Flotek Industries Inc (FTK) 2014 Q4 法說會逐字稿

Good morning and welcome to the Flotek Industries, Inc. fourth quarter and year end 2014 earnings conference call.

(Operator Instructions)

This conference is being recording. At this time, I would like to call over to Mr. Rob Schmitz, Vice President and Corporate Controller for Flotek Industries. Mr. Schmitz, 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 annual report with US Securities and Exchange Commission, were filed yesterday and distributed last evening and are also available on the Flotek website. Before we begin our formal remarks, 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 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934, and other applicable statutes 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 and cause our actual results to differ from such forward-looking statements. These risks are discussed in Flotek's filings with the US Securities and Exchange Commission.

Now, I would like to introduce Mr. John Chisholm, Florida's Flotek's Chairman of the Board, President, and Chief Executive Officer.

Rob, thank you. I'd also like to welcome each of you to Flotek's fourth quarter and full year 2014 conference call. We are glad you are here.

With me today are Rich Walton, Flotek's Chief Financial Officer; Steve Reeves, our Executive Vice President of Operations; Josh Snively, President of our Florida chemical subsidiary, as well as our Executive Vice President of Research and Innovation; Chris Edmonds, our Senior Director of Corporate Finance and Strategy; Rob Schmitz, Flotek Vice President and Corporate Controller; and David McMahon, our Vice President of Production Technologies.

Also joining us today is Larry Best, the President of International Artificial Lift, a Texas-based production technology company. We announced this morning, the acquisition of substantially all of the assets of Larry's company as part of our strategy to strategically grow our production technologies business with the acquisition of leading edge niche technologies.

As we noted in our press release, we believe Larry's business and his unique patented hydraulic technology is in the sweet spot of new niche production technologies and a welcome addition to the Flotek family. We'll talk more about Larry and IAL shortly.

Last evening, we filed our annual report with the US Securities and Exchange Commission. While we won't take your valuable time to regurgitate those filings, we will provide a summary of the results, attempt to add some color regarding current operations, as well as a sense of our future, and then be happy to answer your questions. However, before doing so, a couple of opening comments.

As we noted last night, Flotek reported revenue for the year ended December 31, 2014 of $449.2 million. An increase of $78.1 million or 21%, compared to the year ended December 21, 2013. That represents record annual revenue for the Company. It is the direct result of the effort and determination of our team.

To provide even greater perspective on our progress, 2014 revenues represent an increase of over 300%, compared to revenues of about $112 million in 2009, which equates to nearly 60% average annual revenue growth since we began this journey, now, five years ago. While revenue growth is important, profitable growth is even more impactful to the value of your investment and we've made profitable growth a consistent goal since 2009. We are very pleased with our 2001 profitability.

While annual revenue growth of 21% is admirable, profitability as measured by earnings per share, grew by nearly 45%. One indication that our investment in people and infrastructure is providing positive operating results for our shareholders.

While technologies like our patent-pending FracMax software application are important to our growth in both revenue and profitability, Flotek would not be where we are today without a team of dedicated women and men who are the best in the business, and who collectively, are acutely focused on two things. Creating better wells and bigger returns for our clients and, as a result, generating greater profits for our shareholders.

There is no better measure of the success of our people than efficiency. And, we believe Flotek is at or very near the top in just about every measure of personal productivity.

During 2014, revenue generation per employee increased by 12%. When compared to 2013 levels in operating income per employee, increased by nearly 22%.

While I'm pleased with our efforts to date, I'm not satisfied. And, as I've said before, Flotek is not willing to rest comfortably in the past, but rather, your Company will strive to reach for a future where our industry leading innovation can create more value each and every day for our stakeholders.

That said, we are acutely aware of our world has changed in the past 90 days and how the challenges in front of us are substantial. As such, we are focused on ensuring the appropriate balance between caution and opportunity, making certain that our business is appropriately sized to a more constrained and volatile opportunity set. Yet, not lacking the resources to seize what we believe will be an abundance of business opportunities as we navigate through the current cyclical tumult.

I remind you that we have long memories. And remember vividly the frenzied frantic nature of Flotek finances when we began this journey in 2009. At that time, I made it clear that our responsibility as corporate stewards was to ensure our level of care would virtually eliminate such fiscal crisis in the future.

While we remember 2009 like it was yesterday, we also recognize that the effort of the Flotek team over the past five years allows us to enter this period of cyclical aggression in the strongest financial position in the history of the Company. Our liquidity, cash generation, and productivity metrics allow us to look at this decline as an opportunity to show that added value technology can provide industry leadership across the cycle.

As I've said on each call since I took the helm, now, five years ago, it continues to be my privilege to serve as President of your Company. I remain immensely proud and humbled by the commitment and support of members of the Flotek team, that believed, as a group, they could make a difference in the future of Flotek, and believed in our vision to restore stability and growth to the Company. And, continue to be enthused, that through the efforts of our people, the future is filled with opportunities to create value for our stakeholders.

With that, I'd like to turn the call over to Rich Walton to review our fourth quarter and full year financial highlights and provide some additional color on certain financial issues. Rich.

John, thank you. As John mentioned, Flotek filed its form10K for the period ended December 31, 2014 with the US Securities and Exchange Commission yesterday afternoon.

Flotek reported that revenue for the quarter ended December 31, 2014 was $124.5 million, an increase of 23.5%, compared to the fourth quarter of 2014. Revenue increased 6.6% compared to third quarter 2014.

For full year 2014, the Company reported revenue of $449.2 million. An increase of 21% compared to the full year of 2013. The acceleration in revenue was primarily due to increased sales of the Company's Complex nano-Fluid suite of completion chemistries, as well as strength in downhole technology revenue.

Income from operations for the three months ended December 31, 2014, was $23.6 million. An increase of 34.2%, compared to the same period of 2013, and an increase of 13.1% compared to third quarter 2014.

Income from operations for the year ended December 31, 2014 was $80.9 million. An increase of 37.7% compared to the same period of 2013.

Flotek posted net income of $16.3 million for the three months ended December 31, 2014, or $0.29 per share on a fully diluted basis. An increase of 45% compared to earnings per share of $0.20 for the three months ended December 31, 2013. Earnings per share increased 11.5% compared to the third quarter of 2014.

For the year ended December 31, 2014, the Company reported net income of $53.6 million, or $0.97 per share, an increase of 44.8% compared to the year ending of December 31, 2013.

Earnings before interest, taxes, depreciation, and amortization or EBITDA for the three months ended December 31, 2014, was $28.1 million. An increase of 28% compared to the three months ended December 31, 2013.

EBITDA increased 11.2% compared to the third quarter of 2014. EBITDA for the year ended December 31, 2014 was $98.3 million. An increase of 32.6% compared to the year ended December 31, 2013. SG&A cost as a percentage of revenue declined from 21.1% to 19.9% for the year ended December 31, 2014, as revenues grew faster than SG&A costs.

The Company recorded an income tax provision of $25.3 million. Yielding an effective rate of 32.0% for the year ended December 31, 2014. The change in effective tax rate from 2013 to 2014 was primarily due to changes in state apportionment factors.

Outstanding receivables at December 31, 2014 were $78.6 million, compared to $65 million as of December 31, 2013. The Company's allowance for doubtful accounts was at 1.1% of receivables.

Of note during the quarter, Flotek repurchased 621,726 shares of its common stock in the open market, at an average price of $16.74 per share, for an aggregate total of approximately $10.4 million. This purchase was made pursuant to a $25 million restock purchase program authorized by the Company's board of directors in November 2012.

The Company continued to generate significant cash from operations during the fourth quarter. The power of that cash generation is clearly indicated if one looks carefully at the fourth quarter stock repurchase program.

While we repurchased $10.4 million of Flotek common shares, we ended the year with a balance on our revolving credit facility of just $8.5 million. A clear sign that we continue to generate significant cash from operations even as the market slows.

Overall, we are very pleased with our fourth quarter and full year 2014 financial results. While we recognize that our operating environment has changed meaningfully, even since the end of the year, we continue to believe that Flotek is as well positioned as any energy Company. Not only to weather cyclical pressures and market volatility, but to take advantage of opportunities created as a result of cyclical change.

Flotek's balance sheet is as strong as at any time in the Company's history. And, we intend to be very vigilant in protecting our liquidity, rationalizing costs, and making certain that we maintain a high level of financial flexibility, as the industry searches for the next cyclical inflection point.

Thank you, now I would like to turn the call over to Steve Reeves to provide color on Flotek's operational performance over the past year. Steve.

Rich, thank you. Fourth quarter enterprise-wide gross margins equaled 40.9%. An increase from 39.5% in the third quarter 2014. Full year 2014 gross margins were 40.7%, up from 39.8% for the full year 2013.

Energy chemicals technologies revenue in the fourth quarter was $75.6 million. An increase of 32.9% compared to the same period last year. And, an increase of 10.9% from the third quarter 2014.

Energy chemical technologies revenue of a $268.8 million for the year ended December 31, 2014 increased 33.8% from a year ago levels. Primarily due to the increased sales of stimulation chemical additives largely the result of the introduction of the Company's proprietary patent-pending FracMax software, which statistically demonstrates the positive production and economic impact of using Flotek's CNF chemistries in unconventional well completions.

Income from operations for the energy chemical technologies segment of $24.2 million increased 20.2% for the three months ended December 31, 2014, compared to the same period of 2013. And increased 21.4% compared to the third quarter 2014. Income from operations $84.8 million for the year ended December 31, 2014 increased 29.7% from year ago levels.

Unlike many other oilfield service sub-sectors, we believe value-added chemistry will perform relatively well even as the cycle regresses. While completion chemistry isn't completely insulated from the cycle, we believe continued market penetration, combined with international opportunities, will at least partially offset what appears to be a North American centric decline. At least in the early stages of cyclical weakness.

Moreover, we continue to look for opportunities to grow our chemistry portfolio that provides sustainable, profitable revenue opportunities and broaden our reach in specialty energy chemicals.

Growing technologies revenue for the fourth quarter totaled $31.2 million. An increase of 19.5% relative to the same period in 2013. And, increased 4.4% compared to the third quarter 2014.

[Drilling] technologies revenue of $113.3 million for the year ended December 31, 2014 increased 0.8% from the full year 2013, primarily due to an increase in actuated tool rentals. Drilling technologies income from operations up $5.9 million for the three months ended December 31, 2014 increased 112.8%. That's compared to the same period of 2013.

Income from operations for the segment increased 7.1% compared to the third quarter of 2014. Quarterly income from operations grew largely as a result of product mix and improving cost controls. Income from operations of $19 million for the year ended December 31, 2014 increased 3.9% from year ago from levels.

While drilling technologies is more sensitive to drilling activity and rig count than other Flotek segments, and we understand the challenges ahead, we are also encouraged by the acceptance of our Stemulator axial vibration technology that accelerates drillbit speed in horizontal wells and initial interest in TelePulse, our MWD technology for lateral sections of horizontal wells.

In addition, while we are realistic about domestic market growth in this environment, interest in Teledrift, Stemulator, and other drilling technologies continues to grow internationally. We continue to grow in both the Middle East and South America, including new work in northern Iraq, as well as upcoming work in Oman and additional work in Argentina.

Again, we won't kid ourselves that this market will create unique challenges for drilling technologies, in terms of both activity and pricing. That said, our team is eager to maximize opportunities in market share consolidation, and offer new technologies to clients and prospects that provide best-in-class performance.

Revenue for the production technology segment for the fourth quarter was $5.9 million. An increase of 107.5% compared to the same period in 2013. And, an increase of 19.5% from the third quarter 2014.

Revenue for the production technologies segment of $16 million for the year ended December 31, 2014, increased by 8.1% from the prior corresponding period, as sales of petrovalves and lifting units rose by $4.6 million, or 152.9% in 2014. Offsetting those revenue increases was decrease in equipment sales and related services of $3.5 million, a 31.1% in coal-bed methane related business.

Production Technologies income from operations of $1.3 million increased 280.7% for the three months ended December 31, 2014, compared to the same period in 2013. But, decreased by 16.6% compared to the third quarter of 2014. Income from operations of $3.2 million for the year ended December 31, 2014, increased 6.1% from year ago levels.

Our production technologies business continues to refocus its efforts on niche added-value technologies like that provided by the acquisition of International Artificial Lift, we announced this morning. We believe the next generation hydraulic lift system will create opportunities for Flotek even in a more challenging market.

Moreover, continued international sales opportunities combined with new domestic service opportunities, as a result of long established relationships, create tempered optimism for this evolving segment of our business.

The consumer and industrial chemical technologies segment, or, CITC, was formed in the second quarter of 2013 with the acquisition of Florida Chemical. Segment revenues in the fourth quarter 2014 were $11.7 million. Approximately 21.5% lower than year ago levels and 14.4% lower than third quarter 2014.

CITC revenue of $51.1 million for the year ended December 31, 2014, increased 19% from the prior corresponding period as this segment was created in the second quarter of 2013, upon the acquisition of Florida Chemical. Income from operations CITC segment of $1.5 million decreased 7.4% for the three months ended December 31, 2014, compared to the same period of 2013. And, decreased 15.2% compared to third quarter 2014.

Income from operations of $6.6 million for the year ended December 31, 2014, increased 4.8% from year ago levels. While we remain uber vigilant in our watch to commodity price fluctuations, and what such volatility could mean for activity and/or -- and our commercial operations. We do remain constructive on relative market opportunities and long-term trends that should help our business.

Our focus on technology that helps our customers make better wells and provide better returns for the shareholders. While tempered by the reality of current activity trends and understanding, we must be aware of further cyclical weakness. We look forward to turning those challenges into opportunities, as the cycle finds its footing over time.

With that, I'd like to turn the call back to John Chisholm. John.

Steve, thank you very much and thanks for the effort. Before we take questions, I'd like to add a few concluding thoughts.

As we discussed last quarter, the introduction of FracMax, the Company's patent-pending application for comparing the performance of wells using Flotek's advanced, next generation CNF Completion Chemistries versus those that use conventional surfactants, or nothing at all, continues to be uniquely successful in fueling interest in Flotek's innovative chemistries. As noted in last night's release, the FracMax database continues to grow, now with data from over 75,000 wells across key US basins.

Not only does such a larger database give us compelling evidence of the of CNF on production, it also allows us to estimate the aggregate economic benefit of CNF usage for our clients. Based on data derived from FracMax, we estimate the use of Flotek's CNF Completion Chemistries has added at least $8 billion in aggregate value for operators, when compared to those operators that have not adopted CNF Chemistry. Also as a result of FracMax, we know that the 234 unique operators have employed CNF in various projects in the US

While those are impressive, statistics, just as impressive is what FracMax can now show an operator who's considering using CNF. The latest version of this powerful statistical software can demonstrate production per lateral foot. And, changes in such production over time as well as the predicted productivity of a well, based on its location within a basin. Not to mention, an analysis of the efficacy of various proppants and other additives with and without the use of CNF Completion Chemistries.

Quite simply, in just its first year, FracMax has become the premier analytical tool in determining optimal completion methods. Our ability to run virtually limitless production comparisons through our FracMax analytic subsidiary, is not only helping our clients better understand the compelling benefit of using CNF Chemistry in the completion process, but also, assisting clients in developing a better understanding of completion best practices, validated through an analysis of data derived from the FracMax database.

Most important, FracMax has materially broadened the reach of Flotek's marketing efforts. As a direct result of FracMax, the Company has converted approximately 20 exploration companies from validation clients to ongoing commercial users.

Currently, the Company has an additional 15 to 20 companies in the process of conducting or designing validations. In addition, there are approximately a dozen other unique validations that are in the scheduling process.

As such, in total, we are in a record number of validations on the board. Largely a result of the compelling data contained in our FracMax analytical software.

In fact, with the exception of a trio of companies that have significantly curtailed capital spending due to serious balance sheet constraints, we know of no clients that have completed validations that have not continued to broaden their commercial use of CNF. Let me be clear. Contrary to some pundits who choose conjecture over fact, the interest in CNF continues to grow, even in this challenged commodity priced environment.

In addition to the validations discussed above, we continue to have a record number of corporate inquiries regarding our Complex nano-Fluid Chemistries and FracMax analysis. As such, the pipeline of new validations continues to be robust. Moreover, the number of wells involved currently in validations, is at an all time record.

There are currently 45 wells involved in active, ongoing validations, and approximately 110 wells scheduled to enter the validation process in the coming weeks. As I indicated, when we conceived this powerful validation tool, FracMax is the most compelling sales and value validation tool I have experienced in my three decades in this industry. And we believe operators are finding it hard to ignore their own data, which conclusively validates the economic advantage of using CNF Chemistry in completions.

As Steve mentioned earlier, we are also making significant progress in international markets. Whether it is validating our MicroSolutions chemistry in Saudi Arabia, or in new drilling technology opportunities in the Middle East and South America. We are constructive on those opportunities as international markets inherently have more muted cyclical reaction than North America.

In Oman, the joint venture companies with our partner, Gulf Energy, are now fully functional and funded. And, we have initiated site preparations, including construction of demarcation barriers on the location for our new chemical manufacturing and blending facility. We continue to develop commercial relationships in Oman and elsewhere in the region and believe there is significant opportunities for growth in the coming months.

Canada also remains an important market for Flotek. The focus pressure pumping companies north of the border, continue to see customized Completion Chemistry as a performance differentiator in their marketing efforts to end users.

We understand that the market dynamics will change in many ways similar to the US And, we remain focused on protecting our existing base; working to penetrate new markets in working with our clients in these challenging times to develop appropriate pricing models that are mutually beneficial.

Additionally, our commitment to constant innovation and continuous improvement is no better demonstrated than our commitment to research and innovation. Recently, Flotek unveiled plans for a new 50,000-plus square foot state-of-the-art global research and innovation facility to maximize client collaboration, which is expected to be completed in early 2016.

While we spent a significant amount of time today discussing our energy chemistry business, I'd be remiss if I didn't acknowledge the near frantic level of innovative effort in our drilling technology group. In the last12 months, we've continued to raise the bar on drilling technologies, including the introduction of the Stemulator, and more recently, TelePulse, our horizontal MWD tool.

I'm pleased to announce this morning, that our final validation work with TelePulse was an overwhelming success, and we are accepting commercial jobs beginning this week. While new technology adoption in this market is more challenging, we're excited to extend the reach of Teledrift and create another unique source of technology driven revenue for Flotek.

More important, combining Stemulator and TelePulse with our existing line of CAVO drilling motors, we will now be able to bundle an entire line of lateral drilling solutions, which will better meet the needs of the most prolific unconventional producers across basins in the United States.

Finally, this morning, we announced the acquisition of International Artificial Lift, a development stage hydraulic lift company based in the Dallas-Fort Worth metroplex. The company, founded and lead by Larry Best, an expert developer of hydraulic and electric controls for over four decades, provides Flotek with a proven proprietary hydraulic lift system. That, through its patented and patent-pending designs, will allow for more efficient production.

Larry's 40-plus years of experience in the aerospace and energy industries brings expertise that has improved the reliability and efficiency for hydraulic pumping units. In combination with David McMahon and his production technologies team, we believe Larry's expertise and unique engineering, create a competitive advantage for Flotek. In a market, that even in the current environment, will experience growth and accelerate rapidly as the cycle turns.

With that, I'd like to introduce Larry. Larry, welcome to the Flotek team.

John, thank you. On behalf of International Artificial Lift and our team, we're delighted to join with Flotek to build what we think will be a very dynamic and successful focus on new and innovative production technologies.

A little bit about my background. I have spent my entire professional career working with hydraulic and electrical control systems. Primarily in the aerospace and energy businesses.

In the early eighties, I developed an advanced variable speed drive system, for controlling oilfield pump jacks and hydraulic pumping units, that extended the life of marginal wells. That controller creates a much more efficient system, eliminating constant human intervention, which was an unfortunate limitation of the existing pumping units.

From 1996 until the next decade, I served as general manager of hydraulic -- or, Hydradyne Hydraulics, where I designed hydraulic systems for large helicopters manufactured with companies like Sikorsky, Boeing, and Bell. In 2006, looking for an opportunity to return to the oilfield, I started Chaparral Automation to focus on the next generation of hydraulic pumping units for the oilfield. I developed a hybrid, the Dura-Lift pumping system, which was a long stroke, heavy lift, hydraulic pumping unit.

In 2009, we sold the company to Global Oilfield Services, which in turn, was purchased by a large integrated oilfield services company. After completing my work with Global, I started International Artificial Lift in 2012, to focus on precision pumping and control equipment that was based on new technology.

At IAL, we developed the Hydra-Lift brand of pumping units that feature our patented innovative hydraulic accumulator, our synchronized dual well system, and next generation control system, which create less energy intensive pumping units, with a smaller environmental footprint, and fewer nondurable parts, that reduce capital and overall operating costs.

After spending time with David, John, and Steve, and learning more about the Flotek mission and David's focus on new niche technologies, we couldn't be more happier to join Flotek. We believe that production technologies and innovative lift systems will become more and more important, in a world where unconditional production continues to accelerate. And, we believe that our next generation design focused on increasing production, and improving operating efficiency, will become a standard by which artificial lift systems are judged.

Again, John, thank you for this opportunity and we truly look forward to working with you to broaden our emerging technology. Thank you.

Larry, thank you. We're delighted for you and your team to join the Flotek family. And, we're excited to add your expertise, enthusiasm, and penchant for innovation to our team, as we continue to build an exciting business focused on new, niche technologies, that have an opportunity to make meaningful improvements in the field of production technologies.

While many may think this is a small acquisition, I want to remind you of that good things come in small packages at Flotek. It was just over a decade ago, that Flotek purchased what would become the CNF technology for about a $100,000, and a few thousand shares of Flotek stock. Today it is the flagship of Flotek's technology portfolio.

Based on our review of the hydraulics market and Larry's technology, we're excited about the potential of this business. Both in the next several quarters, as well as in the next decade plus.

Before we take your questions, I want to say a special thank you to Rob Schmitz, Rich Walton, and our accounting and finance teams for continuing to accelerate our reporting timeline. Just as we want to be a leader in oilfield technology, we also want to be a leader in corporate governance and stewardship.

As a result of that incredible effort, I believe we are the first oilfield service company to file our annual report with the SEC. Something people would have never imagined was possible at the beginning of this journey.

While we won't always be perfect, we will strive to hold ourselves to the highest standards in the industry. Whether it relates to business opportunities, or opportunities to improve accountability, and transparency to our shareholders. That said, we understand the challenges in front of us, as we face an extraordinary level of uncertainty in our industry in the coming months.

We will leave recap guesstimates and all price predictions to the pundits. Instead, remaining acutely focused on what we can control. Our cost structure and resulting financial position, our level of service, which we will strive to take to even a higher level.

Our marketing efforts that focus on how Flotek products and services can make better wells, and as a result, provide better returns for our clients. Crafting creative business structures that create mutually rewarding results for both Flotek and our clients, and remaining true to our goal of maximizing value for our shareholders throughout the economic cycle.

Simply, we will strive to be at the top of our market, and focused on both relative and absolute performance. We can do very little about oilfield activity, oil prices, or rig counts. But, we are confident that we have the best products and provide the best service with the best people.

As we focus on our business, I am confident we can remain at the top of our game. And, at least on a relative basis, outperform the benchmarks our stakeholders watch closely.

Regardless of the challenges ahead, what I pledge to you today, as I did on my very first call about five years ago, is that my team and I will come to work each and every day knowing that you've placed your confidence and trust in us as stewards of your capital. We will take that responsibility very seriously and work hard each day to earn that trust.

Let me be clear. The success of Flotek is the result of hard work and untiring efforts of a group of people who believe they can shape the future. As a leadership team, it is incumbent on us to communicate our vision, challenge the spirit, and ensure our team has the tools to exceed even their wildest expectations.

Thank you for your interest in Flotek. I'm glad to be here and we look forward to sharing our journey, both challenges and successes, with you in the coming months.

Operator, we'll now open the call to questions.

(Operator Instructions)

Our first question comes from the line of Georg Venturatos from Johnson Rice. Your line is open. Please proceed with your question.

Hey, good morning, guys.

Hey, Georg.

John, I appreciate, first of all, the update on some of the FracMax information and validation programs. I wanted to first see if you could, maybe, just help frame up the magnitude of the record levels that we're seeing right now. In terms of ongoing and planned programs verse, say, you know, the trailing 12 month average, roughly, you know, kind of pre-FracMax introduction?

Sure. I think we've mentioned at conferences. FracMax has shortened the sales cycle. From what was several months. Now, is to several weeks, to a month or two. Which is a big impact.

And, the level -- you know, as we've mentioned in the validations. I think if folks look back in the transcripts compared to the middle of the summer. They've increased, you know, pretty significantly, those -- the concluded validations that we mentioned all started at the end of September or October.

So those were all initiated right at the end of the third, very beginning of the fourth quarter. And so, we have not seen -- and you know, we made a point of putting granularity into our prepared comments, a drop off in the interest of folks regarding validations.

Okay, and then, I believe you guys had mentioned, kind of, an 80% hit rate in terms of, you know, validation programs moving to commercial. You know, even in this type of environment, you think FracMax can, you know, drive that higher? Given what you're able to show operators today?

Yes. So, actually, the hit rate is a little bit higher than that on the ones that we concluded. The only folks out of the validations that occurred in the end of last year that have not continued was because they stopped all activity.

It wasn't because there was an issue with the technology. In fact, one of the operators increased their average well production by 40% and still laid down their rigs. So, when you get above 80%, you're getting in areas where, you know, that's unprecedented. You know, you're kind of defying gravity. But, it really is approaching 90% where folks continue on after they've seen the validation results.

Okay, great, and last one from me and then I'll requeue. But, when you look at the operators recently that you have converted, how would you describe these?

Were these previously customers that you were unable to penetrate in terms of getting them to accept the technology and FracMax was an integral piece of this? Or, are these just, kind of, operators that have come to the forefront given the marketing effort?

Every one of those validations that have been concluded and are underway are new clients to Complex nano-Fluid. And, almost without exception, every one of them is a result of seeing the production profiles under the public data with FracMax.

Okay, great. Thanks a lot, John.

Thank you, Georg.

Our next question comes from the line of Ben Schuman from Drexel Hamilton. Your line is now open. Please proceed with your question.

All right, good morning, guys. I guess, I'll take a shot at asking how you see Q1 playing out directionally with the lower customer activity in North America? And, at least, sort of, what you see is some of the major near-term swing factors in the business other than commodity price, movement, and rig counts? And, I guess, more specifically, how has January gone so far?

You know, fine question. I'm sure it's one on nearly everyone's mind who's on the call. January, every indication will be similar to January of 2014.

That in itself, we think, is a very interesting benchmark. You know, folks that follow Flotek know that we're not in the business of giving guidance. Even when the industry was much more predictable than it is now.

But, from what we can see in the first quarter, as we mentioned, we expect to outperform the benchmarks that we've set internally. And also, that our stakeholders look at. You know, I think, even Martin Craighead, for heaven's sake, with Baker Hughes, on their earnings call, said they're having a hard time seeing much beyond six weeks. So, ahead, when they had their call about 10 days ago.

So, again, the question specifically, regarding January. It will be at or above 2014.

Okay, great, fair enough. And then, I guess, looking at, sort of, the FracMax validations in a different way. Have you guys been able to determine what kind of improvement in IRRs that some of the E&P customers can get in some of these key basins using CNF products? Especially, as return rates have been so compressed, like all below $50.

Well, let me give you a statistic. And, to that level of specificity, you know, we'd welcome an offline visit with the FracMax analytical folks.

But, if you look at $48 oil in the Eagle Ford. Over the last 18 months, if you profile wells that use CNF versus those that don't. The average CNF well will produce $3.5 million more in revenue at $48 a barrel over 18 months. To give you an appreciation of what the impact is.

Okay, great. And then, let's see, just one more from me, maybe. Can you talk a little bit about potential gross margin impact? Or, how we could look at, sort of, detrimental gross margins, especially on the North American chemical side if the business were to pull back there a bit?

Sure. What we'll do on that is, again, it's probably a question that we're anticipating from other folks which is regarding pricing. And, the way we want to address that is to say that we're looking at pricing on a case-by-case basis. Both from a chemistry and downhole technology standpoint.

And, it all depends on whether we're trying to protect market or penetrate market. And, I think what we would like to say is that we've got a lot of flexibility with our balance sheet that we can defer payment with certain clients. If that helps from an overall pricing strategy.

We also have the ability on the folks that come into our loading dock or the suppliers to Flotek to accelerate payment. If that helps us get a better pricing in terms of affecting our raw material. But, I think overall, a couple of comments.

We're entering this period from the highest operating margins in Flotek's history. So, we're entering it from a position of strength. Do we expect some margin degradation? Yes, but every one of the pricing conversations we've had is tied to a recalibration of the pricing once the commodity price resets itself. Not knowing when that is.

So, we have not had an across-the-board pricing effort because we're looking at this on a case-by-case basis. And, at this point, because so much of our business is done through a distributive model, we're just not going to say yet, what we think the gross margin impact will be. We'll look at this at the end of the first quarter and, you know, if we have to adjust, we'll adjust. And, I think we'll go from there.

One thing I will say, and then we'll pass it on to Steve. Most of the folks probably on this call, have listened to Schlumberger, Halliburton, and Baker. And they all talked about how their technologies they think will be a difference maker through this cyclical term. In fact, Schlumberger even went so far as to say that 25% of their revenue is off of premium technology that carries a premium price.

For competitive reasons, we're not going to disclose our percentage of what we consider premium revenue. But, you can consider it to be meaningful and like those other companies, we believe that the technology of Flotek will certainly help impact the pricing issue that everybody's involved with. But, Steve can say a couple of other comments on that.

I would like to add that while we work with our customers closely and have good relationships, we also from the other side, work through our supply chain. And, we have addressed that from the very beginning of this. We've taken our top supply chain vendors, that came to us, suppliers, that come to us.

And, we have addressed it from our -- the other end of what they can do with us. Based on certain volumes, certain payments, we have some of that flexibility, as John said. And, we have been fairly successful with everybody that we've gone to.

So, while we also -- we're very cognizant of the needs of everybody in this marketplace, we are getting very good support from the other end to help us out. So, it's going both ways. We are getting some relief from the vendor -- from the supplier side.

Great. Thanks a lot, guys.

Our next question comes from the line of Matt Marietta from Stephens. Your line is now open. Please proceed with your question.

Good morning, guys.

Hey, Matt.

Hey, so staying on the pricing discussion there. Do you see a potential trade-off between pricing and continuing to grow sales volumes and capturing market share during the downturn? Or, what's the strategy in that potential trade-off?

Yes, so, as you might imagine, we're not going to divulge the overall strategy of our pricing. In large part because, you know, over 55% of our revenue is put through a distributed business model where over 90% of the chemistry is sold through the distributors of folks like Schlumberger, Halliburton, Baker, and the other pumping companies.

But, I think as a reference point, based on the improvement in the operating income, folks could see in the fourth quarter, that there was not pricing degradation to be able to accomplish those validations. But, I think the words that we want to leave out there for the folks on this call is that we look at pricing on a case-by-case basis, based on what the opportunity may be of the level of activity that a particular client can provide. Not only to us, but, actually in conjunction with the pumping companies. And, it's a collaborative effort with them as well.

You know, and I think I'd have to say that we're encouraged by their willingness to be embracive of pricing opportunities as they present themselves. But, you know, we're not trying to be keysi here. We're just not going to reveal the exact nature of the pricing strategy in this period of time.

Understandable. And that's actually a good segue into my follow up here. You know, a question on the expanding customer base in both the validations and commercial adopters of the CNF technology. Any specifics you can offer on these customers?

Are there any new basins, regions, geology that they're operating in? Anything kind of out of the box that they're working on or any comments you can maybe offer in the size of these companies or scale of their operations?

Yes, so, we'll give you a little bit of further context on that. We mentioned 234 unique clients have used CNF over the last 2.5 years.

And, that's out of a set of about 714 E&P companies that have provided data into FracFocus. So, that represents about 30% of the companies that have drilled and completed wells in the United States. Have actually used Complex nano-Fluid. The number of the wells is about 10%.

So, you can draw the conclusion that the largest operators, with the exception of one or two, have still not embraced the process of Complex nano-Fluid. Which is fully expected and no one should be concerned about that statement. Whether it's this industry or whether it's the medical industry, of trying to break into large hospitals, many times the larger companies take a longer period of time to break in with any type of new, disruptive change in thinking.

So, most of these clients, and as we mentioned in the third quarter earnings call, when we said, more pumping companies are pumping it and more clients are using it, was true then. It's true now.

Most of these companies, we would say, are just below the folks that drill 500 or 600 wells a year. That are in this validation program and ongoing. Although, in the first quarter, there will be two specific validations with major operators that have never availed themselves of CNF before as a direct result of FracMax.

But, I think maybe to -- the question that may be on your mind, Matt, and others, is, out of that last validation repeating only two or three folks stopped. And, that was because of their balance sheet. The largest percentage of these folks have good balance sheets that are continuing on with maybe less activity. But, certainly, they're planning to continue on using CNF with the activity they have. Did that answer it for you?

Yes, it did. That's very helpful color and pretty exciting to hear. But, you know, any basins or regions or geology that are new in these validations?

No, I would say overall, no. Because now -- well, I'll take that back. We pumped CNF for the first time in the diatomite in Bakersfield, California, and it was successful.

We also pumped CNF to my understanding, for the first time in the Tuscaloosa Marine Shale. It was successful and that particular operator has now delayed any of their going-forward program. But it was very successful.

Those were two areas that were new. And, we'll build off from there when the activity allows them to come back.

Our next question comes from the line of Mark Brown from Global Hunter Securities. Your line is now open. Please proceed with your question.

Thank you. Good morning, guys.

Hi, Mark.

Wanted to ask on the International Artificial Lifts acquisition. Obviously, a lot of the larger lift companies have invested a significant amount of capital over the last few years in artificial lift. How is this differentiated from what some of the larger competitors are doing? And, is this a better technology or is it focusing on a different kind of solution?

Yes, so, we'll let David McMahon, who heads up our production technologies take that in just a moment. But, I think for the folks listening in on the call, and we've had a chance to visit with you.

You know, our mission in the whole production technologies is to look at technologies that are maybe below the radar of the larger lift players. That, when you combine it into Flotek, has a chance to meaningfully add to our portfolio and this is a perfect example of that. That, we believe we can build off of. But, David will specifically answer your question as best he can.

Thanks, John. This hydraulic pumping unit such what Larry has designed is very similar to what a lot of the other large companies have implemented and they've done the same thing through acquisitions. Bought and -- some entrepreneurial designs from people and implemented it in the field.

But, when you look at Larry's design, it looks similar. But, when you look at the control system, and where he has patents on it and how he operates the hydraulic pumps. He does it with fewer parts and then can make it more efficient.

And, it also is what we'll talk about in the future is how he can synchronize his pumping units in dual wells. And, that's where he has some patent-pended technology. So, that makes it very unique.

And, it's one of the main interests we have in this company. It's because of the way he designs the hydraulic pumping, the control part of the pump jack.

Does that help you, Mark?

Yes, definitely. That's very helpful. I'll just change gears, and just wanted to ask about the Halliburton Baker Hughes acquisition announcement.

Has the announcement alone had any effect on your business yet? Obviously, Halliburton is one of your largest customers. And, Baker Hughes is another one of your customers. And, what potential implications would it have should that acquisition close?

So, okay, good question. Up to this point, we'd say there's been no effect. Pricing conversations are separately held with both of them. As you would expect, it's business as usual from our standpoint.

It's product development as usual with both of them separately as you would expect. You know, my personal view is that some of the smaller emerging pumping companies have a chance to benefit typically when these acquisitions all come together.

Those other companies have a chance to pick up a little bit. Time will tell. But, as of right now, we've seen no change in the business.

Okay, good, good. And, just my final question on the Bakken recompletion work that you're experimenting with. Is that -- maybe you could just give a status.

And, in terms of timing, I think you mentioned in the last call that this could be a very large market for you. What kind of timing do you think we would start to expect to see some meaningful revenues from that? And, would that be accelerated given the low oil price environment?

Yes, good series of questions there. Specifically regarding the Bakken, the operator that we're involved with on the recompletion there, due to a mechanical issue out of our control downhole and also weather. Although we were involved on one well out of three, we delayed further effort on that until later in the springtime.

But, I think that the whole recompletion approach; we're involved with several recompletion efforts in different parts of the US. One of the reasons for that, and obviously it's got the interest of the big integrated companies as well, the service companies, is that money's pulled out of the operating budget as opposed to capital. And, you know, I think folks are recognizing that maybe the first go-round, had they had a chance to do things a little bit differently, they might have.

And so, you know, I think, stay tuned, not only from us. But, I would expect in future earning calls from other service companies, they'll start talking more and more about this recompletion opportunity.

There's a large -- you know, it's target rich. There's a lot of wells out there that could benefit from small recompletions up to larger ones. Like I say, we're working on several different initiatives in different parts of the US.

All right. I'll stay tuned for that and I'll turn it back. Thank you.

Thank you, Mark.

Mr. Chisholm, there are no further questions at this time. I will now turn the call back to you.

Okay, thank you, Juan Estrada. Before we go, a quick reminder of our Investor Day coming up in Florida on Monday, February 2.

Don't worry, for those of you not wanting to miss the Super Bowl. We will host a watch party Sunday night. Go Patriots. Sorry if I offended any Seattle fans there.

On Tuesday, February 3, we'll be at the IPAA Florida Investor Symposium. And then on February 19, we're presenting at the EnerCom Conference in San Francisco. So, maybe we'll have a chance to see some of you on the road.

For more information on any of these events, please email IR@flotekind.com. And, we appreciate your interest and are pleased you joined us. Have a great Wednesday.

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