Good morning, and welcome to the Flotek Industries Inc. Second Quarter 2013 Earnings Conference Call. [Operator Instructions] This conference is being recorded. At this time, I would like to turn the conference over to Mr. Glenn Neslony, Vice President and Treasurer for Flotek Industries. Mr. Neslony, you may begin.

Thank you, and good morning. Today's call is being webcast, and a replay will be available on Flotek's website. Our earnings and operational update press release as well as our quarterly report with the United States Securities and Exchange Commission were filed and distributed last evening and are also available on the Flotek website. Before we begin our formal remarks, I wish to remind everyone participating in this call, listening to the replay or reading a transcript of this call of the following. Some of the comments made during this conference 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 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 the 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'd also like to welcome each of you to Flotek's Second Quarter 2013 Conference Call. With me today are Rich Walton, Flotek's Chief Financial Officer; Steve Reeves, our Executive Vice President of Operations; Kevin Fisher, our Executive Vice President of Global Business Development; Chris Edmonds, our Senior Director of Corporate Finance and Strategy; and Glenn Neslony, Flotek's Vice President and Treasurer. In addition, Josh Snively, President of Florida Chemical and also a Flotek Executive Vice President, joins us from a secret vacation spot. Josh had this vacation on account of prior to our acquisition of Florida Chemical and given the demands we've placed on him in the last quarter, it is well deserved. Nonetheless, he joins us today, and we will do our best to coordinate Josh's participation in the discussion following our prepared remarks. 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. However, before doing so, I'm pleased to tell you that this morning, Flotek announced that it has entered into a contract to provide certain chemistry technologies to AlMansoori Production Services Company of Abu Dhabi in the United Arab Emirates. The contract, the initial phase of which provides revenue potential of approximately $4 million, calls for Flotek to assist AlMansoori in the development and execution of a program to enhance production in maturing wells and sustain long-term production using Flotek's chemistries. There are a number of maturing producing assets in Abu Dhabi, including the Bab field, the largest onshore field in Abu Dhabi covering approximately 1,200…

John, thank you. As John mentioned, Flotek filed its Form 10-Q for the quarter ended June 30, 2013, with the U.S. Securities and Exchange Commission yesterday afternoon. In that report, Flotek reported that revenue for the 3 months ended June 30, 2013, was $93.6 million compared to $78.3 million for the 3 months ended June 30, 2012. Revenue in the second quarter increased $15.3 million when compared to the same period in the previous year. During the quarter, Flotek acquired Florida Chemical Company. As a result of the acquisition, Florida Chemical's financial results for the months of May and June are included in the company's consolidated financial statements and provided $14.5 million of incremental revenue during the second quarter. Excluding Florida Chemical revenue, Flotek would have reported revenues of $79.1 million, the second highest revenue quarter in Flotek's history. For the 3 months ended June 30, 2013, the company reported net income of $8.4 million, or $0.16 per share on a fully diluted basis, compared to a net income of $13.2 million, or $0.25 per share on a fully diluted basis, for the same period in 2012. For comparison purposes, results for the second quarter 2012 include noncash income of $6.5 million related to the increase in the fair value of our warrant liability resulting from securities issued in a preferred stock offering in 2009. Due to a change in terms of the remaining warrants, the company no longer accounts for these securities as derivative instruments with fluctuating value. In addition, during the second quarter of 2012, the company recorded a $1 million expense related to the extinguishment of debt. Excluding these 2 items, net income in the quarter ended June 30, 2012, would have been $7.6 million. Earnings before interest, taxes, depreciation and amortization, or EBITDA, for the 3…

Rich, thank you. As I mentioned earlier, Josh Snively, our citrus guru and President of Florida Chemical, is on a well-deserved respite this week. However, he volunteered for duty today to update us on Florida Chemical and, if we're lucky, maybe even a -- share a South Florida fishing success story with us because I've seen the pictures and he has got a lot of them. Josh, thanks for making the effort to be on the call this morning.

John, thank you. I'm pleased to be with you this morning from sunny South Florida. While I won't take much of your time this morning, I do want to highlight a couple of items that I think will be of interest to you. First, we couldn't be more pleased to be part of the Flotek team. The transition to a team environment between the research teams of Florida Chemical and Flotek was nearly seamless. And the energy that both teams bring to the table is contagious. I simply could not be more excited that John tasked me to create a holistic research team that works across the chemistry value chain, from the citrus molecule focus of Florida Chemical to the practical application chemistry of Flotek. As a result of our united teams, we have begun to accelerate our research and development efforts, especially in the areas where we can improve the environmental steward of oil and gas producers with bio-based alternatives to traditional products that have less desirable environmental impacts. While we remain in the early stages of market analysis and development, we have already received meaningful orders for xylene and replacement [ph] products from key operators across multiple basins. We are excited to talk about these products in the coming months. In addition to our oilfield applications, Florida Chemical's core flavor and fragrance business continues to experience opportunities for growth. Customer retention as a result of the merger has been terrific, and we have several opportunities to expand existing relationships in a number of meaningful ways. Once we have a full quarter under our belts, we will have an opportunity to discuss the numbers in greater detail. Our focus in the third quarter will be to continue to grow our core business, accelerate the integration of our research teams and remain a leader in innovation and bio-based chemistry solutions that stand in support of environmental stewardship in the oil and natural gas industries. With that, I would like to turn the call over to Steve Reeves, our Executive Vice President of Operations, to discuss our second quarter operating results. Steve?

Josh, thank you. As noted earlier, consolidated revenue for the 3 months ended June 30, 2013, was $93.6 million compared to $78.3 million for the 3 months ended June 30, 2012. Revenue in the second quarter increased $15.3 million when compared to the same period in the previous year. Also, as Rich noted, in conjunction with the filing of pro forma financial statements, the company announced it has adjusted its business segment reporting to reflect the acquisition of Florida Chemical and more precisely describe the company's existing business. In addition to Flotek's 3 traditional segments, a new segment, Non-energy Chemical Technologies, has been added to capture Florida Chemical's non-energy specialty chemistry business. Revenues in the Chemical technology segment for the 3 months ended June 30, 2013, were $47.7 million compared to revenues of $46 million for the 3 months ended in the June 30, 2012. Excluding the incremental revenue provided from the merger, Chemical Technologies' segment revenues were relatively flat year-over-year. Chemical Technologies segment's gross margin were 43.1% for the 3 months ended June 30, 2013, a decline from 44% posted in the same period in 2012. The modest change in margins, albeit from record levels, was primarily the result of product mix, including moderately lower priced margin contributions from production-related products acquired in the Florida Chemical acquisition. A slower-than-anticipated recovery in Canada, combined with moderation of overall oilfield activity in North America, largely explains subdued year-over-year growth in Chemical Technologies' revenue in the second quarter. However, the marketing efforts related to the company's core CnF chemistries has resulted in a number of important new customer validations in the first 6 months of the year, which should result in increased market penetration in the second half of the year. Moreover, the stability of margins, including modest sequential improvement, is evidence…

Steve, thank you very much. Before we take questions, I would like to add a couple of concluding thoughts. While we discussed international opportunities earlier, I'd like to provide a bit of additional color that will help you understand our long-term excitement regarding Flotek's evolution into an international oilfield technology company. We remain incredibly excited about the opportunity in Oman. We continue to believe the development of a chemistry research and production business in Oman is precisely what will propel our international efforts forward in key hydrocarbon-producing regions of the world, the Middle East and North Africa. We're in the final stages of a very deliberate process of completing the formative documentation and organizational structure of our Oman venture. The company is finalizing the legal joint venture entity, finalizing the definitive agreement between the parties and completing the legal transfer of real property into the joint venture entity. It is expected that the legal entity will be completed no later than the end of the third quarter, providing for the planning and development of commercial facilities to begin, as originally anticipated, in the fourth quarter of this year. We've been very clear that we will not rush into an agreement without a thorough understanding of the structure and with certainty that it will stand to maximize value and minimize risk, especially when it is halfway around the world. The time and diligence we spent to ensure those tenets [ph] are preserved will result in a better partnership, especially for Flotek. While Oman is representative of our commitment to developing international markets, it's just one of several new markets we've entered in the past year, many of which were mentioned in last night's press release, our announcement this morning and earlier in this call. In short, there's not a hydrocarbon-producing region…

[Operator Instructions] Your first question comes from the line of Brian Uhlmer from Global Hunter.

I had a couple of quick ones, actually, not difficult this morning as we covered so much last week. On the announced contract this morning in Abu Dhabi, what is the timing of that $4 million revenue potential? Is this a long-term agreement? Or just a short one, 1 or 2 project-type agreement and how does the revenues play out on that?

Good question. It's designed for 12 months with a renewable year extension, and we expect that revenue to start within about 30 days. So you can roll it out at plus or minus right around $400,000 a month.

Okay. Quick one on the Florida Chem and the acquisition. Should we assume that the results from Florida Chem were pro rata for the time that we missed during the quarter that there's no step-up or anything like that in the quarter? So moving forward, rolling our forecast forward, we could use that same pro rata number on a daily basis to forecast 3Q, 4Q, et cetera?

I think that's fair.

Okay. And was the NECT, something we don't spend a lot of time on, was that in line with kind of where -- if we look out at that versus Florida Chem on a year-over-year or a sequential basis in terms of margins and revenues, is that in line, up, down and how are we supposed to forecast that moving forward?

Yes, I think, it's actually may have been slightly up over what we expected. So somewhere around the 27% margin, I think, is fair going forward, Brian, for the NECT side of things. One thing we didn't spend a whole lot of time with is, but I think you had looked at the pro formas, the -- a lot of the Florida Chemical energy revenue is production-related, which typically doesn't carry as high a margin as our specialty chemical and that was blended into our normal energy business. And again, once we get into the third quarter, we'll even give more transparency on that on our next earnings call.

Okay. As we blend that in -- and obviously, it's not the largest piece of the pie, but does that mean that margins should tick downward in Q3? Or will that be made up through kind of integration efforts and higher sales volumes?

Yes, we're not expecting any margin ticking down.

Continuing on, our next question comes from the line of Michael Marino from Stephens.

John, you outlined a lot and a lot of things to be excited about. And you noted in the press release, I guess, some commentary about significant growth for the back half and into '14. But I was curious, if you could dial it in, maybe on -- is there one specific thing that you guys are -- or that you are most excited about as you look into the back half of the year, a product that maybe moves the needle, that we'll see show up in the results in the back half of the year? Or is it a combination of a lot of things, I guess? If you could just maybe -- if there's one thing you could hone in on or not?

Yes. We're, I think overall -- and as you see the company evolve, Michael, this used to be just a 1-product chemical event and we've broadened that, and the downhole tools is the same way. But several different announcements throughout the earnings season of wells in the D-J Basin, wells in the Uinta basin that were talked about in the upper quartile of performance, those wells carried our CnF chemistries in them, which excites us. So we're really looking forward to the further validation and growth in the second half of that. But also, Steve will add a little bit of color in the Stemulator of some recent data running with that, that is also a reason for our enthusiasm.

As we talked, when we were down to Florida, we had pulled them back in, put all the new mods in them and were running these final beta tests on them. The first 6.5-inch run that we just finished up in the Uinta, we did 5,500 feet drilling out there, and 44 hours going through the curve in the horizontal section, which give us an ROP rate of 133 feet per hour, that's just outstanding results. We have 2 more into the hole that were beta testing right now. We'll have those results by the end of the week. And the Bakken, we have 4 in the hole, 1 just finished, 9 days drilling, no damage, everything went rate of penetration of over 100 feet per hour, and these are with all the new mods. We have 10 6.5 ready to go, 10 4.5 ready to go -- 4.75, I'm sorry, and we have about 35 ready to build up after that. So it looks like our final testing of the phase is almost completed and as we talk, we expect to be commercial here by the end of this quarter, at the very least.

Okay. And do you expect those 20 tools to go to work pretty quickly, all 20?

Pretty rapidly. When I said that we had 7 tools in the hole right now, that's without turning any salesmen loose. That is just all-in [ph] work because we just want to get some slow test, analyze the results, do all the analysis and make sure that we're ready to go out.

Okay. And a question on, John, on the margins in the chemical business. I guess with going forward, a little bit different product mix with the xylene replacement, hopefully, taking a bigger part of the percentage there and then the international business. How does that affect margins on kind of a go-forward -- if I were to look out 12 months or 18 months from now?

Yes, so that's going to be a work in progress and we don't want to get too down into the weeds, but we'll just give you kind of a bit of an insight there. The xylene replacement product based on d-limonene will not require as a high a purity as the d-limonene requires for our Complex Nanofluids. So our expectation is, and Josh may be on the call, maybe I'll feed him in here, is that in that net segment where we have lower end margins of the d-limonene, we're going to move that usage of d-limonene into the energy side where we can get a higher margin for that. And so that is a work in progress that we're in the middle of right now. But that's one of the reasons why we have such a level of cautious enthusiasm of this whole xylene replacement as we can take d-limonene from a lesser margin business line and move it in to a higher business margin line because it doesn't require the same purity. But if Josh is on the phone, still, he may want to weigh in. Go ahead.

Yes, thank you, John. Michael, as we look at the xylene replacement opportunity, that, for us, was big it part of the strategy in coming together with Flotek for accelerating that growth opportunity that we see in the marketplace. Timing obviously, is the key. As you heard in the comments, we've already recently had some success with that product as we move forward and the data rolls out and the word continues to spread and the sales force gets more active on promoting that product, we do believe we'll see that continue to ramp up as we move forward.

And then the impact of the international business on margins?

I think those margins are going -- I think the way it's worked out so far, until we get more of a beachhead in the Middle East, the transportation costs, freight may affect those slightly. But we're only talking about 100 or 200 basis points on the international revenue, which, when you blend it in to the overall chemistry margin, won't be that noticeable. And I think again, within another quarter, we'll even have a better understanding of that. One thing we didn't talk a whole lot about, but I think you've picked up with the other earnings call through the season is that Canada is now rebounding. We -- as others consider Canada international and that activity is improving for us through the balance of the year, and that area carries a good margin for us.

[Operator Instructions] Our next question comes from the line of Rudy Hokanson from Barrington Research.

Could you maybe talk more about your marketing efforts right now, as well as the expected costs built in? I know that you've been working hard on it in the first half and you see promise of it coming to fruition in the second half. But going forward, especially now that you have this new portfolio sort of in place, what do you see in terms of the marketing effort itself, also the costs and where it might impact anything on the P&L?

Sure. So -- and we tried to really give real transparency in that SG&A category, both in the press release and the call, and try to point out that there were several what we would call nonrecurring events in the quarter regarding SG&A and the whole issue and events surrounding the noncash on the stock. But more directly to your question, we have stated consistently since I became involved here that whenever we could upgrade the intellectual sales ability of the company, we would do that. And invariably, that occurs before you see the benefit of the revenue created from that strategy. The contract that we announced signing today was a result of numerous trips to the Middle East to enable that to happen. And those were embedded in expenses in the second quarter that we will now see the benefit in the third quarter throughout next year. But, so our view is that from a pure dollar standpoint, because of those nonrecurring efforts, SG&A dollars will go down as a percentage of revenue, it will go down because our expectation clearly is revenue will increase. But Kevin can talk, maybe, a little bit more specifically as to our philosophy of trying to hire as talented people as we can, when we can.

Yes, Rudy, this is Kevin. As you remember just a few weeks ago in our press release, we announced a new sales hire that we have just made, a very senior salesman that had come from a ceramic profit business, not announced in that same release were 2 other pretty high-end type sales folks that we've hired during the quarter out there and we continue to look really for people, and not for slots to replace or to fit a body into. And as we find incremental sales talent that boosts our overall capabilities, we'll bring those in as well. We've also, in our -- we've talked about this in previous quarters as well, we continue to shift assets in our downhole tool business and the sales business, because the market has changed, the activity with downhole tools has changed from the tight gas basins to the oily basins and we continue to shift resources into the more liquids-rich basins. And then add resources there as well. We certainly, if you pay attention so the trade journals and the trade shows and the upstream business there, we're more visible now than ever, more technical pieces being written and published, more advertisements, more presence at trade shows and things like that. I think our marketing has ramped up dramatically in the last year. And as I've said, we'll continue to add where it makes sense because of the technical talent available to add sales folks and engineering type expertise where it makes sense.

Okay. And then one other question and this -- I realize it's very simple and yet you've been probably answering it in so many words, one way or the other. But in terms of the product shift in the second quarter, both in chemicals as well as in Artificial Lift that you highlight, could you maybe, just maybe say in a few simple sentences exactly what that shift meant in terms of product shift. I understand in markets, what was going on between South America and Canada. But as far as product shift went and if that's something you see continuing? Or should we be going back to the type of mix that you had prior to the second quarter? Just sort of in a simple concept.

Sure. Artificial Lift first. The product shift there was, in particular, the Petrovalve revenue that, as we've chronicled in the past, is a lumpy, if you will, unpredictable revenue opportunity that's primarily in the international arena and it happened in the first quarter, didn't happen in the second. And that was the main product shift there, pretty straightforward explanation for you. Regarding the chemicals, again, we didn't want to give a whole lot of color on that. But to the extent that we can, it's not any more complicated than when you add fundamentally a production chemical product line coming from Florida Chemical into the chemistry of what we call, Flotek Classic, the specialty chemicals friction reduction and the Complex Nanofluids and our complex cross-linkers, that is a product shift. And we did that on the fly. We're going to look at that through the third quarter and see what type of pricing opportunity there is for us with many of the same customers. And so that's a work in progress. But that, I think, in the simplest terms explains that for you.

And we now have a question from the line of Richard Dearnley from Longport Partners.

Two questions on international. With the Oman completing soon, do you expect that the Abu Dhabi agreement will take about the same time to finalize and will other country agreements take a long time?

Yes, great question. Sorry if we didn't provide better clarity. The Abu Dhabi agreement with AlMansoori is completed, signed, sealed, delivered, and we expect the first chemicals to be shipped there within the month, certainly within this quarter. The Omani agreement is just in absolute order of magnitude, more complicated in terms of long-term leasing of land in Oman, the structure of the shareholder rights agreement where there are different issues, as many as the folks on the line know, in terms of how do you treat capital calls, can both partners meet the calls when you need to have increased capital, those type of issues are what we're nailing down in that agreement. But as far as an order of complexity, different.

And do you expect that the agreements in the Middle East will largely be on a country-by-country basis? Does every country need a leader on the ground there or joint venture partner or local?

Well, I think, that in itself is a work in progress. I think, what we've committed to do is to look at each one of these country opportunities individually and do what's in the best interest of the Flotek's shareholders. And if we think joint venture is the way to do it, great. If we think it's through an agent relationship like we have with the Teledrift inside Saudi Arabia, great. And each one is judged on their own merits with the use of our capital as to what we think has the best return for our shareholders.

And we now have a question from the line of Greg Garner from Singular Research.

I wanted to ask you about the Eclipse acquisition, what you're thinking was behind there? It appears that you're gaining marketing presence and also some technology. And so I want to understand, is it -- was one better than another? Did you really want to purchase it for the marketing enhancement? Or was there a technology component that was more compelling?

I think the way to answer that is, several of what you proposed there factored into the decision. Here's the way some of these acquisitions come about. These different technologies, many times you're seeing the same people in the same clients. And the clients, many times, push you in a direction to become interested in a technology we didn't have and we didn't have polymer expertise, not only from a technical design standpoint but also from a field injection standpoint. So I think you could infer from that, that several of our current and soon-to-be EOR clients expressed to us that they felt that this company embedded inside a public company that had the capital and infrastructure wherewithal could benefit Flotek. And so we investigated that and came to that conclusion that in several instances, we think we can have the chance to sell more CnF in conjunction with polymer and we think there's an opportunity in certain applications to sell polymer in conjunction with the leading punch [ph] of CnF if that made sense to you.

Okay. And so is it fair to assume then that, that would be -- just looking it from an EOR standpoint, so apparently there are some other CnF advantages there. But just from an EOR standpoint, would that in any way accelerate the revenue stream, to Flotek with the acquisition?

That answer is categorically yes.

But I guess by accelerate, I mean, in the short term of this year, because before we've been mentioning about -- it's been mentioned about how the -- you knew the revenues would start some ramping up their in EOR approximately third quarter. Is this more an enhancement for 2014 or is it something that would occur more soon?

Well, EOGA is generating revenue today. And so we intend to build on that. And like I say, we think there's an opportunity. We feel pretty confident of it that in some of the polymer projects that they have looking at them. Now there's an opportunity to look at CnF a little bit differently than maybe by itself and vice versa. So yes, we bought that with the expectation that the revenue would not only be immediate but also have the opportunity to increase.

Okay. All right. And just one item on the xylene. Is there any sense for what size of that market? It seems like it could be quite large. Is there any way to quantify the xylene market in the oil and gas industry?

Well, that is kind of a difficult, but I think there's 2 ways to kind of put this in perspective. We believe that over half of the xylene market is used on existing wells. And that is very key to us and we therefore believe key to our shareholders to be able to spread out revenue opportunity not dependent on what is the horizontal or gas or oil current drilling rig activity, that's number one. Number two, there's just -- within a couple of operators in the Permian Basin, they use in excess of 20 railcars a month, a railcar is 30,000 gallons. So that's 600,000 gallons of xylene used every month, just for 2 oil and gas operators in the Permian Basin to give you a, at least, a snapshot in that area of just 2 clients, potential clients in a particular geographic area. So we'll do our best by the earnings call in the next quarter to give an order of magnitude of the size of the market. But we think it certainly is significant and that's why we're targeting into that. And again, a special emphasis, it's not dependent on new well activity.

And Mr. Chisholm, I'll now turn the conference back to you for your concluding remarks. Thank you, sir.

Thank you, operator. Again, I'd like to thank everyone for their support of Flotek. We'll actually be in Denver next week at the EnerCom conference. I think in early October, we'll be in San Francisco at the IPAA OGIS conference. We might be able to see some of you at those locations. And we look forward to speaking to you again later this summer. Hope everybody has a great rest of the summer. Thanks for joining us.

Thank you, sir. Ladies and gentlemen, that does conclude the conference call for today. We thank you, all, for your participation and ask that you please disconnect. Thank you, once again. Have a fantastic day.