Good morning, and welcome to the Flotek Industries, Inc. Second Quarter 2012 Earnings Conference Call. [Operator Instructions] This conference is being recorded. At this time, I would now like to turn the conference over to Mr. Glenn Neslony, Vice President and Treasurer for Flotek Industries. Mr. Neslony, you may begin.

Thank you, and good morning. Today's call is being webcast, and a replay will be available on Flotek's website. Our earnings and operational update press release, as well as our quarterly report with the United States Securities and Exchange Commission were filed and distributed last evening and are also available on the Flotek website. Before I turn the call over to Flotek's Chairman and President, John Chisholm, I wish to remind everyone participating in this call, listening to the replay or reading a transcript of this call of the following: Some of the comments made during this teleconference may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, reflecting Flotek's views about future events and their potential impact on performance. Words such as expects, anticipates, intends, plans, believes, seeks, estimates and similar expressions or variations of such words are intended to identify forward-looking statements but are not the exclusive means of identifying forward-looking statements on this call. These matters involve risks and uncertainties that could impact operations and the financial results and cause our actual results to differ from such forward-looking statements. These risks are discussed in Flotek's filings with the United States Securities and Exchange Commission. Now I'd like to introduce Mr. John Chisholm, Flotek's Chairman of the Board, President and Chief Executive Officer.

Glenn, thank you. I would also like to welcome each of you to Flotek's second quarter conference call. With me today are Johnna Kokenge, Flotek's Chief Accounting Officer; Steve Reeves, our Executive Vice President of Operations; and Kevin Fisher, Executive Vice President of Global Marketing and Business Development. Last evening, we filed our quarterly report with the U.S. Securities and Exchange Commission. While we won't take your valuable time to regurgitate those filings, we will provide a summary of the results, attempt to add some color regarding current operations, as well as a sense of our future, and then be happy to answer your questions. As our second quarter results suggest, Flotek's repositioning journey since the trying days of 2009 is nearly complete. In fact, I would suggest that these results, in combination with results from 2011 and the focused effort of every member of the Flotek team over the past 2 plus years, have returned Flotek to financial normalcy, instilled in the Flotek culture an expectation of success and set in place the intellectual and physical infrastructure for the next chapter in Flotek's corporate evolution, one focused on technological innovation, which we believe will lead to unprecedented growth and value creation for our stakeholders. Simply, we have positioned Flotek to operationalize our 2012 mantra, making a difference. We believe Flotek is now in now positioned to make a difference for our clients, our communities, our team members, and most importantly, you, our shareholders, the owners of our company. You have been committed to this journey alongside us, had confidence in our ability even when the challenges were great and provided the support and encouragement to return Flotek to its status as a premier innovator in the oilfield technology arena. While there are a number of measurements of success, market…

Thank you, John. As John mentioned, Flotek filed its Form 10-Q quarterly report for the period ended June 30, 2012, with the U.S. Securities and Exchange Commission yesterday afternoon. In that report, Flotek reported revenue for the 3 months ended June 30, 2012, as $78.3 million, an increase of $22.4 million or 40% compared to $55.9 million for the same period of 2011. Significantly increased period-over-period revenue was realized from both our chemicals and drilling segments due to continued market penetration, steady pricing and closing orders from existing customers. While more muted, Artificial Lift revenues also increased, a result of growth in international orders and new earlier application for our technology. For the 3 months ended June 30, 2012, the company reported net income attributable to common stockholders of $13.2 million or $0.25 per fully diluted common share, compared to net income of $2.1 million or $0.04 per fully diluted common share for the same period in 2011. Included in these results are a number of nonoperating items, including a loss on extinguishment of debt, a change in fair value of warrant liability, interest expense and income tax expense, as well as accrued dividends and accretion of discount on preferred stock, that impact the operating earnings. As John noted earlier, adjusting for these items, Flotek's operating earnings per share for the quarter ended June 30, 2012, were $0.29 per fully diluted share, compared to $0.17 per fully diluted share for the same period in 2011. A reconciliation of our operating earnings to GAAP earnings can be found in our press release issued Wednesday evening. Also in that reconciliation is a simplified version of the calculation of our outstanding share count that many of you have requested in recent months. We also provide a more comprehensive share reconciliation table in our…

Johnna, thank you. In general, while moderating from peak levels year ago, North American drilling activity continues to provide a constructive backdrop for Flotek's portfolio of oilfield technologies. The shift to liquid-rich plays and away from depressed natural gas plays has had an impact on the overall mix of Flotek's business, as well as presented its share of challenges in our sales and marketing effort. As long as natural gas prices remain challenged, limitations on pricing and growth in certain regions will be pervasive. Our continued focus on developing a more balanced portfolio of oilfield technologies that positively impact both liquids as well as natural gas projects continues to yield positive results. Currently, our portfolio sales mix is approximately 70% liquids focused. Even with the incremental moderation in oilfield activity, our margins have remained robust, a result of economies of scale and reduction in input cost. While we don't expect significant pricing power in the near term, we do believe we can hold current levels and work to improve efficiencies as we continue to focus on margin improvement across our business lines. Chemicals revenue for the second quarter and year-to-date periods ended June 30, 2012, increased $16.9 million or 57.8%, and $37.6 million or 67%, respectively, relative to the comparable periods of 2011. The period-over-period increases are primarily due to increased oil-directed and liquid-rich natural gas drilling activity driven by crude oil prices. The increased activity, combined with resolute sales efforts in securing new customers, resulted in incremental product revenue of $15.9 million and $35.9 million for the quarter and year-to-date periods relative to comparable periods in 2011. The Bakken, Niobrara and Eagle Ford shale plays, in particular, were positive contributors to the increase. Liquids and dry product of revenue increased more than 40% period-over-period. In addition, increased activity in…

Steve, thank you very much. As we mentioned in the press release last evening, while we're pleased with the second quarter results, they remain -- they mean little unless we continue to build on our success. One example of new opportunities through innovative application of our existing base technologies is our involvement in Enhanced Oil Recovery. While Steve mentioned we're in the nascent stages of development, our commitment to research in collaboration with clients has resulted in what we believe can be a major new application of CnF chemistries. Flotek's entrance in Enhanced Oil Recovery or EOR market continues to make progress. Flotek's newly developed CnF based CO2 foam diversion product, which is StimOil FD-1, has been successfully applied to arrest premature CO2 breakthrough in a West Texas CO2 flood. As a result, sweep efficiency in the pilot area of the field is improving and oil recovery is steadily increasing. The average oil production in the field trials had doubled over the 3-month trial. CESI Chemical's patented CnF was used in a second field, where the water and CO2 injection rates doubled, which has increased the field oil production by over 100%. This operator is moving the technology application to 4 additional fields. Laboratory work and computer simulations are underway to apply the breakthrough technology in additional fields for new operators in the U.S. and Canada. With the caveat that there is still plenty of work to do, we are very excited about these promising results. Commercialization will take time, but these results provide a solid framework to advance the ball in the coming months. Finally, we have added significantly to the intellectual capacity of Flotek in recent months as we focus on better service to existing and future customers and even more vigorous research effort and a more robust…

[Operator Instructions] And the first question comes from the line of Michael Marino.

John, I apologize if I missed it, but the CnF sales in the quarter, did you all give a number?

No. We didn't specifically break out CnF for the quarter. We just referenced the increase in the overall activity on the chemical side of things, Mike. We can -- we have in the past. I think, that's in the Q. If you want to refer to that or offline, we can give you more detail on that.

Okay. And I guess, one of the kind of follow-ups there is, have you seen any change in the pricing for CnF in -- either in Q2 or quarter to date, Q3?

None.

Okay. And then also, as it relates to maybe a little bit CnF, but on the chemical business, I'm just trying to get an idea for the timing of the Pioneer revenue and how that's -- how did that impact Q2? And is it something that ramps up more in July and going forward? When do you kind of hit full stride with those guys, do you think?

Yes. Good question. The revenue was up in July over previous months with them. And a portion of that is directly related to their earnings call a week ago, where they have reduced other stimulation companies stimulating for them. So now, even more of their business, over 80%, is tied into their vertical stimulation company. But more importantly, with them laying down vertical rigs to move more to a horizontal drilling focus in the Permian Basin, those horizontal completions, as most of the people know on this call, are more frac intensive, which means there is more stimulation work on a horizontal well. And especially, when it's oil based, the jobs are a little bit bigger and there are more of them. And so that activity with them has a direct impact back to us.

And that hasn't -- I mean, that hasn't started yet for the most part?

Well, it started initially. I think they talked in their earnings call that they have 4 or 5 horizontal rigs running down the Wolfcamp area that's going to go to 10 by the end of the year. So that's a reason for our level of expectation through the remainder of the year.

Okay. That's helpful. If I could, just one more on the EOR side of things. I guess, you mentioned a play user on 4 more fields. I'm just trying to get some more color on kind of timing and magnitude. When do we kind of see it start to move the needle? Is it Q4 or is it 2013? And then just when I say move the needle, what does that mean to you, I guess? I mean, are we talking kind of -- how much can you generate from this if you're running on 4 additional fields in addition to the ones that you're running now?

Right. I think the way to look at this, as we've said, is we expect more to build in the fourth quarter this year and into 2013, candidly. And I don't think this is letting too much out there. Based on the returns that we've seen, we're looking at the whole pricing model in the EOR arena in terms of can we achieve a more value-based pricing model that more accurately reflects the improvement or the uplift of: a, either reducing the cost of CO2 being injected; or b, uplifting the amount of produced oil. And I'm not trying to elongate a pretty short question. But we want to try to get into a position that we're not just charging per gallon of CnF going into an EOR flood. And so we're just in the beginning stages now that we have actual data of more than one field of what the uplift is. We're going to think through how we can have a more value-based pricing in that EOR part of our business.

And our next question comes from the line of Brian Uhlmer with Global Hunter Securities.

I will follow up on Mike's question on the EOR project. I was just curious if you can quantify for us based on what you're saying on return-based pricing in an $80 to $90 oil environment. Are we talking about an operator making a 30% or 40% plus return on the project based on using your chemicals? What's the value proposition that the operator is seeing? If you could share a little bit of insight on that.

It is at least that. So in one particular area -- and again, we're having to be a bit careful in terms of what can be shared. But in the first pilot trial that we talked about, those wells in the 90-day period increased 14,000 barrels over that 90-day period over the previous production. And the chemical pricing on that was in the 5 figures. So you can run the math. And that's why you can understand why we're stepping back and trying to look at the value pricing opportunity in that segment of the business.

No doubt phenomenal. That's great color. Following up on the Drilling Products segment, a little bit curious here. Obviously, there's been a lot of shift of rental tools, et cetera with all these news that it's going to hurt some pricing on some of your peers. What -- you talked about something -- some of the products that helped impact and protect your margins, but you do still have some commodity-type rental tools. Can you kind of run us through how you can maintain these margins and your view on whether or not they can be maintained through the back half of the year in a flattish rate environment -- rate kind of environment?

Yes. This is Steve Reeves. Several things we've got going, the Teledrift remote technologies that we will have, we believe that this will be a pickup. This will actually help us up. And you're correct. The pricing is starting -- we're starting to see some pricing on commodity product. But the basins that we're in, where we can let leverage the Teledrift or we can leverage some of our motors with our other irons, we're able to hold these. We also had some gains in major product sales for us in -- that has hurt us in second quarter is centralizers. We do a low-friction centralizer that we sell, and we sell a lot of them. We outsource that to buy it. And the price of it has gone up significantly, which hurt our margins in the second quarter. We have now built our own molds and are in production. So in August, we expect to be back, very margin positive, on these. And these are pretty good piece of our business in down-hole tool. So even though there is some steady pricing pressure, we feel like with the technological advantages and even bringing these things in-house, we're going to be able to hold these margins probably going up through the year unless they was just a collapse someplace.

Right, great. Good color again. I've got 2 more. One -- very quick one for Johnna. On the share count, what should we use as a go forward -- you said there was $49 million -- $49.6 million, I believe, diluted right now, but $54 million this quarter and we will walk through the 3 million shares later. But what should we use on a go-forward basis as the average share count?

I mean, I think on a go-forward basis, you would be more likely to use the $50 million number because the $54 million that you're seeing basically includes an impact of -- due to the impact of the 2008 note which we have not seen previously. So it was just a function of the arithmetic this time. It's kind of an odd fallout, but I would go more back to the $49 million, $50 million range that we've historically seen for shares -- of shares.

And then the final one on John, not to sound like a sycophant, but I enjoy your soliloquy at the beginning every quarter. I'm curious, as we step back and look out 18 months and the balance sheet is cleaned up. You've gone through -- kind of turned the company around. What do you envision as the next step for Flotek? Is it spinning off some of the divisions? Is it going through acquisitions? Is it share buybacks? I mean, are you going to have a great, clean balance sheet as we get into 2013? And where do you see taking this thing as we go through the next 18 months?

No. That's a fine question, Brian. I think the way to answer that question is give you just a little bit of context for this year. I think we've talked at different conferences. We get different opportunities of acquisitions on kind of a monthly basis. And we made a conscious corporate decision that we felt 2012 was the year of just laser beam focus on doing what Flotek does right now. And through the first 6 months of the year, I think the results proved that out. We felt that as we were able to get the balance sheet in better shape, reduce the leverage, that in 2013, that would open up the opportunity when Flotek was even stronger than it is now to look at a strategic technical acquisition that is frankly, most likely, to be more in line with the chemical business that could be blended in, whether it was a technical differentiation or some type of proprietary product. And that's most likely where we will turn to. If the company and we expect it to, continues to perform as it is, it will throw off the cash that will give us the flexibility to do that. But I think in the past year, that's the reason why you haven't seen more activity in that area. But in 2013, we feel we're positioned with the new ERP system, with the people that we've hired into place that we can really look at an acquisition that would make sense for Flotek.

And our next question comes from the line of Richard Dearnley with Longport Partners.

Could you quantify your discussion of the June revenue that slipped into July? And in what area was that? And then what was July rather?

Right. The first part of the question, if you allow me to peel back the cover for just a minute, when we got into this, we thought Flotek would have a higher level of transparency than ever before. Part of that was to instill a business process that would create a financial structure that really defined the way Flotek operates. A reasonable portion of that June revenue surrounded the opportunity of shipped, being Petrovalve's to Petovesa [ph]. When we were originally made aware of that contract opportunity 9 months ago, the leadership team set upon itself a number that we were comfortable with on an accounts receivable basis with Petovesa [ph]. We were able to negotiate a preferred payment plan. But even with that, we had a number that we would not exceed with accounts receivable. We could have done that in June. But we made the distinct choice that we were going to stick with the financial controls that were in place even though it meant we would not reach the expected June revenue and demonstrate -- of the financial control in place of Flotek. And that revenue now has occurred in July. With respect to the July revenue numbers, in the past, we have talked about month-to-month revenue numbers. Quite frankly, we feel that folks out there that are kind of traders try to gain the stock with that information. Flotek is way past the company that will be around here a month from now. We don't feel that those monthly numbers have anything of benefit for Flotek. And we've adopted an approach going forward that the quarter numbers are much more meaningful just based on an event like what happened in June. So expect that from us in the future.

Is the slippage into July $1 million or $2 million? Or is it less than that?

Well, I could say slippage may have been the term. There was a little bit of slippage in Canada, which I think other service companies have talked about. But the number is roughly in the $1 million range. But a good portion of that was a distinct decision made by the leadership team to stay within the financial constraints we established regarding this contract.

I think the accounts receivable -- prudence is a great idea. Your next question would be, you talked about industry recognition of your proven effectiveness. Any more data-based white papers that are current in the works?

It could be fair to say that they are in the works with several different clients. Those -- all have their own journeys as to how long it takes to get them to where there -- in a publicized format, but we would fully expect by the end of the year though it would be a couple more of those current white papers that are able to give more current data to the industry.

[Operator Instructions] Our next question comes from the line of Greg Garner with Singular Research.

A question on the EOR. It appears to me as if this product or perhaps this range of products is probably less field specific than the frac-ing applications. And recently, I'm trying to understand that just because it appears that in expanding that market that it's really more of a testing phase than any for the development as you move into different fields. Is that the right way looking at the EOR business?

I think that's fair. The -- however, in these EOR areas, we do core studies. The clients provide us with cores. There is the whole part of our research capability that is dedicated to EOR. So this -- the loading of the chemicals and the specific exact mixture of the chemicals is not generic from field to field as much as one might think. But I think it's a broad rule. Your initial presumption is correct.

Okay. And any color on to how many different locations being tested or different operators or different specific applications that would be -- being tested over the next several months, 6 months?

Yes. I think the number to go with there is probably less than a dozen but something more than 4 or 5 that will give you a range of the different number of folks we're currently involved with in some stage, either actually injecting in the field, doing those preparatory studies, some type of pilot work like that. It's a fair number.

Okay. And that's really domestically focused right now, right?

Well, as we mentioned, we would expect in this coming quarter, again if we can release some of the data, to talk to you about an EOR initiative in Canada as well.

Okay, okay. I guess, I meant North America and -- there's been some commentary on some prior presentations that you've made, John, I believe, where you talked about some next generation CnF characteristics. Does this reference the EOR? Or is this something else going on with CnF? And I'm wondering, if that's the case, what is this new generation. Why would you call it new generation?

Right. The -- and you're correct. We have mentioned a new generation CnF is on its way. The reason why we haven't talked more about it up to this point is there are certain IP issues that we are nailing down. But I think -- as I've said on maybe the last earnings call, stay tuned. We expect certainly in this upcoming quarter to be able to talk more about the next generation of the patented complex nano-fluids.

Okay. And a comment on today's call, there was a mention about resuming momentum in the second half. That sort of implies that there might be a less than strong, I guess, third quarter with a resumption in the fourth quarter. But it seems like that interpretation might be too drastically, not really interpreting what seems to be the trend and what's happening here. So I'm just trying to put those -- put that comment in the proper context of resuming momentum in the second half. It seems like there is some strong momentum already. So is there any explanation behind the use of that resuming momentum? And do you expect some weakness -- weaker demand in the third quarter? It doesn't really feel that way. That's why I'm asking.

Sure. Kevin Fisher, who heads up our global business development, will answer that for you.

Yes, this is Kevin. I think the comment was really directed more towards the second quarter because of the breakup in Canada and then parts of the Rockies and Northeast U.S. The second quarter kind of flattened out relative to the first quarter. So that was the sort of flattening effect. When we said regaining momentum, we certainly would expect the third quarter and the fourth quarter, the last half of this year, to continue upward in momentum. So regaining momentum was just relative to Q2.

And there is finally no further questions. I'll turn back the call over to you, Mr. Chisholm.

Thank you for everyone's attention, interest and questions. And we will see you on the conference between now and the next call and when we talk to you later here in the third quarter. Thanks again for your interest.

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