Flotek Industries, Inc.

Ladies and gentlemen, greetings and welcome to Flowtech Industries' second quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode, and a question and answer session will follow management's prepared remarks. If anyone should require operator assistance during today's conference, simply press star zero on your telephone keypad. As a reminder, today's meeting is being recorded. It is now my pleasure to introduce Danielle Allen, Senior Vice President and Chief of Staff for Flowtech, Welcome, Danielle. Good morning.

Thank you, and good morning, everyone. We appreciate your participation. Joining me today and participating on the call are John Gibson, Chairman, Chief Executive Officer and President, Michael Borton, Chief Financial Officer, King Bain-Coyd, President of Global Business, and Ryan Ezell, President of Chemistry Technologies. On today's call, we will first provide prepared remarks concerning our business and results for the quarter. Following that we will answer any questions you may have. Yesterday we released our earnings announcement for the second quarter which is available on our website. Please note we have also posted a supplemental presentation on 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 our 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 results 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 SEC. Also, please refer to our reconciliations provided in our earnings press release as management may discuss non-GAAP metrics on this call. With that, I will now turn it over to John.

Thanks very much, Danielle. As we face these extraordinary times together as a company and as a country, I'm extremely grateful to our employees for their work ethic, commitment, and can-do ingenuity. Prioritizing the safety of our employees, customers, and the communities where we work is our top priority, and we continue to focus on providing a safe working environment for all under very tough circumstances. We're fortunate to be optimally positioned in this market given our strong financial position with little debt and a healthy cash position. Flowtech's highly focused on fostering an entrepreneurial culture compromised with talented, highly motivated people with impeccable integrity who will allow us to move ahead with speed and focus. These characteristics of Flowtech are extremely important to position our company for the future. As such, I'd like to provide updates on our leadership team and then go into further detail on the macro environment and the actions Flowtech is taking, particularly in terms of new growth opportunities. Now, management changes. The most rewarding aspect of my job is identifying and developing leaders who can build a differentiated, best-in-class business that leverage extraordinary opportunity that we have before us. And we have that team. This is a team that is entrepreneurial, who can work together to bring value to all of our stakeholders during one of the most challenging environments in history. So I'm excited to introduce new additions to our leadership team are helping to position Flowtech for future growth. First, I'm really excited to have Mike Borden join as Chief Financial Officer. Mike is a strong financial and operational leader who is highly experienced in building and accelerating growth for digital and software as a service technology companies. Another great strength of Mike is cost management. And I think that you'll see he's very aligned with how this company is controlling the controllables. Next, we're pleased that Tang Bang Coyd joins us in the newly created role of President of Global Business, where he oversees our domestic and international business development strategy for both divisions of Flowtech. One of Coyd's key responsibilities is to accelerate the transition of JP3's data as a service and open doors to new markets. I really hope you'll take the time to review his credentials as they speak for themselves. It has been a joy to work with Tang Bang Coed in the past as well, throughout the world. It's also a great pleasure to work with Mike and Coed again as we all work together at Landmark and then Halliburton, and I can say from experience, both of them are battle-tested and their track records are impeccable. Next, I'm thrilled to announce the promotion of Ryan Azell to the newly created role as President of the Chemistry Technologies. Ryan was most recently Senior Vice President of Operations at the company, and in the time I've known Ryan, I've witnessed his determined leadership, relentless focus on operational excellence and profitability, as well as his deep knowledge of flow tech speciality chemistry, and has a Ph.D. in chemistry as well. The one thing that I should say about him, too, is a tremendous passion for his employees, and he's been continuously getting up to the facilities and visiting with the people during this tough time and demonstrating leadership on the ground. I really appreciate Ryan. He's truly an asset, and I have full confidence in his ability to lead our chemistry technology segment. I'm happy to introduce each of them to you and their new roles, and you'll be hearing directly from them in the call. They round out a very strong management team. Lastly, an important development on our board. This morning, we announced that Harsha Agadi has joined Clotec as director and chair of our compensation committee. He brings incredible experience gained from serving as the senior executive of Fortune 50 companies and marquee global brands like Crawford & Company, Brindley's Ice Cream Corporation, Church's Chicken, And Little Caesars Enterprises. My favorite, of course, was Crystal growing up in the South. There are several of us here that we hope that he can introduce us there, which every good Southern boy knows really well. Perhaps not well known to some of you on the West Coast. But he's energetic and a passionate leader who cares deeply about the companies and organizations with which he's affiliated. And we launched our sanitizer business. We're really grateful for his depth of knowledge in that market and the insights and relationships within key market segments who need these high-quality products. And we look forward to leveraging that network from Harsha. Now let's go to probably the least pleasant part of anybody's talk this quarter, and that's the macro environment. Throughout this earnings season, you've undoubtedly heard about the extraordinary challenges that the oil and gas market has experienced, resulting from demand destruction due to response by governments to COVID-19 and oversupply in the market, which was exacerbated by the Saudi-Russia price wars. We've seen prices pre-fall to levels unforeseen with gasoline demand falling by approximately 45% in April alone. U.S. refinery utilization dropping below 70% caused by sharp reductions in travel. And by early May, operators announcing budget reductions of more than 40%, with some cutting even more dramatically. I'll not spend too much time telling you what you already know, but it was an incredibly difficult quarter, one of the most challenging that I've witnessed in my career. However, in this environment, you have to seek out opportunities for improvement and control what you can control. And that's been our team's focus. We're certainly not immune to the macro environment conditions and to the challenges prevented by COVID. However, we are adapting to our customers' needs by focusing on areas to diversify our business away from rig count and drill bits and capturing distinctive opportunities in the digital transformation of the energy industry and leveraging our strong speciality chemical capabilities to produce FDA-registered, high-quality sanitizers, and surface cleaners, both of which are complementary to Flowtech's industry-leading chemistry applications and are permanently domestically sourced supply for these needed products. Liquidity and the cost measures I'd like to address as well. As we position ourselves for the future, we've also taken quick and decisive actions guided by our strategic pillars to preserve our liquidity and financial flexibility. We have a healthy balance sheet with little debt outstanding. They've been disciplined in our approach to our capital allocation. In fact, we've evaluated several inorganic opportunities over the past several months. and we passed on multiple acquisition opportunities that looked appealing and were complimentary to our business, but would have required us to take on additional debt, in some cases substantial. So we passed on all of these, and in hindsight, that seems to be the right decision. We continue to take further steps to strengthen our balance sheet position, and have called out numerous initiatives ranging from a reduction in workforce, to lowering compensation, to cutting back discretionary spending. In addition, we're focused on inventory rationalization and believe we will have opportunities to improve our liquidity as we go forward. Mike will provide a more detailed discussion on liquidity shortly. Digital transformation. Now, this is a topic you see in almost every research report. Energy customers are increasingly looking to access actionable, real-time data and insights that have an impactful business outcome, which really is a euphemism for improved profitability. As noted in the recent in-depth study by Evercore from June 2020 on digital transformation, more than 90% of energy executives surveyed believe that technology and digital transformation will play a critical role in improving their profitability, providing cost savings, and they are noted as key drivers for adoption to improve their business. With our recent acquisition of JP3, an innovative data technology company, we're helping our customers accelerate their digital transformation through real-time composition and valuation data necessary to manage crude oil and natural gas processing in the digital age. The acquisition of JP3 provides compelling strategic and financial benefits as it diversifies Flowtech's business across all segments of the hydrocarbon value chain, from the wellhead to refined product terminals. As we talked about at the time of purchase, JP3 has seen a 58% CAGR over the past four years, and it helps to insulate us from the volatility of rig count. However, it has not been immune to the challenging market conditions, particularly sharp declines seen in refined fuel product demand. As a result, its top-line revenue was significantly impacted in Q2 by a near halt of its clients' capital spending. Despite the difficult market conditions, JP3 is maintaining its customer base, winning both repeat business from existing customers and securing several orders from new customers. We are confident that there's a strong market need for JP3's unique data offerings, given a deep customer loyalty that we have, and are confident that as oil and gas demand ramps up, we expect to see a corresponding rebound in our sales. And a key reason why I recruited Coy. Now, I'm going to turn it over to him to share more about the growth opportunities here at Flowtech. Great pleasure to introduce you to Pang Bang Coy, president of the global business.