Q4 2019 Earnings Call

At this time, all participants are in a listen-only mode. A question-and-answer session will follow Management's prepared remarks. If anyone should require operator assistance during the conference, please press zero on your telephone keypad. As a reminder. This conference is being recorded this now my pleasure to introduce Danielle Allen senior vice president Global Communication or float at home. Thank you. You may begin.

Thank you and good morning everyone. We appreciate your participation joining me today or John Gibson chairman chief executive officer and president Brian Ezell Senior Vice-President of operation. Nick bigney senior vice president general counsel and corporate secretary and Elizabeth Wilkinson our Chief Financial Officer on today's call. We will First share prepared remarks concerning your business results for the quarter and full-year following that we will answer any questions you may have yesterday. We released our earnings announcement for the fourth-quarter and full-year 2019, which is available on our website with today's call is being webcast and replay will also be available on our website. Please note that any comments we make on today's call regarding projections or our expectations for future events or for liquid statement forward-looking statements are subject to a number of risks and uncertainties many of which are beyond our control these risks and uncertainties can cause actual results to differ materially from our current expectations.

We advise.

Our earnings release and the risk factors discussed in our filings with the SEC. Also, please refer to our reconciliation provided on our earnings, press release his management may discuss non-gaap metrics on this call. So with that I will turn it over to John. Thanks Danielle. We appreciate everyone joining us for today's call. And before I begin my comments given the importance of the topic. I'm going to turn it back to Danielle update everyone on the process we have in place at flotec related to the coronavirus Daniel. Thank you and is John said we do recognize the importance of planning for potential scenarios and anticipated impacts related to cross Iris and that's why we have developed a task force comprised of leaders across the company and also supported by input from Key suppliers and customers following guidance from the CDC The Who local Health Organization. The task force has developed action plans to address related risks, and we continue to monitor this very Dynamic situation back to you John. Thanks Danielle is she pointed out we we are dead.

Leading an important effort to put people first and flowtech and that includes our customers and our suppliers when we take it seriously and and health of employees and suppliers. Very important to us. Great to be here. I'm very grateful for the warm welcome. I've received from our customers shareholders supplier partner.

First employees and board I mumbled and thankful to all those of our stakeholders of takes the time to share with me their perspectives on the strengths and opportunities flowtech since this is my first call you I want to let you know what you can expect to hear from me and the team on our quarterly calls on this first call. I want you to get to know me a little bit better my background of the roadmap. I see going forward in the future. You'll likely hear back from the leadership team of the company and we're going to start introducing them to you today. What you will not hear from me is promises around what I hope to achieve in the future to be clear. I'm relentlessly focused on Thursday, and I tend to focus on what we have accomplished as a team thus far rather than promising things that we have not done yet.

now

yes, I talked with our shareholders. One of the most common questions I hear is why did you come to flotec? I wanted to share my perspective with those whom I haven't had a chance to get to know yet. Share a little bit about my background for more than 25 years. My career has been focused on identifying and commercializing unique and disruptive Technologies in the oil and gas sector. I came to float Tech from Pickering Holt where I led and continue to act as a senior advisor to the energy technology team which focuses on emerging oil and gas Technologies. Great team. There tph song writers t p h i was a present CEO trivita, which is a major canadian-based environmental and oil field services company part of that present CEO of Paradigm geophysical Landmark Graphics as well as president of our Energy Service Group verse twelve years in my career included various roles and golf Chevron in Exploration production research. So I've been on the producing side. I've been on the technical

The oil field service side the environmental side. I I've seen our industry full circle and I'm excited about being in the chemistry that speciality chemistry. So I decide to come to flowtech. Well, I felt my skills throughout my career.

Sort of matched flowtech situation. I've established a proven track record of solving complex challenges and and building successful and sizable businesses and many times the ground up or turn around and any chance does this require the development of a shared Vision supporting strategies and then solid execution in addition. I'm financially motivated to see flotec succeed prior to joining. I work closely with the board to establish a pay structure heavily Equity waited as a result of a line with shareholders are wanting to see Materials stock price appreciation as we move forward, but also know that my page structured where I do not earn a buck any bonus in 2020 unless we achieve at least Break Even adjusted ebitda on a full year basis bottom line that would mean a nearly thirty-five million or Improvement year-over-year and adjusted ebitda reasonably easy to see what my motivation is in 2020 my first priority when joining Flugtag was to identify additional opportunity wage.

For cost reduction working closely together. We've embarked on a journey to reduce all costs to accelerate our ability to regain profitability and 20/20 a prime example is the recent Amendment.

Of our thirteen Supply agreement with Florida Chemical Company highlighted in our recent a K. I will now have Ryan discuss the key Provisions the amended agreement, but the bottom line is that we would really improve our cost and cash flow through the the terms of the new and amended contract right? Thanks John and good morning everyone. We're pleased with a modification to the current surfing Supply agreement amended contract represents a significant Improvement in flotec strategic relationship with Florida Chemical Company and our ability to manage our inventory and ancillary costs money. Let me recap the key provisions of the original agreement and according consequences are original agreement requires the purchase of approximately twice. The value of terpenes required to support our current business office resulted in excess inventory and storage cost. The agreement also had an effective price that was greatly exceeded the market price. We worked with FCC to align the agreement with our current business office.

In order to achieve alignment, we agreed on a reduction in the quantity of terpene. We required to purchase or Messi seat by approximately three-fourths for 2020 and by approximately half and each of a 20 21 22 and 23. And we also agreed to an all in fixed price per pound for turkey Nat twenty-twenty that is 45% below the price of the original agreement to make the amended terms and conditions effective both Tech made a one-time payment of 15.8 million dollars to FCC including the payment this effectively reduces our package to less than 50% of the original contract based on current market pricing in addition the agreed price volume reduction for the purchase of turf in in the amended contract for $20 off alone should substantially all set the one-time payment of 15.8 million dollars cash made to FCC. I would also note that in years twenty Twenty-One twenty-two and twenty twenty years.

a negotiated volume

Dakshin of approximately fifty percent in each year should reduce our cash commitments proportionately bottom line. We are now positioned to be more competitive in the market with regards to our procurement and customized chemical portfolios and this opens up opportunities to pursue new channels to Market since joining flotec at the end of August. We've been Relentless in our Pursuits to identify opportunities to reduce operational costs and create positive synergies value stream mapping and continuous Improvement efforts have resulted in millions of dollars in annualized cost Savings in the areas of strategic sourcing Logistics field operations and Facilities Management, the amended terpene agreement represents another step forward and our commitment to get the positive profitability with that. I'll turn it back over to job. Thank you Ryan modify the terms of the terpene agreement clearly places. I stand a better position for improved Financial results in 20-25. We're not done yet. We've identified several opportunities aimed at rationalizing our office space wage.

without impacting our Market presence

We intend to move out of our current headquarters and two satellite offices in the next quarter. This should result in a decrease in the expense of millions of dollars over the remaining life of the leases and and talking about that move by explain to our staff that we're going to do it quickly that includes if we have to use concrete blocks and a few doors from Lowe's in order to achieve the move in the in the most expeditious way in addition. We also offer believe we can improve our risk mitigation as well as reducing our legal cost and discuss the opportunities. We see on the legal side. I'm going to hand it off to our new general counsel and great new ad to our team Nick Nick. Thanks John and good morning everybody. I'm glad to be here as part of the team. Well, I only joined the company recently. I'm excited about the opportunities. We have to improve our legal age here flotec. We're focused on our corporate governance our compliance programs and mitigating the legal risk that we have in in particular. We're working to enhance all of our board interactions birth.

International Trade compliance

Or export controls are related policies and similar matters of the company. We believe that putting effort into these areas will reduce our ongoing legal exposure, especially in our International operations. We're also striving to bring down our outside legal spend historically the legal cost of flotec have been high and we have an opportunity for some substantial reduction. For example, we intend to utilize smaller reporting company rules for our SEC filings, which simplifies the process and in addition. We're bringing more work in house and only using outside advisory when necessary and cost-effective.

What we're still working on identifying all opportunities. Our goal is to bring our legal expenditures down to a level that is at or below what is expected for a company of our size. I look forward to working with the rest of them to make a positive impact going forward John. Thanks, Nick really a pleasure to have Nickel board looking at the current environment for flow tax products and services. It's clear. We must grow our market share by demonstrating how and why our chemistry exceeds competitors and creating tangible returns for our customers in a very very cost-conscious environment. I've also focused much of my attention a valuation our sales effort how we can more effectively engage with current and prospective clients while there's a consensus. There will be no further softening that there will be excuse me. I wish it was no further than a misstatement. Well, there's a consensus that we're going to see a lot additional softening in the US onshore oil and gas market twenty-twenty. We believe in increase the adoption of speciality chemicals dead.

More than offset the decrease and and Drilling and completions activity very few of the wells that are being completed actually use speciality chemicals. If we were to see a tremendous material reduction and and volume of drilling it.

It's it should not impact our ability to go out and make a difference in those Wells are being completed. Our key sales focus is growing Market strategy by improving returns for current customers rebuild relationships with past customers and identifying new customers that can benefit from our chemistry solutions. Additionally. We're catalyzing focus on total cost of recovery per barrel equivalent rather than just need your purchase cost and well as strengthening the publically available evidence for the efficacy of using Advanced c&f products to materially impact oil and gas recovery and profitability for operators. Now since June the company in early January, I spent time with Mark Lewis our senior vice president of global Business Development sales and member of his team's evaluating our Market strategy and related efforts as well as making several sales office with Mark are direct sales Channel focus on customers where we believe we have a high probability of creating an improvement in their returns through technology is something that we can want to continue to execute wage.

We're targeting our efforts on those customers focused on achieving the highest return on Capital rather than the lowest initial Purchase cost per activity. We intend to maintain the extend our knowledge and evidence of wage is positive impact.

Oh well production completion design sense basic models this there for this year. We are going to focus on analytics both internally and externally to include partnering with specific clients in many cases often. Honestly that are willing to share the required data to validate publicly The increased long-term profitability of Wells when using flotex proprietary chemistry, very common today for companies to make sure available anonymously so that we can take advantage of big data analytics in order to understand the totality of Trends and and improve the results. We're also looking forward to utilizing third-party digital fluid flow modeling experts to provide production forecast for Wells with and without treatment for use in discussions with customers about our products in addition will continue to happen to sustain differentiation in our product and and services and we believe that that differentiation is going to determine the winners and losers in this market finally instead of a formal strategic.

Capital Committee in in the company form of strategic Capital committee. The company will continue to evaluate Alternatives with the board of directors for deployment.

Cash, we have on hand our current evaluations for further Capital deployment includes seeking growth opportunities that reduce our dependence on rig count provide new product lines create a greater amount of backlog and or annually recurring Revenue maintain differentiation of our offering from competitors enhance our capability to provide digital transformation of mystery drawing all my background at Landmark Paradigm and tph and strengthen our market share for our current product latch bottom line. We believe that our cash position off our public Equity our North American presents the fact we have no debt continuous focus on cost reduction our commitment to ESG make us very attractive or the absence of an IPO Market has given us a portfolio of numerous opportunities seeking liquidity. We're vetting those opportunities to select those providing the greatest long-term shareholder value age.

With that I'm going to turn it over to Elizabeth to Elizabeth to discuss our financial results.

But it's a good thing. I've turned it over. I'm going to turn it over to live with she's going to walk us through the financial results Elizabeth. Thanks similar to the past few quarters the financial tables in our press release present the operations of our segments as a discontinued operation for all periods as such I will focus my discussion today on quarterly results for our continuing operations, which includes our energy business as well as are supporting research and Innovation and corporate functions looking at our financial results revenue for the fourth quarter was 19.5 million compared to twenty one point nine million for the third quarter ECT. Operating expenses were forty two point six million for the fourth quarter vs. 23.7 million in the third quarter included in the fourth quarter was a 15.8 million dollar loss on purchase commitments associated with the company's 2019 terpene Supply agreement and the recording of birth.

Additional four point four million Reserve related specifically to our turf in inventory balance as of December 31st 2019 as a result of the work done in 2019 improve supply chain and operational efficiencies together with our negotiation of the amendment to our chirping contract. We will be able to dynamically manage our inventory to lower wage going forward corporate G&A increased to nine million in the fourth quarter vs. 5.7 million in the third quarter due to the severance of six seven million dollars recorded in Q4 primarily related to the exit of our former CEO.

research and

Innovation cost increased to 2.2 million from 2.3 million in the preceding quarter quarter at this point going forward. We anticipate corporate office costs will average below five million per quarter and our and I cost to average approximately two million dollars per quarter. We reported a loss from continuing operations a 37.1 million or a 64% loss per diluted share for the fourth quarter compared to a loss of eleven point two million dollars or $19 loss per diluted share for the third quarter as I mentioned earlier significantly impacting. The fourth quarter was lost on the purchase of commitment associated with the chirping support agreement the additional Reserve taken against our for our year-end inventory balance and total severance of three point eight million dollars.

Our adjusted a bit.

For the fourth quarter was a loss of eight point nine million compared to a loss of 8.1 million for the third quarter the change in adjusted of it. Is primarily a reflection of lower money as a result of lower Revenue. Please refer to our table in the release for more details on just turning to the balance sheet as of December 31st. We had cash off of 100.6 million no debt outstanding and 9.9 million in escrowed funds still included on our balance sheet reflecting the estimate of our claim the remaining balance of the indemnity escrow related to the sale of Florida chemical to Archer Daniels, Midland or ADM.

The 15.8 million dollar loss on purchase commitments in Q4 and the four point four million dollar Reserve taken against the terpene balances as of 12/31 reflect our respective that looking forward into the remaining term of our 2019 terping Supply agreement needed a price nor volume of the agreement aligned with our current place to sell terpene in diverse formulations. And in raw form through potential new channels to Market accordingly. We were able to record a lost on the committee on the contract commitment as it stood as of December 31st, 2019 and Reserve against a specific portion of our turn paid product on hand at that date.

Last month, we paid 15.8 million dollars to FCC to amend the terpene supply agreement also in February 2020 the independent third-party usually engaged by ATM and flowtech to resolve our transaction post closing working capital dispute awarded 4.8 million, four point 1 million dollars, uh, the disputed amount all in favor of ADM as recorded as I recorded subsequent event. This amount net of tax is reflected as a loss in Q4 2019 discontinued operations echoing John and Ryan comments in addition to setting ourselves up to materially reduce our inventory moving forward over the past couple of months. We have identified additional opportunities to further improve our cost profile these initiatives compliment the approximately Thirty million dollars of annualized costs per month.

since across the business which we

Implemented in 2019. We look forward to discussing our current efforts in more detail when we report first-quarter results in a couple of months, and with that. I will now open it up for questions. I would note that joining us for the Q&A session are Mark Louis and James Silas senior vice president of research and Innovation operator. Thank you. We will now begin the question-and-answer session to ask a question and one on your telephone keypad. If you're using a speaker phone, please pick up your handset before pressing back to withdraw your question, please press * then two at this time. We will pause momentarily to assemble our roster.

The first question today comes from Daniel Burke with Jonathan rice, please go ahead. Hey, good morning, everyone.

Good morning, Daniel thinking about the the top line. I appreciate the sort of upside adoption scenario for this year. But could you also talk maybe about just just customer concentration risk? Is that is that that pose any challenges to you guys as you look at, you know your customer base in in 2019 versus their proposed activity log in 2020 and then you know if I could elicit it just because we are pretty deeply into q120 at this point any any thoughts on on Transit and top-line in the in the short-term here in q1?

Okay, so it's such a thoughtful question Daniel. Give me just a second here. First thing is since joining. If we sort of think of it as numerator and denominator. I've spent the majority of the first sixty days on the denominator trying to get out what we think's maybe an estimated fifteen million of additional cost at twenty twenty and that's that's been our focus on the numerator. I have spent time on the revenue side with Mark and two one. We we were actually working away. I don't want to give any guidance on that but the customer concentration question is important wage at some a few large customers that are been very loyal and we're excited to be working with and we're expanding out beyond that. So Mark and I both are looking at getting a broader spectrum of customers as I said before not very many Wells I mean I suspect it's single-digit percentage of completions actually used speciality chemicals. So our challenge is making sure

The whole of the speciality chemical business for completions increases and then we want to get that.

Get here, so I'm pretty confident about the the numerator but we're going to expand Beyond just taking advantage of our chemicals. We have some infrastructure as well that we think is going to be very valuable to us and in the year ahead. And so we're looking at there. There's nothing that we have that we won't try to create shareholder value with revenue. And so I know that the question, around when do we see break even and and I can tell you I don't want to give guidance on it, but assume I don't get a bonus until I get there and I have every intention of getting a bulb for 2020. So what date I'll get there on a full year basis is TBD the revenue side. We have some a lot of logistical problems that were solved in nineteen. Thanks to ride and the team there and I think the sales team is really beginning to to to get focused and congeal around what the customer value proposition is and so pretty dead.

A pretty excited about that but give me till the end of q1 and come back at the end of q1 and I'll concentrate the whole of the call on Revenue side of the equation instead of cost. I think it makes sense and just follow up one point Clarity John. I think you said you're focused on an additional $15 of cost savings and twenty twenty self-evident but want to make sure that's the case that would be incremental to the savings you achieve under the under the new terpene pricing Arrangement. Is that is that right? Included that included that sort of like the three buckets where I think we've got really good cost savings. I can quantify is the terpene agreement the reduction in external legal costs as a result of bringing on Nick and the office. Okay. Those are three and that does not mean we're done there. It just means that those three or the the most material that we've identified in the first quarter. Okay, you'll capture that 15 in twenty-twenty. That's not like an exit off.

that's that's that's

Okay that and then maybe one other one, you know, when addressing the cash balance you all spoke to a growth phone in terms of how to deploy that cash you maybe it certainly makes sense that there should be some interesting or attractive deal opportunities out there. But what size deal make sense for the company. What's the right range of of deal size do you think for for you all to contemplate?

Okay. Well another question, you know, I think it's pretty easy for us to see that using a combination of cash and Equity that we we believed could do deals given the really low multiples they could bring in revenues that range anywhere from say 15 million for higher multiple sector to 2 a.m. As much as two hundred million in the lower multiple sectors. So we're we're sort of vetting deals that range from at the low-end fifteen is to the high end a couple of hundred that we think are things that we would be able to do.

All right, guys, I'll leave it there for now. Thank you for the time. If you have a question, please press star. The next question comes from Chicago marathon Capital, please go ahead. Thank you. Hang on. Just maybe just maybe a question for Mark. I'm just wondering in the short time you've spent there. Could you speak a little bit to kind of the sales force go-to-market strategy how you may see that evolving over the course of this year in terms of the focus. Possibly the number of people how it may be a little different than it has been in the office. Can you speak to that tour to go to market strategy?

Let me give you a brief overview. Then. I'll turn it over to mark one thing that transpired was a company sort of moved from being mostly indirect. Mostly Direct in in 2019. Is we go forward we're going to sell product. However, we sell product which means that we're going to have a direct Channel approach because we think that's important for a segment of customers. We're going introduce an indirect sales channels approach. We think that is a great way to reach a large portion of the market and particularly internationally and in some regards and and we working through that and we're also contemplating. We'll call it white labeling our products letting other people sell our Advanced products under their name. So if there's any way to sell products you can assume that all of that is fair game for us today because we're interested in amplifying our sales and we think all of those different methodologies can result in improved sales and have a chance to make a few calls with Mark Zuckerberg.

You're talking about the direct.

I mean, what is your when you meet with customers what's real value proposition that you you explain to people today? I think the real value proposition is is improving their wage. A lot of our customers are clearly living with in class Pro, uh limited on on the capex spend very disciplined in terms of the cutbacks that they invest money. So we're very much focused on the outcomes of the customer and a lot of our key Technologies predicted to see if that these CNF technology that really shows incremental production month and a in a number of cases in the market. So we think the value proposition is is really really strong on our sales forces aligned to those outcomes of the client with us and we felt the entire sales team pretty much over the last six to nine months. So we have four full complement of sales staff around the key basins. We're we're we're dead.

Concentrated the north east and Midland Denver Dallas, Houston and Oklahoma. These folks are very professional, right? They're professionals.

Sales people. They're chemists chemical Engineers petroleum Engineers business graduates all graduates and the focus on the outcome of the client. So we're very confident in the wage in the NL sales staff and their ability to deliver the the right outcome for the customer. One of the things we did to Jim is a lot of a lot of emphasis has been placed upon on sales Channel transition in new sales Channel and give them a chance and going forward. We're just not going to make any excuses using anything. So whatever happens we're accountable for the results of the company, so I'm not going to talk about the sales Channel and whether it's new or transitioning, uh, we have an accountability to grow the revenue of the company and we're going to focus on getting that done and I think the team is making sure that results are what we're focused on not on excuses for why we missed great. Thank you one further question relative to Thursday.

the terpene agreement or just agreement if you do

Have increased demand and you do let's say white label a product and you end up with you know, hopefully a good problem to have where the demand is much much higher a year from now that it is today. How does that tie back into the agreement in terms of your reduced commitment and pricing? How should we look at that in case demand does wage increase dramatically?

So the simplest answer is all it did was cap our take-or-pay and then anything we need above that we can buy at market and we can buy it from whomever. We fight our best price. And so what we did is just review so the obligation that's there to a level that matches what we believe the forecast for our demand of our product is this year? We hope that we're back more from from Florida chemical later in the year. We've developed a great relationship my very thankful to them for working with us to get this changed so that it did underpins a success for our company, but we can buy as much as we need, right? Okay. Thank you very much.

Again, if you have a question, please.

Please press * then 1.

Looks looks like we're out of questions operator it does there so this will finish our question-and-answer session. I would not like to turn it over to John Gibson for any closing remarks. Thank you so much. I just want to thank say. Thanks to everybody for joining us today. I'm looking here at all the people on the call and a lot of them are employees and and we got a all-hands meeting here just a little bit and I'm I'm excited to hear that our employees are listening in and want to know where the company's going and we're going to talk to him in person. Just a moment. I'm really happy to be here and I look forward to working closely with the management and the employees as we focus on building a successful long term business at flotec and and getting to that break-even point as soon as we can't we appreciate the support of all our shareholders and we going to update everyone on our continued efforts at the end of q1 and I hope we have some really good things to talk about them too. Thanks so much, and I appreciate it.

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