Flotek Industries, Inc. (FTK) Q2 2014 Earnings Report, Transcript and Summary

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 a better financial position, and revenues in the second quarter, over $105 million, set another record for Flotek. To provide even greater perspective, revenues for the entire 2009 calendar year were just over $112 million. Assuming we meet our objectives in the third quarter, we will exceed that number in just the next 90 days. I provide that color not to boast about our accomplishments, but to provide perspective on the journey. In fact, while we are pleased with our second quarter results, we are not satisfied. We know we have significant work to do in the second half of the year, and that is where 100% of our focus is today. That said, we wouldn't be where we are today without a team of dedicated women and men who are the best in the business and who collectively are acutely focused on 2 things: creating better wells and bigger return for our clients, and as a result, generating greater profits for our shareholders. As we noted last night, Flotek posted revenue of $105.3 million for the quarter ended June 30, 2014, record quarterly revenue for Flotek and the direct result of the effort and determination of our team. This represents the third consecutive quarter with revenue exceeding $100 million, a trend we expect to accelerate in the coming quarters. Moreover, we not only work harder, we continue to work smarter. In 2014, we are on track to generate over $800,000 of revenue per employee. That's nearly double what Flotek produced per employee in 2008. That impressive statistic is not only the result of better overall efficiency in Flotek facilities, but more importantly, the result of the hard work and dedication of Flotek employees that believe as a team, we can create unique value for Flotek shareholders. While I'm pleased with our efforts to date, I'm not satisfied. And as I've said before, 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 more value each and every day for all of our stakeholders. As I've said on each call since I took the helm now 5 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 the members of the Flotek team that believe, as a group, they could make a difference in the future of Flotek and believe 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 second quarter financial highlights and provide some additional color on certain financial issues. Rich?

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 United States. We continue to tweak the Stemulator design to ensure optimal performance. While Flotek's continued tools enhancement have temporarily slowed the growth of the Stemulator, the company expects rentals to grow steadily in the second half of the year. Revenue for the Production Technologies segment for quarter was $2.9 million, a decrease of $0.5 million compared to the same period in 2013. Production Technologies gross margins increased by $0.4 million or 42.2% for the 3 months ended June 30, 2014, as compared to the same period in 2013. And gross margin percentage increased to 42.5% for the 3 months ended June 30, 2014, from 25.2% for the same period in 2013. These increases are due to product mix from increased international Petrovalve sales and decreased domestic rod pump component sales. Under the leadership of David McMahon, our Production Technologies business continues to refocus its efforts on niche added-value technologies that will create a competitive advantage for Flotek in the coming months. The company is in the advanced stages of exploring options to accelerate its growth in unique technologies and services that will add value to Flotek clients and stakeholders. As we have said in the past, the seasonality of the second quarter can create anomalous results that have little to do with the long-term reality and growth patterns of our business. Given the weakness in Canada and changes in chemistry formulation, that certainly was the case in 2014. I have little doubt that, given the continued stable environment for our overall hydrocarbon development, Flotek should post strong results in the second half of the year. 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 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 the premier oilfield chemistry company, our reputation for innovation and excellence is our single most important asset. Given the use and in some cases, misuse or misapplication of this particular formula, it was only prudent to replace it with a more robust, effective chemistry solution. We have done so, and when we look back a year from now, we will have no doubt that we made the right decision for all of our stakeholders. Quite simply, we have a 0 tolerance policy for mediocrity. Our research and innovation group strives to be the leader in new chemistry technology, and this is just one example of how we will strive to bring our best technologies to the table, each and every day, even if it means we have to redirect our efforts in real-time. As we discussed in our release last night, there are a number of exciting initiatives that should have a positive impact in the second half of 2014 and into the future. The introduction of FracMax, the company's patent-pending application for comparing the performance of wells using Flotek's advance next-generation CnF completion fluids versus those that use conventional surfactants, has been successful in fueling interest in Flotek's innovative chemistries. As a direct result of FracMax, Flotek has added meaningful commercial chemistry validation projects with over a dozen prospective clients across multiple domestic basins. In addition, we are actively working on nearly 20 other validation projects, creating the most robust prospect book in the history of the company. This is just the beginning of the impact of FracMax, as we believe operators will find it hard to ignore the data which conclusively validates the economic advantage of using CnF chemistry in completions. While we have to execute on these opportunities, the ability to get in front of these new prospects is a big first step. I pledge today that you'll be hearing much more about the business benefits of MAX in the coming weeks. Our international efforts are continuing to provide great opportunities to create value for Flotek shareholders. In Canada, while spring breakup had an impact on April and May results, Flotek's presence continues to accelerate. The company's monthly Canadian revenues is now 4x of 2013 levels, and growth should continue with solid partnerships with Canadian service companies. In addition, we believe Canada can provide an opportunity to rapidly prove the efficacy and environmental value of our xylene replacement chemistry. We are also excited about second half opportunities in Mexico as we are beginning to provide advanced completion chemistries to a major national energy company. The company expects the multiple well validation project to continue through the balance of the year. Halfway around the world, we continue to grow our chemistry business in both the Middle East and South America. Flotek Gulf, our Omani joint venture, continues to progress with Flotek and Gulf Energy completing negotiations with an engineering and construction company, for the development of Flotek Gulf's chemistry manufacturing facility. Completion of the facility is expected in early 2015. Moreover, our presence in the Middle East has resulted in an increased chemistry sales across the region, including into Saudi Arabia. Not only are we making progress on the chemistry side, but Teledrift is also becoming a big deal on the international market. Teledrift is now working on nearly 40% of all Saudi Aramco rigs, plus Teledrift continues to expand its presence in Argentina, with Teledrift working on over 55% of all rigs drilling in the South American nation. It should be noted that our investment in our professional team and facilities in Saudi Arabia has made a marked difference on how Saudi Aramco views our relationship and has meaningfully accelerated our growth in the region. While every country and region is different, we're looking carefully at our Saudi and Middle Eastern operations as a model for potential growth in other hydrocarbon-rich countries and regions around the globe. As mentioned last night, July preliminary revenue should be around $37 million, a continuation of the acceleration seen as we exited the second quarter. Moreover with hard work and focus from the Flotek team, we expect month-over-month growth to continue in the second half of the year. That said, I can't emphasize enough that adoption of disruptive technology is not an activity prone to straight-line behavior, and sales occur without regard for the convenience of calendars. While I can't and won't predict the precise timing of our success, I know that I get up each and every morning excited about the opportunities in front of us and knowing that the growth horizon is virtually unlimited. Moreover, I am convinced, both the results of our scientific and technical expertise, as well as the empirical data now validated by FracMax, that there is a big opportunity to improve the way our clients and prospects complete and produce wells and that opportunity creates better economics for all of them and significant financial benefits for you, the owners of Flotek. Hence, we will continue to be focused on the task at hand, spreading the message of the benefits of complex nanotechnology in the oilfield, investing aggressively in technologies that are central to our vision and long-term success, and remain determined to creating best-in-class value for all of our stakeholders. Imagine for just a moment, what it would be like to wake up 5 years from now and realize that Flotek repeated what it has done over the past 5 years. Remember, there were very few believers in 2009, but those who did believe are pretty glad they did. Now our dream is to do just that. Repeat. I challenge myself and our team to make it happen, and we will do everything we can to create and maintain an environment where the seemingly impossible is not only possible, but probable. What I pledge to you today, as I did in my very first call, now 5 years ago, is that my team and I will come back to work each and every day knowing that you have placed your confidence and trust as stewards of your capital. We will take that responsibility very seriously and work hard each day to earn that trust. Let me be clear. The success of Flotek is a result of the hard work and untiring efforts of a group of people who believe they can shape the future. As a leadership team, it's incumbent on us to communicate our vision, challenge the spirit and ensure our team has the tools to exceed even their wildest expectations. 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 months. Operator, we'll now open the call to questions.

[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.