FLOTEK INDUSTRIES INC/CN/ Q1 FY2025 earnings call

• Despite geopolitical and macroeconomic challenges, Flotek had the strongest quarter in a decade, with five consecutive quarters of growth in revenue, gross profit, net income, and adjusted EBITDA.
• In the Data Analytics segment, they acquired 30 real time gas monitoring and dual fuel optimization assets and secured a $160 million multi-year contract.
• Highlights included progress in power generation, custody transfer, and flare monitoring applications within Data Analytics, with the PowerTech solution redefining performance standards in the energy infrastructure sector.
• Chemistry Technology segment continued to grow, with international sales showing a significant uplift.

Flotek Industries had two complementary business segments. In the Chemistry Technology segment, external chemistry revenue increased 88% versus the first quarter of 2024, international revenues totaled $3.8 million (a roughly 250% increase from the $1.1 million in the year ago quarter), and total chemistry revenue grew 36% versus the year ago quarter. For the Data Analytics segment, revenue grew 57% versus the first quarter of last year. The segment also acquired 30 real time gas monitoring and dual fuel optimization assets and secured a $160 million multi-year contract, poised to drive substantial earnings growth and free cash flow.

• The midpoint of 2025 guidance implies 12% growth in revenue and 80% growth in adjusted EBITDA compared to the previous year.
• The Data Analytics segment is expected to contribute over half of the company's profitability in 2026.
• Guidance for the chemistry business in the second half of 2025 is conservative due to macro factors like oil price uncertainties and tariff impacts on pipe and tubular costs.

• Geopolitical and macroeconomic challenges creating market uncertainty.
• Forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially from expectations, as highlighted by the need to review earnings releases and SEC filings for risk factors.

Q: Good morning, Ryan and Bond. Hopefully you all are doing well this morning. I wanted to start on the PowerTech side. Obviously a very good transformational acquisition for you all, but and it's going to obviously increase EBITDA and revenues as we kind of move forward in the 2026, but I was curious as to kind of third party demand on this side. I mean, obviously all those trailers are working with ProFrac today and once they're all delivered in kind of early 2026, just curious as to how fast you can expand that to third parties and take over construction of that of those trailers moving forward.

A: Yes, Don, that's, that's a great question. And in reality, what is probably the basis of some of the, most exciting things that we have going on here at Flotek is that we've been testing the Verax on I would say almost 10 external or additional customers besides where we have the long-term contract now and getting great results. And what most of them have been telling us is they still don't have that full end-to-end solution even though we're able to monitor the gas for them on their current things they're trying to test now. So what this offers for us to go back to them and says, hey, you've been renting just our Verax to monitor the gas quality now we have the full solution. So we expect some pretty rapid uptake. We are looking at what will kind of going forward. We may discuss a little bit further in future calls on what we'll be spending in CapEx to build additional units because I can tell you that we put in excess of 15 additional Verax units to other customers in the last quarter at testing gas quality for remote power operations. So we expect some solid opportunities there going forward.

Q: Morning, guys. Brian wanted to circle back, want to circle back on PowerTech here. Can you touch a little bit on the competitive environment? What are the main incumbents that are kind of servicing this industry, if there are any. And then wanted to confirm in your prepared remarks, I think you mentioned a 500 unit kind of TAM in North America. I just want to make sure I understood. Is that kind of specific to the oil and gas market? Is that a broader definition of the industry? Just to make sure I kind of understand the market opportunity you guys see over the next couple of years.

A: Yes. So I'm going to try to -- you've talked to me many times. I'm going to try not to fall into my technology definition on all these gaps. Right. But you got a lot kind of unpacking that question. So looking at the initial assets that we have, driven by our proprietary Verax measurement technologies that we just acquired they are 100% patented, differentiating turnkey operation for not only detecting out of spec field gas, but also safely conditioning it and optimizing the fuel flow to whether you're looking at a turbine, dual fuel engine, or whatever you've got in operation. So it doesn't matter if you're looking at energy oil field services. If you were looking at solving the constraint of why data centers haven't grown from field gas because of need to be able to control and monitor the volume and create evaluation on how to pay the entities, it solves all these problems even on the grid power support, whether you're going remote or not. When we look at some of the other assets that we're looking at and there's nothing really to compete with these things, just a full turnkey solution. What does exist right now is something similar to what we were talking about where we were looking at our smart filtration skids. There are current, what we call knockout filtration units out there that can detect big volumes of liquids or they use almost like a JT skid in that they use a pressure drop to drop out some of the heavier hydrocarbons and try to stabilize the BTU, but they can't real time monitor it, they can't condition it. They're almost just like just a heavy duty filter. And so even our smart filtration skids will be an advancement compared to them differentiated. So our high level ESDs and Verax’s, there's nothing really to compete with them. They are differentiated premium price technologies for any application. We look at the Smart skids we were targeting; most of those will be oil field locations because you need a smaller footprint to get on location. And it's that first backup to knock out something that could damage whether you're looking at a gen set or turbine or engine. Whereas the other units like the ESDs can operate anywhere. And it's a much, much, much larger market for those than just oilfield surfaces. If that is a little, you know, the clarity you're looking for.

Q: Good morning Ryan, Bond, Mike, thanks for taking my call. Want to start with Data Analytics and then like everybody else we'll shift over the Powers market, but on Data Analytics obviously what queries you've been working on and you spoke a lot about custody transfer and just sounds as though there's a little bit of a longer sales cycle there. Just curious what can open up that market a little bit. Is that getting a couple maybe anchor investors, proof of concept or any, any thoughts on that front.

A: Yes, so I think it's you know, technically if you, and you and I have been talking about this for over a year, you've seen us steadily pull forward. We feel like it's going to be the impact from custody transfer at a point in time, I would say at the beginning of 2024 we had not completed building the XSPCT unit in the full production yet. And now that we've gotten there and we've actually field proven the unit, we're starting to see this opportunity in custody transfer significantly accelerate. We mentioned in Q2 of last year that we were targeting trying to get five to eight pilot sites. We're now at over 20 and those eight are converting to full time DAS revenue. And this is like you're talking to me, this is that proving use case by a large proven E&P operator that we think is going to drive significant impact. We do believe that our international pieces we'll have secured by mid-year is going to drive impact in terms of use case understanding. And right now I think the biggest hurdles we've kind of crossed is that number one they wanted to ensure that honestly they see we're seeing such a monumental variance in most of these sites that we test, the operators sometimes are like skeptical and that they bring GCs out to location to test. We've always tested within 1% or less variance from a GC and right then the operators are just taken back in that while you've got we're getting a measurement from a unit that's as accurate as our gc, we're getting it every five seconds and there's that trust build there and then they're starting to realize we're seeing this potential on one site and we have thousands of these. What now is transition from a localized basin operation that the complete enterprise value for the whole company. And so we do believe those will really start to accelerate. The biggest risk still for us is helping them understand it's easy selling these on new wells. Like almost every one of these applications are on a new well. The ones where they're still hesitant is putting in on old producing wells because there's still some potential concern on opening the back door on liability on someone being underpaid and that's probably the most inertia that we have right now. And I do believe, as you see it, on more of these new construction wells, that we're going to be pulled into settling disputes that are upcoming because most of the work on the old wells we're doing right now are settling disputes and it works out, pretty well because we're the unbiased view on that between the operating resource owner or the end use buyer. So but all-in-all though, I do believe it's just, there's just too much enterprise value, Gerry, for the whole oil and gas industry to provide this level of transparency for it not to grow and move forward. I mean, Warren Buffett even commented on this years ago sooner or later you see such measurement, level of automation that it removes all the snake oil measurement out of it, right. It will be completely understood data and we want to be the tip of the spear on innovation side doing that. So I, I think that we're going to start to see this thing really get critical mass sooner than later, honestly.

Q: Hey, thanks Ryan, can you hear me? Good morning. Given the growth in the international markets, how are you seeing, seeing whether the impact on tariffs will have any, you wouldn't need any external partners or investment in local suppliers?

A: Yes, so it's a good question and technically speaking is, when you look at the way we've been constructing Flotek to be able to manage cycles and changes in commodity pricing and geopolitical environments is that most of the chemicals that we're supplying to international markets we are buying manufactured in country or from partners over there to one improve our in country manufacturing, whether we're looking at ICTVA and the other localized country sourcing that we see in the UAE. So we're definitely doing that in terms of just what's required as table stakes to operate in those countries. But more importantly we are, we're running consistent inflationary and price changing impacts based on what we see of tariffs, what countries we buy and some of this little bit of shift we're seeing. There's no doubt though we've seen, we are experiencing some, I should say the industry is experiencing some supply chain disruption. I do believe that we're positioned in place to outperform a lot of our competitors in that because the team here at Flotek comes with a massive amount of experience in the background. We've kind of done a lot of this before and we were really preparing for this potential shift that we're seeing right now. So but there is no doubt it still causes a little bit of headaches, it still causes a little bit of timing problems. But I think, we've taken some really strong steps to put what I was called guardrails in place so that we get maximum benefit from in country manufacturing, blending and how we source the materials, depending on where we are on the globe, bringing operations.

Q: Thanks. Good morning. First question, just going back to the power gen side. I was hoping you could talk about the transaction a bit more. Obviously the EBITDA and the accretion and the backlog, they all make sense. But Ryan, could you speak a little bit to why these specifically were the right assets and why this was the right time today to get into that business.

A: Yes. So there's a couple of things there. I'm going to go all the way back to, one, when we first agreed to bring in Profrac as a specific partner with us and we signed the long-term supply agreement. We talked a lot about the potential advantages of having a large partner like what they are in terms of, there was an alignment with we're in a technology and advanced company focused on that handshake between total cost of ownership, environmental stewardship and technology, right. There's a similar DNA pattern that we see with an operator like Profrac in terms of the amount of Tier 4 dual fuel electric fleets, the direction they were wanting to go with their operations. And so this goes back almost two years. Some of the initial discussions that I had with leadership's team there, we provided Verax’s for pilot testing on developing this field testing and operating this equipment and overall development and intellectual property development around it. Because we were looking out, we recognized that, these were going to be really big potential solutions, most of it to reduce emissions and environmental footprint. Because the first time we tested equipment on location or the first big site we did, we prevented 1.2 million gallons of diesel from being burned and it was all driven towards that direction. And now if you've seen the electrification demands and all things come to the United States, what we're seeing globally, you see the transmission and distribution line degradation and age, that there's going to be a significant need to help balance this out. It was a natural transition and for us it was because, the driver of the success of the equipment is around the technology, the automation integration, the Viper software, different pieces. So it made natural sense for us to discuss with Profrac acquiring field proven, differentiated patented technology to bring over into our stable and grow it out into other points of the business. Because there's a lot of other operators like Profrac that need this equipment and I think we have relationships with those operators to grow it. We also sell chemicals to some of the MP users that can apply this, this technologies to provide natural gas to data centers or grid power operations, etcetera. So and when you look at, even last year, you look at -- we, our stock performed really well on the growth in our data and chemistry businesses combined. But the stocks that outperform us made transitions in supporting almost an industrialization pivot to supplying grid support and it was a natural step for us. And I think the timing works well despite the little bit of near term volatility we're seeing in commodity pricing. This shift is to get us a weight for filling that volatility, right, to make it more stable, to make it more predictable and drive data driven EBITDA. So I hope that kind of gives a little color about why these ficker assets, because they're differentiated, they're patented, they're driven by decisions, are driven by our data management. And so we were very familiar and it was, and it was a easier piece for us than necessarily doing that all organically because we had a great partner to work with on the development side.