Flotek Industries Inc (FTK) 2006 Q2 法說會逐字稿

Good afternoon. My name is Paige and I will be your conference operator today. At this time, I would like to welcome everyone to the Flotek Industries second-quarter 2006 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be question-and-answer session. (OPERATOR INSTRUCTIONS). Thank you.

Mr. Dumas, you may begin your conference.

Thank you very much. Good afternoon, everyone. Thank you for joining us.

Before we begin, I want to remind you that this call may contain forward-looking statements about future financial results and our actual results may differ materially as a result of factors that are outlined in our filings with the SEC.

Now that I've gotten rid of that comment, we will go into the real meat of our presentation. I'm going to give you a general overview of the quarter and talk a little bit about the two acquisitions that we completed in the second quarter.

First of all, we generated sales of $22 million in the second quarter, which was a 78% increase in revenues over second quarter 2005. The growth in the sales was driven by several drilling tool acquisitions, two artificial lift acquisitions, as well as strong organic growth within our chemical And Logistics division, and our established downhole drilling centralizer business.

In the second quarter, we acquired TWS, which was acquired for the whole quarter, and LifTech, which we had for one month, June, as part of our goal to develop a significant artificial lift segment and to expand our production-driven revenue base. The combined companies will provide a broad spectrum of electric submersible pumps, a patented gas separator, valves and services to support the coalbed methane producers in the Powder River Basin and beyond as we expand. We believe the recent artificial lift acquisitions will provide additional marketing opportunities for our patented Petrovalve line of pump components, and our patented gas separator, and our full line of electric submersible pumps, as we will expand from the coalbed methane market to conventional oil and gas areas with our ESPs, electrical submersible pumps.

The strategic complement of TWS and LifTech, which operate now as Flotek Pump Services, puts Flotek into the coalbed methane production area, supplying a full line of metal and plastic pumps and a patented gas separator. This also boosts the Company's production activity driven revenue base.

As mentioned in the past, we are still alert to the objective of acquiring a downhole rod pump manufacturer, which would provide Petrovalve a complete pump system to offer as opposed to Petrovalve remaining a stand-alone component. As a result of our previously announced association with [Donnan] in West Texas, Flotek and [Donnan] recently completed a joint sale of their pump system using all petrovalves. This was a very significant international order.

With the Chemical and Logistics segment, we have seen continued strong growth in our proprietary chemicals. Sales of our line of biodegradable environmental benign green chemicals grew from $1.6 million in the second quarter of '05 to 4.7 million in the second quarter of '06. We have now started producing, on a limited basis, from our new production facility, which when fully utilized will triple our production capacity. In addition, this new facility is highly automated; that will dramatically improve production times using far less man power.

With regard to our biodegradable chemicals, we have successfully tweaked that formulation to accommodate multiple applications in both drilling and production.

During the second quarter, we recorded the first sale of proprietary, biodegradable capillary foamers out of our facility in the Netherlands. We're currently evaluating additional international expansion opportunities, specifically to serve the Middle East and West Africa. The logistics activity of this segment continues to perform according to projections, and we're currently expanding -- we're currently negotiating to expand this existing contract to add more services and products. During 2005 and 2006, an emphasis was placed on expanding our Drilling Products sales through acquisition, allowing us to expand geographically as well as expand the number of products and services provided. In August of '05, we acquired assets of Harmon, which is a downhole oilfield and mining tool company with manufacturing and sales operations throughout West Texas and Mexico, located in Midland, Texas, and the assets of LOR, a drilling tool rental and inspection provider in South Texas located just outside of Corpus Christi.

In January of '06, we acquired the assets of Canop and Stabilizer Technology, a drilling tool sales and rental provider in Oklahoma, Louisiana, and nicely into the new Fayetteville shale area of Northern Arkansas.

As disclosed earlier this week, we have terminated negotiations on a significant potential acquisition in the downhole drilling tool industry. Based on the numbers, we could simply not reach an agreement that did not impose an onerous debt burden on the combined entity or that provided sufficient accretion to our existing shareholders. We will continue to focus on acquisitions that provide some of the strategic benefits that we had hoped to gain. Our objective is to increase the revenue and profits of Flotek, and that's driven by the need to strengthen our firm by having greater volume purchasing power and spreading corporate costs across a larger base. However, unless we can protect our shareholders against excessive debt or dilution, we will just pass on those kind of targets. Further, the revenues of 52 million that we generated in 2005 we are now projecting to grow in 2006 to 90 to $95 million, resulting in growth not only in revenues but profits as well. I think this cements our claim that we are a growth company.

Our business operations and prospects for future revenue remain strong. Therefore, I am very confident in our performance projections and I reaffirm our earnings guidance of $1.35 to $1.45, basic earnings per share for the full year despite the fact that our estimated tax rate will be 36%, as opposed to our previous guidance, which was based on a 30% tax rate.

At this point, I will turn the call over to Ms. Lisa Meier, our CFO, and she can provide a more detailed review of our second-quarter results. Lisa?

Thank you, Jerry.

Second-quarter sales rose to 22 million, a 78% increase from a year ago. The second quarter of 2006 included the full-quarter revenue contribution of three drilling tool acquisitions completed in August of '05 and January of 2006. The second quarter also included 2.3 million in sales from Flotek Pump Services. Approximately half of our overall growth was derived from our acquisitions with the other half generated by organic growth within our Chemical and Logistics segment, and our established centralizer drilling tool business.

Flotek generated operating income in the second quarter of $3.7 million, a 41% increase from last year. Our Chemical and Logistics segment led the growth in operating income, offset by increased corporate expenses associated with our SOX compliance and external audit and higher drilling tool subrental expenses.

Pretax income for the second quarter was $3.5 million, up from 2.4 million last year and 2.7 million in the first quarter of 2006. Tax had an effective tax rate of 35.4%. This translated to basic earnings per share of $0.26 and diluted earnings per share of $0.24 in the second quarter of '06. This was versus basic earnings per share of $0.29 and diluted earnings per share of $0.26 in 2005. However, those per-share amounts were taxed at a 17.5% effective tax rate.

From a cash-flow perspective, our operating activities generated 3.9 million in the second quarter, a significant increase from 1.2 million in the second quarter of 2005 and 2 million in the first quarter of 2006. Capital expenditures totaled 2.3 million and were primarily related to the expansion of our chemical production facility and the expansion of our downhole drilling mud motor rental fleets.

The two artificial lift acquisitions completed in the second quarter were funded with $6.2 million of cash and 3.9 million in stock. The cash portion was sourced from our existing debt facility and operating cash flows. As discussed in our 10-Q, we have expanded our revolving credit facility from $6 million to $10 million to accommodate our increased sales activity. We are in the process but have not completed renegotiating our senior term facility, which will also be expanded to provide capacity for additional business opportunity.

Moving to the outlook for the full year 2006, we have increased our projection for revenues from $79 million to 90 to $95 million. In February of 2006, we estimated full-year basic earnings per share of $1.35 to $1.45, or $1.20 to $1.30 on a diluted basis. This guidance was based on an effective tax rate of 30%. We hold to our original guidance despite an increase in our estimated effective tax rate from 30% to our current estimate of 36% for the full year.

At this time, I will turn the call back to the operator for any questions.

(OPERATOR INSTRUCTIONS). Bo McKenzie, Pritchard Capital.

Jerry, could you talk a little bit about the expansion going on in the motor business, where you stand, what you've got ordered so far, whether that's coming in and what you might look at ordering going forward? Lisa, how that might affect what we could see out of the [rental] side of the business in subsequent quarters?

I will be glad to, Bo. We have currently ordered 50 mud motors; we've received 32. We have 18 motors that are currently being QC'd and will be in our rental fleet within the next 30 days or less. In addition to that, we are preparing to place an order for an additional 50 units of which we believe that we will receive half of those by the end of this year and the balance of them in the first quarter of '07. In addition to that, we recently purchased and expanded our facility in Evanston, Wyoming, where all of our activities with our mud motor business is currently carried out in the Rocky Mountains from Grand Junction all the way up to the Pinedale area, north of Evanston. So we have tools in Evanston, Vermeil, and Grand Junction.

This new building is being equipped as we speak with the refurbishment equipment, so that we will be able to turn around tools after they come off the job in two, possibly three days, whereas at this point, it's taking us 10 days to 14 days.

Jerry, when you say that, are you talking about being able to go in and deal with the [Staters] Weld or rubber or whatever their compound is, or would that still have to be sent back to whoever is manufacturing the motor?

Bo, would you ask that question again?

So if I understand drilling motors right, you've got a tubular component with a load that goes down the center and there's a rubber or some sort of composite material that's inside the tubular component.

Right.

Are you able to service the [stater], the rubber component, internally, at your facilities or are those going to have to be sent back for that kind of work?

Well, we are able to either buy them -- we outsource it. We don't build them; we outsource them. We have several outsourcing opportunities, either here and we also build that tool in China.

So, out of 100 motors, if you looked at the business right now, how many are you guys subcontracting from Black Max whoever in that business? In other words, I'm trying to get a feel for how much in the short-term is going to be a decline in operating costs in that segment, versus when we start expecting a big pick-up in the revenues from the motors exceeding (indiscernible) right now.

That's an extremely good question, Bo. The answer is why we have moved so aggressively in this business. We're just about at the point where we're not having to sub-rent any motors from anyone else at this point. We were previously sub-renting from other manufacturers, that you either named or didn't name.

At this point, we have, to my knowledge, maybe one or two sub-rentals, but we are able now to furnish our own tools and we are actually having to turn down orders because we can do so much better with our product.

Now, let me give you in example of how we view this in terms of budgetary planning. We will have 100 tools, and if you have 100 tools, you can anticipate having about 45 jobs running at any one time, because you need to have a tool in the well; you have to have a standby. So that takes up about 90 tools, and you've probably got 10 tools being refurbished at any one time.

You will generate approximately $200,000 a year, in fact actually about 240, but we based our economics on 200,000 a year, per pair. So if you look at 45 jobs at -- we're talking about $9 million worth of revenue with the investment in 90 and 100 tools. We anticipate, given the success of our unit, which has been extraordinary, we've never had a failure and every jobs we've had, we've repeated, so we are extremely excited about that adding a significant amount of revenue to us next year with a very, very much improved margin over the sole rental discount that we were getting.

I guess the follow-on with either you or with Lisa, if I look out to Q3 coming forward and Q4, now that you are down to where there is very little in sub-rentals going on, should we expect, in the short-run, to see more or just a change in the operating costs? About how much have we've seen in sub-rented operating costs in that division in the last couple of quarters -- (multiple speakers) -- going forward?

(multiple speakers). Sub-rental costs have been a very large cost for us, and it's one that we have clearly made a decision to own and handle our own equipment and do our own refurbishing. We will no longer or with very limited sub-rental of motors because we will be having our own inventory. However, we will still sub-rent some equipment, so there will always be sub-rental, but the sub-rental will be significantly lower than it's been in the past relative to revenue production. As we move forward and if it makes sense economically, we will become owners and eliminating the sub-rental of whatever it is.

Okay. But Jerry, you're talking what? About 1.5 million a quarter or so in sub-rentals you are going through right now, maybe a little bit more?

Bo, I can't give you that answer without making an answer up, and I just simply don't know that answer right now.

All right, great.

[Lee Currie], Gorilla Capital.

Mr. Currie? Hello?

Mr. Currie has withdrawn his question. (OPERATOR INSTRUCTIONS). [Ed Ajujian], private investor.

Hello, folks. Great quarter. First, I just want to make sure if I'm understanding the math directly on your guidance for the second half, because it looks like, when you really work it out to backing out what has been recorded so far, actually you are expecting to generate something like about $0.82 a share for the second half, almost double what you did for the first half on a diluted basis, whereas the amount of increase in revenues is quite a fair amount less than double. So that would tell me you are expecting to increase your operating margins in the second half. Is that correct?

I think that's a correct assumption.

Okay. That's just from what? Changes in the mix of products or something, or just -- (multiple speakers)?

Well, we're beginning to become more mature in our control of our costs in all of our product lines, and our margins in our chemical business continues to exceed our expectations, and our margins in our downhole drilling group with the motor increase in revenues in the motors, which quite frankly has tripled the margins in that business. So right there, we have a significant increase in margins. In our Pump Services are these artificial lift area. The sales volume is significantly increased from what we had in the first half, and we had sales volume in the artificial lift group or downhole production (indiscernible) in the second quarter of --

2.3 million.

-- speakers) 2.3 million, and that was only a partial participation on the part of the acquisitions. So we anticipate that increasing significantly and the margins are improving because when we acquired the companies, one of the companies, LifTech, as we have mentioned previously, had a lot of inventory that they were a small company. We've been able to, as we've moved along, replace that inventory with a much lower-cost inventory, thereby increasing our margins.

So, we don't make the rig confirmation of our keeping to our guidance lightly. We believe that's going to occur. We will see our revenues, were in the first half, will go up in the second half significantly.

To reinforce what Jerry was saying on the revenue side, we do see growth in all three segments. The revenue growth for our Chemical and Logistics group was very strong in the second quarter and has a seasonal pattern of ramping up in the third and the fourth quarter. With the volumes of sales increasing, we're finding we are able to take advantage of discounts increasingly more. We also anticipate our expanded production facility to come online in full production for the back half of the third quarter and the full fourth quarter.

As it relates to the Drilling Products segment, we are seeing synergies occur from the various acquisitions we've made in that division. We've also seen a very strong performance from our centralizer division, which typically has higher margins than some of the other tool sales. As we discussed in the prior question, we've expanded our rental mud motor fleet throughout the year; that will continue through the third and the fourth quarter. That division has margins of approximately 42% and rentals you can expect to be at 50%-plus.

Finally, as he discussed, in the artificial lift segment, we had one quarter of TWS and one month of LifTech. We will have both entities for the combined back half. As it relates to the cost of the components, those components are typically on about a three-month order time from China, so we anticipate, in the third quarter and throughout the fourth quarter, the effect of our better negotiated supply contracts to come through.

Great, that's very helpful. Thanks. I wonder. On the chemicals business, I wonder if I could just get a better understanding of that. Am I correct that most companies in that business are quite a bit larger than you? Is that correct? I'm just wondering how you are able to get -- apparently you're getting market share. I mean, I know the market is increasing a little bit, as the rig count goes up but you are growing much faster than the rig count, so that tells me you are adding market share. My question is how are you able to take business away from what I believe are companies that are much larger than you that you would think would be able to beat you to jobs?

Ed, the answer is, due to the fact that we made a decision when we got into that business to be a research-oriented proprietary company, and as a result, if you look at the growth of our products that are proprietary, which represent 58 to 65% of our revenue, they are all proprietary and not only are they proprietary, but they outperform whatever else is out there. So it really doesn't make any difference whether we are competing against Baker Chemicals or [Nalco] or anybody you want to name that's far larger than us. The proof in the pudding is that we have a patent on our product and the further proof is that the product outperforms them. So, we are actually replacing those large companies as we move forward geographically and are able to show customers what we can do.

The answer to our continued growth in the chemical business is additional research. We are under Dr. Penny's guidance, spending more and more and more money in research because we know that that's what's taken us to where we are, so we're going to kind of keep dancing with who brought us, you know?

Yes, that makes sense. That makes sense. So you say this expansion is going to triple your capacity. If I may ask, are you at current capacity currently? Like for this last quarter, you did 10 million. Is that basically what you would say capacity is in rough figures, or is it something less than that? I'm just trying to get a sense of what the upside might be here.

When we got into that business, the first year, we did 6.7 million in the facility that we are now adding to. Last year, we did 27, 28 million, the same facility that we were in at 6.8 million.

If you had ever seen that facility, it was an absolute -- it looked like a parking lot full of automobiles; there was no room. So we actually had equipment outside, materials outside under tarpaulins and everywhere else. The bottom line is that we now have a 30,000-square-foot facility, totally automated, computer-driven, and it's going to increase our ability to produce more rapidly; it's going to increase our ability to reduce our lossage of both liquid and dry material in that whole facility. Now, we've gone from 15,000 square feet to a 30,000 addition, so we've now got 45,000 square feet. We've included a systems of vacuuming up all of the dust, which is now returned and sacked and sold instead of brushed out of the warehouse. The efficiencies have increased dramatically, and we're playing in about a $3.5 billion market.

So, we don't have any window or any ceiling on what we can do. The ceiling we have is on whether we can continue to develop products. At this point, we've been able to do so and we continue to put money, time and effort in working with our customers to do that. We're gaining greater support and respect from our customers. That's how we ended up in the Netherlands with Royal Dutch-Shell.

I see. At their request is that you set that up, is that what you -- (multiple speakers)?

That's correct. Also [Warshaw], which is a German company. So we now have -- we are now spending money with Dr. Penny and others, traveling abroad, presenting our data and that data is now being vetted by those customers and they are finding out that it's valid. When that happens, their question is when could you start doing business over here? It has taken us about six months to get going in the Netherlands. Our next move is in the Middle East and West Africa. We will be in Dubai hopefully sometime early in '07.

With the chemicals, though, it's not the kind of thing that you can really ship over long distances, is it, or cost effectively?

No, it isn't. Logistics are an issue. However, one of the nice things about the chemical business is that, as a percentage of the revenue and profitability, the capital expenditures are very minor. We will be able to build a blending facility in the Middle East for something in the neighborhood of $200,000. That will allow us to do everything we need to do. It's a very low-entry business in terms of physical facilities. It's a very high entry cost in terms of adding something that's not a commodity. That's why we made that decision now five years ago to be research-oriented.

Yes, that makes sense. Okay, thank you. Let me shift over to Petrovalve before I take up too much time. But you know, it was slow going up until last quarter. You basically weren't doing anything, so if I understand correctly, you said you did do a sale but that was after the end of last quarter. Is that correct? At the end of June?

You mean the sale I mentioned to with Donnan?

Yes.

Actually, we just actually recently received that sale.

Yes, that makes sense, because for the six months --.

It wasn't in the second quarter.

Yes, if you back out the new companies, it indicates the Petrovalve was almost nil. Is this just a slow ramp-up period? Because you've had to deal with Donnan for a while now, and then even before that, I think you had to deal with the Canadian company whose name escapes me.

Yes, both of those associations are beginning to mature and we're starting to see significant revenue.

Okay, great, because that's where the very healthy margins are, correct? On that?

There are good margins in the Petrovalve and there are good margins in the artificial lift business. I think that that's part of the reason that we're going to -- that we have made the commitment to our guidance.

Okay. The last thing is, on the Petrovalve, I see where Venezuela is seeming to increase a lot of their activities over there. That used to be -- it's quite a few years ago but that used to be a big market for yours. Is there any possibility of getting involved with them again?

Well, we've been selling valves to them, but you can imagine that we're very cautious about what we send down there unless we have money. You know, we try to sell that stuff CIF, cash in fist.

Yes, that makes sense. Okay, thank you very much. Oh, if I could make one constructive comment -- criticism, if I could be so bold here. But the whole issue of the fact that the tax rate change from year-to-year, I think you're really not presenting your best foot forward in your press releases the way you're describing that. I mean, the way I think of something that changed from a prior year to a current year that's going to subsequently stay similar to what the current year is, is I go back to that prior year and do a pro forma adjustment and then see now what my growth rate is doing it that way, keeping apple equal to an apple. When you do that, for your six months periods, you've increased your net income 52%. I would might like to suggest that, in future quarters, you might consider phrasing it that way, that to more -- to better state what is really going on with your business.

Well, I appreciate your comment. We've actually done that here, and with all due respect, we have a great regard for our investors and we assume they could do that themselves (LAUGHTER).

Well, I realize that but it --.

Let Lisa speak to that.

Very pleased for your comments, because every so often, the SEC gets a little fuzzy when we present things that way. We are relatively constrained on the ways that we can represent things pro forma. So that comment is very valuable.

Okay, thank you very much. You've been very helpful.

Thank you and glad to have you as an investor.

Lee Currie, Gorilla Capital.

Good afternoon, Mr. Dumas. Sorry I got cut off earlier.

I thought maybe you were mad at me.

In February, all Flotek shareholders had a profit and a very good feeling about the Company and its management. Six months later, with a better corporate outlook for Flotek, one-third of the market cap around 90 million is gone; most shareholders have a loss and a bad taste in their mouth about the Company and management and their expertise and intentions. My questions are what in the world was there to negotiate about for six months, especially in a rising short-term rate environment which made the deal tougher every week it went by? Why was the people that you were going to acquire negotiating in bad faith? I can't think of anything else was going on besides that. Why did it take you so long to figure it out? Thirdly, how can we be confident that we won't be trapped in a similar, money-losing, incommunicado management period again in the future with a company that says it is still very much looking for acquisitions?

Let me ask you this question, and I will answer your question. We spent this time and we were unable to be communicative because of the things that we are doing. This was an extraordinary -- an extraordinary opportunity for this company to be able to accomplish. It would have been a situation that we would have increased our revenues and our presence in that marketplace in such a way that I think all of our investors would be absolutely delighted. We are, frankly, going to find a way to meet that objective in a different direction.

Unfortunately, we were dealing with a controlled shareholder who does not have any involvement in the oil industry and did not, in any way, represent the balance of the shareholders. So as a result, we would strike an agreement and then we would have to renew that agreement. The original agreement that we had about two months ago or three months ago, we had to change that agreement and try to renegotiate, due to the fact that our stock went down because there was a segment rotation or a sector rotation in Wall Street on the oil field service business. I personally do not see any fundamental reason for our stock having lost 50% of its capitalization. I just don't understand that. The Company is fundamentally strong. I understand the frustration of investors wondering what we were doing, but we reported an extremely strong second quarter. We have now told people that we are comfortable with the balance of our year. While we can't talk to you about other things that we're going to be doing, I think our stock is extraordinarily undervalued. And I can imagine that everybody that bought stock at 25 or 30 or 40 -- or 30 are upset. We've got an awful lot of shareholders that own stock at $1, $2, $3.

But Lee, we worked very hard to bring this about and we had that thing right at the trough ready to drink several times. Because of our stock falling, that created a problem and because of a change that this particular individual wanted that created a dilution of our current shareholders, which we will not to, and it also was placing an onerous amount of debt on the Company and much of that debt would've had nothing to do with moving the Company forward; it would have had to do with taking out some --.

Equity appreciation.

-- some equity appreciation in their company and to the tune of many, many millions of dollars and I'm not talking about 3 or 4; I'm not talking about 15 or 20; I'm talking about many more. I felt very strongly that for us to go to the shareholders and say we're going to cash out some new shareholders to the exclusion of our current shareholders and end up with debt in the new company -- I could not handle that. That's exactly why we did it, and that doesn't keep us from being a good steward of our shareholders' money. It frustrated the hell out of me, to put bluntly, but I felt that it was such a good deal and we're going to find another way to do what we were trying to do, but we will not do it in a way that we would have had to have done it had we agreed to it. I could have agreed to this three months ago and you would have been madder than hell, to put it bluntly.

Well, I guess my point is the comments you're saying here refer to the time period of mid-May and beyond. I guess my question is what happened from January through February, March, April, May, for the four months in there when you were negotiating with these guys before the stock price dropped and complicated the deal? It seems like, to me, that's a long time to figure out that this controlled shareholder there was going to prevent any kind of a realistic deal being done.

Well, first of all, we weren't negotiating with him at that point. We did have public releases during that time. During that period of time, that particular shareholder was working with an investment banking firm for the purpose of attempting to file an S-1 in order to go private -- I mean to go public. That S-1 work ended up costing them a significant amount of money, which by the way they wanted us to pay for that, too, which we refused to do, and negotiated that away. But, they had to back away from their plan to -- and we were waiting for them to either back away or go forward. They had to back away from that plan because the stock market began to discount the value of oil field service companies. During that period of time, we were waiting for them. Then, when we began to negotiate with them in earnest -- June, July, August -- well, say May, June, July and August -- we had a deal that we could have settled in June or early July but it would have not been one -- well, it was one that I wasn't going to accept because it was not in the best interest of our current shareholders. It had nothing to do, whether it was in my personal best interest; it had to do with the fact that our Board of Directors very responsibly even spent the money to get a fairness opinion and determined this was not the proper thing to do for our shareholders. So then we attempted to renegotiate something, and when we got down to that as of last Friday, when I talked to them, I told them that I was pulling the plug. They said, well, we would like to continue to negotiate. My response to them -- find somebody to do that with.

Now, I'm sorry it took that long. It would have been a tremendous deal if we could have done it properly. But we will find another way to accomplish that deed. I think we will find that way. Let's put it this way -- we will find another way. I believe that the stock will start recovering, because we have a fundamentally strong company, we're looking at what's going on in the third quarter so far, and based on that and based on July and based on August, we are more than comfortable with our reconfirmation.

I think that what our shareholders see from us in the next several weeks, in the next several months, is going to make them feel that they need to stay in the stock and that some of those who sold -- well, I hope they didn't take any losses; I hope there are the ones that had the low cost and made some profit. But we believe that we are acting responsibly and in the best interests of the shareholders. Frankly, we can't operate on a quarterly basis and be judged every quarter and be successful or consistently, because sometimes it takes longer to do some of these things. Because I'm very impatient, and unfortunately -- or fortunately I have a CFO and SEC attorneys who stay right on top of me, otherwise I'd move a whole lot faster than I do, because I want to make sure that we don't do anything that is to the detriment of our shareholders, and I personally don't want to go to prison.

Thank you very much.

Lee, I welcome any conversation with you. I got your letter. I couldn't respond to it at that point, but I'm more than happy to respond to you personally. I will be up in your neck of the woods pretty soon, and I will come by and we will just talk more. I don't mind kind of criticism, constructor or destructive. I'm a big boy and I will take it.

Thank you.

Bo McKenzie, Pritchard Capital.

This is going to be a little bit easier. You talk about tripling the blending capacity up in the chemicals business. I guess, looking through my model and stuff, I think I've got somewhere in the realm of about -- hang on, just let me doublecheck to make sure -- something in the realm of about 30, $40 million revenues this year. In the expansion that's going on, I guess I had assumed you just were turning inventory. Are you looking at the ability to triple the revenue base out of that expansion, ultimately, or just to lower the overall cost of manufacturing in the short run?

No, we're looking to triple the revenue! We will also reduce the cost.

Triple it by?

Well, the revenue last year in the Chemical group was 29 million -- 29.2. We fully anticipate that that revenue will continue to grow and frankly, without the capacity of manufacturing and also our situation -- excuse me-- our situation down with our [Reislin] facility, those two areas are expected to grow but without the expansion, physical expansion, there was no place to grow. But right now, we are seeing our revenues ramp up to where it will be about half of our revenues for the year. So that gives you a little hint right there of what we are doing.

Okay. Jerry, I heard rumors somewhere that during the course Q2 or early somewhere early in Q3, you guys may have picked up some multi-year long-term commitments from a couple of majors in the chemicals business. Could you talk about those a little bit, or did I hear a bad rumor?

I think you may have heard a rumor.

Okay.

We don't have any -- the only long-term commitment we have is with our group down in [Reislin]. That's a multi-year contract. I think that's --.

Maybe I got mixed up on something, then.

Yes, it's a multi-year contract, and it's an evergreen contract.

I guess to try to figure out, on the modeling going forward, you know, I had assumed that with the huge number of inventory turns to guys were doing, that it's just really hard to get the efficiency to manufacturing up, that as you look out past Q2 or Q3, whenever the full run rate was going on, the chemicals business, there ought to be a couple of points of margin expansion, even without revenue growth, just from, what, 20, 25, whatever the number of turns were a year on the raw materials you guys were going through. Is that about the right magnitude of margin -- of cost reduction you ought to be able to get out, or could it be better?

That or better.

Okay. Under the last one, with the two ESP companies, you had one for almost a full quarter and one for one month. What kind of run-rate on an annual basis are those things at?

Repeat that question?

The two ESP companies that you acquired, one of them you got for pretty much all of Q2 and one you only had for one month, right?

Yes.

On a full year basis, what kind of combined run-rate is the ESP side of the business running right now?

Well, it looks like it's going to do a run rate at 24 to 25 million a year.

That's what I thought. Then, last -- one last question. I lied about that being the last question. Lisa, what kind of full-year depreciation should we be looking at? Or what kind of third-quarter depreciation should we be looking at with the fact that Q2 didn't really have both of those in there?

There won't be a significant increase in depreciation. Those artificial lift additions don't have -- they really don't have many fixed assets.

The buildings.

Yes, there is not a whole lot with it and I think with the expansion of the chemical production facility, it's depreciated over a pretty long period, so you won't see a material effect of that.

(inaudible).

I lied one more time; I've got one last question. I know you talk about (indiscernible) credit lines you guys have gotten down to just a couple of hundred thousand dollars cash on the balance sheet from the working capital investment and the stuff you bought. I mean in Q3, are you going to need to [draw] further on that working capital line? Is it actually worth coming back in and replacing that with something that's got, I don't know, 25, 30, 35, something like that that could accommodate the kind of likely working capital needs you might face with this kind of growth, going forward?

As discussed, we did fund a portion of the acquisitions in the second quarter from the capacity that was on our line. We've increased that for what we believe our working capital needs will be for the existing growth of the existing companies that we have. We're working right now on renegotiating our term facility. We are fortunate that we have a cooperative partner in our lender. As we grow, they are flexible to grow with us. So we believe we're putting in enough capacity for our immediate plans. Anytime we see something coming down the pike, we work with them to make sure we've got the capital to execute.

Okay, so, Jerry, your best guess -- I mean if this year is 90 to 95 million, that's up a lot from the last time you guys tried to provide numbers, as I recall. I think it was 79 million, but there's two acquisitions post -- one acquisition post then, one major one. 2007, 110, 120? What?

I'm not ready to make that decision, but we are working on our plan and we will probably give guidance on that a little later in the year. But Bo, you are consistent! (LAUGHTER).

All right, guys. Thanks a lot.

At this time, there are no further questions. Do you have any closing remarks?

No, other than to thank everybody. I wish that some others would have had the time to ask questions, but we thank those who did for their interest and we appreciate everything. Thank you for your help, too.

Thank you. This does conclude the Flotek Industries' second-quarter 2006 conference call. You may now disconnect.