Flotek Industries Inc (FTK) 2007 Q4 法說會逐字稿

Good morning and welcome to the Flotek Industries Incorporated conference call.

All participants will be in a listen-only mode, and there will be an opportunity for you to ask questions at the end of today's presentation. (OPERATOR INSTRUCTIONS). Please note that this conference is being recorded.

At this time, I'd like to turn the conference call over to Mr. Jerry Dumas. Mr. Dumas, you may begin.

Good morning, everybody. Thank you for joining us today.

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

Flotek delivered a strong performance in '07 and we earned net income of $16.7 million or $0.88 per fully diluted share during 2007, compared to $11.400 million or $0.61 per fully diluted share in '06. Our net income increased 47% and fully diluted earnings per share increased 45% in '07 versus '06. All amounts reflect the two-for-one stock split we completed in July of '07.

Our focus has been clearly on expanding sales and rentals, our proprietary technology driven products. Because of this company-wide, we increased our gross profit margins from 41% in 2006 to 43% in 2007. Operating income margins remain constant at 19% in 2007 and 2006.

We generated total revenues of $158 million, compared to $101 million in 2006, despite adverse weather and lower gas prices due to lack of pipeline outlets in the Rocky Mountains. Our organic sales growth make up approximately 64% of our year-over-year growth. The acquisition of Triumph Drilling Tools, Sooner Energy Services, and CAVO Drilling Motors made up the balance.

The Chemical and Logistics segment increased revenues 71% year-over-year as a result of 117% growth in our biodegradable, environmentally benign "green" chemical sales. In the latter part of 2007, we completed our state-of-the-art research and development lab north of Houston in the Woodlands. This lab is directed by Dr. Kaufman, who has had over 15 years of research, patent development and publication experience.

The Company also signed a five-year agreement to build and operate a liquid chemical distribution facility for a major service company. This construction of our liquids and chemical facility was completed during the fourth quarter of 2007 and is expected to double our throughput revenue, service revenue in '08. The new liquid chemical distribution facility and our existing cement handling and blending facility will provide a broad range of blending and logistical services to our customer for cementing and stimulation products used offshore and in the Gulf of Mexico and along the entire Gulf coast.

In September of '07, the Company acquired Sooner Energy Services to establish a platform for expansion into production chemicals. Sooner develops, produces and distributes specialty chemical products and services for the drilling and production of natural gas. The Sooner acquisition contributed approximately $2 million in revenue in '07. Our plan for this firm is to move our bio-safe products from CESI to that organization.

Our drilling products revenues grew 55% year-over-year despite significant growing prices -- significantly growing price competition. The acquisition of Triumph Drilling Tools and CAVO Drilling Motors contributed approximately $18 million in incremental revenue in 2007.

The focus in this segment is continued integration of the business acquired, product line expansion, and moving from sub-renting products to owning them to increase the profitability on those rentals. The acquisition of Teledrift in February of '08 will promote these core objectives. Our artificial sales grew 11.7 year-over-year. Low gas prices and pipeline capacity constraints significantly reduced our coalbed methane production activity in the Powder River Basin in '07 versus '06. The opening of various pipelines in this region should promote higher activity levels in 2008.

Our corporate costs were $49.7 million in '07, versus $5.8 million in '06. The primary increase in this relates to the expansion of our accounting and the support personnel for our growing company, our IT initiatives, our IT equipment, and IT personnel, as well as compensation expense for equity granted to officers, directors and employees.

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

(OPERATOR INSTRUCTIONS). Joe Hill, Copia Capital.

How are sales of the micro emulsion tracking for the first quarter?

Well, with the exception of some heavy (technical difficulty) we feel like we are tracking reasonably well.

Okay. What is your outlook for pricing in the mud motors business for this year?

At this point, we haven't run into a great deal of pricing pressure in the motors. The pricing pressure has been primarily on what I would call the dumb iron or the me too products. Interestingly enough, the pricing pressure is coming from some of our larger competitors. You know, at this point, Flotek and downhole tools is arguably one of the largest among the two others, and we've resisted pricing reductions but there seems to be some pricing pressure out there. Let me restate that. There's definitely some pricing pressure out there but not in the motors.

But not in the motors, so can you get more specific as to what product categories or what tools are seeing the pressure?

Sure. What I call the dumb iron, the stabilizers, the roller reamers, things of that sort. You know, that's where you have a lot of small mom-and-pop operations that can get into that business, which is exactly the reason that we've moved to a far more, far greater percentage of our downhole tools to be technologically advanced, such as our acquisition of Teledrift and CAVO.

Okay. The last question -- you mentioned that pipeline capacity expansions may help artificial lift this year. Can you give us some detail? Are you talking about Rex? Are you talking about something else in terms of seeing a pickup in that business?

Well, right now, we're seeing a significant increase in planned drilling in the CBM business by our customers, and we feel like that we will see a much stronger market for our product in the Powder River Basin. In addition to that, we're clearly looking at the opportunity to move geographically through our organic growth and our artificial lift is our plan for this year, primarily.

Geographically, what are your opportunities in lift?

Well, in the Oklahoma, eastern Oklahoma area in Southern Kansas, certainly in the San Juan basis in Farmington, New Mexico and the Four Corners. Those are two very quick areas that we're looking at. In fact, we're looking at Oklahoma as we speak.

Okay, is that Petrovalve or the gas breaker?

Both.

Okay, thank you, sir.

And also the coalbed methane product up there.

Okay, thank you very much.

Thomas Escott, Pritchard Capital.

Good morning. A couple of things -- one, could you comment on new product introductions or let's say the success of new product introductions in the chemicals side of the business? Then in addition to that, the success or progress in introducing the chemicals into different foreign applications?

Well, before I answer your question, did you get your roof blown off out there in Atlanta?

It was quite a blow, but we did okay. Thank you.

Okay, La me have your question again. With regard to introducing our chemical products into the international field, we're very enthused about the potential for that. All I can say to you is that we've begun activity and our initiative internationally, and we have complete cooperation among our organization and the addition of the initiative, so I feel we will see some progress in the latter half. It's going to take the first half of the year to get our actions in place, but we are definitely doing that.

Now, what was the other part of your question?

On chemicals, you've spent a lot of effort on introducing some chemicals or developing some new chemical applications in the U.S. How is that success doing?

Well, we basically have introduced the micro emulsion sometime ago, and it continues to be a very successful application in unconventional gas play, whether it be in the shale sections or whether it be in the tight sands. At this point, other than the other products that we've had and the increase in formulations that we've had with our micro emulsion, we have introduced no other new products at this point, although we are clearly geared up to do that and hopefully will be able to introduce a whole new product line in this year.

With regard to our micro emulsion, we have now determined that, while it has been a tremendous success in using it for unconventional sands, we've now found out that it is now an acceptable and profitable decision on the part of the operator to use it in acidizing, so we would anticipate that would give us a broader acceptance of the product in North America, but particularly in an international market where acidizing is far greater than fracing.

Okay. On the tool business, obviously there's been a lot of price pressure and margin compression in the downhole tools segment. With the addition of Teledrift, is that going to be enough to help hold profit margins stable to better in '08, or are margins there continuing to deteriorate kind of gradually through the year?

I think, from a strategic point of view or from a strategy and then a tactical activity execution of that strategy, we've made a decision that we're going to, as opposed to what we did in '07, we're going to meet the competition with our dumb iron business.

On the other hand, the Teledrift product line and the CAVO motor line, which have not been hammered, have not had that kind of pressure, will certainly contribute to the profitability of our downhole tool business. Without question, we're going to continue to see pricing pressure on the dumb iron section of our downhole tool.

The other thing we're working on as rapidly as we can is to bring as many new tools into our inventory, specifically jars and motors and sharp subs, which will eliminate the sub-rent and more than approximately double our margins when we only product ourselves.

Lastly, and then I will let you go, in the press release, I didn't see a comment specifically about the 2008 guidance. You just gave guidance a month ago and there was no mention of it in this release. Can we conclude from that then that the guidance is basically unchanged from that that you had issued here in recent weeks?

We haven't changed it.

Okay. Well, thank you.

Terese Fabian, Sidoti.

I have a couple of questions. One is I know that Teledrift has some international exposure. Do you have an idea of what your sort of international part of revenues will be or what is it now?

This is Lisa Meier. The Teledrift revenue are about a third international and two-thirds domestic. However, the majority of the international contracts are dollar-denominated, so there's not as much foreign currency exposure. The primary exposure will be to the Canadian dollar.

Okay, Thank you. That's helpful. Because of rounding and all, you didn't give a fourth-quarter EPS number or diluted share count. Is that $0.18 or $0.19 for the fourth quarter that you get?

It is I believe $0.19 off the top of my head, but let me doublecheck.

It is $0.19. Lisa is checking, but I'm quite certain it was $0.19.

Yes, I know it's really close! (LAUGHTER) While Lisa is checking, let me ask you about the share lending arrangement you have with Bear Stearns. Will Bear's difficulties affect the trading of your shares? Do you have any idea of what's happening on that end?

Well, we made a comment in significant events or subsequent events, rather, in our filing, and basically said that we had counsel look at that. So that's really all we have to say. We don't see any immediate impact at all on our stock, unless somebody views that situation which would occur at the end of that contract, which is a long ways down the road. That would be what I would call ultra cautious.

Okay, okay. Are there any implications in transferring the bio-safe chemicals to the Sooner portion of the work? Is that just an organizational or are you going to be doing more developments with Sooner?

Currently, the CSI organization, which is our chemical segment, have had the ability and the time to develop quite a few bio-safe products, as well as other products that are used in production chemicals. Because we did not have a platform to sell that in the North American market and only had a few rifle shot approaches at it internationally, that is just simply a matter of selling them or transferring them over to the Sooner organization.

That's (inaudible) micro emulsion or is that the whole package? (multiple speakers)

Everything we have, it would be in production chemicals, which clearly would include any micro emulsion product as well.

Got you, okay, so just the production end of that?

That's correct.

Okay, thank you.

Megan Bissell, FIG Partners.

I just wanted to check with you on a couple of items, Jerry. On the chemicals side, you guys have talked about being able to implement some price increases there. It sounds to me like that's on the back burner now. Is that right?

No, that is not on the back burner.

So you're able to --?

We are always going to be aggressively seeking to do value pricing, and we are in fact doing that. So (multiple speakers).

So what areas have you guys been successful in pushing pricing up?

Well, we've been able to raise the prices in our Chemical group at this point. There's no price increasing in our downhole tools. We're just fighting (multiple speakers) --.

No, I'm actually just talking chemicals.

No, no, in the chemical business, we have affected successfully a price increase; that's correct. That went into effect at various times in March. We had no affect on that. There would be very little effect in the first quarter, but it will accrue to us in the second, third and fourth quarters.

Okay. On the Drilling Products side, the results -- fourth-quarter results were well short of even my revised expectations. Can you just remind me of what the accounting treatment is? You bought the remaining 50% of CAVO in November, so you have a half quarter of their results in equity and earnings and half consolidated with the legacy business. Is that right?

There's one month that is in equity earnings and two months that are fully consolidated.

Okay, so we would still see -- we will see a step-up in the first quarter from another month of CAVO in the results plus the Teledrift?

Correct.

Okay. Then just a couple of housekeeping things -- interest expense in the first quarter and then the run-rate after that, what are you guys expecting?

Interest expense up through February 14 should be consistent with what you've seen in the past, because it will be under our old facility. Obviously, go-forward from February 14, layer in the convertible debt which is 5.25% on $115 million and then a slight pricing increase with LIBOR plus 375. Fortunately, LIBOR has gone down!

Right! Okay, and I think that's all. Thanks so much, guys.

William Conroy, SMH Capital.

A couple of questions -- when I dissected the earnings, it looked like the effective income tax rate for the fourth quarter ticked up. What should we be thinking about for '08?

I think, going forward for '08, look for approximately 37%, 38%. That's going to be relatively dynamic as we integrate Teledrift, which has more foreign operations and resulting tax credits. But ballparky, I would say that's the best rate to use right now.

Got it. Jerry, kind of a specific question back to follow onto an earlier one on the share lending agreement, can you tell us the name of the entity that borrowed the shares at Bear Stearns?

It's disclosed in our prospectus; it's Bear Stearns, a subsidiary of Bear Stearns.

(multiple speakers) (inaudible)

Is it BSIL? Sorry.

BSIL is the name of it.

Last thing, you had mentioned earlier, I think it was in the preannouncement, that we've seen the operating expenses tick up; you had mentioned back then SOX compliance, the tool tracking system, etc. How should we be thinking about those expenses going forward? Should we see the dollar amounts come down, or should we see the revenue base grow and the percent of revenue come down but dollars held flat?

I think that you'll see the fact that dollars will go up because we are a much larger company, and as a result, we're working very diligently to get a much more comfortable handle on numbers, particularly as we move internationally. We have to look at the consequences of international tax credits and all of the other aspects that will benefit us over into the tax rate.

We passed Sarbanes-Oxley, by golly, and let me tell you, that was a chore! I think, this year, Sarbanes-Oxley will be a little bit easier to do because we understand a little bit better what we're doing. We made a lot of progress from '06. We will now have to do the same thing for CAVO and Sooner, because we did do Triumph this year, so only CAVO and Sooner at this point, and both of those should be reasonably easy, relatively speaking.

Great, thank you very much.

(OPERATOR INSTRUCTIONS). Sir, at this time, I'm showing no additional questions. Would you like to make any final comments?

No, but thank you for taking care of the call, and everyone that called in, thank you. We will sign off.

At this time, you may disconnect your lines.

Thank you!