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Edited Transcript of FTK earnings conference call or presentation 7-Mar-19 3:00pm GMT

Q4 2018 Flotek Industries Inc Earnings Call

HOUSTON Mar 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Flotek Industries Inc earnings conference call or presentation Thursday, March 7, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Danielle Allen

Flotek Industries, Inc. - SVP of Global Communications & Technology Commercialization

* David P. Nierenberg

Flotek Industries, Inc. - Director

* Elizabeth T. Wilkinson

Flotek Industries, Inc. - CFO

* John William Chisholm

Flotek Industries, Inc. - Chairman, President & CEO

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Conference Call Participants

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* Alan Mitrani

* David Sachs

Hocky Management Company, LLC

* Georg Philip Venturatos

Johnson Rice & Company, L.L.C., Research Division - Associate Analyst

* Michael William Urban

Seaport Global Securities LLC, Research Division - MD & Senior Analyst

* Scott Laurence Scher

LMJ Capital - Founder

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Presentation

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Operator [1]

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Greetings, and welcome to Flotek Industries Fourth Quarter and Full Year 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce Danielle Allen, Senior Vice President, Global Communications and Technology Commercialization for Flotek. Thank you, madam. You may begin.

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Danielle Allen, Flotek Industries, Inc. - SVP of Global Communications & Technology Commercialization [2]

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Thank you, and good morning, everyone. We appreciate your participation. With me on today's call is John Chisholm, Flotek's Chairman, President and Chief Executive Officer; and Elizabeth Wilkinson, Chief Financial Officer.

Our earnings press release was distributed yesterday afternoon, which is available on our website. In addition, today's call is being webcast, and a replay will be available on our website.

Before we begin formal remarks, I would like to remind participants that during this call, some of the comments made may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and other applicable statutes reflecting Flotek's views, comments or expectations about future events and their potential impact on performance.

Words such as expects, anticipates, plans, beliefs, believes, estimates or similar expressions or variations of such words are intended to identify forward-looking statements, but are not an exclusive means of identifying such forward-looking statements. These matters involve risks and uncertainties that could cause our actual results to differ from such forward-looking statements.

Risks are discussed in our SEC filings, including our Form 10-K. Also, please refer to our reconciliations provided in our earnings press release as management may discuss non-GAAP metrics on this call.

Finally, after our prepared remarks, we will answer any questions you may have.

So with that, I will turn it over to John.

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John William Chisholm, Flotek Industries, Inc. - Chairman, President & CEO [3]

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Thanks, Danielle. We appreciate everyone joining us for today's call. I'll begin today with a high-level review of 2018 and then discuss our results for the fourth quarter and more recent events in additional detail.

2018 was both a challenging and exciting year for Flotek, given the continued dynamic backdrop of the industry. Operators' ongoing demand for improved well economics and pricing transparency is driving a paradigm shift in the business model to decouple the completion process. This evolution to self-sourcing consumables first began with diesel, moved heavily to profit in 2018 and is undeniably gaining momentum in chemistry as E&Ps ranging from private operators to large independents to the majors are expanding and accelerating their efforts to source chemistries directly.

In recognition of this environment, we've invested significantly to expand our unique portfolio of proprietary products and further enhance our in-house technical understanding accumulated over more than a decade of fluid system design and applications. This clearly sets us apart from our competitors.

Most operators today optimize their completion designs on a region-by-region basis, which is why we have deepened our in-basin technical knowledge base, fluid applications expertise and logistics capabilities. As such, in 2018, we transitioned the majority of our business from an FOB dock seller through traditional channels into a full service provider of reservoir-centric fluid systems directly to our clients at the wellsite.

This holistic and direct-to-wellsite approach, which is our Prescriptive Chemistry Management or PCM platform, allows us to work directly with our clients to achieve the full value of our chemistry offerings.

In turn, this partnership approach accelerates our own development of optimal designs and applications of our fluid systems.

I would note that the effectiveness of our fluid systems has been strong as evidenced by the fact that PCM revenue was the majority of our domestic revenue in 2018 compared to less than 25% in 2017. And importantly, we continue to see increased pull-through of our proprietary value-added chemistries via our PCM platform as well as an uptick in our revenue per client.

To be sure, our full-service delivery model has impacted our near-term operated -- operating margin profile as we have sought to seize the market opportunity in a dynamic and increasingly fragmented environment. However, we expect to begin to see increase in efficiencies in our logistics and other aspects of our operations during the second half of the year as a result of strategic changes we are implementing in the first half of 2019.

While transitioning our business model during 2018, we concurrently undertook significant efforts into adjusting our cost structure. We clearly still have more work to do, but I'm pleased to report that for the full year 2018, we reduced collective spending on G&A and research and innovation by $13 million or 23% from full year 2017 levels.

We continue to adjust our cost structure to meet our evolving business and ensure our long-term success. All costs have been and will continue to be closely scrutinized, including executive compensation in relation to the company's financial performance.

As you will see in our proxy statement that will come out in the coming weeks, my personal total compensation was 70% lower in 2018 as compared to 2017. Complementing our cost-cutting initiatives for 2018 was the enhancement of our corporate government -- governance.

Last year, we welcomed 2 new strategic and independent directors to our board following the departure of 3 long-standing directors. We also changed the leadership of our board committees in 2018, and each board committee now has a new chairperson. Importantly, we restructured and enhanced our executive leadership team, including the addition of Elizabeth as CFO at the end of December.

The Board of Directors and the executive team will continue to work closely together as we focus on further leveraging our core strengths in an environment of enhanced financial discipline.

Turning attention to the fourth quarter as Elizabeth will discuss in her prepared comments shortly, the year-end 2018 financials in our press release present our CICT segment as a discontinued operation for all periods.

As you've likely seen, the sale of Florida Chemical Company was completed last week. And the speed at which we moved from beginning to end of the transaction is an absolute testament to the quality of our people. Given that backdrop, let's take a look at some financial and operational highlights for Q4.

As previously disclosed and reflected in our most recent guidance for the fourth quarter, we expected ECT revenue to be down for the fourth quarter due to an approximately $12 million Middle East CnF order in the third quarter, which did not recur in the fourth quarter. However, for perspective, our fourth quarter 2018 international revenues were 45% higher than the average quarterly revenues achieved in the first half of the year.

Even more encouraging, despite the broader industry activity slowdown during the fourth quarter, our domestic revenue grew 6% from the third quarter, primarily on continued strength in our Mid-Con operations.

During the fourth quarter, we also spent a considerable amount of time on the negotiations and due diligence activity surrounding the sale of Florida Chemical. With the closing of the transaction last week, Flotek has now established itself as a pure play and leading provider of high-performance chemistry solutions to the upstream oil and gas industry.

While there are many benefits of the transaction, one which is key is the opportunity to work closely with ADM to jointly explore and develop next-generation chemistry technologies for the oil and gas and agricultural industries.

Our initial focus is on development of high-value, bio-based chemistries that complement our current technology portfolio and could include sustainable surfactants and oils.

We have also significantly increased our financial flexibility as a result of closing the transaction. After transaction fees and working capital adjustments as well as paying off all of our outstanding debt and associated accrued interest, net proceeds from the transaction were approximately $111 million, including $17.5 million held temporarily in escrow to cover any post-closing adjustments.

We previously announced the formation of a Strategic Capital Committee, which is comprised of key members of the board and executive management. The committee is focused on thoroughly evaluating and making recommendations to the full board on how to best deploy our significant cash balance as a result of the transaction.

These options could include returning capital to shareholders, executing share buybacks, funding previously identified organic growth projects, making additional investments in the business that increase long-term shareholder value and exploring other alternatives.

The members of our board and the committee realize the importance of the opportunity in front of us, and they will take the necessary time to determine what is in the best interest of our shareholders.

In this context, we are pleased to announce that the company has engaged Citi to serve as financial adviser. The committee has also started having meetings and is establishing a framework for decision making, including assessing growth strategies, evaluating benchmark metrics and selecting methodologies for evaluating alternative uses of the proceeds from the sale of FCC.

In light of the recent announcements related to the committee, I've asked the Chairman of the Committee, David Nierenberg, to be available during the question-and-answer portion of this call to address any specific questions about the committee's activities.

With that, I'll turn it over to Elizabeth to discuss our financial results in more detail.

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Elizabeth T. Wilkinson, Flotek Industries, Inc. - CFO [4]

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Thanks, John. As John mentioned, the financial tables in our press release present the operations of our CICT segment as a discontinued operation for all periods. As such, I will focus my discussion today on quarterly results for our continuing operations, which includes our energy business as well as our supporting Research and Innovation Center and our corporate functions.

Given the broad industry slowdown and completions activity for U.S. onshore and the significant decrease in average WTI price in the fourth quarter as compared to the third quarter, our overall top line results were impacted by industry conditions. However, as John mentioned, we saw a 6% increase in revenue for our domestic business, which was primarily driven by continued strength in our Mid-Con operations.

Our operating expenses as a percentage of revenue for the fourth quarter of 2018 increased quarter-over-quarter, primarily due to higher freight expenses and a broader mix of chemicals sold.

Corporate G&A decreased 9% to $6.8 million for Q4 2018 from $7.5 million for Q3 2018 due to the impact of cost-cutting efforts and the reversal of the $0.4 million bonus accrual. For the full year 2018, corporate G&A of $31.5 million was down $10 million or 24% from the full year 2017 total of $41.5 million.

Research and innovation costs fell slightly to $2.3 million for Q4 2018 from $2.4 million for the third quarter. For the full year 2018, R&I expenses were $10.4 million, a decrease of 21% from the $13.1 million level in 2017.

Moving down the income statement, we recorded miscellaneous other expense of $2.4 million, primarily associated with the write-off of certain assets determined to be no longer core to our long-term business and not warranting continued investment to achieve commercialization.

For the fourth quarter of 2018, we also reported a tax benefit of $22.7 million. This was primarily the -- a result of the sale of Florida Chemical closing before we actually issued our year-end financial statements. Doing so allowed us to reverse the majority of the valuation allowance previously taken against our deferred tax asset related to our balance of carried forward net operating losses, or NOLs.

Following the anticipated use of our NOLs to offset our Q1 estimated tax gain on the sale of Florida Chemical totaling $117 million, we expect to have a little more than $10 million of NOLs left over and available to offset for future earnings in 2019 and beyond.

The combined result was fourth quarter 2018 net income for continuing operations of $9.9 million or $0.17 per diluted share as compared to a net loss of $4.9 million or $0.08 per diluted share for the third quarter of 2018.

Turning to the balance sheet. As of December 31, our net debt was $46.7 million, including $3 million of cash and $49.7 million of borrowings on our credit facility.

Finally, our working capital position as of December 31 was $110.5 million, including net assets held-for-sale of $109.3 million and the outstanding balance of the credit facility as of that date.

In conjunction with the closing last week of our sale of Florida Chemical, we paid off our revolver balance and terminated that credit facility, which we expect will save nearly $3 million in annual cash interest expense from year-end 2018 debt levels. Net of transaction fees and working capital adjustments and following the pay down of our credit facility, the remaining net proceeds received by Flotek totaled approximately $111 million, including amounts to be held -- temporarily held in escrow totaling $17.5 million. These proceeds will be subject to customary post-closing adjustments.

Moving forward, we anticipate meaningfully lower levels of working capital, including international accounts receivable, which typically carry longer payment periods.

By way of illustration, as of December 31, working capital from continuing operations would be $51 million, if you exclude net assets held-for-sale and you exclude the balance of our credit facility at that date. If we were to then include the roughly $10 million of citrus terpene inventory, we reflected in assets held-for-sale as of December 31, but actually retained when we sold Florida Chemical, we end up with approximately $60 million of working capital. This is at the high end of the range of working capital we expect to carry going forward, but it is far less than the amount we carried when we were combined with Florida Chemical.

As John mentioned, while we made important progress in 2018, I am now pleased to announce that we have continued to drive further costs out of the business since the announcement of our pending sale of Florida Chemical back in January.

Since then, we have identified a number of additional cost-cutting opportunities that will result in incremental and sustainable cost savings. As a result, we are targeting corporate G&A levels of slightly less than $5 million quarterly and research innovation -- and innovation expense of $2 million quarterly. We expect to achieve the full run rate levels of these lower cost targets in the latter half of 2019.

Supplementing these savings, our targeted operational cost improvements centered on headcount reduction and improved logistics efficiency, which at Q4 2018 activity levels would move us back to double-digit operating margins and put us on a path to reaching positive quarterly adjusted EBITDA by year-end.

In total, at Q4 2018 activity levels, with our overhead and operating cost-savings initiatives, we are targeting taking approximately $15 million annually out of our cost structure, and this is incremental to the $5.5 million we mentioned in our conference call in January.

Looking more specifically at the first quarter of 2019, consistent with the broader industry backdrop and limited visibility due to the overall delay in capital budget setting by operators, we see our top line results for Q1 likely to be slightly down from the fourth quarter of 2018 as January and February activity got off to a slow start. That said, despite this, we are seeing our proprietary value-added product sales are currently trending up in Q1.

I would also note that for the first quarter of 2019, we are expecting slight product margin improvement. However, we are not expecting overall margin improvement as we continue to implement additional operational efficiencies that will have greater impact over subsequent quarters.

And now, I will turn it back to John for his closing comments. John?

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John William Chisholm, Flotek Industries, Inc. - Chairman, President & CEO [5]

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Thank you very much, Elizabeth. While I've been pleased to see oil prices improve since the beginning of the year, we expect continued periods of volatility. As such, we are focused on managing our business in a $50 per WTI barrel price environment.

Operators are facing diminishing returns as mechanical variables have reached, in some cases exceeded, both their economic and technical limits in completion designs. The steady drumbeat for efficiency must evolve to a more holistic approach, which looks at both efficiency and effectiveness in completions and well performance. In the pursuit of performance, chemistry customize to the reservoir is critical to driving true capital efficiency.

Core to our value proposition is a deep base of technical expertise and fluid designs across multiple basins. More specifically, we responded by further integrating our team of technical experts, ranging from chemists to reservoir engineers to geoscientists into our sales process to streamline the sales cycle and feedback loop of our value-added product and service offerings.

More than ever, our clients are bringing a broad cross-section of technical disciplines to the table to evaluate our chemistries. And we are leveraging our growing knowledge in understanding the performance of our advanced chemistries, which have now been applied over thousands of wells across a wide variety of basins and reservoirs.

This is paramount as we develop long-term relationships with our clients and continue to work closely with them to identify and apply the best-customized solutions to meet their needs.

In short, our business centers around leveraging the powerful role the custom chemistry can play in the industry's pursuit of lower cost per BOE produced. Relevant now more than ever, our fluid designs are increasing production rates, improving child well performance across development programs and ensuring continuous and improved production levels in enhanced water flooding programs. And we will continue to expand upon our deep base of experience and our broad portfolio of innovative solutions.

In closing, in the new normal of anticipated and ongoing commodity and completion activity volatility, we bring to bear our best-in-class chemistry technologies in a strong financial position.

With this as our foundation, we are unwaveringly focused on driving higher returns for our clients, while remaining aggressive in our own efforts to build a profitable, through the business cycle, long-term benefit for our stakeholders.

So with that, we will now open up for questions. Operator, we'll turn it back to you, Nancy.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Mr. Georg Venturatos from Johnson Rice.

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Georg Philip Venturatos, Johnson Rice & Company, L.L.C., Research Division - Associate Analyst [2]

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John, first congrats on wrapping up the Florida Chemical sale. I just wanted to start off on that, and I think, you said you have David on the line as well. Just given you've now got, look, nearly $2 per share in net cash post the debt pay down, just wanted to get a couple of items update on, is there any sort of key timing or date that we should be aware of in terms of decision making on the strategic capital side? And then secondarily, as we look at opportunity set, I know that previously you'd talked about $20 million to $30 million in sort of organic logistical efficiency opportunities. Has that expanded or contracted? And then how do you weigh that versus kind of some of your larger acquisition and new product line opportunities?

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John William Chisholm, Flotek Industries, Inc. - Chairman, President & CEO [3]

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Sure. So thanks for the question. First, we'd like to share with everybody, we recognize a company of the size of Flotek with this type of capital cash is in a very unusual situation. And for that reason, primarily is why we asked David to be involved, which is a bit unusual in itself. But that being said, really it's a collaborative effort between the leadership and the board. Elizabeth heads up really from the financial side the effort on that strategic capital committee. And we've not set a line in the sand as to have a decision by X to allow it to fully progress. But I'll let Elizabeth chime in, and then, certainly, she can ask David to chime in as well.

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Elizabeth T. Wilkinson, Flotek Industries, Inc. - CFO [4]

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Yes, I would agree. We definitely, with regard to the timing of decision making, intend to take a very disciplined and measured approach to going through a full gamut of evaluation about the company and its conditions and opportunities and so forth. As regards the $20 million to $30 million that we had mentioned as potential capital growth projects, honestly, as we see it, this company and the opportunities that we have are pretty capital light, that number was probably a bit on the high side. There are some opportunities that would require some capital expenditures, and they are certainly in the queue along with many other alternatives. But I just wouldn't want to overemphasize that. I mean, there are some potential organic growth opportunities out there, but I think we have a lot of other areas that we plan to evaluate before coming to our conclusions.

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John William Chisholm, Flotek Industries, Inc. - Chairman, President & CEO [5]

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Yes. And Georg, we obviously can give you a follow-up if you want to, but let me just interject one thing. When we asked David to come on to the board last summer, we didn't know this would be the outcome of this amount of capital, but we do knew very well what his background was as a partner at Bain Capital for a big part of his career, where making decisions like this were probably never routine, but for heaven sakes, they made hundreds of them in different investments. So we feel really fortunate to -- it's evolved this way, and David, you can certainly chime in if you want to on your assessment as to how we put together this committee and your participation in it.

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David P. Nierenberg, Flotek Industries, Inc. - Director [6]

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Well, thank you, John and Elizabeth. And Georg, I hope you're recovering from Mardi Gras.

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Georg Philip Venturatos, Johnson Rice & Company, L.L.C., Research Division - Associate Analyst [7]

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Hanging in there.

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David P. Nierenberg, Flotek Industries, Inc. - Director [8]

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Hanging in there. As Elizabeth just said, that $20 million to $30 million number that had been previously mentioned was really more a possible example rather than a commitment. We are looking at all possibilities in our process. And before I talk about the process, let me just correct one little thing John just said. I wasn't at Bain Capital. I'm such an old person, I was there before Bain Capital, I was a partner at Bain Consulting, joining the firm in '78 and leaving in '85 to get into the investment business. So let's talk about what the committee is doing in its process because, Georg, I think that will give you some sense of what we are already doing because I heard the part of your question about timing. The management and the board took the initiative to create this committee once we knew that the sale of Florida Chemical is highly likely to happen. And the committee was charged by the board with the right mission, which was to determine what to do with the net proceeds of the sale. That, of course, requires a thorough reassessment, reconsideration of the company's strategy and its ability to execute that strategy. The committee was populated with senior members of the management and 3 independent members of the board, 2 of whom are operators. And we are working together as a team. I am the committee's Chair because I'm an independent outside director, but operationally, the committee is co-led by Elizabeth and me. Why the 2 of us as co-leaders? Well, we're both new and independent. We're both financial professionals. We have extensive turnaround experience, both of us, and then my experience is in strategy and my extensive work in governance with the Millstein Center at Columbia Law School and Glass Lewis. The committee already has developed a detailed work plan of key questions, which must be and are in fact being answered, and also determining the right metrics to use -- to assess the value of all possible uses of cash and to benchmark how they might be used and how they might benefit stakeholders one against the other. I guess, what I really want to emphasize, Georg, this morning, and to everybody listening, is that the company is not waiting until the committee's process of deliberation is completed before it takes action. For instance, what you've just heard from Elizabeth and John about the depth and pervasiveness of cost-reduction efforts of the company reflect our understanding or evolving understanding of the new business model for a single business company under which we are committed, as Elizabeth said, to get as fast as we can to cash flow breakeven, if not better. And while we will consider possible capital expenditures, we will do it with the right degree of professional skepticism and deliberation. Being very selective about which basins and nations we choose to compete in and where we don't. And even when we need equipment, we will be very shrewd about thinking about alternative ways to drive the capital costs as low as possible, spending the company's money as if it were our own. In addition to that, Danielle Allen and her team are doing excellent work on market and customer segmentation and customer targeting, which is relevant to capital allocation decisions. And R&I under James Silas' leadership is focused on several key projects that can help us to reduce product cost and improve its efficacy. So I want to leave with the comment that good stuff is already happening, even before the committee finishes its work. And until we do complete our work, it's almost impossible to say specifically what strategies will be pursued operationally and what strategies will be pursued financially. We are -- regardless, we are committed to not burning the cash that we have the way the company did in the past. This is a process of deliberation. I emphasize the word process to pressure test, to build buy-in and to arrive at the right answer. The D3 Family Funds are a large shareholder in Flotek, and we like others on the call are underwater. We, therefore, do want to get to the right answer as rapidly as possible. We genuinely share the sense of urgency of other stakeholders, but if we artificially rush this process or assume our way to the right answer, the soufflé will not rise. So we want to reach the right answer with the right process, driving the right possible outcome for all stakeholders of this company.

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John William Chisholm, Flotek Industries, Inc. - Chairman, President & CEO [9]

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Thanks, David. Georg, follow-up?

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Georg Philip Venturatos, Johnson Rice & Company, L.L.C., Research Division - Associate Analyst [10]

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Yes, just a couple. I appreciate that update across the board, and David, thanks for that as well, and I just understand the patience that's needed to make that decision. So certainly, I understand that time line is a bit flux. Yes, John, maybe operationally, just had a couple of quick ones. One, I recognize the 1Q guidance, I know your top line touched about slightly lower sequentially. Can you speak maybe to domestically versus internationally looking out at least into -- to 1Q and the first half? And then, I guess, on the international side, you did mention traction in the Middle East and I know that we're not going to have the contribution as we did in the third quarter, but is there any visibility or line of sight to any future larger orders of a similar magnitude?

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John William Chisholm, Flotek Industries, Inc. - Chairman, President & CEO [11]

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Yes. So I think we want to leave it as slightly down for the first quarter, although we talked about our value-add in chemistries are increasing in that percentage of the revenue, which is kind of the contour to the narrative out there of this just relentless cost cutting. I think us and other companies that can show value of value-added are able to assuage the clients to spend the capital on that. The Middle East, as we talked about late last year, this is a brand-new experience for many people there in the Middle East. I was at a conference over the last couple of days and some of them were really actually surprised that now the majority of completions are actually hydraulically fractured. That just didn't happen 3 years ago, 4 years ago. So the predictability of the usage of the chemistry as you're going into kind of a new environment is very difficult. And I know people have felt we're not the world's greatest predictors, we accept that. We do the best we can in an environment where now there is new fracturing going on over there, not only in Saudi Arabia but other countries like Oman and others, which is why if folks look back to the last couple of years, I've always said, we think that is the #1 international area for us. So it'd be a mistake for me to say when we think there'd be another significant order, certain different things are in play, Georg, and we expect the Middle East to continue to build through the rest of the year. I think it's the way we'd like to leave it. It's going to be lumpy. There could be a bigger order. But I think we continue to see that it'll continue to grow throughout the rest of the year, and hopefully, that helps for you. I was at a conference where also a couple of the pumping companies talked about what their vision out was, and they were meaningfully sized companies that they say that their calendar at best looks 6 to 8 weeks out. And so I think, for everybody to kind of level set, that's the new normal now. With the volatility of the pricing, the volatility of the, in many cases, excess supply, 6 to 8 weeks is even what the visibility is of companies that are in this business on the pumping side that are much larger than us. So we see a continued build through the second quarter, and I think we'll leave it at that for right now. And we'll share with folks as we see a change in that as we move through the quarter. Fair enough?

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Georg Philip Venturatos, Johnson Rice & Company, L.L.C., Research Division - Associate Analyst [12]

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That's -- appreciate that John. And last one for me, and then I'll requeue. Just on the cost side, I don't want to miss that side. But you talked about corporate G&A target less than $5 million quarterly. Can you just run through, I know Elizabeth mentioned a few, but just kind of the key items that get us there, variance relative to where we were this quarter, for example?

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John William Chisholm, Flotek Industries, Inc. - Chairman, President & CEO [13]

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Sure, I'll turn that over to Elizabeth.

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Elizabeth T. Wilkinson, Flotek Industries, Inc. - CFO [14]

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Yes. So I mean, obviously, headcount is a significant part of the picture. And in addition, I think there is some different contract costs, IT-related costs and a number of different areas where we have been able to find a little bit here and there to bring that about where we think we'll be able to bring that about.

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Operator [15]

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The next question comes from Mike Urban with Seaport Global.

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Michael William Urban, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [16]

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Wanted to stick with the guidance here a little bit, I think I may have misheard it. So for -- you talked about the revenues being down slightly, and then the margins, you say there is some modest underlying margin improvement, but then the overall margin is down. Is that because of some of the money you had to spend to drive the profitability and efficiency improvements that you are targeting for the second half? Did I hear that right or if you can provide a little more color please?

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John William Chisholm, Flotek Industries, Inc. - Chairman, President & CEO [17]

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Sure. We wanted to try to call a distinction between product margin and overall gross margin. The product margin, we believe, should increase slightly due to the product mix of more value-added chemistries in the first quarter, is what our internal metrics are showing us. So we wanted to call that out. We didn't want any confusion that well, the reason those are being purchased is they're discounting them. Actually, we're not so that margin should increase slightly. And the overall, I'll call it, operational component of the gross margin, we believe will be flat through the quarter, but that's an area that we're targeting in more efficient from a cost standpoint that we think will improve through the second and third quarter. Does that give you better clarity, Mike?

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Michael William Urban, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [18]

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Yes, that's...

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John William Chisholm, Flotek Industries, Inc. - Chairman, President & CEO [19]

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And Elizabeth sounds like she wants to chime in.

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Elizabeth T. Wilkinson, Flotek Industries, Inc. - CFO [20]

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And we'll also be impacted by severance costs, for example, due to considerable headcount reductions.

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Michael William Urban, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [21]

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Okay. And presumably, you would call that out though?

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John William Chisholm, Flotek Industries, Inc. - Chairman, President & CEO [22]

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Sure.

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Michael William Urban, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [23]

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Okay. And then, how much do you have to spend in order to drive the margin, I guess, excluding cost severance and things like that, are there investments that you would have to make, any cost you would have to incur to drive the operating margin improvement, I guess, excluding kind of the incremental investment that the committee is contemplating here?

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Elizabeth T. Wilkinson, Flotek Industries, Inc. - CFO [24]

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There can be some contract terminations that would prove to be worthwhile. So that -- this is one of the things that we have contemplated related to logistics.

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John William Chisholm, Flotek Industries, Inc. - Chairman, President & CEO [25]

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Yes. And I think to maybe give everybody a little bit additional color on that, what Elizabeth is talking about, and I think, probably as you talk to other people you cover, Mike, this whole logistics thing, and in particular, the last mile in many cases can be the Achilles heel of your margin or you can use it as an opportunity. And we have elected at this point in time not to have an internal fleet of drivers at Flotek. And so once you've made that decision, then you can look at either our committed drivers or on the call as you get them drivers of third parties to handle that. And we've evolved the process from having less committed drivers to more flex drivers from third-party people for a couple of reasons: a, the way the activity is, the logistics costs are going down and so we're trying to take advantage of that. But we also think we're getting a much better handle on the ordering of this new business model that we didn't -- that we do not need this assurance of committed drivers that we looked at very closely and the utilization was somewhere only around 50% or so. And so by removing that was of the contracts she is talking about will be part of this cost component that will improve the margins as we move through the first half of the year. Does that help?

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Michael William Urban, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [26]

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Yes, that's helpful. And is that what was driving the margin issue in Q4 as you did have and still, I guess, do have those dedicated drivers and the contracts associated with that and you'll be moving to that outsourced model? And do you think that's what's going to drive the improvement in profitability?

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John William Chisholm, Flotek Industries, Inc. - Chairman, President & CEO [27]

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Yes. So there's 2 things on the situation of the margins in Q4. What you just identified is one, and then when you have a -- as we called out a meaningful order of CnF in Q3, that's a high-value, higher-margin product. And if that doesn't repeat itself, then the margins itself will come down slightly just because of the margin differential that's in those higher-margined premium chemistries. Does that answer that for you?

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Operator [28]

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The next question comes from David Sachs from Hocky Capital.

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David Sachs, Hocky Management Company, LLC [29]

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So first, I'll speak for shareholders and thank David for his involvement in the company, and hopefully, that will lead to a robust conclusion to the process and appropriate allocation of capital. So a couple of questions on the operations. If we can talk about the top line of the business you're indicating will be down modestly in the first quarter, and with ballpark $50 oil, the business should be sequentially improving through the year and the exit rate should be modestly higher than Q1, 10% higher or 15%, just kind of a general guidepost of the direction of the business as you see it today? And then, your goal to get to EBITDA breakeven by the end of the year, I'm just trying to make sure I understand if that -- what the revenue model is to get to that number?

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John William Chisholm, Flotek Industries, Inc. - Chairman, President & CEO [30]

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Sure. Well, thanks for acknowledging the involvement of David. He is perhaps one of the more visible, but we really do like all of our directors. He plays the unique role, which is why we asked him to participate on this call. So thanks for acknowledging that. As I mentioned with Georg, and this is something that people are very -- just I don't want to say uncomfortable with, but the visibility for everybody is probably as difficult as it's ever been in this industry. As I mentioned, the CFO of one of the largest pumping companies at a conference talked about a 6-week to 8-week calendar on their pumping schedule. They would not even start to talk about what does the third and fourth quarter of 2019 look like. So that's the backdrop with which we're dealing in. But the reason we are saying the year will continue to trend up, and then I'll turn it over to Elizabeth, is our internal metrics that we follow, the part of which we shared with on this call, is that we are gaining more revenue per client on PCM. PCM is becoming a majority of the business. And we, along with many others, believe the industry will continue to evolve through more sourcing of the consumables directly. And that's the backdrop as to why we believe the revenue will continue to increase even in an environment of where the completion activity may be flat or slightly up. The movement of the way the completion process is being done is continuing to move in the direction we felt it would for the last period of time. But Elizabeth can give you some more context of that keeping in mind we don't outwardly give complete guidance on what the year revenue will look like.

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David Sachs, Hocky Management Company, LLC [31]

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Yes. I'm just trying to determine where their base is if we're going to achieve EBITDA breakeven. What do we need based on the cost structure you've set in top line to do that?

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Elizabeth T. Wilkinson, Flotek Industries, Inc. - CFO [32]

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So here's what our -- the backdrop was on the cost cutting and the driver for the order of magnitude that we're pursuing and that's that we're looking at improving EBITDA under prevailing market conditions, and we are trying to avoid any innuendos about increasing revenues. But to be more focused on what is the cost structure of our company as it is today and what does it need to be under our current prevailing weak market conditions for us to turn our business into a condition where it can produce a positive EBITDA and that's what drove positive...

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David Sachs, Hocky Management Company, LLC [33]

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So you were base budgeting the cost model to $160 million, $170 million of revenue and we need to show positive EBITDA at $160 million to $170 million in revenue, and to the extent, we can drive or experience better revenue, we should seek commensurate flow-through in profit?

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Elizabeth T. Wilkinson, Flotek Industries, Inc. - CFO [34]

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I don't want to go into that higher degree of detail and specifics, but I will just say that in the generally prevailing conditions, that is our goal to get to make the cuts deep enough to get us to a positive EBITDA condition -- positive adjusted EBITDA.

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David Sachs, Hocky Management Company, LLC [35]

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And what would you estimate the cash costs to identify -- that you identified with the $20.5 million in cost reductions, the additional $15 million you mentioned today, that the $5.5 million that you'd identified earlier...

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Elizabeth T. Wilkinson, Flotek Industries, Inc. - CFO [36]

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Essentially, all cash costs. I mean, it's essentially all cash costs. It's the headcount...

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David Sachs, Hocky Management Company, LLC [37]

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Let me resave that -- rephrase that. What's the cash burn to Flotek to achieve those because there will be severance, there might be lease terminations? I'm just trying to understand what the onetime cost thesis is?

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Elizabeth T. Wilkinson, Flotek Industries, Inc. - CFO [38]

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The severance is very small in the scheme of things. I mean, the severance is going to be in the hundreds of thousands, the cost cutting, as we've said, is over $15 million on an annualized basis and a little bit less than that in the current year.

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David Sachs, Hocky Management Company, LLC [39]

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Okay. But the cost to achieve is single digit -- low single-digit millions to achieve $15 million to $20 million in cost savings?

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Elizabeth T. Wilkinson, Flotek Industries, Inc. - CFO [40]

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Not even.

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David Sachs, Hocky Management Company, LLC [41]

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Not even. Well, that's great work. And then what would you guesstimate your normalized capital spending for -- excluding these growth projects, just the new and improved Flotek...

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Elizabeth T. Wilkinson, Flotek Industries, Inc. - CFO [42]

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Not including organic growth-type projects that you might be thinking of. We're in the sort of $4 million to $9 million range for maintenance-type CapEx.

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David Sachs, Hocky Management Company, LLC [43]

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Okay. And last question, so we have this tremendous success last year of penetrating a client in the Middle East. They had apparently tested on their own dollars the efficacy of your product for a year or longer in -- before they made a determination to pick your product. It's now been applied and it's been used in the field. Is there anything you can update us in terms of the performance? Is there wells since they've started using Flotek chemistry? And if there are milestones along the way or the typical reorder patterns that you would anticipate seeing with that client and I also believe in the press release you mentioned that you've seen additional traction with other Middle East accounts. Just if you can expand upon that beyond just mentioning Oman in your prepared remarks?

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John William Chisholm, Flotek Industries, Inc. - Chairman, President & CEO [44]

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Thanks for those series of questions, David. The -- as most who follow the progression of our discussion of client activity, we allow the clients to talk about the performance as they see it. We don't want to get ahead of where they want to talk about things. I think, in the past, we may have and that didn't serve anyone well, whether it was ourselves or our shareholders. So I think, at this point in time, as frustrating as it may be for some on the call, we want to just stay with where we are, and we'll let the next 6 months turn out in whatever fashion they do. And that could very well be frustrating, but it's the path we've selected to not only protect the integrity of our client relationships, but also to provide some protection from any type of competitive environment. Thank you on that line of questioning.

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Operator [45]

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(Operator Instructions) The next question comes from Scott Scher from LMJ Capital.

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Scott Laurence Scher, LMJ Capital - Founder [46]

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I appreciate it. Thank you to David as well for being on the call. And John and the team, congratulations on the sale of Florida Chemical, that's fantastic. So Elizabeth, I have a question on the accounts receivable and the inventories. The 8-K you put out the other day showed the pro forma for the sale of Florida Chemical, and it showed $45 million of accounts receivable and $45 million of inventory. What do we think inventory turns are going to be in the new business? And what do you think accounts receivable DSO is likely to be? And then I have a follow-up.

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Elizabeth T. Wilkinson, Flotek Industries, Inc. - CFO [47]

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So for inventory turns, at the moment, as I mentioned earlier, we think we're going to be a little bit at the higher end of our overall working capital range that we would typically expect. So I think, it's going to be lower than the sort of $5 million to $7 million that I had anticipated coming in at the earlier part of this year. On day sales outstanding, I think that we do just tend to have a little longer statistic for this company. I'm hoping that we are going to see it go down because of the lower amount of international -- the lower percentage of international receivables, but as to like a specific number for you, I'm not sure I can give you a number there.

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John William Chisholm, Flotek Industries, Inc. - Chairman, President & CEO [48]

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And if you like, Scott, we can...

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Scott Laurence Scher, LMJ Capital - Founder [49]

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But are we managing to a 90-day DSO? So is that kind of where we are managing to?

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Elizabeth T. Wilkinson, Flotek Industries, Inc. - CFO [50]

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I certainly don't plan to manage to a 90-day DSO. So we'd love to be working to get that down absolutely.

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Scott Laurence Scher, LMJ Capital - Founder [51]

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Okay. And then the -- what's in that $22 million of other current assets? I'm just curious because I'm staring at it for the first time in a really long time. You have a clean balance sheet, goodwill is gone, lots of things are gone, the debt is gone. This is like the cleanest balance sheet this company has had in a decade. So I just want to make sure I understand it. So the balance sheet you put out in pro forma the other day had $21.9 million of other current assets, what's in there?

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Elizabeth T. Wilkinson, Flotek Industries, Inc. - CFO [52]

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You know, I don't have that in front of me. The other current assets -- are you -- what is the number that you're looking at?

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Scott Laurence Scher, LMJ Capital - Founder [53]

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I'm staring at the September 30 8-K pro forma that was put out in the 8-K 2 days ago, the pro forma balance sheet adjusted for the sale of Florida Chemical, and it shows $101 million cash, $45 million AR, $45 million inventory, $2.4 million income tax receivable, and then there is a line item, other current assets of $21.9 million. I just want to know what was in that because it's a current asset, which means it's going to become cash shortly?

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Elizabeth T. Wilkinson, Flotek Industries, Inc. - CFO [54]

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Right. I'm sorry, I just -- I don't have that pro forma in front of me. And I just don't have it off the top of my head, but I'm happy to take that offline, and I'll have a look at that. It's just not coming to me.

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Scott Laurence Scher, LMJ Capital - Founder [55]

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That's fine. Where I was ultimately going is the current assets are net $216 million, and conveniently, the accounts payable are $16 million. So we basically have $200 million of net current assets, $100 million of which is cash; $45 million of AR, which we presume are good, these are good claims; and $45 million of inventories that were clean, and through this process, we've had to clean it. So you have $200 million of net current assets and no debt on the company. And you know where I'm going, of course, and the stock is trading at a valuation today of $170 million. So with all due respect to David, and David and I've spoken before, with all due respect, John, to you to wait for this process, why would we not over the next 2, 3 months, while the stock is cheap, buyback some stock. I know you want to wait for this process, but if you come out with an announcement 90 days from now and say we're going to do a $50 million buyback, you will not be buying back stock at $3. You'll be buying it back at $4.50. So as a shareholder, I would love to understand why we have to wait for that process kind of under almost all scenarios, I can't imagine that we would need the entire $100 million.

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John William Chisholm, Flotek Industries, Inc. - Chairman, President & CEO [56]

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No. I think that's a fair observation. One that we've heard from other folks, Scott. David, do you want to chime in on that question?

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David P. Nierenberg, Flotek Industries, Inc. - Director [57]

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One of the great things about having Scott and David on this call is that I share their impatience. Sometimes, they even make me look moderate by contrast. But I absolutely appreciate their suggestions and their sense of urgency. And I want to move this process along as rapidly as we can. There are other people who from time to time don't talk about a repurchase. Other people talk to us from time to time about special dividends. Scott and David and -- we all know that the consequences of one are a short-term benefit for everybody, the consequences of the other are a potentially powerful mid- to longer-term benefit for those people who are longer-term stakeholders. So there's a judgmental process that we are going through as rapidly as we can to determine the proper mix of those 2 strategies as well as to figure out what is needed for ongoing maintenance and what is needed for the pursuit of any possible growth strategies we may consider. Not trying to dodge the bullet here, but the repurchases is not the only thing that we've been hearing about. And so we are trying to approach it through an integrated and holistic process and to move it along as quickly as we can. I'll share one thing...

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Scott Laurence Scher, LMJ Capital - Founder [58]

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One more question, if I may. And I'm just sure it is a little more complicated. So obviously, over the last 2 years, John, you guys have done an unbelievable job within a downturn in the industry to completely pivot this business from an indirect model to a direct model. And I give you a tremendous amount of credit for recognizing it and doing it. Let's imagine that 2, 3 years from now, the business isn't annualizing at $160 million. Let's say, it's annualizing at $225 million or $250 million. And let's hypothetically say that you're doing 15% EBITDA margin. So that will be about $40 million of EBITDA. Even if we get our corporate G&A down to $20 million, we would be consuming half of our EBITDA by being a public company. Just simple math, right? And I'm putting a lot of credit in Elizabeth, she seems very talented that we can get the corporate G&A to $29 million. So let's presume we can do that, I'll give you the benefit of the doubt. And I'm giving you the benefit of the doubt you can get the business from a revenue standpoint back to levels we haven't seen in years. And I'm giving you 15% as an EBITDA margin. Can you just comment? And David, you can comment also that within your strategic process we'll come up with some level of what we feel we're comfortable with the corporate G&A consuming the EBITDA? I'm sure you see the math. Can you just comment on that? And what level of EBITDA were you willing to spend in being a public company?

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John William Chisholm, Flotek Industries, Inc. - Chairman, President & CEO [59]

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I think that all forward-looking options are on the table with the strategic committee. I don't want to preempt David's commentary on this. And I certainly haven't visited with him not anticipating that question. But again, you represent, Scott, not just yourself, but other people that have: a, offered up your question regarding share buybacks; b, a question that is leading to, would Flotek be better off private? Those questions come up regularly. And so they're all being analyzed in this view of what's the best return and the future for the Flotek shareholders that are here today. And I can't exactly tell you how much of our EBITDA is directed towards being a public company. If you look at the shared dollars, it's a couple of million. If you look at the amount of time it takes every quarter, it's greater than that, sure. But David, you're welcome to chime in, but I just want to assure you and others that the whole spectrum of those options are being processed by this committee.

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David P. Nierenberg, Flotek Industries, Inc. - Director [60]

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Thank you, John. David (sic) [Scott], what John said is absolutely right about the mandate and scope of the committee's work. Had the management of this company not executed on the sale of the Florida Chemical, and given the collapse in the price of oil starting around August, September, October of last year, this company probably would have been busting long covenants with PNC in the first quarter and about to make its 11th or 12th amendment of the loan agreement and that would not have been a comfortable place to be. So David (sic) Scott , you could appreciate in a circumstance like that, it might have even been unnecessary in a situation like that to sell the company -- the rest of the company simply to provide a beneficial outcome for all stakeholders rather than a bad outcome. Fortunately, with the sale of Florida Chemical and the net proceeds and financial strength we now have, we have the opportunity to ask and answer the necessary existential questions. You are quite right that over the medium term, even the long term, perhaps this should not be an independent company, perhaps it should not be a public company, we don't know the answers to those questions yet, we're pondering them. But let's assume just for the sake of illustration that several years down the road, perhaps something might happen. If something were to happen, the very best things that we could do to maximize the value for all stakeholders happen to be the very things that the company is working on now. First of all, to make sure that we rightsize our cost structure across-the-board, not just SG&A but also cost of goods, final mile to get that down as low as possible so any possible subsequent owner would not be scared about taking on a bleeder, if I can put it that way. Secondly, the segmentation of customers and the segmentation of channels to build a reliable recurring revenue model, which is also something that we're working on and continuing to strengthen the quality of the management team. All of those are the things that we are doing because, fortunately, we are not in a situation where we are compelled to do anything existentially because we're busting covenants. So we are focusing on those things that will build both short-term and long-term value, and it will give us even more optionality about what we want to be when we grow up.

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John William Chisholm, Flotek Industries, Inc. - Chairman, President & CEO [61]

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Yes. If I can just wrap up on that line of questioning. Thanks, Scott. One of the real benefits that Elizabeth brought to us was a long-standing relationship with Citi. Citi is deeply involved in this entire analysis. They've done it hundreds of times, and that's one of the real side-benefits that we want to make sure everybody remembered from our prepared remarks that even our own team is not doing this in a silo environment, but -- and thank you for the compliments of turning the whole business model around, we appreciate that.

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Operator [62]

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The next question comes from Alan Mitrani from Sylvan Lake Asset Management.

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Alan Mitrani, [63]

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And I appreciate and echo all the comments from David and from Scott as an impatient shareholder, even though I haven't been there as long as those guys as old as David, I too also just echo. I appreciate the focus on cost cuts and reporting also in a clean environment. You've had multiple divisions and it's been difficult to parse the data. I'll give you an example. I went through the 8-K. It seems like your 9-month gross margin was 24.3% on the business that remained through 9 months from what you filed the other day, that's down a couple of thousand basis points from the 40s where it had been in the -- in 11s, 12s and 13s and 14s till you stopped reporting your gross margin for the division. I can't find your gross margin in your press release today. Can you tell me what it was for the remaining division in this quarter?

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John William Chisholm, Flotek Industries, Inc. - Chairman, President & CEO [64]

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They're CICT, ECT. So a main reason why we moved away from gross margin and moved more to operating margin, Alan, was it became an increasing target on our back in terms of not only with the previous business model of the distributors realizing, and I'm talking about the pumping guys, that our gross margin was actually higher than theirs. And I think it also created an environment to have more competitors enter into the chemicals segment then otherwise might have happened. And if you or if anyone cares to, the margins of everybody in this segment have moved at about that type of pace from where they were in the '14 period to where they are now. That being said, the gross margin is certainly in a range of what we have represented or presented in the past. And we're just hopeful people will understand we want to focus into the EBITDA, we want to focus to the operating cash flow, we want to focus to operating income and we want to stay away from calling out that gross margin number. It does us absolutely no good as a company. And hopefully, people will appreciate that.

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Alan Mitrani, [65]

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I understand it. But now that you have one division left, I think, according to the SEC, you have to report gross margin, whether it's in your Q or your K or your press release, I mean, you can't hide it. You want to be a division of a bigger company, great, sell the business, hide the gross margin, be one product, but now that we're shareholders of one division, I'd really appreciate it if you would actually report giving us the normal standard...

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Elizabeth T. Wilkinson, Flotek Industries, Inc. - CFO [66]

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So maybe what you're looking at is that the -- that a certain amount of the segment SG&A is part of -- is added to cost of revenues in our new reporting structure with a single segment. And so where you had the segment SG&A group together with different segments, you're now showing the -- we now have ECT segment G&A -- I mean, segment SG&A added to the operating expenses -- operating expense line. But you will see that breakout in our K when it comes out.

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Alan Mitrani, [67]

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And I'd appreciate that. And look, I don't mean to be hostile from this, but the bottom line is if you want to be -- if you want to sell the company, be part of a different company, I mean, that's fine, but as of where you are now, you got to report your business so that your shareholders can see it and you can't hide costs because I think what seemingly got the company in trouble was that you had a lot of costs being allocated across multiple divisions and it was unclear. I mean, the fact that a company with this size is running the costs that you have and the number of employees you have, without having made the cost cuts already in the last year and quicker than you -- even you have. And I give you credit for making cuts and recognizing that, but the truth is, you have one shot left with the money on your balance sheet and none of your shareholders, and clearly, none of your management wants you to waste it. So sooner, quicker, better, we'd would appreciate it. One other question on CapEx. You said $4 million to $9 million, was that the level you said Elizabeth?

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Elizabeth T. Wilkinson, Flotek Industries, Inc. - CFO [68]

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Yes.

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Alan Mitrani, [69]

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That's a very wide range. And -- but when I add up the -- when I look at your previous CapEx in previous years, oftentimes, it never came close to those numbers, except when you're building the R&D center. Why is the number so high?

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Elizabeth T. Wilkinson, Flotek Industries, Inc. - CFO [70]

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It may not be. I mean, $4 million, I think, is pretty well expected. There are some additional capital projects that we are going to be looking at that we may or may not do, but they're not mandatory. So we'll -- we just need to look at the benefits of those and that's really what's going to determine if there is more than that sort of lower level.

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Alan Mitrani, [71]

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And then lastly, one last question, as it relates to compensation for calendar '19 and maybe David could chime in on this too. What specifically are the executives going to be paid on? Is it getting revenues up stabilizing it? Is it cost cuts? Can you just give us a couple metrics that we can pay attention to throughout the year so that we could see how you're doing and how we're doing?

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David P. Nierenberg, Flotek Industries, Inc. - Director [72]

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Would you like me to speak to that, John?

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John William Chisholm, Flotek Industries, Inc. - Chairman, President & CEO [73]

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Sure.

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David P. Nierenberg, Flotek Industries, Inc. - Director [74]

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Okay. I am a member of the board's comp committee, joined it in the middle of the year. And Michelle Adams is our excellent relatively new committee chair doing a terrific job. As you've heard a few minutes ago, Alan, operators and contractors are saying that they may have only 6 to 8 weeks of visibility, and therefore, one of the things that the committee has been doing is changing from using annual objectives to actually setting quarterly objectives. And then reassessing them every quarter and updating them. I think that it would be best not to be more specific about what the new goals are at this time because it won't be long from now when the proxy will come out and there will be a new CD&A discussion by a new comp committee setting forth our new process and our new numbers. And I believe that those on the call will find it to be a very stakeholder-friendly new approach, which is appropriate for the times that we live in.

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Operator [75]

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This concludes our question-and-answer session. I would like to turn the conference back over to John Chisholm for any closing remarks.

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John William Chisholm, Flotek Industries, Inc. - Chairman, President & CEO [76]

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Thanks, Nancy. And again, we just want to thank -- say thanks, again, for everyone joining us on today's call. I think we nearly had a record number of people dialing in. These are clearly transformative times in our industry, but we believe we have a -- we have proactively transitioned our company for future success as a result of our unique product and localized service offerings and the balance sheet position that the company is currently in. We appreciate everyone's interest in our company and the support of our shareholders and all the questions we received today. We like everyone to have a great day. Thanks, again. We'll talk to you soon.

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Operator [77]

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