Greetings, and welcome to the ProFrac Holding Corp. Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Rick Black, with Investor Relations. Thank you, Rick. You may begin. .

Thank you, operator, and good morning, everyone. We appreciate you joining us for ProFrac Holding Corp.'s conference call and webcast to review our second quarter 2023 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 high-level commentary on the financial highlights of the second quarter of 2023 as well as provide the business outlook 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 a telephonic recording available until August 17, 2023. 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, August 10, 2023. 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. The forward-looking statements reflect the current views of ProFrac's management and are not guarantees of future performance.

Various risks and 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-Q and the other filings with the Securities and Exchange Commission, which can be found at sec.gov or on the company's Investor Relations website under the SEC Filings tab to understand those risks and uncertainties and contingencies.

The comments made today also include certain non-GAAP financial measures as well as other adjusted figures to exclude the contributions of Flotek.

Additional details and reconciliations to the most direct comparable, consolidated and GAAP financial measures are included in the quarterly earnings press 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, Matt Wilks.

Matt?.

Stimulation Services, Proppant Production and Manufacturing. The fastest growing of these segments has been our Proppant segment, which is the largest in-basin proppant producer in the country.

We believe this business is underappreciated, both in terms of potential and in terms of value it contributes to the ProFrac platform as well as ACDC stakeholders. We have been focused on diversifying the customer base and signing contracts for the Proppant Production division. In Q2, we were pleased that third-party sales reached 70% of revenue.

We continue to pursue additional contracts that increase diversification and improved stability, and we expect to grow the customer base and total production at lower cost levels. Lastly, we believe the currently proposed regulation by the Department of Interior and related to the DSL would have a minimal impact on our Proppant Production.

This is because we believe that our West Texas assets are well outside of the high-risk habitize zones. Our goal is to provide more certainty and less volatility to our Proppant division, while boosting our utilization to a level that will optimize profitability.

This segment has the potential to generate 2 to 3x the EBITDA that we had in the second quarter. We highlight this segment to illustrate the incredibly high cash conversion of proppant sales and to demonstrate the stability that a lean multi-mine company can achieve. In terms of the overall market environment, we are optimistic and encouraged.

We're optimistic, because we are seeing pricing remain constructive. While lower asset utilization impacted second quarter earnings, we are confident that pricing remains at constructive levels, and market fundamentals continue to be supportive for a stronger second half of the year.

We're encouraged, because we see multiple players, idle capacity and remain steady on pricing. We see a number of smaller players that are aggressively bidding to spot work, but we view this as isolated and unsustainable.

The number of fleets idled in the last 6 months are considerably higher than the number of staffed fleets that could go back to work in a responsive manner. In addition, natural gas pricing is constructive, which we believe will provide a built-in catalyst as we look forward to the remainder of 2023.

As we approach the back half of '23, we believe we will see operators ramp activity as they prepare for their 2024 programs. I remain proud of what this team continues to accomplish and believe we are well positioned to capitalize on increasing industry activity.

Our fundamental strategies haven't changed and neither have our primary goals for ProFrac. We continue to execute on our goals. Our pumping efficiencies are best-in-class.

We offer a portfolio of Tier 4 dual fuel and electric fleets capable of simultaneously delivering cost savings and emissions reductions for our customers, helping to further separate us from our peers. We are focused on maximizing utilization and profitability and continue to adapt our cost structure to further improve our cash flow.

As always, industry discipline remains a welcome narrative. For ProFrac, we continue to believe that our disciplined approach will produce meaningful shareholder value. With that, I'll turn the call over to Ladd. .

Thanks, Matt. As always, I'd like to thank our team for their hard work and dedication as they continue serving our customers. We firmly believe that great customer service distinguishes our company in the market and is a direct result of the strong culture within our teams to continually serve our customers. Turning to the quarter.

As many of you who closely follow our industry have seen, there were meaningful shifts in activity during the second quarter that resulted in white space and subsequent fleet reductions. That being said, Matt did a great job detailing how pricing remains constructive and industry discipline continues to support a positive outlook.

ProFrac's differentiated and vertically integrated service offering is the cream of the crop in our industry. As we see activities levels rebound, we will purposefully deploy our fleets only where they can earn attractive returns and generate cash for us to return to our stakeholders.

We don't want to get caught up in short-term dislocations in a healthy industry. Customers want service providers with assets and technologies that can reliably deliver efficiency and cost savings. We fit the bill hands down with some of the youngest and most advanced asset base in the industry.

From a stimulation services standpoint, we continue to have strong interest in our fuel-efficient fleet. We're seeing equipment type drive utilization, and diesel appears to be the swing capacity. We've also slowed our CapEx spend, reduced e-fleet gross spend and lowered engine upgrade CapEx in response to activity levels.

White space accelerated in Q2 but appears to have bottomed out in May. After the past year of acquisition, we're adjusting our commercial strategy to target a more diverse customer base with committed contracting approaches across the fleet.

Our goal is to capture longer-term dedicated work, reducing volatility in the business during short-term market dislocation. Turning to our Proppant Production segment. As we guided to last quarter, the second quarter represented the first full quarter contribution from all of our eight mines.

Sand volumes were up as a result, yet constrained from what we believe is their full potential due to lower industry-wide utilization. The Proppant segment continues to show signs of improvement.

Our efforts to diversify the customer base reached an all-time high for third-party sales, and we continue to pursue additional contracts that increase diversification and improved stability. We expect further growth in this segment as the customer base expands, production increases, and costs are lowered.

As we've discussed before, our vertical integration strategy significantly benefits both, our customers and ProFrac throughout the cycles. Our ability to bundle fleets with internally produced sand, logistics and chemicals saves our customers significant cost.

Looking to the back half of the year, we're positioning ourselves to reactivate fleets in Q4 and Q1 as customers solidify their 2024 budgets. The general trend suggests improved activity as we progress into next year. When pursuing commercial opportunities, ProFrac will always prioritize generating returns over winning market share.

We are working diligently with our customers as they build out their calendars with the goal of minimizing gas and integrating more materials into our fleet. I'll now hand it over to Lance to provide more detail on our financial results. .

Thank you, Ladd. As Matt mentioned, we generated $183 million in adjusted EBITDA, $56 million in free cash flow, and we reduced our debt by approximately $86 million during the quarter. On a consolidated basis, revenue for the second quarter totaled $709 million, a decrease driven primarily by lower activity levels as outlined by Matt and Ladd.

Selling, general and administrative costs were $70 million in the second quarter, down slightly from the first quarter. Second quarter SG&A included a number of onetime items such as $9 million in acquisition and litigation-related costs.

This was partially offset by a $7 million reduction in SG&A in our other business activities segment relating to Flotek. SG&A also included noncash stock-based compensation of approximately $9.8 million. We believe our baseline SG&A was down approximately $1 million from the prior quarter when excluding Flotek and these various items.

Additional reductions are expected in the third quarter as a result of our cost reduction efforts. Turning to our business segments. The Stimulation Services segment generated revenues of $608 million in the second quarter, down from the first quarter primarily due to lower fleet count and more white space on active fleets.

Adjusted EBITDA for the segment was $123 million compared to $206 million in the previous quarter. In response to the white space that we outlined, we reduced our fleet count at the end of the second quarter and reduced fleet count again in the first half of August.

We believe this calendar optimization will allow us to capture significant cost savings in the third quarter and beyond. Profit Production segment generated revenues of $110 million in the second quarter, up approximately 34% sequentially.

Adjusted EBITDA for the Profit Production segment totaled $58 million, up approximately 40% from the first quarter. The revenue uplift was primarily driven by the full impact of all eight mines during the quarter compared to approximately 5.5 active mines in the first quarter.

While we saw an uptick in total production, we are focused on getting total output higher. And as we improve efficiencies at our plants, we expect to see a lower cost per ton. The Manufacturing segment generated revenues of $31 million in the second quarter, down approximately 54% from the previous quarter.

Approximately 73% of this was intercompany revenue for products and services provided to the Stimulation Services segment. Adjusted EBITDA for the Manufacturing segment was $3.1 million, down from the first quarter.

This segment was impacted by lower orders by our Stimulation Services segment as they reduced equipment related expenditures and focused on utilizing inventory on hand. Cash capital expenditures totaled $98 million in the second quarter.

As we focus on reducing our CapEx for the remainder of the year, we expect our total CapEx to be approximately $300 million, which reflects the deferral of our fleet upgrade program, including Tier 4 upgrades and electric fleet deployment.

We will remain disciplined with our capital allocation plans and continue to look for areas to further reduce growth CapEx spend. Operating cash flow was $154 million during the second quarter. We continue to manage our receivables and payables to manage liquidity.

In addition, we are focused on consuming the inventory that we have built over the last year, which we expect to [start] providing a working capital benefit to ProFrac in the back half of the year. Total cash and cash equivalents at the end of the quarter was $27 million.

We had total liquidity of $164 million, consisting of a combination of cash and $137 million of availability under our asset-based credit facility. At the end of the second quarter, we had approximately $1.2 billion of debt outstanding. As Matt mentioned, our focus for the remainder of 2023 is generating free cash flow for debt repayment.

We illustrated this priority in the second quarter as we produced free cash flow of roughly $56 million, which we used in combination with cash on the balance sheet to pay down approximately $86 million of outstanding debt. With that, operator, please open the line for questions. .

[Operator Instructions] Our first question comes from the line of Luke Lemoine with Piper Sandler. .

I believe you should have had about 35 active fleets in 2Q.

Can you provide some commentary on the magnitude of the fleets that you guys put on the sidelines in June and then in August?.

Yes. We're not going to provide any commentary on it. What we focused on is maximizing the utilization of every asset that we have and focusing on rightsizing the cost structure associated with that. What we've seen across the industry is a pullback in overall available active fleet.

And what we're really encouraged by is seeing the -- a similar approach to reducing costs associated with inactive fleets. And so we believe that provides some sensitivity for activity levels picking up and what that means for pricing longer term. And the sensitivity is really, really there on the upside.

We're already seeing some green shoots here and believe that the second half of the year is going to be much more robust than people expect. .

Great. Maybe try differently [indiscernible] Matt, to the upside. Any quantification you provide where you think -- or how many fleet reactivations for ProFrac in 4Q or into '24. .

We're not going to guide to fleet count, but we're paying very close attention to rig count. One thing I would point out too, with these operators is that the DUC inventory and the way that the industry has really looked at building DUC inventory has changed. It's completely changed. A high DUC count is a feature of low interest rates.

And with rates coming up the way that they have, the cost of capital associated with a partial spend on an unproductive asset is not the best -- it's not the most efficient use of capital, and we think that that's going to keep DUC inventories subdued. And activity levels will more likely be closely related with rig count.

When we look at rig count and the structure, instead of just looking at it at a high level, we're seeing a lot of the private guys deploy rigs and get back to work with -- where the cost of capital is really excited to see how quickly following those rigs, you'll see frac fleet. .

Okay. And then -- I'll try one more here. With the CapEx reduction, it sounded like the e-fleet deployments were pushed to the right a bit.

Can you just update us on what the e-fleet deployment schedule looks like probably over the next 12, 15 months?.

So we had some under construction that we've pushed into 2024 delivery. And we're focusing on generating cash, reducing CapEx and paring down our overall leverage. .

Our next question comes from the line of Alec Scheibelhoffer with Stifel. .

So just to kick us off here, so we've seen some data points that spot pricing has been weaker in the Permian for Proppant. I'm just curious, have you guys been seeing that as well? And can you talk about maybe what prices are doing in the Haynesville, and I guess, by that effect also the Eagle Ford? And I guess also how ProFrac plays in that market. .

Certainly. So in West Texas, there is some spot pricing that has come down from what has otherwise been a pretty narrow type range. Contracting rates are well above the spot market, and these are isolated situations. The other thing to include is not all mines.

This mine gate pricing and how you look at these basins, it's more of a logistics business than it is anything else. And if you look at the logistics differentials from mine to mine to customer to customer, there's huge gaps that it's easy to miss and When you model it out.

So what we do is we go in, and we focus really closely on where our logistics advantages are, and if there's spot pricing or if there's a competitor out there that has a disadvantage on logistics, we just don't compete with them and worry about them.

We don't have to be the right solution for everyone, but the customers that we work with, we're the right solution for them, and we can earn a higher price per ton and still save the money. .

Understood.

And also as a follow-up, can you also talk to customer preferences for bundling frac sand? And have you seen any changes with the pricing dynamic across the basins for sand?.

I think it's horses for courses. I think that there are different -- I think it's less so about the basin and more so about the individual customer and their format. It's difficult to get full bundle with an operator that's got a full-blown procurement team.

And -- but we love all our customers, and we have a solution for each one, and we do our best to work out a solution that works for them. .

Our next question comes from the line of Don Crist with Johnson Rice. .

I wanted to continue on the sand discussion. I mean it sounds like since you closed performance, the team has really gotten to work and optimize all eight of the mines. Can you talk about kind of costs and how they've come down? Because it looks like your profitability kind of ticked up a couple of hundred basis points in the quarter. .

Yes, certainly. So the way we think about these [plants] is your costs are almost fixed. I mean your labor costs are going to be pretty consistent, gas, electricity, everything is relatively consistent on these businesses. The variable that moves your COGS is utilization and volume.

And we continue to see our utilization and the volumes that we're putting out, climb. And at this point, all of our costs are essentially covered. And so we're in a really good spot to continue our growth in profitability. And as we continue to reach our nameplate capacity at each of these assets, you'll see a much stronger pull through.

And what we love so much about that business is, one, our costs are relatively fixed. So everything we do from here on is -- has a very high cash conversion rate. And the quality of the earnings on that business are -- they really stand out compared to a capital-intensive business like frac services. .

I appreciate that color. And Lance, maybe one for you.

As the business has slowed a little bit in the second quarter, how should we think about working capital? Should it release into the third quarter and maybe possibly into the fourth quarter and generate some free cash flow there?.

Yes. So I think one of the things I mentioned was inventory, which has been building over the past year. And so that's the biggest thing that we're focused on to provide that release. And then to the extent as we -- as the fleets remove, you'll also get that AR AEP impact. So I think that's a fair assumption. .

And any kind of magnitude you'd like to give, would that be $50-plus million or so?.

I think that's feasible. We're targeting the majority of that on the inventory side. But all in, I think it's feasible. .

I think that's pretty bullish for Lance. He is a conservative, conservative type. .

Our next question comes from the line of Dan Kutz with Morgan Stanley. .

So just looking at the press release, you guys had a comment in there that -- and I think you guys touched on this in your prepared remarks that as a result of kind of the actions you guys have taken to rightsize the cost structure and take out costs that, that should help maintain the per fleet profitability metrics.

It's like I appreciate that there could be some activity downside versus what -- where you were in the second quarter given the comment about some fleets coming off in August.

But from a per fleet profitability perspective, should we interpret that comment as you guys feel pretty confident that looking at the second quarter, per fleet profitability should kind of be at that level in the third quarter or second half? Or how would you guys think about that?.

Yes. So when -- one, we've gone in and we've harvested a lot of the synergies from the acquisitions that we've made over the last year.

And we accelerated those, especially when you have a fleet count reduction, what would normally be taken care of through turnover and natural attrition has been something that we took a more direct approach and brought that forward in a much quicker fashion.

The other part is we took our entire calendar and said, "Look, we need to compress this as much as possible." There's no reduction to our calendar or in how many hours we'll pump and how many services we'll provide.

But we want to make sure that we optimize the assets that are working, so that we increase utilization and maximize those assets as much as possible. How do we cover the same work with fewer resources and then focus on them with everything that you need to, to maintain the highest level of pump hours per fleet and then cut all the unassociated costs.

And by doing that, we returned the business to a level of profitability on a per fleet basis that we're known for. .

Got it. That's helpful. Understood. Let's go back to the Proppant Production comment. I think if I heard it correctly that you said that if we look at the second quarter EBITDA, the potential for that business could be 2x to 3x that level.

And I was just wondering if you could kind of unpack what that might contemplate in terms of, is it higher pricing or higher margins or higher utilization? I mean you kind of answered this question previously saying that volume utilization is the name of the game.

But just wondering if you could help us quantify what might be contemplated in 2x or 3x EBITDA for that segment?.

Yes. Certainly, the EBITDA that we produced with -- at the utilization rate that we had in Q2, carried the full fixed cost and burden that we would have at a much higher utilization rate.

And so when you start looking at a lower utilization and delivering results that exceed -- well exceed that fixed cost, when you look at the increase of activity and higher utilization rate with the same fixed cost, it converts and gives you a nice, levered result on your pull-through. So it's -- I think that's a very attainable goal.

And our expectation is to be able to deliver that in a much quicker fashion than mobilizing in a relative way on your frac services side. .

Thank you. This concludes our question-and-answer session. I would like to turn the floor back over to management for closing comments. .

Thank you, operator. ProFrac has purposely built a dynamic platform capable of delivering strong results through market cycles. Although the second quarter posed some challenges, we've already begun to see these headwinds subside, and we believe that we are incredibly well positioned to deliver meaningful shareholder value in the near term.

Thank you for joining us today. We look forward to speaking with you again next quarter. .

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day..