Flotek Industries, Inc. (FTK) Q4 2013 Earnings Report, Transcript and Summary

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

Thank you, and good morning. Today's call is being webcast, and a replay will be available on Flotek's website. Our earnings and operational update press release, as well as our annual report with the U.S. 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 a 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 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 all the exclusive meaning 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 U.S. Securities and Exchange Commission. Now I would like to introduce Mr. John Chisholm, Flotek's Chairman of the Board, President and Chief Executive Officer.

Rob, thank you, and good morning. I would also like to welcome each of you to Flotek's full year 2013 conference call. We are glad that you are here. 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; Josh Snively, President of our Florida Chemicals subsidiary; Rob Schmitz, Flotek's Vice President and Corporate Controller. Today is another first for Flotek as we join you from multiple locations. Josh and I are in Houston at our Florida Chemical facility with the balance of the leadership team in Houston. And a special welcome to Jay Portwood, the newest member of our team. Jay is the president of Eclipse IOR Services or EOGA, a leader in polymer injection technology in Enhanced Oil Recovery and a pioneer in EOR chemistry. Jay brings a new expertise to the Flotek technical team, and we're excited about the future of our EOR business with the addition of Jay and his team. Jay joins us this morning from Calgary. Last evening, we filed our annual 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 questions. However, before doing so, a couple of overarching comments. First, as noted in this morning's press release, Flotek announced a Letter of Intent to acquire SiteLark, LLC, a Dallas-based petroleum reservoir modeling firm led by Dr. Dee Biswas. SiteLark has become a key player in reservoir modeling and conventional and unconventional reservoirs and, as importantly, in Enhanced Oil Recovery project design and evaluation. We were introduced to Dee of SiteLark by Jay Portwood, who, through EOGA, has partnered with Dee on a number of EOR projects, providing Jay with key reservoir modeling services that have led to innovative EOR projects designs that have helped expand EOGA's reach. We believe combining EOGA with SiteLark inside of Flotek will continue to build on our goal of creating a leading EOR services firm offering a broad spectrum of EOR services, from design to evaluation, including best-in-class execution and chemistry technologies to maximize returns from EOR projects. While not large in scale, this acquisition has the potential to be very large in scope and to the future of Flotek. Dee's expertise in modeling and reservoir evaluation not only fits with our EOR focus but also has important applications in primary completion efforts. We believe Dee and his team will have an immediate impact on Flotek's performance. I am reminded with this most recent acquisition of Flotek's acquisition of the company that developed the first CnF chemistries, which, in the early part of the last decade, Flotek acquired for about $100,000 in cash and 10,000 shares of Flotek stock, trading then in the low single digits. We expect to complete the SiteLark acquisition in the coming weeks, and we'll provide more information upon closing the transaction. Second, as we noted last night, Flotek posted revenue of $371,100,000 for the year ended December 31, 2013. Quite simply, that is record revenue for Flotek and is the direct result of the effort and determination of every member of the Flotek team. It is also an indication that working smarter is just as important as working hard. In 2008, Flotek posted revenues of about $215 (sic) [$226] million with over 620 employees. In contrast, last year's $371 million in revenue was the result of the effort of just 485 people. To put it another way, in 2008, the average employee was responsible for just over $403,000 in revenue. Today, each employee, based on average headcount, is responsible for just over $800,000 in revenue. In short, I'm incredibly proud of the contribution each and every employee has made to the Flotek renaissance. Our team is motivated by their drive to be best-in-class in everything we do, a focus on growing our business in a sustainable, efficient way and an acute desire to provide the best returns possible for our shareholders. Very simply, the interests of our team and each of you, our shareholders, are uniquely aligned. That is even more true today, as nearly 50% of Flotek's employees are also Flotek's shareholders, something I'm very proud of. While our stock compensation expense may be slightly ahead of our peers, I am certain that unique investment in the hands of so many of our team members directly and positively impacts our productivity and, as a result, your returns. Finally, I'm very proud of the fact that Flotek has accelerated its reporting schedule and is reporting its annual results, including the filing of our annual report with the SEC, over a month earlier than in previous years. The commitment of our financial team, led by Rich Walton and Rob Schmitz, has worked nonstop since year end to meet our goal of reporting in the first half of February. Moreover, our independent auditors, Hein & Associates, completed their careful and critical review of our financial statement, accounting process and internal controls, which allowed us to accelerate the communication of our annual results. Moreover, our investment in best-in-class financial and accounting systems has allowed us to have near real-time access to data, providing better and more timely financial reports but also serving as a resource for our sales and service personnel in the field to be more responsive and to better serve our customers. In short, we continue to strive to not only be one of the elite oilfield technology companies for our customers, but also one of the leaders in financial reporting as we work tirelessly to build and maintain confidence among all of our stakeholders, from customers to shareholders. These are significant events and milestones for Flotek and show the continued growth, maturation and evolution of your company. They also lead me to be more enthusiastic about our future than ever before. However, as I said 3 months ago, Flotek is not willing to rest comfortably in the past, but rather, your company will strive to reach for a future where our industry-leading innovation can create value for all of our stakeholders. As I've said on each call since I took the helm now over 4 years ago, it continues to be my privilege to serve as President of your company. I remain immensely proud and humbled by the commitment and support of members of the Flotek team that believed, as a group, they could make a difference in the future of Flotek and believed in our vision to restore stability and growth to the company and continue to be enthused that, through the efforts of our people, the future is filled with opportunities to create value for our stakeholders. With that, I'd like to turn the call over to Rich Walton to review our full year financial highlights and provide some additional color on certain financial issues. Rich?

John, thank you. As John mentioned, Flotek filed its annual report on Form 10-K for the year ended December 31, 2013, with the U.S. Securities and Exchange Commission yesterday afternoon. In that report, Flotek reported that revenue for the year ended December 31, 2013, was $371.1 million compared to $312.8 million for the year ended December 31, 2012. Revenue for the full year 2013 increased $58.2 million when compared to the previous year. The increase in revenue was the result of the acquisition of Florida Chemical Company in May and gains in the Energy Chemical Technologies and Artificial Lift Technologies segments. For the year ended December 31, 2013, the company reported net income of $36.2 million or $0.67 per share on a fully diluted basis compared to a net income of $49.8 million or $0.97 per share on a fully diluted basis for the year ended December 31, 2012. Results for the year ended December 31, 2012, included a reduction of deferred federal income tax expense of $18.6 million. This increase in income resulted because it was no longer necessary for the company to record an allowance against this deferred tax asset as of December 31, 2012. Earnings before interest, taxes, depreciation and amortization, or EBITDA, for the year ended December 31, 2013, was $74.2 million compared to $65.1 million for the year ended December 31, 2012. Stock compensation expense for the year ended December 31, 2013, totaled $10.9 million compared to $13.4 million for the year ended December 31, 2012. For the full year of 2013, noncash stock compensation represented approximately 14% of selling, general and administrative expense. SG&A for the year ended December 31, 2013, increased by $11.8 million or 17.7% compared to the full year of 2012. SG&A cost as a percentage of revenue declined from 21.2% to 21% in the year ended December 31, 2013, compared to the full year of 2012. The company recorded an income tax expense of $20.8 million for the year ended December 31, 2013, reflecting an effective tax rate of 36.5% compared to an income tax benefit of $4.3 million for the year ended December 31, 2012. 2012 had an effective tax rate benefit of 9.5%, which primarily resulted from removal of the company's allowance against its deferred tax assets at December 31, 2012. Accounts receivable at December 31, 2013, were $65 million compared to $42.3 million as of December 31, 2012. The company's allowance for doubtful accounts was 1.3% at December 31, 2013. For the 3 months ended December 31, 2013, Flotek posted revenue of $100,800,000, the highest revenue quarter in Flotek's history. That compares to $76.7 million for the last quarter of 2012. This is an increase of 31.4%. Consolidated gross margin for the 3 months ended December 31, 2013, was 39.5% compared to a gross margin of 40.8% for the fourth quarter of 2012. For the quarter ended December 31, 2013, the company reported net income of $11 million or $0.20 per share on a fully diluted basis compared to net income of $23.2 million or $0.44 per share on a fully diluted basis for the last quarter of 2012. The fourth quarter of 2012 was impacted by the allowance on our deferred tax asset, which I've previously discussed. I would now like to turn the call over to Steve Reeves to discuss recent operating results and trends. Steve?

Rich, thank you. As noted earlier, consolidated revenue for the 12 months ended December 31, 2013, was $371.1 million compared to $312.8 million for the 12 months ended December 31, 2012. Revenue for the full year 2013 increased $58.2 million when compared to the previous year. Energy Chemical Technologies revenue for year ended December 31, 2013, increased $16.9 million or 9.2% relative to the comparable period of 2012. The increase in 2013 revenue was the result of the acquisition of Florida Chemical and an increase in sales of stimulation chemicals, including Complex Nanofluid additives. Customers are increasing usage of Complex Nanofluid products in the Rockies, Eagle Ford and other North American basins. Energy Chemical Technologies' gross margin for the year ended December 31, 2013, increased $7.1 million or 8.7%. Gross margin percentage for 2013 declined 0.2% compared to 2012, primarily the result of the continued evolution and broadening of the company's product portfolio. As expected, gross margin was positively impacted by supply chain benefits from the Florida Chemical acquisition. While the company expects segment margins to remain robust, continued evolution and expansion of the breadth of product offerings is likely to lead to marginal fluctuation in margins in the coming quarters. In the fourth quarter of 2013, Flotek delivered more CnF than in any quarter in the company's history as we continue to develop new market opportunities for our key chemistry technologies. In addition, we continued integrating the Florida Chemical assets and intellectual capital with the Flotek team, which has and should continue to provide new research opportunities and operating efficiencies. We remain excited about the opportunities: the use of citrus terpene for xylene replacement, the potential for the use of CnF in EOR projects and the potential to extend our reach into new international markets. Consumer and Industrial Chemical Technologies revenue for the year ended December 31, 2013, totaled $42.9 million. Revenue for the year ended December 31, 2013, is incremental to the company for both the periods as the segment is a new segment acquired during the second quarter of 2013. CICT revenue is primarily driven by demand for d-limonene and other bio-based chemistries offered by the company globally to a multitude of industries, as well as from citrus isolates produced for the flavor and fragrance industry. CICT gross margin for the year ended December 31, 2013, was $10.7 million or 24.8% of revenues. The primary drivers of the margin for the CICT segment are demand for the company's bio-based chemistries and the high-value flavor and fragrance isolates. Drilling Technologies revenue for the year ended December 2013 totaled $112.4 million. Revenue for the year ended December 31, 2013, decreased $4.3 million or 3.7% from the same period in 2012. Revenue declines can be primarily attributed to a decline in actuated tool rentals, a result of the meaningful decline, over 20%, in vertical drilling activity. Drilling Technologies gross margin for the year ended December 31, 2013, was 38.4%, down from 39.2% compared to 2012. Gross margin declined by only 0.8% as a result of actuated tool cost increase, offset by the product mix change in 2013 to higher-margin Teledrift series tools, Stemulator tools and other drilling tools and services. We remain excited about the opportunities for both Teledrift and Stemulator in the year ahead. We continue to see meaningful interest in the Stemulator tool as we work with key clients to improve its efficacy. We are in the final beta testing stages of a measurement center which will provide the user key data on tool performance. We expect consistent growth in the products' acceptance and use throughout 2014. For Drilling technology, we continue to see market share gains in both domestic and international markets. Our relationship with Saudi Aramco has matured, and we expect meaningful growth in the Middle East as we introduce Teledrift into new international markets. Though we have seen incremental business gains in the first several weeks of 2014, we don't expect a significant uptick in vertical drilling activity in the near future. As a result, we continue to focus on market share gains, improved efficiency and best-in-class service. Our strategy has shown early success, as we saw marginal pickup in segment margins in the January. Revenue for Artificial Lift Technologies segment for the year ended December 31, 2013, was $14.8 million compared to $12.1 million for the year ended December 31, 2012. Revenue for the Artificial Lift Technologies segment for the year ended December 31, 2013, increased by $2.7 million or 22.3% compared to the same period in 2012. The introduction of SSI Lift units in the second half of 2013, as well as increased pump and pump equipment sales, led to the revenue increase. This increase is due to a slight rebound in the gas workover drilling market, additional installations in 2013 and more oil-related equipment sales. While traditionally a small part of Flotek's business, we are very excited about the future of our Artificial Lift effort. In January, we announced the addition of David McMahon to the Flotek team, a 2 decade-plus veteran of the Artificial Lift industry. David is excited to reenergize our Artificial Lift offerings, leveraging Flotek's commitment to innovative technologies to bring new products, best-in-class service to the existing clients and future prospects. Our business will focus on niche technologies that should boost margins and market share into the future. We believe 2014 will be a transition year for our Lift business but believe David's expertise and effort is likely to exceed our internal expectations. While we remain vigilant in our careful watch of commodity prices and drilling activity, we believe we are well positioned to continue to gain market share across segments and across geographies in the months ahead. With that, I'd like to turn the call back to John Chisholm. John?

Steve, thank you very much. Before we take questions, I'd like to add a couple of concluding thoughts. While we've spent a lot of time discussing our commitment to research, science and technology, I think it's important to understand exactly what that means. It was less than 6 years ago that Flotek's Complex Nanofluid chemistries were considered a gas-centric product. However, through applied laboratory research, advanced chemistry analysis and intellectual horsepower, Flotek responded to clients looking for improved chemistry for unconventional oil completions. Today, for those interested in advanced chemistry technology for optimal completions, CnF is the gold standard. That said, advanced customized chemistry requires constant innovation and, as important, anticipation and responsiveness to clients' needs. Case in point is the evolution of CnF in the Bakken. While we've had success with CnF in many Bakken wells, we also have found that some Bakken completions aren't as responsive to CnF chemistry as similar completions in other basins. There could be a number of reasons for the wide range of results in the Bakken, including rock type, water saturation, reaction to certain de-emulsifiers, frac design or a number of other variables. That said, in many Bakken wells, the impact of CnF is compelling. What we do know is our best-in-class science team is working with our clients to make sure we maximize the impact of chemistries for all well types and completion scenarios. While that may not happen overnight, we will find the right custom cocktail for all parts of the Bakken, where it was our work that pioneered the concept that in this play in the Williston Basin, there is no such thing as a generic shale. Just like we cracked the code on the use of CnF in oil when few thought it could be done, we'll also unlock the universal potential of CnF for this important domestic oil resource. Our international efforts continue to gain traction. We're in the final stages of our new corporate infrastructure in Oman, which will lead the development and construction of a state-of-the-art chemistry manufacturing facility to serve the hydrocarbon-rich Middle East and North Africa. While we've been deliberate in the development of this project, the process alone has created meaningful opportunities for chemistry and drilling technology relationships in the area, including with our partner, Gulf Energy. Moreover, the opportunities to grow our business in Saudi Arabia are both significant and multifaceted. Away from the Middle East, we continue to see key opportunities in Latin and South America, the nations of the former Soviet Union, the North Sea and as far away as Australia. And that's not to mention significant interest in growth in our Canadian operations, where EOGA has been active in recent months. Finally, I also want to welcome David McMahon to our team as our new Artificial Lift guru. While Steve mentioned David earlier, we believe David's 2 decades of experience at a major integrated service company, combined with his desire to build a world class business at Flotek, is likely to surprise a lot of people in the coming year as we reengineer our pump, valve and service businesses. On one final financial note, earlier this week, we received notice of the exercise of the last remaining warrants from our preferred stock offering in 2009. While those shares are already included in our fully diluted share count and, as a result, make no difference in our reported results, the exercise does represent a key symbolic milestone for your company. At that date in history, Flotek had $600,000 in cash and was a phone call away from bankruptcy. As a result of that offering, the belief of a small group of investors that we could make a difference in a struggling company's future and the hard work and the dedication of the Flotek family, today we sit in the strongest financial position in the company's history and are poised for significant growth in the year ahead, growth that should now be as focused on the bottom line as it is on revenue, a tenet we are acutely focused on as we enter through the new year. As we close one chapter, so begins the next chapter in the history of Flotek, one we hope will be filled with opportunities for all of our stakeholders, opportunities for my colleagues, opportunities for our clients and, most importantly, opportunities for you, our shareholders. I want to pledge to you today, as I did on my very first call now 4 years ago, my team and I will come to work each and every day knowing that you have placed your confidence and trust in us as stewards of your capital. We will take that responsibility very seriously and work hard each day to earn that trust. Thank you for your interest in Flotek. I'm glad to be here, and we look forward to sharing our journey with you in the coming year. Operator, we will now open the call to questions.

[Operator Instructions] And the first question comes from the line of George Venturatos from Johnson Rice. Georg P. Venturatos - Johnson Rice & Company, L.L.C., Research Division: Just wanted to touch on the chemicals margins. Obviously, a great quarter in 4Q, talked about some of the supply chain benefits. Obviously, aware of a little volatility with the product mix from Florida Chemical. But I guess, how does this kind of start to begin to normalize over the next few quarters? Is that as you kind of work through some of the lower-margin stuff from Florida Chemical?

Well, the biggest impact in the quarter is the record amount of volume, of Complex Nanofluid. I think as everyone who has understood and -- understands the Flotek story, it carries the largest margin inside the Energy Chemical Technologies sector. So that had the biggest impact on the quarter for us, is that uplift due to the Complex Nanofluid. We're very aware of the margin differential with Florida Chemicals, products versus ours, and again, the folks that are familiar with the story know that the process is to move more of the d-limonene from a lesser-margin type product over to a higher margin inside the energy chemical sector, which is partly what we were able to do in the fourth quarter, but we have a mission to do. Does that answer it for you, George, or would you like a little more context? Georg P. Venturatos - Johnson Rice & Company, L.L.C., Research Division: No. No, that's helpful. I just wanted to -- I figured CnF was a big driver there, but I know you had mentioned the supply chain benefit as well. The second one, I guess, on CnF 2.0, I know you were working on a few pilot programs in the Eagle Ford, Permian as well. Any kind of update there on a progress report?

Right. So the 2.0, one thing we want everyone to understand, that's a suite of CnF products, not just one standalone product. It's customized for different basins. And although we're very careful in specifically talking about individual clients, Kevin may be able to add some additional color for you in the different geographic areas. So go ahead, Kevin.

Yes, George, this is Kevin. The CnF 2.0 has gained traction through the last half of the year, and even now, I think last -- or actually, this week, the first part of this week, we had 3 tanker loads leave for the D-J Basin. The 2 areas where we've seen the biggest adaptations and benefits so far have been the D-J Basin in Colorado and Southern Wyoming, as well as the Permian Basin. And it's only because of the limited amount that we've manufactured up until now to do these field trials. We will eventually test it in all the basins. As John mentioned earlier in the call, the customized chemistry and finding the right cocktail, not only for each basin but for sort of the subsets of rock and fluid types within each basin, means that we'll further stretch the limits of CnF 2.0 and where we apply it. But it has really come around, and it looks to be achieving what we anticipated, which is equal to or better productivity at half the concentration being pumped.

And the next question comes from the line of Michael Marino from Stephens Inc.

A question on the Q4. Can you remind us again of the impact that the Colorado flooding had on the quarter?

Steve, do you want to take the first stab at that one? That seems so much in the rear-view mirror, but we're going to let Steve go ahead and take a stab at that.

Yes, we thought as it went along that it affected us about $3 million in revenue, was what we claimed. It was pretty easy to document that in sales that got pushed back, and you can take that over and apply it. The -- because we couldn't catch it up, as we said, It wasn't work we lost, but it was work we delayed. And we lost it in both segments. We lost it in Chemical and in the Drilling Products segment.

And that was in the first part of Q4?

The end of Q3 and the first part of Q4, yes.

Okay, so there was some impact.

And something we didn't talk about a great deal was that everybody -- you can simply watch the weather. We didn't make as big a deal out of it because it wasn't the floods, but we did have a tough November and December weather-wise in a couple of our areas.

Okay. And then, I guess, from -- on the basin level commentary, John, that you alluded to. Maybe -- I'd be curious to hear your thoughts and kind of where you guys are in the Eagle Ford, where it seems like maybe the dominoes are starting to fall a little bit. Is the Eagle Ford -- is that your biggest basin yet, or is the Niobrara still the largest?

Yes, we've said that Niobrara, Michael, is still the largest from a volume standpoint, but the Eagle Ford, as you mentioned, is gaining momentum. One thing we do want to point out is that the Eagle Ford is very similar to these other geographic areas in that the shale is not the shale is not the shale, and Kevin can talk a little bit about a difference in the asphaltene and paraffin that we've seen in wells that are less than 3 miles away. Kevin, if you want to just add a little bit of context to that so that everybody will have an appreciation. This truly is about customized chemistry. That's why we're committed to the amount of money we spend at the research facility. It's why we're committed to having as much preliminary information, whether it's cores, whether it's rock samples, drill cuttings, oil, is essential to have the best chance to optimize the performance. But Kevin, why don't you give a little more context on that?

All right. I think probably most people on the call recognize that the Eagle Ford is really sort of a mixture of oil, wet gas and dry gas, and that's moving from north to south. Oil here towards the north, the wet gas and condensate-rich region in the middle of the Eagle Ford, and then if you get south down towards the border with Mexico, it gets gassier, trending towards dry gas. So as John says, within a period of just a few miles, you can get quite a difference in the hydrocarbons that are being produced from the Eagle Ford. At the same time, the depth changes and the rock type changes. But we've seen with our oily CnFs, the CnFs that include more solvent and emulsifiers to use in the oil reservoirs, quite an improvement in being able to handle, dissolve and put in solution the paraffins and asphaltenes that tend to clog the pores. Sometimes it clogs the pores at the very beginning. They're full of these fractures [ph], and then as you begin to produce over time, those same pore throats can be constricted with mobile paraffins, asphaltenes and fines. And so the solvency, the d-limonene that's contained within the CnF really addresses a lot of these problems that develop in oil reservoirs. And as I mentioned, the Eagle Ford changes quite dramatically over a short period of time from north to south. Hope that's helpful for you.

So it is -- we -- I mean, kind of as a follow-up to that, is it fair to say that maybe the growing pains that you're seeing in the Bakken are -- you've kind of been through this before with the Eagle Ford and you've kind of gotten over the hurdle there?

Yes, I think that'd be fair. And we'll let Kevin chime in here for just a second. I think the one thing we've noticed in the Bakken is there is just an absolute lack of uniformity in the completion process. Not only is the rock different from different phases of the Bakken, but Kevin, you may want to address that also, about the lack of standardization, if you will, on the completion itself?

Yes, I would say, in the Bakken, what we've seen so far is probably less variability in the type of fluid and the oils that are -- they can vary a little bit from one spot to the next, but the rock changes dramatically from one area to the next. And something that a lot of people probably don't take into account is the completion type. Those are large frac jobs. Operators tend to pump, in many cases because of cost concerns, a mixture a propense, some high-quality, larger propense, some low-quality, smaller propense. And when you mix those together, the in situ connectivity of those fracs is really unknown. It's sort of hard to compare one well to the next, even when you pump the same completion, because you don't want that mixture looks like down-hole when it's placed in the frac job out there. We have seen in the Bakken, and it's been reported in some SPE literatures, that water saturation makes a huge difference. If you have an in situ water saturation that's higher, the productivity of the oil is much, much less. And that can change over fairly small areas.

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

A couple of questions. One is, going forward on the SG&A, as you've been making progress, do you expect that as a percent of revenue to stay somewhere in the 19% to 19.5% range?

Rich, why don't you answer that question for us?

Yes. This year, we actually achieved 20%, and that was a decrease over the 20.2% of last year. I think as our revenues continue to increase and as we continue to watch the growth that we have in our SG&A cost, I would expect to see some decline in that percentage.

Okay. So what it was in the fourth quarter isn't necessarily indicative of where it would be for the whole year, but the trend should be improvement?

Yes.

Is that correct? Okay. The second -- I'm sorry?

That is correct.

And a second question. On the outlook for the cost on the citrus component on CnF, I mean, you give notice that those costs can be variable and that the market right now is going through some shifts, and I was just wondering what your current thoughts are on your costs for the citrus? I know the FCC assures your supply, but I was just wondering what you see going on in terms of your cost of citrus in the CnF?

Sure, Rudy, this is John. And let me start off and then I'll turn it over to Josh here. Again, the folks that are familiar with the story understand that, that was one of the driving reasons for the acquisition of Florida Chemical, not only for the certainty of supply but also the integration of the supply chain that allows us multiple facilities in which to store citrus oil, due to its shelf life, that allows us the flexibility to make purchases at the most advantageous times for Flotek on a -- but more on a more global, higher level. Josh can give you kind of the latest read on the citrus oil. But I think the underlying theme for anyone listening in on this call is we are very confident about how we can maintain the base product into our CnF throughout this year. Go ahead, Josh.

Yes, hey, Rudy. Just to make sure that we do manage the cost portion of the CnF on the terpenes appropriately, we have a very diversified strategy on purchasing our raw materials from every part of the world that processes citrus fruits. So we have a geographic diversification and a supply diversification. And as John indicated, with our tankage and our understanding of the markets, we position ourselves at the appropriate times in the market to make sure that we have the advantageous cost for not only our products on the CnF side, but also our products on the flavor and fragrance side of the business.

Do you have any visibility right now as to the trend in the pricing on the citrus supply?

It's always dangerous, Rudy, to predict the future, but I would say the momentum in the market is to continue for prices to increase. On the CnF side of our business, we already have our costs covered, so we're in pretty good shape there.

Okay. And one last question, and that's just on the tax rate. Going forward, you did come in below what I was expecting for the fourth quarter. I was wondering, for 2014, do you have any guidance on what the probable tax rate will be?

Yes, Rich will take that for you, Rudy. Good question. Others out there may have the same interest. Go ahead, Rich.

Yes. I think the tax rate that we see going forward would be about -- and this is federal, including state income taxes, would be in the neighborhood of 36.5%.

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

The recent Barron's article about you all mentioned a number of products. I wasn't necessarily -- I was confused as to whether CnF was in all of the products in that article?

I'm going to have to say that I don't have that article right in front of me. So we can certainly answer that question offline or, if you can be more specific, we'll do our best. Again, I don't have that article right in front of me.

RockPerm and OilPerm?

Okay. Fair enough. Those are privately-labeled branded names of Halliburton, which are created from the Complex Nanofluid.

Okay. Good. And then your comment about -- because of the breadth of new product offerings, you're expecting marginal flux in margins. Are you saying there are a whole bunch of products coming and that's going to cause disruption, or what are you saying there?

Well, I'm sorry if how we expressed that didn't come across as clear as we'd like it to. Here's the takeaway we'd like to leave for the folks listening in on the call. We would hope by now that folks have confidence in us in understanding the margin impact to the performance of Flotek, that depending on the introduction of new products, perhaps market penetration in a specific area with existing products, we have a very keen sense as to how we try to manage that gross margin on a quarter-by-quarter basis. And I wouldn't get caught -- too much caught up into it on a quarter-by basis, but look at the trend. We have a initiative well into place that's an internal initiative to improve the overall gross margin with improvement efficiency inside Flotek. The ability for us to report these financial numbers as early as we have was Phase 1 of that initiative. We're now are focusing our efforts into the supply chain. We'll now, this quarter, bring up Florida Chemical on JD Edwards, which in itself will then create some efficiency. So in terms of the margin, we're very keenly focused on how that impacts what we do. And again, from time to time, whether it's in the down-hole products when we introduce something new or on the chemistry side, that margin may fluctuate based on our objective. And Kevin, you may want to chime in as well, if you like.

Yes, Richard. John has addressed the chemical side pretty well. We make a lot of different chemicals, and they each carry different margins. We've discussed before that the CnF margins are higher than most. And for instance, last year, in 2013, we developed 9 new CnF products, each carrying slightly different margins but still higher than most of the other chemical products. So the amount of acceptance and uptake of those will affect the Energy Chemical business to some extent. Steve mentioned earlier on down-hole tools that Teledrift and Stemulator carry a higher margin than some of the other down-hole tool businesses. So the product mix changes slightly, but we have such a large base of products being sold today, these are relatively small fluctuations from quarter-to-quarter. As John said, we're working very hard on the efficiency and the cost-effectiveness of what we do produce and get out there and expect that to have sort of a continuous improvement on margins on the products that go out. Is that helpful for you?

Yes.

The next question comes from the line of Michael Marino with Stephens Inc.

Steve, question on the Drilling Technology group. I guess you referenced expectations around, I guess, maybe a flattening, or you saw some uptick in January but were cautious given the decline in the vertical rig count. Just can you help me understand and remind us again of maybe the drivers behind that business? And specifically, I mean, what I'm kind of thinking about here is, within the Permian, if I think the vertical rig count is going to be pretty flat this year and all the growth there is going to be horizontal, does that play to Flotek's strength in the region, or would you expect your business in that region to be pretty flat?

Okay. Really good questions. The thing that works for us in drilling products, when they drill vertical wells, you run several different bore hole assemblies and there are as much more rental tools that get put in a hole. So there are many more opportunities that we've had forever on vertical wells, especially with our Teledrift side. Our Teledrift side, once you get high direction, you start losing out. And since the Midland is one of our biggest areas in the whole Teledrift product line, we need all of the vertical wells that we can possibly get, and we do dominate the market with that. The problem becomes, such as in the Eagle Ford where they go to pad drilling, they turn the wells over -- and this has been a change in the sales and the way the wells are produced, they turn the wells over to directional companies, usually from surface down. So you're no longer dealing with the E&Ps, you're dealing with directional companies who have a lot of their own devices, their own down-hole tools. And you're kind of subsidizing it. So it has an effect on that on taking opportunity away from you. It has an effect on the high-margin Teledrift work, taking those wells away from you or cutting them back. And that's the reason, last year, Teledrift improved their revenues significantly international and look to do that again this year, whereas domestic stayed pretty flat, even with the large vertical loss. The pace that we've got that we think will counteract that as we go along and get it finalized will be the Stemulator. We really do believe, Mike, that this will open up more market as we go along. We see the -- in the last quarter, we were pretty consistent with our revenues with the Stemulator, and the thing that we discovered was we were selling -- our jobs that we sell to go out on were pretty significant. They met our expectations. Our revenues were a little behind, and we discovered that about 50% of the jobs you go out on, you don't get to put a tool in the hole because the drilling holds up on horizontal drilling and they don't want to trip the pipe. So we've had to rework the model just a little bit, but the opportunity for the Stemulator to work in the horizontal wells opens up a whole new horizon for us.

Mike, let me follow up one thing on Steve there. We're now running Stemulator on an initial basis in Canada. We've had interest in the Stemulator in the Middle East and also in shipping tools to Argentina. So just to echo what Steve says, and as you and I think other people that are familiar with the background of that technology, it's a overlay onto the infrastructure of Teledrift, which is why we're so excited about the type of income pull-through that it has for us.

John, can you remind us again of the tool count there or the job capability, where you are -- maybe where you were in Q4 and where you might be headed?

Yes, Steve will take that for you. Go ahead, Steve.

Yes. We have -- the 2 sizes that we have are the 5-inch and then the 6.5-inch. We have approximately 50 of each one of the tools built, designed out and working. We're going through some modifications which are not major. We'll have them implemented by the end of this quarter. But with 100 tools out there, because 50% of your jobs, like I said, normally don't run the tool, is what we are discovering, we still feel like we're somewhere along the lines of anywhere from 50- to 75-job-a-month capability with that. We also have significant money in our capital budget for 2014 to build as many more tools as we need.

So it's fair to say you'll be building quite a bit more or...

That is the hope. We will build more as soon as we -- the job numbers start approaching where we're starting to stretch the limits. We're not turning anything down. But at this point right now, the 100 tools' more than sufficient by far for what we're pulling.

And the last question comes from the line of Keith Maher from Singular Research.

I was hoping you could perhaps break out the CnF revenue and growth rate for 2013 as you did in -- because you did that for 2012 in the 10-K?

Yes. On this particular call, we're not -- we've -- in general terms, we've talked about that CnF represents slightly over 50% of the energy-chemistry revenue.

Okay. Fair enough. And I understand, with a new product in 2012 and so you're growing off a low base, but then obviously the growth rate slowed a bit this past year. And I understand you've got a lot of -- it looks like a lot of great opportunities going forward. So should we think about perhaps the growth rate as being a bit of pause this year in front of these new opportunities?

No, I wouldn't say so. We're comfortable. As you know, we don't give guidance out, but we're comfortable with the expectations that have been put out there by the folks who follow the Flotek with what the revenue will be for 2014 and the earnings per share. So the biggest ongoing issue that faces Flotek and others -- us a little bit differently because it's a market penetration story first and foremost, but there remains an overhang of excess hydraulic horsepower in North America. And as everyone pretty much knows on this call, the largest percentage cost of drilling and completing a well is involved with the completion and the hydraulic fracture stimulation involving that completion. As long as there's that overhang, it creates this shadow over pricing throughout every part of drilling and completing a well. When you listen to the guys like Halliburton and Slumbers, they feel that'll start to clear up by the end of the summer. We're hopeful that happens. But we don't see any other headwind in front of us, other than the ongoing headwind of this oversupply of hydraulic horsepower.

Okay. Great. That was very helpful. And just one last question on the Consumer and Industrial Chemical segment, obviously new because of the acquisition, so we don't have a lot of history. How should we think about the kind of the growth rate in that area? Is it kind of just -- I mean, it seems like, for fragrances and flavors, that's maybe kind of growing at GDP, but perhaps some of these other efforts you have in bio-based chemistry could help the growth rate a bit. Just I don't know if you could give any color just on kind of the internal growth rate in that area?

Yes. We're modeling that to be flat in 2014. And again, part of it is -- actually, you talked about it, it's us having as complete understanding as we need to. But you also are correct, there are different initiatives involving citrus oil with industries that maybe not have been exposed to it before that we're in the middle of. We're very confident with the research and technical reach of the Florida Chemical folks. And I'd just say, stay tuned. Then again, we're not exactly sure on the volume increase, but in certainly the breadth of different industries that are expressing an interest in the refined products out of citrus oil, quite frankly, is encouraging. But for right now, we're planning a flat growth number for that segment in 2014.

And Mr. Chisholm, there are no further questions over the phone lines. At this time, I will now turn the call back to you for any closing remarks.

Okay. Thank you very much there, Jasmine. Thank you for your support of Flotek, you who are on the call or connected through our website. We look forward to speaking to many of you in the new year. Couple of just updates. Tomorrow, we'll be speaking at the IPAA winter meeting in Fort Lauderdale. That will be webcast next week. We'll be at the Intercom Energy Conference in San Francisco on the 19th, and again, that will be webcast. And then on February 26, we'll be at the Gabelli Conference in New York, and that will be webcast as well. So that will be 3 additional opportunities that will continue to try to add further context of Flotek. So we appreciate the interest and support of everyone, and hope you have a great day.

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.