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Edited Transcript of FTK earnings conference call or presentation 8-Aug-19 2:00pm GMT

Q2 2019 Flotek Industries Inc Earnings Call

HOUSTON Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Flotek Industries Inc earnings conference call or presentation Thursday, August 8, 2019 at 2:00:00pm 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. - Chairman

* Elizabeth T. Wilkinson

Flotek Industries, Inc. - CFO

* John William Chisholm

Flotek Industries, Inc. - President, CEO & Director

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Conference Call Participants

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* 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

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Presentation

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Operator [1]

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Greetings and welcome to Flotek Industries Second Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce Ms. 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 are John Chisholm, Flotek's President and Chief Executive Officer; Elizabeth Wilkinson, our Chief Financial Officer.

Yesterday afternoon, we released our earnings press release for the second quarter of 2019, which is available on our press release -- on our website. In addition, this morning, we posted a related supplemental presentation to our website. Today's call is being webcast, and a replay will also be available on our website. Please note that any comments we make on today's call regarding projections or expectations for future events are forward-looking statements.

Forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. These risks and uncertainties can cause actual events to differ materially from our current expectations. We advise listeners to review our earnings release and the risk factors discussed in our filings with the SEC.

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. - President, CEO & Director [3]

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Thanks, Danielle. We appreciate everyone joining us for today's call. As we discussed on our first quarter call, we expected during the second quarter that the oilfield services sector would, and in fact did, continue to operate in a volatile environment for U.S. onshore drilling and completions activity. We anticipate a similar backdrop for the third quarter, which is in line with the consensus of other oilfield service providers with U.S. land operations.

Despite this environment, I'm pleased to report that we ended the second quarter with a cash balance of $97.5 million, which was essentially level with the balance reported from March 31. We recognize that shorter cycles of continued and sometimes extreme volatility are part of the new normal we operate in today and will continue to experience in the foreseeable future.

As discussed in a research report from Deloitte, published in April, titled Decoding the Oil and Gas Downturn, the oilfield services segment has never been more fragmented than it is today. Two main themes of the report are that service providers must distinguish themselves technologically and they should also develop new and innovative commercial models throughout the value chain. This further supports and validates our continued focus on reshaping our business to proactively position ourselves for long-term success.

This includes controlling the controllables. Controllables can mean different things to different organizations. For Flotek, this meant concentrating on our core competencies as a best-in-class provider of reservoir-centric chemistry solutions for the oil and gas industry. In this capacity, we have and will continue to focus on enhancing internal processes while rightsizing the enterprise and taking costs out of the business to drive increased efficiency and profitability, closely collaborating with operators to identify and define industry challenges, ensuring we build technical peer-to-peer relationships with the specific individuals at our clients that have ultimate decision-making responsibility for chemistry purchases, clearly communicating the significant benefits that our technologies can have on our clients' bottom line results and utilizing innovative commercial strategies to accelerate further adoption of our product offerings.

We believe we are on the forefront of developing and providing industry-leading reservoir-centric chemistry solutions that drive greater capital effectiveness and return on investment for clients.

During the second quarter, we took additional important steps to further differentiate our unique value proposition in the marketplace. One of those key initiatives was the rebuilding and development of a more technically-oriented and client-service-focused sales organization. Historically, geologists, geophysicists and reservoir and petroleum engineers had limited influence in the process of selecting chemistry solutions. The ultimate decision was typically made by the group with responsibility for well completion execution. However, in the past year, we have seen a transition, in which technical positions connected directly with the reservoir are now taking a leading role in decision-making as it relates to chemistry technologies.

Significantly contributing to this enhanced approach by operators has been intensified emphasis on delivering greater asset productivity. As we partner to solve the technical challenges of our E&P clients, there's increasing recognition of the diminishing returns of mechanical variables in well completion designs as shown on Slide 7 of the presentation.

Variables such as lateral length, level of proppant loading and number of fracs and frac stages per foot have long been regarded as the best ways to access the reservoir for maximum recovery. However, these approaches have reached or are exceeding their economic and technical limits in certain basins and thus many operators are turning or will turn their focus to other technologies, such as chemistry that can meaningfully and reliably enable productivity.

As illustrated on Slides 8 and 9, we've seen many operators progressively exploring and better appreciating custom chemistry as a means to achieving optimal recovery of hydrocarbons from the reservoir as they evolve their approaches from capital efficiency to a more holistic strategy of driving capital effectiveness.

Given this backdrop, we recognize the need for a sales force that better understands the technical complexities our clients face and that can more directly communicate the unique and compelling benefits provided by our chemistry solutions.

In support of these efforts, at the end of April, we announced that Mark Lewis joined Flotek as Senior Vice President of Global Sales & Business Development. In this role, he is leading the company's domestic and international sales and business development strategies as well as providing oversight for the delivery of products and services to our clients.

Upon joining Flotek, Mark's first order of business was the reshaping of our sales force that began in the second quarter. Many of the candidates we spoke to in this process indicated that what attracted them to working at Flotek was the opportunity to interact directly with the end users and provide them with truly value-added technology solutions in what has traditionally been a very commoditized environment for chemicals.

I'm pleased to report that over the past few months, we recruited a first-class group of professionals with a deep and diverse pool of technical expertise. As one would expect, it will take time for the new team to get their feet on the ground. However, we have already begun to see a pickup in both client inquiries and requested technical reports. We look forward to seeing the impact of our new sales team's efforts within the coming quarters.

That said, we are continuing to gain traction with a number of strategic prospects for our proprietary value-added chemistries and related technical services. We are seeing successes across a variety of applications, from completion to remediation and even to enhanced water flooding activities on the production side of the business.

Additionally, we are partnering with our clients to address the prevention and mitigation of frac hits, which is one of the biggest challenges facing the industry today as outlined on Slides 10 and 11. Frac hits, also called frac-driven interactions, occur when wells are spaced too closely together, creating communication between the primary or parent and infill or child wells. When this occurs, overall recovery from the reservoir can be significantly depleted depending on the reservoir pressure and the timing of well completion. As a result, industry experts suggest that the production profile can be reduced by as much as half of the anticipated recovery.

While your consider that, contemplate that 70% of new onshore wells drilled in the U.S. could be impacted according to Schlumberger. There is clearly no greater urgency than to solve this complex challenge as billions of dollars are at risk. That is why our technical teams are working alongside our clients' reservoir teams to validate the significant role that reservoir-centric fluid chemistries play in preventing and remediating frac hits.

Last week, our Head of Research and Innovation, Dr. James Silas, highlighted our relevant findings at a Permian Basin industry conference here in Houston. Further, given the substantial positive uplift our chemistries have shown to improve hydrocarbon recovery, we are exploring how our chemistries can better enable capital efficiency as we, along with our clients, evaluate optimized spacing within their development programs. This could well mean that for maximum capital effectiveness, fewer wells may be drilled.

In addition to mitigation and prevention of frac hits, the benefits afforded by our technologies is substantial, including higher incremental and sustained production levels and improved gas-to-oil ratio, lowering operating costs to reduced horsepower requirements and prevention of fluid incompatibility, all of which lead to increased capital effectiveness.

While this list of benefits is convincing, most clients conduct a technical evaluation to see the results in their own operations before making a longer-term commitment to new technologies. On our last earnings call, we discussed our utilization of targeted, performance-driven pricing programs for a limited number of strategic clients, which we initiated earlier this year.

As anticipated, these programs impacted our second quarter operating margins, and we expect continued margin pressure for the near term as these particular clients complete their studies over the coming months. However, by the fourth quarter, we expect to begin to see the benefits of this initiative.

Supporting our view are the studies we have done on thousands of wells in multiple basins that clearly show the benefits of our differentiated offerings. Slides 12 through 4 of our presentation show how customized prescriptions lead to sustained production enhancement. Specifically, we have now shown sustained uplift across hundreds of wells in the Wolfcamp A and Wolfcamp B in the Midland Basin nearly 3 years after completion. This allows us to be optimistic about the results of the client studies currently underway and more importantly, comfortable in our approach as it relates to this initiative.

Our second quarter results were also impacted by the deferral of completions activity by certain clients, primarily due to both scheduled and unscheduled downtime in their programs. I would note that we have already seen these clients resume their completions activities in the third quarter, but believe we could see more anomalies of this sort occur in the third quarter and beyond as whitespace in the calendar is being reported by frac service providers.

Turning to costs. On Slide 15, we show the results of our ongoing significant expense reduction efforts. During the second quarter, we identified more than $5 million of annualized spending cuts that were implemented in mid-July. To date, for 2019, we have announced and executed on initiatives that reduce our annual cash costs by more than $25 million spread across the entire enterprise. I would note that since the second quarter of 2017, we have successfully transitioned our business and taken approximately $21 million or 44% out of annualized spending, specifically related to corporate general and administrative and research and innovation support functions, excluding stock-based compensation expense.

As we've discussed in previous calls, this has been a tough but necessary process as we further adjust our cost structure to ensure long-term success.

Once again, I appreciate all of our employees for their efforts and dedication through this process, which has impacted all levels of our business.

Finally, our Strategic Capital Committee continues to make important progress in their analysis of alternatives for the best use of the net proceeds received from the sale of Florida Chemical at the end of February. As discussed on our last call, under the co-chair direction of our Chairman, David Nierenberg; and CFO, Elizabeth Wilkinson, the committee began its evaluation process with a deep dive into every facet of the company. When that was concluded, we initiated a methodology to review both organic and inorganic inbound growth prospects that Elizabeth will discuss in more detail in a moment.

Throughout this effort, we have utilized Citi and their deep domain expertise to assist us. I cannot overstate how important we consider this process to be. Clearly, the capital markets have always put an emphasis on liquidity, but over the past year, investor sensitivity about liquidity has become even more heightened. We fully agree that a solid balance sheet and financial flexibility are critical to long-term success, especially in an industry that is commodity-based with ongoing and sometimes extreme periods of price volatility.

As such, we believe that we have an extremely unique opportunity and the committee is determined to ensure that they arrive at a strategy that preserves and enhances maximum value for our shareholders.

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

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

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Thanks, John. Similar to last quarter, 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 and corporate functions. Echoing John's comments, we operated in an environment that has continued to be volatile for U.S. onshore drilling and completions activity. This impacted both our top line and margin results for the second quarter, and we expect these conditions to continue to impact us in the third quarter.

Revenue for the second quarter was $34.7 million compared to $43.3 million for the first quarter. As John discussed, in addition to the challenging industry backdrop for U.S. land, our results were directly impacted by the rebuilding of leadership and personnel in our sales organization, the deferral of completion activity to the third quarter by certain clients and the utilization of performance-driven pricing programs for a limited number of strategic clients.

Operating expense was $38.3 million for the second quarter versus $44.6 million for the third -- first quarter. Fundamentally, the decrease in our operating margin was due to fixed and semi-variable costs being absorbed by a lower level of revenue. Looking at the third quarter, we expect our top line results could decline from second quarter due to the factors we've discussed. However, we do see opportunity for significant margin improvement, primarily as a result of increased efficiencies in our logistics, including last-mile delivery, and other operational cost-reduction initiatives.

Corporate G&A decreased to $6.1 million from $7.3 million for the first quarter, primarily due to nonrecurring severance costs recorded in the first quarter associated with our sale of Florida Chemical.

Research and innovation costs decreased to $2.1 million from $2.3 million in the preceding quarter. The decrease is a result of our cost-reduction initiatives announced in prior periods.

Moving down the income statement. Interest expense was essentially 0 as compared to $2 million for the first quarter. As a reminder, following the closing of the sale of Florida Chemical, we paid down the full balance and terminated our credit facility. This resulted in the acceleration in write-off during the first quarter of $1.4 million of unamortized deferred financing costs.

We reported a second quarter loss from continuing operations of $13 million or a 22% -- $0.22 loss per diluted share compared to a loss of $15.4 million or $0.26 loss per diluted share for the first quarter.

On an adjusted earnings basis, we reported a second quarter loss from continuing operations of $12.3 million or $0.21 loss per diluted share versus a first quarter loss of $11 million -- $11.6 million or $0.20 loss per diluted share. Please refer to our tables in the release for more details. Our adjusted EBITDA for the second quarter was a loss of $9.6 million compared to a loss of $8.3 million for the first quarter. Contributing to the higher loss were tighter margins, partially offset by lower G&A and research and innovation expenses. Again, please refer to the tables in the release for more details.

Turning to the balance sheet. As of June 30, we had cash and equivalents of $97.5 million, which were essentially level with our $96.8 million balance at the end of the first quarter. I would note that the third quarter, we currently expect to see a similar level of cash at the end of the period.

At the end of the second quarter, we also continued to have no debt outstanding. In addition, at the end of the period, we reported approximately $15.7 million of escrowed funds on the balance sheet, reflecting a revised estimate of post-closing working capital adjustments related to the sale of Florida Chemical.

As John discussed, we continue to execute on our cost-reduction initiatives during 2019. This includes the mid-July implementation of more than $5 million of additional annualized spending cuts. These reductions were substantially focused on further restructuring our operations, reducing both personnel and other operating costs, while ensuring we retain the ability to absorb top line growth we anticipate later this year and into 2020. Combined with our previously announced reductions, year-to-date, we have implemented initiatives that reduce our annual cash costs by more than $25 million.

Looking beyond the $25 million that we have announced thus far this year, we are currently in the process of developing an action plan to execute on the priority initiatives that have been identified through our engagement in the second quarter of a global consulting firm recognized for their extensive supply chain expertise, particularly in the upstream energy space.

Over the course of several weeks, they conducted an interactive assessment to help us identify and prioritize additional opportunities to reduce costs and drive greater profitability through order-to-cash efficiencies, including process enhancements to sales, supply chain and logistics.

Turning attention to the Strategic Capital Committee. As co-chair of the committee, I wanted to provide some additional perspective on our process. Since its formation, the committee has formally met 8 times, utilizing research and advice provided by Citi's energy team as well as detailed analysis performed internally.

As discussed on our last call, the committee first focused on taking a deep dive into Flotek's ongoing business. This included a thorough assessment of every product, service, process, market, distribution channel and customer. From that process, we gained a better understanding of what we do well, where we can improve and potential opportunities for growing our business.

In addition, we have taken an exhaustive review -- undertaken an exhaustive review of the different alternatives for the best use of capital using a lens of what protects value and drives maximum return for our shareholders, including how to best position the company over the longer term in the public capital markets.

The sale of Florida Chemical has provided Flotek with a substantial amount of financial flexibility. This places Flotek in a unique position relative to similar-size oilfield service providers as well as companies in the upstream oil and gas space, in general. Accordingly, while a nominal stock buyback or special dividend to shareholders has some appeal, at present, the committee has not recommended any action that would undermine the advantages that dry powder provides Flotek in the energy sector today.

As further outlined on Slide 16, our near-term focus is on the possibility of investments in organic and inorganic opportunities that will provide us with greater scale and immediate positive operating cash flow, while building on and enhancing our core competencies.

As John discussed in his opening comments, we fully recognize that we must evolve the business to ensure our long-term success in a very fragmented oilfield services space. Through the committee's evaluation process, we have identified a number of high-value organic growth opportunities that we believe could result in greater scale and improved profitability. These growth opportunities include: targeting clients of scale, establishing strategic partnerships, commercializing differentiated next-generation technologies and expanding adoption of our chemistries for enhanced oil recovery.

While these initiatives are expected to be capital-light in nature, we recognize that realizing the full benefits of our efforts will take time and require working capital. As it relates to inorganic investments, we continue to be focused on broadening our exposure across the life cycle of the well as opposed to remaining as significantly concentrated on the completion stage.

As expected, we have continued to receive and evaluate inbound inquiries, and we have also taken an active role in identification of businesses that logically align with our core competencies and provide for both financial and operational synergies. An important priority is to focus on opportunities that not only meaningfully grow our business, but bring immediate and stable positive cash flow to the table.

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

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

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Thanks, Elizabeth. The onshore North American upstream oil and gas industry continues to evolve rapidly. More recently, this has included heightened investor scrutiny of capital spending, cash flow generation and return on capital considerations. As a result, oilfield service providers are under more pressure than ever to provide E&Ps with superior product and service offerings and, as I mentioned earlier, technical differentiation.

We, like many others in the industry, believe that truly customized chemistry and fluid systems for the reservoir is the next critical step to drive enhanced, both near- and long-term well production and related economics. We recognized this many years ago, and even with our significant cost-cutting efforts, we have not compromised our efforts to expand our unique portfolio of proprietary products and further enhance our in-house technical understanding of fluid system design and application. As we have stated in the past, we believe this sets Flotek apart from its competitors.

In closing, we are optimistic that our differentiated technologies, combined with our proactive efforts to enhance our financial performance and improve our operations and sales capabilities, are positioning Flotek for long-term success. So with that, we will now open it up for questions. Similar to the last couple of our calls, given his role as co-chair of the Strategic Capital Committee, I have asked David Nierenberg to join us during the Q&A.

Operator, we'll now open for calls.

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

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John, if I may, before we go into the question-and-answer mode, I'd like to make some comments as well about the Strategic Capital Committee.

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John William Chisholm, Flotek Industries, Inc. - President, CEO & Director [7]

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Sure.

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

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There's no question that Q2 was ugly, and as Elizabeth described, there was a fair amount of nonrecurring and housekeeping events, which made it look even uglier than it actually was, but it was ugly. However, my new job as Nonexecutive Board Chair and as Elizabeth's co-chair of the Strategic Capital Committee, requires that we follow the wisdom of that sage, Joan Rivers, who said, "Get over it. Grow up already." And we are. We will not panic, we will not make rash or short-term asset allocation decisions. Rather, we will use time arbitrage to help Flotek get well as it buys time through continued intense cost reduction, shrewd monetization of its strong balance sheet, sharpening Flotek's strategic focus, enabling our new sales team to rebuild sales momentum and finding the right leader to execute our strategy well for the benefit of all stakeholders.

We pledged a substantial strategic update today. Here it is. We are making considerable forward progress, deliberating about and selecting among competing alternatives, ranging from paying a special dividend to share repurchase to investing in profitable organic and inorganic growth. Each prospective allocation has been weighed and weighted using such factors as the current capital market for oilfield services companies, which makes our balance sheet strength extremely advantageous today; the strengths and weaknesses of Flotek; a preference to build on Flotek's profitable strength, but not on weaknesses; a willingness to consider inorganic growth if it would magnify our strength, provide economies of scale, reduce risk and make us immediately profitable; and attracting strong leadership.

Now I want to amplify on these words. Our assessment of the current widespread wreckage in the oilfield services capital market today with so many once mighty companies' share prices knocked down to under $1 or single digits and with such pervasive fear of debt repayment, access to capital and busting covenants and with energy stocks being so out of favor as a percentage of the entire S&P 500 capitalization, convinced us that we are in a buyer's market today for energy businesses. Therefore, we should recognize the very considerable opportunity costs of using cash merely for financial engineering. The opportunity cost of possible misallocation of capital today is about as high as I have ever seen it. Because our cash is so strategically valuable now, we are intense about protecting it 4 ways: continuing to reduce cost; managing our balance sheet to generate cash through monetization of working capital, controlling CapEx and discretionary investments and collecting escrows; steering the mix of our product sales toward our most profitable products; and using our new upgraded sales team to drive revenue growth again.

Our policy has to be this: do not let our cash become a melting block of ice. Rather, use time to make prudent profitable allocations of scarce capital in a buyer's market.

Moving on to the Strategic Capital Committee's second criterion, an assessment of our strengths and weaknesses so that we can better build on strengths, I will share with you that I probably do not endear myself to my colleagues on the Strategic Capital Committee initially when I asked the committee to refresh and review our due diligence about CnF's effectiveness. Of course, I had evaluated it twice before, but after changes in drilling and completion techniques, new competitive offerings and some client losses, I wanted to revisit that again to make sure that we were building this company on a solid foundation.

And we examined many, many data points from large customers, not our data, but their data, which was extensively analyzed. And it gave solid proof to all of us that CnF adds compelling value and it is profitable, and it has a strong patent portfolio protecting it, and it is maintained and constantly improved by the strength of our R&I organization.

So you might wonder then why did it decline? You've heard in the past 3 reasons for that. You heard that discrete pressure on operators to live within cash flow after the decline in the price of oil hurt. You heard about fear, uncertainty and doubt spread by competition, and you know that with sponsor turnover, particularly in private equity-backed companies, when they exit, that can create discontinuities. But with Mark Lewis joining us, we have learned that we had opportunities to significantly upgrade our sales team by making it stronger in chemistry and enabling it to provide better long-term customer service. This is our learning, and we believe that it will enable us to make CnF grow again because it is a solid product.

So properly sold and serviced and sold to the right prospects, CnF adds substantial value and is profitable for Flotek. It is a solid foundation on which to build the company.

We believe CnF's best niche opportunities probably are private and private equity-owned operators because they take a longer-term view than The Street does. Far-end nationalized oil companies for the same reason, they take a longer-term view; companies and executives, which have been disappointed by John talk -- by what John talked about, which was this so-called "mechanical productivity solutions," which sometimes cause more harm than good. So we do think that there's finally a substantial potential opportunity to grow CnF outside of drilling and completion in the production side, focusing on what's either called EOR or IOR. And we already have dozens of proof points in the United States and Canada about its impact in that context.

Moreover, the production side of the business is recurring revenue, and it is relatively insulated from competition from the large contractors. So if I may borrow from Ronald Reagan, there definitely is a pony in this room, and this pony's name is CnF. If CnF were not the pony, then the Strategic Capital Committee could lean towards paying out a large special dividend or even towards selling the company. But a profitable core product, which adds value, which can be focused and grown and which has growth opportunities in EOR, we definitely want to build on that. And our CnF growth opportunity is being substantiated in real-time by half a dozen large customer prospects. We do have several other organic growth opportunities in other parts of the company. We just don't have time to talk about them this morning.

Next, because we are in a buyer's market for oilfield services, have $100 million and are protecting it vigilantly, the Strategic Capital Committee is evaluating inorganic growth opportunities, which could grow revenue and profit. Our evaluation of these with Citi has already considered approximately 40 possibilities. Our acquisition criteria include these goals: buying immediate positive EBITDA in a buyer's market; therefore, not buying a start-up, not buying a bleeder, but a well-managed partner with scale and profits.

Second, finding opportunities to realize economies of scale and functions where we must become stronger such as purchasing logistics and last-mile delivery that were, especially in base and scale, is important. Adding organic growth, assistance selling CnF into EOR and IOR markets, working with a partner which has scale and is networked into the production segment of the market, insulating Flotek from the extreme cyclicality of the Drilling and Completion segment and competition from large contractors which have integrated chemistry businesses, logistical and last-mile help for our prescription chemistry management business, next generation of leadership for the company, and finally, R&I, has the ability to help companies with whom we might partner, decommoditize products in their portfolios just as they are doing for us.

To conclude, we would like to take full advantage of the balance sheet strength with our -- which our cash is so precious and valuable today relative to paying out cash in dividends or repurchases. There is no certainty that we will make an acquisition, nor should we act under pressure to make one. But there would be a very different certainty if we had dividended out the cash or used a large portion of it to do repurchases because that cash then would be gone and could no longer be used to buy and build growth, scale, profitability and build further on our solid CnF platform in a buyer's market. So we are going to keep the pressure on cost reduction, protect our cash, grow CnF and scour this buyer's market for sensible prudent business combinations, which could add value. That's the end of my comment.

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

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Thanks, David. And operator, go ahead. We will take questions.

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Questions and Answers

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Operator [1]

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

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

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I guess, appreciated all of the commentary there. First place I wanted to start, I guess, was on the strategic side. David, you gave a lot of detail and thought into how you're thinking about moving forward and certainly appreciate the lack of wanting to purely use financial engineering here with the cash on hand. It sounds like there's considerable amount of opportunities that you're looking at, taking into account what, I think, is a prudent thing to do right, immediately at least accretive positive cash flow business for you. How do you think about the sizing of those opportunities and particularly given where, as you mentioned, there's been stress on the leverage stance within the oil service space? How do you think about the long-term leverage you're willing to put on this business depending on you finding the right opportunity on the acquisition front?

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David P. Nierenberg, Flotek Industries, Inc. - Chairman [3]

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I want to make sure I understand your question right. Did you ask how much leverage we want to put on the business?

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Georg Philip Venturatos, Johnson Rice & Company, L.L.C., Research Division - Associate Analyst [4]

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How much leverage, I guess, long-term would you be willing to put on the business depending upon the acquisition that you may find?

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David P. Nierenberg, Flotek Industries, Inc. - Chairman [5]

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A 2-word answer would be not much. Not much in this capital environment.

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Georg Philip Venturatos, Johnson Rice & Company, L.L.C., Research Division - Associate Analyst [6]

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Okay. Makes sense. Just wanted to make sure given there are some that sound like sizable opportunities out there.

Okay. Second question. On the sales front, you guys mentioned the addition of Mark. Just wanted to get a few more thoughts on -- just detail on the sales team impact and how quickly we may be able to see that on the CnF sales front? And then second part of the question, just the performance pricing program you all have mentioned and John, I think, you mentioned 4Q we could start to see that positive turn. Just any more detail you can provide on that process would be great.

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John William Chisholm, Flotek Industries, Inc. - President, CEO & Director [7]

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Sure. So as everybody who's familiar with the story knows that the sales cycle on the CnF is typically at best a 60-day and sometimes a 120-day process, it's just the way it works by the time you get the right amount of people and the right people around the table. But we are trying to accelerate that with the strategic targeted performance-based engagements. And I think we're not going to say with who, but we will say that we're encouraged with the acceptance of those from a client perspective and also the early indications of what we felt would happen.

With respect to the sales group, as we mentioned in the earlier remarks, we've been able to attract folks from different parts of the value cycle, whether it's been rock property analysis with some log background, whether it's more from a distribution standpoint of companies that are in that value cycle. So we have a much more diverse sales approach than we had earlier that's recognizing the E&P companies themselves are becoming more diverse with the people that are involved in selecting the chemistry. And we think that's exactly where we need to be. And I think an important thing to mention, again, is that one of the driving reasons for those folks joining us is they wanted to interact with the ultimate end user. And that obviously was a criteria for us, and they've met that criteria. Hopefully that helps, Georg.

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Operator [8]

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The next question is from Mike Urban of Seaport Global.

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Michael William Urban, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [9]

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So helpful commentary on the outlook and, obviously, a very thoughtful process around the evaluation of the business. Presumably, before you look at any type of acquisition -- and I would generally agree, it's certainly a buyer's market. But at the same time, clearly got to add value, which from my perspective would be just having the organization structurally profitable such that you're just not adding not only revenue and EBITDA to it, just structurally a profitable business. So if we kind of take a step back, in Q2, obviously, there are some reasons for that. Could you lay out a path to kind of when and how we get to that point where it might make sense to layer something on? I guess, there's a good starting point with kind of the incremental $5 million in your annualized savings, but that still doesn't get you there. How much of the kind of negative EBITDA, if you will, were things that you think will reverse here, or are some of these transitory factors? But, again, just more broadly, a path to at least getting this thing to a point where it might structurally make sense to layer on another business?

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John William Chisholm, Flotek Industries, Inc. - President, CEO & Director [10]

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Yes. I'm going to let Elizabeth give you a little bit more context on that. Clearly, the overall macro environment that you've now listened to throughout the earnings season is going to be a challenge for everyone in the third quarter, and now people are wondering whether people are going to run out of money in the fourth quarter, for heaven's sakes. So this is a position for Flotek that we have to drive the top line in a profitable way. And as we started out with our remarks about controlling the controllables, we have rightsized this enterprise in a way that you will see meaningfully improvement in the EBITDA number through the remainder of the year with a qualification that there still needs to be a sustained level of macro activity in North America. But Elizabeth can chime in with a little bit more context to give you kind of a pathway forward.

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Elizabeth T. Wilkinson, Flotek Industries, Inc. - CFO [11]

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Yes. So I guess what I can add is just sort of the EBITDA. Look, driving into the year, we were very focused on trying to adjust our business, especially from a cost-cutting perspective, that would allow us to get to breakeven and positive EBITDA in the latter part of the year. And I think it's definitely going to be challenging to do that based on what we've been seeing at this point in the year, but we remain hopeful that we'll be moving significantly in that direction. So much depends on revenues. When we were looking at this whole thing earlier in the year, we were really anticipating a year a lot more like last year. On the other hand, we are doing a lot of things to improve our cost structure. So what I can tell you is that we are being very strategic in making meaningful traction later in the year, and we think that our strategy that we have in place will speak loudly as we see some of these things develop later, will speak loudly for our future prospects.

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David P. Nierenberg, Flotek Industries, Inc. - Chairman [12]

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Mike, we appreciate the leaning of your comments and your question. We are using the current period to continue working on cost structure. We are also -- as you know, we've made 2 great additions to our management team this year with Elizabeth and Mark. So we are continuing to build a solid foundation here because you're right, it would not be sensible to be making an acquisition until such time as we felt good about how we were operating. And we're getting there, we're getting there fast, but you were quite right.

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Michael William Urban, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [13]

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And I guess, again, I just -- I realize you're still kind of going through this process, but any kind of help you can give us, even kind of on a backward-looking basis, in terms of the second quarter of the things that kind of drove the magnitude of that negative EBITDA? Again, you referenced some things being better on logistics, customer studies, things like that because if we're talking about $40 million-ish of annualized negative EBITDA, you take out $5 million and you're still -- in costs, you're still at kind of negative $35 million. That's a lot of revenue. I'm just trying to -- if you can help us at all kind of bridge that, I think that would be a big help for us and for people on the call and potential investors.

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

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So I mean, just generally, I think we talked about things we're testing, the revenue side. On the cost savings side, we basically have cost-cutting activities that we have just undertaken that are going to cut our personnel costs significantly as well as certain logistics contracts changes that we've made, which we also think will continue to improve those costs. So I think it's just a combination of some different things playing in that we believe we will be seeing some improvement, notwithstanding the revenue pressures.

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Michael William Urban, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [15]

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Well, I guess maybe that's a better way to tackle it. I mean the -- kind of the macro backdrop. Certainly, as you said you're focusing on what you can control. You can't really control the macro backdrop, but once you get through all of the things that you can control, the cost, the efficiency, and again, some of these kind of one-off or anomalous costs, with the kind of normalized cost structure that you envision, what level of revenue would it take? So we can kind of take -- we can all make our own assumptions on the macro, but what level of revenue would it take to get to that EBITDA breakeven level?

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Elizabeth T. Wilkinson, Flotek Industries, Inc. - CFO [16]

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I guess, generally, we'd be wanting to see things getting back to something in the sort of first quarter type of revenue range or higher to get us back into that neighborhood where we think that's achievable.

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David P. Nierenberg, Flotek Industries, Inc. - Chairman [17]

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Mike, a lot of it has to do with the mix of the products sold. The higher the mix of CnF, the lower the breakeven level.

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

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Sure. And then would you -- again with a respect to timing, is there any expectation in your current outlook that you see a meaningful international sale over the balance of the year?

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

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So we're continually encouraged by the international activity, both in South America and the Middle East. For market competitive reasons, we're not going to get into a whole lot of detail, except to say this. In early September, both Elizabeth and Mark are headed over to the UAE to establish a Flotek branch office there. And I think the takeaway we'd like to leave is we wouldn't be going through that effort if we didn't feel comfortable about the near and midterm outlook of increased activity in the Middle East. And I think we'd like to leave it at that for now.

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Michael William Urban, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [20]

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Okay. And then, I guess, just a couple of housekeeping things, if I could. I may have missed it. You're continuing to reduce G&A costs, done a great job on that. What's your expectation for the third quarter?

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Elizabeth T. Wilkinson, Flotek Industries, Inc. - CFO [21]

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So generally, we're on track with our goal for getting down on a cash basis to something in the neighborhood of $5 million. However, we do know already that based on the outcome of our price uptick as a result of the sale of Florida Chemical, when we did our fair value on our stock-based compensation, our costs have gone up considerably to the point where we're probably going to have an extra $400,000 a quarter just for stock-based comp. So on a cash basis, I think we're going to be in that neighborhood, but on an overall total expense, I think it's going to go up a little bit.

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Michael William Urban, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [22]

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Okay. So up relative to the, I guess, you had $1.2 million of stock-based comp in Q2. So up a few hundred -- $300,000, $400,000 relative to that?

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Elizabeth T. Wilkinson, Flotek Industries, Inc. - CFO [23]

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So I mean, we still think it's going to be coming down from the Q2 level, just to be clear, but I just don't think we're going to get down to that $5 million level for the total expense.

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Michael William Urban, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [24]

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Okay. Got you. And then last one for me. What's your full year CapEx expectation?

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Elizabeth T. Wilkinson, Flotek Industries, Inc. - CFO [25]

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Approximately $3.7 million.

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Operator [26]

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(Operator Instructions) The next question is from Jake [Labelle] of [Willan] Management.

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Unidentified Analyst, [27]

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Elizabeth, on the call, you mentioned that you expect the cash position to be kind of level at the end of Q3 to where it is right now. Does that assume that you guys are collecting some of the escrowed funds? Or is there just more working capital to take out in the meantime that kind of gets you to that kind of cash flow breakeven number for the third quarter?

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Elizabeth T. Wilkinson, Flotek Industries, Inc. - CFO [28]

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Yes. It does actually assume that we would be collecting some of the escrowed funds. And that is one of the things that it will be a little bit in play because we haven't finalized our agreement with ADM with regard to how much of the adjustment escrow we'll be entitled to. So that process is still ongoing. So there is a little bit of play there depending on the determination of the adjustment escrow, the post-closing working capital adjustment escrow.

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Unidentified Analyst, [29]

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Got you. And then in terms of working capital, is this a good -- where we ended at the end of Q2, was that kind of a good level to kind of think about going forward? Or is there more opportunity to still pull cash -- grow the business and still pull some cash out of working capital from where we are today?

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Elizabeth T. Wilkinson, Flotek Industries, Inc. - CFO [30]

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No. I don't really anticipate. Like for example, the change in our inventories, I don't anticipate that we're going to be continuing to do that further. I mean, we've basically tried to adjust and allow ourselves to play out some extra -- excess inventory that we had on hand. But we are definitely going to be getting very, very focused about -- I mean, as part of these cost initiatives that we talked about undertaking right now. One of them is very, very focused on procurement activities and inventory management. But I'm not sure that that's necessarily going to mean that it's lower than what you're seeing right now. In fact, we might have a little bit of an inventory build just based on our expectations.

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Unidentified Analyst, [31]

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Okay, okay. I want to change gears a little. One of the things that was kind of noticeably absent from the conversation around what you all plan to do with the cash cushion right now was just the -- you didn't really explore the -- or didn't talk about the exploration of selling the business. You guys are now trying to build these relationships that there are a lot of people, a lot of bigger companies out there that already have those kind of [in-basin] relationships that you guys want to get deeper with. And there's, obviously, a lot of overhead into running your business that exists that wouldn't exist in the hands of one of those companies. And we're sitting here thinking as a shareholder, could potentially create a lot of value in a shorter time than going out and building these relationships and building the business. So can you guys just comment a little bit on that and what you've explored there?

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David P. Nierenberg, Flotek Industries, Inc. - Chairman [32]

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The company has a strong balance sheet, and it's turning itself around. I think the sense of the committee is, and I think I can speak for the Board as well, is that if we were to do what you were saying, it would make a lot more sense to do that at the time when the company was performing very well and was perceived to be performing very well. And so when I used the phrase time arbitrage earlier that's one -- a possibility. But again, if a company has a very weak balance sheet and isn't performing well, then it may need to sell itself. But we have a lot of opportunities to add value to what we have here, and we have -- I think all of us come to the conclusion that the better thing to do is to keep our head down and make those good things happen.

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Operator [33]

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Okay. We have reached our allotted time. I'd like to turn the conference call back over to management for any closing comments.

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John William Chisholm, Flotek Industries, Inc. - President, CEO & Director [34]

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Thanks, operator, and thanks for the questions. And hopefully with David's input as well there, we're able to provide as much clarity and context as to where we are and where we believe we're headed. Hopefully, we'll have a chance to see some of you in person in Denver on Wednesday of next week when we present at EnerCom's Oil and Gas Conference. For those of you who can't make it, you can listen to it on a webcast, it'll begin around 10:15 Central Time. We'll also participate in Johnson Rice's Annual Energy Conference that'll be held September 23 to 25 in The Big Easy in New Orleans. Again, thanks for everyone's continued interest in Flotek. We appreciate the patience and support of our shareholders. Hope everyone has a great day.

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Operator [35]

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