Flotek Industries Inc (FTK) 2010 Q2 法說會逐字稿

Good morning and welcome to the Flotek Industries Inc. second 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 our Quarterly Report with the US Securities and Exchange Commission were filed and distributed last evening. 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 this call of the following. Some of the comments made during this 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 the exclusive means of identifying forward-looking statements on this call.

These matters involve risk 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 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 second quarter 2010 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 Operations, Johnna Kokenge, Flotek's Vice President and Corporate Controller and Glenn Neslony, Vice President and Treasurer.

As noted in our press release last evening, we filed our Quarterly Report with the Securities and Exchange Commission. While we won't take your valuable time to regurgitate those filings, we will 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. I continue to focus my energies on doing everything I can to position Flotek to reemerge as one of the preeminent specialty oil field companies serving both North America and selected international markets with our innovative series of specialty chemicals, drilling products including our industry-leading Teledrift measurement oil drilling product and our suite of artificial lift products and services, which have recently been awarded a major contract from a leader in Powder River Basin coalbed methane development and production.

The second quarter of 2010 continued to show meaningful signs of improvement on all metrics and provides all of us at Flotek with a belief we are on a path, albeit one that will require significant effort and additional strategic thinking, to rebuilding what we believe can be a special oil field services Company, both by providing value-added transformational products to our customers, as well as once again, providing industry-leading returns to our stakeholders. Both Jempy and Steve will walk through the specific and operational highlights in a moment; however, before doing so I'd like to provide some high level highlights of the quarter. Revenues for the quarter, totaling nearly $31.2 million were the best in over a year. As we indicated on our first quarter call in May, March revenues of nearly $11 million set a high watermark that we believe would be difficult to beat in the second quarter; however, we eclipsed March levels in June with $11.6 million in firm wide revenues. Moreover, as we indicated in our press release last evening, we believe July revenues will be in excess of $12 million and August is also trending positive.

While we know our road to recovery and profitability will not be one free of twists, turns and even a pothole or two, experiencing success has created an even greater desire to continuously improve and challenge ourselves to do better. 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 our business segments.

While it seemed nearly impossible just eight months ago that Flotek could regain its footing, begin to reestablish its credibility among its various constituencies and have a fighting chance to return to profitability, the Flotek team has made significant progress marching down the field on all fronts. While the work has just begun, and our task list remains lengthy, we firmly believe there is an opportunity to return Flotek to a positive net income run rate by year-end. It is my personal goal and one shared by members of the Flotek team to reach that benchmark by December. Such an achievement would be a fitting reward of the dedication and hard work of a resilient group of industry professionals.

At the corporate level, we continue to look for ways to improve processes, streamline work flow, and create a more efficient support network for our field personnel as well as greater transparency for all of our stakeholders. While achievement of these goals results from a number of small and large steps, measurement is relatively simple. One indication of our success is the fact that for the first time in several quarters, Flotek has filed all of its required Quarterly Reports without an extension, has completed its audit review in a timely and cooperative manner, and is presenting what we hope you will agree with more transparent results and metrics to our investors. I want to especially commend our financial team, Johnna, Jempy, Glenn, and Eddie Griffin, Chris Gonzales, and many others that have diligently labored to reach this milestone, and I also want to thank our new audit team at Hein & Associates to their committment in efficient learning in their first review process and the beginning of what we believe will be a mutually valuable relationship.

We continued our efforts during the quarter, along with our financial Advisors at FIG Partners to reestablish lines of communication with all of our financial stakeholders including common stock holders, preferred shareholders and convertible debt investors as well as the New York Stock Exchange. We continue to receive constructive criticism and ideas from many stakeholders on how to reengineer our balance sheet and many other facets of our Company. We welcome all ideas as we continue to work in partnership with our stakeholders to improve Flotek. We also continue to work with the New York Stock Exchange to reach compliance with continued exchange listing requirements. We provide quarterly updates on our progress and remain focused on regaining compliance over the course of the 18 month review period.

All that said, our journey to reestablishing Flotek is in the early innings of a long game. Our efforts must remain focused but flexible to meet the needs of our customers and investors, enthusiastic but measured to assure strategic success, and selfish but selfless to put Flotek's long term interest ahead of short-term passing fads that will assure the enduring success and future of Flotek. I thank each of you for your patience, interest and support for Flotek, and hope we can count on you as a long term supporter of our efforts for years to come. With that I'd like to turn the call over to Jempy Neyman, Flotek's Executive Vice President of Finance to discuss the second quarter financial highlights. Jempy?

Thanks, John. In the second quarter of 2010, Flotek revenue totaled $31.2 million, an increase from $28.4 million in the first quarter of 2010 and $23.5 million in the second quarter of 2009. The Company posted a net loss attributable to common shareholders of $7.4 million in the second quarter of 2010, an improvement compared to a loss of $12.1 million in the first quarter of 2010 and $19.8 million in the second quarter of 2009. On a per common share basis, Flotek lost $0.28 in the second quarter of 2010 compared to a loss of $0.60 in the first quarter of 2010, and $1.01 in the second quarter of 2009.

Flotek filed its Quarterly Report on Form 10-Q for the period ending June 30, 2010, with the US Securities and Exchange Commission on Thursday, August 12, 2010. A complete set of second quarter financial tables can be found in our Quarterly Report, which can be accessed on Flotek's website. John and I will be happy to respond to any specific questions you have regarding our financial presentations during the question and answer session following our prepared remarks.

While we were pleased with the continued 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 continue to search for new and better ways to operate our business, whether it is improvements in field technology or more efficient process or corporate oversight and control. We continue to strive for meaningful improvement in expenses across our business without jeopardizing future growth opportunities. We did make significant progress on a number of fronts in the quarter including a nearly 10% sequential reduction in outside professional fees. We expect this trend to continue as our new audit and accounting relationship with Hein & Associates should further reduce accounting costs.

In addition, one non-recurring cost is worthy of mentioning. During the quarter and consistent with the retirement agreement executed with former CEO Jerry Dumas in 2009, the Company recorded a $3 million non-cash stock compensation expense related to the vesting of Mr. Dumas's earned equity in the Company. This is a significant expense item that has no impact on Flotek's cash position. In addition, this concludes the Company's financial obligations to Mr. Dumas as he ended his tenure as an employee of the Company and a member of the Company's Board of Directors and we wish Jerry well in his retirement and future endeavors.

Flotek's cash balance as of June 30, 2010 was approximately $5.3 million compared to $6.5 million at the end of the first quarter of 2010 and $2.7 million at the end of the second quarter of 2009. Receivables collections accelerated subsequent to the end of the quarter and cash balances as of August 10, 2010, were approximately $9.3 million. Today, Flotek will make its semiannual convertible debt interest payment of approximately $2.7 million, resulting in a net cash balance of $6.5 million. Moreover, even with the recent acceleration in collections, receivables continue to grow, an additional sign of increased business activity. Even after the interest payment on the convertible debt made today, Flotek will have a stronger net cash position than after the credit financing completed at the end of the first quarter.

In early August, Flotek filed its 2009 federal income tax return and as indicated in the Company's Quarterly Report, expects to receive a $7.1 million refund for taxes previously paid. Under the terms of our senior credit facility, 75% of the refund, net of any other federal income taxes due, will be used to reduce senior debt with the balance adding to Flotek's cash balance. We discussed detailed segment financial performance in both our Quarterly Report and our earnings press release filed last evening.

Again, we're happy to answer questions at the conclusion of these remarks. And now I'd like to turn the call over to Steve Reeves to discuss our business operations. Steve?

Jempy, thank you. As mentioned, a review of the segment revenue and operating profit numbers can be found in our 10-Q and yesterday's earnings press release. I would like to take this opportunity to add some color to those results. In general, a continued 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 activity from the cyclical trough rarely provides immediate opportunities for improvement. That said, pricing power did show incremental signs of improvement across most product lines and geographic regions. We are acutely focused on price and margin improvement in the second half of 2010.

Our chemical and logistics segment continues to improve as sales of both the flagship microemulsion and traditional chemical products grew in the quarter. Chemical and logistics revenue for the quarter ended June 30, 2010, was $14 million, an increase of $4.6 million or 48.5%, compared to $9.4 million for the quarter ended June 30, 2009. The Company's sales are beginning to benefit from our initiative to reach key decision makers at exploration and production concerns that benefit most of our next generation surfactants. In addition, the Company's initiatives to develop applications that improve performance in tertiary or recovery are yielding early results. While there is still a significant amount of work to do before we can turn the focus on enhanced oil recovery projects to commercial success, we are pleased with the early results and acceptance of Flotek's chemical applications to the EOR market.

In addition, the Company has recently commenced business with an exploration and production Company operating in Turkey to provide an array of chemicals for their ongoing operations in the country. The initial order of more than $750,000 includes a wide range of chemicals, addressing fracture stimulation, acidizing, cementing and drilling applications. We expect additional business through the balance of 2010 and into 2011. A key focus of Flotek in the second half of 2010 and 2011 will be converting additional international prospects into commercial contracts. Also in the chemical business, Flotek is working to position itself appropriately to address environmental challenges in key developing exploration regions such as the Appalachian Basin and the Marcellus Shale.

Flotek believes the environmentally friendly nature of its microemulsion offerings provides opportunity to grow its business as the focus on environmental issues becomes more acute. Our drilling products segment experienced growth in the quarter, a result of an increase in overall drilling activity as well as changing our sales approach and increased demand for our teledrift technology. Drilling products revenue for the quarter ended June 30, 2010, was $14.9 million, an increase of $3.3 million or 28.1% compared to $11.6 million for the quarter ended June 30, 2009.

Growth in the Permian Basin and the Haynesville Shale play helped push second quarter Teledrift revenue up approximately 28.2% sequentially. Teledrift also benefited from strength in Argentina while Canadian revenue was down sequentially as a result of the expected Spring breakup. The Company expects third quarter Canadian activity to increase with normal seasonal growth. In addition, the Company successfully completed its first Teledrift job for Saudi Aramco during the quarter and continues to develop its relationship in Saudi with expectations of additional work in the second half of the year.

The Gallium Mining Tools division, while small relative to our oil field operations posted sequential revenue growth of 78% in the second quarter. Both domestic and international activity, largely due to growth in Mexico lead the way. Artificial lift revenue for the quarter ended June 30, 2010, was $2.3 million, a decrease of $0.2 million or 7% as compared to $2.5 million for the quarter ended June 30, 2009. Our artificial lift business, while hampered by environmental drilling restrictions in Powder River Basin and subdued natural gas prices experienced only a modest decline in activity with sequential quarterly revenue down 2.2%. However the Company began a new contract with a major coalbed methane operator in the Powder River Basin in July which produced over $400,000 in incremental revenue in July and is expected to accelerate in the second half of the year.

We continue to look for ways to grow revenues profitably and improve margins on existing sales. We will be keenly focused on creating more efficient sales and marketing strategies in the second half of 2010, especially in our drilling products segment and we will be quick to look for ways to rationalize businesses that don't fit our long term needs. In addition, we will look for ways to better cross-sell Flotek products and services by making certain all of our field personnel are aware of Flotek's complete line of product offerings and how our customers can benefit from utilizing a wide array of Flotek specialty products in completion applications.

I would be happy to answer any questions at the end of our remarks. For now, I'll turn the call back to John.

Steve, thank you very much. This afternoon, Flotek will hold its annual stockholders meeting, at which time we believe stockholders will elect Directors for the coming year and likely approve a number of other initiatives. Results will be publicized following the conclusion of this meeting.

While plenty of hard work remains for the Flotek team, I hope you can sense the excitement and eagerness as we see the results of our hard work in the first six months of 2010. It is clear that we have hard working people with a sense of pride and resolve that Flotek will not only survive but thrive into 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 President, my top priority is to be openly candid and honest about our Company and our businesses with all of our stakeholders. In the second quarter, we build on the foundation we began to put in place in late 2009 and in the first quarter of this year which will allow Flotek to better serve as customers and provide better results for our financial stakeholders.

No question, significant challenges remain that require hard work, strategic thinking and creative solutions. As I said earlier, our goal in the second half of the year is to continue to produce growth in earnings, improved margins and exit 2010 with a positive net income run rate. I believe that those goals are attainable and have impressed upon the Flotek team the importance of not only meeting but exceeding those objectives. This is an exciting time to be with Flotek. We have a lot of serious work to do that will require serious committment 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'll now be glad to open the call to questions.

Thank you. (Operator Instructions). Our first question comes from the line of Richard Dearnly from Longport Partners. Please proceed with your question.

Good morning. I'm new to your Company and in fact just got the Annual Report and everything, so I haven't finished it even, but I'm curious about the Cavo motors and the artificial lift seem to be vertically focused and you talk about applying them to the horizontal drilling market. Could you talk about the history there and then what you're doing in that regard or did I read that incorrectly?

No, that is correct. We in the Cavo motors section before we came out with the closed bearing motor which we introduced about six to eight months ago, really into the marketplace, we were stronger in the vertical position, but now we are refocusing and I would say that we probably have one-third to 45% of our work in the Cavo motor coming from horizontal wells now. In the artificial lift, it is in the coalbed methane, mainly just in the lifting products of those wells up there. They don't have the horizontal wells in the coalbed methane.

Right. I see, and the shareholder letter also says you're in about 20% of the wells in North America. Is that because the other 80% don't use your kind of products or is that because competitors have that market share?

It is a case of both, but mainly it is there is a tremendous amount of competition. There's also some marketplaces that are, you can take California for instance. Very few products are run out there so even though their well is operating, no one really operates in them, but at the current time, we're probably on 20% of the operating wells out there.

I see, and then yesterday or the day before, Range released their results or what they include in their Marcellus fracs. Do you make any of that, any of those?

Yes, the products that all of the companies use in fracturing, we make all of them and we're very in tune with all of the environmental regulations that are from up there. We have our meetings, we work with Range and all of the major E&Ps as to releasing our chemicals.

But aren't the competitors doing the same thing?

Yes. Everybody has to.

Everybody is environmentally friendly these days or at least trying to be?

They are trying to be. We feel like we have, if you go back and you're a new investor, if you go back to our website and read in our microemulsion, we believe we were one of the leaders in starting with the green technology and the microemulsion for fracturing and we have followed that on with our chemistry.

Oh, good. Okay, thank you.

Okay. Thank you for the questions.

Our next question comes from the line of Ralph Wagner from Wagner Investment Management. Please proceed with your question.

Yes, good morning. Thanks for taking the questions. Just first item on the SG&A, the large increase, does that include that $3 million to Jerry? Or it seems a large--

There was cross-talk there, but Jempy can go ahead and take the question.

The answer to that is yes, roughly $3 million of that expense is attributable to the stock compensation charge that we took this quarter.

Okay, thank you. The other question was Saudi Arabia has recently announced that they will not further increase the level of exploration activity. Any reaction to that and what impact it will have on you working over there?

No. We're really not concerned as an entry into it. Giving into a brand new market for us, even if it was say 100 rigs are not going to go up, would be an exciting time for us, the opportunity to take part in what they have going is very significant for our Company.

Okay, fine, thank you very much.

Sure. Thanks for the questions.

(Operator Instructions). The next question comes from the line of Josh Silverstein with FIG Partners. Please proceed with your question.

Hi, good morning guys.

Good morning, Josh.

You had talked about the stim oil business and specifically related to the EOR projects. I was curious if you guys, can you use that in the Granite Wash or the Niobrara or the Bakken shale, or is there another chemical product you have for that type of work?

The stim oil product line that we have developed is for those product lines specifically. This will really, Josh, if you follow this, this will really widen out our range of being able to do the fracturing exactly in the Bakken shale, the Niobrara and other and then in the Eagle Ford. All of the liquid rich formations.

Got you, okay. Are you guys currently using the product in those formations right now or is this just a new part of the year entering into that market?

No. We're using them right now in particularly the Bakken with EOG and Inner Plus and also some activity in the Eagle Ford, so the increase in that product is happening as we speak.

Got it, and then a lot of the focus from the press release and from your comments was looking over into the international arena. I was curious where your current revenue run rate may be in the international side and where you think you might be able to get to with some of the focus on Africa and the Middle East.

Well, there's one thing we've learned, these international projects have a tendency to take longer than what anybody wants them to, so we're very careful in terms of putting expectations out there of the commercial realization of the revenue but Steve can talk in some general terms in the remainder of the year where we expect that activity to improve.

We are expecting to see, if it goes as planned from Canada, from Turkey, the things that are coming back strong again for us, the Saudi pick up, we would expect our international revenues to pick up another 30% from wherever they are right now and I don't have the number right at me. I would say they are in the 8% to 9% range. But, you're probably just a little short, Josh but we expect those to be much healthier as the year goes out.

Got it. Okay, and then just lastly, can you break down the EBITDA for this quarter and then for the first half, just wanted to double check my numbers.

Sure. The EBITDA for the quarter was a give or take positive $3 million EBITDA year-to-date is a positive $2 million is where we are right now. That is with the extraction of the one-time Jerry Dumas stock charge, so we like the progression of the improvement of EBITDA.

And the only other thing to take into consideration is what that has done if you are looking at the recently filed Form 10, the only difference is that to get a more pure EBITDA number, the appreciation and depreciation associated with the cost of revenue has been stripped out and put below the lines to get a more pure EBITDA number.

Got it. Okay, thank you.

Our next question comes from the line of Richard Dearnly with Longport Partners. Please proceed with your question.

Two if I may. What's the fully diluted share count now?

Yes, it's right at 33 million shares.

And the stim oil product, what are the barriers to acceptance there? Being an oil versus a gas product, or a gas-targeted product, is the sales call a different, is it different or is it the same people or how does that work?

Yes, good question, maybe a two part answer. The folks that are doing the primary completion work in the Eagle Ford, the Bakken, those type of fluid rich formations are the same folks that are completing in gas reservoirs, so the sales call there is essentially the same people. The sales calls into the EOR secondary recovery, oftentimes is completely different people, and sometimes different companies and we've just applied for the first abstract for the EOR conference next Spring in Tulsa, regarding our chemical products, and how they improve recovery when used with CO2 and EOR. We hope and are confident that abstract will be accepted, and as the year goes on, we're hopeful that we can release more technical information as to how those products are performing. Hopefully that answered your question for you.

Right. Well, the year-end letter suggests instead of calling on the service companies you're calling on the E&P companies directly to tell them or convince them that your products are going to help them drag it through the service companies.

Well, right. It's not in any way that we've abandoned contacting and working with the service companies. That's a very concerted part of our sales effort but we have significantly increased the focus and the energy of having technical seminars, technical discussions with the E&P companies. They are the ultimate buyer and ultimate value benefactor of these chemicals and we immediate to make sure that they realize the impact that it has not only improving their well but also improving their balance sheet, and that's a task that it's our responsibility to convey that message and not rely on anybody else to do that for us. That is a process. It's not like flipping the switch, as frustrating as it is for all of us you don't see the immediate return but as we mentioned here earlier, we're encouraged about the results of that effort of going and visiting and discussing directly with the E&P companies.

Right, okay. Thank you.

Sure. Thank you for the questions.

(Operator Instructions). We have a follow-up question from the line of Ralph Wagner from Wagner Investment Management. Please proceed with your question.

Yes, I wanted to have your whole issue of the rationalization of the various divisions at this time in the new environment as we go out. The question is can you sell off some divisions that reduce the debt and the potential dilution? You kind of addressed that, how you're going to handle that in the balance of this year and next year, because there has been some M&A activities in the industry in the last several weeks. Thank you.

Fair question and in fact I'm sure many of the folks on the call just noticed the Allis-Chalmers transaction this morning in this sector. We look at in association with our folks from FIG Investment Partners that guide us in this area at every aspect of Flotek. Our mission is to create the best return we can for our shareholders and to this point in time, the investigation of these different divisions has lead us to conclude we need to be right where we are, but that's an ongoing effort and that may change in the near future. We don't know, but it's something that takes a reasonable amount of our time, not an excessive amount to constantly evaluate what the market is telling us about the profitability in the future of every one of these services that we provide the industry so fair question, tried to give you as current answer as we can with that part of our business.

Okay, great. Thank you very much. Just one minor question to follow-up here is, how is the relationship with the whole banking industry for you guys now? I know you're still you need to recapitalize yourself but when and how, I mean, are we going to see some resolution there, because the stock is stuck at $1 range because of the uncertainty.

Well, I think again that may be a two part question. We feel very pleased and satisfied with our relationship with the current lending group headed up by White Box and Gates Capital. And so we feel very good about that for the period that's lined out in our reports. There's no doubt that the convertible bond situation is not in the back or the front of everybody's mind as to how we're going to deal with that. Fortunately we have a year to manage that and we feel the best way to manage that is to put together quarters of good performance and that will create more flexibility for us as we deal with that event, and that's what we're focused on.

Okay, have you seen some interest in outside analysts about coverage again?

No, there's some interest in that. There's no doubt about it, and again, we recognize probably better than anyone where we're at right now is we have to demonstrate to everybody that what we say we can do we in fact can do. We feel very good about the progress we've made as we mentioned in this call through this point in time. We like what we see going forward, but we realize we have to demonstrate that what the performance is what we believe it can be and when that happens, we are confident even more interest from the analysts that want to take a look at Flotek.

There are no further questions at this time. I will turn the call back to you. Please continue with your presentation or closing remarks.

Thank you very much for everyone's interest, patience and questions and we'll look forward to visiting with you if not sooner, some time in October reporting on the third quarter.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.