Greetings. Welcome to ProFac Holding Corp. First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this call is being recorded. It is now my pleasure to introduce your host, Rick Black, 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 first 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 first quarter of 23 as well as the business outlook before opening the call up to your questions. There will be a webcast of today's call available via webcast on the company's website at pfholdingscorp.com as well as the telephonic recording available until May 17, 23. More information on how to access these financial features is included in the company's earnings press release. Please note that the information reported on this call speaks only as of today, May 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 law, including management's expectations on future financial and business performance. These forward-looking statements reflect the current views of ProFrac management and they're not guarantees of performance. Various risks and uncertainties and contingencies could cause actual results to differ materially, performance, or achievements to differ from those expressed in management's forward-looking statements. The listener or reader is encouraged to read ProFac Form 10-Q and other filings with the Securities and Exchange Commission, which can be found at sec.gov or on the company's Investor Relations website section under the SEC tab to understand those risks and uncertainties, and contingencies. The comments today also includes certain non-GAAP financial measures as well as other adjustments and figures to exclude the contribution of Flotek. Additional details and reconciliations to the most directly 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 ProPak Executive Chairman, Matt Wilks. Matt?

Thanks, Rick, and good morning, everyone. We are pleased to report ProFrac's operational and financial results for the first quarter of 2023. Once again, we generated strong revenues and adjusted EBITDA as we continue to execute on our acquired retirement place and vertical integration strategies. I am proud of what this team has accomplished and excited to realize the full potential of this business as we move forward. Since the end of the third quarter of 2022, ProFrac has closed five transactions, adding 12 fleets and 6 mines across multiple basins. During the first quarter of 2023, we estimate that we absorbed over $20 million of costs associated with the conversion optimization and retirement of acquired assets. To be clear, these costs were not added back to arrive at the $255 million of adjusted EBITDA for the quarter. However, it is important that we call these costs out as they are nonrecurring. Those non-recurring costs were associated with standardizing and upgrading acquired pumps as well as optimizing efficiencies of the mines we have acquired. We incurred these expenses so that all of our assets are capable of performing to our standards. Additionally, as our asset base has expanded, we have taken the opportunity to reposition Frac fleets so that they would be in a position to cross-sell our sand and logistics. As a result of these initiatives, we believe our first quarter financial performance was not reflective of the true earning power of our business. Since becoming public, we have worked aggressively to build out our platform with several key objectives in mind. The goal remains to position ProFrac to, one, deliver the safest, highest, and most consistent service quality for our customers; two, insulate the business from cyclicality as best as possible by vertically integrating the supply chain; and…

Thanks, Matt. First, I want to thank our team for their hard work and dedication as they continue serving our customers so well. In Q1, ProFrac realized a 7% increase in sequential revenue and generated $255 million of adjusted EBITDA despite the significant one-off costs incurred following our recent acquisitions. Our results for the quarter were impacted by business improvement initiatives associated with these acquisitions. We're prepared to adjust our commercially available resources to respond to industry discipline. During the quarter, we made moves that will enable us to fully execute our strategy of integrating materials and capturing the full earnings potential of our fleet moving forward. We continue to see tightness in the market and stable service pricing. This market backdrop is supportive of our business. We will remain disciplined in the same way that our customers behave, and we will deploy our fleets where they can earn an attractive return and generate cash for us to return to our stakeholders. Following our recent acquisitions, we went toward upgrading and standardizing these assets. Additionally, as we added sand capacity, we began relocating fleets to be better positioned to integrate our bundled services moving forward. We have consistently seen significantly higher annualized gross profit generated from fleets that pump our sand and use our logistics and chemicals. This earnings potential is what drove our profit acquisitions over the last year. Since the end of the third quarter of 2022, ProFrac added over 16 million tons per year of capacity across key markets. Historically, several of our legacy fleets and all our acquired fleets were working on an equipment-only basis. Our strategic priority has been and will continue to be increasing the number of fully integrated fleets we operate. We are already seeing the benefits of this strategy. As a reminder,…

Thank you, Ladd. On a consolidated basis, revenue for the first quarter totaled $852 million, an increase of 7%. The revenue increase was driven primarily by the improved average active fleet count and an increase in the amount of proppant sold. Adjusted EBITDA, excluding Flotek was $255 million, a decrease of 5% sequentially. We incurred approximately $20 million of costs related to the conversion, optimization, and retirement of acquired assets during the quarter for which we did not make an adjustment to EBITDA. These costs were comprised of $12 million related to upgrading acquired fleet pumps to ProFrac's latest technology, $3 million for optimizing certain acquired assets, and $5 million of direct costs associated with fleets that were retired and are no longer being marketed. As expected, our adjusted EBITDA per fleet on an annualized basis, excluding Flotek, decreased due to the diluted utilization along with an increase in costs associated with the company's work to standardize acquired fleets. Selling, general and administrative costs were $76.3 million in the first quarter. Excluding stock-based compensation and amounts attributable to Flotek, selling, general and administrative costs totaled $51.8 million. Turning to our business segment. The Simulation Services Segment generated revenues of $790 million in the first quarter, up 3% sequentially. Adjusted EBITDA for the segment was $206 million compared to $252 million in the previous quarter. Although revenues increased due to a higher average active fleet count, it was offset by lower utilization and elevated costs resulting from the recent acquisitions. As we expand our material integration, we may see profit shift amongst segments based on specific customer agreements and our commercial approach. The Profit Production Segment generated revenues of $82 million in the first quarter, up 132% sequentially. Adjusted EBITDA for the profit Production Segment totaled $41 million, up 104% from…

Thank you. [Operator Instructions] Our first question is from Arun Jayaram with JPMorgan. Please proceed.

Good morning, gentlemen. I was wondering if you could give us maybe some thoughts on how you think 2Q could kind of play out from a profitability standpoint? Ladd, you mentioned you expect sequential growth in terms of the top-line. I was wondering if you could maybe give us a little bit more thoughts on maybe stimulation services, you expect sequential growth on the top-line there? And how do you think EBITDA could play out, assuming that the $20 million doesn't repeat on a sequential basis?

Yeah. We're not going to provide any guidance on our path forward. Just that sequentially, we expect to see consistent improvement as we digest these transactions and continue to bring each of the potential for these subsidiaries for ProFrac Holdings as a holdings company represented in multiple service lines. And our focus is maximizing the profitability across each of those service lines.

Okay. Fair enough. Fair enough. And maybe for Lance. I was wondering if you could help us out on just thinking about how CapEx could trend over the next couple of quarters and for the full year. And if you can just help us from a modeling standpoint on the timing for the four fleets that will -- over the balance of the year, that would be helpful. Thanks.

Yeah. I think that Q2 will probably be a little heavier-weighted. And then Q3 will be a little heavier than Q4. I think that right now, I think we're going to adjust the CapEx budget as we think about how many fleets we offer into the market and what the customer demand is for those fleets. But I think that we're not revising the full-year outlook at this point. But I think that we're taking a disciplined approach to all CapEx, including maintenance and growth CapEx as we look forward.

One thing I would add to add to that, though, is that the timing of CapEx and the capital outlay for that are not on the same timeline. Much of the inventory that we carry now has already been paid for. And so whenever we pull that into CapEx that will already have been paid for. So from a cash outlay standpoint, there's -- it doesn't have a big impact.

Okay. And are we still looking at CapEx in, call it, the $350 million range for the full year?

That would be the high end. We expect it to be a lot lower, but we're not looking to provide any visibility into that at this time.

Okay. Thanks a lot.

Our next question is from Saurabh Pant with Bank of America. Please proceed. Saurabh, please see if your line is muted.

Hi, good morning, guys. Sorry, yeah, I was on mute. So good morning, Matt, Ladd and Lance.

Good morning.

I guess I'll maybe start with, if you can just walk us through the different basins, obviously, the gas basin and the oil basin, and the underlying dynamics are a little different at this point in time. If you can just walk us through what you're seeing in the gas basins versus the oil basins and how you are repositioning your assets? And maybe talk to your strategy a little bit in the near term and across these spaces.

Yeah. So we're seeing a very disciplined approach from our customers and just really operators as a whole. And so we've seen relatively consistent capital deployed by each one of them. They didn't ramp up a whole lot whenever oil was at 120 and gas was pushing $10. So it hadn't really pulled back a whole lot -- from -- now that you have a lower price point. I think that when you look at the forward curve on the gassy markets, you've got a very constructive curve. And with your larger players with good hedges, they've maintained a steady CapEx program. So we're seeing a pretty good outlook. We like where we sit. We like how our -- how the overall services space is also remaining disciplined. And I think it's that disciplined approach that does go in and make sure that you maximize the profitability of every asset that you have working. But we're not going to go in and focus in on each basin. I think for the most part, the industry remains sold out -- and as we put the digesting these transactions in Q1 behind us, I think that we'll be back on the path that everyone knows and expects from ProFrac. And if we had a chance to do it again, we would do it again. We like the opportunities that exist for the business and like the path that we're on, and we'll continue down that path to generating cash flow for our stakeholders.

Okay. Perfect. No, I appreciate that answer. And a quick follow-up to what Arun was asking, he was trying to dig into the second quarter. I appreciate we can't provide guidance right now, right? But just to make sure we are thinking about the starting point, right? Should we add back the $20 million to the 1Q EBITDA and then think about that as a starting point for second quarter? Or is that not the right way to look at it?

Yeah, that's the way I look at it. Those were nonrecurring items associated with these acquisitions and as well as upgrading the equipment to a standardized format. And so when we look at that, we look at that as being inclusive. So what does that put us at $2.75? And then from there, we see this CQ2 as being sequentially stronger and look forward to delivering on those results.

Okay. No, perfect stance for that few clarification. Okay, guys. Thank you, I'll turn it back.

Our next question is from Don Crist with Johnson Rice. Please proceed.

Good morning, gentlemen. I wanted to ask about the electric fleets as they are built and kind of rollout. Are they going to displace Tier 2 or kind of lesser quality fleets, i.e., are you going to keep your fleet count roughly stable with the first quarter as those roll out?

So we certainly believe that they will displace the Tier 2 equipment. And in general, across the entire space, we also believe that the next-gen equipment that's out there from anything from dual fuel to e-fleet to direct drive will continue to displace the Tier 2 equipment that is -- has a high degree of consumption of diesel. And with that excessive costs -- so we -- as we look forward, this is continuing to be a very concentrated market that's very healthy, and we believe that it's going to do a great job all the way through the cycle. And as we see that consolidation in the space, it's going to continue to push more and more towards technology because this isn't just that there's fewer players that represent the market. It's that it's fewer players with technology and lower operating costs because ultimately, the number thing for our customers is reducing their overall cost per lateral foot. And so technology allows two things -- a number of things to exist at the same time, higher stage rates for your equipment products, while also reducing the overall net cost from the reduction of fuel costs.

Okay. And just one more for me, I guess, for Lance on the balance sheet. As you see free cash flow coming across the transom, should we assume that you keep some minimum level of cash and then the rest kind of gets sweeped over to either the term loan or the revolver going forward?

I think our goal is to kind of minimize the revolver as opposed to carry it. I mean, we will have some minimum level of cash, but it's going to be pretty small. I think what you see in March 31 is really kind of just the timing of collections or payments in the 24 hours following. And so I think we want to minimize interest costs and just keep that ABL kind of going with cash generationor the term loan in the case of the quarterly payments of sweeps.

Yeah, and. So I think it's a good time to jump on this. So as we look at our discretionary cash going forward, we're going to be paying down our debt, and we're also going to be going presenting to our board for approval, a return of capital program. And this proposal will be going to our board in the very near future in the next couple of weeks, where we outline what we'll be doing with our discretionary cash, either a dividend or a buyback -- and so we'll get that over to them, and we'll be updating shareholders as soon as possible. And along with that, one thing I would highlight is that whenever we look at our float here, our inventory is higher than our float. CapEx budget is higher than our float, ABL is higher than our float. Our quarterly EBITDA is higher than our float. I honestly don't understand why any energy company out there would want to be a public company. And so we'll be looking at what we do with our discretionary cash as a very focused effort to make sure that all stakeholders get their proportional share of those discretionary cash flows.

I appreciate all the color. I'll turn it back.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to the management for closing comments.

Those were my closing comments.

Thank you to everyone for joining.

This will conclude today's conference. You may disconnect at this time. And thank you for your participation.