Flotek Industries Inc (FTK) 2010 Q1 法說會逐字稿

Good morning and welcome to the Flotek Industries Inc. first quarter 2010 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 the Company's prepared remarks. An operator will provide instructions on how to ask your questions at that time. (Operator Instructions). This conference is being recorded. At this time, I would like to turn the conference over to Mr. Glenn Neslony, Vice President and Treasurer for Flotek Industries. Mr. Neslony, you may begin.

Thank you and good morning. Today's call is being Webcast, and a replay will be available on Flotek's website. Our earnings and operational update press release as well as SEC filings regarding the Company have been distributed in the past 24 hours. All are available on the Flotek website.

Before I turn the call over to Flotek's President, John Chisholm, I wish to remind everyone participating in this call, listening to the replay, or reading a transcript of the this, of the following. Some of the comments made during the teleconference may constitute forward-looking statements within the meaning of Section 27-A of the Securities Act of 1933 and Section 21-E of the Securities 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 exclusive means of identifying forward-looking statements on this call. These matters involve risks and uncertainties that could impact operations, and the financial results and cause our actual results to differ from such forward-looking statements. These risks are discussed in Flotek's filings with the United States Securities and Exchange Commission.

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

Glenn, thank you. I would also like to welcome each of you to Flotek's first quarter 2010 conference call. With me today is 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 of the Company, and Glenn Neslony, Vice President and Treasurer. Also joining us for her first conference call is Johnna Kokenge, Flotek's new Vice President and Corporate Controller. Johnna brings a wealth of experience to our financial team and will be the point person coordinating corporate accounting policy, SEC filings and the like. In addition as she becomes more familiar with Flotek's accounting procedures, I'm certain she'll interface with many of our stakeholders. I'm sure you'll find Johnna a welcome addition to the Flotek team.

As noted in our press release this morning, we filed our quarterly report with the Securities and Exchange Commission on Friday evening, along with a host of other filings. While we won't take your valuable time to regurgitate those filings, we'll provide a summary of those filings, attempt to add some color regarding current operations as well as a sense of our future and then be happy to answer your questions. It remains my privilege to serve as 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.

The first quarter of 2010 showed meaningful signs of improvement from the end of 2009, and provides all of us at Flotek with the belief that we are on a path, albeit one that will require significant effort and additional strategic thinking, to rebuilding what we believe can be a premier specialty oilfield service Company. Both Jempy and Steve will walk through the specific financial and operational highlights in a moment. However, before doing so, I'd like to provide some high level highlights and an explanation of the plethora of filings made Friday afternoon. Revenues from the quarter, totaling nearly $28.4 million, were the best in over a year. March, which was approximately $10.9 million, reached a level that given normal operating expenses, would not only have produced positive EBITDA but would have also provided positive net income.

While not every month in our recovery will be like March, the Flotek team now knows what is possible and our entire organization from the Houston corporate headquarters to field offices from Appalachia to the Rockies, is focused on creating profitable growth across all of our business segments. We also improved our financial flexibility by the refinancing of our Senior Credit Facility and through a partial exchange of our convertible notes. As discussed in our year-end call, a consortium of White Box Advisors and Gates Capital Management stepped in to replace a syndicate led by Wells Fargo, and provided not only a larger credit facility, but also one with far less burdensome covenants as we work through the process of stabilizing the enterprise and positioning Flotek for future growth. While the new facility provides us with a flexibility to strategically position Flotek for the future, it is only the first in a series of steps that will be required to repair the balance sheet and forge a more appropriate and durable capital structure.

During the quarter, we along with our financial advisors at Fig Partners, worked diligently to reopen lines of communications with all off our financial stakeholders, including common stockholders, preferred shareholders, and convertible debt investors, as well as the New York Stock Exchange. While our conversations were engaging, we expected and received constructive criticism as well as ideas from many stakeholders on how to improve our balance sheet and many other facets of our Company. While we may not be able to accept every idea as pragmatic, we encourage such dialogue and look forward to continuing to improve our communications with all of our stakeholders and work in partnership to improve Flotek.

During the quarter, we did submit a plan to regain permanent compliance with the listing requirements of the New York Stock Exchange, that was accepted by the compliance authorities at the Exchange. We continue to work with the Exchange on a regular basis as we focus on regaining compliance over the course of the 18-month review period. As part of the Senior Credit Facility refinancing, we provided an equity grant to our new lenders that was priced below the warrants issued in the August 2009 preferred stock offering. As a result, those warrants were repriced to reflect the lower price stock issued under the new credit agreement. During our review of the accounting treatment of the senior preferred securities, we discovered a relatively recent and esoteric accounting standard that impacts the way Flotek must account for the warrants issued in the August 2009 offering.

To make the explanation as simple as possible, due to the fact that warrants contain anti-dilution price protection provisions, GAAP standards require us to account for the warrants as a liability on our balance sheet and fairly value that liability on a periodic basis. While we were not convinced that the impact of such an accounting change was quantitatively material on past financial statement presentations, Flotek management and the Board of Directors determined it was in the best interest of all stakeholders for Flotek to amend its third quarter and full year 2009 financial reports. As a result, on Friday we filed an amended 10-Q for the third quarter of 2009, and an amended 10-K for the full year. With our goal being full transparency with Flotek's stakeholders, this was the correct action. I want to stress, however, that while the amendments have an impact on both the Company's balance sheet and income statement, the changes were non-cash in nature.

While we intend to abide by the rules of the profession, it is important to understand we believe such accounting treatment to be counter intuitive. It is important to recognize that the warrants do not under any circumstance create a demand obligation for the Company. Rather, if exercised by the holder, in most cases for cash, the Company would provide the holder with Flotek common equity. In no circumstance will the Company ever have to pay cash to any holder of a warrant, and in fact if exercised, the warrants would add to shareholder equity on the balance sheet. The worst case is the warrants simply expire and the impact is permanently removed from the capital structure.

Moreover, under the accounting treatment, the warrants will also be fairly valued on a quarterly basis and have an impact on the income statement. Again, it is important for investors to understand the counter intuitive impact on the income statement. As the price of our common stock increases, the value of the liability and corresponding negative impact on the income statement increases. All that said, none of these adjustments have any impact on cash or operating earnings of Flotek and we pledge to provide a thorough description of the accounting treatment on a quarterly basis. The impact on the income statement in the first quarter was $1.8 million.

While positioning the Company for growth is important, all growth must be both strategic and profitable. As such, we began a strategic review initiative in the first quarter in which we started to assess all aspects of our business, challenging each business unit to justify its strategy and cost structure. In some cases, like the downhole tool division, it resulted in the sale of a piece of the business and combination of redundant facilities. In others, it has led us to consider more holistic strategic options, a process that continues today. However, in all business segments and at the corporate level it has caused us to take a hard look at cost and expenses which will have an impact on our bottom line results as we move forward to 2010 and beyond.

That said, let me be clear. Our cost structure must continue to improve and improve quickly. I have tasked our financial team to review all expenses, starting in the Houston corporate headquarters and find ways to make Flotek a more efficient Company. First quarter expenses, while impacted by significant nonrecurring items, related to both the credit facility refinancing and consultants assisting with the financial reporting transition we discussed in the year-end conference call, remained above acceptable levels. I pledge to you that we have made smart cost reduction our top priority in the coming months.

During my days as a collegiate and professional athletes my coaches stressed the importance of playing the game from start to finish and the importance of finishing strong. We're in the first quarter of a four quarter game and we intend to play hard and finish strong. Adversity has made us stronger and we intend to use the lessons learned to continue to develop a new play book at Flotek. Since I took the ball nine months ago, our people have rallied as a team and done everything I have asked and more, working harder than ever to ensure your Company is positioned correctly to benefit from the opportunities that present themselves. While significant challenges remain, I'm very proud of the way our colleagues and associates continue to represent Flotek.

With that, I'd like to turn the call over to Jempy Neyman, Flotek's Executive Vice President of Finance, to discuss first quarter financial highlights. Jempy?

Thanks, John. As John indicated, during the quarter, Flotek announced an agreement under which we entered into a $40 million senior secured credit facility with White Box Advisors of Minneapolis and Gates Capital Management of New York. Both White Box and Gates have been long-time stakeholders in the Company. In addition to the Senior Credit Facility, Flotek entered into an agreement with both White Box and Gates to exchange a portion of their current holdings in our outstanding convertible debentures for new, secured convertible notes, providing additional deleveraging of the Company's balance sheet. This transaction is the first step in what management hopes will be a transformational year for Flotek. The steps to delever our balance sheet will not be easy, and will be taken with due care and deliberation by management and the Company's Board of Directors. The process will continue to involve a series of strategic decisions, continued diligent review of all aspects of our business, and the appropriate use of equity and other capital market strategies to reduce debt while at the same time working to maximize value for all of Flotek's stakeholders.

In the first quarter of 2010, Flotek revenues totaled $28.4 million, an increase from $24.6 million in the fourth quarter of 2009, but a decline from $40.7 million in the first quarter of 2009. The Company posted net loss attributable to common shareholders of $12.1 million, compared to $6.6 million in the fourth quarter of 2009, and $2 million in the first quarter of 2009. On a per common share basis, Flotek lost $0.60 in the first quarter of 2010, compared to a loss of $0.35 in the fourth quarter of 2009, and $0.10 in the first quarter of 2009. While we were pleased with the growth in revenues, the net loss in the quarter is not acceptable. As John mentioned, our top priority is profitable growth, and we continue to look critically at all aspects of the business to create more efficient processes. We believe over the course of the next several months, we will see meaningful improvement in expenses across our businesses, from corporate SG&A to field expenses in all business lines. That said, it's important to note that there were several special, nonrecurring expense items in the first quarter, including nearly $1.7 million in professional fees, accruals for executive departures, and other items of approximately $3.5 million in nonrecurring costs associated with the refinancing of the credit facility.

In addition, reclassification of the warrants, as John explained, added $1.8 million of additional non-cash expense in the first quarter. First quarter EBITDA showed a loss of $990,000, an improvement of nearly $1 million from the fourth quarter of 2009. Excluding nonrecurring items, EBITDA would have been positive in the quarter. We believe revenues of $7.5 million per month should yield positive EBITDA results. Preliminary results for April show revenues of approximately $9.3 million.

Finally, we have worked diligently over the past several months to improve our financial accounting processes and personnel. While substantial resources have been expended, we believe we now have the processes and personnel in place to provide timely, accurate, and transparent financial data to our stakeholders. The addition of Johnna Kokenge to our financial team has already yielded benefits to the preparation of our financial statements and our relationships with our outside auditors. And now I would like to turn the call over to Steve Reeves to discuss our business operations. Steve?

Jempy, thank you. A review of the segment revenue and operating profit numbers can be found in this morning's earnings press release. I would like to take this opportunity to add some color to those results. In general, an increase in North American drilling activity provided a positive backdrop for Flotek's stable of products and services. However, as discussed on our last conference call, early acceleration in activity from the cyclical trough rarely provides immediate opportunities for price improvement. While pricing pressure has subsided in some regions and for some products, meaningful price acceleration would be a pleasant surprise in the near term.

Flotek's Chemicals and Logistics segment remains our leading business unit with sequential revenues improving by nearly 13%. An improvement in the North American rig count combined with an increase in natural gas completion activity provided support for our microemulsion products, strength in Canada also contributed to improved results. We remain cautious on near term natural gas prices, and as a result, visibility for chemical sales growth is somewhat cloudy. In addition, we expect the slight decline in Canada in the second quarter, a result of annual deceleration in activity due to spring breakup. However, early indications suggest the second half of 2010 should show marked improvement in Canada.

Several initiatives are under way that should provide growth opportunities for our chemical division. First, new marketing initiatives discussed on our last call are beginning to have an impact. Not only have we better aligned compensation to match sales and service results, our chemical marketing efforts are more accurately focused on economic decision makers within the beneficiaries of our products, the exploration and production companies. As a result, we have increased our penetration of key resource play participants while continuing to develop our relationship with pressure pumping and other service companies. We expect new trials with major players in both the Barnett and Marcellus shales very soon.

In addition, as discussed on our last call, we continue to develop focused products on early stages of marketing specialty chemicals for both oil shale and enhanced oil recovery applications. While it is still early in the process, we are encouraged by the interest in our oil focused initiatives and hope to be able to report successful marketing efforts in future months. Finally, international opportunities are becoming more tangible. We continue to focus on a promising south American contract, and should begin providing specialty chemical supplies to a new Marine fracturing vessel in the North Sea in the second half of 2010 and have been approached by European and Asian exploration service companies looking at shale opportunities abroad.

Downhole tool revenues increased over 21% on a sequential basis, although the business is still experiencing significant pricing pressure, a result of oversupply in key markets. Key to the turnaround is the downhole tool division is Teledrift, which saw a 10% boost in revenue on growth in geographic regions, especially the Permian Basin and the Haynesville Shale. We continue to fine-tune our new marketing strategy for Teledrift, and expect accelerated growth during the balance of the year. In addition, Saudi Aramco is preparing to run Teledrift, and we believe there's a real opportunity to further penetrate the Saudi market. All of this helped our drilling activity in the Williston basin has improved as has activity in the Eagle Ford and South Texas where operators are playing the oil window around what may become one of the most prolific gas plays in the lower 48. Our early presence in south Texas should benefit us as drilling activity in the Eagle Ford grows.

Mining activity has recovered from cyclical lows with revenues at our Gallian mining group up nearly 20% sequentially. We expect growth will continue in the second quarter. Our focus on cost is most important in this division. We continue to evaluate all product lines and look for regional consolidation opportunities to create a more efficient operation. Artificial Lift revenues increased nearly 3% on a sequential basis. While we remain a top tier player in the Powder River Basin coal bed methane, depressed natural gas prices have limited growth.

Uncertainty surrounding natural gas prices, combined with weather, and environmental limitations will likely limit growth in the second quarter. However, our new contract with a major player in the Powder River Basin should begin to provide increased revenue in the second half of 2010, possibly as much as $4 million to $5 million. While our momentum in the first quarter appears to be sustainable, there remains a lot of work to do to return Flotek to profitability. We will continue to work to create an efficient and customer-driven oilfield services Company. With that, I will turn it back to John.

Steve, thank you very much. There's plenty of hard 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 in 2010 and beyond. We hope this call has been helpful in summarizing Flotek's current financial and market positions, and in the coming quarters look forward to continuing to improve our communications with all of our stakeholders. As I've said from my first day as interim President, my top priority is to be openly candid and honest about our Company and our business with all of our stakeholders. My assessment to date is we've made significant progress in stabilizing Flotek's business and financial picture. However, significant challenges remain that will require hard work, strategic thinking and creative solutions.

Our focus in the second quarter is to post positive EBITDA, continue to reduce cost, specifically SG&A, and be able to see our way to profitability in the second half of 2010. This is an exciting time to be with Flotek. We have a lot of serious work to do that will require a serious commitment on the part of our people. We appreciate you remaining interested in our company, and look forward to sharing our successes and challenges with you throughout the balance of 2010. Operator, we will now open this call for questions.

Thank you. (Operator Instructions). One moment, please, for our first question. Our first question comes from [Thomas Burgeon with Priority Capital]. Please proceed with your question.

Hi, good morning. Thank you for taking the question. I had a question, I think Jempy, I just wanted to make sure I understood something that you said. I think you mentioned that $7.5 million of revenue is the breakeven level on an EBITDA basis. Is that correct?

Yes, on a normalized basis, where we are not incurring some of these nonrecurring expenses that we were hit with in the first quarter, we think at a normal operating level, that should be a breakeven for EBITDA.

Okay. And then I think you had mentioned that April was trending to something in the mid-nines in terms of revenue, so am I interpreting that to be --

That's correct.

That you should be in the sort of $1.7 million of EBITDA for the month? Am I thinking about that right?

Yes, we still -- again, we will probably have some of the expenses that are -- that we are incurring that are non-normal operating, so my estimate is that for April we won't be at the level you suggested but we should be positive.

Okay. Great. And then my final question, if I may, is congratulations on getting the new senior secured credit facility done. One component of the credit facility that you don't have that many companies do is a traditional line of credit and I was wondering if you've been exploring that option with any financial institutions. Thank you.

That is a correct observation and we -- when we did the deal, we obviously projected cash flow, but there's also the opportunity to expand the facility on a rational basis if the need arises.

Okay. Thank you.

Thank you. Our next question comes from the line of [Hongo Sans] with Stephens Capital. Please proceed.

Hi, guys. Thanks for the call. If you could just give us a little sense of how the quarter progressed in terms of the chemical business and the Drilling Products, the downhole tools, did you see kind of increased utilization in demand as you worked through the quarter or was it pretty even?

No, as you take off and you look at it, you can see that in January and February when we were in the $9 million range, we went to March of having about close to $11 million, so we saw improvement in all three -- in both of the divisions, Artificial Lift stayed pretty flat going across but both in chemical and downhole tool we showed improvement as the rig count improved throughout the first quarter.

Great. Thanks. In terms of the basins that you're active, could you talk a little bit -- you mentioned some qualification trials that you're doing in the Barnett and the Marcellus. Are you seeing pretty nice demand in specific basins? Can you just give us a little color on that?

Yes, we have -- we continue in chemical, we continue with the strong growth, with the strong places that we've always been, and where we're trying to repenetrate, we're trying to repenetrate back into the Barnett. The reason we want to run the test up in the Marcellus is because obviously any time that you -- we're trying to do a field test that we can go out then and publish the results on. You get these and it will help us improve in the Marcellus. For the downhole tool side, we've really done well in the Marcellus. We have picked up in the Bakken and whereas if we had actually gotten out of the Eagle Ford, which it looks like it should have done about four, five months ago, we doubled our revenue down there in the past two months. So each one of the basins and it goes without saying the Haynesville is strong for us in both chemical and in the downhole tool.

Got it. Got it. Lastly, in terms of the international opportunities, certainly you've got a nice business potentially in the Middle East with the Teledrift assets, is there an opportunity to take the chemical business over to Europe as they start looking at their emerging shale plays there? Are you guys starting to look at that at all?

That is correct. In fact -- this is John. We're shipping chemicals over to Turkey and into other places in Europe right now where they're beginning completions in the shale. Also like to add that these trials, if you will, are really initiated with the new marketing effort of going directly to the operator instead of solely relying on the service Company to create those opportunities. As Steve mentioned, validation is the most important part of a value-added product or service like the microemulsion is, so we're really making a strong effort to be able to have published papers in these areas to validate the performance. Might also add that a year ago our microemulsions did not really have the capability in these oil plays which it now does. 5% of our microemulsion revenue in the first quarter was directed into the oil plays from a nonexistent a year ago. We expect that to continue to improve in the Bakken and Eagle Ford as well.

Great. I really appreciate it, guys. Thanks a lot.

Thank you. (Operator Instructions). It appears there are no further questions at this time. I'll turn the conference back to you.

Okay. Thank you very much, operator. And thank you for all the participation on the call and we'll look forward to visiting with you after the second quarter. Thanks again.

Thank you. Ladies and gentlemen, that concludes our conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a good day.