Flotek Industries Inc (FTK) 2009 Q3 法說會逐字稿

Good morning. And welcome to the Flotek third quarter 2009 earnings conference call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity for you to ask questions. Please note this event is being recorded.

I would now like to turn the conference over to Glenn Neslony. Please go ahead.

Thank you, and good morning. Today's call is being webcast and a replay will be available on Flotek's Web site. Our earnings and potential update releases as well as SEC filings regarding the Company have been distributed in the past 24 hours. All are available on the Flotek Web site.

Before I turn the call over to Flotek's Interim President, John Chisholm, I wish to remind everyone participating in this call, listening to a replay, or reading a transcript of the call of the following. Some of the comments made during this teleconference may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, reflecting Flotek's views about future events and their potential impact on performance. Words such as expects, anticipates, intends, plans, believes, seeks, estimates, and similar expressions or variations of such words are intended to identify forward-looking statements but are not the exclusive means of identifying forward-looking statements on this call. These matters involve risks and uncertainties that could impact operations and the financial results that cause our actual results to differ from such forward-looking statements. These risks are discussed in Flotek's filings on the United States Securities and Exchange Commission.

Now, I would like to introduce Mr. John Chisholm, Flotek's Interim President.

Glenn, thank you. I would also like to welcome each of to you Flotek's third quarter 2009 conference call. With me today are Jempy Neyman, Flotek's Executive Vice President of Finance and Strategic Planning, Steve Reeves, our Executive Vice President of Business Development and Special Projects. Steve also continues to oversee operations for the Company. And Glenn Neslony, Vice President and Treasurer.

Noted in recent news from the Company, in our quarterly report filed with the Securities and Exchange Commission last evening, and in our earnings release early this morning, Flotek remains in a period of transition. It remains my privilege to serve as Interim President of your Company and I continue to focus my energies on doing everything I can to position Flotek to benefit from the next cyclical acceleration in the oilfield services business. That said, positioning this Company and refocusing the effort on what is important, building profitable business lines inside of Flotek, remains an arduous task. As business moves through the nadir into a period of recovery, recent events have suggested how challenging such repositioning can be. However, as I indicated on the second quarter call, one of the most important goals I have as Interim President is to provide no nonsense transparency to all of our stakeholders. We have worked diligently to renew lines of communication with all of our stakeholders, and while we still have work to do, we are generally pleased with our efforts today.

One way to provide transparency is through our quarterly filings. Press releases, and conference calls like these. Today, we hope to provide additional insight as to our business, the inner working of Flotek and our plans for the balance of this year, and into 2010.

Before I discuss a couple of specific issues in the quarterly filing, a word about recent events inside the Company is appropriate. As disclosed in recent filings with the Securities and Exchange Commission, and through recent press releases, Flotek's leadership has undergone a series of changes. First, we have begun the process of realigning our organizational structure to be consistent with Company functions. As a result, we have created three Executive Vice President positions. Jempy Neyman has been appointed Executive Vice President of Finance and Strategic Planning. As such, Jempy will be responsible for all capital market activities of the Company including Investor Relations and other shareholder and debt holder issues. In addition, Jempy will oversee the Company's finance effort as well as be responsible for coordinating strategic planning, budgeting, and other initiatives related to the Company's long-term business plan.

Steve Reeves, while still having responsibility for most operational matters, has been named Executive Vice President of Business Development and Special Projects. In this role, Steve will be charged with what Steve has always done best for Flotek. Work with our field personnel to secure business, target and create opportunities for revenue and profit growth, and focus on how best to deliver exceptional customer service to the focus of Flotek's business, our customers. Many of you have commented to me about how important Steve Reeves is to our business, and to our relationship with shareholders. As a result, Steve will become more involved as his time permits with Jempy in our interaction with shareholders.

Currently, the position of Executive Vice President of Accounting and Reporting is vacant due to the recent departure of Scott Stanton. The Company is in the early stages of replacing Mr. Stanton as we continue to look for ways to improve the efficiency of our accounting and reporting processes. We've taken one very positive step in that direction with the promotion of Mr. Glenn Neslony, to the position of Vice President and Treasurer of Flotek. Glenn has served as our SEC reporting point person for the past four years and has been an integral part of the preparation of our accounting statements. While generally behind the scenes, Glenn, a Certified Public Accountant, has worked tirelessly to improve our accounting and reporting group, and given the opportunity I believe will be an important member of our accounting group where we have made grade strides in the past weeks to create a more collegial and, as a result, effective work environment.

We have asked our new Audit Committee Chairman, Mr. John Reiland, to assist in formulating a plan to make certain our accounting and reporting group is structured to provide the most effective service to the Company and its stakeholders in the most effective manner possible. We are undergoing a review of the group currently and we will begin to put those recommendations in place as soon as possible. I pledge to you to have a progress report on our year-end conference call, if not sooner. As indicated, the Board of Directors has elected John Reiland, also a Certified Public Accountant, with significant public company and turn-around experience, to serve on the Company's board of directors and also to be Chairman of the Audit Committee. In addition, your Company's board has elected Mr. Ken Hern to serve on the board of directors and serve as the new Chairman of the Governance Committee. Mr. Hern spent nearly his entire professional career at Texaco serving as the President of the company's Brazilian, Nigerian, and Saudi Arabian business units. He is also an experienced oilfield chemist bringing both pragmatic experience and leadership acumen to the Flotek board.

While we are focused on the future, understanding the past can provide important condition text for our future success. As you know, three directors recently resigned from the Flotek board of directors. Mr. Jim Massey, a veteran of the oilfield and a personal friend, resigned after spending nearly a year on the board of directors. Jim brought a sense of spirit, reason and thoughtfulness to the board of directors of Flotek. He will be missed but believe that his decision to leave the Flotek board would open a spot for a new director with new thoughts and ideas as we move through this transitional phase. In addition, Kevin McMahon and Barry Stewart also tendered their resignations as members of the Flotek board of directors. We thank both for their service. While replacing any member of the board of directors of a public company can be a challenge, we believe both Mr. Reiland and Mr. Hern will fill the empty shoes admirably and create a board with a singular focus on positioning Flotek for the future. We continue to look for additional prospective board members who can add value to Flotek and its stakeholders and will keep you apprised of developments as they occur.

While I will leave most of the financial and operational information for Jempy, Steve and Glenn to present, I do want to mention a couple of items raised in our recent quarterly filing with the Securities and Exchange Commission. As noted, due to prolonged and protected weakness in North American drilling activity, our third quarter revenues and EBITDA did not prove sufficient to meet the covenant requirements established by our senior lending group and our current credit facility. As a result, we sought and were granted a waiver of certain defaults by our senior lenders for covenant violations which occurred in the third quarter. A complete description of those violations and the waiver can be found in our third quarter release. It is important to note that this waiver covers the third quarter only, and due to the uncertain nature of our business, we are likely to face similar covenant issues in the fourth quarter and perhaps into early 2010. As a result, accounting standards require us to classify the entire amount of our senior credit facility as current debt. Note that this accounting treatment has no impact on payment or other terms on the senior credit facility.

We are currently preparing a plan to discuss the restructuring of our senior credit facility with our current lenders which would, in our view, provide terms under which the Company could effectively operate in the future. In addition, we are evaluating other sources of capital that may have fewer restrictions than our current senior credit facility. I have directed our finance staff and outside advisors to present a plan to the board of directors that would allow us to complete this process by year end. While we believe a renegotiation with current lenders is possible, we also believe that there are other sources of capital to replace the current senior credit facility should we believe renegotiated terms are not in the best interest of Flotek's other stakeholders. That said, it is important to note that should we be unable to complete a renegotiation of our current facility, or find another source of debt capital, we could be in violations of the term of our credit facility which could lead to a number of events that are not in the best interest of any of our stakeholders and which are described in detail in our quarterly filings with the Securities and Exchange Commission.

In addition, and as a result, of our uncertain ability to meet the covenants of our senior credit facility as currently structured, our outside auditors, UHY, have indicated a need to take evaluation allowance against certain deferred tax assets that until now have been credited as assets on the Company's balance sheet. This results in a noncash charge of approximately $16 million in the third quarter. While the concept is complex and, candidly, a bit confounding to us, the GAAP theory is that in certain cases, it is possible that the Company's current financial position could lead to a result such as additional issuance of equity, sales of assets or other potential changes of control that could limit the Company's future use of net operating losses. Hence, GAAP standards as interpreted by our outside auditors require us to provide for this allowance.

While at first daunting, a couple of important points of clarification and comfort are in order for our stakeholders. First, this is a noncash charge which has no impact on cash position or liquidity. Second, we do not lose the benefit of the NOLs. And in fact, with changes in the senior credit facility, or additional capital, it is possible the allowance could be reversed in the future. That said, it is likely that the removal of this asset from the Flotek balance sheet will cause the Company to breach the minimum net worth requirement for continued listing by the New York Stock Exchange. As a result, we would expect the Exchange to notify us in the coming days of this violation, and require us to respond. This notice does not lead to an immediate delisting. In fact, absent other violations of listing requirements, and subject to the Company's ability to meet the required remedial steps, including the preparation of a business plan, that shows the plan to return within the listing standards in the next 18 months, the Exchange will permit continued listing. In this case, Flotek would simply either need to show its minimum net worth had returned to a value greater than $50 million, or its equity market capitalization for a 30-day trading period grew to greater than $50 million. Only one of those criteria needs to be met in order to recomply with current New York Stock Exchange standards. In addition, and only as a contingency, the Company has directed counsel to review other listing opportunities to assure ongoing compliance with all covenants related to its bank and other public indebtedness.

I understand that these issues are concerning to Flotek stakeholders, as they are to the board of directors. As a shareholder, director, and the Company's Interim President, know that they weigh on me and my colleagues every day. And we take them very seriously. Also know that we are working diligently to seek solutions to the problems, and turn the current challenges into future opportunities for Flotek. We will not solve these problems overnight. However, I am confident we will solve them with hard work, a focus on our business, and creative solutions that lead to long-term growth and success for Flotek.

Finally, as a result of the uncertainty and recent changes in management, and the board of directors, the Flotek board asked me if I would remain in the role of Interim President through June 2010 or until the next annual meeting of Flotek shareholders. I have agreed to do so in hopes my presence will provide a source of continuity and stability for a company in transition and in an attempt to move the Company back to a focus on its core business. That said, we have made progress in our search for a permanent Chief Executive Officer, as we have interviewed search firms and had several internal discussions about possible candidates and structure. In addition, the executive restructuring in the formation of the office of the President provides a more stable foundation from which a new chief executive can lead. As I said on the second quarter conference call, once my role as Interim President is complete and upon selection of a new chief executive, I will focus on introducing the new leader to you, focus on building relationships between Flotek's new leadership team and the Company's long-standing, long-term supporters.

Thank you for your attention and your interest in Flotek. With that, I will turn the call now over to Jempy Neyman, Flotek's Executive Vice President of Finance and Strategic Planning. Jempy?

Thanks, John. I would like to take a minute to review the Company's third quarter financial results. For the third quarter ending September 30, 2009, the Company posted a net loss of $23.1 million, or $1.18 per share. That compares to a net profit in the quarter ending September 30, 2008, of $5.1 million, or $0.27 a share. For the nine months ending September 30, 2009, the Company posted a net loss of $44.9 million, or $2.29 a share. That compares to net profit in the nine months ended September 30, 2008, of $12.8 million, or $0.60 a share on a fully diluted basis. As John described earlier, the Company took a one-time charge related to income tax provisions which had a material impact on the third quarter 2009 results. Flotek's net loss from operations for the quarter ending September 30, 2009, was $2.5 million or approximately $0.13 a share. And that compares to net income from operations for the year-ago quarter of $12.2 million, or $0.63 a share.

A complete presentation of the financial statements can be found in our third quarter report filed with the Securities and Exchange Commission last night. I would encourage each of you to review those financials and the accompanying notes for a full presentation of our financial situation. As John indicated, we continue to work to improve our transparency, and with the assistance of our auditors, counsel, and our new audit committee chairman, I believe we continue to make great strides toward that goal.

There have been a number of events since we last reported to you that I would like to address now. While we continue to face challenges in our daily business operations, we continue to make strides in a number of areas. As a result of the private placement completed in August, our liquidity situation is improved. As we indicate in our quarterly report, we believe that assuming our current revenue levels and cost structure, combined with the current cash balance and cash flows, that we have resources to meet our operating needs through at least September 30, of 2010. While changes to our lending relationships or a further deterioration in business could impact those estimates, we are also assuming no improvement in revenues or margins in the next 12 months and no additional reductions in expenses, all of which we think provide opportunities for continued improvement.

In addition, as reported earlier this month, Flotek's shareholders approved all ballot initiatives before them at the special meeting of stockholders concluded on November 9, 2009. At the special meeting, Flotek stockholders approved an amendment to the Company's certificate of incorporation to increase the number of authorized shares of common stock to 80 million, from 40 million. In addition to approval of the amendment to the Company's certificate of incorporation, stockholders approved the Company's ability to pay dividends in the future on its preferred stock, by issuing shares of the Company's common stock. The anti-dilution price protection provisions contained in the warrants issued in the August private placement, and the contingent warrants issued by the Company in the August private placement. We believe these are important steps in the continued plan to regain investor confidence, improve our balance sheet, and work toward positioning the Company to benefit from the eventual acceleration in the oilfield services cycle.

John also mentioned the reserve taken against the net operating losses carried as an asset on the Flotek balance sheet. And I want to iterate that there are no cash consequences to this accounting treatment. The NOLs remain an asset of Flotek and they're still available for future use under acceptable circumstances. And once we're able to resolve current uncertainty surrounding our ability to perform under our senior credit facility, we may be able to reverse the reserve, thereby re-establishing their value on the balance sheet, as an asset. As indicated, we are working diligently to restructure our current facility, and believe that our relationship with our lenders will facilitate open dialogue, and opportunity to craft a facility that will be acceptable to our lenders and tenable to Flotek. However as a measure of security and comfort, we are considering substitute sources of capital to meet our credit needs into the future.

I would like to thank you for your time and your interest in Flotek. While our business continues to face challenges, know that we are committed to finding reasonable solutions, in an effort to create future opportunities. And I look forward to a dialogue with each of you in the coming weeks and months.

And now I would like to turn the call over to Steve Reeves to discuss our business operations. Steve?

Jempy, thank you. In general, I would characterize the third quarter operational results as challenged but stable. While pricing pressures continue, overall revenues did show modest sequential improvement month over month during the third quarter. Moreover, a marked turnaround in the rig count has provided a reserve improvement visibility, although a significant additional increase in drilling activity is still needed to provide clear visibility into the future, especially with respect to pricing. As you know, we provide data in three reporting segments -- Chemicals and Logistics, Drilling Product, and Artificial Lift. A complete review of the financial performance and a brief narrative can be found in our quarterly report filed with the Securities and Exchange Commission last evening. I will address each segment in turn.

Our Chemical and Logistics segment showed modest improvement in the third quarter as we continue to work through inventories and the groups on incremental increase in orders throughout the quarter. Our focus on cost reduction helped hold segment margins relatively steady even as we continued to experience some pricing pressure. We are somewhat encouraged about Canada as our comparative revenues held nearly constant even though drilling activity was down dramatically year-over-year.

Our Drilling Products revenue from oil and gas-related clients held relatively steady in the third quarter but were negatively impacted by a continued slowdown in our mining group as copper prices continued to be weak. While we have begun to see some stability for mining clients, we are not quite ready to predict a firm bottom is in place. Moreover, we continue to feel meaningful price pressure from smaller operators in many of our key basins. That said, we continue to increase our share in emerging areas such as the Marcellus shale, where we continue to receive positive response from a number of leading operators in the region. In addition, we have begun a new motor rental program in the Bakken which has been well received and hope to continue growth in that key oil basin in the coming months.

Our Teledrift product line, while meaningfully impacted by the decline in drilling activity, has begun to show signs of its growth potential, as revenues improved both domestically and internationally. Our TeleShock product has been approved by Saudi Aramco as a new standard for wireline surveys and we are awaiting our first commercial well assignment. In Argentina, YPF is replacing old Teledrift tools with the new ProDrift tools, a process that will continue well into next year. Due to market conditions we have delayed additional work and the introduction of the next generation TelePulse into 2010.

Artificial Lift revenues remain relatively flat as little new coalbed methane activity is underway in our core Powder River Basin region. We do not expect an increase in activity until operators have sustained visibility of gas prices above the $5 threshold. However, we did complete our first successful oilfield installation of our Artificial Lift system, something that could help increase revenue and margin for this division into the future.

Flotek's field managers and leadership team has spent the last several weeks focused on developing our outlook and plans for 2010. And while we are still in the final stages of preparation, we are keenly focused on creating more operational efficiencies without sacrificing the flexibility needed to take advantage of opportunity from increased drilling and completion activities in our core basins. While we indicated in the second quarter conference call that we will no longer provide earnings guidance once our plan is complete, we do plan to provide an operational and outlook update to Flotek stakeholders. While we are cautious, we are encouraged by the month over month improvements we saw in the third quarter in many regions across business reporting segments. While October was a bit soft in some regions as a result of weather, we do feel somewhat more sanguine about year-end activity. That said it is important to remember that both November and December are slightly impacted by holidays and as a result are hard to predict.

While we all understand that at the end of the day, our success is measured quantitatively on a dollars and cents basis, I do want to take a minute to recognize the dedication, commitment and effort of our field personnel at all levels of the Flotek organization. In the most difficult times, we sometimes forget the human aspect of our business. I'm honored to work with some of the hardest-working men and women in the oilfield, and they remain ready to serve our customers when they need us.

With, that I will turn the call back to John Chisholm.

Steve, thank you for your comments, and more importantly, thank you for your service to Flotek. Your comments about our people rings very true to me. There would have been so many easy ways to give up and quit but those who remain at Flotek are the most dedicated people I have worked with. Their concern for the Company, their colleagues and their customers has become very apparent to me in the past several weeks. There is plenty of work to do as we face numerous challenges in the weeks and months ahead. However, we have hard-working people with a sense of pride and resolve that Flotek will not only survive but thrive into 2010 and beyond. I know this has been a lengthy discussion but we felt that providing this information to you was important. Thank you for your time, attention and interest in Flotek.

Operator, we will now open the call to questions.

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Mark Brown of Pritchard Capital.

Hi, I was just wondering if you guys could talk a little bit more about the capital raising alternatives that you're considering, and what the timing would be. It sounds like you see that as a plan B, that plan A would be to try to work something out with your lenders, but maybe you can just update us in terms of when you will make that decision, to go forward with plan A, or to resort to plan B.

Mark, this is Jempy. Thanks for the question. I think, suffice it to say, our preference and initial focus would be on working with our current lenders. As I've said on many of our prior calls, I think we are fortunate enough to have a very good relationship with our lending group, and they have been very supportive and very helpful through some very difficult times. So that would be our preference.

But I think as a matter of prudence, we have to explore other, as you call them, plan B scenarios. We have begun discussions with our current lenders, and have committed to, once we get the 2010 plan approved here in the next several weeks, to sit down with them, and present that plan, along with a business plan that shows what we think might reasonably happen through the end of the existing credit agreement, which matures the end of the first quarter 2011. And also present a business plan that shows our strategy, some of our thoughts on a number of business issues and capital issues. With that, we will begin having some other discussions, as I said, just as a matter of prudence. John, during the call, referenced a commitment that we have to our board to present that plan by year end. So I would say it is a work in progress right now. But we would expect to have a lot more clarity on what direction we're going by year-end.

Okay. That's helpful. And John talked about moving forward, focusing on the core business, and when you say core business, is that the chemicals and logistics, is that the Teledrift? And are you looking at potentially divesting any of those assets?

We have three segments, as you realize, and of course, the Chemical and Logistics, and the down hole tool are by far the bigger of the two of the three and then followed by Artificial Lift. One of the things that we plan on doing on a go forward, just like adding the new board of directors member, is we're going to really pay close attention to our Chemical and Logistics. We think there are some gains to be made here. And we want to approach this business just with a wide open mind in the future. We're really focusing on two of the three, looking very hard at those.

Okay. And you talked a little bit about some of the progress with Saudi Aramco with Teledrift and I think I heard correctly that you're delaying the introduction of your new project until sometime in 2010. Maybe you could clarify if I heard that correctly.

Right. The TelePulse tool is our MWD down hole tool. And what we have decided is we are having tremendous success with the ProDrift. And we're looking at the Saudi deal as being a nice user of those tools and we are going to put our short-term capital into the building and the progression of the ProDrift tool. We still are finishing off the TelePulse, we're going to go ahead and get it ready to go commercialized, but what we're focusing on right now is where the dollars can give us the quickest return and get us back to where we should be. We're not dropping it, we are just, because of the costing of it, not going to commercialize it just right now in the soft marketplace.

Okay. And then on the chemical side, were you encouraged by the growth sequentially of revenue and do you believe that will continue? What are you hearing from your customers on the micro emulsion product?

We're doing well. Yes, of course, we're ecstatic about the growth of it, as it has turned and started coming back a little bit. We do realize in the fourth quarter, and it is tough, it is with the fracturing, and we hate it, but you practically lose a week in November and December because of holidays on the fracturing. So fourth quarter, we don't expect to see it, but we are very excited about where we're going into 2010 with our chemical business.

And then with the environmental concerns that have been raised in the Marcellus, what is Flotek's position on that? Is it favorable to you in the sense that your product is marketed as biodegradable, or is it a concern that you might be forced to reveal the ingredients that are included in that? I just want to get your sense of what the implications could be.

As a matter of fact, we're very excited about the greenness of our chemical, and we are preparing presentations that we show. We already went into New York and given the presentation of our chemicals, and the good part was they did not make us release the final end product on it, as soon as we were able to. We didn't have to show our formulation. We did have to prove that it was green. But we think we can beat that all right. And we think that we're the leaders with the green technology in micro emulsion, so this will be good for us in the future.

All right. Well, thank you very much. I will get back in the queue.

(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

This is John Chisholm again. We would like to thank everyone for their patience and listening to our narrative. We felt the narrative was important. There was a lot of things to cover. It is a dynamic time for Flotek. We've made a commitment, as we said, earlier to be very transparent. And we will continue to do that. And we hope to see many of our stakeholders, shareholders, in person, in the weeks and months ahead, and we will look forward to visiting with you again at our next quarterly call. And thanks again for everyone's interest and attention.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.