Flotek Industries Inc (FTK) 2008 Q2 法說會逐字稿

Good morning and welcome to the Flotek Industries' second-quarter earnings conference call. All participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. An operator will give instructions at that time. (OPERATOR INSTRUCTIONS). Please note this conference is being recorded. Now I would like to turn the conference over to Mr. Brian Shannon. Mr. Shannon, you may begin.

Thank you, Camille. I would like to welcome everyone to today's second-quarter 2008 conference call for Flotek Industries Inc. Before we begin, I would like 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. Today's call will also be available for replay on the Flotek website, www.flotekind.com on the Investor Relations page.

Joining the call today is Chairman, Chief Executive Officer and President, Jerry Dumas; Steve Reeves, Executive Vice President and Chief Operating Officer; Vice President of Business Development, Jim (inaudible); and Andrew Jowett, Chief Accounting Officer and interim Chief Financial Officer. And now I will turn the call over to Jerry Dumas.

Thank you, Brian and welcome to all of you. I appreciate you joining our call this morning. As I am sure all of you know by now that our CFO for the past four years, Lisa Meier, is leaving Flotek to pursue other career options. As a result, Flotek is in the process of looking for a suitable replacement that embraces the ethics and culture of our Company to join the management team. As when we added Mr. Reeves as our Chief Operating Officer, we are looking to continue to grow the quality and the strength of our people in our current corporate organization. Mr. Jowett, in the meantime, will serve as our interim CFO and Mr. Jowett has been our Chief Accounting Officer, served extremely well in previous jobs and has served us well for almost two years here at Flotek.

I'm very proud of the fact that we delivered a strong performance in the second quarter of '08. Second-quarter '08 total revenue increased to $56.8 million from $37.8 million for the second quarter of '07, representing a 50.3% quarter-over-quarter improvement. This is also a 22.2% sequential increase over first-quarter '08 revenue of $46.5 million.

Flotek's net income of $5.1 million, or $0.26 per share, fully diluted share for the second quarter of '08 was comparable to earnings of $4.9 million, or $0.25 per fully diluted share for the second quarter of '07. This is an increase of 4.8 in net income and a 4% increase in fully diluted earnings per share quarter-over-quarter. However, this represents a 48.9% increase in sequential net income, up from $3.4 million earned in the first quarter of '08.

Our focus has been on increasing sales while working to control costs. Companywide, we were able to increase gross profit margins from 44.5% in the second quarter of '07 to 46.6% in the second quarter of '08. This is up from 40.5% in the first quarter of 2008. We have been able to improve these margins as a result of enjoying a full quarter of benefit from our price increases in the chemical group and managing our raw material costs.

Income from operations for second quarter '08 was $11 million, which is 40.8% higher than the $8.3 million earned in the second quarter of '07. However, operating income margin decreased from 22% to 19.4% quarter-over-quarter. Sequentially, second-quarter operating margins increased from 15.4% realized in the first quarter of '08. This decrease is primarily a result of a 71.6% increase in SG&A from $6.8 million to $11.6 million and a 112.1% increase in depreciation and amortization from $1.6 million to $3.4 million quarter-over-quarter. The SG&A increase is attributable to increased indirect personnel costs in chemical and logistics, downhole tool and corporate, as well as increased professional fees and costs associated with our international initiative.

Depreciation increased because of capital expenditures and asset acquisitions. Amortization of intangible assets also had an impact on the decrease in our operating margins. EBITDA, however, increased 40.8% over second quarter '07 from $10.2 million to $14.3 million and 48.7% over the first quarter '08, up from $9.7 million. At this point, I would like to have Andrew Jowett give you some of the segment performances. Andrew?

Thank you, Jerry. Our chemical and logistics segment performance remained stellar. Second-quarter revenue increased 34% over the same period last year, increasing to $28.5 million from $21.1 million. Sales of our biodegradable chemicals continue to grow. Sales of the specialty products grew from $14 million second quarter last year to $20.3 million this year for a 43% increase.

Micro-emulsion sales grew as a percentage of total chemical and logistics sales from 67% in the second quarter of '07 to 71% in the second quarter this year. Additionally, Sooner Energy contributed $1.6 million to chemical and logistics revenue, an increase over the same period last year.

Drilling product revenues grew 78% from $13.7 million in the second quarter of '07 to $24.3 million in the second quarter of '08. The Teledrift and CAVO acquisitions contributed $8.6 million to the segment increase. It is significant to note the dramatic increase in operating income from drilling products, which was 192% higher second quarter this year than for the same period last year.

Operating income rose from $1.6 million last year to $4.7 million this year with important contributions from the acquisitions of the mud motor operated at CAVO and the end of [UD] operations at Teledrift. The existing rental tool operation results have expanded. These improvements resulted in income from operations as a percentage of revenue increasing from 12% to 19%. We continue to focus on productline expansion and move from subrental of products to owning tools that will increase the profitability on these rentals.

Sequentially, second-quarter rentals were 26% higher than the first-quarter revenues, increasing from $19.3 million to $24.3 million and operating profit margins went from 14% in the first quarter '08 versus the 19% in the second quarter previously mentioned. Gross margins are significantly better second quarter at 41% versus 37% in the first quarter.

Artificial lift sales increased from $3 million in the second quarter of '07 to $4.1 million this year. Drilling activity in the Powder River Basin in Wyoming was the primary driver for this increase. Additionally, income from operations improved 108% and income from operations as a percentage of revenue increased from 5% to 8% quarter-over-quarter.

Debt minus cash on hand was $157 million at June 30, 2008, a reduction of $2 million on the balance at March 31, 2008. Net cash provided by operating activities was $8.4 million in the second quarter of 2008 compared to $2.3 million in the first quarter of 2008 and $6.3 million in the second quarter of 2007. The increase in operating cash flow was a result of higher net income, higher non-cash charges such as depreciation and stock compensation expense and reduced working capital outflows.

Approximately $6.2 million of capital expenditure was made in the second quarter. This was primarily due to the ongoing expansion of our drilling tool inventory, especially mud motors and Teledrift products and construction of a new facility at Teledrift. And now I will turn the call back over to Jerry.

The corporate costs were $4.8 million in the second quarter of '08 versus $2 million in the second quarter of '07. Stock-based compensation accounted for $700,000 of the expense, up from $300,000 for this period last year. Salaries and benefits at $1.4 million, incentive compensation at $1.1 million and professional fees at $1.4 million are the major components of the corporate G&A category.

I am personally committed to focusing management's efforts on the control of these costs and identifying our areas that we can cut that do not negatively impact our growth or efficiency and particularly a careful review of our professional fees is underway with a goal of reducing these costs in the very near term. Based on our performance year-to-date and the prospects for the remainder of this year, we reiterate our earnings guidance of $1.12 to $1.22 per share diluted earnings.

With that, we would welcome questions and available to answer those questions will be those of us here, including Mr. Reeves, our Chief Operating Officer and anyone else, so we would welcome those calls -- those questions.

(OPERATOR INSTRUCTIONS). Mark Brown, Pritchard Capital Partners.

Hi, great quarter. Just wanted to ask, in terms of your SG&A costs, where do you see that going for the remaining quarters of the year in 2009? Should we expect that to flatten out or will that possibly be coming down as a percentage of revenue?

Mark, as I mentioned in my last comment, I am personally involved in that. I feel like that is an area that we have opportunity to improve and so I can only say to you that it is our intent to do everything we can to reduce the SG&A and particularly in the area of professional fees. And I believe that, at worst, we will see no increase, but over the next several quarters, we fully intend to see a control exhibited in that area.

Okay. I wanted to ask about your plans to expand the chemical sales into the Marcellus and Bakken shales. What is the -- when do you expect to start to see a ramp-up in revenues there? What is the timing and what kind of startup costs would you usually expect to have in those kinds of pursuits?

Mark, this is an area that has been discussed very thoroughly from a strategic and a tactical point of view and certainly Mr. Reeves is the one that will be the chief guy to guide this, so I'm going to let him speak to that not in absolute detail, but to address that question.

Mark, this is Steve Reeves. Good day. The segments that you have talked about in both the Marcellus and the Bakken, we are working in those areas with the chemical department right now. We have had extensive meetings in the Marcellus during the past two to three weeks with top operators, the top (inaudible) companies up there and we will avail ourselves of every opportunity, which we are currently doing.

The Bakken is the same way. They are doing a tremendous amount of slick water fracs in the Bakken and we will look at that. And like any startup operation, we will manage the startup costwise so that it does not hinder our margins in the chemical department, but there will be startup costs anytime you are moving into a new country. But we figure we are in the Marcellus and in the Bakken right now working.

Okay. Thank you very much.

Victor Marchon, RBC Capital Markets.

Good morning. Congratulations on the quarter. Jerry, the first question I have was just on the product side. You guys talked about in the first-quarter call receiving parts for the motors. I just wanted to see where you stood on that end right now? Have all the parts been fully received and is the third quarter going to show a nice ramp from the second?

Well, while I am aware of that question, I am going to turn it over to our Chief Operating Officer because he is the guy I look to.

Once again, we have started getting all of the parts in in April, May, June. We not only got the parts in, we have massive orders coming in the second half of the year and we brought in -- we added 25% to the fleet in brand new tools also. About the end of June, we got them assembled and put together and going out into location. So obviously, the second half of the year, we expect our utilizations to pick up.

Right now, we are hindered more so with our ability to rebuild, of which we are opening two more new places up (technical difficulty) centers. Parts are in, the tools are running and we are running at a high utilization currently today even with the others we have in. We also have more capital budget. We will add another approximately 15% to the fleet between now and the end of the year. So this is going to be a major driver for us in the second half of the year just as we anticipated it would be.

The second I had was just on the price increases, Jerry, that you had talked about. Can you just talk to the success that you have seen with them to date? Have they been fully implemented and absorbed by your customers?

Well, with regard to the chemical group segment, absolutely, they have been absorbed. They have been accepted. And with the pricing pressure in the pressure pumping area beginning to be reduced, that is helpful, but I can tell you that one of the things that has been more helpful and has begun to resonate has been our marketing initiative to the E&P companies to show them the tremendous economic importance of using our micro-emulsion. Therefore, I think that has had a great impact on our increase as the utilization acceptance of product and we continue to think that that will be the case.

As a matter of fact, in our artificial lift, we now have, effective August 1, another increase in prices in our artificial lift area, an 8% increase that had been accepted. So that is going to help us in our artificial lift as well. So the chemical has been accepted, artificial lift of 8% has been accepted, so we are able to stave off reasonably well the increase in raw materials and we have been able to get our price increases accepted.

So to that point, seeing what you guys are seeing on the cost side, these price increases will be net price increases? There is some net to it.

In the chemical business, the 8.5% increase would not be a total 8.5% net because we definitely had to fight off very small increases in our feedstock, but we ended up getting the larger proportion or a larger percentage of that, maybe 6% and I am estimating that. But we have got a lot of people out there that we buy from and they are suffering the same cost increases as we are.

And on our artificial lift, we have got, we believe, a double whammy of improvement. Number one, an 8% increase in prices effective August 1 and number two, we have been able to build more of our product in China at a lower cost than we had been paying previously. So while the artificial lift is our youngest ever effort, it is one of the things that we have said all along that we are going to build a very strong foundation because it is a huge market and we will be looking at it in the future, much as the way we were successfully able to build the downhole tube group, which was questioned oftentimes. And we finally are now beginning to see tremendous and significant contribution to our operating profit from our downhole tube and we see that happening in artificial lift as well at an earlier stage.

And the last one I have just as it relates to pricing is on the drilling product side. The more commodity-type of products -- have the pricing pressures alleviated there or is still some of that lingering in the third quarter?

I think there is probably two answers to that. As you have heard us explain, we have got our smart iron and we have got our dumb iron. If we only are having to compete in the dumb iron business, the pricing pressure is still there because you have got very small people with little overhead that are not public and they are able to price their dumb iron. So what we are trying to do, and with quite a bit of success, if pricing an overall bottom whole assembly. That way we are able to bring our dumb iron along with our smart iron, which we don't have to cut prices on. So that is our approach and it is beginning to work for us. But on an apple-to-apple, dumb iron-to-dumb iron, there has been no improvement. In fact, there never will be. There has always been price cutters in dumb iron and there always will be.

Great. That's all I had. I appreciate it. Thank you.

Reid Ellison, William D. Witter, Inc.

Good morning, guys. Congratulations on the quarter. I think what I wanted to talk about I guess first is when you're talking about the increase in the use of micro-emulsions, do you break that out by I guess an increase in overall pressure pumping volume or is it a result of it I guess being adopted by a greater percentage of jobs?

Let me let Steve answer that once again because he is right on top of it.

We are working right now. We want it to come from both [puddles], [twofolds], more in each well, meeting specs that we think will give the optimum results for the well and to have more market penetration. I would say currently, we come from pumping more jobs. That is just -- it is an offhand gut feel because I've spent a lot of time with them and I think it comes from pumping more jobs right now, which makes sense because there is more frac work going on right now.

Okay. As far as thinking about I guess new independent companies that are using the product, could you give us an idea of what the growth or the adoption as a result of your marketing efforts are?

The adoption of our product by the independent pumping service companies?

Yes. I'm talking about maybe I guess -- I'm trying to think about how to think about that. I guess the amount you are adding on.

If I am understanding your question correctly, I am going to give an answer. I hope it is the right -- I hope I am answering the right question. The increase in the utilization or the approval and purchase of our micro-emulsion products for fracking has had a significant growth among the major pressure pumping companies, but the greatest growth has been in the independents. So the breadth of acceptance has been very satisfying. Is that the question you're asking?

That's great. And then I guess my second question is an update on I guess the labor market and talking about -- are you still seeing the same pressures as far as high wages in the salesforce?

Steve can answer it, but let me give you an overview answer to that. The answer is absolutely no relief at this point and Steve, if he needs to, can go into some detail. But one of the reasons that we are having to motivate and be able to retain our people is that we have been able to try to keep our salaries and our wages in a reasonable level because there are salaries and wages being paid by companies that are not public companies that are absolutely outrageous. That may be a 40%, 50% or even a 100% increase over what we are paying.

As an example, Steve told me we had two individuals who were young kids that we were training and they were given a doubling of their salary and we are not talking about salespeople, we are talking about just shop-type personnel. So therefore, we have been able to alleviate some of that and retain our people with stock options and things of that sort, which has had a lot to do with what you are seeing in the costs that we have to absorb and the expensing of options or grants. Now if Steve needs to add to that, be glad to.

We do a study on a real regular basis and look at where we stand in the marketplace and try to make sure our bands are in there, but these bands in the past two years have moved upward faster than anytime that I have ever been associated with it and we don't see a lessening, which is good for the common workers. It is tough to forecast what your wages are going to be the next quarter and the next year, but we remain competitive with our whole benefits.

Okay, great. And then I guess my final question is on the two economic studies that you discussed in the press release. Could you give us an idea of why you commissioned those two studies?

Well, of course, we are looking at one up in the Denver [Jillsbird] basin and one in the Piceance. One of the ways that you really get to the E&P operators is you go out in their area where they are working and commission an independent study of your product and let the chips fall where they may.

In our case, we are very satisfied with where we will fall. It has been proven over and over again that we enhance production with our micro-emulsion products. So when we get a customer to work with us and are able to do a field study of which we then publish and go out with it under their byline also, these are very effective marketing tools and in the industry we work today, it is what have you done for me lately.

If you have got a study that is three years old, everybody wants to look at it and say maybe that doesn't apply. So you try to stay current with these and we have two of them going on out in the Piceance and one in the Denver Jillsbird up around Denver going on right around now, which we will be releasing. After we get the results, which we anticipate being in the next couple of months, we will have everything in.

All right, perfect. Thank you, gentlemen.

Steve Yang, Fred Alger Management.

Hello, can you hear me?

Hello.

Yes, hi, guys. Great quarter. I have got a couple questions. First of all, Teledrift, could you tell me sort of the revenue sales contribution, as well as the margin contribution for that? Hello?

Yes, indeed. Andrew, do you want to pull those specifics? I will simply put it this way. We are very pleased with Teledrift with the early guidance that we had when we came on board with the company and said what we expected them to do. They are meeting all of our expectations. They are helping drive the margins. If you go back and study our gross profit margins and our field operating margins, they are having a big effect, but they are right on target with our expectations from when we first bought the company. And I am going to kind of not get any more specific than that right there, but we are very satisfied with the Teledrift acquisition.

Okay. And then on the press release, you mentioned the micro-emulsion patent. What kind of patent? Could you give a little more color on that? Is that manufacturing, formulation patent?

The patent is published and so I would suggest you just pull it up and read it because everybody that would love to be able to compete with us have done that and in order to answer that question would take a session with you and our research lab with Dr. Kaufman or with the President of our chemical group and I am not going to be embarrassed to tell you I don't know how to explain that.

Okay, thank you very much. Great quarter, guys.

[Michael Toledano], Gilder.

Hey guys, good quarter. I had a question in terms of the -- specifically the chemical division. Is there a way you could break out the revenues from customers reordering the product versus new customers and I guess kind of is it -- and then I guess any detail you could give would be great?

About the only thing I can say to that is a very general statement that everybody that started buying the product from the beginning and obviously, everybody is aware that, in '04 when we introduced our micro-emulsion, one of the major pumping companies was the first to adopt it and that particular company has continued to use our product in an ever-growing volume of dollars as a percentage of our total revenues. Their percentage of their purchases of all of our sales rather have diminished even though their absolute dollars have continued to grow at a very aggressive rate.

Right now, we have so many customers that are using the product that I can't hardly think of anybody except the most unimportant in terms of the market pumping service companies that frankly don't do frac work. There are a lot of small pumping service companies that only do cementing and so right now, I would say that, within reason, virtually every company that does frac work, within reason, is buying our product now.

And so every company -- so in terms of total market opportunity in the U.S. -- I know you guys are expanding internationally, but you think you are close to a saturation point. Is that kind of --?

That is a misinterpretation of what I said.

Okay.

Basically what I am saying is that the acceptance of the product has been almost universal. However, the acceptance of the product in terms of being used on every frac job is not complete and universal, which is one of the reasons that we have initiated our marketing strategy to go to the E&P company and point out to them the impact on their balance sheet, which is a result of improving the return on their investment, which is a result of increasing the size of their reservoir and as a result, we are seeing that resonate in terms of more customers saying to their pressure pumping choice, that is their business, we want to make sure we use a micro-emulsion, do you have one? And they all do because we sell to all of them.

The other thing that is occurring is that there are areas that, where we are doing nothing but slip water, that are beginning to realize that the addition of our micro-emulsion will enhance significantly their performance and then what Steve said earlier, we are seeing evidence that people are beginning to recognize that using a formulation that we recommend instead of a lesser formulation clearly has an advantage. And so we see some evidence of that becoming more acceptable and as a result, we are selling more per frac job.

Okay, great. Thank you very much.

[Matt Nigiri], Citadel Asset Management.

Thanks, good morning or good afternoon for you I guess. You talked about entering the Marcellus and the Baaken, could you just talk a little bit about what basins you are most active in today? I am not sure if you want to give exact percentages, but sort of just talk about where you are most active today, both micro-emulsions and some of your rental tools as well.

We are so diversified that I will point that out. In micro-emulsion, we work in the Wyoming area, we work in all of the basins in the Piceance. We work a tremendous amount down in the Barnett shale, of course, shale plays coming in. In our downhole tools section, all of the common basins, from the Permian Basin through Oklahoma, there is very few places -- I guess to limit that and say where we are not is the West Coast for a lot of reasons and we are not as strong in the Northeast and the Marcellus as we want to be, but we are investigating it strongly. And in the Louisiana offshore market we need to be stronger. But as far as a spread of where our revenue is generated, it is pretty much across the board.

One of the areas that Steve has been giving a significant amount of attention to is in the Haynesville and there are a huge number of drilling rigs in that area and Steve has just balked up our two operations that serve that --

(technical difficulty).

I think the operator needs to mute her line.

Oh, okay. I kept -- okay, well anyway, the Haynesville is an area that Steve is giving a lot of importance to. He has recently beefed up our north Louisiana operations, as well as our East Texas operations and with personnel, as well as -- we have moved a lot of equipment in there because there is -- how many rigs are in that area, Steve?

There is 200 to 300 that will be settled in over there and we are going to participate pretty strongly in that area.

Okay, great. What is your capacity right now on micro-emulsions to supply the market?

Well, we are a long ways from being unable to respond to the market. We built a facility that was completed effectively at the end of '07 and in terms of dollars, we could produce $200 million, $225 million. So we are a long ways from having any concerns about capacity there.

Okay, great. Anything to talk about on the international front? Is that an area that is worth pursuing at this point? Or you have enough on your plate domestically?

I am delighted to talk about that because that is something that I was pushing pretty hard and while there are two things that we need to be aware of, it costs a lot of money to get started internationally and we are doing that. That has a lot to do with the fact that our operating earnings were down to 19 points -- I forget the number is right in front of me -- because we are spending a lot of money internationally. However, year-to-date, our sales of our total revenues have increased from 5.3% in '07 to 8.4% in '08 in the first half so far.

So bottom line, what we are looking at is getting close to doubling our sales and we anticipate that, as the year goes by, the result of our international sales will accelerate to the point that we will hit something in the neighborhood of 10%, hopefully a little better. So the sales are going excellent in Canada, which, by the way, we anticipate, which is a very nice change. We anticipate a tremendous increase in activity in Canada and we are well-positioned to participate. We are working very, very hard to establish ourselves in the Middle East right now and our Latin American operations are growing. So our initiative for international is paying off and it is going to be a point of importance over the next several years.

Okay, great. And just one final one, just for my own understanding, could you talk about -- I am sure you don't want to give specifics here, but in general terms, for a typical frac job, what does it cost to add micro-emulsions? What sort of percentage of the job is that and is it ever -- I'm just trying to get a handle on how much of an addition is this for the user to buy your product and use it.

Steve and I both could answer this in generalities. First of all, there is no such thing as a typical frac job and I don't mean that to be a wiseacre. There just isn't. Frac jobs, even in the Barnett shale, are not typical. They change from geographic area to the next.

Number two, the thing that changes the utilization or rather the percentage of our chemical as a percentage of the total frac job is the formulation. If we get them to do what we think is proper on a particular job, obviously it would be higher. Oftentimes, we are not successful in doing that, but I will say that, because of the marketing initiative to the E&P companies, we seem to be making progress in that area.

So those are two reasons why it is very difficult to tell you. I have seen numbers where we have said that the cost of our product was as low as 3%. I have actually seen numbers as high as 30%. I would say it is way on the low side of the average of that.

Who bears the cost of that, the E&P company or the pressure pumping company?

The E&P company because basically what happens is the pressure pumping company will come in and say we will frac this job and we will do it in this manner using this product, this formulation, these ingredients, this recipe and it is going to cost you X. So that is an all-in turnkey job, if you will.

All right, great. Thanks, guys. I appreciate it.

(OPERATOR INSTRUCTIONS). Scott Escott, Pritchard Capital.

Good morning, Jerry, how are you doing?

Is this Tom?

This is Tom, yes.

I was wondering where that Scott came from.

Well, it is first name and last name I guess. Anyhow, great to hear from you again. And my question was, in recent periods, you have talked about new product formulations that your R&D group in the Woodlands has been working on for micro-emulsions, new products applications and as I recall, completion fluids or perhaps secondary recovery fluids. Can you expand on that as to what new products are being developed to use the ME formulation?

Do you want to answer that or do you want me to answer? Well, first of all, we introduced two new products at the tail end of the second quarter and I emphasize the very tail end. One of them was a friction reducer, which our R&D department took a product that was available -- that we had or that was available and we did some reformulation and rechemistrying if I can use that non-educated comment and as a result, we introduced to the company a product called [stem lube]. Very happy with the initial reception and obviously, we will be pushing that strongly in the forthcoming quarters.

The second thing we have done is we had a biocide that we introduced in the last week of the second quarter. A biocide is a product that is used in frac water to kill all of the bugs that would create problems downhole and our first order for that was a little in excess of $350,000. So we have got two new products. Now, Tom, I am not going to tell you what is going on in the R&D department because they won't even tell me sometimes.

Okay, that's great. Thank you. And then second question, unrelated to that, you have begun to take some of these -- it was either downhole tools or the CAVO pumps over to the Middle East. I think you moved some into -- I don't know if it was Dubai or Saudi or what. Can you talk about that footprint of moving some equipment into the Middle East to begin the work there? Do you have a backlog of work? Is it kind of a steady customer stream? Can you talk a little bit about that?

If you don't mind, I am going to take that. I have been working with Paul Deutch, our international man who is overseeing all of this and right now, we are currently -- I have asked him to go do a study for me over there and we are looking at where we may open a rebuild/repair shop and a rental shop operating in our territories in Dubai, wherever it will be. We see significant opportunities to go in and I have to weigh those opportunities against the cost that we have right now.

Currently, we have nothing more than our ideas scoped out, checking with the customers and he has been over a couple of times doing the groundwork on it. But as far as actually going and putting the repair depot, the rebuild depot on the ground, we have not done that yet. We haven't pulled the trigger on it and he is pressuring me to go ahead and make the move.

Like I have said earlier, we have to look at our international expansion in terms of how it affects us overall and we are spending significant dollars getting to 8% of our revenues from international and we just have to move wisely and make sure anything we do will return dollars pretty fast. So that is what we are looking at right now and I hope to have something in the third quarter, a decision made on how soon we pull the trigger on that.

Well, obviously, I know you are trying to watch expenses very closely and the G&A numbers kind of smacked everybody in the face pretty good. Do you feel like you really need to have some either contracts in hand or customer commitments in hand or backlog of work or something to be able to pull the trigger on that?

That is pretty much the sense. Once you go into an area from -- I have expanded several times into different countries in my past life -- and you need contracts. You need people that have assured you that when you get there, you will hit the ground running. Speculation is hard on international contracts and yet part of what we are doing right now is speculation -- going in and putting infrastructure in and putting a base. But when it comes to actually moving hard iron into an area, it is suicide just to move your hard iron and leave it laying and then try to go sell it. So that is the analysis we have to do, what customers will actually commit to giving us some work once we hit the ground with the right products and that is a little bit tougher.

Okay, thank you.

Michael Toledano, Gilder.

Hey, guys. Sorry, just one actual follow-up question. I guess -- and sorry, I am kind of new to the Company -- but I guess the biggest question I have is it seems like a great product. It doesn't seem like it is costing the companies so much to use it and it really increases flow rate and efficiency of a well. And I guess what do you guys see as the biggest reason that people aren't using it? Is it a lack of awareness, is it competition? I mean what is stopping people from -- from the people who don't buy it, what is stopping them from not buying it?

There is a couple of things we need to point out here and number one, we may have understated it just a little bit. If you go down in the Barnett shale for example and you look at it as a 700,000 gallon stage in a frac job and there is seven, eight, nine of these stages in a well, then you go in and say we want to put a mixture in of whatever percentage we put in. We do come out to be a pretty significant part of the ticket and part of what you look at in the industry that has always been a bugaboo is what you pay today versus your earnings in the future.

And we do push the price of a job up because our product -- it pays out in the long run, so short-term gains, long-term gains and that is one of the reasons we are spending more and more time doing studies and going and seeing the E&P companies and talking to them and just showing them the results of our productline because it does add to the cost of a ticket. Let there be no doubt.

And have you guys -- I am just curious if you guys have any thoughts or done a study on where -- the price of nat gas and where you see demand construction. If nat gas was at 13 right now, would you see more orders or I guess if you have thought at all about that.

We think about it all the time.

But is there any kind of like I guess data, studies you guys have done, what kind of -- for these pumpers, how -- at what price for them does it make sense to use the micro-emulsion?

We think it makes sense for them at any price because it adds -- we have been able to prove with what it adds in in the way of production and long-term production on flow back. So we think, selfishly, that it is good no matter what the price is. Obviously, the higher the natural gas price goes, the easier it is for an operator to look at it and buy more product. Have you seen the study that we did initially, which showed that we were able to increase the flow back of the frac fluid by 41% over any other method and that thereby increased the production 47%? Have you seen that?

I have not. I thought -- the number -- someone told me I think it was 19% over the life of a well. I don't know where I got that though.

Well, I don't either.

Okay. It's closer to 40% -- so 40% over not using the ME technology?

We know that the initial production rate is up 47% over anything else that we use and that was a 250-well study, so that has held up well. Now we are doing a much more detailed economic study so that we can use this data with the operator, which I think is clearly beginning to resonate and when this data is available in the next 60 days, I think we will have a bigger sales tool than we have ever had.

That's great. Terrific.

One other -- this is Jim (inaudible). One of the -- related to the price of natural gas, if you look at the application of our micro-emulsion, it is in unconventional -- predominately in unconventional reservoirs like your shales and tight sands. Obviously, the higher the natural gas price is, more drilling opportunities become economically feasible. When that occurs, then there is more opportunity for our product to sell. So that would be an expanding market because there would be more potential wells to drill.

And I would imagine it would be better, more efficient for the drillers too. Great, thank you very much, guys.

That does conclude today's question-and-answer session. I would like to turn the conference back over to Mr. Shannon.

Thank you, everyone for participating in today's second-quarter conference call. We appreciate your interest as always in Flotek Industries and we look forward to speaking to you in the third quarter. Have a nice day and we appreciate you.

This does conclude today's conference call. Thank you for your participation. You may now disconnect.