to stabilize the business and get it on a path to profitability. As we say, we feel like we've turned the corner, certainly in that regard. But as it relates to buying back stock or other items to return cash to shareholders at this point in time, probably not a bad cycle of maturity in terms of the Company, certainly something that we hope to get to in the near term. But as we sit here today, we don't have any plans to buy back shares.
Richard Rudgley
Okay, understood. Thank you.
Operator
Thank you. And at this time, Mr. Ezell, it appears we have no further questions. Please proceed, sir.
Ryan Ezell
Okay. I would like to remind you that Flotek will be participating in the 36th Annual ROTH Conference at the Ritz-Carlton in Dana Point California next week. I'll be participating in an oilfield service panel discussion on Monday, March 18, at 1 PM Pacific time, and we've joined ball bonding hosting one-on-one meetings with investors during the conference. We look forward to seeing you at the conference next week. And thanks again, for joining us today.
Operator
Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending and at this time, we do ask that you please disconnect your lines and have a good day.
