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…

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…

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…

[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.