Good morning and welcome to Flotek Industries Inc., Second Quarter 2017 Earnings Conference Call. All participants will be in a listen-only mode. There will be an opportunity for you'd ask questions at the end of the Company's prepared remarks and 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 Matt Marietta, Flotek's Senior Vice President of Corporate Development and Investor Relations. Mr. Marietta, you may begin.

Thank you and good morning on behalf of the Flotek team. Joining me this morning are John Chisholm, Flotek's Chairman, President and Chief Executive Officer; Rich Walton, our Chief Financial Officer; Josh Snively, Executive Vice President and Florida Chemical President; and Robert Bodnar, Executive Vice President of Performance and Transformation, as well as other members of our leadership team. Our earnings press release was distributed yesterday and is available on the Flotek website. In addition, today's call is being webcast, and a replay will be available on our website. Before we begin, our formal remarks, I would like to remind everyone participating in this call, listening to the replay or reading a transcript 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, comments or expectations 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 an exclusive means of identifying forward-looking statements on this call. These matters involve risks and uncertainties that could impact operations and financial results and cause our actual results to differ from such forward-looking statements. These risks are discussed in Flotek's filings, including our Form 10-K, with the U.S. Securities and Exchange Commission. With that, it is my pleasure to turn the call over to John for opening remarks, followed by a financial review from Rich and insights into key initiatives of our organization by Robert and Josh followed by an outlook from John. We will open for Q&A after their remarks. With that, John?

Thank you, Matt, and thank you all for joining today's call hosted from our Global Research and Innovation Center Headquarters here in Houston. I'll begin by giving a summary of our quarterly results, followed by an overview of our Business segments. Additionally, I will highlight ongoing initiatives which we believe are creating substantial operating leverage to accelerate maximize our delivery of cash flow in future periods. Rich Walton, will then review our financial highlights for the quarter and provide additional financial details followed by Robert Bodnar who will discuss an operational overview. Josh Snively, will provide an update of citrus end markets and ongoing initiatives at Florida Chemical. Our integrated operating subsidiary was on our consumer and Industrial Chemistry Technology segment. Finally, I'll end with closing remarks and an outlook with guidance before taking your questions. Overall, Flotek's second quarter results were mixed versus broader expectations primarily due to timing of operations of a handful of clients and weaker than expected results in Canada which is our largest international geography. However, we did experience uptake for our prescriptive chemistry management platform which is showing signs of accelerating market adoption. We continue to manage a challenging citrus market in Consumer and Industrial Chemistry Technology segment which outperformed on revenues but margins turned into lighter than we expected due to product mix and timing of a large order. Our commitment to reducing general and administrative expense can be measured in the quarter as we are transitioning to a leaner and growth focused pure play Chemistry Technology Company. Additionally, as you will hear later in the call we have a better handle on our ability to provide reliable guidance and introduce a detail outlook for the first time in our Company's recent history. For continuing operations which encompasses our Energy Chemistry Technology or…

Thank you, John. As John mentioned we have completed the sale of substantially all of the assets of our Drilling Technologies and Production Technologies segments. Closing of these transactions occurred in late May. Cash consideration was $19.9 million with a customary $1.9 million escrow hold back to be realized over the next 18 months. The assets, liabilities and results of Drilling Technologies and Production Technologies segments continued to be reported as discontinued operations. The financial statements in this Form 10-Q and going forward should more accurately represent the results of our core businesses, Energy Chemistry Technologies and Consumer and Industrial Technologies as continuing operations. For the second quarter we reported total revenue of $85.2 million compared with $64.1 million in the prior year period, an increase of $21.1 million or 32.9%. On a sequential basis quarterly revenue was up 6.5%. Our topline growth was driven by strength in Energy Chemistry. Sequential growth in Energy Chemistry revenue was 8.4% due to increasing domestic well completion activity by customers. International sales for Energy Chemistry historically down in the second quarter due to the spring break up in Canada were impacted by an extended breakup period in Canada this year. Revenue in Canada was down $1.4 million in the second quarter compared to the same period of 2016 and down 68% sequentially. Consumer and Industrial Chemistry revenue for the second quarter was flat sequentially and down 6.7% compared to the same period of 2016. However, international sales in the second quarter increased $2 million compared to the same period of 2016. The segment operating margin was 14.1% in the Energy Chemistry segment and 6.3% in the Consumer and Industrial Chemistry segment. Corporate general and administrative expense was $11.2 million, an increase of $1.6 million from the second quarter of 2016 and a reduction…

Thank you, Rich. We have made a number of operational enhancements that are creating greater alignment with our clients within the ECT segment. For example, just over two years ago, our CnF manufacturing capacity or core processing facility in Marlow, Oklahoma was just around 750,000 gallons per month. At quarter end, our capacity was above 1.5 million gallons of CnF per month and we are in progress to expand to about 2 million gallons per month as we enter 2018. We continue to target 70% to 80% plant utilization, which is a level that maximizes our financial performance and allows cushion for rapid growth. A recent project to expand our inventory and processing capabilities in the Permian has been yielding substantial success. We've increased our throughput Monahan's, which is located in the heart of the Delaware Basin by 10 times since the first quarter. Our clients are responding very favorably to our ability to adjust to their schedules and provide cushion for CnF and our total fluid chemistry designs. We now have the ability to execute water analysis, pre-frac testing, sample collection and quality control for our clients in the basin. These new capabilities should increase our penetration rates and even further enhance our reliability to our clients. We have also just executed an expansion in the Marcellus, Utica region located in Canonsburg, Pennsylvania. This new facility is under a multi-year lease and should allow our business to expand more quickly into the northeast areas of the country. From this location, we can offer bulk storage, technical support, and local sales office presence to maximize our response time and accelerate basin penetration. In addition, we have ongoing projects designed to enhance our operating leverage. We are optimizing liquid production flows in our manufacturing facilities, which includes large water storage facilities…

Thank you, Robert. Our CICT segment performed mix during the quarter as timing of orders, mix and material inflation did impact margins while revenue exceeded our initial expectations. We have made inroads with a variety of new client relationships and believe our growth opportunities remain abundant. Additionally, our corporate inventory positioned increased during the quarter driven by a seasonal crop cycles and historically high prices. I would like to provide an update of the citrus markets as we have not said enough in the past and the future we believe there will be ample more to discuss the past two years have been some of the most volatile we have ever experienced, the greening disease challenges have resulted in raw material inflation of greater than 200%. We have properly staggered contracts and utilized our scale as a top 10% citrus oil purchaser globally to manage these challenges and take market share. Recently the USDA Brazil crop report was released and indicates the orange crop for processing will expand 53% after four years of declines. We will purchase diligently as we believe cost should soften over the next few months. We managed our inventory to accommodate lower citrus prices as our quantity on hand is seasonally lower than normal but our inventory value is as high as it has been and long time. While as premature to guess what the deflation slope maybe we are confident the direction should be beneficial to our entire supply chain. As John alluded to earlier where expanding and Florida as well internationally. Currently we are in the final phases of adding another distillation column in Florida increasing our total number of commercial units to eight. The new unit will not only add to our ability to produce orange molecules it will also allow flexibility for…

Thanks, Josh, and before we take questions. I'd like to offer an outlook and add some concluding thoughts. While there were some successes and yes some disappointments in the quarter. The second quarter marks the most important transition for our Company to date. As we are now a technology focused, pure play specialty chemistry company. We've successfully exit it our Drilling and Production Technologies segments repaid our term debt and the industry is shifting right into where we are positioned. For the first time in our Company's recent history we offer some high level guidance to help set expectations in both the near and longer-term. Our team has worked hard to be able to help communicate our outlook in financial terms and be more precise in this communication to our shareholders and area we will continue to enhance. We have also improve our internal forecasting capabilities and focused on our client and market intelligence which we believe will be powerful for our business going forward. We expect ECT revenues to expand in the low-to-mid double-digits on a sequential percentage growth basis and believe that we can deliver segment margins 100 to 200 basis points above the second quarter due to pricing benefits, product mix and fixed cost leverage. We believe see CICT revenues will decline in the mid teen percentage range sequentially due to seasonal factors and EBITDA margins to improve slightly into the low double-digits due to higher margin sales. Our corporate G&A and allocated to our segments is expected to continue to moderate. CapEx should continue its current run rate and remain minimal. We will direct focus to our EBITDA margins going forward as we believe it is more relevant to our shareholders and for competitive reasons. We exited the second quarter with a considerable amount of momentum.…

Thank you. [Operator Instructions] And our first question comes from the line of Georg Venturatos with Johnson Rice. Please proceed with your question.

Good morning guys.

Hi there, Georg.

Hey, John. Last part I appreciate the guidance here. I think that's helpful guide goes for everybody in the near-term and I know it's something you often working on. As we think about that I guess first off on the revenue side and certainly nice to see a low to mid-teens double-digit type sequential increase. Can you give us a little better sense of how comfortable we should feel about that relative to existing bookings and also in relation to kind of the select opportunities you talked about in the release. Is that further upside potential? I guess I'm just getting trying to get a little better sense of what's kind of big into that number from a backlog perspective?

Sure. As we try to detail out with other commentary from other players in the industry, there is more and more decoupling occurring with the overall chemistry beyond CnF. So that growth is including - CnF increasing along with conventional chemistry as the decoupling continues to accelerate.

Okay. I'd say really our confidence level is 80% plus in the guidance, unless there's some type of down draft with the oil commodity price. We've got the best line of sight visibility that we've ever had due to the amount of people that are purchasing directly through Flotek.

Perfect, that's sort of I was just getting that in terms of backlog visibility and work for the near-term. You mentioned it here and I think it's important to and from an industry perspective, we've heard it. But certainly a positive trend in non-CnF side, I mean during the quarter 27% sequential growth in that business, some of it bounce back from 1Q. But can you maybe talk a little more about the broadening PCM opportunity set, and like you said [indiscernible] talked about some of the usages of friction reducers for extending that average lateral length across the industry? And how that kind of plays broader to the story and ability for your chemistry business to grow and even a flattish rig count environment that opportunity set expanding?

So great question, what we're able to do because the industry is wanting to do it is have a larger chemistry footprint on location beyond selling a CnF service, so some of these conventional PCM programs do not include CnF. We think that's okay, because over time we believe those clients will grow to embed CnF in the total solutions, some start with CnF. And so we believe it broadens the opportunity of expanding CnF and clearly the industry has a momentum that we think will not go back to appreciating what the economics look like with the decoupling of the chemistry. And so the fact that this should sit in directly with our cost structure and the same amount of sales people can sell this offering as they were just selling CnF within reason the same amount of blenders are able to blend the chemistry. It will create the leverage that we've talked about here in this call to the EBITDA line, which is what we want folks like yourself and others to focus on.

Got it. And last one and then already queue here, but I thought it was - is nice to get some of the updates from Josh on the citrus pricing, the inflation we've seen. In recognizing that we're entering is period here in the second half .Can you talk to is and maybe Josh can answer it, but more directly in terms of how that timing and that lag effect may impact the bottom line and when that inflection point is from results standpoint as you work through that existing inventory maybe as you get into 2018 I was trying to get a better sense of when we should see that turn in numbers if we see the market play out like something?

Sure. And all right Georg take and just a second. One thing and I try to point out your question gives us the opportunity our unit volume citrus oil really is at a low level crediting to Josh is 30-plus years of the way you purchased citrus oil. The reason inventory dollar number up is because of the increased in the pricing that the contracts that had to be executed. But he'll talk about for you now as we get closer in heading into the fourth quarter how we think there is definitely because of his relationships not only to Brazil and others how that will start to even out.

Hey, Georg, you certainly saw some of the impact of the shift in the market in Q2 you know we lost several 100 basis points on the Turpin categories. So the psychology of the market changed when the bigger numbers started becoming reality out of Brazil and they started processing. Some of it has already occurred to John's point we - volume wise were to a four-year low on the volume of inventory that we actually have. So I think we're pretty well-positioned we will fight a declining market in Q3 and in Q4 that certainly contributes to the lower topline guidance that we provided. But we feel Q3, Q4 we will work through this final it will compress our margins a little bit. So little bit different story than what we told after Q1. At Q1 we didn't know the crop was going to be so big out of Brazil, but we're positioned well our inventory is volume wise it'll low you saw some of the impact this quarter that will be offset by some of the positive opportunities we see in Asia and other parts of the world with a new product development.

And maybe to help on the model you should begin to see those inventory turns move quicker with the dollar value going down per unit of raw material. And so I think you know from a working capital perspective those metrics should improve with that deflation through the model if you want to talk about that more offline let me know.

And just to be clear Georg, we're not anticipating a crash of citrus oil prices. We're expecting prices to moderate to hopefully more normal levels and that will be beneficial to the total Flotek Company.

Great. That's helpful guys. Thanks a lot.

[Operator Instructions] Our next question comes from the line of Sean Milligan with Coker & Palmer. Please proceed with your question.

Hey guys.

Hi Sean

Can you walk me through the guidance on the ECT side for topline, so I guess to start, if we just look that - I'm trying to understand how much international headwinds cost you in revenue in the second quarter?

Yes. Sean that number is around $3 million and primarily driven by Canada, Canada's revenue declined was about - it was more than 65% sequentially. And so there's two factors going on there, obviously, the seasonality of the breakup, but there's been a consolidation of two large frac companies in Canada that we're working through. So it would be - we don't want to say we're going to get right back to the first quarter levels, but over the next few quarters, we do expect to get back to that first quarter level.

Okay. Let's just say you gained half of that back in the second quarter, is that primarily CnF or is that non-CnF?

It's primarily CnF Sean.

Okay. And then I guess what I'm trying to get to back into is heading into the third quarter, do you see the domestic CnF trends better than 6% on a volume basis?

We do.

Okay. Is that double-digit quarter-over-quarter or is it going to be kind of equally weighted versus the non-CnF side?

It should be in the double digits and here is the one qualifier that I think other people have talked to in their earnings calls. We had two or three CnF clients that were scheduled to go in June, but when tracks get delayed because of operational issues or whatever they don't just pick those up the next week. They have to get back in the queue and in several cases these clients are going to be done in the middle to end of August, which we have no control over. But from what we can see it should be a double-digit on the CnF from what we can see.

Okay. And then just to confirm the 100 to 200 basis points incremental margin, is that on the gross line or the EBITDA line.

That's on the EBITDA line and we called out the increase in the gross margin on CnF really as much as anything - let folks know that the pricing is intact and the pricing has continued to be accepted, but from a pricing resiliency and from any type of competitive standpoint, we want really our shareholders and folks like yourself to focus on the EBITDA line margin and its growth as the conventional chemistry will continue to grow and just give folks kind of a fair way here. CnF well can range between say $200,000 to $350,000 range. A full chemistry PCM well can range from $700,000 to $1 million. And so as more and more of that happen as we kind of telegraphed a couple of quarters ago, there will be gross margin compression, but the leverage will come with the EBITDA. And that's as we talked about the EBITDA lifted by 100 basis points this quarter, we believe it will uplift another 100 to 200 basis points in the third quarter and that's the line we want to have folks focus on. And what's really happening is these operators and I think even a couple of them have talked about in their press releases are able to reduce their AFEs due to this decoupling and that actually affords a window of looking at CnF as its high valued economics maybe differently than they would have a year ago. So there's a double advantage of the way this industry is moving from what we can see.

Okay, thanks John.

Sure.

On G&A side, if you back out the retirement comp, you say or you cut G&A a little bit in second quarter. Can you kind of qualify for us the impact that you might see in third quarter on a G&A basis for many time kind of cuts you're making at the corporate level?

Yes, so I think for everyone out there, I'll give you a couple of benchmarks from first quarter to second quarter. If you look at cash, on the corporate side of G&A, it went from $9.9 million to $8.3 million, a reduction of 15%. If you look at the total enterprise went from $19.6 million to $17 million. And we believe there will be a continued tapering of that. As we look at just exactly as this business model takes effect with PCM more decoupling. So as I've told folks in the past, we are focused on this. And continue to be and I think this quarter speaks to that. And I think offline or that maybe able to time in terms of a modeling standpoint, how to look at that going forward, if that's something you would like to have. But again I think it's important to note, the reduction that we did occur from the second to first quarter.

Yes, Sean, so we took a couple million out sequentially in the quarter if you consolidate what's in corporate and what's in the segment. I don't know that we'll get another couple million out sequentially in the third quarter, then in another million out in the third quarter is certainly possible, and furthermore into the fourth quarter. But we will give updates on those metrics as we move forward to you.

All right, thanks. I'll re-queue.

Thank you, Sean. There are no further questions at this time. I'll turn the call back to you.

Okay. Thank you for those that listened in and those that you'll be reading the transcript will be out on the road at intercom in the middle of August, up in Denver that conference and again we'll continue to do our best to provide the best clarity we can as to the repositioning of Flotek that we've undergone during this period, and thanks again for everyone's interest. We'll talk to you next quarter if not before.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.