Flowco Holdings Inc. Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Third Quarter Performance: Flowco delivered adjusted EBITDA of $76.8 million, with a 382 basis point expansion in adjusted EBITDA margin quarter-over-quarter. Free cash flow was approximately $43 million excluding capital associated with the recent asset acquisition.
• Business Segments: Shift toward a high-margin rental portfolio, driven by growth in high-pressure gas lift (HPGL) and vapor recovery system (VRU) rentals. HPGL solutions enhance production efficiency, while VRU sees momentum as operators monetize natural gas. The August acquisition of 155 systems integrated well, contributing to margin improvement.
• Sales and Supply Chain: Revenue declined in both segments, with Natural Gas Technologies impacted by supply chain optimization efforts. Production Solutions product sales remained resilient with strong gross margin performance.
• Capital Allocation: Deployed $39.7 million in organic capital, prioritizing expansion of surface equipment and VRU rental fleets. Balance sheet was strong with $205.2 million in borrowings and $518.3 million in availability under the credit facility. Declared a quarterly dividend and repurchased $15 million in shares.

Segment Performance

• Production Solutions Segment: Third quarter revenue decreased 2.1% to $126 million. Adjusted segment EBITDA increased 3.6% from the second quarter to $55 million, with a 240 basis point expansion in adjusted segment EBITDA margin. The decline in revenue was primarily due to lower downhole components product sales, partially offset by higher rental revenue from the existing fleet and recently acquired assets.
• Natural Gas Technologies Segment: Third quarter revenue decreased 21% to $51 million. Adjusted EBITDA decreased 7.6% to $25 million over the same period, but adjusted segment EBITDA margin increased by 714 basis points due to a favorable revenue mix shift towards vapor recovery from natural gas systems. Rental revenue, mostly recurring, increased to $107 million from $102 million in the previous quarter.

Guidance

• Fourth Quarter: Expect adjusted EBITDA of $76 million to $80 million. Production Solutions segment anticipates a small incremental seasonal slowdown in product sales. Natural Gas Technologies segment expects a rebound in sales across natural gas and VRU systems. SG&A is expected to be broadly consistent with the third quarter.
• Outlook: Rental fleet to continue delivering consistent performance. Disciplined capital deployment and differentiated business model are expected to drive strong results, with continued focus on production optimization through technology and collaboration.

Risks

• No specific risks detailed in the transcript beyond general forward-looking statement risks mentioned initially, which are detailed in press releases and SEC filings.

Question and Answer

Q: Derek Podhaizer with Piper Sandler on Natural Gas Technologies optimization A: Discussed optimizing the natural gas systems business unit by consolidating a facility into El Reno, OK (a world-class manufacturing center), closing a facility in Pampa, TX, and reallocating capacity while placing nearly all employees from Pampa in neighboring areas.

Q: Derek Podhaizer on rentals A: Shift to rentals due to capital deployment and softer product sales; run rate dependent on capital deployment pace, expecting some recovery in product sales moving forward.

Q: Phillip Jungwirth with BMO Capital Markets on Archrock assets and cross-selling A: Inherited accounts with HPGL potential, integration of acquired systems into fleet was seamless, with positive customer reception and early returns on cross-selling efforts.

Q: Phillip Jungwirth on VRU adoption A: Optimistic on VRU adoption due to natural gas demand, pipeline construction, and positive trends in regions like the Permian.

Q: Sean Mitchell with Daniel Energy Partners on proprietary software tools A: In-house development of proprietary software for optimizing systems, with early returns from investments and aims to integrate data for field-wide production optimization.

Q: Jeff LeBlanc with TPH & Company on HPGL and VRU tailwinds A: HPGL benefits from stable oil production and continued demand in the Permian; VRU driven by natural gas demand and pipeline capacity trends Q: Derek Podhaizer on buyback and 2026 outlook A: Buyback is opportunistic; 2026 capital spending expected to be consistent with current opportunity set, but no full-year guidance provided yet