Flotek Industries, Inc. (FTK) Q2 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the Flotek Industries, Inc. Second 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 questions at that time. [Operator Instructions] This conference is being recorded. At this time, I would like to turn the call over to Mr. Chris Edmonds. Please go ahead.

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 want to remind everyone participating in this call, listening to the replay or reading a transcript of this call, of the following: Some of the comments made during this teleconference may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and other applicable statutes reflecting Flotek’s views about future events and their potential impact on performance. Words such as expects, anticipates, intends, plans, believes, seeks, estimates and similar expressions or variations of such words are intended to identify forward-looking statements, but are not 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. John, good morning.

Chris, thank you. I’d like to welcome each of you to Flotek’s second quarter 2015 conference call. We are glad you are here. With me today are Rich Walton Flotek’s Chief Financial Emeritus Officer; Rob Schmitz 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; and Chris Edmonds, our Senior Director of Corporate Finance and Strategy. 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 to those filings, we will provide a summary of the results then 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 opening comments. As we noted last night, Flotek recorded revenues for the quarter ended June 30, 2015 of $87 million a 5.6% increase compared to first quarter 2015 revenue but a decrease of 17.4% when compared to the second quarter of a year ago. While no business likes reporting declining year-over-year comparables, the fact oilfield activity declined nearly three times faster than Flotek revenue over the past 12 months suggests the performance enhancing technology does have an important place in the oilfield even in the most challenging of times. More importantly, while also activity as measured by just about any metric, continued to decline in the second quarter, your company actually posted sequential revenue growth, the result of the tireless effort of the Flotek team and precise execution of Flotek’s growth strategy, especially in our Energy Chemistry segment which we’ll discuss in more detail in a moment. While revenue growth is important, the ability to achieve profitable growth is even more important, especially in an operating environment where profits can be as allusive as the next single top discovery. Yet in the quarter Flotek posted profits of $1.1 million or $0.02 for fully diluted common share. That compares to a loss of $0.03 in the first quarter. Again our focus on best in class custom designed chemistry technologies drove our performance and we believe will continue to drive performance in future quarters. Finally, Rob will discuss our financial results and position in greater detail. Flotek’s balance sheet remains a strong as at any time in the history of the company. And we continue to generate positive cash in arguably the worst market environment in over a decade. These are hallmarks of which we remain proud and are further testament to the incredible efforts and dedication of the hardest working women and men in the oilfield technology industry. That said while we’re pleased with our progress in the second quarter, we are not satisfied. Our progress and success in the second quarter simply make us more enthused about future opportunities. We will continue to work smarter and harder to ensure we are focused on continuing to gain market penetration with our technologies and as importantly are appropriately positioned during the current market challenges with opportunities for Flotek and its stakeholders. One step in ensuring that we remain the laser focused in being prepared to capture opportunities when the cycle turns, we make certain that our business is appropriately sized, but also that we are focused on the right businesses. Last time we announced a one-time non-cash charge of just over $20 million that primarily facilitated the refocusing of our drilling technology business. The impairment of certain inventory really quickly reduces our exposure to lower technology, commoditized equipment, allowing Flotek to continue its quest to become the leader in advanced oilfield technology. While critical review of business segments is a difficult and sometimes painful task, it is also critical as a business continues to grow and mature. For Flotek the current trough in activity provided the perfect environment for such evaluation and will result in a much stronger and more profitable enterprise as we progress into the next cyclical acceleration. Let me be clear, Flotek’s singular focus is to create a company that is positioned to be the technology leader in the oil and gas business. In short, that means our quest is to ensure that every segment and every skew inside the Flotek enterprise posses a technological advantage that creates value for both our clients and our shareholders. Quite simply, Flotek will be known as a technology company that services the energy industry. As I’ve said on each call, since I took the helm now nearly six years ago, continues to be my privilege to serve as President of your company. I remain immensely proud and humble by the commitment and support of members of the Flotek team that believes as a group, they can make a difference in the future of Flotek and believe in our vision to restore stability and growth of the company, and continue to be enthused that through the efforts of our people, the future is still with opportunities to create value for our stakeholders. With that, I’d like to turn the call over to Rob Schmitz, our Chief Financial Officer, to review our second quarter financial highlights, and provide some additional color on certain financial issues. Rob?

John, thank you. As John mentioned, Flotek filed its Form 10-Q, for the period ended June 30, 2015, with the U.S. Securities and Exchange Commission, yesterday afternoon. Flotek recorded that revenue for the three months ended June 30, 2015 was $87 million, compared to $105.3 million for the three months ended June 30, 2014, and $82.4 million for the first quarter of 2015. Second quarter 2015 revenue increased 5.6% sequentially, but decreased 17.4% when compared to the same period in 2014. The decrease in year-over-year revenue is driven by the steep decline in oilfield activity. However, the increase is sequential revenue was driven almost entirely by the increased sales of Flotek Complex nano-Fluid completion chemistries as the company’s marking campaign a new direct distribution model provided significant revenue opportunities during the quarter. For the three months ended June 30, 2015, the company reported net income excluding non-cash charges of $1.1 million or $0.02 per share fully diluted, compared to net income of $11 million or $0.20 per share fully diluted for the same period in 2014 and a net loss of $1.5 million or $0.03 per share fully diluted for the first quarter of this year. As John mentioned, during the second quarter, as a result of decreased rig activity and Flotek’s expectations for future market activity, the Company refocused its Drilling Technologies segment to contemplate on products and market that leadership believes has the best opportunity for profitability in the future. As a result, the Company recorded a pre-tax impairment charge of $20.4 million in the second quarter of 2015. Including these charges, the Company recorded a net loss of $12.5 million or $0.23 per share fully diluted for the three months ended June 30, 2015, compared to a net income of $11 million or $0.20 per share for the same period in 2014. Earnings before interest, taxes, depreciation, and amortization or EBITDA adjusted for the non-cash impairment charge for the three months ended June 30, 2015, was $6.4 million, compared to $22 million for the three months ended June 30, 2014. Also Flotek entered into an agreement with PNC Bank, the Company’s lead senior lender, to amend the current credit facility. The amendment alters the definition of adjusted EBITDA used in the calculation of the Fixed Charge Coverage Ratio, providing for exclusion of certain non-cash expenses, non-cash contemplation expense and the current non-cash impairment charge from the calculation. In addition, the amendment allows Flotek to exclude up to $7.5 million in 2015 capital expenditures and additional $5 million in capital expenditures in 2016 related to the construction of the Company’s new Research and Innovation facility from the calculation of the Fixed Charge Coverage Ratio. A complete description of the amendment to the Flotek credit facility can be found in an 8-K filed this morning with the U.S. Securities and Exchange Commission. Cash balances remained relatively flat compared to the first quarter of 2015. Inventories after the effect of the impairment charge were $84.6 million as of June 30, 2015, a slight decrease from $86 million as of December 31, 2014. During the quarter, the Company continued to build seasonal and strategic terpene inventories in its Consumer and Industrial Technologies segment. Outstanding receivables as of June 30, 2015 were $56.5 million compared to $78.6 million as of December 31, 2014. The Company’s allowance for doubtful accounts was at 1.5% of receivables as of June 30, 2015. Depreciation and amortization expense, excluding depreciation and amortization included in cost of sales, for the three months ended June 30, 2015, increased by $0.3 million when compared to the same period of 2014. Interest and other expense decreased $0.2 million for the three months ended June 30, 2015 as compared to the same period of 2014. During the quarter, the Company repurchased 367,129 shares of our common stock at an average price of $12.55 per share or approximately $4.6 million. To-date Flotek has repurchased a total of 1,168,495 shares since the program inception. Flotek continues to maintain an industry leading balance sheet and we intend to remain very vigilant in protecting our liquidity, rationalizing cost and making it certain that we maintain a high level of financial flexibility as the industry searches for the next cyclical inflection point. Thank you. And now I would like to turn the call back to John Chisholm, to discuss our current business environment and strategic initiatives. John?

Rob, thank you very much. And you extended change for enabling our financial reporting in this timeframe. Before we take questions, I’d like to make a handful of additional comments on the current business conditions, strategy, our expectation for the coming months, and a few concluding thoughts. There is absolutely no doubt, the Flotek’s Energy Chemistry Technologies segment and more specifically growing acceptance of Flotek’s CnF completion chemistries drove the Company’s strong second quarter performance. Moreover, as we noted last night, there is a little down in our mind that CnF has now reached the tipping point in most North American basins which suggests operators are more inclined to consider using CnF than not. The growth in CnF volumes provides strong support for that statement. During the second quarter Flotek sold more CnF by volume than in any quarter in its history, except for the fourth quarter of 2014. Moreover, if you look at just sales in the United States, Flotek delivered more CnF to U.S. locations than in any other quarter in the Company’s history. In fact, as noted last night, based on volume, Flotek’s second quarter CnF sales grew 76% sequentially and 34% year-over-year in a market in which activity has declined between 40% and 60% depending on your favored metric. Domestic CnF sales more than doubled from first quarter levels and are up over 40% from the same period in 2014. While such strong performance might be expected in a market with strong industry fundamentals, this type of growth may seem anomalous to some, given the current headwinds facing the oil and gas industry. That said, not only are we not at all surprised with the results, we expect similar results in the coming months, notwithstanding the continued challenges facing this industry. Quite simply, disruptive technologies like CnF are just as likely to impact in industry during periods of instability as they are when all the planets are aligned. Our entire Energy Chemistry team from scientists and engineers to our sales and market specialists have worked tirelessly with operators and our distributing service company partners to deliver the consistent message that advanced custom design chemistries specifically CnF provide the best opportunity to maximize the productive potential of a well. Then as we have discussed in recent months, just a year ago, we introduced FracMax the Company’s patent-pending data analytics and visualization software application, allowing operators and others to compare the performance of wells using Flotek’s advanced next generation CnF completion chemistries versus those that conventional surfactants or nothing at all which accelerated the conversation about the efficacy of Flotek innovative chemistries. FracMax continues to expand with nearly 100,000 wells in the completion data base and more in the historical data base across nearly all North American basins. Not only is it such a large data base which is compelling evidence of the impact of CnF on production, it allows us to estimate aggregate economic benefit of CnF usage for our clients. As we have noted in the past, FracMax suggested the use of CnF has added nearly $10 billion in incremental economic value to the over 250 operators who have chosen to use Flotek advanced chemistries in their completion systems. Continuous improvements to the FracMax platform continue to add value for Flotek’s clients. As noted in recent presentations, we’ve added the ability to view and calculate production collateral foot to standardize the length and the ability to calculate the impact of the use of CnF on reserve replacement ratios, a key metric in the analysis of operator’s borrowing potential. We’re also working to add more detailed multi-variable and analyst functions and more to script [ph] these statistics that will enable specific company analysis. In fact, we are in the process of developing a version of FracMax which will allow operators to customize the software as a powerful analytical tool and import proprietary data that will optimize drilling and completion decisions based on a combination of operator specific and standardized data provided by FracMax. We are confident that this company centric version of FracMax could become the next standard in drilling and completion analytics and further establish Flotek and its chemistry as the technology and innovation leader in the energy industry. Not only have we had significant interest from domestic exploration and production companies in customization of FracMax, we’ve also received interest from national oil companies and other parties that are interested in how FracMax is going to optimize their energy portfolios. Third variable that we believe is having a marked impact on the growth of CnF is our recent introduction of the Flotek Store, the Company’s nomenclature for its strategy to market, sell, and deliver CnF directly to the oil and gas operators. Those who directly benefit from increased production, resulting from the use of Flotek advanced completion chemistry. While we are less than 90 days in the process of establishing direct relationships, reception has been incredibly positive and opens up an entirely new group of customers. The major independents, the family run production companies; they are more involved in completion designs and procurement and as a result were difficult for Flotek to reach. Let me be clear, we value our relationships with our service partners and we work side by side as we continue to sell those companies as we have in the past. However, a direct to market path is both prudent and opportunistic in today’s environment in which operators are acutely focused on performance enhancing technologies, direct proof of concept effectively validated by FracMax and best value pricing and the ability to main [ph] multiple completion partner relationships as a result of an abundance of available hydraulic horsepower. In short, we believe the growth in CnF usage is the result of operators realizing that maximizing production in a $50 oil place environment is every bit as important as in an environment where oil trades at a $100 plus and can cover many less efficient completion and production factor. It just so happens that Flotek’s expertise combined with our ability to prove the efficacy of CnF through FracMax and now the supply of the product through our direct distribution network makes the value proposition of Flotek’s Complex nano-Fluids very difficult to ignore and creates a complete Flotek value experience. What is even more promising is the fact that we believe Flotek’s growth in the quarter is repeatable in the foreseeable future. The second quarter growth was not the result of scores of small validation projects; it was the result of a dozen or so operators, deciding that an investment in CnF in well maximization was a key way to enhance the value of their company. With dozens of validations in a pipeline and more joining the process every day, future growth is already in playing views. With the empirical data provided by FracMax, we believe the validation process will be accelerated, if not sub-planted altogether by the wide ranging acceptance of CnF across basins in North America. That said and as we said before, disruptive technology does not generally grow literally. However, we know the TAM or total addressable market is multiples beyond our existing business which leaves plenty of opportunity for growth in nearly any market condition. Finally, a comment about price, while CnF volumes grew faster than CnF revenue, concluding that was the result of discounting is just far too simplistic. While selling price is down year-over-year, CnF prices were stable to slightly firming sequentially. We recently introduced a new CnF formulation that as a result of the efforts of our Research and Innovation team carries less input cost with better results than early generations CnF chemistry. As a result, we are able to maintain appropriate margins even as slightly lower selling price. We believe that is a prudent decision in this market environment. In addition, while price integrity is critically important with differentiated protected products like CnF, a balanced approach taking into account price; margin; and volume is the best way to maximize long-term profits. We are pleased with our pricing trend and will continue to pursue industry leading margins while making certain exposure to our patent protected core CnF chemistry portfolio is maximized with the goal of creating long-term mutually rewarding relationships with our clients. Before I conclude, a few comments about other business activities and opportunities during the quarter. Flotek continues to pursue re-stimulation opportunities and is participated in about two dozen targets to-date with results ranging from 150,000% to 200,000% percent uplift in baseline production. We continue to believe this could become a meaningful market opportunity for Flotek in 2015 and beyond. And we’re willing to be creative restructuring our re-stimulation relationships including participating in the production gains our client experience as part of our compensation in key projects. We are currently in discussions with the potential partner that would provide significant flexibility in assessing and funding such opportunities. Moreover, using our proprietary reservoir modeling expertise from our SiteLark subsidiary we can add additional value for clients looking for predictive and evaluation expertise as they develop re-stimulation strategies. As noted in our release last evening, we continue to make progress in our EOR efforts, more recently experiencing early success with CnF in the Flood projects underway with Kinder Morgan in West Texas. Through our EOG subsidiary, we are now participating in EOR projects Canada, the South America with multiple applications from EOG’s core polymer products, the Flotek CnF chemistries customized for use and enhanced recovery projects. Our acquisition of International Artificial Lift earlier this year is beginning to create opportunities for our Production Technologies group with the shipment of initial hydraulic lift units to Mexico in the quarter. Combined with the new Asian based supply chain agreement for key pump technologies, we are encouraged about growth in our Production Technologies business in the balance of 2015 as well. Finally, our international business continues to move ahead with an increase in sales and additional opportunities. I was recently in Saudi Arabia for meetings with executive of Saudi Aramco and came away with the belief that not only will existing business continue to grow but additional opportunities especially in chemistry are growing closer on the horizon. In fact, Saudi Aramco’s U.S. research team has asked to collaborate the Flotek’s Research and Innovation group to explore the development in application of nano technologies inside Aramco’s exploration and production portfolio. I’ve never been more excited about the future of Flotek than I am today and I have never been more confident in our prospects and capacity to execute even with the industry headwinds in front of us. I’m convinced we have the right people in the right places to grow our business in the coming weeks and months and with even greater acceleration in the coming year. In fact, we are confident enough in our pipeline and ability to execute that we believe third quarter Energy Chemistry revenue will grow in excess of 10% with steady to expanding margins in the same period. I pledge to you today as I did in my first hall, now six years ago, is that my team and I will come to work each and every day knowing that you placed your confidence and trust in us as stewards of your capital. We will take that responsibility very seriously and work hard each day to earn that trust. Let me be clear, the success of Flotek is not an accident or luck; it is the 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 is incumbent on us to communicate our vision, challenge the spirit and ensure our team has the tools to exceed [ph] even in their wildest expectations. Thank you all for your interest in Flotek. I am certainly glad to be here. And we look forward to be sharing our journey, both challenges and successes with you in the coming months. And with that operator, we will now open the call to questions.

[Operator Instructions] Our first question comes from Matt Marietta of Stephens. Please go ahead.

Great quarter to say the least here; it’s very obvious that in the results traction is accelerating for CnF in the industry. But the point was made that CnF is reaching a tipping point in virtually all domestic basins. Could we revisit the Williston Basin in particular where, if I recall correctly, there were some efforts to reformulate CnF some time ago? Has there been incremental success in the Williston, maybe elaborate a little bit on how we’ve arrived to this tipping point across this variety of the basins?

Well, there certainly has been incremental activity in the Williston Basin and our early indications are that the products that have been formulated at Research and Innovation have increased the success profile. But to be fair, a lot of folks like to look at beyond three months and into the six months timeframe. And so, we’ll be able to report even with more clarity on that on our next earnings call. But certainly, the activity in the Williston Basin is up in terms of the usage of CnF activity.

And another question here that I’ve been asked over night, early this morning is lead-time order process time. Can you maybe elaborate a little bit on, in the first quarter there was a negative effect of inventory draw down due to distribution channels. Obviously no one saw North America following thus far this fast [ph] in the first quarter but are there any anomalous inventory impacts to the second quarter to be aware of that provided a benefit, maybe elaborate a little bit on lead-times? How quick the distribution channel’s getting to the end-user to help us kind of calibrate the significant growth here in CnF?

I think that’s a fair question, probably other folks are thinking about it. The short answer is no, there is no anomalous activity. In fact, I’d like to give a kind of a quick shot as to the logistics team of Flotek that was able to handle this level of activity without actually missing an order. But more specifically to your question, Steve Reeves will kind of give you and others, a perspective of how this industry when they say just in time, it truly is just in time. Go ahead, Steve.

Yes. I was just -- at our Marlow facility the other day and we were looking through the orders, when they were coming in, when they were moving and we took the first of that seven or eight days of the month, looked at all orders that came in and have been ordered from the field and well over 80% of them wanted deliver within 24 hours of ordering. So Marlow, Oklahoma, we were getting orders and via South Texas, the Rockies and we were getting them literally 80% for 24 hours or less beyond location. So, that’s a true definition of just in time inventory.

That’s pretty fantastic. So I guess to answer there was no restocking and impacts in the volume sales, right?

We didn’t see any. No, sir.

No, not all Matt but certainly a good perspective question.

Thanks and one from me, if you don’t mind just kind of on modeling and CapEx. So far year-to-date CapEx has trended under the $25 million level or so. I understand that that was a kind of back half weighted number. But can you elaborate on timing of CapEx, maybe readdress so we can assume there is that still a fair number or is that come down?

We’ll let Rob take that for you, give you a little bit more clarity on what we’re looking at for the remaining six months of the year?

I think our outlook for the rest of the year is that we will end up around $26 million for the year and yes, most of the second half is as a result of the construction of our R&I facility. So I think you can blend the difference kind of evenly through the third and fourth quarters.

[Operator Instructions] Our next question comes from Georg Venturatos of Johnson Rice. Please go ahead.

Hey, good morning guys.

Hi George. Congratulations.

I wanted to reiterate congrats as well, certainly an impressive CnF quarter and nice to see the combination of the marketing efforts we’ve obviously been putting and in the development of FracMax there. I have a little bit of a bigger question, bigger picture question for you John, just in terms of; look I know you had mentioned the tipping point we’re seeing in nearly all basins; with the success of FracMax and also Flotek Store, two things that have kind of been developed in the last short-term period. Looking at the overall market share opportunity that we had discussed in the past and previous years, has that changed in terms of what the opportunity set is for CnF in your mind given what we’ve seen developed in the last couple quarters, and also the direct selling opportunity to operators?

Yes, sure, great question. For those listening in, they might have wondered why I’ve said congratulations. George has got a new addition to the family, new kiddo which is always an adventure. So that was the reason for that comment. So, we had just as kind of a history had said that by the time 2016, we would be exiting ‘16, we felt we’d be penetrating 30% of the wells completed in the U.S. with Complex nano-Fluid, those comments were made when the rig count was at 1,800 and certainly no expectation by us or anyone else that it would be at 850. Now that being said, the thing that I am thinking is I am sure a bit difficult for folks like you is -- and ourselves quite frankly is there is no template out there for what we’re doing in particular could be Flotek Store approach. No one really has done it on the scale that we’re talking about and implementing that I am aware of in this industry. Our sense is we will become the template in years to come for folks that will likely follow this model. But that being said, there -- as we stated earlier here in this call, the total available market is very high for us to be able to penetrate. We’d be having a different conversation if we were at 85% market penetration. So, we can stick with the 30%. I think if we’re able to get the 30% by the end of next year exiting that, in this environment of what we know today, that’s truly going to something special. But we don’t see any reason today why we should hold back from that because of the absolute validation of the economic value you get with CnF, a 100,000 wells in FracMax is obviously an order of magnitude different than 40,000. The big data indicates the value that you’re receiving. And so we’ll go ahead and stick with that for now, George. Does that help you?

That’s very helpful, John. And I missed your congrats. So thanks for that. I appreciate it. On the second one for me, on a chemistry side, I think the obviously top-line was impressive, margins as impressive in my view, talked about pricing stabilizing. Just wanted to talk about the other two variables there that maybe immediate or potentially longer term drivers, but one, how beneficial could the direct operator selling approach be over time to margins? And then secondarily, any additional commentary on input costs from the CnF side as it relates to the vertical integration with Florida Chemical that could be helpful over time as well?

I’ll take the first part of that; second part, we’ll turn it over to Josh. Here is the key collateral impact that the Flotek Store is creating by a more complete Flotek experience. In that the pricing over time and let’s say six-monthish, we believe will increase through the Flotek Store by 20% or so based on the way we’ve identified the pricing model. But what’s really important is that more and more of these operators are moving in increasing the loading of the CnF from what has been incredibly traditional model in this industry of any type of chemistry that it’s a gallon per 1,000, more and more because all of our research data indicates that you will get incremental economic return when you increase the loading from a gallon and half -- to a gallon and half and in some cases two gallons per 1,000 of the total fluid pump in these horizontal completions. So, what that means is before the Flotek Store, many of these operators could not get their heads around a two gallon per 1,000 loading due to the price that is being extended to them from the service company distributed business model. So now that whole relic model is being kind of relooked at because of the pricing to the Flotek Store. And again, I think that’s the thing that we’ll continue to monitor and share with you and others as we move through this. Please be patient with this. Like I said, there is no template out there that we could say well, company exited this, five years ago and this is what they experienced. But I think the key thing to kind of keep an eye on separate from pricing is the movement of the loading factor of CnF in its well. So we’ll keep folks informed. But in terms of the second part of your question of internal cost due to vertical integration, let Josh talk about that.

Great question on internal cost and that certainly is a balance throughout the year; prices are coming up and the raw materials coming [Technical Difficulty] is that we great visibility [Technical Difficulty] and we take appropriate decisions not only on inventory but also on forward contracts. But we have great relationships [Technical Difficulty] and we make sure that we are well positioned not only for our external sales but also for our internal [Technical Difficulty] markets is a great benefit to the Flotek [Technical Difficulty].

Our next question is a follow up from Matt Marietta of Stephens. Please go ahead.

I wanted to talk a little bit about the customer base. And I recall, it was a few color -- or couple of quarters ago where you offered the color that there were some very large end users beginning validation programs. One of these turned to adoption and secondarily I think you offered there now 250 or more end users. And if I recall were we closer to a mid 100 number or so just a year ago. And please correct me if I’m wrong but any color you can provide on connecting the results that you reported with the customer base would be really helpful.

I think the 100 number was that you referenced was low. I don’t want folks out there to think that we’ve doubled the client base in under a year. But because of the pragmatic data, we are very comfortable that it’s in excess of 250 current end users now. And the nature of this industry is quite frankly, in many cases, it takes less time to demonstrate differentiating disruptive technology to smaller client than it is these larger integrated whether they are independent or major oil and gas companies; it just does. And those that we mentioned a quarter ago in our earnings call or more, I think for the folks listening in on this call, they can be confident that our penetration into those larger companies is through validations is proceeding at the pace that we felt was possible. And we would like to be able to provide more clarity and context on that quarter from now. I think folk that are familiar with this industry know that still one of the great barriers in it is the transparency of folks really allowing people to talk about what they are doing. That’s one of the reasons we were pleased that Kinder Morgan said sure, to talk about Kinder Morgan was EOR. For whatever reason, these companies still have a hesitancy to embrace that approach but we’ll try to give you more clarity on that after the third quarter. But rest assured, the approach that we’ve undertaken with these larger people operators is proving out where we thought it would be.

Our next question comes from Mark Brown, Global Hunter Securities. Please go ahead.

I wanted to ask about the decision to take the impairment charge and drilling technologies and production technologies to exit and deemphasize some of the businesses in that scope. Could you just clarify that? I think that the -- some of the Teledrift sales that you make, countries like Argentina and some of the countries in the Middle East have sort of a strategic value in order to get you in the door with some customers in those countries. Are those still ongoing, so that you’re being pretty selective in terms of what you decide to exit and what you stay in?

So, we’ll probably take that in three parts. I’ll take the first part of it and then Rob can chime in and Steve can certainly chime in about Teledrift internationally. But I think important thing for the folks listening into this call and certainly it’s been consistent with our shareholders of the past that this was the decision not so much made for today but where we believe the industry will be a year from today. And our view of the drilling rig activity is going to be much more elongated because of the efficiencies that these -- the rigs that are going to be used are going to be the best in class rigs; that are going to be the most efficient; you’re going to have a higher performance of more wells being able to be drilled with fewer rigs than ever before in this industry. So, the sheer number of rigs we believe will not get back to the number, certainly we were all operating in a year ago today. And so our decision is, was much more forward thinking than what’s happening in July of 2015. Let me also chime in, just one thing internationally that we didn’t talk about. But regarding the chemistry as well, we’re shipping our first CnF in the Chile; we’re increasing our shipments into Argentina and also into pockets of Europe. And we didn’t talk about that in much because we had other things to talk about. But internationally that presence is growing as well. But Rob now will give you a little bit more color as to the rightsizing and then Steve can certainly talk to you about the Teledrift international activities.

I think that that’s an important question because really the restructuring and the change in focus is really around our U.S. business and particularly in certain markets in our U.S. business, specifically in the south, our south region exit the motors manufacturing process. We just felt like there is areas where our tools are not going to be as competitive in that market, so that really drove a big chunk of the adjustment. So Steve, do you want to talk about the international business?

Yes. On the international side, especially on the Teledrift, both Argentina and Saudi are growing, driving business as far as from the Teledrift side. In the impairment, a vast majority of anything we did with Teledrift was we took the oldest generation of equipment that we no longer support; we cleaned all of that out and moved it up, so that only the pro series are what we continue to support. We have opportunities in international, running test in Iraq; Egypt we’ve run; we’ve been contacted in Venezuela. We still see quite a bit -- it would be lumpy as it comes in just like Saudi was. But we see quite a bit of opportunity for Teledrift from the international side. We see from the development of the Telepulse from Teledrift with a little upturn. That would be another good piece for us. And then we’re going to spend quite a bit of our efforts going forward on the Stemulator, on the North American and United States side. So, we got out of -- also we were supporting about three different motor businesses, three different. And we decided that we would focus on what we could do very well in the northern region in northern United States; we still stay on top of that with what we do. And the other parts, we’re going to take our focus out and look at the things that we can compete and then our top of the line products for us. Teledrift will continue to be a backbone in our downhole tools because we are suffering in North America because of rig count, but what we’re getting international opportunities, we’ll make that out.

I also wanted to ask about your CICT segment. How should we think about modeling that over the next few years? Is this going to correlate in any way with the potential improvement in your overall chemistries demand given that the flavors and fragrances are sort of residual products out of your citric oil as an input or is this more secular, is it little bit more protected from the cyclical variances that we see in drilling and completions?

The CICT business, when you look at the flavor and fragrance component that actually will continue to improve and get stronger. So, what you will see is our internal consumption for terpenes increases in the ECT business, the margins will get stronger and the profitability will get stronger in CICT. So it’s not as much of a top-line store as it is the profitability that will come out of that unit. And we will be processing more citrus oils because of the terpenes demand that we’re generating which will add to our flavor business.

If I could on to that good context that Josh gave on a more macro level, we like to encourage people to drink more flavored drinks and for women’s buy more perfume.

[Operator Instructions] Our next question comes from George Austin, private investor. Please go ahead.

Good morning. And further congrats on a terrific quarter, particularly the CnF volume growth. John, quick question in two parts regarding the headcount expansion comment, over the last 9 to 12 months, at a time others in the industry were contracting obviously, Flotek’s volume expansion and client expansion resolving the reason. Approximately how many were added over the next 9 to 12 months? And even more importantly, do you need to add more people over the balance of the year as you expand your client base or the existing sales staff sufficient and it will be further volume divided by the same number of personnel?

What folks on the call need to kind of put into perspective is there is two different approaches in play here. The overall downhole technologies grew has incurred, Steve what percentage of manpower reduction?

We’re over 25% manpower reduction since February.

So that’s looking at not only now but where we think. As I mentioned earlier, the rig activity is going to be through the rest of this share, early next year. On the chemistry side of things, we’ve been able merely through the effort that you heard us talk about over the last two years with the capital we put into Marlow to make that a much more automated outreach with the acquisition of Florida Chemical which brought in [indiscernible] to be able to increase this throughput; it’s not any type of meaningful headcount addition. And so every incremental gallon that you even put through these facilities once you reach a certain level creates a greater marginal profitability on that next gallon. Where we have added people is on the technical and business development side for research, and our Research and Innovation area. And we look at this kind of like a good policy of always trying to improve. And if there are three agents out there that we think will add to the depth and reach of what we’re doing, we will go after those folks whether it’s on a research standpoint you’re in Houston; whether it’s a research standpoint in Canada, whether it’s a technical standpoint in the Middle East and certainly a business development standpoint from a marketing, selling of our chemistry. That overarching answer has probably related to 10 or 15 people we’ve hired at the start of the year in the chemistry side of the company. We don’t see a significant increased balance of the year but again if we are made aware of a key person whether it’s coming from the research side and maybe in energy service company or someone -- we’ve just hired someone from Clorox, for heaven’s sakes, in Research and Innovation to give a little bit different perspective of what we’re doing with a lot of our chemistry. So I think that’s the thing for folks to look forward to for the balance of the year. Nothing material there but very targeted in terms of adding to our team.

Many thanks for the clarity and the response to both on the R&I and the business development side of Energy Chemistry Technologies headcount.

Thank you. At this time, I’d like to turn the call back over to John Chisholm for any closing remarks.

Thank you, operator and thank all the folks for joining us and for your interest in Flotek. We look forward to visiting with you in the coming weeks and months, including our August pilgrimage to my home town Denver, Colorado for the 20th anniversary of EnerCom’s Oil and Gas Conference that’s coming up just next month. So again, thanks for everyone’s interest and time this morning. And we’ll talk to you soon.

Thank you. Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect all lines. Thank you and have a good day.