Good morning and welcome to Flotek Industries Inc Third 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 our Head of Operations as well as other members of our leadership team and board. Our earnings press release was distributed this morning 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 they 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 US 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 our operations given by Josh followed by our outlook. We will open for Q&A after the remarks. And with that, John?

Thank you, Matt, and thank you all for joining today's call hosted from our Global Research and Innovation Center Headquarters, in Houston. I'll begin by giving a summary of our quarterly results, followed by an overview of business segments and ongoing strategic initiatives aimed at maximizing our ability to generate free cash flow in future periods regardless of the commodity price scenario. Rich will then review our financial highlights for the quarter and provide additional financial details followed by Josh, whose role at Flotek was recently expanded oversee operations for our entire organization. We are pleased Josh has accepted this critical role and we're confident in his vast experience in Chemistry manufacturing, efficiency improvements as we believe this change will further integrate our organization. Josh will provide an operational overview in our Energy Chemistry Technology segment and update around our citrus end markets and ongoing initiatives at Florida Chemical our integrated operating subsidiary within our Consumer and Industrial Chemistry Technology segment. Finally, I'll end with closing remarks and outlook before taking your questions. Overall Flotek's third quarter results were below expectations primarily due to challenges we faced related to Hurricane Harvey but also impacted by client slowdowns in the Rockies region in our ECT segment. Our CICT segment performed relatively in line with our expectations while we were able to execute higher than expected sales after Hurricane Irma created disruptions in the global citrus market place. The third quarter was disappointing; however, our ability to extract cash from our business highlights the shift we've made from a diversified oil field equipment provider which requires higher CapEx into an asset light pure play specialty chemistry technology company. For continuing operations, which encompasses our Energy Chemistry Technology or ECT and Consumer and Industrial Chemistry Technology or CICT segments Flotek's consolidated third quarter…

Thank you, John. As we've previously discussed the assets liabilities and results of the drilling technology and product technology's segments continue deep to be presented as discontinued operations. During the third quarter, the company completed the sales substantially all of the remaining assets of the company's drilling technology segment for $1 million in cash consideration and a note receivable of $1 million due in one year. The company expects to have sold or liquidated all asset and settled liabilities related to these two segments by year end. A customary escrow holdback of $1.9 million should be realized over the next 13 months. The financial statements in the Form 10-Q and going forward should more accurately represent the results of our core businesses, Energy Chemistry Technology's and consumer and industrial technology's as continuing operations. For the third quarter we reported total revenue of $79.5 million compared with $64.3 million in the prior year period. An increase of $15.2 million or 23.5%. On a sequential basis, quarterly revenue was down $5.7 million or 6.7%. Energy chemistry quarterly revenue was $61.2 million an increase of $16.1 million or 35.8% over the prior year period. A sequential quarterly decline in revenue of $4.7 million or 7.1% was experienced in the energy chemistry. International sales for this segment increased $2.5 million during the third quarter of 2017 compared to the second quarter of 2017. Consumer and industrial chemistry revenue for the third quarter down $1.1 million or 5.2% sequentially and down $1.1 million compared to the same period of 2016. Our third quarter consolidated operating margin was a negative 3.9%. The segment operating margin was 11.2% in the energy chemistry segment and 5.4% in the Consumer and Industrial Chemistry segment. Corporate general and administrative expense was $10.3 million flat from the third quarter of 2016…

Thank you Rich. I'm honored to take on the role of Operations for the entire organization and believe through greater efficiencies we will maximize our ability to generate cash flow for our shareholders. Beginning with our CICT segment, we've positioned our inventory to withstand citrus market disruptions that the global citrus industry is experiencing since Hurricane Irma. As we announced last quarter progress continues to occur and the expansion of Florida Chemical and the new distillation tower being installed this month enhances our capabilities and to new citrus [indiscernible] opportunities and or relieved any potential bottlenecks with our citrus isolate production. We've established new channels to make with our Japan sales office, which contributes to our first Asia end market sale in October. We believe we have a runway of opportunities in our CICT segment and we have laid the ground work to capitalize on our strong position in the global citrus markets. To provide an overview of the impact from Hurricane Irma on the global citrus industry we believe crop damage in Florida will lead to tighter supplies. This is already caused prices for citrus oils to increase and is unlikely to alleviate until at least the end of the second quarter of 2018. This has changed our outlook from last quarter but is important to keep in mind that the current Brazilian crop is expected to climb 50% or greater to last season. To put this into context, the growth in Brazil more than offsets the volume of the entire Florida citrus crop. It is for this reason we believe the Irma associated impacts is temporary and we have adjusted for this market dynamic. And taking on leadership of the cross [ph] segment operational activities we can leverage our manufacturing and G&A efficiencies of the entire Flotek organization.…

Thanks, Josh and before we take questions I would like to offer an outlook and add some concluding thoughts. While we acknowledged disappointments in the quarter. We continue to progress the company towards and asset light pure play specialty chemistry business model that is positioned to generate free cash flow regardless of the commodity price. To that note, as a month end in October we have a $27.4 million net debt position and current liquidity of $47.5 million which includes undrawn balances on the company's revolving line of credit. This is as strong as a financial position Flotek has been in since I began leading the organization in 2009. In ECT, visibility in the fourth quarter has challenged given the anticipated holiday slowdown, commodity swings and client desire to align CapEx with cash flows. However, recent success with new clients opens the door for further penetration of our CnF product portfolio as evidenced by more wells being identified by operators in their public remarks which have utilized our technology. To that extent, we are excited to see well names and programs in the public domain, we will continue to refrain from speaking about their success. In our CICT segment where we have greater client visibility, we anticipate a normal seasonal slowdown however we expect the top line to be in the $15 million to $18 million range with flat margins. On the cost front, we will continue to drive G&A lower, we've undergone an extensive cost reduction program to outline our strategy we've reduced our total continuing operations headcount by around 10% to in this time last year to current. In addition, we project [indiscernible] salary and benefits have declined by 15% and expenses by employee on expense accounts are down more than 30% from a year ago. We've also eliminated consulting and contract labor positions which reduces the spending in this category by 40%. In all, our long-term target is to operate at 20% or below G&A level relative to revenues which we're targeting in early 2018. For the fourth quarter, we believe we will recognize an additional $1 million of cash savings or a total of cash SG&A level of $15 million to $16 million for the quarter which will be mostly recognized at the corporate G&A line. We expect further savings into 2018 which we look forward to update on this ongoing initiatives will take time to reflect through the financial reporting. As we move forward our business is more efficient, our cost are structurally lower and we see opportunities arising to continue our long-term outperformance of growth relative to benchmarks. Finally, I'd like to thank our shareholders, employees, clients and stakeholders for their support of Flotek. And to all veterans we thank you for your service and honor you on this upcoming Veterans Day weekend. With that operator, we'll now open the call to questions.

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

John, I just wanted to start on ECT segment. In relation to your top one or two customers and certainly we saw in the Q some continued follow through there, but can you maybe just provide us what you can in terms of discussions there with your key customers as that's been a point of emphasis in recent quarters with investors and then secondly within the ECT segment, just kind of wanted to get an updated market share status as it relates to obviously you guys called out the Rockies but Permian and Eagle Ford and just get a sense of this year penetration targets have changed at all given at least the trend we've seen in the last quarter or so.

Sure. Our retention rate quarter-over-quarter is as high as it's ever been throughout the year. In fact, we increased the number of unique clients by a little bit over 10% third quarter over second quarter. As I've said consistently on these calls this is - when you have transformational technology and you're not going to have as much as folks would like to have a predictable, steady growth it just doesn't happen that way. I think that kind of bears out with other transformational technologies over the last decade or so in this industry. So, from time-to-time there will be a leveling and in some cases, it may even decrease as the market continues to work its way through and we continue to penetrate. Another statistic is that our amount of revenue directly to clients in the quarter was 66% two years ago this time it was essentially 10% and so that trend we believe is very encouraging as it gives us the direct contact with the clients that expose them directly to our technical capability. We've and again folks that have followed the story of the way we reported we've made a decision in terms of not talking specifically about clients, although I think folks have seen over the last four or five maybe in the last four or five weeks certain clients have talked about their frustration of not having the amount of frac heads available that they wanted to have, certain clients have talked about an overall 20% lack of efficiency in the completion process and certainly that was an effect for us, but we've just taken the approach that we're not going to specifically talk about well performance unless that client does it themselves. Regarding the top two we don't see any benefit in expanding on communication there because we have certain confidentially agreements with those folks and we honor that and we hope everybody respects that with the question that you provided there, and I hope that kind of extra granularity in terms of the retention, the increase in clients, the increase in business that's flowing directly through to the client gives you greater context.

Now that makes sense. John, I appreciate at least those data points and what you can't provide us here on the call. On the margin side, just wanted to hit on this as well and obviously we saw EBITDA margins in the ECT segment. We were lower than we were looking for and certainly kind of tough quarter down 500 basis points. Can you maybe breakout and you did a little bit, but the factors obviously mix shift likely there. Citrus pricing but just kind of want to get a sense of what we can see in terms of potential recovery in the margins from where we are and looking at this particular aspect that can improve. I know that Josh mentioned kind of mid-2018 to kind of see that really reversal in citrus pricing with the Brazil crop coming on.

Right so I think the kind of gem to take out of that question is that, the CnF margins are essentially flat. We've held up those margins, we've made a real focus on that. We've made a real focus on maintaining the pricing model on that. The PCM margins are in a state of flux, Josh talked about that a little bit and I'll give you kind of business approach in answer that. In the fall of 2016, when we really started this and the industry really started to gain momentum on decoupling and disaggregation, self-sourcing, whatever different people want to call it. It's been my view over history that you're giving really kind of one change to make a first impression because when you take on the responsibility delivering the chemistry package directly to location. Those operators are expecting seamless performance to what they've been used to. I think there's a tendency to over staff that to ensure that it gets done right. And it's take us sometime to really understand the optimum amount of folks that are needed to be able to provide that service and that's part of the rationalization of the people that we've undergone in the last quarter that we've talked about and we're still working through like when now products are returned to us because they're not all completely pumped. It's a different situation than when we were selling directly to service companies and if they didn't use it, they'd save it and use it perhaps on the next well. So, the return freight [ph], the return logistics and all that it's still a work in progress which from time-to-time has effect on the margins, but it's something we've got our hands around and again with Josh's position there. The connective of the logistics and the supply chain between CITC and ECT. We're pretty confident that those margins will improve. Does that help?

Yes, no, no thanks. John. Last one from me. And then I'll re-queue. But on the SG&A front, look this has been a long discussed topic and certainly pleased to see you guys put that in the release today. I know you've been putting a lot of efforts in that. Just wanted to confirm, but just in terms of timing. It sounds like [indiscernible] called out sequential reduction here fourth quarter, but as we look to the full efforts that you've done. You think it's going to be largely full realized in the early part of 2018, is the right way to think about it.

Yes, I'd say first quarter you'll see another kind of step change maybe a tail in the second quarter. But I think we believe your assumption is correct there. George and we're already as we talked about with the free cash flow and all that, seeing early benefits of that imitative. I think we wanted to call out to the folks that are listening are going to transcript. It goes all the way to really looking at inside the expense accounts in terms of, can we as efficient as possible. So, this has been a top to the bottom effort of really looking at how can we make Flotek as efficient as we can to be able to deliver the returns we want.

Got it. Well appreciate the answers. John.

Sure.

[Operator Instructions] and gentlemen we're showing no further questions on the audio lines at this time.

Okay. Thank you, operator and thanks folks.

Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation. And ask that you kindly disconnect your lines. Have a good day everyone.