Ladies and gentlemen, good morning, everyone and welcome to the Flotek Industries Inc. Second Quarter 2014 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. Please go ahead, sir.

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 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 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 and 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 the 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 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. I would also like to welcome each of you to Flotek's Second Quarter 2014 Conference Call. We're glad you're here. With me today are Rich Walton, Flotek's Chief Financial Officer; Steve Reeves, our Executive Vice President of Operations; Chris Edmonds, our Senior Director of Corporate Finance and Strategy; and Rob Schmitz, Flotek Vice President and Corporate Controller. 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, a couple of bigger-picture comments. While it's hard for some of us and probably you to believe, it was 5 years ago this week, that it became clear that Flotek was on the brink of the great financial abyss. The company was in default on its credit facility, had, at best, marginal liquidity and business prospects and opportunities were severely limited. In the second quarter of 2009, Flotek reported $23.5 million in quarterly revenue. That's right. $23.5 million in revenue. While the odds may have been stacked against Flotek, when the Board asked if I would step in as your President, I believed so strongly in the core product and its efficacy that I could not say no. Combined with right financial minds, I was confident, some would say foolish, that we could build the team that could create a world-class oilfield technology company of which all of our stakeholders could be proud. Fast forward to today, 5 years, almost to the day, hence, and we are a long way to doing just that. The company has never sported…

John, thank you. As John mentioned, Flotek filed its quarterly report on Form 10-Q for the quarter ended June 30, 2014, with the U.S. Securities and Exchange Commission yesterday afternoon. Flotek reported that revenue for the quarter ended June 30, 2014, was $105.3 million compared to $93.6 million for the quarter ended June 30, 2013. Consolidated revenue for the 3 months ended June 30, 2014, increased $11.7 million or 12.5% relative to the comparable period of 2013. This increase in revenue was primarily due to increased sales of stimulation chemical additives in our Energy Chemical Technologies segment. As expected, seasonal activity declines in Canada impacted revenue by nearly $3 million collectively in April and May. In addition, the transition to an optimized CnF blend in a key basin caused a transient reduction in revenue of approximately $1 million, as well as a modest short-term impact on energy chemistry gross margins. For the quarter ended June 30, 2014, the company reported net income of $11.0 million or $0.20 per share on a fully diluted basis compared to net income of $8.4 million, or $0.16 per share on a fully diluted basis for the quarter ended June 30, 2013. Earnings before interest, taxes, depreciation and amortization or EBITDA for the quarter ended June 30, 2014, was $22.0 million compared to $17.6 million for the quarter ended June 30, 2013. Stock compensation expense for the quarter ended June 30, 2014, totaled $2.4 million compared to $3.6 million for the quarter ended June 30, 2013. Selling, general and administrative expenses remained relatively flat for the 3 months ended June 30, 2014, as compared to the same period of 2013. SG&A costs as a percentage of revenue declined from 22.5% for the second quarter of 2013 to 19.8% for the current quarter as revenue grew faster than SG&A costs. The company recorded an income tax provision of $6.0 million, reflecting an effective tax rate of 35.1% for the 3 months ended June 30, 2014, compared to an income tax provision of $4.7 million, reflecting an effective tax rate of 35.9% for the comparable period in 2013. Flotek continues to sport one of the strongest balance sheets in the industry. The current ratio continues to improve. During the quarter, Flotek's total outstanding debt did increase by $1.9 million, or 3.5% since March 31, 2014, largely a result of seasonal inventory accumulation and higher estimated tax payments. However, during the 6 months ended June 30, 2014, Flotek has reduced outstanding debt by $5.2 million, or 8.4% from the balance at December 31, 2013. Accounts receivable at June 30, 2014, were $65.9 million compared to $65.0 million as of December 31, 2013. The company's allowance for doubtful accounts was 1.2% at June 30, 2014. Inventories in the quarter rose by $10.2 million, primarily as a result of traditional seasonal increase in citrus product inventory held at Florida Chemical. Now I would like to turn the call over to Steve Reeves, who will discuss second quarter operating highlights. Steve?

Rich, thank you. As noted earlier, consolidated revenue for the 3 months ended June 30, 2014, was $105.3 million compared to $93.6 million for the 3 months ended June 30, 2013. Second quarter enterprise-wide gross margin equaled 40.2%, relatively flat compared to the second quarter of 2013. Energy Chemical Technologies revenue in the first quarter was $62.6 million, an increase of $14.9 million or 31.2% compared to last year. Quarterly gross margins in the segment were 43.8% compared to 43.1% a year ago. While we continue to make progress in CnF adoption rates, the traditional spring thaw in Canada had a marked impact on completion activity for the North, and as a result, CnF sales. We estimated the spring breakup reduced CnF revenues by about $3 million in April and May. Moreover, given nearly all of that displaced revenue was CnF related, gross margins for the quarter were also impacted. The Consumer and Industrial Chemical Technologies segment or CICT was formed in the second quarter of 2013 with the acquisition of Florida Chemical. Segment revenues in the second quarter was $12.6 million. CICT gross margin for the 3 months ended June 30, 2014, contributed $2.9 million. Gross margins for the quarter decreased from the comparable period of 2013, primarily due to the lower margin for terpene. Drilling technology revenue for the quarter totaled $27.2 million, down $2.5 million relative to the same period in 2013 but an increase of $2.3 million sequentially. Drilling Technologies gross margin for the quarter was 39.5%, a decrease from 41.8% compared to the same period of 2013 but a modest increase from 39.3% in the first quarter of 2014. Not only did Teledrift stabilize in the quarter, including strong international growth, but our core tools business gained momentum in key basins especially in the Southern…

Steve, thank you very much. Before we take questions, I'd like to add a handful of concluding thoughts. First, like many of you, when I first reviewed margins in the energy chemistry segment, I had questions about the 300 basis point sequential decrement. However, after reviewing the data carefully and reviewing our activity pattern, it seems clear that the results are transient and relate almost entirely to short-term fluctuations that will dissipate as we move into the second half of the year. It is important to remember that nearly 100% of the displaced revenue opportunities resulting from the thaw in Canada are high-margin CnF chemistries. In addition, we made a conscious decision to phase out an older completion chemistry blend that we felt was not as effective as newer formulations. While that was absolutely the right decision, both for our clients and for Flotek, it also temporarily removed a relatively high-margin sales opportunity from our stable of products. Hence, the product mix in the quarter was skewed to slightly lower margin products resulting in a lower blended gross margin. That said, with the recovery in Canada and clients redirected to better formulations, the product mix should be more favorable in the second half of the year. We have noted consistently over the course of the last 18 months that we felt gross energy chemistry margins should rise by 100 to 200 basis points from 2013 levels. Given 2013 margins were 44.1%, the math suggests overall sustainable gross energy chemistry margins should fall in the 45% to 46% range. For the first 6 months of 2014, energy chemistry margins were 45.3%. As to the reformulation, while the decision had a transient impact on second quarter results, it was absolutely the right decision for the future of Flotek. For Flotek to remain…

[Operator Instructions] Our first question comes from the line of Michael Marino with Stephens.

John, you talked or, I guess, you guys posted top line growth in the energy chemicals business of around 25% in the quarter, and just based on the pipeline of work that you see, is there any reason this can't be or won't be sustained in the second half -- for the entirety of the second half of the year and even to next year? I guess I'm just trying to understand maybe the puts and takes, I recognize that the growth isn't linear, but if it's going to be better than that, why might that be? If it's going to be worse than that, why might that be?

Sure. A great question. I'm sure it's a question a lot of folks have that are listening in on the call. So as we just mentioned here kind of in our comments, Michael. The FracMax application, which shows public data that's modeled with FracFocus and production data from wells around the country, we believe -- I think the folks who have looked at it empirically believe that there is a validating ability of the increased cost of complex nanofluid. That's why we have a higher backlog of validations now than ever before in the company. So to directly answer your question, we expect that growth to continue on that plane through the balance of the year. And when you're in a market penetration story, as this is, you get to what's called the halo effect, which that every evidence of a validation creates a halo that should make it -- compress the time for the next client to consider and, in fact, use the technology. And that's the phase of this market penetration effort that we're entering into right now.

Okay. And just to follow-up on those validation projects that you outlined. Are those field tests or lab tests? Or is that a combination of both? And then what has been kind of the historic conversion rate of those types of projects into -- whether it's a lab test moving to a field test or a field test moving to a more consistent customer?

Sure. So the validations that we mentioned, they are all field validations in numerous basins, I think, give or take a little bit, it's 44 wells that will essentially happen with new clients to the Flotek technology between now and the end of the quarter. And the sustained rate, once people send cores or drill cuttings and oil samples into the lab, they've pretty well committed to a validation. And so that's all in place for these validations that we mentioned today. And then it becomes a matter of the stickiness to continue to illustrate that these folks are getting a value and should sustain the usage of the complex nanofluid going forward well beyond the validations, and those have about an 80% success rate. The reason why it may not be 100% is the client company may move people in and out of the decision-making process that were involved in the validation. It's not like you're starting over but you kind of are. Bur it's a very high success sustained rate once the validation occurs. And I might also add, those validations typically are a minimum of 3 wells. One point never makes a trend line. So they're typically 3 wells, sometimes they're 5. We have one that's a 12-well validation. So that's kind that gives you the idea the number of wells that we're talking about on these different projects.

So it'd be fair to say that those validation programs from a year ago, 80% of those have turned into kind of consistent customers, and now you're kind of moving along with the next group and the hope is that becomes consistent?

I think that would be a fair assessment. And our hope is based on the history of the sustained rate when someone enters into a validation program.

Our next question comes from the line of Georg Venturatos with Johnson Rice. Georg P. Venturatos - Johnson Rice & Company, L.L.C., Research Division: John, I wanted to -- you did a great job of kind of outlining the impact to the chemicals margins in the quarter. As we look at the back half, certainly see improvement back to kind of that run rate we talked about. Is it safe to think 3Q is kind of a little bit of a transition to probably getting back to the upper end of that rate in Q4? Do you think it's a -- quick of a bounce back in 3Q?

Well, it's certainly -- you used the term transition, but the biggest effect that will accelerate that transition, quite frankly, is Canada. As we mentioned there, the activity in July is right at 4x greater than a year ago July, and nearly all of that business, 80% of it, is complex nanofluid in nature. The one thing that we're doing, it's a little thing, but again, I think, it puts an emphasis on our focus of looking at every part of the margin thread inside the chemistry side, as we now have dedicated trucking to 3 distinct areas in our operation in North America which really means we have take-or-pay contracts with dedicated trucking that is able to reduce our freight. That's part of the 100 to 200 basis points we talked about that we felt would go on. We now have the type of ability to forecast where we think the utilization of these products will be through the balance of the year that we can step out and do take-or-pay type contracts with these trucking groups that can reduce that in that area. So kind of maybe a longer answer than you wanted, but we feel pretty confident about the end of this third quarter, those margins are going to be back where we thought they would be in terms of the high 45%, approaching 46%. Georg P. Venturatos - Johnson Rice & Company, L.L.C., Research Division: Okay. Great. And then also, I just wanted to touch on FracMax. Certainly, early days, seems like you're gaining some nice traction with regards to the validation projects. I guess, you mentioned this was a record with the 17 ongoing currently but -- I know things fluctuate, but compared to the first 6 months of the year prior to kind of the introduction of FracMax, how many were we kind of running on average then?

I'd say it was probably 1/4 of that number, right , this -- you're one of the folks that have had a chance and see it. I think in our view and -- still a lot of these E&P companies are what I would say prisoners of their point of view, which at all cost, they cut costs. And our mission is to change that point of view to where incremental spending that's validatable and creates economic uplift is what they should consider. We think, because it's not our data, it is their data, it's their information they turn into the state production records, their information they turn into FracFocus. That their data is what creates the economic validation by using the technology. And that's our mission, is to change that point of view, to modify that point of view. And we believe that FracMax, because of its independent nature, should go a long way to helping us do that. Georg P. Venturatos - Johnson Rice & Company, L.L.C., Research Division: Okay. Great. And then last one for me. Is there any particular basin or region where the FracMax data has been incrementally helpful versus your previous marketing efforts in that region? Or has it been pretty broad in terms of the helpful nature of incremental activity?

I would say, overall, it's broad. But there might be a slight edge to South Texas. The percentage of these validations is slightly skewed to South Texas over any other particular geographic basin. But I'd say overall, it's broad, but again slightly skewed to South Texas, Eagle Ford and that area.

[Operator Instructions] Our next question comes from private investor, George Austin. [ph]

This is George. Introduced the question I have regarding FracMax and the validation projects, and you roughed it to say maybe 80% hit ratio, but let me expand the question into timing of the validation projects. The press release mentions 12 underway and 17, which -- and by the way, in your comments, you mentioned 20. So I don't know whether there's been a few more very recently. But either way, is there a rough estimate of the timing to bring one of the -- any one of the validation projects to fruition? And the point here is that since FracMax was, I guess, just introduced in June, but you did say maybe some were underway before that, so it's just 6, 7 weeks ago. Is there a rough idea like weeks, months to bring a possible 80% hit ratio to, if you will, a deal with any given producer?

Well, good question. I'm sure that's also a question on the minds of a lot of folks that are listening in on the call. So as you might expect, all of these producers are different. They all have a different process of understanding and becoming encouraged on a different way of doing things. But I would say, overall, what used to take months now takes weeks, up to 1 month or 2 in the sales process to create a validation. And again, I don't want to, in any way, oversimplify the process of changing the point of view, of introducing an element that will cost money to make money. You have to still get different levels of acceptance and buy-in with these E&P companies and that normally doesn't happen around one meeting around a conference table. But again, the fact that the data is independent and is derived from their very own information, a lot of the second guessing, a lot of the engineering of questioning the normalization process of showing value that, in large part, has been taken away in the discussion of whether they're going to increase the cost of their completion. And that's, I think, really what compresses the decision timeframe for these people. But again, I don't want anyone to leave this call thinking that it's like going over to the wall and flipping a switch, it's not that easy. You still have to have different levels of buy-in, and it still really kind of amazing that you could have, on a team of 6 people, 5 folks buy in, and there's still one guy that doesn't understand it or doesn't, for whatever reason, accept it, that you have to work on extra hard to get the whole team to go along. And I don't want take everybody's time up about the sales process of value added. But again, it's still a process out there. Sure. Thank you for the question, George.

[Operator Instructions] Our next question comes from the line of Mark Brown with Global Hunter Securities.

I wanted to ask about the Flotek micro solutions product that you discussed at the Analyst Day. I think you have -- had referenced some trials of that in July and early August, and I wanted to know what you're seeing there and what plans you have, if you can maybe give a sense of the contribution in terms of revenues that you expect and perhaps, what basins you think that would be most applicable to be used in?

Great question. The -- interestingly enough, the first meaningful validations of the micro solution are very likely to incur with Saudi Aramco in this quarter. The product is on the water. We've had extensive laboratory testing. Saudi Aramco individuals have been over to our Woodlands facility, we've been over there. And now that we've put that out there, I'm sure there will be increased focus on our third quarter earnings call as to how that does because, quite frankly, if it performs the way we think it will, who better to validate it than the largest oil and gas company in the world as to how it can improve their drilling fluid process. A word of caution, and they are aware of this, that the opportunity of having complete success on the first 2 or 3 validations, although it's reasonable, isn't certain. So it may take 2 or 3 efforts to modify the exact recipe, if you will, but they have as much of a level of expectation and hopefulness that this solution will meaningfully add to them of not having to run oil-based drilling fluid as frequently as they are right now. We will keep everyone posted on that. We've also had meaningful discussions with, I would call it 1 or 2 independent drilling fluid companies here in the U.S. that are ongoing that we should have opportunities again towards the end of this quarter in a couple of geographic areas here in the United States. Does that answer your question for you?

Yes, that's great. And the other question I had is just, I think you put out a press release recently on the Xylene replacement technology, and I just wanted to check is that sort of a new branding to emphasize the environmental benefits of the fracturing fluid additive? Or is there a different formulation involved in that product line?

Well ,yes, great series of questions there. Let me talk about it maybe 2 or 3 different ways. We have an increased level of interest from the service company sector in California about our Xylene replacement chemistry. And I think, just stay tuned on that as the year moves on for the acceptance for what we're trying to do there. We specifically mentioned Canada, because the folks that are on this call certainly are smart enough to understand with asphaltene and paraffin prevalence in Wells in Canada, it is a target-rich environment. There are at least a couple, again, service companies, who've expressed a keen interest of walking away from pumping Xylene any more. And we're working out now the volume requirements that can make our solution, what we would call price competitive, which means it's going to be slightly higher than Xylene, but we believe taking the environmental risk off the table will be worth a certain price above what you can pump Xylene for. There is a particular service company in the East Coast area, Utica, Marcellus that has exclusively gone away from Xylene to the extent they've actually turned down work from their clients if the client specified Xylene. So I'd say just from the start of this year to now, there is movement in the industry of people wanting to understand more the economics and the technical benefit of moving away from Xylene. So we remain very encouraged that the momentum we thought would be coming is starting to come. And again, I wouldn't expect a meaningful layering on of revenues the remainder of this year for Xylene replacement, but there are some very unique opportunities in different parts of, certainly in North America, that we hope to be able to share more with you after the third quarter. Sure. Thank you for the question.

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

John, you mentioned a number of different, I guess, basins and geographies where you're optimistic like Canada and Mexico and Middle East. But I just want to understand kind of within the commentary around top line growth in the back half of the year that you addressed in my first question, is one of those areas or is it another basin domestically that's driving that growth more than others? I mean, obviously, Canada's got the seasonal impact, but just kind of absent -- maybe normalized for seasonality, I mean, is there -- so on a year-on-year basis, is there one basin or region that you're more excited about, and that's going to drive more of the top line growth than another?

Sure. I would say that it's between now and the end of the year, it's going to be 2 of them. It's going to be Canada, and it's going to be the Eagle Ford. And if things play out the way we think they will in Mexico, heading into 2015, we'll likely add Mexico to that list. And that's not to say at all that we're down on the DJ Basin or the Permian Basin or the Barnett, we're not. But I think, since you asked the question, to give you our most objective answer, it would be Canada, the Eagle Ford and heading into next year, again, if things work out, we'll add Mexico to that list.

Sir, there are no further questions at this time. Please continue with your presentation or closing remarks.

No. If there are no further questions, we appreciate those questions. I think they were, of the nature, that answered thoughts of a lot of the folks that were on the call. We'll be at a conference in Denver in a couple of weeks at the EnerCom conference. Then we'll be in San Francisco for an IPAA conference. Those will all be webcast, if you can't make it there. And certainly, we appreciate everyone's interest, and pleased that you're able to join us. Have a great Thursday, and we'll talk to you if we don't see you before -- at the end of the third quarter. Thank you very much.

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. Have a great day, everybody.