Flotek Industries, Inc.

Good morning and welcome to the Flow Tech Industries third quarter 2020 earnings conference 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 star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Danielle Allen, Senior Vice President, Chief of Staff for Flowtech. Thank you. You may begin.

Thank you, and good morning, everyone. We appreciate your participation. Joining me today and participating on the call are John Gibson, Chairman, CEO, and President, Michael Borden, Chief Financial Officer, Tang Beng Khoid, President of Global Business, and Ryan Udell, President of Chemistry Technologies. On today's call, we will first provide prepared remarks concerning our business and the results for the quarter. Following that, we will answer any questions you may have. Yesterday, we released our earnings announcement for the third quarter, which is available 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 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, Danielle, and thank you to our employees, our shareholders, our customers, and to our board of directors. I'm extremely grateful for the strong support that Flowtech has received. Additionally, I'm truly inspired by our employees. They've remained focused and committed to executing our vision every day while juggling dynamic demands at home and work. A patchwork of return to school procedures and evolving challenges related to the pandemic. My gratitude for their dedication cannot be overstated, and it's a great honor to work alongside them. Now, before we dive deeper into the quarter, I wanted to welcome Mike Fucci to Flowtech's Board of Directors. As the former chairman of Deloitte US, Mike is an incredibly respected and influential leader who has spent his career contributing to the strategic vision of one of the world's most respected professional services and accounting firms. Additionally, over the course of his career, Mike has become a thought leader on human capital, diversity and inclusion, and business transformation. We are very fortunate to have Mike join us. Thank you, Mike, for joining Flowtech's board. I really look forward to working with you. Now let's turn to the third quarter. Now, overall, our quarterly performance showed some positive signals. We are by no means satisfied with our results, and we have more work to do. As I said last quarter, navigating through this global market disruption caused by COVID and demand destruction has been the most challenging environment that I've had experienced in my career, and even so, I remain very optimistic about the future of Flowtech. We're doing everything possible to position ourselves to be a stronger company in 2021. That means having the discipline to make some hard decisions today. Last quarter, you met Mike Borden, our new CFO, on his third day at Flowtech, and every day since then, he has been diligently identifying areas where we can improve our business performance, strengthen our processes, introduce efficiencies, and implement cost reductions. I continue to be impressed with Mike's attention to detail and commitment to high standards, and I'm very glad he's here. Together with the leadership team, Mike has driven several important initiatives that, while difficult today, mean we emerge stronger for the future as the market recovers. Among those are an impairment, inventory write-downs, and workforce reductions. This is a period of transition for us, We believe we have the right leadership team in place to help us accelerate the transformation of the company and are making the necessary adjustments to our business model. We're building a culture that drives value creation for all of our shareholders, an entrepreneurial culture with chemistry as the common platform, underpinned by a passion for customer success and shareholder returns. Glowtech has a clear path forward for growth and profitability, and our team is focused on results. Now, with regard to the macro environment, let's address that first, as it's been the inescapable force impacting our business performance. Although the world started to slowly emerge after COVID lockdowns in the third quarter, the fundamentals of the oil and gas market remain severely challenged. A drastic slowdown in the oil and gas activity across the spectrum significantly limited customer capex activities from the wellhead to the gas pump, many of which have been put on hold while some sites were completely shut down. Additionally, midstream budgets in gathering and processing have decreased 60% year-over-year, while U.S. drivers reduced their road mileage by approximately 34%, with a corresponding drop in the consumption of refined fuels. That said, we're still seeing some positive indicators. Crude pricing has begun to show signs of improvement from last quarter, although still at low levels. Refinery throughput has improved significantly. although margins have remained compressed and customer demand has not moved in tandem. Some of the customers have resumed modest levels of completion activity in the Permian, and we saw increased demand for our speciality chemicals, stimulation chemicals in particular, in select international markets, primarily in the Middle East. In summary, we saw some improvement in the market, but not nearly enough to get excited that the market is recovering. As a result, it was a difficult quarter with mixed results. The drop in economic activity and weak demand is weighing on sales across our business segments. Last quarter, we closed our acquisition of JP3, a data and analytics technology company serving the oil and gas industry. With our first full quarter of JP3 results included in our financials, performance fell way short of expectations as JP3 sales were impacted by dramatic reductions in capital budgets by midstream and downstream customers. As a result of these conditions, we took a hard look at what we could achieve in the near term. In light of anticipated ongoing market disruption and the necessary resources needed to transition to a recurring revenue model, and after this analysis, we concluded that we should take an impairment charge across several categories for JP3. And we also completed our quantitative and qualitative analysis of inventory following the acquisition to assess market values and align it to anticipated customer demand. In tandem, we're lowering operating expenses to be commensurate with the revenue decline we anticipate from moving to a recurring subscription model and reduce demand in a difficult market. These cost reductions include a headcount reduction of 35% within the segment, as well as a decrease in other operational costs that are not directly tied to near-term revenue generation. These actions were not taken lightly, but were necessary as we manage our business so that we minimize the impact on our liquidity in 2021 and beyond as we transition to subscription-based revenues. Additionally, I'm also pleased to announce that Tang Bang Coid has assumed the duties of president of JP3. We recruited Coid to Flowtech last quarter, following more than 30 years of experience in the oil and gas industry. He is a proven leader building enterprise-wide software solutions for energy companies across the full hydrocarbon stream, and he's demonstrated a very strong track record expanding businesses to international markets. I have full confidence in Coyd and our team at JP3 to build a very strong future. In the long term, the business has considerable growth opportunities, and we remain confident about the compelling strategic financial benefits as JP3 diversifies Flowtech's business across all segments of the hydrocarbon value chain. and its technologies are helping customers accelerate digital transformation by providing the real-time data necessary to manage crude oil and natural gas processing. We also have the opportunity to address potentially greenhouse gases with JP3, and so emerging markets are a real opportunity for us as well. CORD will address the migration to a subscription-based data model and also highlight our growth strategy to expand our market penetration both domestically and abroad. Transitioning to chemistry technologies and our newly launched sanitizer and disinfectant business that we'll often refer to as Jansan business, through the quarter we experienced pricing pressure as suppliers with lower quality products offered steep discounts to liquidate inventory ahead of the anticipated tightening of regulatory standards, which we believe will drive those products off the market. We trust these disruptions will be temporary in nature, Even with the recent announcements about the anticipated COVID vaccines, we still believe there will be a long-term change in consumer and business behavior. It will take some time for vaccines to be proven, manufactured, delivered, and administered widely. And there are still large unknowns about the number of Americans who will take the vaccine without data related to long-term effectiveness and side effects. Most importantly, I'd like to emphasize that we're building out a product portfolio in Janssen. It extends beyond sanitizer to address a broader set of needs in the janitorial and sanitizer market and transcends the current pandemic. Overall, our chemistry technology segment experienced sequential improvement as we've seen an uptick in energy chemistry activity both domestically and internationally. As a result, we are pleased to see a 52% increase in overall segment revenue in the third quarter versus the second quarter. Now, let's move to liquidity and cost measures. We continue to take decisive actions guided by our strategic pillars to best position Flowtech for the future. Our balance sheet remains healthy, and we are focused on bolstering our financial flexibility. As a reminder, earlier this year, in order to preserve our liquidity, we reduced headcount, lowered salaries of our executive team, curtailed discretionary spending, and decreased compensation for our board of directors. Throughout the quarter, we continued to work with our suppliers to negotiate costs on raw materials, negotiated reductions in our leases, and reduced our freight costs. Now, I'm going to turn it over to Coyd for further discussion of JP3 efforts to drive revenue, and then we'll turn it over to Ryan Azell, who will give an update on the trends at the chemistry technology segment, including the process of our new Janssen operations.