Flotek Industries, Inc. ($FTK)

Good morning, ladies and gentlemen, and welcome to the Flotek First Quarter 2026 Earnings Conference Call. [Operator Instructions] This call is being recorded on Wednesday, May 6, 2026. I would now like to turn the conference over to Michael Critelli, VP Commercial. Please go ahead, sir.

Thank you, and good morning. We are thrilled to have you with us for Flotek's First Quarter 2026 Earnings Conference Call. Today, I'm joined by Ryan Ezell, Chief Executive Officer; and Bond Clement, Chief Financial Officer. We'll begin with prepared remarks on our operations and financial performance followed by Q&A. Yesterday, we released our first quarter results, 2026 full year guidance, and an updated investor presentation, all available on our Investor Relations website. This call is being webcast with a replay available shortly afterward. Please note that today's comments may include forward-looking statements. These are subject to risks and uncertainties that could cause actual results to differ materially from our projections. For a full discussion of risk factors, please review our earnings release and most recent SEC filings. Please also refer to the reconciliations in our earnings release and investor presentation for non-GAAP measures. With that, I will turn the call over to our CEO, Ryan Ezell.

Thank you, Mike, and good morning to everyone. We appreciate your interest in Flotek and your participation today as we review our first quarter 2026 operational and financial results. In the first quarter of 2026, Flotek further positioned its industrialized pivot and transformational growth storyline through the continued execution of its corporate strategy. Driven by the power convergence of innovative, real-time data, and chemistry solutions, as shown on Slide 3, Flotek has laid the foundation for a data-driven growth trajectory built on diverse recurring revenue, high-margin services, and proprietary technologies that create value for our customers and improve returns for our shareholders. The strategic transition of the company into a Data as a Service business model continues to gain momentum while expanding the total addressable market for the company. As a result, Flotek's Data Analytics segment grew exponentially, while our differentiated chemistry segment outpaced the market in a challenging environment through an unwavering commitment to safety, service quality, innovation, and total value creation. Now before I discuss the company's vantage point on the evolving geopolitical and macroeconomic dynamics within the sector, I'd like to touch on some key highlights for the first quarter referenced on Slide 4 that Bond will discuss later in the call. Company total revenue grew 27% as compared to the first quarter of 2025, highlighted by 295% growth in data analytics, which was the highest quarterly revenue for data analytics in the company's history. Chemistry Technologies revenue increased 13% despite 3-year lows in completions activity in North America, which was also the highest quarterly revenues in over 7 years. Company gross profit climbed 25% versus the first quarter of 2025. It's impactful to note that Data Analytics accounted for 50% of the company gross profit versus 8% in the prior year quarter, marking a major milestone in Flotek's transformation. Total company adjusted EBITDA grew 44% year-over-year. And Flotek's Expect Analyzer was named Product of the Year at the 2026 Analyzer Technology Conference. And finally, 2026 guidance builds upon a multi-year trend of revenue and profitability growth as the company executes on its strategic initiatives to provide long-term resiliency and profitability as shown on Slide 5. Most importantly, these results were achieved with 0 lost time incidents in the field operations. I want to thank all of our employees for their hard work and commitment to safety and service quality in achieving these outstanding results. Now turning to the larger picture for the energy and infrastructure sector. We share the viewpoint that the ongoing situation in Iran will have impactful and potentially long-term implications on global supply and energy security that will demand action. The structural disruption in the Middle East has catalyzed a fundamental shift in supply side dynamics, establishing a higher baseline for energy security and recalibrating the risk profile for regional supply. As cumulative production deficits and reductions in strategic reserves are trending towards 1 billion barrels, we expect increased investment in localized oil and gas developments, while geographies that do not possess resources look to rapidly diversify energy security exposure. All of these factors point towards a fundamentally tighter energy market than what existed just 60 days ago and support a stronger commodity pricing environment for increased upstream activities. Layering in the expanding power demand driven by AI, data centers, and industrial reshoring, combined with the reliability issues of an aging transmission infrastructure, the expectations for tailwinds within the energy sector further strengthened. North America is already showing early indicators of recovery as completions activity white space has all but disappeared for the first half of 2026 with spot work interest increasing throughout the remainder of the year. Our legacy pressure pumping customers continue to capitalize on the portfolio diversification opportunity provided by the demand for remote power generation. Flotek is poised to support emerging customers with products and services that help protect their assets while optimizing their operational performance and fuel efficiency. With multi-year waiting list for turbines and reciprocating engines, protecting these capital-intensive investments is critical, along with enabling reliability standards that exceed the greater than 99% uptime requirements. Transitioning from the macro view, let's dive into details, starting with Slide 9. I want to spotlight the remarkable progress in our Data Analytics segment. We saw service revenues increase 785% in the first quarter of 2026 versus the first quarter of 2025, driving gross profit margin to 75% versus 38% in the prior year period. This strong growth is powered by our flagship upstream applications, power services, and digital valuation, both of which are generating significant contracted wins and a robust recurring revenue backlog shown on Slide 10. Highlighting these wins are; first, 21 power services measurement units added since closing our original Power Tech deal. These are in addition to the primary long-term Power Tech contract assets. There's a 27-unit order from a large OFS customer with an expanding distributed power fleet to monitor field gas for power generation and digital valuation of fuel quality and consumption, a 15-unit order from a major midstream customer for real-time crude and condensate quality measurement and also a deployment of a Smart Skid rental to a major IOC to optimize gas quality with real-time blending of field gas and CNG, which is one of the first applications of its kind. We also deployed rental assets to support our large utilities recovery power contract in Montana. This momentum has accelerated with these new contracts, expanding our expected backlog for the remainder of the year in 2026 to $34.1 million and our 3-year expected backlog to more than $90 million. Power Services led this growth, further reinforcing our shift towards high-margin recurring revenue streams. Flotek's Power Services has evolved from a novel analytical approach into a transformative solution for the energy infrastructure sector that we call Power Tech. What began as advanced analytics has grown into a comprehensive end-to-end fuel management platform, redefining performance standards and operations within the sector, as shown on Slide 11. Our expanding portfolio of patents and field-proven use cases position Flotek as a leader across the natural gas value chain. When considering the velocity of our measurement, we deliver unmatched real-time fuel monitoring, conditioning, blending, and engine control to optimize performance and safety for behind-the-meter distributed power operations. The success of Flotek's Power Services applications is expanding rapidly as we expect to have proprietary real-time analyzers on more than 50% of the currently active North American e-frac and natural gas power fleets by year-end. Additionally, on March 3, 2026, Flotek announced its first contract within the utilities infrastructure sector seen on Slide 12. Leveraging our patented Power Tech platform, Flotek will partner with leading distributed power service providers to coordinate the installation of up to 50 megawatts of state-of-the-art power generation equipment, including advanced gas distribution and smart conditioning systems to support critical federal disaster recovery initiatives. We are pleased to announce that we have initiated Phase 1 of the project, which includes the mobilization of 12 megawatts of distributed power, combined with our proprietary gas conditioning and distribution skids to the infill staging area while the site prep work is completed. First power is expected in the third quarter of 2026. Now let's transition to Slide 13, where we dive into our second upstream application, Digital Valuation. This groundbreaking use case sets a new standard in the oil and gas industry, delivering unprecedented transparency and minimizing enterprise risk for producing wells like never before through real-time digital twinning of the custody transfer process. In the fourth quarter of 2025, Flotek reported a historic milestone in natural gas measurement. The XSPCT spectrometer became the first optical instrument to achieve the stringent reproducibility and repeatability requirements of the oil and gas industry standard for custody transfer, GPA2172, also known as API 14.5. We believe the XSPCT speed, accuracy, durability, and qualification under the rigorous measurement standards outlined in GPA 2172 will provide a significant advantage in the discussions with prospective customers as we aggressively expand its manufacture and field deployment. In March of 2026, the XSPCT Analyzer was named Product of the Year at the 2026 Analyzer Technology Conference, further exemplifying its differentiated capabilities. Since completing our Digital Valuation pilot program in the third quarter of 2025, we exited the year at 25 active units deployed. Furthermore, 2026 is off to a great start with that number more than doubling to 57 units currently deployed or contracted for delivery. It is clear that execution of our transformational strategy to grow the data analytics segment through upstream applications is gaining traction. But what is most important is what it means for our stakeholders and investors. First, our data-driven strategy ensures predictable recurring revenue and cash flow, delivering stability and long-term value. Secondly, our proprietary data technologies and superior measurement accuracy enable velocity and decision control that establish a high barrier to entry, secure client loyalty, and support our value-based service model. And finally, long-term high-margin subscriptions position Flotek for sustained growth and margin expansion, driving significant shareholder value over time. And lastly, let's move to our Chemistry Technologies segment, which continues to deliver robust performance, driven by the differentiation of our prescriptive chemistry management services and our expanding international presence. Slide 15 highlights the resilient performance of our Chemistry Technologies segment, which delivered a 13% increase in total revenue for the first quarter of 2026 compared to the first quarter of 2025 despite a 21% decline in the average North American frac fleet count over the same period according to primary vision data. As mentioned earlier, we believe we have reached the trough of the cycle and see encouraging indicators for cautious optimism in the second quarter of 2026 and beyond. We continue to closely monitor operational and supply chain risk to our international operations amid the ongoing conflicts in the Eastern Hemisphere. It's evident that our chemistry team has executed our strategy flawlessly. As we move into the second quarter of 2026 and beyond, the opportunities leveraging the convergence of prescriptive chemistry management and data services move to the forefront through high-margin services that improved operator ROI. These advanced data-driven services include smart chem add units, real-time flowback monitoring, and implementation of prescriptive geological targeting. Looking ahead, I am more confident than ever in Flotek's momentum and our ability to drive sustained profitable growth as we execute our transformative corporate strategy. We are firmly positioning Flotek as a high-growth technology leader in the energy and infrastructure sectors, accelerating innovation through the powerful integration of real-time data analytics and advanced chemistry solutions that are tailored to precisely meet our customers' evolving needs. Now I'll turn the call over to Bond to provide key financial highlights.

Thanks, Ryan. Good morning, everyone. Our first quarter results build upon record-setting 2025. We issued our initial guidance for 2026 that points toward continued strong growth in revenue and adjusted EBITDA. Quarterly highlights included achieving our highest quarter of total revenue since the fourth quarter of 2017, driven by the largest quarterly contribution from ProFrac in the more than 4-year history of our supply agreement and the second consecutive quarter in which our Data Analytics segment surpassed $10 million in revenue. Total revenues for the quarter increased 27% year-over-year and 4% sequentially, driven by continued strength in related party revenue, which increased $21 million or approximately 70% compared to the year ago quarter. Of that increase, roughly $14 million was related to chemistry revenue, while approximately $7 million was attributable to the Power Tech lease agreement. External customer chemistry revenue declined 33% year-over-year, but was flat on a sequential basis, which we view as an encouraging sign. As Ryan touched upon earlier, we expect external chemistry revenue to increase in the second quarter amid improving customer engagement, reinforcing our belief that completion activity levels are stabilizing and may be in the early stages of recovery as we move through the year. Data Analytics delivered another strong quarter with service revenue increasing significantly compared to the prior year period. As highlighted on Slide 9, service revenue accounted for 82% of DA revenue this quarter, up sharply from the year ago quarter, helping to drive first quarter DA gross profit margin to 75%, a 200 basis point improvement sequentially. Data Analytics segment revenue represented 15% of total company revenue in the first quarter, significantly up from 5% in the year ago quarter. As highlighted in the earnings release, we began mobilizing equipment to location relative to our disaster recovery Power Services contract. As a result of this incremental revenue, we are forecasting sequential growth in Data Analytics during the second quarter. As noted on Slide 12, we currently expect 2026 revenues from this contract to total approximately $12 million before consideration of the contract extension. Gross profit increased 25% as compared to the year ago quarter. First quarter gross profit as a percentage of revenue totaled 22%, which equated with the year ago quarter despite the nearly $5 million reduction in the order shortfall penalty as compared to the first quarter of last year. SG&A expenses increased 10% year-over-year, primarily driven by higher noncash stock-based compensation related to the timing of our long-term incentive grants. For context, our 2026 grants were issued in the first quarter, whereas the 2025 grants were made in the fourth quarter. On a sequential basis, SG&A declined 9%, reflecting lower legal and professional fees. As revenue continued to scale this quarter, we saw meaningful leverage in our G&A expenses. Excluding stock compensation, G&A declined to 8.7% of revenue, down from 10.5% in the year ago quarter. That nearly 200 basis point improvement below the gross profit line reflects the efficiency of our cost structure and was a key driver in the year-over-year expansion in adjusted EBITDA margin in the first quarter of this year. Net income for the quarter was $4.7 million or $0.12 per share compared to $5.4 million or $0.17 per share in the prior year quarter. The year-over-year decline was primarily driven by higher depreciation and interest expense related to the Power Tech acquisition that closed during the second quarter of 2025 as well as a higher effective tax rate. For the first quarter, our effective tax rate was approximately 26% compared to only 1% in the year ago period, reflecting adjustments that we previously discussed related to our valuation allowance on deferred tax assets. As an update to our prior expectations, we now anticipate our effective tax rate to be in the range of 23% to 26% going forward, the vast majority of which will be noncash and that incorporates estimated state taxes on top of the 21% federal rate. Per share metrics for the first quarter of 2026 as compared to the year ago quarter also included a higher share count as a result of the 6 million shares issued in conjunction with the Power Tech acquisition in the second quarter of last year. Our earnings release yesterday included our guidance for 2026. As shown on Slide 4, we're estimating total revenue in a range of $270 million to $290 million and adjusted EBITDA in a range of $36 million to $41 million. The midpoints of these metrics imply growth of 18% and 17%, respectively, as compared to 2025. As a reminder, our adjusted EBITDA numbers presented in the release and the presentation, including our guidance, do not add back noncash amortization of contract assets, which totaled $2.2 million in the first quarter and are expected to total $6.2 million for the remainder of 2026. On the balance sheet, you may note a new line item called equipment credit related party. As part of the settlement of the 2025 OSP, we agreed to receive a $12.5 million allowance from which we can place orders for construction of power services equipment. We've already placed POs for approximately $10 million of additional distribution and conditioning assets that we expect to have in service throughout 2026. We expect to fully utilize the equipment credit in 2026, which will represent the bulk of our estimated capital expenditures budget. We believe 2026 is shaping up to be a significant year for Flotek. Importantly, we've been able to deliver consistent growth metrics while maintaining a disciplined balance sheet and low leverage. As shown on Slide 16, using the midpoint of our 2026 adjusted EBITDA guidance, our leverage ratio is approximately 1x based on net debt outstanding as of March 31. When you factor in the estimated $8.4 million in 2026 noncash amortization of contract assets, we are less than 1x levered. We believe that this ultimately positions us to continue investing in growth while maintaining financial flexibility. With that, I'll turn it back to Ryan for closing remarks.

Thanks, Bond. Our first quarter 2026 results extend our multi-year track record of consistent improvement as we continue transforming Flotek into a data-driven technology leader. The Data Analytics segment delivered strong growth, highlighted by triple-digit increases in service revenue, expanding recurring revenue streams and a robust multi-year backlog. Together with our resilient prescriptive chemistry management services, Flotek is well positioned to gain additional market share and drive further top and bottom line improvement with substantial upside opportunities in our data-driven services. We remain committed to shaping the industry's digital and sustainable future by leveraging chemistry as our common value creation platform. With our proven execution, expanding high-margin capabilities, and clear pathway to scale growth, Flotek is poised for the next phase of value creation for our investors. Operator, we're ready to open the floor for questions.

[Operator Instructions] [Technical Difficulty]

Operator, we're having trouble hearing you.

This is the operator speaking.

Hearing a lot of background noise on your end. Can you hear us?

I can hear you loud and clear. Is my line coming out crystal clear or do you hear any background noise?

It is now, but it was very garbled for a second. We're ready to turn over to questions. You have Jeff Grampp in the queue.

Yes, Jeff Grampp.

I wanted to start first, Ryan, the data point to get to 50% of your units on frac fleet is impressive. I wanted to start there. As I recall, that was kind of how things initially started with the ProFrac relationship and the IP and value you guys brought from that angle and then obviously ultimately scaling that to a much larger deployment with them. I'm curious, is that kind of the goal or outcome on some of these deployments? Or just what kind of traction or state of conversation we're at to potentially expand the kind of market opportunity with some of these customers?

Yes, Jeff, that's a great question. Well, I'll try to give you some pretty tangible color on how our approach to that is. And when we look at our Power Services business, we've taken a very methodical approach. Our background in monitoring hydrocarbon flow through our Data Analytics group has got over 15 years' experience. So we took an approach of all the different basins, hydrocarbon quality, gas quality, all these areas to look at the position of where frac fleets are going to be, where potential data center locations will be, other power generation sites, et cetera, and have built our equipment and measurement techniques for those specific geographical locations and went down a pursuit plan of looking at proving out our measurement, then moving into control and then finally, the distribution piece. What you're seeing now is we definitely targeted our primary experienced customer base, which is around e-frac, natural gas power. And most of these customers now are aggressively moving into other behind-the-meter distributed power platforms. And so when you look at our original work that started back in 2022 with ProFrac, right? And then you look at the continued growth of North America's e-frac fleets and natural gas fleets, we've done -- the team has done a great job at working with a multitude of other clients to get our Verax or XSPCT units out on location to start measuring gas quality, whether it for digital valuation and volume pieces or for potential conditioning. And this is always the first step in our sales process, and we're proud to announce that between current already awarded work and the recent POs we've just received by the end of the year, we will have an analyzer on location for over 50% of these, what I call, higher tech or upper tier level fleets, which is a phenomenal step in terms of what we're doing here. And we're hoping that that evolves into our ability to be able to further advance their conditioning and/or optimization of it, whether it be in reciprocating engines or turbines or even their natural gas pumping fleet. And so that's just part of our execution of our sales process.

For my follow-up, on the utility infrastructure side of thing, I appreciate you guys putting some data on the impact of '26. What are you guys kind of expecting? I know we're still early here, but where do you think potentially build beyond this Phase 1 and the 12 megawatts that you guys put out? Is there -- are there additional phases under consideration? Or is that kind of your best guess for what the steady-state work of that contract could be?

Yes. So right now, after we did the initial assessment, yes, we've got -- it looks to be -- there are 2 primary sites, which are Phase 1 and Phase 2. Phase 1 is obviously moving forward. We've mobilized the additional -- the first 12 megawatts of location with our proprietary conditioning and distribution equipment and plan to have that site active in the back half of the year. We do believe that with the success of that project, we will initiate into a Phase 2, which would probably move an additional 15 to 20 megawatts for that secondary phase. The timing on that at best would be the very end of the year, probably more into the 2027 time frame, if we're being honest about looking at what it takes for site prep for that location. But we do expect this work to continue past just our 6-month measurement part of the contract. But again, I think in a lot of our guidance, we've been conservative until we officially lock that down. But we do expect this project in the end to be between 25 to 30 megawatts with all of our gas distribution equipment on location. Another point to note, Jeff, we talked about our primary goals of growing our Power Services with related to the oilfield power. But what's exciting to note is that now based on the basin studies we're doing and recent work, we're starting now to see our tentacle stretch out into other areas around data center growth as well as other behind-the-meter power generation opportunities, where we're seeing a sight into 200-plus megawatts of power generation and conditioning opportunities that are coming in the pipeline that we are actively pursuing through the back half of the year and probably roll into sometime like the 2027 time frame. So that pipeline is continuing to grow and fill up. What's also been interesting is that we've actually got Verax units on 2 different large turbine gas-fired powered power plants. We've been monitoring fuel quality, the percentage of ethane in the natural gas, how we monitor and optimize fuel and all those projects running too. So a lot of exciting things happening in the power services market for Flotek, which are going to, if you look at it, offer us potential upside and where we are in the numbers in the back half of the year and particularly rolling into '27.

Next question comes from Rob Brown with Lake Street Capital Markets.

Congratulations on all the progress. Just following up on the 200-megawatt pipeline you just talked about. How does the cadence of the quotes in that market work? I think you sort of said you're building into '27, but how does the cadence work? And how is the revenue kind of flow through for you as those come into the mix?

Yes. Obviously, our -- Rob, our primary goal is around the gas conditioning and fuel optimization services. And they kind of come in different ways where traditionally, we are usually the primary gas conditioning equipment for, let's say, emergency power start-ups or peak power support because they are using really raw fuel gas that could potentially be wet or different applications to it. And often cases, there's obviously some power shortages there. So we're able to leverage our relationships with current customers to help pass through or bring some of those power generation assets to it. And then when you move over into the data centers, those are some longer-term plays where we are -- as they're improving the fuel efficiency and/or depending on their geographical location on the gas quality or pipeline quality, that's where we come in to play on those on the heavy side. Those are typically coming out to be a little bit on the longer end of what I'd say our sales pursuit cycle is because there's engineering, there's proven out, there's gas testing, sampling, all those pieces come in there. And just from the sheer fact of as we're pursuing that pipeline, and we're already halfway into May. That's the reason why I say those are probably more 2027 revenue-generating opportunities. However, there is opportunities always to pull some of these forward, particularly on those where power assets are already on location, they're having optimization issues or gas quality issues, we're getting pulled in by a lot of clientele to take a look and see if we can fix those problems.

And then on the 57 units that you have deployed around order, how does the order book pipeline look for that product? It seems like it's really growing nicely. How do you sort of see that order book building or the pipeline building?

Yes. I would say, definitely, if you look at the fact that when we just talked a few weeks ago, those numbers have more than doubled on issued POs and contracted delivery and what's been put in the field. What's interesting is it kind of -- it's definitely not a linear growth issue. What we're seeing is we're seeing double-digit orders of units. We get them installed and you're then starting to see amplified opportunities. And then what's really interesting is we're having a lot of conversations with the midstream providers, which is really the main target audience. And we feel like once we get a solid acceptance rate, we've got 2 major midstream customers right now that are looking. And these guys alone, if they do any type of scale purchases, you could triple the current active number on a couple of POs. And so I think what you're now going to start to see is we hope to start seeing this increase in definitely a nonlinear fashion. And so when you start looking at the target number of units that we have put out there, we want to try to get to roughly 150 by year-end. Those numbers are definitely a striking distance of what we want to do in custody transfer with potential upside.

Our next question is from Gerry Sweeney with ROTH Capital.

I wanted to talk about, obviously, Digital Analytics. Digital Analytics, great opportunity, lots of opportunities starting to emerge. As you're looking at the playing field, I mean, what do you need to maybe solidify some of these orders, get the product out there a little bit further, maybe some of the choke points, do you need some more investment sales? Is it more time oriented, more testing? Just trying -- it feels like we're on the cusp of a few different opportunities as long as -- as well as some longer opportunities, but just wanted to see internally what you need to do to keep that moving along at the fastest pace possible.

Yes. So we -- if we can, we kind of break it down again, when we look at -- let's just talk power services components. We got to kind of break it down into the phases of measurement plus conditioning and then control and distribution. So we're making great headway because we talk about the number of measurements to be before the end of the year, the majority of those POs are already received. We're in the process now of manufacturing and field deployment of the analyzers into the operations. Then comes into what's probably the better revenue growth component is when we move into conditioning. And we mentioned around our first, I would call, modified smart blending skid where it's actually monitoring the volumes of CNG to field gas for a flat BTU quality that we're seeing every 5 seconds. That's the first of its kind in the field to do that. And what happens is as you get these analyzers on location, the next step is putting pieces of equipment like that as being the next step in the phase. And so as Bond mentioned, we've already issued POs to build out $10 million dedicated towards the next generation of our conditioning and distribution assets. And so for us, we're expecting a big majority of that equipment to come online by mid-year, and then you're going to start to see it have potential impact and upsides and uptake into the industry. So we are definitely putting at minimum $12 million into capital assets for conditioning. There's potential you could see even more than that as the business cases arise. And so we've continued to amplify our sales force. We actually have open positions now to put more salespeople on the ground. We picked up a couple of other large-scale engineering firms that are involved in design builds for data centers, et cetera, and that are getting comfortable with our equipment. And the last piece that I'll say is still pretty exciting is we're in some extremely in-depth conversations with the OEM engine providers. As you know, most of them on reciprocating and/or turbines, projects are sold out for the next 3 years, and they're doubling and tripling their capacity, and we are way down the road in ability to be able to control engines by methane number and WABI index. So look for some exciting things for us on that aspect to provide layered in additional upside opportunities depending on the distribution schedule we could potentially see in the back part of the year.

Are those conditioning skids that you're building and expect to come -- to be available at mid-year? Are they all factored into your guidance? Or are they sort of layered in as you go through the year into next year?

I would say they're layered in conservatively is the way I would look at it. So as they come online, and we probably -- we have them kind of objected utilization rates, there's definitely room and higher utilization rate and then coming online sooner to add in there. And Gerry, this is kind of the new frontier for us. We're getting a better understanding. I would say we traditionally look to more of these conservative components in there with opportunities to really push the envelope on asset utilization and return on these investments. And so we have a pretty positive outlook for the back part of the year. [Technical Difficulty] Hello, [ Don ], you there?

Yes. Sorry, I didn't hear the operator. Ryan, I wanted to ask about your comment about the U.S. pressure pumping business, either on the third-party side or with ProFrac. What are you seeing out there? I mean, we're hearing that a lot more pressure pumping is going to work. Just kind of your thoughts around that and chemical sales, whether it be domestically or through ProFrac there.

Yes, Don, we're in advantage point, right? Basically, we kind of break it up in the first half of the year, the second half of the year, where we had a lot of potential things in this first half have now really solidified. The majority of this spot call white space has gone, particularly on the target customers that we have, which are using Tier 4 dual fuel direct drive natural gas or e-fleets. And so we're starting to see an uptick there. Our expectation is our external chemistry customers will continue to strengthen from Q2 onwards. And we're getting more and more details on the back half of the year where you're starting to see the spot work go up. The availability of this upper tier equipment, Don, is almost gone now. It's pretty tight, which is good for the market. And then so for that to translate into chemistry sales, you've seen that play out with our related party revenues with ProFrac. These fleets have moved into a lot of the gas basins where they have great positioning. We picked up a lot of chemistry there. And so we expect this to transcend to some of our other customers. And then also, I would say that our external business is slightly impacted by a little bit of weather in the first part of Q1 and some normal repair and maintenance cycles and all the businesses are starting to pick up. Even more importantly is there's a lot of optimism for our frac business in the Middle East. We got through the trial stages. We expect the large deployments of our chemistry to start to hit the ground this quarter. And we're already now moved up. We're on 2 operating fleets, looking to pick up 1 to 2 more by the end of the year. So you're going to see a lot of stage work coming from the Middle East, which is going to start to bolster our external chemistry revenue mix a lot. So I hope that gives you a little bit more color on what we're seeing. But I think I'm getting a lot more bullish on it. And there's still a lot of talks around the capital discipline piece, where to get a fleet built require long-term commitment, but there's a lot of the higher-end Tier 4 and e-fleets are getting all called out right now.

So Don, just to give you a little bit of numbers around that. When you look at the first quarter external chemistry revenue from 2025 of $22 million, obviously, we're down this quarter. We do believe by the end of the year, we could see those kind of numbers on a quarterly basis that we saw in the first quarter of 2025. So getting back to where we were last year, which would be a big growth driver as we sit today.

Yes. And that was going to be my next question on whether or not the Middle East impacted that $14 million that you generated this year or not. It sounds like it didn't -- it was more kind of year-end related, but any comments around that and just getting chemicals into the Middle East? I know you were talking about going to the West Coast of Saudi and bring them in either through Egypt or the West Coast of Saudi. Just any thoughts around that logistics part too.

Yes. I would say that right now, international business was extremely light in Q1 because we talked about the logistics delays. I've been very pleased with our team's logistics plan for delivery. We're going to see in Q2. We're actually starting to see chemicals get on the ground a few weeks earlier than expected. And with our biggest customer there, they're pleased about that, and we're starting to see a pickup in the total number of stages. And then looking here domestically, our chemistry team has done a phenomenal job of figuring out some opportunities in growing the business. What's been very interesting is we always talk about the convergence of our data business and our Chemistry business. We're starting to see that play out where there's opportunities to utilize our XSPCT units and 2-channel Verax units for flowback control, crude and gas quality as well as our new advanced real-time [ Chemed ] units, which use micro doses on concentrates, et cetera. So all of these things are fueling not only differentiation, but significant growth opportunities for the Chemistry and resultingly some high-margin data services, too.

Your next question comes from the line of Gowshi Sri from Singular Research.

On the gross margins coming in at 22.2%, I think the D&A is already at 50% of gross profit. As the shortfall penalty mechanism kind of resets through 2026 and DA shares continue to grow, how should we think about the pace of gross margin expansion? Is 25%, 27% realistic range by second half of '26? Or are there other offsets we should model?

So I'll let Bond comment a couple more around just the hard numbers. I think one thing that's going to impact us is we continue to see overall gross margin improvement even with reductions of what we've seen with the OSP, that thing is dwindling down to minimal effect now. The part that's probably going to play the most role is how much actual distributed power revenue is coming through the P&L because traditionally, if we were pulling through distributed power, working with one of our big customers, colleague groups to do that, we typically just have a minimal markup on that. And so it kind of dilutes some of the profitability, like we particularly said our contract in Montana, whereas traditionally speaking, our conditioning skid is alone coming at the 81% gross margin. And so depending on how additional megawatts move into the back half of the year, it could dilute that down. Bond, you can provide a little additional color on that.

Yes. I mean I think in the back half, we will see margin expansion, but I think it's hard to really forecast that because like we just mentioned, we are going to expect a pretty sizable increase in external chemistry revenue. So when you look at how the gross margin plays through with a chemistry business that's also growing at smaller margins, racing against a DA business that's growing at higher margins, I think 25% by the end of the year is possible, but we are forecasting gross margins to continue to move up.

I just have one more question. On the Q1 deck, you flagged the EPA flare monitoring enforcement I think kind of rolled back. Given that VeraCal was generating around $2 million to $2.5 million of flat and 60% gross margin in '25, how much of that demand has deteriorated from what you originally expected? Is that business pivoting towards voluntary or international regulatory framework to offset that headwind?

Yes. So I think that there's no doubt, it's been a slight bit of softness to it here domestically. Now again, we do have a fleet that's staying relatively busy. But I think in terms of it being a rapid growth mechanism domestically, it's been slowed a bit. Now what we are seeing is deployment internationally. And we look at it -- we also look at it here on the state side, 2 particular states around New Mexico and Colorado are advancing their utilization of the equipment. So like I say, it doesn't compare an opportunity to the digital valuation or power services, but it's been relatively steady with some domestic pressure on it in Texas. But New Mexico and Colorado still looks to be going pretty strong. I think what we're seeing with it is instead of it being that mobile 14-day test pad thing, they're looking at it more into an overall operational efficiency and the real-time tuning of the flare to where they get into a one of the lower emitter statuses, carbon capture type things on operational efficiency. And we're seeing that not only play out here domestically, but we're also seeing that growth internationally.

There are no further questions at this time. I will now turn the call over to Michael Critelli. Please continue, sir.

Thank you. Join us at -- of our upcoming investor events, May 26 to the 28, you can catch us at the Louisiana Energy Conference, taking meetings and giving an investor presentation. On June 16 and 17 at the Planet MicroCap 2026 Conference at the Bellagio Hotel & Casino in Las Vegas. And August 17 and 18 at EnerCom Denver at the Westin, featuring an investor presentation and one-on-one meetings. For all other events and the latest info, look at the Events section of our website.

Yes. Thanks, everyone, for your time today and your questions on the call. We'll speak to you soon.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.