Q2 2019 Earnings Call

At this time, all participants are in listen only mode.

A question and answer session will follow management's prepared remarks.

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As a reminder, this conference is being recorded.

It is now my pleasure to introduce.

Yes Alan.

Senior Vice President Global Communications and technology commercialization for Flotek. Thank you Madam you may begin.

Yesterday afternoon, we released our earnings press release for the second quarter of 2019, which is available on our press release on our website.

In addition.

This morning, we posted a related supplemental presentation to our website.

Today's call is being webcast and a replay will also be available on our website.

Please note that any comments, we make on today's call regarding projections or expectations for future events are forward looking statements.

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 events to differ materially from our current expectations.

We advise listeners to review our earnings release and the risk factors discussed in our filings with the FCC.

Also please refer to our reconciliations provided in our earnings press release as management may discuss non that non-GAAP metrics on this call.

Finally, after our prepared remarks, we will answer any questions. You may have so with that I will turn it over to John .

Thanks, Danielle we appreciate I appreciate everyone joining us for today's call.

As we discussed on our first quarter call. We expected during the second quarter. The oilfield services sector would and in fact did continue to operate in a volatile environment for U.S. onshore drilling and completions activity, we anticipate a similar backdrop for the third quarter, which is in line with the consensus of other oilfield service providers with U.S. land operations.

Despite this environment I'm pleased to report that we ended the second quarter with a cash balance of $97.5 million, which was essentially level with the balance reported for March 31st.

We recognize that shorter cycles have continued and sometimes extreme volatility are part of the new normal we operate in today and will continue to experience in the foreseeable future.

As discussed in a research report from Deloitte published in April titled Decoding, The oil and gas downturn in the oil field services segment has never been more fragmented than it is today.

Two main themes of the reports are that service providers must distinguish themselves technologically and they should also develop new and innovative commercial models throughout the value chain. This further supports and validates our continued focus on reshaping our business to proactively position ourselves for long term success.

This includes controlling the controllables.

Controllables can mean different things to different organizations.

For Flotek this man concentrating on our core competencies as a best in class provider of reservoir century chemistry solutions for the oil and gas industry. In this capacity, we have and will continue to focus on enhancing internal processes, while rightsizing, the enterprise and taking costs out of the business to drive increased efficiency and profitability.

Closely collaborating with operators to identify and define industry challenges.

Ensuring we build technical peer to peer relationships with the specific individuals at our clients that have ultimate decision, making responsibility for chemistry purchases.

Clearly communicating the significant benefits that our technologies can have on our clients bottom line results and utilizing innovative commercial strategies to accelerate further adoption of our product offerings.

We believe we are on the forefront of developing and providing industry, leading reservoir century chemistry solutions that drive greater capital effectiveness and return on investment for clients. During the second quarter. We took an additional important steps to further differentiate our unique value proposition in the marketplace.

One of those key initiatives was the rebuilding and development of a more technically oriented and client service focused sales organization.

Historically geologists Geophysicists and reservoir in Petroleum Engineers had limited influence in the process of selecting chemistry solutions. The ultimate decision was typically made by the group with responsibility for well completion execution.

However, in the past year, we have seen a transition in which technical positions connected directly with the reservoir are now taking a leading role in decision, making as it relates to chemistry technologies.

Significantly contributing to this enhanced approach by operators has been intensified emphasis on delivering greater asset productivity.

As we partner to solve the technical challenges of our MP clients, there's increasing recognition of the diminishing returns of mechanical variables in well completion designs as shown on slide seven of the presentation.

Variables, such as lateral lengths level of proppant loading and number of Fracs in frac stages per foot have long been regarded as the best ways to access the reservoir from maximum recovery.

However, these approaches have reached or are exceeding their economic and technical limits in certain basins and thus many operators are turning or will turn their focus to other technologies, such as chemistry that can meaningfully and reliably enable productivity.

As illustrated on slides eight and nine we have seen many operators progressively exploring and better appreciating custom chemistry as a means to achieving optimal recovery of hydrocarbons from the reservoir as they evolve their approaches from capital efficiency to a more holistic strategy of driving capital effectiveness.

Given this backdrop, we recognize the need for a salesforce that better understands the technical complexities, our clients face and that can more directly communicate the unique and compelling benefits provided by our chemistry solutions.

In support of these efforts at the end of April we announced that Marc Lewis joined Flotek as senior Vice President of global sales and business development. In this role he is leading the company's domestic and international sales and business development strategies as well as providing oversight for the delivery of products and services to our clients.

Upon joining flotek Mark's first order of business was the reshaping of our Salesforce that began in the second quarter.

Many of the candidates we spoke to in this process indicated that what attracted them to working at Flotek was the opportunity to interact directly with the end users and provide them with truly value added technology solutions and what has traditionally been a very commoditizes environment for chemicals.

I'm pleased to report.

That over the past few months, we recruited a first class group of professionals with a deep and diverse pool of technical expertise as one would expect it will take time for the new team to get their feet on the ground. However, we've already begun to see a pickup in both client inquiries and requested technical reports.

We look forward to seeing the impact of our new sales teams efforts within the coming quarters.

That said, we are continuing to gain traction with a number of strategic prospects for our proprietary value added chemistries and related technical services. We are seeing successes across a variety of applications from completion to read remediation and even to enhanced water flooding activities on the production side of the business.

Additionally, we are partnering with our clients to address the prevention and mitigation of Frac hits, which is one of the biggest challenges facing the industry today as outlined on slides 10 and 11.

Frac hits also called Frac, driven interactions occur when wells are space too closely together, creating communication between the primary or parent and infill or child wells. When this occurs overall recovery from the reservoir can be significantly depleted depending on the reservoir pressure and the timing of well completion.

As a result industry experts suggest that the production profile can be we reduced by as much as half of the anticipated recovery.

Why do you consider that contemplate that 70% of new onshore wells drilled in the U.S. could be impacted according to slumber J.

There is clearly no greater urgency then to solve this compact complex challenge as billions of dollars are at risk.

That is why our technical teams are working alongside our clients reservoir teams to validate the significant role that reservoir centric fluid chemistries play in preventing and Remediating Frac hits.

Last week, our head of research and innovation Dr., James Silas highlighted our relevant findings at a Permian basin industry conference here in Houston.

Further given the substantial positive uplift our chemistries have shown to improve hydrocarbon recovery, we are exploring how our chemistries can better enable capital efficiency as we along with our clients evaluate optimize spacing within their development programs. This could well mean that for maximum capital effectiveness fewer wells may be drilled.

In addition to mitigation and prevention of Frac hits, the benefits afforded by our technology is a substantial including higher incremental and sustained production levels and improved gas to oil ratio lowering operating costs through reduced horsepower requirements and prevention of fluid in compatibility all of which lead to increased capital effectiveness.

While this list of benefits is convincing most clients conductor technical evaluation to see the results in their own operations before making a longer term commitment to new technologies.

On our last earnings call, we discussed our utilization of targeted performance driven pricing programs for a limited number of strategic clients, which we initiated earlier this year.

As anticipated these programs impacted our second quarter operating margins and we expect continued margin pressure for the near term as these particular clients complete their studies over the coming months.

However by the fourth quarter, we expect to begin to see the benefits of this initiative.

Supporting our view are the studies, we have done on thousands of wells in multiple basins that clearly show the benefits of our differentiated offerings slides 12 through four of our presentation show how customized prescriptions lead to sustain production enhancement specifically, we have now shown sustained uplift across hundreds of wells in the Wolfcamp, a and Wolfcamp b in the Midland Basin nearly three years after completion.

This allows us to be optimistic about the results of the client studies currently underway and more importantly comfortable in our approach as it relates to this initiative.

Our second quarter results were also impacted by the deferral of completions activity by certain clients, primarily due to both scheduled and unscheduled downtime in their programs I would note that we have already seen these clients resumed their completion was activities in the third quarter, but believe we could see more anomalies of this sort of occur in the third quarter and beyond as a white space in the calendar is being reported by Frac service providers.

Turning to costs on slide 15, we show the results of our ongoing significant expense reduction efforts during the second quarter, we identified more than $5 million of annualized spending cuts there were implemented in mid July .

To date for 2019, we have announced and executed on initiatives to reduce our annual cash cost by more than $25 million spread across the entire enterprise.

I would note that since the second quarter of 2017, we have successfully transitioned our business and taken approximately $21 million or 44% out of annualized spending specifically related to corporate general and administrative and research and innovation support functions, excluding stock based compensation expense.

As we've discussed in previous calls this has been a tough but necessary process as we further adjust our cost structure to ensure long term success.

Once again I appreciate all of our employees for their efforts and dedication through this process, which has impacted all levels of our business.

Finally, our strategic capital Committee continues to make important progress in their analysis of alternatives for the best use of the net proceeds received from the sale of Florida chemical at the end of February .

As discussed on our last call under the co chair direction of our Chairman, David Nierenberg and CFO Elizabeth Wilkinson. The committee began its evaluation process with a deep dive into every facet of the company.

When that was concluded we initiated a methodology to review, both organic and inorganic inbound growth prospects that Elizabeth will discuss.

In more detail in a moment.

Throughout this effort, we've utilized city and their deep domain expertise to assist us.

I cannot overstate how important we consider this process to be.

Clearly the capital markets have always put an emphasis on liquidity, but over the past year investor sensitivity about liquidity has become even more heightened.

We fully agree that a solid balance sheet and financial flexibility are critical to long term success, especially in an industry that is commodity based with ongoing and sometimes extreme periods of price volatility.

As such we believe that we have an extremely unique opportunity and the committee is determined to ensure that they arrive at a strategy that preserves and enhances maximum value for our shareholders.

With that I'll turn it over to Elizabeth to discuss our financial results in more details Elizabeth.

Thanks, John .

Similar to last quarter, the financial tables in our press release present, the operations of our CIO Cts segment 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 our supporting research and innovation and corporate functions echoing John's comments, we operated an environment that has continued to be volatile for us onshore drilling and completions activity. This impacted both our top line and margin results for the second quarter and we expect these conditions to continue to impact us in the third quarter.

Revenue for the second quarter was $34.7 million compared to $43.3 million for the first quarter as John discussed in addition to the challenging industry backdrop for US land. Our results were directly impacted by the rebuilding of leadership and personnel in our sales organization. The deferral of completion activity to the third quarter by certain clients.

And the utilization of performance driven pricing programs for a limited number of strategic clients.

Operating expenses 38.3 million for the second quarter versus 44.6 million for the first quarter.

Fundamentally the decrease in our operating margin was due to fixed and semi variable costs being absorbed by a lower level of revenue.

Looking at the third quarter, we expect our topline results could decline from second quarter due to the factors. We've discussed however, we do see opportunity for significant margin improvement primarily as a result of increased efficiencies in our logistics, including last mile delivery and other operational cost reduction initiatives.

Corporate DNA.

Decreased to 6.1 million from 7.3 million for the first quarter, primarily due to nonrecurring severance costs recorded in the first quarter associated with our sale at Florida chemical.

Research and innovation costs decreased to 2.1 million from $2.3 million in the preceding quarter. The decrease is the result of our cost reduction initiatives announced in prior periods.

Moving down the income statement interest expense was essentially zero as compared to $2 million for the first quarter. As there was a reminder, following the closing of the sale of Florida Chemical we paid down the full balance of and terminated our credit facility.

This resulted in the acceleration and write off during the first quarter of $1.4 million of unamortized deferred financing costs.

We reported a second quarter loss from continuing operations of 13 million or 22% and 22 cents loss per diluted share compared to a loss of 15.4 million or 26 cents loss per diluted share for the first quarter.

On an adjusted earnings basis, we reported a second quarter loss from continuing operations of 12.3 million or 21 cents loss per diluted share versus a first quarter loss of 11 night $11.6 million or 20 cents loss per diluted share. Please refer to our tables in the release for more details.

Our adjusted EBITDA for the second quarter was a loss of $9.6 million.

Compared to a loss of $8.3 million for the first quarter contributing to the higher loss were tighter margins, partially offset by lower DNA.

And research and innovation expenses.

Again, please refer to the tables in the release for more details.

Turning to the balance sheet.

As of June Thirtyth, we had cash and equivalents of 97.5 million, which are essentially level with our 96.8 million balance at the end of the first quarter.

I would note that the third quarter. We currently expect to see a similar level of cash at the end of the period.

At the end of the second quarter. We also continued to have no debt outstanding. In addition at the end of the period, we reported approximately 15.7 million of escrowed funds on the balance sheet, reflecting a revised estimate a post closing working capital adjustments related to the sale of Florida chemical.

As John noted discussed we.

Continue to execute on our cost reduction initiatives during 2019.

This includes the mid July implementation of more than 5 million of additional annualized spending cuts. These reductions were substantially focused on further restructuring our operations, reducing both personnel and other operating costs, while ensuring we retain the ability to absorb topline growth.

We anticipate later this year and into 2020.

Combined with our previously announced reductions year to date, we have implemented initiatives that reduce our annual cash cost by more than $25 million.

Looking beyond the 25 million that we have announced thus far this year.

We are currently in the process of developing an action plan to execute on the priority initiatives that have been identified through our engagement in the second quarter of a global consulting firm recognized for their extensive supply chain expertise, particularly in the upstream energy space.

Over the course of several weeks they.

Conducted an interactive assessment to help us identify and prioritize additional opportunities to reduce costs and drive greater profitability through order to cash efficiencies, including process enhancements to sales supply chain and logistics.

Turning attention to the strategic capital Committee as co chair of the Committee I wanted to provide some additional perspective on our process.

Since its formation.

The committee has formally met eight times utilizing research and advice provided by cities energy team as well as detailed analysis performed internally.

As discussed on our last call. The committee first focused on taking a deep dive into Floteks ongoing business. This included a thorough assessment of every product service process market distribution channel and customer.

From that process, we gained a better understanding of what we do well, where we can improve and potential opportunities for growing our business.

In addition, we have taken an exhaustive review undertaken an exhaustive review of the different alternatives for the best use of capital using a lens of what protects value and drive maximum returns for our shareholders, including how to best position the company over the longer term in the public capital markets.

The sale at Florida Chemical has provided flotek with a substantial amount of financial flexibility. This places flotek in a unique position relative to similar size oilfield service providers as well as companies in the upstream oil and gas space in general.

Accordingly, while a nominal stock buyback or special dividend to shareholders has some appeal at present. The committee has not recommended any action that would undermine the advantages that dry powder provides flotek in the energy sector today.

As further outlined on slide 16.

Our near term focus is on the possibility of investments in organic and inorganic opportunities that will provide us with greater scale and immediate positive operating cash flow, while building on and enhancing our core competencies.

As John discussed in his opening comments, we fully recognize that we must evolve the business to ensure long term success in a very fragmented oilfield services space.

To the committees evaluation process, we have identified a number of high value organic growth opportunities that we believe could result in greater scale and improved profitability.

These growth opportunities include targeting clients of scale, establishing strategic partnerships commercializing differentiated next generation technologies and expanding adoption of our chemistries for enhanced oil recovery.

While these initiatives are expected to be capital light in nature.

We recognize that realizing the full benefits of our efforts will take time and require working capital.

As it relates to inorganic investments, we continue to be focused on broadening our exposure across the lifecycle of the well as oppose to remaining as significantly concentrated on the completions phase.

As expected we have continued to receive and evaluate inbound inquiries and we have also taken an active role in identification of businesses that logically aligned with our core competencies and provide for both financial and operational synergies an important priority is to focus on opportunities that not only meaningfully grow our business, but bring immediate and stable positive cash flows to the table.

I will now turn it back to John for his closing comments, Tom Thanks Elizabeth.

The onshore North American upstream oil and gas industry continues to evolve rapidly.

More recently this has included heightened investor scrutiny of capital spending cash flow generation and return on capital consider positions as a result oilfield service providers are under more pressure than ever to provide the MPS with superior product and service offerings and as I mentioned earlier technical differentiation.

We like many others in the industry believe the truly customized chemistry and fluid systems for the reservoir is the next critical step to drive enhanced both near and long term well production and related economics.

We recognize this many years ago and even with our significant cost cutting efforts, we have not compromised our efforts to expand our unique portfolio of proprietary products and further enhance our in house technical understanding of fluid system design and application.

As we have stated in the past we believe this sets flotek apart from its competitors.

In closing we are optimistic that our differentiated technologies combined with our proactive efforts to enhance our financial performance and improve our operations and sales capabilities are positioning flotek for long term success.

So with that we will now open it up for questions similar to the last couple of our calls given his role as co chair the strategic capital Committee.

I've asked David number to join US during the Q1 day operator, we'll now open for calls John .

If I may before we go into the question and answer mode I'd like to make some comments as well about the strategic error committed.

There is no question that Q2 was ugly.

Elizabeth described there was a fair amount of nonrecurring and housekeeping events, which made it look even greater than it actually was when it was Margaret.

However.

My new job of non executive Board chair.

Elizabeth Co chair of the strategic capital Committee.

Our requires that we follow the wisdom of that Sage Joan Rivers said.

Going over it.

Grow up already.

We are.

We will not panic.

We will not make rash or short term asset allocation decision.

Rather we will use time arbitrage to help flotek well.

As a five time through continued intense cost reduction.

Shrewd monetization.

Oh that strong balance sheet.

Sharpening Floteks strategic focus.

Enabling our new sales team.

To rebuild sales momentum.

And finding the right leader to execute our strategy well for the benefit of all stakeholders.

We pledged a substantial strategic update today here it is.

We are making considerable forward progress deliberating about selecting them on competing alternative.

Ranging from paying a special dividend.

Share repurchase through investing in profitable organic and inorganic growth.

Each prospective allocation has been waited and waited.

Using such factors as the current capital market for oil field services companies.

Which makes our balance sheet strength extremely advantageous today.

The strengths and weaknesses of Flotek preference to build on floteks profitable strength, but not a weakness.

A willingness to consider inorganic growth.

Magnify, our strength provide economies of scale reduce risk.

And make us immediately profitable and attracting strong leadership.

No I want to amplify on these words.

Our assessment of the current widespread wreckage in the oilfield services capital market today.

So many once mighty companies share prices knock down to under a bark or single digits.

And with such a pervasive fear.

Of debt repayment access to capital busting covenants.

And with energy stocks being so out of favor as a percentage of the entire S&P 500 capitalization.

Convinced us that we are in a buyer's market today for energy businesses.

Therefore.

We should recognize the very considerable opportunity cost of using cash really for financial engineering.

The opportunity cost of possible misallocation of capital today is about as high as I've ever seen it.

Because our cash is so strategically valuable merrell, we are intense about protecting it.

For wave.

Continuing to reduce cost.

Managing our balance sheet to generate cash through monetization of working capital controlling capex and discretionary investments some collecting EPS growth.

Steering the mix of our product sales toward our most profitable products and using our new upgraded sales team to drive revenue growth again.

Our policy has to be this.

Do not let our cash become a building block of life.

Rather.

It's time to make prudent profitable allocation of scarce capital at a buyer's market.

Moving onto the strategic capital Committee second criteria and assessment of our strengths and weaknesses. So that we can better build on strength.

I will share with you that I, probably did not endear myself to my colleagues on the strategic capital Committee initially when I asked the committee to refresh and review our due diligence about cnf effectiveness.

Of course, I had evaluated at twice before.

But after changes.

In drilling and completion techniques, new competitive offerings and some client losses are wanted to revisit that again.

To make sure that we were building this company on a solid foundation.

And we examined many many data points from large customers not our data, but their data, which was extensively analyzed and it gave solid proof to all of us that cnf compelling value.

Andrew this profitable.

And it has a strong patent portfolio protecting it.

And it is maintained and constantly improve by the strength of our R&D organization.

So you might wonder then.

Why did it decline.

You've heard in the past three reasons for that you heard that the street pressure on operators to live within cash flow after the decline in the price of oil hurt.

You heard about fear and uncertainty and doubt spread by competition.

And you know that with sponsor turnover, particularly in private equity backed companies when they exit that can create.

This continuity, but.

With Marc Lewis joining us we have learned that we had opportunities to significantly upgrade our sales team.

By making it stronger in chemistry, and enabling it to provide better long term customer service. This is our learning and we believe that it will enable us to make cnf grow again, because it is a solid product.

So probably sold and serviced and sold to the right prospects cnf that substantial value and it's profitable for flotek. It as a solid foundation on which to build the company.

We believe cnf Beth niche opportunities, probably are private and private equity owner operators, because they take a longer term view of industry does.

Foreign nationalized oil companies for the same reason they take a longer term view.

Companies and executives, which have been disappointed by John talk why what John talked about which was this so called a quote mechanical productivity solutions, which sometimes cause more harm the good.

So we do think.

That there's finally a substantial.

Potential opportunity to grow cnf outside of drilling and completion and the production side.

Focusing on what they are they're called Youre or Iowa, and we already have dozens of proof points in the United States and Canada.

About its impact in that context. Moreover.

On the production side of the business is recurring revenue.

Additive relatively insulated from competition from the large contractors.

So if I may borrow from Ronald Reagan.

There definitely is a pony in this room and this ponies name Cnf.

If cnf, we're not the pony.

Then the strategic capital committee could lean towards paying out a large special dividend.

Even towards selling the company.

But a profitable core product, which adds value, which can be focused on growth.

And which have growth opportunities and yes.

Are we definitely want to build on that.

And our Cnf growth opportunity is being substantiated in real time.

Half a dozen large customer prospects.

We do have several other.

Organic growth opportunities in other parts of the company. We just don't have time to talk about them. This morning.

Next because we are in a buyer's market for oilfield services have a $100 million and are protecting it Richard Vigilantly.

The strategic capital Committee is evaluating inorganic growth opportunities, which could grow revenue and profit.

Our valuation of these with Citi has already considered approximately 40 possibilities.

Our acquisition criteria include these goals.

Barring immediate positive EBITDA.

In a buyer's market, therefore, not buying a startup not buying up leader, but a well managed partner with scale and profits.

Second finding opportunities to realize economies of scale and functions, where we must become stronger such as purchasing logistics and last mile delivery.

Especially in basin scale is important.

Adding organic growth.

Assistance sewing cnf, youre, an IPO or markets.

Working with a partner, which has scale and its network into the production segment of the market.

Insulating flotek from the extreme cyclicality of the drilling and completion segment.

And competition from large contractors, which have integrated chemistry businesses.

Logistical and last mile help for our prescription chemistry management business.

The next generation of leadership for the company.

And finally, our Illinois has the ability to help companies with whom we might partner de commoditize products in the airport portfolios just as they are doing for us to conclude.

We would like to take full advantage of the balance sheet strange with or which are cash.

So precious and valuable today relative to paying out cash and dividends or repurchases. There is no certainty.

We will make an acquisition nor should we act under pressure to make one.

But there will be a very different certainty.

If we had dividended out the cash or use the large portion of it to do repurchases because that cash then would be gone.

And could no longer be used to buy and build growth.

Scale profitability and build further on our solid cnf platform in a buyers market.

So we're going to keep the pressure on cost reduction protect our cash gross cnf and scar, where this buyers market for sensible prudent business combinations, which could add value.

That's the end of my comments.

Thank you Sir Thanks, David and operator go ahead, we will.

Take questions.

Thank you Sir we will now begin the question and answer session.

To ask a question you May press Star then one.

Telephone.

If you are using a speakerphone please pick up your handset.

Keith.

At anytime your question has been addressed and you would like to withdraw your question. Please.

Your head back into the game.

The first question comes from George Venturatos of Johnson Rice. Please go ahead.

Hey, good morning, everyone.

Hi, George.

Hey, John .

I guess I appreciate all the commentary there.

First place I wanted to start I guess with on the strategic side.

David You gave a lot a lot of detail and.

Thought into how you're thinking about moving forward and certainly appreciate the.

The lack of wanting to purely use financial engineering here with with the cash on hand.

Sounds like there's considerable amount opportunities.

That you're looking at.

Taking into account what I think is a prudent thing to do right immediately at least accretive.

Positive cash flow business for you how do you think about.

The sizing of those opportunities and particularly given where as you mentioned there's been stress on on the leveraged names within the oil service space. How do you think about the long term.

Leverage you're willing to put on this business.

Depending on.

You finding the right opportunity on the acquisition front.

Well I want to make sure I understand your question right did you ask how much leverage we want to put on the business.

How much leverage I guess long term would you be willing to put on the business depending upon the acquisition that you may find.

A two word answer would be not much.

Not much in this capital environment.

Okay makes sense.

Just wanted to make sure given given there are some it sounds like sizable opportunities out there.

Okay second question.

On the sales front you guys mentioned you know the addition of Mark just wanted to get a few more thoughts on.

You know just detail on on the sales team intact and and how quickly we may be able to see that on the Cnf a sale front and then second part of the question just the performance pricing program. You All mentioned that John I think you mentioned for Q, we could start to see that that positive turn just just to any more detail you can provide on on that process would be great.

Sure.

So is everybody is familiar with the story knows that the sales cycle on the Cnf is typically at best the 60 day, it's sometimes 120 day process.

Just the way it works by the time, we get the right amount of people in the right people around the table, but.

We are trying to accelerate that with these strategic targeted.

Performance based.

Engagements and I think I, we're not going to say with who but we will say that we're encouraged with the acceptance of those.

From a client perspective and also the early indications of what we felt would happen.

With respect to the sales group as we mentioned in the earlier remarks.

We've been able to attract folks from different parts of the value cycle, whether it's been rock property analysis with some log background whether it's.

More from a distribution standpoint of companies that are in that value cycle. So we have a much more diverse.

Sales approach than we had earlier that's recognizing.

The S&P companies themselves are becoming more diverse with the people that are involved in selecting the chemistry.

And we think thats exactly where we need to be and I think an important thing to mention again is that one of the driving reasons for those folks joining us is they want to interact with the ultimate end user and that's obviously was a criteria for us and.

Theyve met that criteria hopefully that helps George.

I appreciate that thanks, Joe.

The next question is from Mike Urban of Seaport Global. Please go ahead Sir.

Thanks, Good morning.

Good morning, Mike.

So.

Helpful commentary on the outlook and and obviously, a very thoughtful process around the valuation of the.

The business.

Yes, presumably before you look at any type of acquisition, then I would generally agree it's certainly a buyer's market, but at the same time.

Yes, clearly got to add value, which from my perspective would would be just having the organization structurally profitable such that you're just not adding not only revenue and EBITDA up to it just structurally profitable business. So we kind of take a step back in Q2, obviously there are some reasons for that but could you lay out a path to kind of when and how we get to that point, where it might make sense to layer something on.

I guess theres, a good starting point with kind of the incremental 5 million in annualized savings that that still does get you there how much of the.

Kind of negative EBITDA. If you will was where things that you think will reverse here are some of these transitory factors, but again just more broadly on a path to at least getting this thing to the point, where they might structure would make sense to layer on another business.

Yes, I'm going to let Elizabeth give you a little bit more context on that.

Clearly the overall macro environment that you've now listen to throughout the earnings season.

It's going to be a challenge for everyone in the third quarter now people were wondering where people are going to run out of money in the fourth quarter for Heaven's Sakes. So this is a.

Position for Flotek that we have to drive the topline in a profitable way and as we started out with our remarks about controlling the controllables. We have right sized this enterprise in a way that you will see meaningfully improvement in the EBITDA number through the remainder of the year with the qualification that.

Theres still needs to be a sustained level of macro activity in North America, but Elizabeth can chime in with a little bit more context to give you kind of a pathway forward. Yes. So I guess, what I can add is just sort of the other the outlook you know driving into the year, we were very focused on trying to.

Adjust their business, you know, especially them cost cutting perspective that would allow us to get to breakeven or positive EBITDA in the latter part of the year.

And I think it's definitely going to be challenging to do that based on what we've been seeing.

At this point in the year, but we remain hopeful that we'll be moving significantly in that direction.

So much depends on revenues.

When we are.

We're looking at this whole thing earlier in the year, we were really anticipating year lot more like last year on the other hand, we are doing a lot of things to improve our cost structure.

So when it can tell you is that.

We are being very strategic.

In making meaningful traction later in the year and we think that.

You know our strategy that we have in place will speak loudly.

As we see some of these things develop later.

We'll speak loudly for future prospects.

Mike We appreciate the lean and of your comments and your question.

We are using the current period to continue working on.

Wow cost structure.

You are also as you know we've made two great additions to our management team this year with.

Hi, Mark.

So we are continuing to build a solid foundation here, because you're right it would not be sensible.

To.

Making an acquisition until such time as we fill.

Good about how we were operating and we're getting there we're getting there fast.

You are quite right.

And Ah.

I I guess, you know again I I just.

I realize you're you're still kind of going through that this this process, but a any kind of help you could give us to even kind of on a backward looking basis in terms of the second quarter of the things that.

You know kind of drove the magnitude of that that negative EBITDA again, you referenced some things being better on logistics and <unk> customer studies thing things like a if things like that you know because if we're talking about you know 40 million of annualized a you know negative EBITDA you take out five and you're still you know and it costs are still what kind of negative 35, that's a lot.

Revenue growth and I'm, just trying to if you can help us at all kind of bridge that I think that'd be a big help for you know for us and for people on the call and potential investors.

So I mean, just generally I think we talked about you know things impacting.

On the revenue side on the cost cutting side, you know we basically have.

Cost cutting activities that we've just undertaken that are going to cut our personnel costs significantly as well as certain logistics contracts changes that we've made which we also think we continue to improve those costs.

So I think it's just a combination of some different things.

Playing in that we believe.

It will we will be seeing some improvement.

Notwithstanding the revenue pressures.

Well I guess, maybe that's a better way to tackle it you mean the.

Kind of macro backdrop certainly.

So you're focusing on what you can control you can't really control the macro backdrop, but.

You know once you get through all of the things that you can control the cost efficiency and again some of these kind of one off or anomalous costs.

With the kind of normalized cost structure that you envision what level of revenue what would it take so we can kind of take we can all make around assumptions on the macro but what level of revenue would it take to get to that EBITDA breakeven level.

Yeah.

And I guess.

Generally we'd be wanting to see things getting back to something you know in this sort of first quarter type of revenue range or higher.

To get us back into that neighborhood, where we think that's achievable.

Okay. That's helpful.

Michael lot of it has to do with the mix.

Chronic so.

However, the mix of fair enough.

The lower the breakeven level.

Sure.

And then would show you a again with respect to timing or is there any expectation.

And your current outlook that you see a meaningful international sale over the balance of the year.

So we're continually encouraged by the international activity, both in South America, and the Middle East.

For market competitive reasons, we're not going to get into a whole lot of detail except to say this in early September both Elizabeth and Mark are headed over to the UAE to establish a Flotek branch office, there and I think we did take away we'd like to leave is.

We wouldn't be going through that.

Effort.

If we didn't feel.

Comfortable.

About the near and mid term outlook of increased activity in the middle East and I think we'd like to leave it at that for now.

Yes.

And then I guess just couple of housekeeping things, if I could and I may have missed it you know continuing to reduce GA cost done a great job on that what's what's your expectation for the third quarter.

So generally we're on track with our our goal for getting down on a cash basis to something in the neighborhood of 5 million. However, we do know already that based on the outcome of our price uptick as a result of the sale at Florida chemical when we did our fair value on our stock based compensation our costs have gone up considerably to the point, where we're probably going to have an extra 400000, a quarter just for stock based comps on a cash basis. I think we are going to be in that neighborhood.

But on a overall total expense I think its going to go up a little bit.

Because up relative to that I guess, you had 1.2 million of stock based comp and in Q2 up a few hundred to three 400000 roubles to that.

So I mean at we still think it's going to be coming down from the Q2 level. It just to be clear.

But I just don't think we're going to get down to that 5 million dollar level for the total expense.

Oh, Okay got you and then last one for me, what's your full year Capex expectation.

Approximately 3.7 million.

Okay.

That's all for me I will turn it back thank you.

Thanks, Mike.

Once again, if you have a question please press star one.

Telephone.

The next question is from Jake.

Women management. Please go ahead Sir.

Hi, Elizabeth on the call you mentioned that you expect the cash position to be kind of level at the end of Q3, Thats, where it is right now.

Does that assume that you guys are collecting some of the the escrowed funds or is there just more working capital to take out in the meantime that kind of gets you to that kind of cash flow breakeven number for the third quarter.

Yes, it does actually assume that we would be collecting some of the the escrowed funds in and that is one of the things that it will be a little bit in play because we haven't.

Finalized our agreement with ATM with regard to how much of the adjustment escrow will be you know will be entitled to so that process is still ongoing. So there is a little bit of play there depending on on the determination of the adjustment escrow the.

Post closing working capital adjustment at ASCO.

Got you and then in terms of working capital is this is this a good where we ended at the end of Q2 was that kind of a good level to kind of think about.

Going forward or or is there more opportunity still pull cash you'll grow the business and still pull some cash out of working capital from where we are today.

No I don't really anticipate like for example, the change in our inventories I don't anticipate that we're going to be.

You know continuing to do that further I mean, we've we've basically tried to adjust and allow ourselves to to play out.

You know some extra excess inventory that we had on hand, but we're definitely going to be getting very very focused about I mean as part of these cost initiatives that we talked about undertaking right. Now one of them is very very focused on procurement activities and inventory management.

But I'm not sure that that's necessarily going to mean that it's lower than what you're seeing right. Now in fact, we might have a little bit of an inventory build just based on our expectations.

Okay, Okay, I want to change gears, a little bit one of the things that there was kind of noticeably absent from the conversation around you know what you all plan to do with the cash position right. Now. We're just the you didn't really explore the or talk about the exploration of of selling the business. You guys are now trying to build these relationships.

And that there are a lot of people want to bigger companies out there that already have those kind of in basin relationships that you guys want to get deeper with.

And you know, there's obviously a lot of a lot of Ah overhead into running your business that exists that they wouldn't exist in the hands of one of those one of those companies and would you know sitting here thinking as a shareholder would could potentially create a lot of value in a shorter time than going out and building these relationships and building. The business. So can you can you guys just comment a little bit you know on on that on that and.

What you've explored there.

For the company has a strong balance sheet.

And it's turning itself around.

I think the sense of the committee is and I think I can speak for the board as well.

If we were to do what you were saying.

Oh, yes.

Make a lot more sense to do that.

Im when the company was performing very well.

Perceived to be performing very well.

And so.

Uh huh.

The phrase probably more arbitrage earlier.

That's one possibility.

Again.

If a company has a very weak balance sheet and isn't performing well that they need to sell itself, but we have a lot of opportunities to add value to what we have here.

And we have I think all of us come to the conclusion.

The better thing to do is to keep our head down and make those good things happen.

Got you. Thank you guys very much.

We have reached our allotted time I'd like to turn the conference call back over to management.

Comments.

No. Thanks, operator, and thanks for the questions and hopefully with some.

David's input as well there we were able to provide as much clarity in context as to where we are and where we believe we are headed.

Hopefully, we'll have a chance to see some of you in person in Denver on Wednesday next week, when we present at Enercom as oil and gas conference for those of you can't make it you can listen to it on the webcast that will begin around 10 15 Central time will also participate in Johnson Rice has annual energy conference. There will be held September 20 sort of the 25th.

In the big easy in New Orleans again, thanks for everyone's continued interest in Flotek. We appreciate the patience and support of our shareholders Hope everyone has a great day.

Yeah.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect. Thank you.