Flotek Industries, Inc. (FTK) Q1 2018 Earnings Report, Transcript and Summary

Good morning, and welcome to the Flotek Industries Incorporated First Quarter 2018 Earnings Conference Call. [Operator Instructions]. This conference is being recorded. At this time, I would like to turn the conference over to Matt Marietta, Flotek's Executive Vice President of Finance and Corporate Development. 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 Accounting Officer; and Josh Snively, Executive Vice President and our Head of Operations as well as other members of our leadership team. Our earnings press release was distributed yesterday afternoon 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 participants that during this call, some of the comments made 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, plans, believes, 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. These matters involve risks and uncertainties that could 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. Also, please refer to our reconciliations provided in our earnings press release as management may discuss non-GAAP metrics. With that, I'll turn the call over to John Chisholm.

Thank you, Matt, and thank you all for joining today's call hosted from our Global Research and Innovation Center headquarters here in Houston, Texas. I'll begin with some introductory remarks followed by Rich for a financial review, then Matt who will provide an update on our financial improvements and outlook. And then Josh will provide an operational overview. Finally, I'll end with closing thoughts before taking your questions. I'd first like to thank all the Flotek employees for their effort and our stakeholders for their persistence during this evolving but challenging period for the company. Crude oil prices are at a multi-year high. However, the energy industry has entered into a phase of capital discipline. In the first quarter, numerous companies have reported on the effects of weather, logistic bottlenecks and sand supply, and we were not immune to those events. We did see a sequential revenue improvement month-over-month during the quarter. However, our current run rate remains below our internal targets. So what we call intro challenges will continue for some time as more sand is being supplied in basin and shortages of workers and truck drivers will persist. By continuing to decouple or disaggregate more and more products, the operating companies are finding new sources of cash flow. Chemistry has become the new frontier in what is still the early stages of the unconventional technology progression. Just as operators pushed to decouple drilling markets years ago, they have now driven the decoupling trend within completions, as evidenced by diesel, sand and now chemicals. This is creating friction in legacy distribution and supply chain models. Our market positioning in chemistry solutions are ideally suited for this shifting business model as many times, we prescribe less chemistry than what has been pumped in the past while also accelerating cash flow for our clients through improved initial and sustained production uplift. We continue to be focused on what we can control, which is delivering an impactful chemistry experience to our clients and streamlining our operations while not compromising on our technical innovation, which Josh will elaborate on later in the call. An example of what we can control is our total SG&A run rate. This quarter, our SG&A is down more than 30% year-over-year, representing a $28 million annualized cost reduction. These structural changes are creating a more effective and efficient organization. Our CICT segment continues to execute at a consistently high level, which provides stability that helps counterbalance the current volatility in our ECT segment. The citrus market is tight, but again, due to the multi-decade experience of the Florida operations in purchasing strategies, we are extremely well positioned for both of our segments. We have and will continue to invest our capital expenditures that will reflect our confidence in growth opportunities with new products and markets in Flavors and Fragrances, both domestically and internationally. Although predicting the timing of a steady state of activity is challenging, our strong financial position and value-creating chemistry will enable us to continue to meet our clients' needs and requests as we evolve from being just a supplier to becoming directly connected partners. I'll now turn it over to Rich Walton to provide a review of our key financial information.

Thank you, John. Flotek filed its Form 10-Q for the quarterly period ended March 31, 2018 with the U.S. Securities and Exchange Commission yesterday afternoon. For the quarter, we reported total revenue of $60.5 million compared with $80 million in the prior year period, a decrease of $19.5 million or 24.3%. On a sequential basis, quarterly revenue was down $12 million or 16.5%. Energy Chemistry quarterly revenue decreased 32.4% compared to the prior year period and declined 25.7% on a sequential basis. Our Consumer and Industrial Chemistry segment quarterly revenue increased 1.3% compared to the prior year period and increased 13% on a sequential basis. For the first quarter of 2018, we reported a loss from operations of $6.8 million. For the quarter, the consolidated operating margin was a negative 11.2%. The segment operating margins were a negative 0.4% in Energy Chemistry segment and a positive 12.5% in the Consumer and Industrial Chemistry segment. Corporate general and administrative expense for the quarter was $8.5 million, a decrease of $3.8 million or 30.8% compared to the prior year period. Our corporate G&A during the first quarter of 2018 was 14% as a percentage of revenue as we continued to progress our cost-reduction initiatives. Noncash compensation was $2 million in the first quarter. Segment selling and administrative expense for the first quarter was $7.1 million, a decrease of $3.2 million or 30.9% compared to the prior year period. Segment selling and administrative expense during the first quarter of 2018 was 11.8% as a percentage of revenue. For the quarter, research and development expense was $2.9 million, down from $3.1 million in the same period a year ago. For the first quarter of 2018, Flotek reported net income from continuing operations of $0.1 million, representing income of $0.00 per share on a fully diluted basis. This compares to a net loss from continuing operations of $0.7 million for the first quarter of 2017, representing a loss of $0.01 per share on a fully diluted basis. The ultimate impact of the 2017 Tax Act may differ from the amounts recorded at the end of 2017 because of additional regulatory guidance and changes in interpretations of the legislation. No changes were recorded in the first quarter of 2018. The company reported an income tax benefit of $7.7 million in the first quarter of 2018. At March 31, 2018, the company had accounts receivable of $45.3 million compared to $46 million at December 31, 2017. At March 31, 2018, days revenue and accounts receivable was approximately 67 days. At March 31, the allowance for doubtful accounts is $0.7 million or 1.5% of the receivable balance. At March 31, 2018, inventories totaled $82.1 million compared to $75.8 million at December 31, 2017, an increase of 8%. At March 31, 2018, borrowing under our revolving credit facility was $39.7 million. Debt increased by $11.8 million during the first quarter to fund working capital needs and to fund negative net operating cash flow of $2.5 million in the quarter. At March 31, there was undrawn availability of $35.2 million under our revolving credit facility. During the first quarter of 2018, capital expenditures were $1.8 million. The Form 10-Q provides full disclosures of our first quarter 2018 results. And now I will turn the call over to Matt to address some of our financial initiatives that we are executing now.

Thank you, Rich. I would first like to reiterate our disappointment in our ECT segment performance in the first quarter of 2018. We believe we can and should execute at a higher level and are working tirelessly to do so. One of the core tenets of our focus on controlling what we can remains on the SG&A initiative, which we aggressively put into place in late 2017. Our third quarter -- on our third quarter conference call last year, we laid out a series of targets in 3 key buckets relative to our fourth quarter 2016 benchmark. First, we committed to reducing executive salaries, incentives and benefits by at least 15%. Since then, they have declined more than 40% from that period. Secondly, expense accounts on a per-employee basis were targeted to be down by 30% or more and has since declined 48% per person and 52% on an absolute basis. Finally, we have eliminated a variety of professional fees, including contract labor, by 49% from, beating our 40% reduction goal in that category. We have exceeded our targets on these fronts and will continue to identify areas to maintain controls, and we will look to make further improvements, where possible, without sacrificing the growth of our business going forward. In the first quarter 2018, our cash SG&A of $13.7 million decreased by more than 30% year-over-year and was more than 10% below our internal target. To be clear, this has not been a slash-and-burn approach but a targeted strategy that has yielded results. I want to thank our employees for embracing this initiative and executing upon it. We have streamlined Flotek into a more efficient organization from an SG&A perspective and will maintain this level of spending discipline going forward. We are in constant and proactive discussions with our lenders and continue to have a very supportive and long-standing relationship. We were within compliance of our financial covenants in the first quarter and will work to ensure that we protect our liquidity and financial flexibility. We are also focusing on ways to improve our cash performance. This includes improvements to our day sales outstanding, inventory turnover and, where possible, in our payables. While we will not provide guidance on those metrics, some financial KPI targets that we should be able to operate within, are an inventory turnover ratio greater than 3.5x annually and DSOs under 60 days. Additionally, we have lowered our CapEx plan for 2018 from $12 million to $16 million, to $9 million to $13 million. It currently remains difficult to offer top line guidance in our ECT segment, given rapid market dynamics shifts and a number of operational challenges we have faced. We are allocating resources from different teams to strengthen our sales and marketing strategy and believe that cross-department teamwork on this front will show progress over time. With the expansion of our Prescriptive Chemistry Management, or PCM, activities, we do believe we will be in a stronger position to provide guidance at a later date. We ask for patience from our shareholders, given the multitude of challenges we have faced. As an organization, we are confident that we will overcome these obstacles. And while it may not be immediate, it will be done the right way. That said, we do believe it is a very fair expectation for our ECT segment to show improvement in the second quarter relative to the first. But for now, we would categorize that progress as moderate to keep expectations grounded. As stated in our press release yesterday afternoon, our CICT segment continues to perform as we have planned. For the second quarter, we expect a low single-digit percent increase in revenues on both a sequential and year-over-year basis and are targeting a mid-teen EBITDA margin. Given the cost reductions and process improvements we continue to make, we do not foresee a significant increase to our SG&A costs even as our organization focuses substantially more effort and resources into our sales and marketing strategies. I'll now turn the call to Josh, who will provide an update on our sales and operations.

Thank you, Matt. In the first quarter of 2018, our energy business got off to a slow start in January following a soft December as a result of cold weather and icy roads, which limited completion activity and delivery of our chemistries. Overall, the availability of frac equipment and sand remained very tight in the first quarter, causing operators to prioritize their frac schedules over their fluid system designs, thereby limiting their ability to specify preferred consumables in their well completions. These dynamics negatively impacted our results. However, as the quarter progressed, our activity levels gradually increased throughout the period. Our business continued to evolve from a traditional chemistry manufacturing operation to developing, manufacturing and delivering to the field our best-in-class chemistries for our clients. Our Prescriptive Chemistry Management, or PCM, platform is better aligned -- is better aligning us as partners with operators. We conduct geologic analysis, prescribe customized fluid, full-fluid chemistry systems optimized for the reservoir, provide on-site QA QC and provide real-time adjustments in the field to our clients' fluid needs. To meet growing demand for our PCM offering, we are currently adding personnel and assets that will scale in line with increasing field delivery and application activities. Our field crews are modest, requiring only 3 field chemists and a mobile lab trailer to provide real-time fluid system diagnostics. This shift in our channel to market will take time to complete but, in the long run, will better align our interest with the evolving market and will broaden our chemistry solutions and customer base. To further support these efforts, we added additional tanks and blending capabilities in our Waller facility as well as expanded our operations in Marlow and Monahans. Optimizing the number of drivers and tanks required for field deliveries will continue to improve our efficiencies. As we look forward, we see demand for our PCM platform continuing to grow. Additionally, our research and innovations team is proactively listening to the needs of our clients. We are collaboratively developing customized fluid systems and chemistry solutions with the ultimate goal of improving our clients' cash returns for their operations. To that end, we highlighted in our press release the introduction of three new chemistries earlier this year that we believe will contribute to our growth in coming months, MicroSolv, StimLube Max and RheoFlo CAT300. These products enable us to address a wider range of geologic challenges and price points. In addition to these new chemistries, our differentiated legacy products continue to outperform the market and provide superior value. We are finding new applications for our CnF product line from improving injection wells, to enhanced waterflooding, to improved oil recovery and acidizing and various production chemical needs. In short, we believe we are still in the early innings of market potential for our flagship technology. Our sales and marketing strategy continues to evolve as the market drives greater disruption. Our sales organization continues to expand our direct customer interactions, and new incentives were initiated during the quarter designed to broaden our client communication and expand commercial opportunities. Our CICT business executed at a high level during the quarter. We continue to experience strong demand for our terpene chemistries as well as our natural citrus flavor molecules. Our new distillation column came online in January, debottlenecking our molecule creation ability and enhancing our long-term diversification potential. Our presence in Asia continues to be promising as grapefruit products remain in a short supply and demand is high. While citrus greening continues to be a concern, we remain well positioned on our inventory to meet internal and external demand. We will closely watch our inventory levels as we learned yesterday that Brazil's crop for next season will be 289 million boxes, down from 397 million boxes last season. Given this new revelation and the impact Hurricane Irma had on Irma's current crop, we are pleased with the foresight of our supply chain management. Looking out, we see the need to continue to expand into other citrus varietals, specifically grapefruit flavors as well as lemon and other cultivar options for clients. We're being pulled to do more, and we will respond to meet the demands of the market opportunities we have. We are focused on improving operational efficiencies across both our ECT and CICT segments, which we continue to integrate and share best practices. We have implemented new field delivery IT solutions that will improve our client billings and on-site inventory management. We are also expanding our client fulfillment team in Houston for better client response and internal communication. These efforts should reflect in a smarter organization and allow our operations to make decisions faster with more information. We are managing our business at the EBITDA and cash flow level. Again, we are not pleased with our performance for the quarter, but we are pleased with the cost controls and progress we have made to date. We are listening to our clients, and we will deliver at a cadence that our competition cannot keep pace with. Our broader chemistry portfolio, proven performance technologies, field delivery -- field service delivery and our ability to engage our clients at a deeper level will result in success. In all, we have made progress operationally, but we have more to go to further execute on our plan. With that, I'll turn it back to John to offer concluding remarks.

Thanks, Josh. Appreciate the effort. Before we take questions, I would like to add some concluding thoughts. Our Prescriptive Chemistry Management platform is expected to grow as we anticipate our clients' evolving needs while what have been traditional market channels for decades are being disrupted by the operating companies. Despite the issues we faced in the first quarter, Flotek Industries remains well positioned, both financially and operationally, as operators continue to recognize that our technology and products have value in enhancing their cash flow and asset values. We have continued to expand our case study and marketing efforts to elevate the technical awareness of our ability to positively influence our clients' reservoir performance. In this quarter alone, we released 2 additional studies that involved over 650 wells, showing increased production that resulted in accelerating cash flow for our clients. This demonstration of value is leading service companies and operators alike to explore ways we can become connected with a technical and/or economic partnership beyond simply selling discrete chemicals. As I noted on our last call, 2018 is the first full year that Flotek has focused 100% on providing custom and prescribed chemistry. And with the shifting dynamics that we have discussed during this call, we are positioned to weather these periods of volatility. We have a flexible and sound financial position that Matt discussed, and we plan, as always, to invest our shareholders' capital in our core and highest-return areas. In my now 41-plus years in this industry, I've been a part of so many downturns that I've lost track. But I have never seen the level of disruptiveness or transformation during that time that is happening now. We can all agree that the efficiency improvement in drilling wells, from weeks down to days, has meaningfully impacted the drilling side of the industry without question. And it was about 3 years ago that the cost ratio to drill and complete a well flipped to where the majority of cost is now on the completion side. When you combine that with the increasing and expanding desire of operators, with or without a supply chain functionality to self-source what they can, you have the ingredients for a disruptive business model that we are in the early stages of, and our company is positioned for this. We are confident in the outcome for us and the value we will provide as the industry evolves. I would like to share a quick story from just a couple of weeks ago. I was asked how I remain so optimistic despite the challenges our organization has faced, and I replied that it all starts with leadership and the people. They all believe we are on a mission. Beyond the people, if you step back and just take a minute and reflect of weathering the worst downturn ever, citrus greening and hurricanes, third-party scrutiny that has called into question the value of chemistry and our technology in particular, to name just a few, you are able to put into perspective that past and be optimistic about how this segment is transforming and how Flotek will play such an impactful role. In closing, I would like to humbly thank our shareholders, employees, clients and stakeholders for their continued support and patience. With that, operator, we will now open the call to questions.

[Operator Instructions]. Our first question comes from the line of Georg Venturatos from Johnson Rice.

John, I think we've probably talked for a quarter or 2 about operators focused on AFEs and well cost controls. And you guys have talked about addressing new channels there and MicroSolv in particular. But maybe just generally speaking, how quickly could we see some of those applications start to impact top line expectations? And as you look out to 2Q, and I appreciate the lack of visibility, but just to mention that you expect a moderate improvement quarter-over-quarter, how much of that -- those new products are maybe embedded within that expectation?

Sure. I'm going to turn that over to Josh. And while we won't talk products specifically, he's really dialed in with the sales group and kind of will give you kind of a general flavor.

Georg, on the new products, really, you're looking at a minimum of 3 to 6 months on a typical product introduction. So it does take time, and I think of and that's the basis of some of the caution on the guidance that Matt provided to you. MicroSolv was really released just in April. So we will see that -- effects of that product toward the end of the quarter. We'll start pumping, and then we expect volumes to pick up as we move forward in Q3 and Q4. I would say the same holds true for the StimLube Max as well as the RheoFlo CAT. So it takes time when you introduce new chemistry. Most companies like to test those chemistries. They do compatibility testing. You typically have a field trial. They want to see results before they commit to long-term purchases. But we do feel very good about the diversification of that line and what it brings to the clients in the way of cost initiatives as well as performance to meet their specific criteria.

Okay, that's helpful. And then, in that same vein, from a mix shift perspective, just on the margin front, should we -- I guess, there's some give-and-take, right, obviously CnF highest margin. But it sounds like MicroSolv's pretty competitive there as well. I mean, how should we anticipate that shaking out just in overall ECT margins as we kind of progress into '19, just generally speaking?

Yes, I think when you look at ECT going forward and the growth of PCM, we're adding a lot of service components to what we do for the industry as the operators are asking us of those services. The products themselves will carry different price points. Those margins might be a little bit lower than what you see in our traditional CnFs. So as you combine the service activities and those costs with the product formulations, those margins might be a little bit leaner on the gross margin line. But we feel good about the EBITDA line and how we're managing up from that point.

Okay, makes sense. I wanted to hit on the balance sheet side. Obviously, you guys maintain modest leverage here, but you saw the inventory buildup in Q1 and the working capital hit. You mentioned some further inventory buys in the first half of the year. Just wanted to see if you could put a magnitude on that. And then also talk about what you anticipate, at least in early conversations with the lenders, in terms of expansion potential maybe on the revolver.

Yes, I'll take the second part of that question and then let Josh maybe speak to the inventory purchase timing from a supply chain. We don't have a firm update today, but what we can say is we're being very proactive in communicating with our lender. This relationship has been there for quite some time. We expect that relationship to continue. And there are probably some things we can do to eliminate any concern on future covenants or things of that nature. I don't anticipate we need to increase our borrowings or the size of the facility from here. I think what you've seen largely on the balance sheet is the funding of our working capital accounts. Last year, you saw a release of that in the back half of the year. I don't expect this year to be substantially different due to the seasonal factors of the inventory. And I'll let Josh maybe elaborate on the timing of inventory purchases and the sources.

Yes, Georg, with our shift in supply largely coming from South America and Central America, Brazil has just finished their season. They've, as I mentioned in the script, had a 397 million box crop that was very good for us coming off of such a short crop the prior year. Those deliveries came in, in really the back end of Q4 and in Q1, which led to the inventory build. We should see those inventory start to moderate as we move forward. The good news is given their next crop, given the issues that we had in Florida this year, that our inventory is very well positioned for overall market dynamics. But that turn should start increasing as we move forward into Q2 and certainly into Q3.

[Operator Instructions]. Our next question comes from the line of John Harloe with Barrow, Hanley.

Okay. We're in a different age on the portfolio management side. ESG is becoming almost a requirement by our clients. I had to read the Glass Lewis analysis on the proxy. And there's a couple of things I noticed that I want to talk through. One is that the board has shrunk, and I'm curious, particularly it would seem like, at this point, we need maybe more help. It is down by 2, maybe 3 and what the outlook is in terms of replacing directors.

Sure. That process we talked about maybe a month ago on a release. But we hired an independent governance board expert to help guide that. And the board will get back up to the level that it was with an emphasis on different skill sets that are independent and would add a focus on governance, if you will. So that will change shortly.

Are we talking about mid-year? I mean, is it that -- that process will be completed that quickly?

Yes, we would expect that.

Okay. Second thing is we haven't talked about some of the things we've talked about in the past in today's conference call. I was curious what the year-over-year sequential comparisons would have been in Canada, China and Argentina.

So year-over-year in Canada is down somewhat due just to the overall activity. I think even most of the multinational service companies don't talk an awful lot about Canada because Canada is certainly down from what it was last year or the year before, and we're there as well. We've got initiatives that look like will happen once the breakup is over, which is in about the next couple of weeks. But overall, to answer your question directly, it's down slightly. China, through the first part of the year, is down slightly. But again, we think that will build through the second half of the year. And Argentina actually is up slightly. As I think the overall international is about 15% of our revenue, we consider Canada international. And we expect it to be kind of that way through the rest of the year. Hopefully, that helps.

And that this current time, there appears to be no further questions. Mr. Chisholm, I'll return the presentation back to you once again to continue -- I stand corrected. We just received a question. This question comes from the line of Aria Cole from Cole Capital.

This is a question for John. Regarding the Energy Chemistry segment, I'm just -- it's a question asking for a little embellishment. Can you clarify what is happening in the distribution channel in terms of the disruption? I'm getting the impression that you may have had some oil service companies, we know the names, Schlumberger, Halliburton, doing business with you. And for some reason, maybe their activities and purchases with Flotek are down substantially as you go more through a direct route to E&Ps. So I'm just trying to understand if you look at your business in terms of channels, direct through oil service firms and other ways, what specifically are the changes happening in these channels? Because I get the impression that maybe you're losing business with the oil service for various reasons. I'm just trying to understand, if so, why that is the case.

Yes, that's a good question. Josh will take the first part of that, and then I may chime in. But there is changing dynamic for sure, and we tried to talk about that throughout the call. It started with diesel. It's evolved through sand. It's now moving towards chemistry as kind of the last frontier of the way the operators can decouple and have more control over their cost structure. But I'll let Josh chime in, and I'll come back in if needed.

Yes, that's certainly a good question and relevant question. When we look at the marketplace rather than thinking specific names or specific channels, what we're seeing in the marketplace is a shift from the operators wanting to take more control over their spend and how that happens. Obviously, in Q1, with the horsepower sand issues, there was less flexibility there for some of those operators to make that happen. As we look forward, channels to market, we're happy to work through multiple channels to market. The fact is that our interest aligns very well with the operators. The operators are asking for performance chemistries, whether it's a price point, whether it's a yield increase, whether it is going from a cross-link system to a slick water system, and we are recognized by these operators as having the best-in-class knowledge of a variety of chemistries for the marketplace. So we do see a shift occurring there. The service market channels are what they are. We will continue to provide our chemistries to a multitude of channels. But as we look forward and what we're seeing in the market today, it is the operators who are asking us for more of what we can provide, which is value to enhance their recoveries and help create better cash flow for their businesses.

I'm not sure I can add anything.

And just to clarify. If you look at the $41 million of ECT revenue, what percentage of that revenue would you categorize is in the direct channel, the oil service middle channel and any other way you might want to categorize it?

I think there's -- it can be a little confusing when you try and break it down that way for a couple of reasons. One, we're -- we may be engaged with the operator on helping them design their full fluid system. But that system may actually sell through a service company, and it may show up on a service company books rather than a direct operator book. Or the service company may be buying. So it gets a little bit noisy. In general, you could probably use a 50-50 split there as a general number.

Maybe to elaborate, however, in terms of who's making those decisions from a value perspective, that number is substantially higher today with the operators. So, in many cases, an operator will direct in service provider to purchase our chemicals -- or our chemistry solutions. And in that event, the actual force behind that decision is meaningfully higher weighted to the operator today.

Yes. Would you think it's 60%, 90% in terms of decision making being made by the operator?

We don't want to give an exact number because it's very hard to measure the exact number. But I'd say somewhere between that range is not a bad place to take I guess at.

All right. I just asked because the higher the number is, the more encouraging it would be in terms of thinking that you've been able to work your way through most of the channel disruptions, and you can start building revenues going forward.

Maybe a good way to answer that question is to speak to the trajectory of how this has involved since 2015. At that point in time, this number was virtually nothing. It was less than 10%. And today, it's meaningfully higher, somewhere in the range that you offered. There will always be -- there are multiple tiers of channels to the market. And to try not to get too far into the weeds, there are service companies that are very focused on execution, and those companies tend to work very well with us and their operators in getting high-quality chemistry into the market.

[Operator Instructions]. Thank you. We now have a question from the line of David Sachs from Hocky Capital.

Maybe as a way to expand on the last question. If you could talk a little bit about retention rates with your customer base in terms of the clients you're serving directly as well as if you can expand a little bit on your customer concentration with your top 10 accounts or top 5 accounts.

Yes. We'll give a level of transparency on that understanding we don't want a complete open book for the people that also try to compete in this market. Josh will give that to you. I think the key takeaway we want to share with the folks, you, the previous caller and others that may be thinking this, is as we mentioned in the prepared comments, if you step back and look at how this has moved from the disaggregation of diesel to disaggregation of sand, you've heard the sand providers talk about this on the last mile delivery where they provide that service directly into operators and how it's moving to chemistry, this is in, I think, Matt mentioned, the nascent stages of that process. And although a higher percentage of them are guiding the purchasing, still not the highest percentage goes directly into the operator. This is a process. It's evolving. It's unmistakable. We could see it coming from 1.5 years ago, and it's gaining momentum. But to address your specific questions, we'll try to give you some clarity on retention and all that. Josh?

Yes, thanks, John. David, obviously, there is a turnover in our client base. We are seeing some customers that have gone different routes to different chemistries. But at the same time, we're adding a completely new group of clients at the same time. The PCM customer base is going to look a lot different than what the historical customer base of Flotek has resembled in the past. So when it comes down to the concentration issues, we do expect concentration to be less of a concern in the future. As we have a broader client base that we sell our chemistries through the PCM model going forward. Whether that ends up going through the service company on the billing side or whether that's direct to an operator, the customer base is always going to be evolving as we are evolving our chemistry portfolio. So that's another thing you need to think about as you look forward is the chemistry line expanding, enhancing more clients and creating a broader client base, as we mentioned in the opening remarks.

And if you're selling directly to the consumer, that, in theory, should eliminate some type of a pumping surcharge. Would it make you then substantially more competitive with other surfactants?

Surfactants are a different class of chemistries that have their place. But the pumping charge, I think, is the real point of your question. Pumping charges are going to be there. The service companies have assets to pay for, and they're going to figure out how to charge for their services just like we're going to figure out how to bill our chemistries. The operators are asking for transparency in the marketplace of what they're paying for. So whether that's a pumping fee, whether that's chemical charges, whether that's horsepower charges or sand charge, it's going to -- that's being developed as we speak. But we have seen pumping fees. They're starting to get more reasonable. And we would expect to see more pumping fees in the marketplace, whether it's us or somebody else selling a surfactant. So when you want to compare us to a surfactant, that is a different class of chemistry. That is a lower range. And if clients want surfactants, we can certainly broaden our portfolio and have the ability to service those needs when they come in and identify that need to us. But that will be driven by the operator themselves.

And with the data that you've been collecting for the last year or 2 in this more transparent environment, with which you're going to be representing your products, shouldn't that really give Flotek a huge competitive advantage?

Well, we certainly like our competitive position. It is complex. The marketplace is complex. And it does take time to transition. But yes, we think that having a direct relationship with the operator, not just from a pricing standpoint, but from a value proposition of the chemistries we can provide to help them produce better wells to hit their financial targets, that is the real value proposition we have for the marketplace.

And maybe to expand on that. We see operators who have geologic variances in the same reservoir. They may call it an interval, but the geology may differ. And what we can provide are different fluid systems to accommodate variable geology even within the same reservoir formation, and that adds value to our client base to optimize our fluid system. That's where we say we're aligned with the operators to maximize the performance of the well. That's a capability that we offer to the industry.

And if the large service companies are providing either resistance to this or charging excessive pumping fees, to circumvent them, would you be going more to independents? Or is there another solution that you're kind of evaluating as a way to circumvent the larger historic buyers of your product?

Yes. We let those guys come to us with their pumping service fees. And whether they're the integrateds, whether they're the independents, the pure horsepower plays, we like to think we can get along with all people in the channels to market, and we will do our best to do that. But at the end of the day, the focus is going to be on understanding the needs of that client from a chemistry standpoint and providing those best-in-class chemistries that they need to achieve their objectives regardless of channel to market.

Yes, maybe a different way to look at this is we're responding to the demands of the operators. Our focus is on improving the performance of their wells and maximizing their cash flow. That's where our interest is aligned.

It seems like the data sets that you're presenting with the 650-well test studies supports 20% to 30% or greater flow increases and significant increases in net present value cash flows. So the economic equation seems very, very compelling. So hopefully, that message resonates and this dynamic market shift evolves fairly quickly and we can move forward.

We agree 100% with you, David.

Yes, thanks for acknowledging that. The challenge has been, I think, the slope of the increase in activity, and then you add anomalous freezing events and sand supply disruptions into the equation, and the first quarter was very challenging. But we do agree with the long-term value proposition. That's why we're here and having the conversations with the operators that we have.

I think it would be helpful if maybe for the next call to just share some information on the client retention rates. Maybe it can be anonymous, but just looking at whether your independent well operators are staying with their chemistry suppliers and there is just some noise here at the top with the service companies, and in theory, that will sort itself out fairly quickly.

Yes. That's a nice suggestion, and we are listeners and we are certainly figure out how to represent that in a way that doesn't diminish our competitive position, but no, nice suggestion. We appreciate that.

I actually think it's going to enhance your competitive position as other operators realize that there's value in what you're providing. It's not just unique to them.

We appreciate that.

I'll now return the presentation back to our speaker, Mr. Chisholm. Please continue. Thank you.

Sure. We'd like to thank everyone for their interest, those questions that came through. And again, we appreciate everyone's persistence in staying with us through this evolving period of time. Look forward to talking to you again soon.

Thank you so much, sir. 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. Thank you once again. Have a great day.