Greetings, and welcome to the ProFrac Holding Corp. 2023 Year-End and Fourth Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael Messina. Thank you, Mr. Messina, you may begin.

Thank you, operator. Good morning, everyone. We appreciate you joining us for ProFrac Holding Corp.'s conference call and webcast to review our fourth quarter and 2023 year-end results. With me today are Matt Wilks, Executive Chairman; Ladd Wilks, Chief Executive Officer; Lance Turner, Chief Financial Officer; and Matt Zinn, CEO of the Proppant Business. Following my remarks, management will provide high-level commentary on the financial highlights of the fourth quarter and full year 2023, as well as 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 the telephonic recording available until March 20, 2024. 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, March 13, 2024. 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. These forward-looking statements reflect the current views of ProFrac management and are not guarantees of future performance. Various risks, 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-K 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 Filings tab to understand those risks, uncertainties and contingencies. The comments today also include certain non-GAAP financial measures as well as other adjusted 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 ProFrac's Executive Chairman, Mr. Matt Wilks.

Thanks, Michael, and good morning, everyone. After my prepared remarks, Ladd and Matt Zinn will take a deeper dive into the performance of our subsidiaries, and Lance will provide additional insight into our financial performance. While fourth quarter results were challenged, we continue to take strategic actions to better position ProFrac for growth in 2024, and we are already seeing improved results in the first quarter. Despite the industry headwinds that persisted in the second half of 2023, we meaningfully grew free cash flow for the year to $293 million, an increase of 173% over 2022. This substantial cash flow generation demonstrates the earnings capabilities of our vertically integrated operating structure and the resiliency and differentiation of our services in the face of market softness. We were hindered a bit in 2023 by our exposure to the spot market and our strategy to hold prices steady when activity flattened, but we have adjusted and now entered 2024 with positive momentum. I'd also like to highlight that in 2023, we grew our asset base and improved our capital structure, a strategy that we believe will pay dividends for years to come. We completed the acquisition of REV Energy Holdings and producer services holdings, which added frac fleets and expanded ProFrac's geographic footprint to include the Rockies and Bakken. We also completed the acquisition of Performance Profits, which demonstrated our commitment to the Haynesville, greatly enhanced our vertical integration strategy and made ProFrac the largest provider of in-basin sand in North America with a multi-basin footprint. Then, in October, we announced our intent to maximize the full value of our profit production segment, which operates through the wholly owned subsidiary, Alpine Silica, and confidentially filed a registration statement on Form S-1 with the SEC. Finally, in December, we refinanced our senior secured…

Thank you, Matt. I want to start by thanking our amazing team for their hard work and dedication and commitment to safety. We're extremely proud of the reputation that our people have built with our customers. This is a direct result of an extreme focus on the customer experience and the strong culture throughout our entire organization to make customer service our number one priority. We also recognize that the team is vital in order for us to accomplish our 3 priorities in 2024. Now diving into our 2023 results, I'd like to give a state of the union for PF Holdings. On the Pressure Pumping side, we have activated 10 fleets as we focused on utilization and a dedicated customer base. We believe our profitability per spread should revert to the $20 million to $25 million level, in line with expectations for our peers and exclusive of profit generated by the Proppant Segment. Our focus on utilization is shining through. Starting in late Q2 2023, our white space in our frac calendar reached unsustainable levels and our pumping hours per active fleet dropped. In 2024, we plan to improve utilization by at least 30%. While we did see some lost time in January, primarily due to weather, I'm happy to share that January was a stellar start to the year. And in the month of February, we achieved a pumping efficiency that was 20% higher than what we averaged in Q2 and Q3 of last year. And we think there is room to grow that figure as we continue to align with dedicated high-efficiency customers that have strong backlog of work. Now that our recent acquisitions have been fully integrated into the ProFrac umbrella, we have refocused on our core pumping stages and selling sand. In addition, our leadership…

Thanks, Ladd. I am honored and humbled to be chosen as the steward of the Proppant Production segment. We are extremely excited about the assets we have and the transformation taking place within the organization. On our last call, Ladd spoke about how we are marketing all 8 lines for the first time with a focus on securing term contracts with customers at sustainable prices that support our goal of consistent high utilization of our mines. I am pleased to report that we had success over the recent RFP season. The contracts that we secured with customers over this process are a mixture of traditional take-or-pay and percentage of customer demand. These percentage of demand contracts, while not as desirable as take-or-pay contracts aligned with our desire to develop long-lasting partnerships with our customers with upside potential as our customers become more efficient or expand their completion activity. While we have a great foundation with this commercial approach, we have seen weather impact us in Q1, along with customer impacts related to natural gas prices. We estimate we lost approximately 300,000 to 400,000 tons of sales in January and February, but expect to further increase production into the warmer months. Our first quarter utilization is expected to increase slightly from the fourth quarter. However, we then expect utilization to increase to 65% to 75% starting in the second quarter. We are confident that our focused effort on commercial and operational growth in our Proppant segment will meaningfully improve 2024 metrics and results. Alpine is in the middle of a transformation and will produce higher throughput, higher utilization and lower cost per ton, and we believe that it will soon emerge as the sand market leader in 2024. I will now hand it over to Lance to provide more detail on our consolidated financial results.

Thank you, Matt. To recap the year, we generated $688 million of adjusted EBITDA on $2.6 billion in revenue for an overall EBITDA margin of 26%. We also generated $293 million of free cash flow in 2023 that was used to significantly expand our asset base, both in Stimulation Services and the Proppant Production segments. Fourth quarter revenue totaled $489 million, a sequential decrease driven primarily by the lower fleet count as it bottomed in the middle of the fourth quarter. EBITDA was $110 million as we experienced slightly lower efficiencies on our active assets and lower pricing for our products and services. For the fourth quarter, stimulation services revenues were down sequentially to $403 million. About 75% of this reduction was driven by our lower number of fleets. The remaining decline was driven by slightly lower pricing for our services. The number of integrated fleets fluctuated with our active fleet count, but we continue to supply approximately 30% of our fleets with materials. Adjusted EBITDA for the segment was $58 million for the fourth quarter. This segment was impacted by approximately $10 million in shortfall payments related to our supply agreement with Flotek. The profitability per active fleet for the fourth quarter was also impacted by white space in the calendar. In the first quarter, as our focus on dedicated high-efficiency customers takes hold, we expect to improve profitability per active fleet. In general, we expect 60% to 70% incrementals on increased efficiencies when all else is equal. Proppant Production segment generated $383 million of full year revenues, which was up substantially when compared to the $90 million generated in 2022 due to the sand mines added during the year. Revenues for the fourth quarter were $93 million, down approximately 6%, driven largely by lower sand pricing. Approximately 75%…

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

Matt, with reactivating templates, it looks like you're probably displacing some competitors. Can you talk a little more about just kind of the market structure, how you're attacking this? And as you see it right now, is tenor reactivations about the right number? Or is the goal to eventually work back up to 45 fleets?

Yes. So we've added 10, and the majority of those have come in the first quarter. And so there's only 1 or 2 that was actually in Q4 that we added. And we expect to end at some point in this year, around 41%, 42%. And if the market is there, we're going to go ahead and take it to 45% and get full utilization across the platform.

Okay. And then you cited your February pumping analysis setting a record. You added the 10 fleets. Ladd, you talked about getting EBITDA per fleet back to $20 million to $25 million annualized just kind of look in the Stimulation segment. Is this where you guys currently are? Or when do you see this transpiring this year?

Not to put a specific date on it. We're not quite there yet, but we expect to be there in the first half.

Okay. And then maybe just one quick one. I know you're not disclosing your fleet count, but just kind of trying this roughly in 4Q, were you kind of maybe in the mid-20s and now you're in the mid-30s?

That's correct.

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

So just to start us off here, just kind of following up on the prior question line. If you could just -- on the 10 fleet that you reactivate, I was just wondering if you could comment on sort of the pricing dynamics in the market as well as overall supply and demand and what you're seeing given what gas prices have been doing, et cetera.

Yes. I think top line, the market is flattish, and so we're coming in, we're adding fleets in an environment where there's not an increase of active fleets in the market. So that is that is -- have an impact on top line. But the utilization and absorption of costs and reducing our per unit cost across the business far outweighs any concessions we make on the top line. And we expect that trend to continue as far as cost.

Got it. Appreciate the color. And then just shifting gears to the Proppant segment. I'm just wondering if you could comment on the current spot pricing for frac sand. And I guess, just kind of your exposure to that market, given your comments on contracting year-to-date or fourth quarter?

I'll defer to Matt Zinn on this one.

We're still seeing spot pricing in the 20s, depending on the market up into the 30s and some other segments, not necessarily the Permian. And we continue to see some exposure to that market, but our focus is continuing to wire longer-term supply term agreements with customers and have a minimal exposure to the spot market as possible.

Got it. Appreciate it. If I could just squeeze one more in. I was just wondering if you could provide some additional color on your '24 free cash flow expectations and any kind of target we could think about the leverage ratio exiting the year.

So on services, I don't want to guide too aggressively, but we expect to generate a tremendous amount of free cash, pay down debt. And it's not unreasonable for us to be able to cut our debt in half this year.

Our next question comes from the line of Arun Jayaram with JPMorgan.

I wanted to see if you could give us a sense of the tuck-in pricing concessions, did you yield, call it, relative to the leading edge in order to improve the utilization from the beginning of the fourth quarter? And thoughts on could this -- what has been maybe the reaction to -- from your peers? From some of your market share gains? And could this -- do you worry that this could have maybe a destabilizing impact on the level of pricing discipline that we did observe in the industry last year?

I really don't care what it does to our competitors. I don't spend a lot of time thinking about them. We're doing what's right for ProFrac. We're taking market share. We're not going to hold up pricing to their benefit and key market share to do it. We're taking our market share back. And I don't really care what it does to them. What I like is what it does for us.

Got it. And Matt, Ladd mentioned a target to get to $20 million to $25 million in EBITDA per fleet. But we're just trying to think about our modeling in the next couple of quarters? Where do you think you're at from a profitability perspective as we sit here today?

As we sit here today, high teens. I think. Mid to high teens. And then in -- before the half end, we expect to be in that 20% to 25% range.

And maybe...

The biggest driver for it is cost absorption and utilization rates diluting our cost per unit.

Right, right. And then just maybe, Matt, your perspective, what are the recent things that we have seen as we've seen call it 5 natural gas companies, [indiscernible] and CNX now pulling back on CapEx. Could you talk about some of your just natural gas exposure today and just maybe potential impacts to the frac and Proppant side of the businesses?

Yes, we've got about 1/3 of our business exposed to gas markets. And -- we don't have a crystal ball. We don't know when the gas market is going to come back. We don't know how deep or why this gap is going to be, but we're committed to be patient and -- or big believers and the demand drivers that are coming later this decade. So we're staying committed to our customer base there, staying committed to these basins and welcome a huge increase to duck inventory. And hope for improving commodity.

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

Maybe just another one on the Proppant business. You guys have kind of touched on some of these points already, but just wondering if you can expand at all on some of the drivers that are contemplated in the utilization upside that you guys flagged in terms of will it be external particular basins where a lot of potential customer types, tailwind from more Proppant per well from a well design perspective. Just wondering if you could give us any more color on the drivers of that I think it's 65% to 75% utilization target out later this year?

Yes. We continue to see improved demand on our Permian assets, specifically and increasing utilization there. And it's a combination of third-party and internal -- the focus right now is making sure that all of our customers are provided great service and great products, and we're continuing to focus on those areas. And South Texas and the Permian or the greatest utilization drivers for increase.

Great. Thanks. Appreciate that color. And then apologies if I missed this, but wondering if you could give us an update on efrac? Kind of what your nameplate capacity is now? How many of those fleets are working? What plans are for or some of the new builds that were maybe paused last year? And also more broadly, what plans are for dual fuel upgrades maybe in your 2024 budget?

Yes. Fuel efficiency continuing to be a major theme in the -- in this industry, and it's become a really strong demand driver for us. We're not at full utilization on our e-fleet, but expect to be this year again, this goes into how much operators spend on diesel and being able to eliminate as much of that cost as possible and grow margins alongside it so that everybody wins. On the e-fleet front, we expect to be fully utilized this year, working with operators they're very interested in a turnkey solution that's everything from gas, power gen, along with your e-fleet. And so -- we've begun to fund a high degree of success in bundling that as a turnkey solution and expect that to get us to full utilization this year.

Our next question comes from the line of John Daniel with Daniel Energy.

Matt, in the press release, when you note the big step-up in the pumping hours in January and February, is that a function of just less white space on the calendar? Or is there something from a job design, which is letting you get more hours per day? Or both?

It's more associated with calendar efficiency. I mean our crews are amazing. We get out regardless of customer type, we're usually pumping 20, 20-plus hours every single day that they have available to pump. But the question is, is that 18 days per month? Or is it 28 days per month? Right. And so going in working with customers on their program, making sure that we're aligning our interest with the right customers. And when you look at our revenue per pump hour, we recognize that we have to be a little bit more competitive with customers that can give us 28 or 30 days a month pumping. But what we see from getting more pump hours per month and the dilutive effect on our cost structure, it's more than worth it for us to come in and provide some top line concession.

Okay. So I'm trying to translate here. It sounds like you would think you've got a better customer mix today than maybe 4 to 5 months ago. Is that a fair statement?

Well, we love all of our customers. But as far as customers that can give us a high percentage of pumping days per fleet. It's the highest it's ever been. This is the highest account -- this is the highest calendar efficiency that we've ever seen from our customer base.

Okay. I got another one here, and this is not meant to be a gotch you question, but when you talk about full utilization later this year, are you assuming the U.S. working frac crew count for the whole industry is growing? Or is this more of an increased market share?

So when you look at the industry, I think we suffered from our own failures in 2023. And we come in -- we've come into 2024 with a deficit of our own that when we overcome that deficit will outperform our peer class just from stabilizing the business to where it should have been the whole time. And this -- we expect this to happen regardless of what the total market does.

Okay. All right. And then one final one for me. This is probably more for Matt on the sand side. But can you speak to any inquiries in terms of -- not looking for price point here, but just the level of inquiries for sand maybe back half of the year out of the Haynesville mines? Are they starting to talk about that? Or is it too early?

We're constantly talking to our customers about their timing. I don't know that there's necessarily an RFP season for that region, so to speak, but we are closely aligned with all the major operators in that basin, and we're talking to them regularly about their upcoming programs and where they think their activity may shift based on gas pricing.

Our next question comes from the line of Tom Curran with Seaport Research Partners.

Matt Zinn, thank you for joining the call. Good to know you a little bit better. Opening question for you. Could you share some color on the nature of where the CapEx spend will be going for Alpine this year when it comes to your own budget?

We evaluate all our CapEx based on improving utilization or lowering cost structure. So improving reliability or lowering the cost of manufacturing. So that's our key focus is where our demand is and where we can lower cost or improve reliability. So the places that we have growth opportunity are where we're going to have the most bang for our buck.

Got it. And then when it comes to utilization, could you tell us, one, where you exited the quarter at utilization-wise. And then two, from there to, let's say, north of 70%, what do you expect the split to be between internal -- feeding that ProFrac expected active fleet ramp? And then third-party sales. Again, in the ramp from where you exited utilization-wise to climbing north of 70% like you're targeting?

Approximately 2/3 of the ramp is external customers and 1/3 of the ramp is internal, just rough numbers. We continue to see strong demand based on our footprint in the Permian with large operators that have drilling programs, completion programs that spread across the basin, and we continue to see strong demand as we've reached out to those customers about their operations.

And at this point, Matt, would you say you've got all that demand in hand in whatever different forms it might exist, contracts, dedicated acreage, here mutual interest, whatever the nature of how you've secured that demand, you have it and it's just a question of executing from here on the third-party side?

We have a line of sight, and we're currently negotiating supply agreements as we speak, an assumption on a certain percentage of those being executed goes into that number. And then we'll execute like we have for years and years.

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

Just one question for me. I remember from past conversations that the utilization of the sand plants was somewhere in the 50-ish percent before you acquired performance. Is that pretty good kind of bogey to start with and kind of where do we think it's going to go year-over-year as we kind of ramp towards that 65% to 75%?

Yes, our historical utilization of our mines has been around that 50%. And we -- as we've become more focused on third-party agreements, that's where the ramp comes from.

Right. So we should expect somewhere in the 50% year-over-year kind of bogey for modeling purposes?

Correct.

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

Thank you, operator. The takeaway today is that we are aggressively focused on growing value for all stakeholders. And we have a plan to get it done. We look forward to sharing our successes in the coming quarters as we increase utilization and drive improved results. We look forward to speaking with you again on our next call.

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