Good morning and welcome to the Flotek Industries First Quarter 2015 Earnings Conference Call. All participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of the company's prepared remarks. An operator will provide instructions on how to ask your questions at that time. [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 web cast 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 web site. 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 Act of 1934 and other applicable statutes reflecting Flotek's views about future events and their potential impact on performance. Words such as expects, anticipates, intends, plans, believes, seeks, estimates and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements on this call. These matters involve risks and uncertainties that could impact 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 first quarter 2015 conference call, we are glad you are here. With me today are Rich Walton, Flotek's Chief Financial Officer; Steve Reeves, our Executive Vice President of Operations; Josh Snively, President of our Florida Chemical Subsidiary as well as our Executive Vice President of Research and Innovation; Chris Edmonds, our Senior Director of Corporate Finance and Strategy; Rob Schmitz, who you just heard from, Flotek's Vice President and Corporate Controller. Last evening, we filed our quarterly report with the U.S. Securities and Exchange Commission, but we won't take your valuable time, should we [indiscernible] to take those filings. We will provide a summary of the results, attempt to add some color regarding current operations, as well a sense of our future and then be happy to answer your questions. However, before doing so, a couple of comments. As noted last night, Flotek reported revenue for the year ended March 31, 2015 of $82.4 million, a decrease of $20.2 million or 19.7% relative to the comparable period of 2014. The decrease in revenue was driven by the steep decline in oilfield activity as indicated by the 25.5% decline in the average North American rig count in this quarter. While its hard not to be disappointed in our first quarter results, its also important to maintain perspective, especially given the cyclical nature of our industry. Moreover, it is important to remember the journey through which we have traveled in the last five years. The same macro environment had been present in 2009, its very unlikely we would be speaking to you today. Yet here we are, with a balance sheet that arguably is as strong as any in the history of the company, a company that generated…

John, thank you. As John mentioned, Flotek filed its Form 10-Q, for the period ended March 31, 2015, with the U.S. Securities and Exchange Commission yesterday afternoon. Flotek recorded that revenue for the quarter ended March 31, 2015 was $82.4 million, a decrease of $20.2 million or a 19.7% compared to the same period of 2014. Flotek reported a loss from operations for the three months ended March 31, 2015 of $1.3 million. Flotek posted a net loss of $1.5 million for the three months ended March 31, 2015 or $0.03 per share on a fully diluted basis. Earnings before interest, taxes, depreciation and amortization or EBITDA for the three months ended March 31, 2015, was $3.1 million, compared to $23.1 million for the three months ended March 31, 2014. The company recorded an income tax benefit of $0.4 million, yielding an effective tax rate of 21.1% for the three months ended March 31, 2015 compared to an income tax provision of $6.4 million, reflecting an effective tax rate of 34.7% for the comparable period in 2014. The reduction in the effective tax rate, is primarily attributable to a mix of pre-tax profit and loss between domestic and international tax jurisdictions. Outstanding receivables, net of the allowance as of March 31, 2015 were $56 million, compared to $78.6 million as of December 31, 2014. The company's allowance for doubtful accounts was 1.5% of receivables as of March 31, 2015. Despite the deteriorating economic conditions, the company's receivable base, sales outstandings remain within historical ranges at 61 days. We continue to keep a close eye on customer payment habits, particularly among smaller North American customers, but during the quarter we did not experience any significant deterioration among that customer base. During the quarter, the customer repurchased 180,190 shares of our common…

Rich, thank you very much. Before we take questions, I'd like to make a few comments on strategy and add a few concluding thoughts. Before doing so however, I do want to mention an item we discussed in both our 10-Q and press release. Flotek received notice in early January, from the U.S. Environmental Protection Agency, that FC Pro, a unit of our Florida Chemical subsidiary, had committed reporting in technical violations of the agency's regulations. After discussions with the EPA and our counsels, we agreed to settle the matter without an admission of wrongdoing, agree to pay a fine of approximately of $400,000. What matters here, is that the alleged violations were all technical in nature. There are no allegations of pollution, illegal handling of any type of waste, but rather a claim that the company did not obtain the appropriate permits and file the appropriate documentation, based on the change in the company's volume of regulated products. These events largely occurred prior to Flotek's acquisition of Florida Chemical in 2013. Also, to allow more time for strategic discussions and your questions, we will forego the regurgitation of the segment financial results this quarter, comprehensive review of those numbers and management's discussions can be found in our 10-Q and earnings release last evening, and we will happy to discuss any questions you may have. As discussed in recent months, the introduction of FracMax, the company's patent pending application, while comparing the performance of wells using Flotek's advanced next generation CnF completion chemistries, versus those that use conventional surfactants, are nothing at all; continues to be uniquely successful in fueling interest in Flotek's innovative chemistries. The FracMax database continues to grow, now with data from over 80,000 wells across key U.S. basins. Not only does such large database give us…

[Operator Instructions]. The first question comes from Georg Venturatos with Johnson Rice. Please go ahead.

Hey, good morning guys.

Good morning Georg.

Hey John, appreciate all the commentary on the business outlook [indiscernible] in this difficult environment, but wanted to guess -- without looking too much backward, but wanted to get a little better sense as kind of the top line progression throughout the quarter. I know -- cognizant of the fact that quarter-over-quarter, we were kind of in line with activity levels. Sounded like January was kind of in line to flattish year-over-year. I guess the bigger question is, do you feel like we are still kind of tracking at least in line with activity levels over the last couple of months here? And maybe on a segment basis, things are different that might be worth a comment?

No, good question. I am sure it’s a thought on a lot of folks listening to the call. February was a dreadful month and part of that was, there was a inventory draw-down with a lot of the companies that we sell CnF and the chemistry through. The buildup in January, I think was still folks thinking that the activity would continue at a pace, that then did not materialize. March was back to a more normal run, quite frankly, if February had been like March, the quarter would have been profitable. So its really, inventory draw-down that folks were not expecting at the end of January, early February that contributed to that. Does that -- enough clarity for you?

No, that's helpful. I guess, focusing a little more on the chemical side, I guess, whatever you can give us in terms of how those pricing discussions are going, and then also as we look to kind of potential margin troughs here, as maybe we see activity levels kind of flatten out across the industry in the back half of the year; with the cost reductions that you have taken, are those largely reflective? In Q1 I guess -- I know you mentioned that they would be somewhat mitigating to the margin decline going forward, maybe just a little more detail there?

Another good question; reduction in manpower really occurred in the middle part of the first quarter, so the real effect of that will be fully realized in the second quarter. And we are always reviewing the operation as it is, and if we need to make further adjustments, we will. We have consolidated, as we said in the press release, several of our facilities to reduce costs there. We have gone out of our way to protect the margin on the patented complex of nano-fluid chemistry. Some of the margin degradation [ph] in the quarter was product mix and we have been able to secure a contract where we are now a meaningful provider to Frac Tech, a pumping company, where those chemicals that we provide to them, don't carry the type of margins that are patented, as specialty chemicals chemistry does. But we made that decision as much of a load factor anticipated in the future of the end of this year and 2016 to be ingrained inside of that company and be able to display our service we felt would stand us well, and have more clarity with that, as that activity builds up through the second quarter. But I think the important thing on the takeaway here, is we have gone out of our way to protect the margins on the complex nano-fluids as best we can.

Great to hear. And then last one for me, interesting comments on the restim opportunity, certainly from a value proposition standpoint. Any basin specific increased activity noteworthy?

Seems to be so far, most prevalent in the Permian Basin and the Eagle Ford. Tall city, which is -- I think these restimulation companies will go everywhere from big companies, like BHP, down to companies -- maybe folks haven't heard of, like Tall City. But we can share with you, that they and the Permian Basin use our full complement of technology, where we had samples inside our research facility. We used our SiteLark reservoir modeling to predict what we felt the production increase would look like in the new to client curve, and they did a job of total cost of around $200,000 and their estimate that matches with us, is in the first year, they will realize really the $40 price model of oil, $3 million uplift in that well. So that's quite a meaningful return for them. But again so far, the interest has been pretty much in the Permian Basin and the Eagle Ford, and we had also, in the Williston and the Bakken as well.

Great. Well appreciate your thoughts John.

Thanks for the questions Georg.

The next question comes from Mark Brown with Global Hunter. Please go ahead.

Hey John, how are you doing?

Very well Mark. Good to see you in New York couple of days ago, go ahead.

Curious on the restimulation opportunity, and I know you talked about a little bit in your prepared remarks. But what should we think about when modeling the revenues and the timing of those revenues, and in terms of margins, how that would compare to your existing CnF franchise? Any commentary would be helpful.

Sure. Again, good question. I think for most of the folks listening in on this call, they are probably aware of two things; this restimulation concept is nothing new. It has been around for years, and decades actually. I think it has increased in awareness, due to the rapid downturn in the activity, and it in many ways, can be an opportunity to get second chance at production of the well. Many of these wells have been completed with a variety of different completions that folks still have not settled on, and with varying degrees of results, so I think folks are looking at; and we reenergize, rehabilitate a well that had this large capital program of an expensive drilling and original fracturing stimulation, and help get some of the return out that they may not have gotten out on the first drill-in [0:31:32]. So our focus on the restimulation is to look at really remediation, restimulation without sand, to be able to affect the capillary pressure in the near well bore region, because most of these wells on the first time did not use CnF, and our laboratory indication and results so far show, that when you apply that, you will get an uplift in the production. Now its early, but our modeling says it will sustain itself, as I mentioned in the Tall City type program, for at least a year. Its too early to say, how big of an impact this will have on our revenue. It certainly avails us of having a more direct control of the loading of CnF of this specific type of CnF we want to use, which is a good thing. And typically, the loading is much higher, than a normal hydraulic fracture job, where that might be two gallons per 1,000. This in some cases, maybe four gallons per 1,000 of CnF, to make sure you come in contact with that near well bore region in an effective way. So to answer your margin question, the jobs will be smaller, but we will sell more CnF on a loading basis. Our basis per job should be up slightly. But again, I am not trying to [indiscernible] here, but its too early to say how big an impact it will be on the revenue, but the results so far are strongly encouraging. Hopefully, that answered it for you?

Yeah, thank you very much. That's helpful. Just my follow-up is on FracMax analytics. You talked about how that is something that you might be able to monetize at some point, and I was wondering what sorts of plans you have for that at this stage? And also, the SiteLark reservoir modeling, is that in any way, connected to your FracMax analytics data, so that you can sort of look for correlations that can help in terms of identifying where to apply your CnF products?

Great bit of questions. For the time being, we felt it was important to maintain the identity of FracMax, closely aligned with Flotek. We have had several people, several organizations, service companies actually ask us how they could have more direct availability to FracMax, because in their words, its something they have never seen before. And we have taken the approach at this time, that its of greater validation value for our clients, the E&P operators and ourselves, for to remain inside to Flotek, that may change over time, but for right now, that's the way it is. Regarding SiteLark, yes the reservoir modeling is in the background, inside FracMax, that's how we have come up with the ability to estimate on a -- we think, very accurate basis of what the reserve replacement ratio difference is, when we use complex nano-fluid versus when you don't. Most folks probably on this call are familiar with that, business that's a key question that most lenders ask their clients, is, what's your ability to replace your reserves. And we wanted to put more of the reservoir emphasis on FracMax, because we are really trying to make folks understand CnF's chemistry, its impacts of reservoir performance, and a logical extension of that is to look at what is the replacement ratio of the reserves, when these wells re produced. Quite frankly, when you increase the performance of the well on a restimulation that obviously affects the reserve replacement ratio, and that's why we are committed at going to connect those parts of the Flotek capability, and to display it, in a way that we can through FracMax.

Thank you very much.

The next question comes from James Schumm with Oppenheimer. Please go ahead.

Hey, good morning guys.

Good morning.

Could you just talk a little bit about CnF pricing, and then maybe also just talk about -- maybe what you're seeing with some of the competing clones out there? Is pricing getting more competitive now, say, over the past six months or so?

Sure. To be honest with you, we are not very aware of what the clone pricing model is. That's something we can't control. What we can control is the illustration of what the difference in the products do from a performance standpoint, that is very conclusive, as to the CnF performance versus clones. I think, one thing that as a reference to that, there was a comment made two days ago, at the IPAA by Range Resources, at a breakout session, that they in fact said -- had a question of -- is there any new technology that can be used, and they mentioned they are going to use complex nano-fluid, which is us [ph] And it is more expensive, but if we can get a 5% uplift, that's their words, it would be well worth the cost. So we don't get overly concerned about the pricing of the clones, because for us, its not a cost question, it’s a value question of what is the well going to do, once you decide to make the choice of the adequate? To directly answer your question on CnF, as we mention, we have done our very best to protect the pricing and the margins of that, because in spite of the way certain people have tried to look at it, its just a chemical similar like a biocyte or a bacteriocyte, its much more than that. It’s a way to enhance the performance of a reservoir. And we feel good through this initial first 90 days that we have been able to protect as best we can, the pricing of CnF.

Okay. And then just on your -- I think you mentioned your 30 new validations in the first quarter, which was two times what you had in the first half of 2014. So that's very impressive. And I am assuming that's attributed to FracMax, but -- so I was wondering if that's the case, or if you have changed your sales strategy at all? And with all of these validations, does that impact your margins at all in the near term, if you're maybe giving product away for free, to incentivize people to just try the product, to demonstrate the value?

Okay. Again, good series of questions there. No, we have never given the product away, nor will we. It has certainly been my experience that, if you go down that path, its very difficult to get out of it. Occasionally, we will make a margin pricing decrease on something that we think has a significant opportunity for the future, not just on three wells or five wells. But that in itself is a rarity. We are glad you picked up on a note on the validations. Clearly, it’s a big part of it, as FracMax -- there is really two other things. As we mentioned here, the understanding and the more industry awareness is making it move more maintstream and there is just more chatter out there, that's accelerating the adoption timeline for folks out there. And we are very believing, that we have a very aggressive business development team that we helped reshape somewhere early last year, and these are very aggressive business development folks, that are able to talk about performance, and not just so much about costs. But our thesis heading into this, was that we would be able to increase market penetration in a low commodity environment, coupled with low activity, and we believe that's proving to be correct. Just based on the amount of new clients we have in the first quarter, is more than at anytime that I am aware of, that we have been engaged from transforming this industry to look at value as opposed to cost of complex nano-fluid.

Okay. Thanks John. And if I could just sneak one last one in, can you just give us an update on TelePulse, and if that's gaining traction, how that's going?

Sure. I will let Steve take a good portion of that question. But for the folks out there, the real reason that we spent two years on developing TelePulse, was to be able to create a downhole tool functionality that will be able to couple our motors, our stimulator, and now the ability to go horizontal with directional information. But Steve will give you more clarity, as to where we are with TelePulse.

As we finish the year, and got our initial beta testing done, and we are satisfied with the results and went out and did our first commercial jobs. I guess its one of those tight situations. The strategy is exactly what John said, to get off of selling one service per well and packaging up everything from our motor, up through our TelePulse, through the stimulator, getting those all going. Our timing couldn't have been more immaculate. We are sitting here now, we go out, we have some great -- we got great results on the wells we did, that we went out and did, especially the MWD market; obviously you have enough MWD kits out there to run 1,600, 1,700 -- service 1,600, 1,700 rigs, and they have the reputations for it. So as we come out and introduce our TelePulse and put it into the marketplace, right when the rig count falls so dramatically, is that a real [indiscernible]. I mean, so you are looking at opportunities to still kind of package these things up. But there is just this supply and demand and it has a -- kind of helping the stalls [ph] right now. We will progress with it, the tool is ready, it runs, and the packaging ideal, as we get any in the second half of the year, we certainly hope we see a leveling out of the rig count. We will see some of the MWD companies pull their horns in, and it will become an open market again. At that point, we expect the revenues on the TelePulse and the stimulators to grow significantly in the second half of the year.

Okay, great. Thanks guys. Appreciate it.

Okay.

Sure. Thank you.

[Operator Instructions]. I do have a follow-up question from Georg Venturatos with Johnson Rice. Please go ahead.

Hey guys, just a quick housekeeping one for me. Had some prepared comments on the tax rate. Just wanted to see if we could get a little clarity on that?

Sure. We will turn that question over to Rob, regarding the taxes.

Yeah, thanks John. So last year, we started looking at our international business that has grown dramatically over the last several years, and looked at how we could restructure that, to more effectively manage it. And as a result, starting at the beginning of this year, we started to manage more of our international business through foreign subsidiaries. And so those profits move into the foreign subsidiaries from our U.S. business. And because we plan to permanently reinvest those profits, it has an effect on our overall tax rate. Now the 21% you see in the first quarter, is representative of the dramatic decline we have -- of course we have had in the U.S. market, relative to our overseas business. So we wouldn't expect to see a rate that low in future years, I would say; and that rate itself for the current year is probably going to move around a little bit. But I would say in the future, as you're modeling, when our business returns to more normal levels, you would see probably a 28% to 32% effective tax rates.

Okay, great. I appreciate that. Thanks a lot.

Sure. Thanks Georg for the question. I am sure a lot of folks were thinking about it.

The next question comes from Rudy Hokanson with Barrington. Please go ahead.

Thank you very much. Could you maybe talk, John, a little bit more about what happens with the customers that are going through the validation testing right now, and what type of lead-time to when an order might come in and in what quantity they might place orders, if they are giving you any indication on that? Or right now, we are going to stick with what we know, but we are really curious about what we are doing. We want to make sure we have done our homework, so that when we are given the go-ahead, we can step up and come in with a lot of confidence?

Sure. The validations -- first off, its something we may have -- make sure that we put good clarity on. Since the middle of last year, when we introduced FracMax, we are not aware of any operator who has initiated the use of CnF -- that has stopped running CnF, period. Now the only qualifier to that, there is a couple of operators, that from a financial standpoint, completely shut down their operations for six months. But any operator that that has an ongoing program, has continued to use CnF; because I think that's a question that folks have asked in the past, what's the conversion rate from a validation to an ongoing user. And its very-very high, like the 100%, except for those couple. What we can't control, which certainly affected us in the first quarter, are those users of CnF, that their activity has gone for example, 10 rigs to three, six rigs to one, obviously we can't control that. From a validation standpoint, we have moved the vast majority of those, to within about a 30-day window, that when we make the initial discussions with them, many times -- what we call lunch and learn, where they will have seven or eight team members around a table, and they will see our technical presentation from research and innovation, as to why CnF is able to do what it does and then they see FracMax that validates the technology -- its normally within 30 days. They will send samples to the lab. Wells that are in close proximity, and within 30 days they are ready to go. Now occasionally, there are still clients that have a longer lead time, that maybe two or three months, and to be fair, as I mentioned Range earlier in a question, Range Resources, that was more of nine months to a year process, just because of the unique operating environment up there in the Marcellus, the extra water that will be produced, as a result of the CnF off these wells and those types of things. Their area, where they have got condensate in addition to gas, to make sure the exact right CnF formulation was used. But overall, to answer your question, we have compressed the timeline of validations from spot to execution of somewhere closer to 30-45 days, does that help you?

Yeah I think. If you could just give me an idea then of, once they are onboard and they look at their programs in a particular area where you're validating, do they then come in and basically place orders that would cover all the wells they are working on in that particular basin, or do they do a piecemeal much to the behavior of the customers?

Yeah the behavior of the customers in large part, is driven by the bigger macro environment, in terms of their contracts with the stimulation companies, that those have dramatically changed over the last year. So then instead of having a year contract, from a stimulation company now. In many cases, it’s a month, and in some cases, it’s a couple of wells at a time. And so when they don't know, if they are going to switch around their service companies, its very difficult for them to place orders over a long period of time. So most of this, is a just in time, purchasing, delivering event, due to the way that the clients are scheduling the work with the companies that are providing the hydraulic stimulation. Does that make sense for you?

Yes. So while there is a lot of uncertainty in the market, it also gives you the opportunity to come in, because there isn't that obligation for them to hold on to a previous process or service provider. You could come in a lot sooner than you may have before?

Yeah, I think there is the opportunity to that for sure, and I think again, earlier in our comments, I think overall, the industry is still a bit unsettled, as to the optimum way to complete these wells, and so a lot of folks are reexamining that, and that is again a nice open door for us, with folks that otherwise, in the previous level of activity didn't use CnF, and they are now open to more ideas. We will just kind of leave it at that, but I think your analysis there is a good one.

Okay. Thank you very much. That answers my question.

Sure.

The next question comes from George Austin, private investor. Please go ahead.

Good morning John. And thank you for taking my question.

Hi George.

In order to position the question, I want to give a little context. During the Schlumberger earnings call last Friday, I am sure others were struck by Paal's multiple references to risk based, incentive based provision of services. And based on his words, significantly enhanced production and reserves from refracking etcetera, etcetera, some of the comments that were already made here. But it was his multiple references. Now having said that, there was no reference to Flotek, no any reference to chemicals per se, but a clear reference to potential and a goal of increased market share in services. So that brings the question, how is Flotek impacted or will be impacted by at least what he used, and I know you do too -- view to FracMax, CnF, etcetera, market share gains, market penetration all the key words. Whether it's rebranding of Flotek products through Schlumberger, or [indiscernible] directly to the operators. So maybe you could put some sort of order of magnitude on what you're thinking, and obviously I believe from what I heard, what he is now thinking as the major player in the service industry, about orders of magnitude, market share gains; treated it from a macro point of view, but maybe you could put a little order of magnitude on this so-called significant new trend in oilfield services?

Sure. The senior level executives of Schlumberger, just below Paal's level, have been introduced and are familiar with the FracMax capability, and the difference that the CnF can make on a new completion or a recompletion and they are all very aware of that. And you're correct, under the distributive business model that has been prevalent for all these years, whether you're a Schlumberger or a Halliburton or a Universal or C&J or a Petroplus, all those companies rebrand, rename the CnF product. And what we have done is, modify slightly the recipe of CnF based on the geographic area and based on the fluid compatibility of those different pumping companies, which totals about 62 different unique brand names that are conveyed to the client from these different, now over 40 pumping companies; which certainly, has resulted in some type of brand nullification for us. The FracMax side benefit is, its described as CnF, there was a question earlier about clones or nothing at all, and we felt the side benefit is, that it would allow us to reintroduce complex nano-fluid and the understanding of what it does, rather than being caught up in, what exactly is it called by the distributors. So I wouldn't expect Paal to have referenced Flotek at all, because we are behind the scenes with them, just like we are with all these other pumping companies. We are separating this restimulation opportunity, really in probably two categories. I believe that the Halliburtons, Schlumbergers, Bakers, Weatherfords of the world, will really encourage their clients to consider a larger completion, most often including sand, I think data indicates that a lot of these multiple fracked horizontal wells didn't effectively frac all of the different zones that were perforated. And so you can expect them to talk about…

There are no further questions.

Okay. Well thank you all for joining us and for your interest in Flotek. We look forward to visiting with you in the coming weeks and months, and we will talk you again after the second quarter. Thank you, operator.